As filed with the Securities and Exchange Commission on November 26, 2002
(S-4) Registration No. 333-101059/(S-1) Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(WITH RESPECT TO 6.52% CONVERTIBLE SENIOR SUBORDINATED NOTES
DUE DECEMBER 31, 2009
BEING ISSUED IN THE EXCHANGE OFFER)
-------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(WITH RESPECT TO THE ADDITIONAL 6.52% CONVERTIBLE SENIOR SUBORDINATED NOTES
DUE DECEMBER 31, 2009 BEING OFFERED FOR CASH)
-------------------
ALKERMES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 2834 23-2472830
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
88 Sidney Street, Cambridge, Massachusetts 02139-4136
Telephone: (617) 494-0171
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Richard F. Pops, Chief Executive Officer, Alkermes, Inc.
88 Sidney Street, Cambridge, Massachusetts 02139-4234
Telephone: (617) 494-0171
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
Copies to:
Morris Cheston, Jr., Esq. Abigail Arms, Esq. Mitchell S. Bloom, Esq.
Ballard Spahr Andrews & Ingersoll, LLP Shearman & Sterling Testa, Hurwitz & Thibeault, LLP
1735 Market Street, 51st Floor 801 Pennsylvania Avenue, N.W. 125 High Street
Philadelphia, Pennsylvania 19103 Washington, D.C. 20004 Boston, Massachusetts 02110
Telephone: (215) 665-8900 Telephone: (202) 508-8000 Telephone: (617) 248-7000
--------------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Aggregate Amount of
be Registered Registered(1) Price Per Unit Offering Price Registration Fee
------------- ------------- -------------- -------------- ----------------
6.52% Convertible Senior
Subordinated Notes due
December 31, 2009 $115,000,000 100% $115,000,000(1) (2)(6)
6.52% Convertible Senior
Subordinated Notes due
December 31, 2009 (3) $50,000,000 100% $50,000,00 (2)(6)
Common Stock, par value
$.01 per share 8,092,791 shares(4) $8.06(5) $65,227,895(5) $6,001
(1) Pursuant to Rule 457(f)(1) under the Securities Act of 1933, this amount
is the market value as of November 5, 2002 of the maximum amount of 3.75%
Convertible Subordinated Notes due 2007 (the "existing notes") that may be
received by the Registrant from tendering holders in the exchange offer.
(2) The registration fee was calculated pursuant to Rule 457(f) under the
Securities Act of 1933.
(3) We registered an additional amount of new notes to be offered for cash to
holders of existing notes who participate in the exchange offer.
(4) The total number of shares of common stock being registered in connection
with this offering is 10,387,034. A filing fee of $1,980 for the
registration of 2,294,243 of these shares of common stock was previously
paid in connection with the initial filing of the Registration Statement
on Form S-3 (No. 333-101058) and the Registration Statement on Form S-4
(No. 333-101059) on November 6, 2002. The total number of shares of common
stock that are being registered represent an estimate of the number of
shares that would be issued if the Registrant elects, under the terms of
the new notes, to make interest payments on the new notes in common stock
instead of cash including to pay, if applicable, the two-year interest
make-whole provision in common stock instead of cash. Also includes such
indeterminate number of shares of common stock as shall be issuable upon
conversion of the new notes being registered hereunder. No additional
consideration shall be received for the common stock issuable upon
conversion of the new notes and therefore no registration fee is required
pursuant to Rule 457 under the Securities Act.
(5) Estimated in accordance with Rule 457(c) and Rule 457(d) solely for the
purpose of calculating the amount of the registration fee based on the
average of the high and low price of the Registrant's common stock as
reported on the NASDAQ National Market on November 19, 2002.
(6) A filing fee of $15,180 for the registration of $165,000,000 aggregate
principal amount of the new notes was previously paid in connection with
the initial filing of the Registration Statement on Form S-3 (No.
333-101058) and the Registration Statement on Form S-4 (No. 333-101059) on
November 6, 2002.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SEC ACTING PURSUANT TO SECTION 8(a) MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS PROSPECTUS MAY CHANGE. WE MAY NOT COMPLETE THE EXCHANGE
OFFER AND ISSUE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES,
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion, dated November 26, 2002
[ALKERMES LOGO]
EXCHANGE OFFER
6.52% Convertible Senior Subordinated Notes due December 31, 2009 for its
3.75% Convertible Subordinated Notes due 2007
AND THE SALE OF
up to $50,000,000 of its 6.52% Convertible Senior Subordinated Notes
due December 31, 2009
-----------------
If you elect to participate, for each $1,000 principal amount of our 3.75%
Convertible Subordinated Notes due 2007, you will receive from us $575 principal
amount of our 6.52% Convertible Senior Subordinated Notes due December 31, 2009.
The new notes will be issued in denominations of $1,000 and any integral
multiples of $1,000. Alkermes will pay any fractional new notes in cash. If
you tender existing notes in the exchange offer, you will have the right to
participate in the cash offer in which we are offering up to $50 million of
additional 6.52% Convertible Senior Subordinated Notes due December 31, 2009.
The exchange offer will expire at 5:00 p.m., New York City time, on
December 24, 2002, unless we extend the offer.
Our common stock is traded on the NASDAQ National Market under the symbol
"ALKS." On November 25, 2002, the last reported sale price of our common stock
on the NASDAQ National Market was $9.09 per share.
We are mailing this prospectus and the letter of transmittal on November
26, 2002.
-----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF FACTORS YOU
SHOULD CONSIDER BEFORE DECIDING TO PARTICIPATE IN THIS EXCHANGE OFFER OR
PURCHASE ADDITIONAL 6.52% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE DECEMBER 31,
2009.
We have retained Georgeson Shareholder Communications Inc. as our
information agent to assist you in connection with the exchange offer. You may
call Georgeson Shareholder Communications Inc. at (866) 318-0506 (toll free), to
receive additional documents and to ask questions.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
The Dealer Manager for the Exchange Offer:
U.S. BANCORP PIPER JAFFRAY
THIS PROSPECTUS IS DATED __________ __, 2002.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THIS PROSPECTUS.
--------------
TABLE OF CONTENTS
Where You Can Find More Information ................................................. 2
Summary ............................................................................. 3
Risk Factors ........................................................................ 16
Special Note Regarding Forward-Looking Statements ................................... 29
Use of Proceeds ..................................................................... 30
Price Range of Common Stock ......................................................... 30
Dividend Policy ..................................................................... 30
Ratio of Earnings to Fixed Charges .................................................. 30
Capitalization ...................................................................... 31
Selected Historical Consolidated Financial Data ..................................... 32
The Exchange Offer .................................................................. 33
Cash Offer of Additional New Notes .................................................. 41
Description of New Notes ............................................................ 42
Description of Existing Notes ....................................................... 56
Management's Discussion and Analysis of Financial Condition and Results Of Operations 68
Quantitative and Qualitative Disclosures About Market Risk .......................... 80
Business ............................................................................ 82
Management .......................................................................... 97
Certain Transactions ................................................................ 107
Management and Principal Shareholders ............................................... 109
Description of Capital Stock ........................................................ 111
Book-Entry System - The Depository Trust Company .................................... 113
United States Federal Income Tax Considerations ..................................... 115
Plan of Distribution ................................................................ 122
Legal Matters ....................................................................... 123
Experts ............................................................................. 123
Financial Statements ................................................................ F-1
You should rely only on the information contained in this prospectus.
We have not, and the dealer manager and placement agent have not, authorized
any other person to provide you with different information. This prospectus is
not an offer to sell, nor is it seeking an offer to buy, these securities in
any state where the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of the date on the front cover, but the
information may have changed since that date.
WHERE YOU CAN FIND MORE INFORMATION
Alkermes, Inc. is a reporting company and files annual, quarterly and
current reports, proxy statements, and other information with the Securities and
Exchange Commission. You may read and copy these reports, proxy statements, and
other information at the Securities and Exchange Commission's public reference
room located at 450 Fifth Street, N.W., Washington, DC 20549. You can request
copies of these documents by writing to the Securities and Exchange Commission
and paying a fee for the copying cost. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for more information about the operation of the
public reference rooms. Our Securities and Exchange Commission filings are also
available at the Securities and Exchange Commission's web site at
"http://www.sec.gov". In addition, you can read and copy our filings at the
office of the National Association of Securities Dealers, Inc. at 1735 K Street,
Washington, DC 20006.
Upon written or oral request, we will provide without charge to
each person, including any beneficial owner, to whom this prospectus is
delivered a copy of any or all of such documents which are filed with the
Securities and Exchange Commission (other than exhibits to such documents).
Written or oral requests for copies should be directed to Investor Relations, 88
Sidney Street, Cambridge, Massachusetts 02139 or (617) 494-0171.
2
SUMMARY
This summary does not contain all of the information you should consider
before exchanging your existing notes for the new notes or investing in
additional new notes. For a more complete understanding of us and this exchange
offer, we encourage you to read this entire prospectus. The term "new notes"
refers to the 6.52% Convertible Senior Subordinated Notes due December 31, 2009
offered by this prospectus. The term "existing notes" refers to our existing
3.75% Convertible Subordinated Notes due 2007 to be exchanged for the new notes
in the exchange offer. You should read this entire prospectus carefully. Unless
otherwise indicated, "we," "us," "our," "Alkermes" and similar terms refer to
Alkermes, Inc. and its subsidiaries.
OUR BUSINESS
We are an emerging pharmaceutical company that develops therapeutic
products based on our formulation expertise and proprietary drug delivery
technologies. Our product development strategy is twofold. We partner with many
of the world's finest pharmaceutical companies and we also develop novel,
proprietary drug candidates for our own account. We have a broad pipeline of
products and product candidates, including two marketed products, several
product candidates at various stages of clinical development and others at
earlier stages of development. Our products are based on controlled,
extended-release dosage forms of injectable drugs using our ProLease(R) and
Medisorb(R) delivery systems, and the development of inhaled pharmaceuticals
based on our proprietary Advanced Inhalation Research, Inc. ("AIR(TM)")
pulmonary delivery system. In addition to our Cambridge, Massachusetts
headquarters and research and manufacturing facilities, we operate research and
manufacturing facilities in Ohio. Some of our key products include:
- Risperdal Consta(TM) is a long-acting formulation of Janssen
Pharmaceutica Inc.'s ("Janssen") anti-psychotic drug RISPERDAL(R)
based on our Medisorb technology. RISPERDAL is the most commonly
prescribed drug for the treatment of schizophrenia in the world and
had sales of over $1.8 billion in 2001. In August 2001, Janssen filed
a New Drug Application, or NDA, for Risperdal Consta with the U.S.
Food and Drug Administration ("FDA") and similar regulatory filings
have been submitted in more than 30 countries around the world. On
June 28, 2002, Johnson & Johnson PRD ("J&J PRD"), an affiliate of
Janssen, received a non-approvable letter for Risperdal Consta from
the FDA and is currently working to respond to the FDA's concerns.
There can be no assurance that the issues raised in the letter will
be resolved on a timely basis, if at all. Since August 2002,
Risperdal Consta has been approved in eight countries around the
world and launched in Austria, Germany and the United Kingdom. We are
the exclusive manufacturer of Risperdal Consta for Janssen.
- Nutropin Depot(R) is a long-acting ProLease formulation of rhGH that
we developed in collaboration with Genentech, the leading supplier of
rhGH in the United States. rhGH is approved for use in the treatment
of children with growth hormone deficiency, or GHD, which results in
short stature and potentially other developmental deficits, Turner's
syndrome, chronic renal insufficiency and other indications. Our
extended-release formulation, approved by the FDA in December 1999
for use in GHD children and commercially launched by Genentech in
June 2000, requires only one or two doses per month compared to
current growth hormone therapies that require multiple doses per
week. We and Genentech have also agreed to continue the clinical
development for Nutropin Depot in adults with GHD, and have initiated
a Phase III clinical trial with Genentech, which commenced in
December 2001.
- Vivitrex(TM), our most advanced proprietary product candidate, is a
long-acting Medisorb formulation of naltrexone, an FDA-approved
treatment for alcoholism and opiate abuse.
3
Naltrexone is currently available in a daily oral-dosage form. It is
estimated that there are currently 2.3 million people in the United States
who seek treatment for alcoholism, a number which is projected to grow at
a rate of 2% per year. We believe there is a significant need for a
product that will help improve compliance in this patient population. In
October 2001, we completed a second trial, which was a multi-center
clinical trial, of Vivitrex, the data from which was presented at the
Annual Meeting of the American College of Neuropsychopharmacology. This
trial tested the safety, tolerability and pharmacokinetics of repeat doses
of Vivitrex administered monthly to alcohol-dependent patients. In March
2002, we initiated a Phase III clinical trial in alcohol-dependent
patients testing the safety and efficacy of repeat doses of Vivitrex. We
plan to manufacture Vivitrex for both clinical trials and commercial
sales, if any.
- Inhaled epinephrine is our leading proprietary product based on our AIR
pulmonary delivery technology that we are developing for the treatment of
anaphylaxis, which is a sudden, often severe, systemic allergic reaction.
Currently, patients self-administer epinephrine by injection. We believe
that an inhaled dosage form of epinephrine may offer patients significant
advantages over the injection method, such as ease of use and titration of
doses. In August 2002, we completed our second Phase I study of inhaled
epinephrine.
We have additional products in clinical trials with our partners,
including a long-acting injectable form of r-hFSH, recombinant human follicle
stimulating hormone, for the treatment of infertility, with Serono S.A., a
long-acting injectable form of AC2993 (synthetic Exendin-4), for the treatment
of Type II diabetes, with Amylin Pharmaceuticals, Inc. and pulmonary
formulations of insulin and rhGH with Eli Lilly and Company.
Below is a summary of our key proprietary and collaborators' product
candidates and their respective stages of clinical development.
PRODUCT
CANDIDATE INDICATION Stage(1)
-------------------------------------------------------------------------------------------------
Nutropin Depot Pediatric growth hormone deficiency Marketed
Risperdal Consta Schizophrenia (2)
Vivitrex Alcohol dependence Phase III
Vivitrex Opioid dependence Phase II
Nutropin Depot Adult growth hormone deficiency Phase III
Medisorb AC2993 (Exendin-4) Diabetes Phase II
AIR Epinephrine Anaphylaxis Phase I completed
ProLease r-hFSH Infertility Phase I completed
AIR Insulin Diabetes Undisclosed
AIR hGH Growth hormone deficiency Phase I completed
AIR small molecule products Respiratory disease Phase I completed/Preclincal
---------------
(1) "Phase I" clinical trials indicates that the compound is being tested in
humans for safety and preliminary indications of biological activity in a
limited patient population. "Phase II" clinical trials indicates that the trial
is being conducted in patients and is to provide information on dosing and is
testing for safety and preliminary evidence of efficacy. "Phase III" clinical
trials indicates that the trial is being conducted in patients and is testing
the safety and efficacy of the compound. "Preclinical" indicates that we or our
partners are conducting formulation, efficacy, pharmacology and/or toxicology
testing of a compound in animal models or biochemical assays.
(2) Approved for marketing in the United Kingdom, Germany, Mexico, Austria, New
Zealand, Switzerland, Iceland and the Netherlands. An affiliate of our
collaborative partner received a non-approvable letter from the FDA. See "Risk
Factors."
4
Our principal executive offices are located at 88 Sidney Street,
Cambridge, Massachusetts 02139 and our telephone number is (617) 494-0171.
-------------------------
Alkermes(R), the Alkermes logo, ProLease(R) and Medisorb(R) are registered
trademarks of Alkermes, Inc. AIR(TM) and Vivitrex(TM) are trademarks of
Alkermes, Inc. Nutropin Depot(R) is a registered trademark of Genentech, Inc.
RISPERDAL(R) is a registered trademark, and Risperdal Consta(TM) is a trademark,
of Janssen Pharmaceutica Products, LP.
5
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We have summarized the terms of the exchange offer in this section.
Before you decide whether to tender your existing notes in this offer, you
should read the detailed description of the offer under "The Exchange Offer" and
of the new notes under "Description of New Notes" for further information.
TERMS OF THE EXCHANGE
OFFER ............... We are offering up to $115,000,000 principal amount of
new notes for up to an aggregate principal amount of
$200,000,000 of our existing notes. We are offering to
exchange $575 principal amount of new notes for each
$1,000 principal amount of our existing notes. New notes
will be issued in denominations of $1,000 and any
integral multiple of $1,000. Any fractional new notes
will be settled in cash.
You may tender all, some or none of your existing notes.
We may pay interest on the new notes in cash or shares
of our common stock, solely at our option.
CONVERSION PRICE .... The new notes will be convertible into our common stock
at any time prior to maturity at a conversion price
equal to a 17-1/2% premium over the simple average of
the daily volume-weighted average price of our common
stock for each of the five trading days immediately
preceding the third trading day prior to the expiration
date of the exchange offer, subject to adjustment upon
certain events.
EXPIRATION DATE;
EXTENSION;
TERMINATION ......... The exchange offer and withdrawal rights will expire at
5:00 p.m., New York City time on December 24, 2002, or
any subsequent date to which we extend it. We may extend
the expiration date for any reason. In the case of an
extension, we will issue a press release or other public
announcement no later than 9:00 a.m. New York City time,
on the next business day after the previously scheduled
expiration date. If we extend the expiration date, you
must tender your existing notes prior to the date
identified in the press release or public announcement
if you wish to participate in the exchange offer. We
have the right to:
- extend the expiration date of the exchange offer
and retain all tendered existing notes, subject to
your right to withdraw your tendered existing
notes; and
- waive any condition or otherwise amend the terms
of the exchange offer in any respect, other than
the condition that the registration statement be
declared effective.
6
CONDITIONS TO THE
EXCHANGE OFFER ...... The exchange offer is subject to the registration
statement and any post-effective amendment to the
registration statement covering the new notes being
effective under the Securities Act of 1933. The exchange
offer also is subject to customary conditions, which we
may waive.
WITHDRAWAL RIGHTS ... You may withdraw a tender of your existing notes at any
time before the exchange offer expires by delivering a
written notice of withdrawal to State Street Bank and
Trust Company, the exchange agent, before the expiration
date. If you change your mind, you may retender your
existing notes by again following the exchange offer
procedures before the exchange offer expires. In
addition, if you tender existing notes and we have not
accepted them for exchange by January 24, 2003, you may
therefore withdraw your existing notes at any time in
the period beginning on that date and ending on the date
we do accept your existing notes for exchange.
PROCEDURES FOR
TENDERING OUTSTANDING
EXISTING NOTES ...... If you hold existing notes through a broker, dealer,
commercial bank, trust company or other nominee, you
should contact that person promptly if you wish to
tender your existing notes. Tenders of your existing
notes will be effected by book-entry transfers through
The Depository Trust Company.
If you hold existing notes through a broker, dealer,
commercial bank, trust company or other nominee, you
also may comply with the procedures for guaranteed
delivery.
Please do not send letters of transmittal to us. You
should send those letters to State Street Bank and Trust
Company, the exchange agent, at one of its offices as
indicated under "The Exchange Offer," at the end of this
prospectus or in the letters of transmittal. The
exchange agent can answer your questions regarding how
to tender your existing notes.
ACCRUED INTEREST ON
EXISTING NOTES ...... Existing note holders will receive accrued and unpaid
interest on any existing notes accepted in the exchange
offer. The amounts of accrued interest will be
calculated from the last interest payment date up to but
excluding the closing date of the exchange offer.
7
INTEREST ON NEW NOTES Interest on the new notes will be payable in cash or
shares of our common stock, solely at our option, at a
rate of 6.52% per year, payable on June 30 and December
31 of each year, commencing on June 30, 2003. If we
elect to pay interest in common stock, the shares of
common stock will be valued at 90% of the average of the
closing price for each of the five trading days
immediately preceding the second trading day prior to
the interest payment date. Interest on new notes will
begin to accrue as of the closing date of the exchange
offer.
INFORMATION AGENT.... Georgeson Shareholder Communications Inc.
EXCHANGE AGENT....... State Street Bank and Trust Company
DEALER MANAGER....... U.S. Bancorp Piper Jaffray
RISK FACTORS......... You should carefully consider the matters described
under "Risk Factors," as well as other information set
forth in this prospectus and in the letter of
transmittal.
DECIDING WHETHER TO
PARTICIPATE IN THE
EXCHANGE OFFER ...... Neither we nor our officers or directors make any
recommendation as to whether you should tender or
refrain from tendering all or any portion of your
existing notes in the exchange offer. Further, we have
not authorized anyone to make any such recommendation.
You must make your own decision whether to tender your
existing notes in the exchange offer and, if so, the
aggregate amount of existing notes to tender after
reading this prospectus and the letter of transmittal
and consulting with your advisers, if any, based on your
own financial position and requirements.
CONSEQUENCES OF NOT
EXCHANGING EXISTING
NOTES ............... If you do not exchange your existing notes in the
exchange offer, your existing notes will be subordinated
to the new notes. Further, the liquidity and trading
market for existing notes not tendered in the exchange
offer could be adversely affected to the extent a
significant number of the existing notes are tendered
and accepted in the exchange offer.
CASH OFFER .......... If you tender some or all of your existing notes, and
you would be interested in participating in the cash
offer of additional new notes, you should give your
indication of interest directly to the placement agent
at (877) 420-2321, attention Jeffrey Winaker or
Brian Sullivan.
TAX CONSEQUENCES .... Please see "United States Federal Income Tax
Considerations."
8
INSUFFICIENCY OF
EARNINGS TO COVER
FIXED CHARGES ....... Earnings were insufficient to cover fixed charges in the
following amounts: $9.9 million in fiscal 1998; $37.5
million in fiscal 1999; $62.8 million in fiscal 2000;
$4.7 million in fiscal 2001; $49.1 million in fiscal
2002; and $106.4 million in the six months ended
September 30, 2002.
THE CASH OFFER
TERMS OF THE CASH OFFER
We are separately offering up to $50 million aggregate principal amount of
additional new notes for cash to holders of existing notes who participate in
the exchange offer.
CASH OFFER FOR
ADDITIONAL NEW NOTES The discussion under the heading "Cash Offer of
Additional New Notes" provides further information
regarding the cash offer.
USE OF PROCEEDS ..... We intend to use the net proceeds, if any, received from
the sale for cash of the additional new notes for
general corporate purposes, including research,
development and clinical trial activities, especially
for proprietary compounds, and for manufacturing
facilities and equipment.
PLACEMENT AGENT ..... U.S. Bancorp Piper Jaffray
INDICATIONS OF
INTEREST ............ If you tender some or all of your existing notes, and
you would be interested in participating in the cash
offer of additional new notes, you should give your
indication of interest directly to the placement agent
at (877) 420-2321, attention Jeffrey Winaker or Brian
Sullivan.
9
COMPARISON OF NEW NOTES AND EXISTING NOTES
The following is a brief summary of the terms of the new notes and the
existing notes. For a more detailed description of the new notes, see
"Description of New Notes."
NEW NOTES EXISTING NOTES
----------------------------- ------------------------
SECURITIES........... Up to $165,000,000 principal $200,000,000 principal
amount of 6.52% Convertible amount of 3.75%
Senior Subordinated Notes due Convertible Subordinated
December 31, 2009, of which Notes due 2007.
up to $115,000,000 are being
offered in the exchange offer
and up to $50,000,000 are
being offered in the cash
offer. The new notes will be
issued in principal amounts
of $1,000 and integral
multiples of $1,000.
ISSUER............... Alkermes, Inc. Alkermes, Inc.
MATURITY............. December 31, 2009. February 15, 2007.
INTEREST............. The new notes will bear The existing notes bear
interest at an annual rate of interest at an annual
6.52% payable in cash or, at rate of 3.75%. Interest
our option, in common stock. is payable on February
If we elect to pay interest 15 and August 15 of each
in common stock, the shares year, beginning August
of common stock will be 15, 2000.
valued at 90% of the average
of the closing price for each
of the five days immediately
preceding the second trading
day prior to the interest
payment date. Interest will
be payable on June 30 and
December 31 of each year,
beginning June 30, 2003.
10
NEW NOTES EXISTING NOTES
----------------------------- ------------------------
CONVERSION - GENERAL The new notes will be The existing notes are
convertible into common stock convertible into common
at any time prior to maturity stock at any time prior
at a conversion price equal to maturity at a
to a 17-1/2% premium over the conversion price of
simple average of the daily $67.75 per share,
volume-weighted average price subject to adjustment
of our common stock for each upon certain events.
of the five trading days
immediately preceding the
third trading day prior to
the expiration date of the
exchange offer, subject to
adjustment upon certain
events.
AUTO-CONVERSION ..... We may elect to automatically None.
convert some or all of the
new notes on or prior to
maturity if the closing price
of our common stock has
exceeded 150% of the
conversion price for at least
20 trading days during any
30-day trading period, ending
within five trading days
prior to the notice of
automatic conversion.
PROVISIONAL
REDEMPTION .......... None. We may redeem some or
all of the existing
notes at any time prior
to February 19, 2003 if
the price of our common
stock exceeds 200% of
the conversion price for
at least 20 out of 30
trading days prior to
redemption.
OPTIONAL REDEMPTION.. We may redeem some or all of We may redeem some or
the new notes on or after all of the existing
January 1, 2005 at declining notes on or after
redemption prices plus February 19, 2003 at
accrued and unpaid interest. declining redemption
prices plus accrued and
unpaid interest.
11
NEW NOTES EXISTING NOTES
----------------------------- ------------------------
INTEREST MAKE-WHOLE
PROVISIONS DURING
FIRST TWO YEARS
UPON AUTO-
CONVERSION .......... If an automatic conversion None.
occurs on or prior to
December , 2004, we will
pay additional interest in
cash or, at our option, in
common stock, equal to two
full years of interest on the
converted new notes, less any
interest paid or provided for
on the new notes prior to
automatic conversion. If we
elect to pay the additional
interest in common stock, the
shares of common stock will
be valued at 90% of the
average closing price of our
common stock for the five
trading days immediately
preceding the second trading
day prior to the conversion
date.
UPON VOLUNTARY
CONVERSION .......... If you elect to voluntarily None.
convert your new notes prior
to December , 2004 and prior
to a notice of auto-conversion,
we will pay additional
interest in cash or, at our
option, in common stock,
equal to two full years of
interest on the converted new
notes, less any interest paid
or provided for on the new
notes prior to voluntary
conversion. If we elect to
pay the additional interest
in common stock, the shares
of common stock will be
valued at 90% of the average
closing price of our common
stock for the five days
preceding the second trading
day prior to the voluntary
conversion date.
12
NEW NOTES EXISTING NOTES
----------------------------- ------------------------
REPURCHASE AT
HOLDER'S OPTION UPON
A REPURCHASE EVENT .. You may require us to You may require us to
repurchase your new notes repurchase your existing
upon a repurchase event in notes upon a repurchase
cash, or at our option, in event in cash, or at our
common stock, at 105% of the option, in common stock,
principal amount, plus at 105% of the principal
accrued and unpaid interest. amount, plus accrued and
unpaid interest.
RANKING ............. The new notes are The existing notes are
subordinated to our senior subordinated to our
indebtedness, but will rank senior indebtedness. The
senior in right of payment to indenture for the
the existing notes. The existing notes does not
indenture for the new notes limit our ability to
does not limit our ability to incur additional
incur additional indebtedness, senior or
indebtedness, senior or otherwise. The existing
otherwise. notes are also
structurally subordinated
to the indebtedness and
other liabilities of our
subsidiaries.
PROHIBITION ON
PRIVATE TRANSACTIONS
BY US INVOLVING
EXISTING NOTES ...... For a period of two years None.
following the issuance of the
new notes, we will be
prohibited from engaging in
any private repurchases,
debt-for-equity swaps or
similar transactions with
respect to the existing notes.
13
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER
WHY ARE WE DOING THE EXCHANGE OFFER AND THE CASH OFFER?
We believe that this exchange offer is an important step in re-calibrating our
capital structure to be better suited for the current market environment. If the
exchange offer is fully subscribed, it will:
- eliminate $85 million principal amount of convertible notes;
- position us to automatically convert substantially all our debt into
equity at stock prices approximately 75% above the current market price;
- leave the aggregate annual interest payments unchanged, while allowing us
the flexibility to make interest payments, at our option, in common stock;
and
- raise up to $50 million of additional capital through the cash offer.
HOW DO I PURCHASE ADDITIONAL NOTES FOR CASH?
If you tender existing notes in the exchange offer, you will have the
opportunity to indicate your interest for additional new notes in the cash
offer. Allocations of additional new notes will be made by the placement agent
in its sole discretion.
If you would like to purchase additional new notes for cash, you may
indicate your interest in purchasing new notes by contacting Jeffrey Winaker or
Brian Sullivan at U.S. Bancorp Piper Jaffray at (877) 420-2321.
IF I PARTICIPATE IN THE EXCHANGE OFFER, HOW MANY NEW NOTES AM I ELIGIBLE TO
PURCHASE FOR CASH?
If you tender existing notes in the exchange offer, there is no limitation
on the number of new notes you may indicate you are interested in purchasing for
cash. If indications of interest exceed the total amount of new notes that are
being offered for cash, allocations will be made at the discretion of the
placement agent.
IS THE EXCHANGE OFFER CONDITIONED UPON A MINIMUM NUMBER OF EXISTING NOTES BEING
TENDERED IN THE EXCHANGE OR NEW NOTES BEING PURCHASED FOR CASH?
No, the exchange offer is not conditioned upon any minimum number of
existing notes being tendered or new notes being purchased for cash. The
exchange offer and the cash offer are subject to customary conditions, which we
may waive.
HOW SOON MUST I ACT IF I DECIDE TO PARTICIPATE?
Unless we extend the expiration date, the exchange offer and the cash
offer will expire on December 24, 2002 at 5:00 p.m., New York City time. The
exchange agent must receive all required documents and instructions before that
time or you will not be able to participate in either the exchange offer or the
cash offer. In addition, U.S. Bancorp Piper Jaffray must also receive
indications of interest in purchasing new notes for cash prior to that date.
14
WHAT HAPPENS IF I DO NOT PARTICIPATE IN THE EXCHANGE OFFER?
If you do not participate in the exchange offer, you will not be eligible
to purchase additional new notes in the cash offer. If a significant number of
the existing notes are tendered and accepted in the exchange offer, the
liquidity and the trading market for existing notes will likely be impaired.
Also, the new notes will be senior in right of payment and preference to your
existing notes.
HOW WILL FRACTIONAL NEW NOTES BE SETTLED?
We will exchange $575 principal amount of new notes for each $1,000
principal amount of our existing notes that are tendered in the exchange. We
will issue new notes only in denominations of $1,000 and integral multiples of
$1,000. We will settle any fractional new notes in cash. For example, if you
tender ten existing notes ($10,000 aggregate face value), you will receive five
new notes ($5,000 aggregate face value) and $750 in cash.
WHAT SHOULD I DO IF I HAVE ADDITIONAL QUESTIONS ABOUT THE EXCHANGE OFFER OR THE
CASH OFFER?
If you have any questions, need additional copies of the offering
material, or otherwise need assistance, please contact the information agent for
this offering.
GEORGESON SHAREHOLDER COMMUNICATIONS INC.
17 STATE STREET, 10TH FLOOR
NEW YORK, NEW YORK 10004
(866) 318-0506
To receive copies of our recent SEC filings, you can contact us by mail or
refer to the other sources described under "Where You Can Find More
Information."
15
RISK FACTORS
You should carefully consider the risks described below before you decide
to exchange your existing notes for new notes or buy for cash additional new
notes. The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties that we do not presently know or
that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, they could materially
adversely affect our business, financial condition or operating results. In that
case, the trading price of our common stock and the existing notes could
decline.
RISKS RELATED TO ALKERMES
J&J PRD RECEIVED A NON-APPROVABLE LETTER FOR RISPERDAL CONSTA FROM THE FDA AND
THE FUTURE OF RISPERDAL CONSTA IN THE UNITED STATES IS UNCERTAIN.
On June 28, 2002, J&J PRD, an affiliate of our collaborative partner
Janssen, received a non-approvable letter for Risperdal Consta from the FDA. The
issues raised in the letter may not be resolved on a timely basis, if at all,
and Risperdal Consta may not be approved for any commercial use in the United
States. The FDA's response to and issues with the New Drug Application, or NDA,
submitted with respect to Risperdal Consta may impact the response of regulatory
agencies in other countries where filings are pending. Even if Risperdal Consta
is approved in the United States or elsewhere, the timing of the approvals is
uncertain and there may be significant delays. It is uncertain whether the FDA's
issues with the NDA will impact the labeling of Risperdal Consta in the United
States or in other countries, if it is approved. The NDA was filed by an
affiliate of J&J PRD and Janssen, and they are responsible for obtaining
regulatory approvals. We cannot control the activity of any of our collaborative
partners, and we are dependent upon Janssen's efforts to resolve the FDA's
issues with the NDA for Risperdal Consta. Janssen may terminate our
collaboration, including the license and manufacturing agreements, based on its
right to do so on short notice under such agreements. If any of the foregoing
events were to occur, it would have a material adverse effect on our business,
results of operations and financial position.
OUR DELIVERY TECHNOLOGIES OR PRODUCT DEVELOPMENT EFFORTS MAY NOT PRODUCE SAFE,
EFFICACIOUS OR COMMERCIALLY VIABLE PRODUCTS.
Many of our product candidates require significant additional research and
development, as well as regulatory approval. To be profitable, we must develop,
manufacture and market our products, either alone or by collaborating with
others. It can take several years for a product candidate to be approved and we
may not be successful in bringing additional product candidates to the market. A
product candidate may appear promising at an early stage of development or after
clinical trials and never reach the market, or it may reach the market and not
sell, for a variety of reasons. The product candidate may:
- be shown to be ineffective or to cause harmful side effects during
preclinical testing or clinical trials;
- fail to receive regulatory approval on a timely basis or at all;
- be difficult to manufacture on a large scale;
- be uneconomical;
- not be prescribed by doctors or accepted by patients;
16
- fail to receive a sufficient level of reimbursement from government
or third-party payors; or
- infringe on proprietary rights of another party.
If our delivery technologies or product development efforts fail to
generate product candidates that lead to the successful development and
commercialization of products, or if our collaborative partners decide not to
pursue our product candidates or if new products do not perform as anticipated,
our business and financial condition will be materially adversely affected.
WE RELY HEAVILY ON COLLABORATIVE PARTNERS.
Our arrangements with collaborative partners are critical to our success
in bringing our products and product candidates to the market and promoting such
marketed products profitably. In some cases, we depend on these parties to
conduct preclinical testing and clinical trials and to provide funding for
product candidate development programs. Most of our collaborative partners can
terminate their agreements with us for no reason and on limited notice. We
cannot guarantee that any of these relationships will continue. Specifically,
GlaxoSmithKline ("Glaxo") has an option to develop products in two designated
fields in the respiratory disease market that expires at the end of November
2002. We do not expect to extend Glaxo's option in these two fields and,
therefore, rights to those fields will revert to us. In addition, Glaxo has
rights to two other fields and it is uncertain whether they will elect to fund
product development programs in these fields. Failure to make or maintain these
arrangements or a delay in a collaborative partner's performance may materially
adversely affect our business and financial condition.
We cannot control our collaborative partners' performance or the resources
they devote to our programs. If a collaborative partner fails to perform, or
perform on a timely basis, the research, development or commercialization
program on which it is working will be delayed. If this happens, we may have to
use funds, personnel, laboratories and other resources that we have not
budgeted, and consequently, we may not be able to continue the program. The
failure of a collaborative partner to perform or a loss of a collaborative
partner may materially adversely affect our business and financial condition.
Disputes may arise between us and a collaborative partner and may involve
the issue of which of us owns the technology that is developed during a
collaboration or other issues arising out of the collaborative agreements. Such
a dispute could delay the program on which the collaborative partner or we are
working. It could also result in expensive arbitration or litigation, which may
not be resolved in our favor.
A collaborative partner may choose to use its own or other technology to
develop a way to deliver its drug and withdraw its support of our product
candidate.
Our collaborative partners could merge with or be acquired by another
company or experience financial or other setbacks unrelated to our collaboration
that could, nevertheless, adversely affect us.
None of our drug delivery systems can be commercialized as stand-alone
products but must be combined with a drug. To develop any new proprietary
product candidate using one of these drug delivery systems, we often must obtain
the drug from another party. We cannot assure you that we will be able to obtain
any such drugs on reasonable terms, if at all.
17
THE RETURN FROM OUR INVESTMENT IN RELIANT IS UNCERTAIN.
In December 2001, we made a $100 million investment in Series C Preferred
Units of Reliant Pharmaceuticals, LLC ("Reliant") in exchange for approximately
a 19% interest in Reliant, and entered into a strategic relationship with
Reliant. Reliant is a privately held pharmaceutical company marketing branded,
prescription pharmaceutical products to primary care physicians in the United
States. Our investment in Reliant is illiquid and requires us to take noncash
charges if Reliant incurs net losses from its operations. We recorded equity
losses of approximately $64.9 million related to our Reliant investment from the
date of our investment through September 30, 2002, and we anticipate that our
investment in Reliant will result in continuing losses for the foreseeable
future. We may not see a return on this investment. In addition, there can be no
assurance that we will be able to successfully implement our strategic
relationship with Reliant.
CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND THEIR OUTCOME IS
UNCERTAIN.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
products, we or our partners must demonstrate through preclinical testing and
clinical trials that our product candidates are safe and effective for use in
humans. We have incurred and we will continue to incur, substantial expense for,
and devote a significant amount of time to, preclinical testing and clinical
trials.
Historically, the results from preclinical testing and early clinical
trials have often not predicted results of later clinical trials. A number of
new drugs have shown promising results in clinical trials, but subsequently
failed to establish sufficient safety and efficacy data to obtain necessary
regulatory approvals. To date, our proprietary product candidate, Vivitrex, has
only been tested in a small number of patients and there can be no assurance
that our Phase III clinical trial will produce results sufficient to obtain
regulatory approval. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which may delay, limit or prevent
regulatory approval. In addition, regulatory delays or rejections may be
encountered as a result of many factors, including changes in regulatory policy
during the period of product development.
Clinical trials conducted by us, by our collaborative partners or by third
parties on our behalf may not demonstrate sufficient safety and efficacy to
obtain the requisite regulatory approvals for our product candidates. Regulatory
authorities may not permit us to undertake any additional clinical trials for
our product candidates.
Clinical trials of each of our product candidates involve a drug delivery
technology and a drug. This makes testing more complex because the outcome of
the trials depends on the performance of technology in combination with a drug.
We have other product candidates in preclinical development. We have not
submitted Investigational New Drug Applications, or INDs, or begun clinical
trials for these product candidates. Preclinical and clinical development
efforts performed by us may not be successfully completed. We may not file
further INDs. We or our collaborative partners may not begin clinical trials as
planned.
Completion of clinical trials may take several years or more. The length
of time can vary substantially with the type, complexity, novelty and intended
use of the product candidate. The commencement and rate of completion of
clinical trials may be delayed by many factors, including the:
- inability to recruit clinical trial participants at the expected
rate;
- failure of clinical trials to demonstrate a product candidate's
safety or efficacy;
- inability to follow patients adequately after treatment;
18
- unforeseen safety issues;
- inability to manufacture sufficient quantities of materials used for
clinical trials; and
- unforeseen governmental or regulatory delays.
If a product candidate fails to demonstrate safety and efficacy in
clinical trials, this failure may delay development of other product candidates
and hinder our ability to conduct related preclinical testing and clinical
trials. As a result of these failures, we may also be unable to find additional
collaborative partners or to obtain additional financing. Our business and
financial condition may be materially adversely affected by any delays in, or
termination of, our clinical trials.
WE WILL NEED TO SPEND SUBSTANTIAL FUNDS TO BECOME PROFITABLE.
We will need to spend substantial amounts of money before we can be
profitable, and there can be no assurance we will achieve profitability. The
amount we will spend and when we will spend it depends, in part, on:
- the progress of our research and development programs for
proprietary and collaborative product candidates, including clinical
trials;
- the time and expense that will be required to pursue FDA or foreign
regulatory approvals for our product candidates, and whether such
approvals are obtained;
- the cost of building, operating and maintaining manufacturing and
research facilities;
- how many product candidates we pursue, particularly proprietary
product candidates;
- the time and expense required to prosecute, enforce and/or challenge
patent and other intellectual property rights;
- how competing technological and market developments affect our
product candidates;
- the cost of possible acquisitions of drug delivery technologies,
compounds, product rights or companies; and
- the cost of obtaining licenses to use technology owned by others for
proprietary products and otherwise.
If we require additional funds to complete any of our programs, we may
seek funds through arrangements with collaborative partners, by issuing
securities, through debt or bank financing or other financing structures. We
will continue to pursue opportunities to obtain additional financing in the
future. Such financing may be sought through various sources, including debt and
equity offerings, corporate collaborations, bank borrowings, lease arrangements
relating to fixed assets or other financing methods. The source, timing and
availability of any financings will depend on market conditions, interest rates
and other factors. Our future capital requirements will also depend on many
factors, including continued scientific progress in our research and development
programs (including our proprietary product candidates), the magnitude of these
programs, progress with preclinical testing and clinical trials, the time and
costs involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the establishment of additional collaborative arrangements, the
cost of manufacturing facilities and of commercialization activities and
arrangements and the cost of product in-licensing and any possible acquisitions.
If we are unable to raise additional funds on terms that are favorable to us, we
may have to cut back significantly
19
on one or more of our programs, give up some of our rights to our technologies,
product candidates or licensed products or agree to reduced royalty rates from
collaborative partners.
WE ANTICIPATE THAT WE WILL INCUR SUBSTANTIAL LOSSES IN THE FORESEEABLE FUTURE.
We have had net operating losses since being founded in 1987. At September
30, 2002, our accumulated deficit was $457 million. These losses principally
consisted of the costs of research and development and general and
administrative expenses, as well as noncash compensation costs and noncash
charges related to our share of Reliant Pharmaceuticals, LLC's losses. We expect
to incur substantial additional expenses over the next several years as our
research and development activities, including clinical trials, increase and as
we continue to manufacture products. In addition, we expect these costs to
increase over prior years as we expand development of our collaborators' and our
own product candidates.
Our future profitability depends, in part, on our ability to:
- obtain and maintain regulatory approval for our products in the
United States and in foreign countries;
- enter into agreements to develop and commercialize products;
- develop and expand our capacity to manufacture and market products
or enter into agreements with others to do so;
- obtain adequate reimbursement coverage for our products from
insurance companies, government programs and other third party
payors;
- obtain additional research and development funding from
collaborative partners; and
- achieve certain product development milestones.
We may not achieve any or all of these goals and, thus, we cannot provide
assurances that we will ever be profitable or achieve significant revenues. Even
if we do achieve some or all of these goals, we may not achieve significant
commercial success.
OUR MANUFACTURING EXPERIENCE IS LIMITED.
We currently manufacture Nutropin Depot, Risperdal Consta and all of our
product candidates, except Cereport. The manufacture of drugs for clinical
trials and for commercial sale is subject to regulation by the FDA under
then-current good manufacturing practices regulations and by other regulators
under other laws and regulations. We have manufactured product candidates for
use in clinical trials but have limited experience manufacturing products for
commercial sale. We cannot assure you that we can successfully manufacture our
products under current good manufacturing practices regulations or other laws
and regulations in sufficient quantities for commercial sale, or in a timely or
economical manner.
Our manufacturing facilities in Massachusetts and Ohio require specialized
personnel and are expensive to operate and maintain. Any delay in the regulatory
approval or market launch of product candidates to be manufactured in these
facilities will require us to continue to operate these expensive facilities and
retain specialized personnel, which may increase our expected losses.
We have a number of manufacturing facilities, including good manufacturing
practices facilities for Nutropin Depot and Risperdal Consta, and facilities for
future ProLease product candidates, Medisorb
20
product candidates and AIR pulmonary drug delivery product candidates. We are
currently expanding our facility in Ohio for Risperdal Consta and our Medisorb
technology product candidates and constructing a facility in Massachusetts for
our AIR technology product candidates. To date, the FDA has inspected and
approved our manufacturing facility for Nutropin Depot and inspected our
manufacturing facility for Risperdal Consta and issued an approvable letter. We
cannot guarantee that the FDA or foreign regulatory agencies will approve any of
the other facilities or, once they are approved, that such facilities will
remain in compliance with current good manufacturing practices regulations.
If more of our product candidates progress to mid- to late-stage
development, we will incur significant expenses in the expansion and/or
construction of manufacturing facilities and increases in personnel in order to
manufacture product candidates. The development of a commercial-scale
manufacturing process is complex and expensive. We cannot assure you that we
will be able to develop this manufacturing infrastructure in a timely or
economical manner, or at all.
Currently, many of our product candidates, including Vivitrex, are
manufactured in small quantities for use in clinical trials. We cannot assure
you that we will be able to successfully scale-up the manufacture of each of our
product candidates in a timely or economical manner, or at all. If any of these
product candidates are approved by the FDA or other drug regulatory authorities
for commercial sale, we will need to manufacture them in larger quantities. If
we are unable to successfully scale-up our manufacturing capacity, the
regulatory approval or commercial launch of such product candidate may be
delayed or there may be a shortage in supply of such product candidate.
If we fail to develop manufacturing capacity and experience, fail to
continue to contract for manufacturing on acceptable terms, or fail to
manufacture our product candidates economically on a commercial scale or in
accordance with current good manufacturing practices regulations, our
development programs will be materially adversely affected. This may result in
delays in receiving FDA or foreign regulatory approval for one or more of our
product candidates or delays in the commercial production of a product that has
already been approved. Any such delays could materially adversely affect our
business and financial condition.
THE FDA OR FOREIGN REGULATORY AGENCIES MAY NOT APPROVE OUR PRODUCT CANDIDATES.
Approval from the FDA is required to manufacture and market pharmaceutical
products in the United States. Regulatory agencies in foreign countries have
similar requirements. The process that pharmaceutical products must undergo to
obtain this approval is extensive and includes preclinical testing and clinical
trials to demonstrate safety and efficacy and a review of the manufacturing
process to ensure compliance with current good manufacturing practices
regulations. This process can last many years and be very costly and still be
unsuccessful. FDA or foreign regulatory approval can be delayed, limited or not
granted at all for many reasons, including:
- a product candidate may not be safe or effective;
- data from preclinical testing and clinical trials may be interpreted
by the FDA or foreign regulatory agencies in different ways than we
or our partners interpret it;
- the FDA or foreign regulatory agencies might not approve our
manufacturing processes or facilities;
- the FDA or foreign regulatory agencies may change their approval
policies or adopt new regulations;
- a product candidate may not be approved for all the indications we
or our partners request; and
21
- the FDA may not agree with our or our partners' regulatory approval
strategies or components of our or our partners' filings, such as
clinical trial designs.
For some product candidates, the drug used has not been approved at all or
has not been approved for every indication it is targeting. Any delay in the
approval process for any of our product candidates will result in increased
costs that could materially and adversely affect our business and financial
condition.
Regulatory approval of a product candidate is limited to specific
therapeutic uses for which the product has demonstrated safety and efficacy in
clinical testing. Approval of a product candidate could also be contingent on
post-marketing studies. In addition, any marketed drug and its manufacturer
continue to be subject to strict regulation after approval. Any unforeseen
problems with an approved drug or any violation of regulations could result in
restrictions on the drug, including its withdrawal from the market.
OUR PRODUCT CANDIDATES MAY NOT GENERATE SIGNIFICANT REVENUES.
Even if a product receives regulatory approval for commercial use, the
revenues received or to be received from the sale of such products may not be
significant and will depend on numerous factors outside of our control,
including, in many instances, our collaborators' decisions on pricing and
discounting, the reliance on third-party marketing partners outside the United
States, the ability to obtain reimbursement from third-party payors, the market
size for the product, the reaction of companies that market competitive products
and general market conditions. In addition, if certain volume levels are not
achieved, the costs to manufacture our products may be higher than anticipated.
Risperdal Consta
An NDA for Risperdal Consta was submitted to the FDA in August 2001 by
Janssen Pharmaceutica Products, LP. A number of similar filings have been
submitted with drug regulatory authorities worldwide by Janssen. On June 28,
2002, J&J PRD, an affiliate of Janssen, received a non-approvable letter for
Risperdal Consta from the FDA. There can be no assurance that the NDA or other
foreign regulatory filings will be approved in a timely fashion, if at all. If
there is a significant delay in resolving the issues raised by the FDA, we may
incur significant expenses without receipt of the corresponding royalty and
manufacturing revenues. The revenues received from the sale of Risperdal Consta
may not be significant and may depend on numerous factors outside of our
control, including those outlined above. In addition, the costs to manufacture
Risperdal Consta may be higher than anticipated if certain volume levels are not
achieved. If Risperdal Consta does not produce significant revenues or if the
manufacturing costs are higher than anticipated, our business, results of
operations and financial condition would be materially adversely affected.
Vivitrex
We are currently conducting a Phase III clinical trial in
alcohol-dependent patients testing the safety and efficacy of repeat doses of
Vivitrex, an injectable extended-release formulation of naltrexone. To date, our
proprietary product candidate, Vivitrex, has only been tested in a small number
of patients and there can be no assurance that the Phase III clinical trial will
produce results sufficient to obtain regulatory approvals. Even if the Phase III
clinical trial is successful and we submit an NDA to the FDA, there can be no
assurance that the FDA will accept our data or that the NDA will be approved. We
are relying on data from the original approval of oral naltrexone under Section
505(b)(2) of the U.S. Food, Drug and Cosmetic Act. While we believe only one
Phase III efficacy study will be required for approval, the FDA will require
that additional safety data be collected on Vivitrex's long-term use before
approval. Even if an NDA is approved, we will have to market it ourselves or
enter into co-promotion or sales and marketing arrangements with other
companies. We currently have no sales force or any
22
marketing experience and arrangements with other companies will result in
dependence on such other companies for revenues. In either event, a market for
Vivitrex may not develop as expected. There are manufacturing risks that come
with the manufacture of Vivitrex. See "Our manufacturing experience is limited."
In addition, naltrexone is made using controlled substances and, therefore, we
may be unable to obtain commercial-quantity supplies of naltrexone on
commercially reasonable terms.
IF AND WHEN APPROVED, THE COMMERCIAL USE OF OUR PRODUCTS MAY CAUSE UNINTENDED
SIDE EFFECTS OR ADVERSE REACTIONS, OR INCIDENCE OF MISUSE MAY APPEAR.
We cannot predict whether the commercial use of products (or product
candidates in development if and when they are approved for commercial use) will
produce undesirable or unintended side effects that have not been evident in the
use of or clinical trials conducted for such products (and product candidates)
to date. Additionally, incidents of product misuse may occur. These events,
among others, could result in product recalls or withdrawals or additional
regulatory controls.
PATENT PROTECTION FOR OUR PRODUCTS IS IMPORTANT AND UNCERTAIN.
The following factors are important to our success:
- receiving and maintaining patent protection for our products and
product candidates and for those of our collaborative partners;
- maintaining our trade secrets;
- not infringing the proprietary rights of others; and
- preventing others from infringing our proprietary rights.
Patent protection only provides exclusive rights for the term of the
patent. We will be able to protect our proprietary rights from unauthorized use
by third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
We know of several U.S. patents issued to third parties that relate to our
product candidates. One of those third parties has asked us to compare our
Medisorb technology to that third party's patented technology. Another such
third party has asked a collaborative partner to substantiate how our ProLease
microspheres are different from that third party's patented technology. The
manufacture, use, offer for sale, sale or importing of any of these product
candidates might be found to infringe on the claims of these third party
patents. A third party might file an infringement action against us. Our cost of
defending such an action is likely to be high and we might not receive a
favorable ruling.
We also know of patent applications filed by other parties in the United
States and various foreign countries that may relate to some of our product
candidates if such patents are issued in their present form. If patents are
issued to any of these applicants, we may not be able to manufacture, use, offer
for sale, or sell some of our product candidates without first getting a license
from the patent holder. The patent holder may not grant us a license on
reasonable terms or it may refuse to grant us a license at all. This could delay
or prevent us from developing, manufacturing or selling those of our product
candidates that would require the license.
We try to protect our proprietary position by filing U.S. and foreign
patent applications related to our proprietary technology, inventions and
improvements that are important to the development of our business. Because the
patent position of pharmaceutical and biotechnology companies involves complex
legal and factual questions, enforceability of patents cannot be predicted with
certainty. Patents, if issued, may be challenged, invalidated or circumvented.
Thus, any patents that we own or license from others
23
may not provide any protection against competitors. Our pending patent
applications, together with those we may file in the future, or those we may
license from third parties, may not result in patents being issued. Even if
issued, such patents may not provide us with sufficient proprietary protection
or competitive advantages against competitors with similar technology.
Furthermore, others may independently develop similar technologies or duplicate
any technology that we have developed. The laws of certain foreign countries do
not protect our intellectual property rights to the same extent as do the laws
of the United States.
We also rely on trade secrets, know-how and technology, which are not
protected by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality agreements with parties that
have access to it, such as our collaborative partners, licensors, employees and
consultants. Any of these parties may breach the agreements and disclose our
confidential information or our competitors might learn of the information in
some other way. If any trade secret, know-how or other technology not protected
by a patent were to be disclosed to or independently developed by a competitor,
our business and financial condition could be materially adversely affected.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS AND RECALLS.
We may be exposed to liability claims arising from the commercial sale of
our products, Nutropin Depot or Risperdal Consta, or the use of our product
candidates in clinical trials and those awaiting regulatory approval. These
claims may be brought by consumers, our collaborative partners or third parties
selling the products. We currently carry product liability insurance coverage in
such amounts as we believe are sufficient for our business. However, we cannot
provide any assurance that this coverage will be sufficient to satisfy any
liabilities that may arise. As our development activities progress and we
continue to have commercial sales, this coverage may be inadequate; we may be
unable to obtain adequate coverage at an acceptable cost or we may be unable to
get adequate coverage at all. This could prevent or limit our commercialization
of our product candidates or commercial sales of our products. Even if we are
able to maintain insurance that we believe is adequate, our financial condition
may be materially adversely affected by a product liability claim.
Additionally, product recalls may be issued at our discretion or at the
direction of the FDA, other government agencies or other companies having
regulatory control for pharmaceutical product sales. We cannot assure you that
product recalls will not occur in the future or that, if such recalls occur,
such recalls will not adversely affect our business, financial condition or
reputation.
WE MAY NOT BE SUCCESSFUL IN THE DEVELOPMENT OF PRODUCTS FOR OUR OWN ACCOUNT.
In addition to our development work with collaborative partners, we are
developing proprietary product candidates for our own account by applying drug
delivery technologies to off-patent drugs. Because we will be funding the
development of such programs, there is a risk that we may not be able to
continue to fund all such programs to completion or to provide the support
necessary to perform the clinical trials, obtain regulatory approvals or market
any approved products on a worldwide basis. We expect the development of
products for our own account to consume substantial resources. If we are able to
develop commercial products on our own, the risks associated with these programs
may be greater than those associated with our programs with collaborative
partners.
IF WE ARE NOT ABLE TO DEVELOP NEW PRODUCTS, OUR BUSINESS MAY SUFFER.
We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial resources and capabilities substantially
greater than our resources and capabilities, in the development of new products.
We cannot assure you that we will be able to:
- develop or successfully commercialize new products on a timely basis
or at all; or
24
- develop new products in a cost effective manner.
Further, other companies may develop products or may acquire technology
for the development of products that are the same as or similar to the product
candidates we have in development. Because there is rapid technological change
in the industry and because other companies have more resources than we do,
other companies may:
- develop their products more rapidly than we can;
- complete any applicable regulatory approval process sooner than we
can; or
- offer their newly developed products at prices lower than our
prices.
Any of the foregoing may negatively impact our sales of newly developed
products. Technological developments or the FDA's approval of new therapeutic
indications for existing products may make our existing products or those
product candidates we are developing obsolete or may make them more difficult to
market successfully, any of which could have a material adverse effect on our
business and financial condition.
WE FACE COMPETITION IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES.
We can provide no assurance that we will be able to compete successfully
against the competitive forces in developing our product and product candidates.
We face intense competition from academic institutions, government
agencies, research institutions and biotechnology and pharmaceutical companies,
including other drug delivery companies. Some of these competitors are also our
collaborative partners. These competitors are working to develop and market
other drug delivery systems, pharmaceutical products, vaccines and other methods
of preventing or reducing disease, and new small-molecule and other classes of
drugs that can be used without a drug delivery system.
There are other companies developing extended-release drug delivery
systems and pulmonary delivery systems. In many cases, there are products on the
market or in development that may be in direct competition with our products or
product candidates. In addition, we know of new chemical entities that are being
developed that, if successful, could compete against our product candidates.
These chemical entities are being designed to work differently than our product
candidates and may turn out to be safer or to be more effective than our product
candidates. Among the many experimental therapies being tested in the U.S. and
Europe, there may be some that we do not now know of that may compete with our
drug delivery systems or product candidates. Our collaborative partners could
choose a competing drug delivery system to use with their drugs instead of one
of our drug delivery systems.
Many of our competitors have much greater capital resources,
manufacturing, research and development resources and production facilities than
we do. Many of them also have much more experience than we do in preclinical
testing and clinical trials of new drugs and in obtaining FDA and foreign
regulatory approvals.
Major technological changes can happen quickly in the biotechnology and
pharmaceutical industries, and the development by competitors of technologically
improved or different products or drug delivery technologies may make our
product candidates or platform technologies obsolete or noncompetitive.
25
Further, our product candidates may not gain market acceptance among
physicians, patients, healthcare payors and the medical community. The degree of
market acceptance of any product candidates that we develop will depend on a
number of factors, including:
- demonstration of their safety and clinical efficacy;
- their cost-effectiveness;
- their potential advantage over alternative treatment methods;
- the marketing and distribution support they receive; and
- reimbursement policies of government and third-party payors.
Our product candidates, if successfully developed and approved for
commercial sale, will compete with a number of drugs and therapies currently
manufactured and marketed by major pharmaceutical and other biotechnology
companies. Our product candidates may also compete with new products currently
under development by others or with products which may cost less than our
product candidates. Physicians, patients, third-party payors and the medical
community may not accept or utilize any of our product candidates that may be
approved. If our products do not achieve significant market acceptance, our
business and financial condition will be materially adversely affected.
WE MAY NOT BE ABLE TO RETAIN OUR KEY PERSONNEL.
Our success depends on the services of key employees in executive,
research and development, manufacturing, and regulatory positions. The loss of
the services of key employees could have a material adverse effect on our
business. On August 26, 2002, we announced a restructuring program to reduce our
cost structure as a result of our expectations regarding the financial impact of
the non-approvable letter for Risperdal Consta received by our partner, J&J PRD.
The restructuring program reduced our workforce by 122 employees, representing
approximately 23% of our employees, and includes plans for consolidation and
closure of certain leased facilities in Cambridge, Massachusetts, closure of our
medical affairs office in Cambridge, England, write-off of leasehold
improvements at leased facilities being vacated and reductions of other
expenses. In connection with the restructuring program, we recorded a charge of
$3.7 million in the quarter ended September 30, 2002. We can provide no
assurance that further reductions in force will not occur or that such
reductions will not result in the loss of key personnel.
IF WE ISSUE ADDITIONAL COMMON STOCK, YOU MAY SUFFER DILUTION OF YOUR INVESTMENT
AND A DECLINE IN STOCK PRICE.
As discussed above under "We will need to spend substantial funds to
become profitable," we may issue additional equity securities to raise funds,
thus reducing the ownership share of the current holders of our common stock,
which may adversely affect the market price of the common stock. In addition, we
were obligated, at September 30, 2002, to issue 12,334,949 shares of common
stock upon the vesting and exercise of stock options and vesting of stock
awards. Any of our shareholders could sell all or a large number of their
shares, which could adversely affect the market price of our common stock.
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE.
The realization of any of the risks described in these "Risk Factors" or
other unforeseen risks could have a dramatic and adverse effect on the market
price of our common stock. Additionally, market prices for securities of
biotechnology and pharmaceutical companies, including ours, have historically
been very volatile. The market for these securities has from time to time
experienced significant price and volume fluctuations for reasons that were
unrelated to the operating performance of any one
26
company. In particular and in addition to circumstances described elsewhere
under "Risk Factors," the following factors can adversely affect the market
price of our common stock:
- non-approval or set-backs in development of our product candidates
and success of our research and development programs;
- public concern as to the safety of drugs developed by us or others;
- announcements of issuances of common stock or acquisitions by
Alkermes;
- developments of our corporate partners;
- announcements of technological innovations or new therapeutic
products by us or others;
- changes in government regulations or patent decisions; and
- general market conditions.
WE MAY ENCOUNTER DIFFICULTIES INTEGRATING FUTURE ACQUISITIONS.
We have in the past and may again acquire novel technologies, compounds or
the rights to certain products through acquisitions of such technologies and
intellectual property rights or through the acquisition of businesses or
companies. We cannot assure you that any such future acquisition will be
completed, successfully integrated with our current businesses, will achieve
revenues or will be profitable. We may have difficulty assimilating the
operations, technology and personnel of any acquired businesses.
If we make significant acquisitions for stock consideration, the current
holders of our common stock may be significantly diluted. If we make significant
acquisitions for cash consideration, we may be required to use a substantial
portion of our available cash.
ANTI-TAKEOVER PROVISIONS MAY NOT BENEFIT SHAREHOLDERS.
We are a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a person or group to acquire
control of us, even if the change in control would be beneficial to
shareholders. Our articles of incorporation and bylaws also contain certain
provisions that could have a similar effect. The articles provide that our board
of directors may issue, without shareholder approval, preferred stock having
such voting rights, preferences and special rights as the board of directors may
determine. The issuance of such preferred stock could make it more difficult for
a third party to acquire us.
RISKS RELATED TO THE NEW NOTES
THE NEW NOTES ARE SUBORDINATED TO OUR SENIOR DEBT, BUT SENIOR IN PAYMENT TO THE
EXISTING NOTES.
The new notes will be unsecured and subordinated in right of payment to
senior debt, including our existing bank loan and equipment lease financing. The
new notes are senior to the existing notes. As a result of such subordination,
in the event of our liquidation or insolvency, a payment default with respect to
senior debt, a covenant default with respect to designated senior debt or upon
acceleration of the new notes due to an event of default, our assets will be
available to pay obligations on the new notes only after all senior debt has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on any or all of the new notes then outstanding. Neither we nor our
subsidiaries are prohibited under the new notes indenture from incurring
additional debt.
27
OUR SUBSIDIARIES WILL NOT BE PROHIBITED FROM INCURRING DEBTS IN THE FUTURE THAT
WOULD BE SENIOR TO THE NEW NOTES.
At September 30, 2002, we had approximately $9.75 million of outstanding
senior indebtedness.
The new notes are effectively subordinate to all indebtedness and other
liabilities of our subsidiaries. Substantially all of our operations are
conducted through our subsidiaries. Because substantially all of our operations
are conducted through subsidiaries, claims of holders of indebtedness of such
subsidiaries, as well as claims of regulators and creditors of such
subsidiaries, will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of Alkermes, Inc., including the new
note holders.
The new notes are obligations exclusively of Alkermes, Inc. Our
subsidiaries are separate and distinct legal entities. Our subsidiaries have no
obligation to pay any amounts due on the new notes or to provide us with funds
for our payment obligations, whether by dividends, distributions, loans or other
payments. In addition, any payment of dividends, distributions, loans or
advances by our subsidiaries to us could be subject to statutory or contractual
restrictions. Payments to us by our subsidiaries will also be contingent upon
our subsidiaries' earnings and business considerations.
WE MAY NOT HAVE THE FINANCIAL RESOURCES TO REPURCHASE THE NEW NOTES IN THE EVENT
OF A CHANGE IN CONTROL.
We may be unable to repurchase the new notes in the event of a change in
control. Upon a change in control, you may require us to repurchase all or a
portion of your new notes. If a change in control were to occur, we may not have
enough funds to pay the repurchase price for all tendered new notes. Any future
credit agreements or other debt agreements may prohibit repurchase of the new
notes for cash, or expressly prohibit the repurchase of the new notes upon a
change in control or may provide that a change in control constitutes an event
of default under that agreement. If a change in control occurs at a time when we
are prohibited from repurchasing the new notes, we could seek the consent of our
lenders to repurchase the new notes or could attempt to refinance the debt
agreements. If we do not obtain consent, we could not repurchase the new notes.
Our failure to repurchase the new notes would constitute an event of default
under the new notes indenture, which might constitute an event of default under
the terms of our other debt. Our obligation to offer to repurchase the new notes
upon a change in control would not necessarily afford you protection in the
event of a highly leveraged transaction, reorganization, merger or similar
transaction.
IF AN ACTIVE MARKET FOR THE NEW NOTES FAILS TO DEVELOP, THE TRADING PRICE AND
LIQUIDITY OF THE NEW NOTES COULD BE MATERIALLY ADVERSELY AFFECTED.
Prior to the offering there has been no trading market for the new notes.
The dealer manager has advised us that it currently intends to make a market in
the new notes. The liquidity of the trading market for the new notes will depend
in part on the level of participation of the holders of existing notes in the
exchange offer. The greater the participation in the exchange offer, the greater
the liquidity of the trading market for the new notes and the lesser the
liquidity of the trading market for the existing notes not tendered in the
exchange offer. However, U.S. Bancorp Piper Jaffray is not obligated to make a
market and may discontinue this market making activity at any time without
notice. In addition, market making activity by U.S. Bancorp Piper Jaffray will
be subject to the limits imposed by the Securities Act of 1933 (the "Securities
Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). As a result,
we cannot assure you that any market for the new notes will develop or, if one
does develop, that it will be maintained. If an active market for the new notes
fails to develop or be sustained, the trading price and liquidity of the new
notes could be materially adversely affected.
28
WE EXPECT THE TRADING PRICE OF THE NEW NOTES AND THE UNDERLYING COMMON STOCK TO
BE HIGHLY VOLATILE, WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR NEW
NOTES AND UNDERLYING COMMON STOCK.
The trading price of the new notes and the underlying common stock will
fluctuate in response to variations in:
- our operating results;
- announcements by us or our competitors of technological innovations
or new products; and
- general economic and market conditions.
In addition, stock markets have experienced extreme price volatility in
recent years, particularly for biotechnology companies. In the past, our common
stock has experienced volatility not necessarily related to announcements of our
financial performance. Broad market fluctuations may also adversely affect the
market price of our new notes and underlying common stock.
IF WE AUTOMATICALLY CONVERT THE NEW NOTES, YOU SHOULD BE AWARE THAT THERE IS A
SUBSTANTIAL RISK OF FLUCTUATION IN THE PRICE OF OUR COMMON STOCK FROM THE DATE
WE ELECT TO AUTOMATICALLY CONVERT TO THE CONVERSION DATE.
We may elect to automatically convert the new notes on or prior to
maturity if our common stock price has exceeded 150% of the conversion price for
at least 20 trading days during a 30-day trading period ending within five
trading days prior to the notice of automatic conversion. You should be aware
that there is a risk of fluctuation in the price of our common stock between the
time when we may first elect to automatically convert the new notes and the
automatic conversion date. This time period may extend up to 30 calendar days
from the time we elect to automatically convert the new notes until the
conversion date.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Summary," "Risk Factors"
and "Business" contains forward-looking information. This forward-looking
information is subject to risks and uncertainties including the factors listed
under "Risk Factors," as well as elsewhere in this prospectus. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. These statements are only predictions and
may be inaccurate. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined under "Risk Factors." These factors may cause our actual
results to differ materially from any forward-looking statement. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
29
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange of the existing
notes for the new notes pursuant to the exchange offer. We also are offering up
to $50,000,000 aggregate principal amount of additional new notes for cash. We
intend to use the net proceeds, if any, from the sale of the additional new
notes for research, development and clinical trial activities, especially for
proprietary compounds, and for manufacturing facilities and equipment. We may
also use the proceeds to license or otherwise acquire additional drug delivery
technologies or compounds for use in proprietary products, although no such
actions are currently contemplated. In addition, we expect to use the net
proceeds for working capital and other corporate purposes. We have not yet
determined the amount of net proceeds to be used specifically for each of these
purposes. Pending such use, we intend to invest the net proceeds in cash
equivalents, U.S. government obligations, high-grade corporate notes and
commercial paper.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the NASDAQ National Market under the symbol
ALKS. As of November 5, 2002, our common stock was held by 642 holders. Set
forth below for the indicated periods are the high and low sale prices for our
common stock. The closing share price of our common stock on November 25, 2002
was $9.09.
HIGH LOW
---- ---
Fiscal year ending March 31, 2001
First Quarter............................... $55.00 $21.56
Second Quarter.............................. 49.38 29.00
Third Quarter............................... 43.50 25.69
Fourth Quarter.............................. 33.50 18.75
Fiscal year ending March 31, 2002
First Quarter............................... $37.75 $20.38
Second Quarter.............................. 35.36 17.39
Third Quarter............................... 28.90 18.22
Fourth Quarter.............................. 31.39 23.67
Fiscal year ending March 31, 2003
First Quarter............................... $26.65 $14.65
Second Quarter.............................. 10.68 3.55
Third Quarter (through November 25, 2002)... 11.31 6.86
DIVIDEND POLICY
No dividends have been paid on the common stock or non-voting common stock
to date and we do not expect to pay cash dividends thereon in the foreseeable
future.
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended March 31, Six Months Ended September 30,
---------------------------------------- ------------------------------
1998 1999 2000 2001 2002 2002
---------------------------------------- ------------------------------
Ratio of earnings to fixed
charges (1) .............. -- -- -- -- -- --
(1) For the fiscal years ended March 31, 1998, 1999, 2000, 2001 and 2002 and for
the six months ended September 30, 2002, earnings were insufficient to cover
fixed charges by $9,868,000, $37,488,000, $62,828,000, $4,670,000,
$49,129,000 and $106,438,000, respectively. For this reason, no ratios are
provided.
30
CAPITALIZATION
The following table sets forth the consolidated unaudited
capitalization of Alkermes:
- at September 30, 2002:
- as adjusted to give effect to the issuance of the new notes in
the exchange offer on the assumption that all of the outstanding
existing notes were validly tendered and accepted for exchange;
- as adjusted to give effect to the issuance for cash of an
additional $50 million of new notes; and
- as adjusted to reflect a net gain of $80.9 million on the
assumed early extinguishment of all outstanding existing notes.
This extinguishment of debt will result in recognition of gain
in our statement of operations in the period in which the
exchange offer is consummated.
The interest make-whole provisions contained in the new notes will be
separately accounted for as derivative financial instruments in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Of the aggregate principal amount of new
notes to be issued in the exchange offer and cash offer, $9.0 million has been
allocated to these instruments based on their estimated fair values. This
derivative liability will be adjusted quarterly for changes in fair value
through either the date the interest make-whole provisions expire, at which time
the liability will be zero, or the date at which an interest make-whole
provision is triggered, with the corresponding charge or credit to other expense
or income. This allocation of value to the interest make-whole provisions has
been recorded as a discount on the new notes and the new notes will be accreted
to par value through quarterly interest charges over the seven-year term of the
new notes.
To the extent that existing notes are not validly tendered or accepted
in the exchange offer, the amount attributed to the new notes would decrease,
the amount attributed to the existing notes would increase and the accumulated
deficit would increase. The financial data at September 30, 2002 in the
following table are derived from our unaudited financial statements for the
quarter ended September 30, 2002.
September 30, 2002
----------------------
Actual As Adjusted
(unaudited)
(dollars in thousands)
Current portion of long-term debt ........................... $ 3,700 $ 3,700
--------- ---------
Long-term debt, less current portion:
6.52% Convertible senior subordinated note
(new notes) (net of $9.0 million discount) ......... -- 156,000
3.75% Convertible subordinated notes
(existing notes) ................................... 200,000 --
Other long-term debt ........................................ 6,050 6,050
--------- ---------
Total long-term debt ........................... 206,050 162,050
--------- ---------
Shareholders' equity:
Preferred stock, par value $.01 per share: authorized,
3,000,000 shares; none issued(1) ................... -- --
Common stock, par value $.01 per share: authorized,
160,000,000; issued and outstanding, 64,334,418
shares at September 30, 2002(1) (2) ................ 643 643
Non-voting common stock, par value $.01 per share:
authorized, 450,000; issued and outstanding,
382,632 shares at September 30, 2002(1) ............ 3 3
Additional paid-in capital ............................ 444,832 444,832
Deferred compensation ................................. (2,039) (2,039)
Accumulated other comprehensive (loss) income ......... (47) (47)
Accumulated deficit ................................... (456,966) (376,066)
--------- ---------
Total shareholders' (deficiency) equity ............... (13,574) 67,326
--------- ---------
Total capitalization .......................... $ 196,176 $ 233,076
========= =========
(1) We are authorized to issue an additional 1,550,000 shares that are
undesignated capital stock. See "Description of Capital Stock."
(2) Outstanding shares exclude the shares reserved for issuance upon
conversion of the new notes and 12,334,949 shares issuable under our stock
option and award plans.
31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
Alkermes. The consolidated statements of operations data for the years ended
March 31, 2002, 2001 and 2000, and the consolidated balance sheet data as of
March 31, 2002 and 2001, have been derived from our consolidated financial
statements, which are included elsewhere in this prospectus, and which have been
audited by Deloitte & Touche LLP, independent auditors. The consolidated
statement of operations data for the years ended March 31, 1999 and 1998 and the
consolidated balance sheet data as of March 31, 2000, 1999 and 1998, are derived
from audited consolidated financial statements not included in this prospectus.
The financial data for the six-month periods ended September 30, 2002 and 2001
are derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring items, which Alkermes considers necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the six months ended September 30, 2002 are
not necessarily indicative of the results that may be expected for the entire
year ending March 31, 2003. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included herein.
ALKERMES, INC. AND SUBSIDIARIES
(in thousands, except per share
data)
SIX MONTHS
CONSOLIDATED STATEMENT OF ENDED
OPERATIONS DATA: YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------------------------- ----------------------
2002 2001 2000 1999 1998 2002 2001
--------- --------- --------- --------- --------- --------- ---------
Revenues:
Revenue under collaborative
arrangements ............... $ 54,102 $ 56,030 $ 22,920 $ 33,892 $ 25,585 $ 19,762 $ 30,032
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Research and development ..... 92,092 68,774 54,483 48,457 31,762 52,786 43,303
General and administrative ... 24,387 19,611 14,878 14,556 8,375 15,212 11,785
Restructuring costs .......... -- -- -- -- -- 3,682 --
Noncash compensation (income)
expense attributed to
research and development ... -- (2,448) 29,493 16,239 2,183 -- --
Purchase of in-process
research and development ... -- -- -- 3,221 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total expenses ............... 116,479 85,937 98,854 82,473 42,320 71,680 55,088
--------- --------- --------- --------- --------- --------- ---------
Net operating loss .............. (62,377) (29,907) (75,934) (48,581) (16,735) (51,918) (25,056)
Total other income (expense) . 6,426 13,038 7,887 7,525 4,153 (1,714) 4,101
--------- --------- --------- --------- --------- --------- ---------
Equity in losses of Reliant
Pharmaceuticals, LLC ........... (5,404) -- -- -- -- (59,469) --
--------- --------- --------- --------- --------- --------- ---------
Net loss ........................ (61,355) (16,869) (68,047) (41,056) (12,582) (113,101) (20,955)
Preferred stock dividends ....... -- 7,268 9,389 7,455 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss attributable to common
shareholders ................... $ (61,355) $ (24,137) $ (77,436) $ (48,511) $ (12,582) $(113,101) $ (20,955)
========= ========= ========= ========= ========= ========= =========
Basic and diluted loss per common
share .......................... $ (0.96) $ (0.43) $ (1.52) $ (0.99) $ (0.27) $ (1.76) $ (0.33)
========= ========= ========= ========= ========= ========= =========
Weighted average number of
common shares outstanding ...... 63,669 55,746 51,015 49,115 46,038 64,289 63,319
========= ========= ========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA: AT MARCH 31,
--------------------------------------------------------- AT SEPTEMBER 30,
2002 2001 2000 1999 1998 2002
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents and
short-term investments ....... $ 152,347 $ 254,928 $ 337,367 $ 163,419 $ 194,257 $ 71,693
Other current assets ............ 24,290 16,678 8,474 5,745 8,562 17,596
Total assets .................... 350,350 391,297 413,961 213,452 220,977 224,122
Current liabilities ............. 42,886 31,062 22,487 28,500 19,517 31,645
Long-term obligations ........... 207,800 211,825 222,792 28,417 12,933 206,050
Shareholders' equity (deficiency) 99,664 148,410 167,967 156,206 181,455 (13,574)
32
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING EXISTING NOTES
We are offering to exchange your existing notes for new notes as
follows:
- $575 principal amount of new notes for each $1,000 principal
amount of existing notes for up to 100% of the aggregate
outstanding principal amount of existing notes. The new notes
will be issued in denominations of $1,000 and any integral
multiple of $1,000. We will pay cash for any fractional portion
of new notes.
Based on the principal amount outstanding as of the date of this
prospectus, we are offering to acquire up to $200,000,000 aggregate principal
amount of existing notes that are validly tendered on the terms and subject to
the conditions set forth in this prospectus and in the accompanying letter of
transmittal. In addition, if you elect to tender existing notes in the exchange
offer, you will have the right to participate in the cash offering of up to $50
million principal amount of additional new notes.
You may tender all, some or none of your existing notes, subject to the
terms and conditions of the exchange offer. Holders of existing notes must
tender their existing notes in a minimum $1,000 principal amount and multiples
thereof.
The exchange offer is not being made to, and we will not accept tenders
for exchange from, holders of existing notes in any jurisdiction in which the
exchange offer or the acceptance of the offer would not be in compliance with
the securities or blue sky laws of that jurisdiction.
OUR BOARD OF DIRECTORS AND OFFICERS DO NOT MAKE ANY RECOMMENDATION TO
THE HOLDERS OF EXISTING NOTES AS TO WHETHER OR NOT TO EXCHANGE ALL OR ANY
PORTION OF THEIR EXISTING NOTES. IN ADDITION, WE HAVE NOT AUTHORIZED ANYONE TO
MAKE ANY RECOMMENDATION. YOU MUST MAKE YOUR OWN DECISION WHETHER TO TENDER YOUR
EXISTING NOTES FOR EXCHANGE AND, IF SO, THE AMOUNT OF EXISTING NOTES TO TENDER.
EXPIRATION DATE
The expiration date for the offer is 5:00 p.m., New York City time, on
December 24, 2002, unless we extend the offer. We may extend this expiration
date for any reason. The last date on which tenders will be accepted, whether on
December 24, 2002 or any later date to which the exchange offer may be extended,
is referred to as the expiration date.
EXTENSIONS; AMENDMENTS
We expressly reserve the right, in our discretion, for any reason to:
- delay the acceptance of existing notes tendered for exchange, subject
to the requirement that we promptly issue new notes or return tendered
existing notes after expiration or withdrawal of the exchange offer;
- extend the time period during which the exchange offer is open, by
giving oral or written notice of an extension to the holders of
existing notes in the manner described below; during any extension, all
existing notes previously tendered and not withdrawn will remain
subject to the exchange offer;
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- waive any condition or amend the terms of the exchange offer other than
the condition that the registration statement becomes effective under
the Securities Act; and
- terminate the exchange offer, as described under "Conditions for
Completion of the Exchange Offer" below.
If we consider an amendment to the exchange offer to be material, or if
we waive a material condition of the exchange offer, we will promptly disclose
the amendment in a prospectus supplement, and if required by law, we will extend
the exchange offer for a period of five to ten business days.
We will give oral or written notice of any (1) extension, (2)
amendment, (3) non-acceptance or (4) termination to the holders of the existing
notes as promptly as practicable. In the case of any extension, we will issue a
press release or other public announcement no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
PROCEDURES FOR TENDERING EXISTING NOTES
Your tender to us of existing notes and our acceptance of your tender
will constitute a binding agreement between you and us upon the terms and
subject to the conditions set forth in this prospectus and in the accompanying
letter of transmittal.
Tender of Existing Notes Held Through a Custodian. If you are a
beneficial holder of the existing notes that are held of record by a custodian
bank, depository institution, broker, dealer, trust company or other nominee,
you must instruct the custodian, or such other record holder, to tender the
existing notes on your behalf. Your custodian will provide you with their
instruction letter, which you must use to give these instructions.
Tender of Existing Notes Held Through DTC. Any beneficial owner of
existing notes held of record by The Depository Trust Company ("DTC") or its
nominee, through authority granted by DTC may direct the DTC participant through
which the beneficial owner's existing notes are held in the DTC to tender on
such beneficial owner's behalf. To effectively tender existing notes that are
held through DTC, DTC participants should transmit their acceptance through the
Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible, and the DTC will then edit and verify the acceptance and send an
agent's message to the exchange agent for its acceptance. Delivery of tendered
existing notes must be made to the exchange agent pursuant to the book-entry
delivery procedures set forth below or the tendering DTC participant must comply
with the guaranteed delivery procedures set forth below. No letters of
transmittal will be required to tender existing notes through ATOP.
In addition, the exchange agent must receive:
- a completed and signed letter of transmittal or an electronic
confirmation pursuant to DTC's ATOP system indicating the principal
amount of existing notes to be tendered and any other documents, if
any, required by the letter of transmittal; and
- prior to the expiration date, a confirmation of book-entry transfer of
such existing notes, into the exchange agent's account at DTC, in
accordance with the procedure for book-entry transfer described below;
or
- the holder must comply with the guaranteed delivery procedures
described below.
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Your existing notes must be tendered by book-entry transfer. The
exchange agent will establish an account with respect to the existing notes at
DTC for purposes of the exchange offer within two business days after the date
of this prospectus. Any financial institution that is a participant in DTC must
make book-entry delivery of existing notes by having DTC transfer such existing
notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfer. Although your existing notes will be tendered through
the DTC facility, the letter of transmittal, or facsimile, or an electronic
confirmation pursuant to DTC's ATOP system, with any required signature
guarantees and any other required documents, if any, must be transmitted to and
received or confirmed by the exchange agent at its address set forth below under
"Exchange Agent," prior to 5:00 p.m., New York City time, on the expiration
date. You or your broker must ensure that the exchange agent receives an agent's
message from DTC confirming the book-entry transfer of your existing notes. An
agent's message is a message transmitted by DTC and received by the exchange
agent that forms a part of the book-entry confirmation which states that DTC has
received an express acknowledgement from the participant in DTC tendering
existing notes that such participant agrees to be bound by the terms of the
letter of transmittal. Delivery of documents to DTC in accordance with its
procedures does not constitute delivery to the exchange agent.
If you are an institution which is a participant in DTC's book-entry
transfer facility, you should follow the same procedures that are applicable to
persons holding existing notes through a financial institution.
Do not send letters of transmittal or other exchange offer documents to
us or to U.S. Bancorp Piper Jaffray, the dealer manager.
It is your responsibility that all necessary materials get to State
Street Bank and Trust Company, the exchange agent, before the expiration date.
If the exchange agent does not receive all of the required materials before the
expiration date, your existing notes will not be validly tendered.
Any existing notes not accepted for exchange for any reason will be
returned without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
We will have accepted the validity of tendered existing notes if and
when we give oral or written notice to the exchange agent. The exchange agent
will act as the tendering holders' agent for purposes of receiving the new notes
from us. If we do not accept any tendered existing notes for exchange because of
an invalid tender or the occurrence of any other event, the exchange agent will
return those existing notes to you without expense, promptly after the
expiration date via book-entry transfer through DTC.
BINDING INTERPRETATIONS
We will determine in our sole discretion, all questions as to the
validity, form, eligibility and acceptance of existing notes tendered for
exchange. Our determination will be final and binding. We reserve the absolute
right to reject any and all tenders of any particular existing notes not
properly tendered or to not accept any particular existing notes which
acceptance might, in our judgment or our counsel's judgment, be unlawful. We
also reserve the absolute right to waive any defects or irregularities or
conditions of the exchange offer as to any particular existing notes either
before or after the expiration date, including the right to waive the
ineligibility of any holder who seeks to tender existing notes in the exchange
offer. Our interpretation of the terms and conditions of the exchange offer as
to any particular existing note either before or after the expiration date,
including the letter of transmittal and the instructions to such letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of existing notes for
exchange must be cured within such reasonable period of time as we shall
determine. Neither we, the exchange agent nor any other
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person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of existing notes for exchange, nor
shall any of them incur any liability for failure to give such notification.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Once all of the conditions to the exchange offer are satisfied or
waived, we will accept, promptly after the expiration date, all existing notes
properly tendered, and will issue the new notes promptly after acceptance of the
existing notes. The discussion under the heading "Conditions for Completion of
the Exchange Offer" provides further information regarding the conditions to the
exchange offer. For purposes of the exchange offer, we shall be deemed to have
accepted properly tendered existing notes for exchange when, as and if we have
given oral or written notice to the exchange agent, with written confirmation of
any oral notice to be given promptly after giving such notice.
For each $1,000 principal amount of existing notes accepted for
exchange, the holder of the existing notes will receive new notes having a
principal amount of $575. The new notes will be issued in denominations of
$1,000 and any integral multiples of $1,000. We will pay cash for any fractional
amount of new notes. In addition, you will have the opportunity to provide
indications of interest of participating in the cash offering of up to $50
million principal amount of new notes. The new notes will bear interest from the
closing date of the exchange offer. Existing notes accepted for exchange will
accrue interest up to but excluding the closing date of the exchange offer. We
will pay such accrued and unpaid interest at closing to holders whose existing
notes are tendered in the exchange offer and accepted by us.
In all cases, issuance of new notes for existing notes that are
accepted for exchange in the exchange offer will be made only after timely
receipt by the exchange agent of:
- a timely book-entry confirmation of such existing notes into the
exchange agent's account at the DTC book-entry transfer facility;
- a properly completed and duly executed letter of transmittal or an
electronic confirmation of the submitting holder's acceptance through
DTC's ATOP system; and
- all other required documents, if any.
If we do not accept any tendered existing notes for any reason set
forth in the terms and conditions of the exchange offer, or if existing notes
are submitted for a greater principal amount than the holder desires to
exchange, the unaccepted or non-exchanged existing notes tendered by book-entry
transfer into the exchange agent's account at the book-entry transfer facility
will be returned in accordance with the book-entry procedures described above,
and the existing notes that are not to be exchanged will be credited to an
account maintained with DTC, as promptly as practicable after the expiration or
termination of the exchange offer.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your existing notes and you cannot complete the
procedures for book-entry transfer set forth above on a timely basis, you may
still tender your existing notes if:
- your tender is made through an eligible institution;
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- prior to the expiration date, the exchange agent received from the
eligible institution a properly completed and duly executed letter of
transmittal, or a facsimile of such letter of transmittal or an
electronic confirmation pursuant to DTC's ATOP system and notice of
guaranteed delivery, substantially in the form provided by us, by
facsimile transmission, mail or hand delivery, that:
(a) sets forth the name and address of the holder of
existing notes tendered;
(b) states that the tender is being made thereby; and
(c) guarantees that within three trading days after the
expiration date a book-entry confirmation and any
other documents required by the letter of
transmittal, if any, will be deposited by the
eligible institution with the exchange agent; and
- book-entry confirmation and all other documents, if any, required by
the letter of transmittal are received by the exchange agent within
three trading days after the expiration date.
WITHDRAWAL RIGHTS
You may withdraw your tender of existing notes at any time prior to
5:00 p.m., New York City time, on the expiration date. In addition, if you
tender existing notes and we have not accepted them for exchange by January 24,
2003, you may withdraw your existing notes at any time after that date until we
do accept your existing notes for exchange.
For a withdrawal to be effective, the exchange agent must receive a
written notice of withdrawal at the address or, in the case of eligible
institutions, at the facsimile number, set forth below under the heading
"Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date.
Any notice of withdrawal must:
- specify the name of the person who tendered the existing notes to be
withdrawn;
- contain a statement that you are withdrawing your election to have your
existing notes exchanged;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the existing notes were tendered,
including any required signature guarantees; and
- if you have tendered your existing notes in accordance with the
procedure for book-entry transfer described above, specify the name and
number of the account at DTC to be credited with the withdrawn existing
notes and otherwise comply with the procedures of such facility.
Any existing notes that have been tendered for exchange, but which are
not exchanged for any reason, will be credited to an account maintained with the
book-entry transfer facility for the existing notes, as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer.
Properly withdrawn existing notes may be retendered by following the procedures
described under the heading "Procedures for Tendering Existing Notes" above, at
any time on or prior to 5:00 p.m., New York City time, on the expiration date.
CONDITIONS FOR COMPLETION OF THE EXCHANGE OFFER
We will not accept existing notes for new notes and may terminate or
not complete the exchange offer if the registration statement covering the
exchange offer is not effective under the Securities Act.
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We may not accept existing notes for exchange and may terminate or not
complete the exchange offer if:
- any action, proceeding or litigation seeking to enjoin, make illegal or
delay completion of the exchange offer or otherwise relating in any
manner to the exchange offer is instituted or threatened;
- any order, stay, judgment or decree is issued by any court, government,
governmental authority or other regulatory or administrative authority
and is in effect, or any statute, rule, regulation, governmental order
or injunction shall have been proposed, enacted, enforced or deemed
applicable to the exchange offer, any of which would or might restrain,
prohibit or delay completion of the exchange offer or impair the
contemplated benefits of the exchange offer to us;
- any of the following occurs and the adverse effect of such occurrence
shall, in our reasonable judgment, be continuing:
- any general suspension of trading in, or limitation
on prices for, securities on any national securities
exchange or in the over-the-counter market in the
United States;
- any extraordinary or material adverse change in U.S.
financial markets generally, including, without
limitation, a decline of at least twenty percent in
either the Dow Jones Average of Industrial Stocks or
the Standard & Poor's 500 Index from the date of this
prospectus;
- a declaration of a banking moratorium or any
suspension of payments in respect of banks in the
United States;
- any material disruption has occurred in commercial
banking or securities settlement or clearance
services in the United States;
- any limitation, whether or not mandatory, by any
governmental entity on, or any other event that would
reasonably be expected to materially adversely
affect, the extension of credit by banks or other
lending institutions;
- a commencement of a war or other national or
international calamity directly or indirectly
involving the United States, which would reasonably
be expected to affect materially and adversely, or to
delay materially, the completion of the exchange
offer; or
- if any of the situations described above existed at
the time of commencement of the exchange offer and
that situation deteriorates materially after
commencement of the exchange offer;
- any tender or exchange offer, other than this exchange offer by us,
with respect to some or all of our outstanding common stock or any
merger, acquisition or other business combination proposal involving us
shall have been proposed, announced or made by any person or entity;
- any event or events occur that have resulted or may result, in our
judgment, in an actual or threatened change in the business condition,
income, operations, stock ownership or prospects of us or of us and our
subsidiaries, taken as a whole; or
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- as the term "group" is used in Section 13(d)(3) of the Exchange Act;
- any person, entity or group acquires more than 5% of
our outstanding shares of common stock, other than a
person, entity or group which had publicly disclosed
such ownership with the SEC prior to the expiration
date of the exchange offer;
- any such person, entity or group which had publicly
disclosed such ownership prior to such date shall
acquire additional common stock constituting more
than 2% of our outstanding shares; or
- any new group shall have been formed that
beneficially owns more than 5% or our outstanding
shares of common stock which in our judgment in any
such case, and regardless of the circumstances, makes
it inadvisable to proceed with the exchange offer or
with such acceptance for exchange of shares.
If any of the above events occur, we may:
- terminate the exchange offer and promptly return all tendered existing
notes to tendering existing note holders;
- extend the exchange offer and, subject to the withdrawal rights
described in "Withdrawal Rights," above, retain all tendered existing
notes until the extended exchange offer expires;
- amend the terms of the exchange offer; or
- waive the unsatisfied condition and, subject to any requirement to
extend the period of time during which the exchange offer is open,
complete the exchange offer.
The conditions are for our sole benefit. We may assert these conditions
with respect to all or any portion of the exchange offer regardless of the
circumstances giving rise to them. We may waive any condition in whole or in
part in our discretion. Our failure to exercise our rights under any of the
above conditions does not represent a waiver of these rights. Each right is an
ongoing right which may be asserted at any time. Any determination by us
concerning the conditions described above will be final and binding upon all
parties. All such conditions to the exchange offer, other than those subject to
applicable law, will be either satisfied or waived by us on or before the
expiration of the exchange offer. There are no federal or state regulatory
requirements that must be met, except for requirements under applicable
securities laws.
If we consider an amendment to the exchange offer to be material, or if
we waive a material condition of the exchange offer, we will promptly disclose
the amendment in a prospectus supplement, and if required by law, we will extend
the exchange offer for a period of five to ten business days.
If a stop order issued by the SEC is in effect with respect to the
registration statement of which this document is a part, we will not accept any
existing notes tendered and we will not exchange for any new notes.
FEES AND EXPENSES
U.S. Bancorp Piper Jaffray is acting as the dealer manager in
connection with the exchange offer. U.S. Bancorp Piper Jaffray will receive a
fee in the manner described below for its services as dealer manager.
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U.S. Bancorp Piper Jaffray's fee will be calculated based on a sliding
scale based on the principal amount of existing notes tendered. Based on the
foregoing fee structure, if all of the existing notes are exchanged in the
exchange offer, U.S. Bancorp Piper Jaffray will receive an aggregate fee of
approximately $1.5 million. U.S. Bancorp Piper Jaffray's fees will be payable if
and when the exchange offer is completed.
U.S. Bancorp Piper Jaffray will also be reimbursed for its reasonable
out-of-pocket expenses incurred in connection with the exchange offer (including
the reasonable fees and disbursements of counsel), whether or not the
transaction closes.
We have agreed to indemnify U.S. Bancorp Piper Jaffray against
specified liabilities relating to or arising out of the offer, including civil
liabilities under the federal securities laws, and to contribute to payments
which U.S. Bancorp Piper Jaffray may be required to make in respect thereof.
However, in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. U.S.
Bancorp Piper Jaffray may from time to time hold existing notes, new notes and
our common stock in its proprietary accounts, and to the extent it owns existing
notes in these accounts at the time of the exchange offer, U.S. Bancorp Piper
Jaffray may tender these existing notes.
We have retained Georgeson Shareholder Communications Inc. to act as
information agent and State Street Bank and Trust Company to act as the exchange
agent in connection with the exchange offer. The information agent may contact
holders of existing notes by mail, telephone, facsimile transmission and
personal interviews and may request brokers, dealers and other nominee existing
note holders to forward materials relating to the exchange offer to beneficial
owners. The information agent and the exchange agent will receive reasonable
compensation for their respective services, will be reimbursed for reasonable
out-of-pocket expenses and will be indemnified against liabilities in connection
with their services, including liabilities under the federal securities laws.
Neither the information agent nor the exchange agent has been retained
to make solicitations or recommendations. The fees they receive will not be
based on the principal amount of existing notes tendered under the exchange
offer.
We will not pay any fees or commissions to any broker or dealer, or any
other person, other than U.S. Bancorp Piper Jaffray for soliciting tenders of
existing notes under the exchange offer. Brokers, dealers, commercial banks and
trust companies will, upon request, be reimbursed by us for reasonable and
necessary costs and expenses incurred by them in forwarding materials to their
customers.
The aggregate fees and expenses to be incurred in connection with the
exchange offer and the cash offer, assuming maximum existing note holder
participation, we estimate will be approximately $3.3 million and will be paid
by us.
LEGAL LIMITATION
The above conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition, or may be
waived by us in whole or in part at any time and from time to time in our sole
discretion. Our failure at any time to exercise any of the foregoing rights
shall not be deemed a waiver or any such right and each such right shall be
deemed an ongoing right which may be asserted at any time, and from time to
time.
In addition, we will not accept for exchange any existing notes
tendered, and no new notes will be issued in exchange for any such existing
notes, if at such time any stop order shall be threatened or in
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effect with respect to the registration statement of which this prospectus
constitutes a part or the qualification of the indenture under the Trust
Indenture Act of 1939.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as the exchange
agent for the exchange offer. All executed letters of transmittal should be
directed to the exchange agent at one of its addresses as set forth below.
Questions about the tender of existing notes, requests for assistance, and
requests for notices of guaranteed delivery should be directed to the exchange
agent addressed as follows:
FOR REGISTERED EXISTING NOTES
By Mail or Overnight Courier:
Mr. Ralph Jones
State Street Bank and Trust Company
Corporate Trust, 5th Floor
2 Avenue de Lafayette
Boston, MA 02111
By Facsimile Transmission:
(617) 662-1452
Confirm by Telephone:
(617) 662-1548
If you deliver the letter of transmittal to an address other than as
set forth above or transmission of instructions via facsimile other than as set
forth above, then such delivery or transmission does not constitute a valid
delivery of such letter of transmittal. If you need additional copies of this
prospectus or the letter of transmittal, please contact the information agent at
the address or telephone number set forth on the back cover of this prospectus.
CASH OFFER OF ADDITIONAL NEW NOTES
In addition to the exchange offer, we are offering to those holders of
existing notes, which are tendered and accepted in the exchange offer, the right
to purchase up to $50 million aggregate principal amount of additional new notes
for cash (the "cash offer"). The new notes in the cash offer are identical in
all respects to the new notes provided in the exchange offer as described in
this document under the heading "Description of New Notes."
If a holder's tender of existing notes is withdrawn, we will not sell
any additional new notes for cash to that holder. Offers to purchase additional
new notes must be in denominations of principal amount of $1,000 and any
integral multiple of $1,000.
You may indicate your interest in purchasing additional new notes by
giving your indication of interest to U.S. Bancorp Piper Jaffray at (877)
420-2321, attention Jeffrey Winaker or Brian Sullivan.
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DESCRIPTION OF NEW NOTES
Alkermes, Inc. will issue the new notes under an indenture dated as of
December , 2002 between us and State Street Bank and Trust Company, as new
notes trustee. The following summarizes the material provisions of the new notes
and the new notes indenture. This summary is subject to and is qualified by
reference to all the provisions of the new notes indenture. As used in this
description, the words "we," "us" or "our" do not include any current or future
subsidiary of Alkermes, Inc.
GENERAL
We are offering to issue up to $165,000,000 aggregate principal amount of
new notes, which amount includes:
- $115,000,000 aggregate principal amount to be issued in the exchange
offer assuming 100% of the outstanding existing notes are tendered
and accepted in the exchange offer; and
- up to an additional $50,000,000 aggregate principal amount of new
notes to be issued for cash to holders of existing notes tendered
and accepted in the exchange offer.
The new notes will be unsecured senior subordinated obligations of
Alkermes, Inc. that are subordinate in right of payment as described under
"Subordination" below. The new notes will be convertible into common stock as
described under "Voluntary Conversion" and "Automatic Conversion" below. The new
notes will be issued in denominations of $1,000 and multiples of $1,000. The new
notes will mature on December 31, 2009 unless earlier converted, redeemed or
repurchased.
The new notes will bear interest at the rate of 6.52% per year. Interest
will be paid on June 30 and December 31 of each year, commencing on June 30,
2003, subject to limited exceptions if the new notes are converted, redeemed or
repurchased prior to the applicable interest payment date. The record dates for
payment of interest will be June 15 and December 15 of each year. Interest will
be computed on the basis of a 360-day year consisting of twelve 30-day months.
Interest will be payable in cash or common stock at our option. If we
elect to pay interest in common stock, the shares of common stock will be valued
at 90% of the average of the closing price for each of the five trading days
immediately preceding the second trading day prior to the interest payment date.
We will provide holders notice of our election to pay interest in common stock
instead of cash no later than the record date prior to such interest payment
date. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
We will pay principal and interest on the new notes at the office or
agency we maintain for such purpose in the Borough of Manhattan, The City of New
York, which shall initially be the office or agency of the new notes trustee. At
our option, however, we may pay interest by check mailed to your address as it
appears in the new notes register. However, holders of $2,000,000 or more in
principal amount of new notes may elect in writing to be paid by wire transfer;
provided that any payment to The Depository Trust Company ("DTC") or its nominee
will be made by wire transfer of immediately available funds to the account of
DTC or its nominee.
If we elect to make a payment in common stock instead of cash with respect
to any payment under the terms of the new notes indenture that permits such
election, we may either pay cash for any fractional shares or round the
fractional share up to the nearest whole share.
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We will not be restricted from paying dividends or repurchasing securities
or incurring indebtedness under the new notes indenture. The new notes indenture
has no financial covenants. Holders of the new notes are not protected in the
event of a highly leveraged transaction or a change in control of Alkermes
except as described under "Repurchase at Option of Holders upon a Repurchase
Event" below.
You are not required to pay a service charge for registration or transfer
of new notes. We may, however, require you to pay any tax or other governmental
charge in connection with the transfer. We are not required to exchange or
register the transfer of:
- any new note for a period of 15 days before selection for
redemption;
- any new note or portion selected for redemption;
- any new note or portion surrendered for conversion; or
- any new note or portion surrendered for repurchase but not withdrawn
in connection with a repurchase event.
The new notes will be issued:
- in fully-registered form; and
- in denominations of $1,000 and multiples of $1,000.
BOOK-ENTRY SYSTEM
Global Security
The new notes will be issued in the form of a global security held in
book-entry form. Except as noted below under "Certificated Notes," DTC or its
nominee will be the sole registered holder of the new notes for all purposes
under the new notes indenture. Owners of beneficial interests in the new notes
represented by the global security will hold these interests pursuant to the
procedures and practices of DTC. Owners of beneficial interests must exercise
any rights in respect of their interests, including any right to convert or
require repurchase of their interests, in accordance with DTC's procedures and
practices. Beneficial owners are not holders, and are not entitled to any rights
under the global security or the new notes indenture with respect to the global
security. We and the trustee may treat DTC as the sole holder and owner of the
global security.
Certificated Notes
Certificated new notes may be issued in exchange for new notes represented
by the global security if DTC no longer serves as the depositary and no
successor depositary is appointed by us.
VOLUNTARY CONVERSION
You may voluntarily convert your new notes into our common stock prior to
maturity.
You may, at your option, convert some or all of your new notes at any time
prior to maturity into our common stock at a conversion price equal to a 17-1/2%
premium over the simple average of the daily volume-weighted average price of
our common stock for each of the five trading days immediately preceding the
third
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trading day prior to the expiration date of the exchange offer, subject to
adjustment upon certain events. You may convert new notes in denominations of
$1,000 and multiples of $1,000. The conversion price is subject to adjustment as
described below. If the new notes are called for redemption, the conversion
rights on the new notes called for redemption will expire at the close of
business of the last business day before the redemption date, unless we default
in payment of the redemption price. If you have submitted your new notes for
repurchase after a repurchase event, you may only convert your new notes if you
deliver a withdrawal notice before the close of business on the last business
day before the repurchase date.
If you convert your new notes after a record date and prior to the next
interest payment date, you will have to pay us interest, unless the new notes
have been called for redemption under the new notes indenture. We will pay a
cash adjustment for any fractional shares based on the market price of our
common stock on the last business day before the conversion date.
You can convert your new notes by delivering the new notes to an office or
agency of the new notes trustee in the Borough of Manhattan, The City of New
York, along with a duly signed and completed notice of conversion, a form of
which may be obtained from the new notes trustee. In the case of a global
security, DTC will effect the conversion upon notice from the holder of a
beneficial interest in the global security in accordance with DTC's rules and
procedures. The conversion date will be the date on which the new notes and the
duly signed and completed notice of conversion are delivered. As promptly as
practicable on or after the conversion date, but no later than three business
days after the conversion date, we will issue and deliver to the conversion
agent certificates for the number of full shares of common stock issuable upon
conversion, together with any cash payment for fractional shares. In the event
we fail to convert any tendered new notes into common stock in accordance with
the terms of the indenture, the holder may bring an action to enforce its right
to convert.
You will not be required to pay any stamp, transfer, documentary or
similar taxes or duties upon conversion but will be required to pay any stamp or
transfer tax or duty if the common stock issued upon conversion of the new notes
is in a name other than your name. Certificates representing shares of common
stock will not be issued or delivered unless all stamp or transfer taxes and
duties, if any, payable by the holder have been paid.
Additional payment upon conversion during first two years.
If you elect to convert your new notes at any time on or prior to the
second anniversary date of the initial issuance of the new notes, you will
receive a payment of additional interest upon conversion so long as we have not
previously mailed an automatic conversion notice to holders. We will pay
additional interest upon conversion equal to two years of interest, less any
interest actually paid or provided for on the new notes prior to the conversion,
payable, in cash or, at our option, in common stock, valued at 90% of the
average closing price of our common stock for the five trading days immediately
preceding the second trading day prior to the voluntary conversion date. Our
ability to pay additional interest in common stock will be subject to certain
conditions set forth in the new notes indenture.
Adjustment to the conversion price
The conversion price will be adjusted if:
(1) we dividend or distribute shares of our common stock to our
common stock holders;
(2) we split, subdivide or combine our common stock;
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(3) we issue rights or warrants to all holders of our common stock
to purchase common stock at less than the current market
price;
(4) we dividend or distribute to all holders of our common stock
capital stock or evidences of indebtedness or assets, but
excluding:
- dividends, distributions and rights or warrants referred
to in (3) above or to be exercised in connection with
certain trigger events;
- dividends and distributions paid exclusively in cash or
paid in connection with our liquidation, dissolution or
winding up; or
- capital stock, evidence of indebtedness, cash or assets
distributed in a merger or consolidation.
(5) we make a dividend or distribution consisting exclusively of
cash to all holders of common stock if the aggregate amount of
these distributions combined together with (A) all other
all-cash distributions made within the preceding 12 months in
respect of which we made no adjustment plus (B) any cash and
the fair market value of other consideration payable in any
tender offers by us or any of our subsidiaries for common
stock concluded within the preceding 12 months in respect for
which we made no adjustment, exceeds 10% of our market
capitalization, being the product of the then current market
price of the common stock multiplied by the number of shares
of our common stock then outstanding;
(6) the purchase of common stock pursuant to a tender offer made
by us or any of our subsidiaries involves an aggregate
consideration that, together with (A) any cash and the fair
market value of any other consideration payable in any other
tender offer by us or any of our subsidiaries for common stock
expiring within the 12 months preceding such tender offer plus
(B) the aggregate amount of any such all-cash distributions
referred to in (5) above to all holders of common stock within
the 12 months preceding the expiration of the tender offer for
which we have made no adjustment, exceeds 10% of our market
capitalization on the expiration of such tender offer; or
(7) payment on tender offers or exchange offers by a third party
other than Alkermes, Inc. or our subsidiaries if, as of the
closing date of the offer, our board of directors does not
recommend rejection of the offer. We will only make this
adjustment if a tender offer increases the person's ownership
to more than 25% of our outstanding common stock and the
payment per share is greater than the current market price of
the common stock. We will not make this adjustment if the
tender offer is a merger or transaction described below under
"Consolidation, Merger or Transfer of Assets."
The conversion adjustment provisions apply to the conversion price for
both voluntary conversions and automatic conversions.
If we implement a stockholders' rights plan, we will be required under the
new notes indenture to provide that the holders of new notes will receive the
rights upon conversion of the new notes, whether or not these rights were
separated from the common stock prior to conversion.
If we reclassify our common stock, consolidate, merge or combine with
another person or sell or convey our property and assets as an entirety or
substantially as an entirety, each existing note then
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outstanding will, without the consent of the holder of any existing note, become
convertible only into the kind and amount of securities, cash and other property
receivable upon such reclassification, consolidation, merger, combination, sale
or conveyance by a holder of the number of shares of common stock into which the
existing note was convertible immediately prior to the reclassification,
consolidation, merger, combination, sale or conveyance. This calculation will be
made based on the assumption that the holder of common stock failed to exercise
any rights of election that the holder may have to select a particular type of
consideration. The adjustment will not be made for a consolidation, merger or
combination that does not result in any reclassification, conversion, exchange
or cancellation of our common stock.
We are permitted to reduce the conversion price of the new notes for
limited periods of time, if our board of directors deems it advisable. Any such
reduction shall be effective for not less than 20 days. We are required to give
at least 15 days' prior notice of any such reduction. We may also reduce the
conversion price to avoid or diminish income tax to holders of our common stock
in connection with a dividend or distribution of stock or similar event.
No adjustment in the conversion price of the new notes will be required
unless it would result in a change in the conversion price of at least one
percent. Any adjustment not made will be taken into account in subsequent
adjustments.
AUTOMATIC CONVERSION
We may elect to automatically convert the new notes if our stock price
hits specific targets.
We may elect to automatically convert some or all of the new notes at any
time on or prior to maturity if the closing price of our common stock has
exceeded 150% of the conversion price for at least 20 trading days during any
consecutive 30-day trading period ending within five trading days prior to the
notice of automatic conversion. We refer to this as an "automatic conversion."
The notice of automatic conversion must be given not more than 30 and not less
than 20 days prior to the date of automatic conversion.
If an automatic conversion occurs on or prior to the second anniversary
date of the issuance of the new notes we will pay additional interest in cash
or, at our option, in shares of our common stock to holders of new notes being
converted. If we elect to pay the additional interest in shares of our common
stock, the shares of common stock will be valued at 90% of the average of the
closing price of our common stock for each of the five trading days immediately
preceding the second trading day preceding the conversion date. This additional
interest shall be equal to two years' worth of interest less any interest
actually paid or provided for prior to the date of automatic conversion. We will
specify in the automatic conversion notice whether we will pay the additional
interest in cash or common stock. We will not issue fractional shares for any
additional interest upon conversion but will instead make a cash adjustment for
any fractional share interest.
You will not be required to pay any stamp, transfer, documentary or
similar taxes or duties upon conversion but will be required to pay any stamp or
transfer tax or duty if the common stock issued upon conversion of the new notes
is in a name other than your name. Certificates representing shares of common
stock will not be issued or delivered unless all stamp or transfer taxes and
duties, if any, payable by the holder have been paid.
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OPTIONAL REDEMPTION
At any time on or after January 1, 2005, we may redeem some or all of the
new notes, at our option, upon not less than 20 nor more than 60 days' prior
notice by mail, at the redemption prices specified below. The redemption price,
expressed as a percentage of the principal amount, is as follows for the
12-month periods beginning January 1, 2005:
PERIOD REDEMPTION PRICE
------ ----------------
January 1, 2005 to December 30, 2005......................................... 104.657%
December 31, 2005 to December 30, 2006....................................... 103.726%
December 31, 2006 to December 30, 2007....................................... 102.794%
December 31, 2007 to December 30, 2008....................................... 101.863%
December 31, 2008 to December 30, 2009....................................... 100.931%
December 31, 2009 (maturity)................................................. 100.000%
In each case we will also pay accrued and unpaid interest to, but excluding, the
redemption date. If the redemption date is an interest payment date, we will pay
interest to the record holders as of the relevant record date.
No sinking fund will be provided for the new notes, which means that the
new notes indenture will not require us to redeem or retire the new notes
periodically. We may not redeem the new notes if there is a default under the
new notes indenture. See "Events of Default and Remedies" below.
REPURCHASE AT OPTION OF HOLDERS UPON A REPURCHASE EVENT
If a repurchase event occurs after issuance of the new notes, you will
have the right, at your option, to require us to repurchase all or any portion
of your new notes 40 days after we mail holders a notice of the repurchase
event. The repurchase price we are required to pay will be equal to 105% of the
principal amount of the new notes submitted for repurchase, plus accrued and
unpaid interest to, but excluding, the repurchase date. If a repurchase date is
an interest payment date, we will pay the interest that is due and payable on
such date to the record holder on the applicable record date.
We may pay the repurchase price, at our option, in cash or common stock.
If we elect to pay the repurchase price in common stock, the number of shares we
deliver will be valued at 95% of the average of the closing price for each of
the five trading days immediately preceding the second trading day prior to the
repurchase date. We may only pay the repurchase price in common stock if we
satisfy conditions provided in the new notes indenture.
A repurchase event will be considered to have occurred if:
- our common stock or other common stock into which the
new notes are convertible is neither listed for trading
on a United States national securities exchange nor
approved for trading on an established automated
over-the-counter trading market in the United States; or
- one of the following "change in control" events occurs:
1. any person or group becomes the beneficial owner
of more than 50% of the voting power of our
outstanding securities entitled to generally vote
for directors;
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2. our shareholders approve any plan or proposal for
our liquidation, dissolution or winding up;
3. we consolidate with or merge into, or participate
in a share exchange with any other corporation,
partnership, limited liability company or other
entity or any other corporation, partnership,
limited liability company or other entity merges
into us, and, in the case of any such merger,
consolidation or share exchange, our outstanding
common stock is changed or exchanged into other
assets or securities as a result;
4. we convey, transfer or lease all or substantially
all of our assets to any person; or
5. the continuing directors do not constitute a
majority of our board of directors at any time.
However, a change in control will not be deemed to have occurred if:
- the last sale price of our common stock for any five
trading days during the ten trading days immediately
before the change in control is equal to at least 105%
of the conversion price;
- in the event of a transaction specified in (1) or (3)
above, if our shareholders immediately before such
transaction constituting the change in control own,
directly or indirectly, immediately following such
transaction, at least 51% of the combined voting power
of our outstanding voting securities resulting from such
change in control in substantially the same proportion
as their ownership of the voting stock immediately
before such transaction; or
- of a transaction specified in (3) or (4) above, all of
the consideration, excluding cash payments for
fractional shares in the transaction constituting the
change in control, consists of common stock traded on a
United States national securities exchange or quoted on
the NASDAQ National Market, and as a result of the
transaction the new notes become convertible solely into
that common stock.
The term "continuing director" means at any date a member of our
board of directors:
- who was a member of our board of directors on November
5, 2002; or
- who was nominated or elected by at least a majority of
the directors who were continuing directors at the time
of the nomination or election or whose election to our
board of directors was recommended by at least a
majority of the directors who were continuing directors
at the time of the nomination or election or by the
nominating committee comprised of our independent
directors.
Under the above definition of continuing director, if the current board of
directors approved a new director or directors and then resigned, no change in
control would occur. The interpretation of the phrase "all or substantially all"
used in the definition of change in control would likely depend on the facts and
circumstances existing at such time. As a result, there may be uncertainty as to
whether or not a sale or transfer of "all or substantially all" of our assets
has occurred.
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We will be required to mail holders of new notes a notice within 15 days
after the occurrence of a repurchase event. The notice must describe, among
other things, the repurchase event, the holder's right to elect repurchase of
the new notes and the repurchase date. We must deliver a copy of the notice to
the trustee and cause a copy, or a summary of the notice, to be published in a
newspaper of general circulation in New York, New York. You may exercise your
repurchase rights by delivering written notice to us and the new notes trustee.
The notice must be accompanied by the new notes duly endorsed for transfer to
us. You must deliver the exercise notice on or before the close of business on
the thirty-fifth calendar day after the mailing date of the repurchase notice.
You may require us to repurchase all or any portion of your new notes upon
a repurchase event. We may not have sufficient cash funds to repurchase the new
notes upon a repurchase event. We may elect, subject to certain conditions, to
pay the repurchase price in common stock. Certain of our existing debt
agreements, as well as future debt agreements, may prohibit us from paying the
repurchase price in either cash or common stock. If we are prohibited from
repurchasing the new notes, we could seek consent from our lenders to repurchase
the new notes. If we are unable to obtain their consent, we could attempt to
refinance the new notes. If we were unable to obtain a consent or refinance, we
would be prohibited from repurchasing the new notes. If we were unable to
repurchase the new notes upon a repurchase event, it would result in an event of
default under the new notes indenture. An event of default under the new notes
indenture could result in a further event of default under our other
then-existing debt. In addition, the occurrence of the repurchase event may be
an event of default under our other debt. As a result, we would be prohibited
from paying amounts due on the new notes under the subordination provisions of
the new notes indenture.
The change in control feature may not necessarily afford you with
protection in the event of a highly leveraged transaction, a change in control
or similar transactions involving us. We could, in the future, enter into
transactions, including recapitalizations, that would not constitute a change in
control but that would increase the amount of our senior indebtedness or other
debt. We are not prohibited from incurring senior indebtedness or debt under the
new notes indenture. If we incur significant amounts of additional debt, this
could have an adverse effect on our ability to make payments on the new notes.
In addition, our management could undertake leveraged transactions that
could constitute a change in control. The Board of Directors will not have the
right under the new notes indenture to limit or waive the repurchase right in
the event of these types of leveraged transaction. Our requirement to repurchase
new notes upon a repurchase event could delay, defer or prevent a change of
control. As a result, the repurchase right may discourage:
- a merger, consolidation or tender offer;
- the assumption of control by a holder of a large block
of our shares; and
- the removal of incumbent management.
The repurchase feature is not the result of any specific effort to
accumulate shares of common stock or to obtain control of us by means of a
merger, tender offer or solicitation, or part of a plan by us to adopt a series
of anti-takeover provisions. We have no present intention to engage in a
transaction involving a change of control, although it is possible that we would
decide to do so in the future.
The Exchange Act and the SEC rules thereunder require the distribution of
specific types of information to security holders in the event of issuer tender
offers. These rules may apply in the event of a repurchase. We will comply with
these rules to the extent applicable.
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SUBORDINATION
The new notes will be unsecured and subordinated to the prior payment in
full of all existing and future senior indebtedness as provided in the new notes
indenture. However, the new notes will be senior in right of payment to the
existing notes. Upon any distribution of our assets upon our dissolution,
winding up, liquidation or reorganization, payments on the new notes will be
subordinated to the prior payment in full of all senior indebtedness. If the new
notes are accelerated following an event of default under the new notes
indenture, the holders of any senior indebtedness will be entitled to payment in
full before the holders of the new notes are entitled to receive any payment on
the new notes.
We may not make any payments on the new notes if:
- we default in the payment on senior indebtedness beyond any
grace period; or
- any other default occurs and is continuing under any
designated senior indebtedness that permits holders of the
designated senior indebtedness to accelerate its maturity, and
we and the trustee receive a notice, known as a payment
blockage notice, from a person permitted to give this notice
under the new notes indenture.
We may resume making payments on the new notes:
- in the case of a payment default, when the default is cured or
waived or ceases to exist; and
- in the case of a nonpayment default, the earlier of when the
default is cured or waived or ceases to exist or 179 days
after receipt of the payment blockage notice.
No new period of payment blockage may be commenced unless:
- 365 days have elapsed since our receipt of the prior payment
blockage notice; and
- all scheduled payments on the new notes have been paid in
full, or the new notes trustee or the holders of new notes
shall not have begun proceedings to enforce the right of the
holders to receive payments.
No default that existed on any senior indebtedness on the date of delivery
of any payment blockage notice may be the basis for a subsequent payment
blockage notice.
The term "senior indebtedness" means the principal, premium, if any, and
interest on, including bankruptcy interest, and any other payment on the
following current or future incurred:
- indebtedness for money borrowed or evidenced by new notes,
debentures, bonds or other securities;
- reimbursement obligations under letters of credit, bank
guarantees or bankers' acceptances;
- indebtedness under interest rate and currency swap agreements,
cap, floor and collar agreements, currency spot and forward
contracts and other similar agreements and arrangements;
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- indebtedness consisting of commitment or standby fees under
our credit facilities or letters of credit;
- obligations under leases required or permitted to be
capitalized under generally accepted accounting principles;
- obligations of the type listed above that have been assumed or
guaranteed by us or in effect guaranteed, directly or
indirectly, by us through an agreement to purchase; and
- any amendment, modification, renewal, extension, refunding or
deferral of any indebtedness or obligation of type listed in
the bullet points above.
Senior indebtedness will not include:
- any indebtedness or amendment or modification that expressly
provides that it is subordinate to or is not senior to or is
on the same basis as the new notes;
- any indebtedness to any subsidiary;
- indebtedness for trade payables or the deferred purchase price
of assets or services incurred in the ordinary course of
business; or
- the new notes.
If the trustee or any holder of the new notes receives any payment or
distribution of our assets of any kind on the new notes in contravention of any
of the terms of the new notes indenture, then such payment or distribution will
be held by the recipient in trust for the benefit of the holders of senior
indebtedness, and will be immediately paid or delivered to the holders of senior
indebtedness or their representative or representatives.
In the event of our insolvency, liquidation, reorganization or payment
default on senior indebtedness, we will not be able to make payments on the new
notes until we have paid in full all of our senior indebtedness. We may,
therefore, not have sufficient assets to pay the amounts due on the new notes.
Neither we nor our subsidiaries are prohibited from incurring debt under the new
notes indenture. If we incur additional debt, our ability to pay amounts due on
the new notes could be adversely affected. At September 30, 2002, we had
approximately $9.75 million of senior indebtedness. We may also incur additional
debt in the future. The subordination provisions will not prevent the occurrence
of any default or event of default or limit the rights of any holder of new
notes to pursue any other rights or remedies with respect to the new notes.
As a result of the subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceedings, holders of the new notes may receive less than other creditors on a
ratable basis.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute "events of default" under the new notes
indenture:
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- we fail to pay the principal or premium, if any, on any of the
new notes when due, whether or not prohibited by the
subordination provisions of the new notes indenture;
- we fail to pay interest or additional interest on the new
notes when due if such failure continues for 30 days, whether
or not prohibited by the subordination provisions of the new
notes indenture;
- we fail to perform any covenant in the new notes indenture if
such failure continues for 45 days after notice is given in
accordance with the new notes indenture;
- we fail to repurchase any new notes after a repurchase event;
- we fail to provide timely notice of a repurchase event;
- we fail or any of our significant subsidiaries fail to make
any payment at maturity on any indebtedness, including any
applicable grace periods, in an amount in excess of
$7,500,000, and such amount has not been paid or discharged
within 30 days after notice is given in accordance with the
new notes indenture;
- a default by us or any significant subsidiary on any
indebtedness that results in the acceleration of indebtedness
in an amount in excess of $7,500,000, without this
indebtedness being discharged or the acceleration being
rescinded or annulled for 30 days after notice is given in
accordance with the new notes indenture; or
- certain events involving bankruptcy, insolvency or
reorganization of us or any significant subsidiary.
The new notes trustee is generally required under the new notes indenture,
within 90 days after its becoming aware of a default, to provide holders written
notice of all incurred default. However, the new notes trustee may, except in
the case of a payment default on the new notes, withhold this notice of default
if it determines that withholding the notice is in the best interest of the
holders.
If an event of default has occurred and is continuing, the new notes
trustee or the holders of not less than 25% in principal amount of outstanding
new notes, may declare the principal and premium, if any, on the new notes to be
immediately due and payable. After acceleration, but before a judgment or decree
based on acceleration, the holders of a majority in aggregate principal amount
of outstanding new notes may, under circumstances set forth in the new notes
indenture, rescind the acceleration of the principal of and premium, if any, on
the new notes, other than the payment of principal of the new notes that has
become due other than because of the acceleration. If an event of default
arising from events of bankruptcy, insolvency or reorganization occurs and is
continuing with respect to us, all unpaid principal of and accrued interest on
the outstanding new notes would become due and payable immediately without any
declaration or other act on the part of the new notes trustee or holders of new
notes.
Holders of a majority in principal amount of outstanding new notes may
direct the time, method and place of conducting any proceeding for any remedy
available to the new notes trustee or exercising any trust or power conferred on
the new notes trustee, subject to specified limitations. Before exercising any
right or power under the new notes indenture at the direction of the holders,
the new notes trustee will be entitled to receive from such holders reasonable
security or indemnity against any costs, expenses and liabilities that it might
incur as a result.
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Before the holder of a new note may take any action to institute any
proceeding relating to the new notes indenture, or to appoint a receiver or a
trustee, or for any other remedy, each of the following must occur:
- the holder must have given the new notes trustee written
notice of a continuing event of default;
- the holders of at least 25% of the aggregate principal amount
of all outstanding new notes must make a written request of
the new notes trustee to take action because of the default;
- holders must have offered reasonable indemnification to the
new notes trustee against the cost, expenses and liabilities
of taking action; and
- the new notes trustee must not have taken action for 60 days
after receipt of such notice and offer of indemnification.
These limitations do not apply to a suit for the enforcement of payment of
the principal of or any premium or interest on a new note or the right to
convert the new note in accordance with the new notes indenture.
Generally, the holders of not less than a majority of the aggregate
principal amount of outstanding new notes may waive any default or event of
default, except if:
- we fail to pay the principal of, premium or interest on any
new note when due;
- we fail to convert any new note into common stock; or
- we fail to comply with any of the provisions of the new notes
indenture that would require the consent of the holder of each
outstanding new note affected.
We will send the new notes trustee annually a statement as to whether we
are in default and the nature of any default under the new notes indenture.
CONSOLIDATION, MERGER OR TRANSFER OF ASSETS
We may not consolidate or merge into another person or sell, lease, convey
or transfer all or substantially all of our assets to another person, whether in
a single or series of related transactions, unless:
- either (A) we are the surviving entity, or (B) the resulting
entity is a U.S. corporation, limited liability company,
partnership or trust and expressly assumes in writing all of
our obligations under the new notes and the new notes
indenture;
- no default or event of default exists or would occur; and
- other conditions specified in the new notes indenture are
satisfied.
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MODIFICATION AND WAIVER
The consent of the holders of a majority in principal amount of the
outstanding new notes affected is required to make a modification or amendment
to the new notes indenture. However, a modification or amendment requires the
consent of the holder of each outstanding new note affected if it would:
- extend the fixed maturity of any new note;
- reduce the interest rate or extend the time of payment of
interest on any new note;
- reduce the principal amount or any premium of any new note;
- reduce any amount payable upon redemption or repurchase of any
new note;
- adversely change our obligation to repurchase any new note
upon a repurchase event;
- adversely change the holder's right to institute suit for the
payment of any new note;
- change the currency in which any new note is payable;
- adversely modify the right to convert the new notes;
- adversely modify the subordination provisions of the new
notes; or
- reduce the percentage required to consent to modifications and
amendments.
Holders of a majority in principal amount of the new notes may approve the
release of the two-year prohibition on our ability to engage in any private
repurchases, debt-for-equity swaps or similar transactions with respect to any
existing notes that remain outstanding after the exchange offer is completed.
Under the new notes indenture, we may make certain modifications and
amendments to the new notes indenture without obtaining the prior consent of the
holders of the new notes.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the new notes indenture while new
notes remain outstanding if:
- all new notes will become due in one year or are scheduled for
redemption in one year; and
- we deposit sufficient funds to pay all outstanding new notes
on their scheduled maturity or redemption date.
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PROHIBITION ON PRIVATE TRANSACTIONS BY US INVOLVING EXISTING NOTES
For a period of two years following the issuance of the new notes, and as
long as the new notes remain outstanding during such two-year period, we will be
prohibited from engaging in any private repurchases, debt-for-equity swaps, or
similar transactions with respect to the existing notes.
GOVERNING LAW
The new notes and the new notes indenture are governed by the laws of the
State of New York, without regard to conflicts of laws principles.
CONCERNING THE NEW NOTES TRUSTEE
We have appointed the new notes trustee as the initial paying agent,
conversion agent, registrar and custodian for the new notes. The new notes
trustee also is the trustee, initial paying agent, conversion agent, registrar
and custodian for our existing notes. We may maintain deposit accounts and
conduct other banking transactions with the new notes trustee or its affiliates
in the ordinary course of business. In addition, the new notes trustee and its
affiliates may in the future provide banking and other services to us in the
ordinary course of their business.
If the new notes trustee becomes one of our creditors, the new notes
indenture and the Trust Indenture Act of 1939 may limit the right of the new
notes trustee to obtain payment on or realize on security for its claims. If the
new notes trustee develops any conflicting interest with the holders of new
notes or us, it must eliminate the conflict or resign.
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DESCRIPTION OF EXISTING NOTES
We issued the existing notes under an indenture dated as of February 18,
2000, between us and State Street Bank and Trust Company, as existing notes
trustee. The following summarizes the material provisions of the existing notes
and the existing notes indenture. This summary is subject to and is qualified by
reference to all the provisions of the existing notes indenture. As used in this
description, the words "we," "us" or "our" do not include any current or future
subsidiary of Alkermes, Inc.
GENERAL
The existing notes are unsecured general obligations of Alkermes, Inc.
that are subordinate in right of payment as described under "Subordination"
below. The existing notes are convertible into common stock as described under
"Conversion by Holders" below. The aggregate principal amount of the existing
notes is limited to $200,000,000. The existing notes are issued in fully
registered form and denominated in integral multiples of $1,000. The existing
notes will mature on February 15, 2007 unless earlier converted, redeemed or
repurchased.
The existing notes bear interest at the rate of 3.75% per year. Interest
is paid on February 15 and August 15 of each year, subject to limited exceptions
if the existing notes are converted, redeemed or repurchased prior to the
applicable interest payment date. The record dates for payment of interest are
February 1 and August 1 of each year. Interest is computed on the basis of a
360-day year consisting of twelve 30-day months.
We maintain an office in the Borough of Manhattan in New York, New York
where the existing notes may be presented for registration, transfer, exchange
or conversion. Initially, this will be an office or agency of the existing notes
trustee. We may, at our option, pay interest on the existing notes by check
mailed to the registered holders of existing notes. However, holders of more
than $2,000,000 in principal amount of existing notes may elect in writing to be
paid by wire transfer; provided that any payment to The Depository Trust Company
("DTC") or its nominee will be made by wire transfer of immediately available
funds to the account of DTC or its nominee.
We are not restricted from paying dividends or repurchasing securities or
incurring indebtedness under the existing notes indenture. The existing notes
indenture has no financial covenants. Holders of the existing notes are not
protected in the event of a highly leveraged transaction or a change in control
of Alkermes except as described under "Repurchase at Option of Holders upon a
Repurchase Event" below.
Holders of the existing notes are not required to pay a service charge for
registration or transfer of existing notes. We may, however, require holders of
existing notes to pay any tax or other governmental charge in connection with
the transfer. We are not required to exchange or register the transfer of:
- any existing note for a period of 15 days before selection for
redemption;
- any existing note or portion selected for redemption;
- any existing note or portion surrendered for conversion; or
- any existing note or portion surrendered for repurchase but not
withdrawn in connection with a repurchase event.
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BOOK-ENTRY SYSTEM
Global Security
The existing notes were issued in the form of a global security held in
book-entry form. Except as noted below under "Certificated Notes," DTC, or its
nominee, is the sole registered holder of the existing notes for all purposes
under the existing notes indenture. Owners of beneficial interests in the
existing notes represented by the global security hold these interests pursuant
to the procedures and practices of DTC. Owners of beneficial interest must
exercise any rights in respect of their interests, including any right to
convert or require repurchase of their interests, in accordance with DTC's
procedures and practices. Beneficial owners are not holders, and are not
entitled to any rights under the global security or the existing notes indenture
with respect to the global security. We and the trustee may treat DTC as the
sole holder and owner of the global security.
Certificated Notes
Qualified institutional buyers may request that certificated existing
notes be issued in exchange for existing notes represented by the global
security. In addition, certificated existing notes may be issued in exchange for
existing notes represented by the global security if DTC no longer serves as the
depositary and no successor depositary is appointed by us.
CONVERSION BY HOLDERS
Holders of existing notes may, at their option, convert their existing
notes, in whole or in part, at any time prior to maturity into our common stock
at a conversion price of $67.75 per share. Holders may convert existing notes in
denominations of $1,000 and multiples of $1,000. The conversion price is subject
to adjustment as described below. If the existing notes are called for
redemption, the conversion rights on the existing notes called for redemption
will expire at the close of business of the last business day before the
redemption date, unless we default in payment of the redemption price. If a
holder has submitted its existing notes for repurchase after a repurchase event,
such holder may only convert its existing notes if it delivers a withdrawal
notice before the close of business on the last business day before the
repurchase date.
Except as described below, we will not make any adjustment for accrued
interest or dividends on common stock upon conversion of the existing notes. If
a holder converts its existing notes after a record date and prior to the next
interest payment, the holder will have to pay us interest, unless the existing
notes have been called for redemption under the existing notes indenture. We
will pay a cash adjustment for any fractional shares based on the market price
of our common stock on the last business day before the conversion date.
Holders can convert existing notes by delivering the existing notes to an
office or agency of the existing notes trustee in the Borough of Manhattan, The
City of New York, along with a duly signed and completed notice of conversion, a
form of which may be obtained from the existing notes trustee. In the case of a
global security, DTC will effect the conversion upon notice from the holder of a
beneficial interest in the global security in accordance with DTC's rules and
procedures. The conversion date will be the date on which the existing notes and
the duly signed and completed notice of conversion are delivered. As promptly as
practicable on or after the conversion date, but no later than three business
days after the conversion date, we will issue and deliver to the conversion
agent certificates for the number of full shares of common stock issuable upon
conversion, together with any cash payment for fractional shares. In the event
we fail to convert any tendered existing notes into common stock in accordance
with the terms of the indenture, the holder may bring an action to enforce its
right to convert.
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If a holder delivers an existing note for conversion, the holder will not
be required to pay any taxes or duties for the issue or delivery of common stock
on conversion. However, we will not pay any transfer tax or duty payable as a
result of the issuance or delivery of the common stock in a name other than that
of the holder of the existing note. We will not issue or deliver common stock
certificates unless we have been paid the amount of any transfer tax or duty or
we have been provided satisfactory evidence that the transfer tax or duty has
been paid.
The conversion price of $67.75 per share will be adjusted if:
(1) we dividend or distribute shares of our common stock to our common
stock holders;
(2) we split, subdivide or combine our common stock;
(3) we issue rights or warrants to all holders of our common stock to
purchase common stock at less than the current market price;
(4) we dividend or distribute to all holders of our common stock capital
stock or evidences of indebtedness or assets, but excluding:
- dividends, distributions and rights or warrants referred to in
(3) above or to be exercised in connection with certain
trigger events;
- dividends and distributions paid exclusively in cash or paid
in connection with our liquidation, dissolution or winding up;
or
- capital stock, evidence of indebtedness, cash or assets
distributed in a merger or consolidation.
(5) we make a dividend or distribution consisting exclusively of cash to
all holders of common stock if the aggregate amount of these
distributions combined together with (A) all other all-cash
distributions made within the preceding 12 months in respect of
which we made no adjustment plus (B) any cash and the fair market
value of other consideration payable in any tender offers by us or
any of our subsidiaries for common stock concluded within the
preceding 12 months in respect for which we made no adjustment,
exceeds 10% of our market capitalization, being the product of the
then current market price of the common stock multiplied by the
number of shares of our common stock then outstanding;
(6) the purchase of common stock pursuant to a tender offer made by us
or any of our subsidiaries involves an aggregate consideration that,
together with (A) any cash and the fair market value of any other
consideration payable in any other tender offer by us or any of our
subsidiaries for common stock expiring within the 12 months
preceding such tender offer plus (B) the aggregate amount of any
such all-cash distributions referred to in (5) above to all holders
of common stock within the 12 months preceding the expiration of the
tender offer for which we have made no adjustment, exceeds 10% of
our market capitalization on the expiration of such tender offer; or
(7) payment on tender offers or exchange offers by a third party other
than Alkermes, Inc. or our subsidiaries if, as of the closing date
of the offer, our board of directors does not recommend rejection of
the offer. We will only make this adjustment if a tender offer
increases the person's ownership to more than 25% of our outstanding
common stock and
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the payment per share is greater than the current market price of
the common stock. We will not make this adjustment if the tender
offer is a merger or transaction described below under
"Consolidation, Merger or Transfer of Assets."
If we implement a stockholders' rights plan, we will be required under the
existing notes indenture to provide that the holders of existing notes will
receive the rights upon conversion of the existing notes, whether or not these
rights were separated from the common stock prior to conversion.
If we reclassify our common stock, consolidate, merge or combine with
another person or sell or convey our property and assets as an entirety or
substantially as an entirety, each existing note then outstanding will, without
the consent of the holder of any existing note, become convertible only into the
kind and amount of securities, cash and other property receivable upon such
reclassification, consolidation, merger, combination, sale or conveyance by a
holder of the number of shares of common stock into which the existing note was
convertible immediately prior to the reclassification, consolidation, merger,
combination, sale or conveyance. This calculation will be made based on the
assumption that the holder of common stock failed to exercise any rights of
election that the holder may have to select a particular type of consideration.
The adjustment will not be made for a consolidation, merger or combination that
does not result in any reclassification, conversion, exchange or cancellation of
our common stock.
We are permitted to reduce the conversion price of the existing notes for
limited periods of time, if our board of directors deems it advisable. Any such
reduction shall be effective for not less than 20 days. We are required to give
at least 15 days' prior notice of any such reduction. We may also reduce the
conversion price to avoid or diminish income tax to holders of our common stock
in connection with a dividend or distribution of stock or similar event.
No adjustment in the conversion price of the existing notes will be
required unless it would result in a change in the conversion price of at least
one percent. Any adjustment not made will be taken into account in subsequent
adjustments.
PROVISIONAL REDEMPTION
We may redeem some or all of the existing notes at any time prior to
February 19, 2003, at a redemption price equal to $1,000 per existing note plus
accrued and unpaid interest to the redemption date if the closing price of our
common stock has exceeded 200% of the conversion price for at least 20 trading
days in the consecutive 30-trading day period ending on the trading day
immediately prior to the mailing of the notice of redemption.
OPTIONAL REDEMPTION
At any time on or after February 19, 2003, we may redeem some or all of
the existing notes, at our option, at the redemption prices specified below. The
redemption price, expressed as a percentage of the principal amount, is as
follows for the 12-month periods beginning on February 15 of the year indicated
(February 19, 2003 through February 14, 2004, in the case of the first such
period):
Year Redemption Price
---- ----------------
2003 102.14%
2004 101.61
2005 101.07
2006 100.54
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and 100% of the principal amount on February 15, 2007. In each case we will also
pay accrued and unpaid interest to, but excluding, the redemption date. If the
redemption date is an interest payment date, we will pay interest to the record
holders as of the relevant record date. We are required to give notice of
redemption not more than 60 and not less than 30 days before the redemption date
under the existing notes indenture.
No sinking fund is provided for the existing notes, which means that the
existing notes indenture does not require us to redeem or retire the existing
notes periodically. We may not redeem the existing notes if there is a default
under the existing notes indenture. See "Events of Default and Remedies" below.
REPURCHASE AT OPTION OF HOLDERS UPON A REPURCHASE EVENT
If a repurchase event occurs, a holder of an existing note will have the
right, at its option, to require us to repurchase all or any portion of its
existing notes 40 days after we mail holders a notice of the repurchase event.
The repurchase price we are required to pay will be equal to 105% of the
principal amount of the existing notes submitted for repurchase, plus accrued
and unpaid interest to, but excluding, the repurchase date. If a repurchase date
is an interest payment date, we will pay the interest that is due and payable on
such date to the record holder on the applicable record date.
We may pay the repurchase price, at our option, in cash or common stock.
If we elect to pay the repurchase price in common stock, the number of shares we
deliver will be valued at 95% of the average of the closing price for each of
the five trading days immediately preceding the second trading day prior to the
repurchase date. We may only pay the repurchase price in common stock if we
satisfy conditions provided in the existing notes indenture.
A repurchase event will be considered to have occurred if:
- our common stock or other common stock into which the existing
notes are convertible is neither listed for trading on a
United States national securities exchange nor approved for
trading on an established automated over-the-counter trading
market in the United States; or
- one of the following "change in control" events occurs:
1. any person or group becomes the beneficial owner of more
than 50% of the voting power of our outstanding
securities entitled to generally vote for directors;
2. our shareholders approve any plan or proposal for our
liquidation, dissolution or winding up;
3. we consolidate with or merge into any other corporation
or any other corporation merges into us and, as a
result, our outstanding common stock is changed or
exchanged for other assets or securities unless our
shareholders immediately before the transaction own,
directly or indirectly, immediately following the
transaction at least 51% of the combined voting power of
the corporation resulting from the transaction in
substantially the same proportion as their ownership of
our voting stock immediately before the transaction;
4. we convey, transfer or lease all or substantially all of
our assets to any person; or
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5. the continuing directors do not constitute a majority of
our board of directors at any time.
However, a change in control will not be deemed to have
occurred if:
- the last sale price of our common stock for any five
trading days during the ten trading days immediately
before the change in control is equal to at least 105%
of the conversion price; or
- all of the consideration, excluding cash payments for
fractional shares in the transaction constituting the
change in control, consists of common stock traded on a
United States national securities exchange or quoted on
the NASDAQ National Market, and as a result of the
transaction the existing notes become convertible solely
into that common stock.
The term "continuing director" means at any date a member of
our board of directors:
- who was a member of our board of directors on December
31, 1999; or
- who was nominated or elected by at least a majority of
the directors who were continuing directors at the time
of the nomination or election or whose election to our
board of directors was recommended by at least a
majority of the directors who were continuing directors
at the time of the nomination or election or by the
nominating committee comprised of our independent
directors.
Under the above definition of continuing director, if the current board of
directors approved a new director or directors and then resigned, no change in
control would occur. The interpretation of the phrase "all or substantially all"
used in the definition of change in control would likely depend on the facts and
circumstances existing at such time. As a result, there may be uncertainty as to
whether or not a sale or transfer of "all or substantially all" of our assets
has occurred.
We will be required to mail holders of existing notes a notice within 15
days after the occurrence of a repurchase event. The notice must describe, among
other things, the repurchase event, the holder's right to elect repurchase of
the existing notes and the repurchase date. We must deliver a copy of the notice
to the trustee and cause a copy, or a summary of the notice, to be published in
a newspaper of general circulation in New York, New York. The holder may
exercise its repurchase rights by delivering written notice to us and the
existing notes trustee. The notice must be accompanied by the existing notes
duly endorsed for transfer to us. The holder must deliver the exercise notice on
or before the close of business on the thirty-fifth calendar day after the
mailing date of the repurchase notice.
The holders of the existing notes may require us to repurchase all or any
portion of their existing notes upon a repurchase event. We may not have
sufficient cash funds to repurchase the existing notes upon a repurchase event.
We may elect, subject to certain conditions, to pay the repurchase price in
common stock. Certain of our existing debt agreements, as well as future debt
agreements, may prohibit us from paying the repurchase price in either cash or
common stock. If we are prohibited from repurchasing the existing notes, we
could seek consent from our lenders to repurchase the existing notes. If we are
unable to obtain their consent, we could attempt to refinance the existing
notes. If we were unable to obtain a consent or refinance, we would be
prohibited from repurchasing the existing notes. If we were unable to repurchase
the existing notes upon a repurchase event, it would result in an event of
default under the existing notes indenture. An event of default under the
existing notes indenture could result in a further event of default under our
other then-existing debt. In addition, the occurrence of the
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repurchase event may be an event of default under our other debt. As a result,
we would be prohibited from paying amounts due on the existing notes under the
subordination provisions of the existing notes indenture.
The change in control feature may not necessarily afford holders of the
existing notes with protection in the event of a highly leveraged transaction, a
change in control or similar transactions involving us. We could, in the future,
enter into transactions, including recapitalizations, that would not constitute
a change in control but that would increase the amount of our senior
indebtedness or other debt. We are not prohibited from incurring senior
indebtedness or debt under the existing notes indenture. If we incur significant
amounts of additional debt, this could have an adverse effect on our ability to
make payments on the existing notes.
In addition, our management could undertake leveraged transactions that
could constitute a change in control. The Board of Directors does not have the
right under the existing notes indenture to limit or waive the repurchase right
in the event of these types of leveraged transaction. Our requirement to
repurchase existing notes upon a repurchase event could delay, defer or prevent
a change of control. As a result, the repurchase right may discourage:
- a merger, consolidation or tender offer;
- the assumption of control by a holder of a large block
of our shares; and
- the removal of incumbent management.
The repurchase feature was a result of negotiations between us and the
initial purchasers of the existing notes. The repurchase feature is not the
result of any specific effort to accumulate shares of common stock or to obtain
control of us by means of a merger, tender offer or solicitation, or part of a
plan by us to adopt a series of anti-takeover provisions. We have no present
intention to engage in a transaction involving a change of control, although it
is possible that we would decide to do so in the future.
The Exchange Act and the SEC rules thereunder require the distribution of
specific types of information to security holders in the event of issuer tender
offers. These rules may apply in the event of a repurchase. We will comply with
these rules to the extent applicable.
SUBORDINATION
The existing notes are unsecured and subordinated to the prior payment in
full of all existing and future senior indebtedness as provided in the existing
notes indenture. Upon any distribution of our assets upon our dissolution,
winding up, liquidation or reorganization, payments on the existing notes will
be subordinated to the prior payment in full of all senior indebtedness. If the
existing notes are accelerated following an event of default under the existing
notes indenture, the holders of any senior indebtedness will be entitled to
payment in full before the holders of the existing notes are entitled to receive
any payment on the existing notes.
We may not make any payments on the existing notes if:
- we default in the payment on senior indebtedness beyond any
grace period; or
- any other default occurs and is continuing under any
designated senior indebtedness that permits holders of the
designated senior indebtedness to accelerate its maturity,
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and we and the trustee receive a notice, known as a payment
blockage notice, from a person permitted to give this notice
under the existing notes indenture.
We may resume making payments on the existing notes:
- in the case of a payment default, when the default is cured or
waived or ceases to exist; and
- in the case of a nonpayment default, the earlier of when the
default is cured or waived or ceases to exist or 179 days
after receipt of the payment blockage notice.
No new period of payment blockage may be commenced unless:
- 365 days have elapsed since our receipt of the prior payment
blockage notice; and
- all scheduled payments on the existing notes have been paid in
full, or the existing notes trustee or the holders of existing
notes shall not have begun proceedings to enforce the right of
the holders to receive payments.
No default that existed on any senior indebtedness on the date of delivery
of any payment blockage notice may be the basis for a subsequent payment
blockage notice.
The term "senior indebtedness" means the principal, premium, if any, and
interest on, including bankruptcy interest, and any other payment on the
following current or future incurred:
- indebtedness for money borrowed or evidenced by existing
notes, debentures, bonds or other securities;
- reimbursement obligations under letters of credit, bank
guarantees or bankers' acceptances;
- indebtedness under interest rate and currency swap agreements,
cap, floor and collar agreements, currency spot and forward
contracts and other similar agreements and arrangements;
- indebtedness consisting of commitment or standby fees under
our credit facilities or letters of credit;
- obligations under leases required or permitted to be
capitalized under generally accepted accounting principles;
- obligations of the type listed above that have been assumed or
guaranteed by us or in effect guaranteed, directly or
indirectly, by us through an agreement to purchase; and
- any amendment, modification, renewal, extension, refunding or
deferral of any indebtedness or obligation of type listed in
the bullet points above.
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Senior indebtedness will not include:
- any indebtedness or amendment or modification that expressly
provides that it is subordinate to or is not senior to or is
on the same basis as the existing notes;
- any indebtedness to any subsidiary;
- indebtedness for trade payables or the deferred purchase price
of assets or services incurred in the ordinary course of
business; or
- the existing notes.
If the trustee or any holder of the existing notes receives any payment or
distribution of our assets of any kind on the existing notes in contravention of
any of the terms of the existing notes indenture, then such payment or
distribution will be held by the recipient in trust for the benefit of the
holders of senior indebtedness, and will be immediately paid or delivered to the
holders of senior indebtedness or their representative or representatives.
In the event of our insolvency, liquidation, reorganization or payment
default on senior indebtedness, we will not be able to make payments on the
existing notes until we have paid in full all of our senior indebtedness. We
may, therefore, not have sufficient assets to pay the amounts due on the
existing notes. Neither we nor our subsidiaries are prohibited from incurring
debt under the existing notes indenture. If we incur additional debt, our
ability to pay amounts due on the existing notes could be adversely affected. At
September 30, 2002, we had approximately $9.75 million of senior indebtedness.
We may also incur additional debt in the future. The subordination provisions
will not prevent the occurrence of any default or event of default or limit the
rights of any holder of existing notes to pursue any other rights or remedies
with respect to the existing notes.
As a result of the subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceedings, holders of the existing notes may receive less than other creditors
on a ratable basis.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute "events of default" under the existing
notes indenture:
- we fail to pay the principal or premium, if any, on any of the
existing notes when due, whether or not prohibited by the
subordination provisions of the existing notes indenture;
- we fail to pay interest or liquidated damages on the existing
notes when due if such failure continues for 30 days, whether
or not prohibited by the subordination provisions of the
existing notes indenture;
- we fail to perform any covenant in the existing notes
indenture if such failure continues for 45 days after notice
is given in accordance with the existing notes indenture;
- we fail to repurchase any existing notes after a repurchase
event;
- we fail to provide timely notice of a repurchase event;
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- we fail or any of our significant subsidiaries fail to make
any payment at maturity on any indebtedness, including any
applicable grace periods, in an amount in excess of
$7,500,000, and such amount has not been paid or discharged
within 30 days after notice is given in accordance with the
existing notes indenture;
- a default by us or any significant subsidiary on any
indebtedness that results in the acceleration of indebtedness
in an amount in excess of $7,500,000, without this
indebtedness being discharged or the acceleration being
rescinded or annulled for 30 days after notice is given in
accordance with the existing notes indenture; or
- certain events involving bankruptcy, insolvency or
reorganization of us or any significant subsidiary.
The existing notes trustee is generally required under the existing notes
indenture, within 90 days after its becoming aware of a default, to provide
holders written notice of all incurred default. However, the existing notes
trustee may, except in the case of a payment default on the existing notes,
withhold this notice of default if it determines that withholding the notice is
in the best interest of the holders.
If an event of default has occurred and is continuing, the existing notes
trustee or the holders of not less than 25% in principal amount of outstanding
existing notes, may declare the principal and premium, if any, on the existing
notes to be immediately due and payable. After acceleration, but before a
judgment or decree based on acceleration, the holders of a majority in aggregate
principal amount of outstanding existing notes may, under circumstances set
forth in the existing notes indenture, rescind the acceleration of the principal
of and premium, if any, on the existing notes, other than the payment of
principal of the existing notes that has become due other than because of the
acceleration. If an event of default arising from events of bankruptcy,
insolvency or reorganization occurs and is continuing with respect to us, all
unpaid principal of and accrued interest on the outstanding existing notes would
become due and payable immediately without any declaration or other act on the
part of the existing notes trustee or holders of existing notes.
Holders of a majority in principal amount of outstanding existing notes
may direct the time, method and place of conducting any proceeding for any
remedy available to the existing notes trustee or exercising any trust or power
conferred on the existing notes trustee, subject to specified limitations.
Before exercising any right or power under the existing notes indenture at the
direction of the holders, the existing notes trustee will be entitled to receive
from such holders reasonable security or indemnity against any costs, expenses
and liabilities that it might incur as a result.
Before the holder of an existing note may take any action to institute any
proceeding relating to the existing notes indenture, or to appoint a receiver or
a trustee, or for any other remedy, each of the following must occur:
- the holder must have given the existing notes trustee written
notice of a continuing event of default;
- the holders of at least 25% of the aggregate principal amount
of all outstanding existing notes must make a written request
of the existing notes trustee to take action because of the
default;
- holders must have offered reasonable indemnification to the
existing notes trustee against the cost, expenses and
liabilities of taking action; and
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- the existing notes trustee must not have taken action for 60
days after receipt of such notice and offer of
indemnification.
These limitations do not apply to a suit for the enforcement of payment of
the principal of or any premium or interest on an existing note or the right to
convert the existing note in accordance with the existing notes indenture.
Generally, the holders of not less than a majority of the aggregate
principal amount of outstanding existing notes may waive any default or event of
default, except if:
- we fail to pay the principal of, premium or interest on any
existing note when due;
- we fail to convert any existing note into common stock; or
- we fail to comply with any of the provisions of the existing
notes indenture that would require the consent of the holder
of each outstanding existing note affected.
We will send the existing notes trustee annually a statement as to whether
we are in default and the nature of any default under the existing notes
indenture.
CONSOLIDATION, MERGER OR TRANSFER OF ASSETS
We may not consolidate or merge into another person or sell, lease, convey
or transfer all or substantially all of our assets to another person, whether in
a single or series of related transactions, unless:
- either (A) we are the surviving entity, or (B) the resulting
entity is a U.S. corporation, limited liability company,
partnership or trust and expressly assumes in writing all of
our obligations under the existing notes and the existing
notes indenture;
- no default or event of default exists or would occur; and
- other conditions specified in the existing notes indenture are
satisfied.
MODIFICATIONS OF THE EXISTING NOTES INDENTURE
The consent of the holders of a majority in principal amount of the
outstanding existing notes affected is required to make a modification or
amendment to the existing notes indenture. However, a modification or amendment
requires the consent of the holder of each outstanding existing note affected if
it would:
- extend the fixed maturity of any existing note;
- reduce the interest rate or extend the time of payment of
interest on any existing note;
- reduce the principal amount or any premium of any existing
note;
- reduce any amount payable upon redemption or repurchase of any
existing note;
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- adversely change our obligation to repurchase any existing
note upon a repurchase event;
- adversely change the holder's right to institute suit for the
payment of any existing note;
- change the currency in which any existing note is payable;
- adversely modify the right to convert the existing notes;
- adversely modify the subordination provisions of the existing
notes; or
- change the percentage required to consent to modifications and
amendments.
Under the existing notes indenture, we may make certain modifications and
amendments to the existing notes indenture without obtaining the prior consent
of the holders of the existing notes.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the existing notes indenture while
existing notes remain outstanding if:
- all existing notes will become due in one year or are
scheduled for redemption in one year; and
- we deposit sufficient funds to pay all outstanding existing
notes on their scheduled maturity or redemption date.
GOVERNING LAW
The existing notes and the indenture are governed by the laws of the State
of New York, without regard to conflicts of laws principles.
CONCERNING THE EXISTING NOTES TRUSTEE
We have appointed the existing notes trustee as the initial paying agent,
conversion agent, registrar and custodian for the existing notes. We may
maintain deposit accounts and conduct other banking transactions with the
existing notes trustee or its affiliates in the ordinary course of business. In
addition, the existing notes trustee and its affiliates may in the future
provide banking and other services to us in the ordinary course of their
business.
If the existing notes trustee becomes one of our creditors, the existing
notes indenture and the Trust Indenture Act of 1939 may limit the right of the
existing notes trustee to obtain payment on or realize on security for its
claims. If the existing notes trustee develops any conflicting interest with the
holders of existing notes or us, it must eliminate the conflict or resign.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Alkermes, Inc. (together with its subsidiaries, referred to as "we,"
"us," or "our"), a Pennsylvania corporation organized in 1987, is an emerging
pharmaceutical company developing products based on applying its sophisticated
drug delivery technologies to enhance therapeutic outcomes. Our areas of focus
include: controlled, extended-release of injectable drugs using our ProLease(R)
and Medisorb(R) delivery systems, and the development of inhaled pharmaceuticals
based on our proprietary Advanced Inhalation Research, Inc. ("AIR(TM)")
pulmonary delivery system. Our business strategy is twofold. We partner our
proprietary technology systems and drug delivery expertise with many of the
world's finest pharmaceutical companies and we also develop novel, proprietary
drug candidates for our own account. We have a pipeline of products in various
stages of development. In addition to our Cambridge, Massachusetts headquarters,
research and manufacturing facilities, we operate research and manufacturing
facilities in Ohio. Since our inception in 1987, we have devoted a significant
portion of our resources to research and development programs and the purchase
of property, plant and equipment. At September 30, 2002, we had an accumulated
deficit of $457 million. We expect to incur substantial additional operating
losses over the next few years.
We have funded our operations primarily through public offerings and
private placements of debt and equity securities, bank loans and payments under
research and development agreements with collaborators. We historically have
developed our product candidates in collaboration with others on whom we rely
for funding, development, manufacturing and/or marketing. While we continue to
develop product candidates in collaboration with others, we also develop
proprietary product candidates for our own account that we fund on our own.
FORWARD-LOOKING STATEMENTS
Any statements herein or otherwise made in writing or orally by us with
regard to our expectations as to financial results and other aspects of our
business may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to our
future plans, objectives, expectations and intentions and may be identified by
words like "believe," "expect," "may," "will," "should," "seek," or
"anticipate," and similar expressions.
Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
our business is subject to significant risks and there can be no assurance that
actual results of our development and manufacturing activities and our results
of operations will not differ materially from our expectations. Factors which
could cause actual results to differ from expectations include, among others:
(i) Johnson & Johnson Pharmaceutical Research and Development, LLC ("J&J PRD"),
an affiliate of our collaborative partner Janssen Pharmaceutica Inc.
("Janssen"), received a non-approvable letter for Risperdal Consta(TM) from the
FDA and there can be no assurance that the issues raised in the letter will be
resolved in a timely fashion, if at all; (ii) Nutropin Depot(TM), Risperdal
Consta and our product candidates (including our proprietary product candidate,
Vivitrex(TM)), if approved for marketing, may not produce significant revenues
and, in commercial use, may have unintended side effects, adverse reactions or
incidents of misuse; (iii) this exchange offer and cash offer may not be
successful and may not achieve their intended results; (iv) our delivery
technologies or product development efforts may not produce safe, efficacious or
commercially viable products; (v) our collaborators could elect to terminate or
delay programs at any time and disputes with collaborators or failure to
negotiate acceptable new collaborative arrangements for our technologies could
occur; (vi) we may be unable to manufacture our first products, Nutropin Depot
and Risperdal Consta, or to manufacture future products, on a commercial scale
or economically; (vii) after
68
the completion of clinical trials and the submission to the FDA of a New Drug
Application, or NDA, for marketing approval and to other health authorities as a
marketing authorization application, the FDA or other health authorities could
refuse to accept such filings or could request additional preclinical or
clinical studies be conducted, each of which could result in significant delays,
or such authorities could refuse to approve the product at all; (viii) clinical
trials are a time-consuming and expensive process; (ix) our product candidates
could be ineffective or unsafe during preclinical studies and clinical trials
and we and our collaborators may not be permitted by regulatory authorities to
undertake new or additional clinical trials for product candidates incorporating
our technologies, or clinical trials could be delayed; (x) we could lose our
entire investment in Reliant Pharmaceuticals, LLC ("Reliant"); (xi) we depend on
others to market and sell our products and product candidates; (xii) even if our
product candidates appear promising at an early stage of development, product
candidates could fail to receive necessary regulatory approvals, be difficult to
manufacture on a large scale, be uneconomical, fail to achieve market
acceptance, be precluded from commercialization by proprietary rights of third
parties or experience substantial competition in the marketplace; (xiii)
technological change in the biotechnology or pharmaceutical industries could
render our product candidates obsolete or noncompetitive; (xiv) difficulties or
set-backs in obtaining and enforcing our patents and difficulties with the
patent rights of others could occur; (xv) we will need to spend substantial
funds to become profitable and will, therefore, continue to incur losses for the
foreseeable future; and (xvi) we will need to raise substantial additional funds
to continue research and development programs and clinical trials and could
incur difficulties or setbacks in raising such funds.
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission requested that
all registrants discuss their most "critical accounting policies" in
management's discussion and analysis of financial condition and results of
operations. The Commission indicated that a "critical accounting policy" is one
which is both important to the portrayal of our financial condition and results
and requires management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. While our significant accounting policies are more fully
described in Note 2 to our March 31, 2002 consolidated financial statements, we
believe the following accounting policies to be important to the portrayal of
our financial condition and can require estimates from time to time.
REVENUE RECOGNITION - Research and development revenue consists of
non-refundable research and development funding under collaborative arrangements
with various corporate partners. Research and development funding generally
compensates us for formulation, preclinical and clinical testing related to the
collaborative research programs, and is recognized as revenue at the time the
research and development activities are performed under the terms of the related
agreements, when the corporate partner is obligated to pay and when no future
performance obligations exist.
Fees for the licensing of product rights on initiation of collaborative
arrangements are recorded as deferred revenue upon receipt and recognized as
income on a systematic basis (based upon the timing and level of work performed
or on a straight-line basis if not otherwise determinable) over the period that
the related products or services are delivered or obligations as defined in the
agreement are performed. Revenue from milestone or other upfront payments is
recognized as earned in accordance with the terms of the related agreements.
These agreements may require deferral of revenue recognition to future periods.
For the three and six months ended September 30, 2002, there were estimates made
in connection with upfront fees paid under license agreements that were
immaterial to the overall revenues earned and there were immaterial estimates
made for research and development expenses.
EQUITY METHOD INVESTMENT IN RELIANT - In connection with the $100
million equity investment in December 2001, we recorded a $2.7 million noncash
charge in fiscal 2002 for in-process research and
69
development based on management's estimate at the time of the investment, which
is subject to adjustment (see "Results of Operations - Three and Six Months
Ended September 30, 2002 and 2001").
RESEARCH AND DEVELOPMENT EXPENSE - Our research and development
expenses include salaries and related benefits, laboratory supplies, temporary
help costs, external research costs, consulting costs, occupancy costs,
depreciation expense and other allocable costs directly related to its research
and development activities. Research and development expenses are incurred in
conjunction with the development of our technologies, proprietary product
candidates, collaborators' product candidates and in-licensing arrangements.
External research costs relate to toxicology studies, pharmacokinetic studies
and clinical trials that are performed under contract by external companies,
hospitals or medical centers for us. All such costs are charged to research and
development expenses as incurred.
RESTRUCTURING OF OPERATIONS - On August 26, 2002, we announced a
restructuring program to reduce our cost structure as a result of our
expectations regarding the financial impact of a delay in the U.S. launch of
Risperdal Consta by our partner Janssen. The restructuring program reduced our
workforce by 122 employees, representing 23% of our total workforce and includes
plans for consolidation and closure of certain leased facilities in Cambridge,
Massachusetts, closure of our medical affairs office in Cambridge, England,
write-off of leasehold improvements at leased facilities being vacated and
reductions of other expenses. The workforce reductions were made across all
functions of the Company. Under the restructuring plan, we are focusing our
development activities on those programs that are in the later stages of
clinical development and those programs that involve the most productive
collaborations. We are moving aggressively forward in evaluating and
prioritizing the programs that offer the greatest commercial potential.
In connection with the restructuring program, we recorded a charge of
approximately $3.7 million in the Consolidated Statements of Operations in the
quarter ended September 30, 2002, which consisted of approximately $1.5 million
in employee separation costs, including severance and related benefits, and
approximately $2.2 million in facility consolidation and closure costs,
including significant estimates relating to a lease cancellation fee and the
length of time it will take to sublease certain of our facilities. As of
September 30, 2002, we had paid out approximately $978,000 and $210,000 in
employee separation costs and facility closure costs, respectively.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2002, 2001 AND 2000
Our research and development revenue under collaborative arrangements
was $54.1 million, $56.0 million and $22.9 million for the fiscal years ended in
2002, 2001 and 2000, respectively. The decrease in such revenue for fiscal 2002
as compared to fiscal 2001 was mainly the result of a significant non-recurring
milestone earned in fiscal 2001, which was largely offset by a significant
increase in funding earned under other collaborative agreements during fiscal
2002. The increase in such revenue for fiscal 2001 as compared to fiscal 2000
was mainly a result of the significant non-recurring milestone earned in fiscal
2001 and referred to above. In addition, there was an increase in funding earned
under other collaborative agreements.
Total operating expenses were $116.5 million for the fiscal year ended
in 2002 compared to $85.9 million and $98.9 million for the fiscal years ended
in 2001 and 2000, respectively. The increase for fiscal 2002 as compared to
fiscal 2001 was due to an increase in research and development expenses and
general and administrative expenses. The decrease for fiscal 2001 as compared to
fiscal 2000 was primarily related to a decrease in noncash compensation charges
partially offset by an increase in research and development expenses and general
and administrative expenses.
70
Research and development expenses were $92.1 million for the fiscal
year ended in 2002 compared to $68.8 million and $54.5 million for the fiscal
years ended in 2001 and 2000, respectively. The increases in research and
development expenses for fiscal 2002 as compared to fiscal 2001 and for fiscal
2001 as compared to fiscal 2000 were mainly the result of increases in
personnel, external research expenses and lab supplies as we advance our
proprietary product candidates and our collaborators' product candidates through
development and clinical trials and prepare for commercialization. There was
also an increase in occupancy costs and depreciation expense as we continue to
expand our facilities in both Massachusetts and Ohio. We expect an increase in
research and development costs in fiscal 2003 resulting from the continuing
development of our proprietary product candidates and collaborators' product
candidates.
A significant portion of our research and development expenses
(including laboratory supplies, travel, dues and subscriptions, recruiting
costs, temporary help costs, consulting costs and allocable costs such as
occupancy and depreciation) are not tracked by project as they benefit multiple
projects or our drug delivery technologies in general. Expenses incurred to
purchase specific services from third parties to support our collaborative
research and development activities are tracked by project and are reimbursed to
us by our partners. We generally bill our partners under collaborative
arrangements using a single full-time equivalent or hourly rate. This rate is
established by us annually based on our annual budget of salaries, employee
benefits and the billable non-project-specific costs mentioned above. Each
collaborative partner is billed using a full-time equivalent or hourly rate for
the hours worked by our employees on a particular project, plus any direct
external research costs. We account for our research and development expenses on
a departmental and functional basis in accordance with our budget and management
practices.
General and administrative expenses were $24.4 million, $19.6 million
and $14.9 million for the fiscal years ended in 2002, 2001 and 2000,
respectively. The increase for fiscal 2002 as compared to fiscal 2001 was
primarily a result of an increase in personnel, as well as increased
professional fees, consulting costs and noncash compensation expense. The
increase for fiscal 2001 as compared to fiscal 2000 was a result of increased
professional fees, consulting costs and an increase in amortization of expenses
associated with the sale of $200 million principal amount of our existing notes.
There was also an increase in occupancy costs as we expand our facilities in
both Massachusetts and Ohio.
Noncash compensation expense (income) was $1.9 million, ($2.4 million)
and $29.5 million for fiscal years ended 2002, 2001 and 2000, respectively. In
fiscal 2002, noncash compensation expense was primarily related to restricted
stock awards granted during fiscal 2002 and is included in research and
development expenses and general and administrative expenses, as appropriate. In
fiscal 2001 and fiscal 2000, noncash compensation (income) expense related
primarily to restricted common stock and stock options granted to certain
employees and consultants associated with our wholly owned subsidiary, AIR,
prior to its acquisition in fiscal 1999. The majority of such restricted common
stock and stock options completed vesting during fiscal 2001 and, therefore,
noncash compensation expense is no longer being separately disclosed in the
Statements of Operations in fiscal 2002. Fluctuations in noncash compensation
charges during fiscal 2001 and 2000 were primarily a result of changes in the
market value of our common stock, partially offset by a reduction in the number
of shares of common stock subject to future vesting. As a result of fluctuations
in our common stock price during fiscal 2001, we recognized noncash compensation
income for the year based on the calculation of noncash compensation for
consultants, as prescribed under the fair-value method of accounting in
Statement of Financial Accounting Standards ("SFAS") No. 123.
Interest income was $15.3 million, $22.4 million and $11.5 million for
the fiscal years ended in 2002, 2001 and 2000, respectively. The decrease for
fiscal 2002 as compared to fiscal 2001 was primarily the result of lower average
cash and investment balances as compared to the prior year. Interest
71
income also decreased as a result of a decline in interest rates as compared to
the prior year. The increase for fiscal 2001 as compared to fiscal 2000 was
primarily the result of the interest income earned on the increase in average
cash and investment balances mainly resulting from the investment of the net
proceeds from the sale of the existing notes in February 2000. Interest income
in fiscal 2001 also increased as a result of an increase in interest rates as
compared to the prior year.
Interest expense was $8.9 million for the fiscal year ended in 2002
compared to $9.4 million and $3.7 million for the fiscal years ended in 2001 and
2000, respectively. The decrease for fiscal 2002 as compared to fiscal 2001 was
primarily the result of a decrease in the average outstanding debt balance as
compared to the prior year. The increase for fiscal 2001 as compared to fiscal
2000 was primarily the result of interest costs related to the existing notes.
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
The net loss for the three and six months ended September 30, 2002 in
accordance with generally accepted accounting principles was $67.8 and $113.1
million or $1.05 and $1.76 basic and diluted loss per common share. The net loss
in accordance with generally accepted accounting principles for the three and
six months ended September 30, 2001 was $12.6 and $21.0 million or $0.20 and
$0.33 basic and diluted loss per common share. The net loss for the three and
six months ended September 30, 2002, excluding $35.3 million and $59.5 million
in noncash charges related to our share of the losses in Reliant, was $32.6 and
$53.6 million or $0.51 and $0.83 basic and diluted loss per common share. The
increase in the net loss, excluding our loss in Reliant, was primarily the
result of restructuring costs as well as an increase in research and development
and general and administrative expenses as we continue to advance our
proprietary product candidates and our collaborators' product candidates through
development and clinical trials and prepare for commercialization. The increased
loss also reflected a decrease in revenues as our Risperdal Consta program
evolves from a development stage project into a commercial program.
Our research and development revenue under collaborative arrangements
for the three and six months ended September 30, 2002 was $9.5 million and $19.8
million compared to $14.5 million and $30.0 million for the corresponding
periods of the prior year. The decrease for the three and six months ended
September 30, 2002 was the result of a milestone payment received during the
three months ended June 30, 2001 as well as decreased funding from Janssen
during the three and six months ended September 30, 2002 as the Risperdal Consta
project evolves from a development stage project into a commercial program. See
"Results of Operations - Risperdal Consta" for further information on the status
of Risperdal Consta. The decrease in research and development funding was
partially offset by an increase in research and development funding earned under
certain other collaborative agreements.
Total operating expenses increased to $41.1 million and $71.7 million
for the three and six months ended September 30, 2002 from $29.0 million and
$55.1 million for the three and six months ended September 30, 2001. The
increase was due in part to restructuring costs of $3.7 million taken in the
quarter ended September 30, 2002 as well as increases in research and
development expenses and general and administrative expenses, which are
discussed below.
On August 26, 2002, we announced a restructuring program to reduce our
cost structure as a result of our expectations regarding the financial impact of
a delay in the U.S. launch of Risperdal Consta by our partner Janssen. The
restructuring program reduced our workforce by 122 employees, representing 23%
of our total workforce and includes plans for consolidation and closure of
certain leased facilities in Cambridge, Massachusetts, closure of our medical
affairs office in Cambridge, England, write-off of leasehold improvements at
leased facilities being vacated and reduction of other expenses. The workforce
reductions were made across all of our functions. Under the restructuring plan,
we are
72
focusing our development activities on those programs that are in the later
stages of clinical development and those programs that involve the most
productive collaborations. We are moving aggressively forward in evaluating and
prioritizing the programs that offer the greatest commercial potential.
In connection with the restructuring program, we recorded a charge of
approximately $3.7 million in the Consolidated Statements of Operations in the
quarter ended September 30, 2002, which consisted of approximately $1.5 million
in employee separation costs, including severance and related benefits, and
approximately $2.2 million in facility consolidation and closure costs,
including significant estimates relating to a lease cancellation fee and the
length of time it will take to sublease certain of our facilities. As of
September 30, 2002, we had paid out approximately $978,000 and $210,000 in
employee separation costs and facility closure costs, respectively.
The employee separation costs and the facility consolidation and
closure costs were accrued under Emerging Issues Task Force ("EITF") 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)."
Pursuant to the restructuring plan, the following charges and payments
have been recorded during the quarter ended September 30, 2002:
Balance, Charge Payments Balance,
June 30, for the for September 30,
Type of Liability 2002 Period the Period 2002
---------------------------------- ------------ ----------- ----------- -----------
Employee termination benefit costs $ -- $ 1,461,881 $ (977,845) $ 484,036
Facility closure costs ........... -- 2,219,838 (209,977) 2,009,861
------------ ----------- ----------- -----------
Total ............................ $ -- $ 3,681,719 $(1,187,822) $ 2,493,897
============ =========== =========== ===========
We expect to substantially complete our restructuring program by the
end of fiscal 2003. If our restructuring program is implemented in the manner
and on the timeline we intend, we expect to realize expense savings of
approximately $20 to $25 million in fiscal 2003. However, we cannot assure you
that our restructuring program will achieve all of the cost and expense
reductions and other benefits we anticipate or that the plan will be completed
on the timetable anticipated.
Research and development expenses for the three and six months ended
September 30, 2002 were $28.2 million and $52.8 million as compared to $22.6
million and $43.3 million for the corresponding periods of the prior year. The
increase in research and development expenses for the three and six months ended
September 30, 2002 as compared to the three and six months ended September 30,
2001 was mainly the result of increases in personnel and external research
expenses as we advance our proprietary product candidates and our collaborators'
product candidates through development and clinical trials and prepare for
commercialization. There was also an increase in occupancy costs as we continue
to expand certain facilities in both Massachusetts and Ohio. As discussed above,
on August 26, 2002, we announced a restructuring program to reduce our cost
structure. The restructuring program reduced our workforce and includes plans
for consolidation and closure of certain leased facilities and reductions of
other expenses. We are focusing our development activities on those programs
that are in the later stages of clinical development and those programs that
involve the most productive collaborations and, therefore, we continue to expect
an increase in research and development expenses during fiscal 2003 as compared
to fiscal 2002.
73
Below is a summary of our key proprietary and collaborators' product
candidates and their respective stages of clinical development.
Product Candidate Indication Stage(1)
----------------- ---------- --------
Nutropin Depot Pediatric growth hormone deficiency Marketed
Risperdal Consta Schizophrenia (2)
Vivitrex Alcohol dependence Phase III
Vivitrex Opioid dependence Phase II
Nutropin Depot Adult growth hormone deficiency Phase III
Medisorb AC2993 (Exendin-4) Diabetes Phase II
AIR Epinephrine Anaphylaxis Phase I completed
ProLease r-hFSH Infertility Phase I completed
AIR Insulin Diabetes Undisclosed
AIR Hgh Growth hormone deficiency Phase I completed
AIR small molecule products Respiratory disease Phase I completed/Preclinical
(1) "Phase I" clinical trials indicates that the compound is being tested
in humans for safety and preliminary indications of biological
activity in a limited patient population. "Phase II" clinical trials
indicates that the trial is being conducted in patients and is to
provide information on dosing and is testing for safety and
preliminary evidence of efficacy. "Phase III" clinical trials
indicates that the trial is being conducted in patients and is testing
the safety and efficacy of the compound. "Preclinical" indicates that
we or our partners are conducting formulation, efficacy, pharmacology
and/or toxicology testing of a compound in animal models or
biochemical assays.
(2) Approved in the United Kingdom, Germany, Mexico, Austria, New Zealand,
Switzerland, Iceland and the Netherlands. Received a non-approvable
letter from the FDA. See "Results of Operations - Risperdal Consta" for
further information on the status of Risperdal Consta.
General and administrative expenses for the three and six months ended
September 30, 2002 were $9.2 million and $15.2 million as compared to $6.4
million and $11.8 million for the corresponding periods of the prior year. The
increase in the three and six months ended September 30, 2002 as compared to the
three and six months ended September 30, 2001 was primarily a result of the
write off of $2.7 million in deferred merger costs in connection with the
termination of our proposed merger transaction with Reliant, which is discussed
below. There was also an increase in personnel and occupancy costs and
professional fees.
Interest income for the three and six months ended June 30, 2002 was
$1.1 million and $2.4 million compared to $4.2 million and $8.7 million for the
corresponding periods of the prior year. The decrease in interest income for the
three and six months ended September 30, 2002 as compared to the three and six
months ended September 30, 2001 was primarily the result of a lower average cash
and investment balance as compared to the prior year periods as discussed in
"Liquidity and Capital Resources" below. Interest income also decreased as a
result of a decline in interest rates as compared to the same periods in the
prior year.
Interest expense for the three and six months ended September 30, 2002
was $2.1 million and $4.1 million as compared to $2.3 million and $4.6 million
for the corresponding periods of the prior year. The decrease in interest
expense for the three and six months ended September 30, 2002 as compared to the
three and six months ended September 30, 2001 was primarily the result of a
decrease in the average outstanding debt balance as compared to the prior year
periods.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
74
RELIANT
In December 2001, we announced a strategic relationship with Reliant.
As part of the relationship, in December 2001, we purchased approximately 63% of
an offering by Reliant of its Series C Convertible Preferred Units, representing
approximately 19% of the equity interest in Reliant, for a purchase price of
$100 million. The investment is being accounted for under the equity method of
accounting because Reliant is organized as a limited liability company, which is
treated in a manner similar to a partnership. Because, at the time of our
investment, Reliant had an accumulated deficit from operations and deficit in
members capital, under applicable accounting rules, our share of Reliant's
losses from the date of our investment is being recognized in proportion to our
percentage participation in the Series C financing, and not in proportion to our
percentage ownership interest in Reliant. We record our equity in the income or
losses of Reliant three months in arrears. For the three and six months ended
September 30, 2002, this noncash charge amounted to $35.3 million and $59.5
million, respectively. Reliant is a privately held company over which we do not
exercise control and we rely on the unaudited financial statements prepared by
Reliant and provided to us to calculate our share of Reliant's losses in our
consolidated statements of operations. We anticipate that Reliant will have
substantial net losses through 2003, and accordingly, recorded our 63% share of
such losses in our consolidated financial statements beginning in the quarter
ended March 31, 2002.
In connection with our $100 million equity investment in Reliant, we
are in the process of allocating our proportionate share of the assets acquired
and liabilities assumed in accordance with the guidance set forth in SFAS No.
141, "Business Combinations." We have taken a $2.7 million noncash charge in
fiscal 2002 for in-process research and development through the Consolidated
Statements of Operations under the caption "Equity in losses of Reliant
Pharmaceuticals, LLC." The $2.7 million noncash charge is related to
management's current estimate of the amount of the purchase price to be
allocated to in-process research and development. This analysis of the purchase
price allocation is preliminary and the amount of in-process research and
development is subject to future adjustment.
On March 20, 2002, we entered into an Agreement and Plan of Merger with
Reliant. On August 14, 2002, we and Reliant announced the mutual termination of
the merger agreement. The companies agreed to terminate due to general market
conditions. There were no payments triggered by the mutual termination and each
company will bear its own legal and transaction fees. As a result of the
termination of the merger agreement, we expensed approximately $2.7 million of
deferred merger costs in the three months ended September 30, 2002.
RISPERDAL CONSTA
On August 2001, Janssen Pharmaceutica, L.P. filed an NDA for Risperdal
Consta with the FDA and similar regulatory filings have been submitted to other
drug regulatory agencies worldwide. Risperdal Consta is a Medisorb long-acting
formulation of Janssen's antipyschotic drug RISPERDAL(R). On June 28, 2002, J&J
PRD, an affiliate of our collaborative partner Janssen, received a
non-approvable letter for Risperdal Consta from the FDA. In connection with this
non-approvable letter, J&J PRD has met with the FDA and is working to answer the
FDA's questions. There can be no assurance that the issues raised in the FDA's
letter will be resolved on a timely basis, if at all. On August 1, 2002 and
August 9, 2002, we announced that J&J PRD received approval to market Risperdal
Consta in Germany and the United Kingdom, respectively. Since those dates,
Risperdal Consta has been approved in several other countries and we have
announced that Risperdal Consta is in late-stage regulatory review in a number
of other countries. Nevertheless, the impact of the FDA's nonapprovable letter
on other regulatory filings made worldwide is not known at this time. There can
be no assurance that Risperdal Consta will be approved by the FDA or other
regulatory agencies on a timely basis, if at all.
75
QUARTERLY FINANCIAL DATA
(In thousands, except per share data)
THREE MONTHS ENDED
------------------------------
JUNE 30, SEPTEMBER 30,
2002 2002
------------- -------------
Revenues:
Research and development revenue under
collaborative arrangements $ 10,291 $ 9,471
-------- --------
Expenses:
Research and development ...................................... 24,599 28,186
General and administrative .................................... 6,016 9,196
Restructuring costs ........................................... -- 3,682
-------- --------
Total expenses ....................................... 30,615 41,064
-------- --------
Net Operating Loss ............................................... (20,324) (31,593)
-------- --------
Other Income (Expense):
Interest income ............................................... 1,366 1,068
Interest expense .............................................. (2,081) (2,067)
-------- --------
Total other income (expense) ......................... (715) (999)
-------- --------
Equity in losses of Reliant Pharmaceuticals, LLC ................. 24,213 35,257
-------- --------
Net Loss Attributable to Common Shareholders ..................... $(45,252) $(67,849)
======== ========
Basic and Diluted Loss per Common Share .......................... $ (0.70) $ (1.05)
======== ========
Weighted Average Number of Common Shares Outstanding ............. 64,261 64,318
======== ========
THREE MONTHS ENDED
----------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
2001 2001 2001 2002
---------- ---------- ---------- ----------
Revenues:
Research and development revenue under collaborative arrangements $ 15,527 $ 14,505 $ 11,451 $ 12,619
---------- ---------- ---------- ----------
Expenses:
Research and development ........................................ 20,710 22,593 23,040 25,749
General and administrative ...................................... 5,374 6,411 5,903 6,699
---------- ---------- ---------- ----------
Total expenses ......................................... 26,084 29,004 28,943 32,448
---------- ---------- ---------- ----------
Net Operating Loss ................................................. (10,557) (14,499) (17,492) (19,829)
---------- ---------- ---------- ----------
Other Income (Expense):
Interest income ................................................. 4,525 4,217 4,428 2,132
Interest expense ................................................ (2,310) (2,331) (2,136) (2,099)
---------- ---------- ---------- ----------
Total other income (expense) ........................... 2,215 1,886 2,292 33
---------- ---------- ---------- ----------
Equity in losses of Reliant Pharmaceuticals, LLC ................... -- -- 2,700 2,704
---------- ---------- ---------- ----------
Net Loss Attributable to Common Shareholders ....................... $ (8,342) $ (12,613) $ (17,900) $ (22,500)
========== ========== ========== ==========
Basic and Diluted Loss per Common Share ............................ $ (0.13) $ (0.20) $ (0.28) $ (0.35)
========== ========== ========== ==========
Weighted Average Number of Common Shares Outstanding ............... 63,237 63,399 63,896 64,148
========== ========== ========== ==========
76
THREE MONTHS ENDED
------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
2000 2000 2000 2001
------------ ------------ ------------ ------------
Revenues:
Research and development revenue under collaborative arrangements $ 28,967 $ 7,514 $ 9,689 $ 9,860
------------ ------------ ------------ ------------
Expenses:
Research and development ........................................ 14,440 16,498 16,863 20,973
General and administrative ...................................... 4,817 4,944 4,969 4,881
Noncash compensation expense (income) ........................... 3,149 (2,290) (1,644) (1,663)
------------ ------------ ------------ ------------
Total expenses ......................................... 22,406 19,152 20,188 24,191
------------ ------------ ------------ ------------
Net Operating Income (Loss) ........................................ 6,561 (11,638) (10,499) (14,331)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest income ................................................. 5,599 5,660 5,506 5,671
Interest expense ................................................ (2,395) (2,308) (2,365) (2,331)
------------ ------------ ------------ ------------
Total other income ..................................... 3,204 3,352 3,141 3,340
------------ ------------ ------------ ------------
Net Income (Loss) .................................................. 9,765 (8,286) (7,358) (10,991)
Preferred Stock Dividends .......................................... 1,868 1,867 2,095 1,437
------------ ------------ ------------ ------------
Net Income (Loss) Attributable to Common Shareholders .............. $ 7,897 $ (10,153) $ (9,453) $ (12,428)
============ ============ ============ ============
Earnings (Loss) Per Common Share:
Basic ........................................................... $ 0.15 $ (0.19) $ (0.17) $ (0.21)
============ ============ ============ ============
Diluted ......................................................... $ 0.13 $ (0.19) $ (0.17) $ (0.21)
============ ============ ============ ============
Weighted Average Common Shares Used to
Compute Earnings (Loss) Per Common Share:
Basic ........................................................... 53,957 54,651 55,670 58,753
============ ============ ============ ============
Diluted ......................................................... 59,856 54,651 55,670 58,753
============ ============ ============ ============
77
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments were approximately
$71.7 million at September 30, 2002 as compared to $152.3 million at March 31,
2002. The decrease in cash and cash equivalents and short-term investments is a
result of cash used to fund our operations, to acquire fixed assets and to make
interest and principal payments on our indebtedness.
We invest in cash equivalents, U.S. Government obligations, high-grade
corporate notes and commercial paper, with the exception of our $100 million
investment in Reliant. Our investment objectives for our investments, other than
our investment in Reliant, are, first, to assure liquidity and conservation of
capital, and second, to obtain investment income. Investments classified as
long-term at September 30, 2002 consist of U.S. Government obligations held as
collateral under certain letters of credit, lease and loan agreements.
All of our investments in debt securities are classified as
"available-for-sale" and are recorded at fair value. Fair value was determined
based on quoted market prices.
CORPORATE AND COLLABORATIVE DEVELOPMENTS
- We announced the initiation of the Phase III clinical trial of
Vivitrex, our proprietary injectable extended-release
formulation of naltrexone. The multi-center trial will test
the efficacy and safety of repeated doses of Vivitrex
administered monthly to alcohol-dependent patients. The
clinical trial follows the successful completion of a
multi-dose, multi-center safety and pharmacokinetic clinical
assessment of Vivitrex in alcohol-dependent volunteers
conducted in the second half of 2001.
- Pursuant to the terms of an agreement with Eli Lilly & Company
("Lilly"), Lilly has agreed to provide funding of certain
amounts for the design and construction of a portion of AIR's
manufacturing facility in Chelsea, Massachusetts. Lilly's
investment will be used to fund pulmonary insulin production
and packaging capabilities. This funding will be secured by
Lilly's ownership of specific equipment to be located and used
in the facility. We have the right to purchase the equipment
from Lilly, at any time, at the then-current net book value.
- In November 2002, Alkermes and General Electric Capital
Corporation ("GECC") entered into a Master Lease Agreement to
provide us with sale/leaseback equipment financing. On
November 8, 2002, Alkermes received $6 million in equipment
financing from GECC under the Master Lease Agreement. Under
the terms of the Master Lease Agreement, we will make lease
payments to GECC over a 36-month period beginning in December
2002.
At March 31, 2002, we had approximately $260.8 million of net
operating loss ("NOL") carryforwards for U.S. federal income tax purposes and
approximately $18.8 million of research and development tax credits available to
offset future federal income tax, subject to limitations for alternative minimum
tax. The NOL and research and development credit carryforwards are subject to
examination by the tax authorities and expire in various years from 2002 through
2023. Due to the uncertainty of realizing the future benefits of the net
deferred income tax assets, a full valuation allowance has been established at
March 31, 2002 and, therefore, no benefit has been recognized in the financial
statements.
In August 2002, we announced the regulatory approval and expected
commercial launch of Risperdal Consta in Germany and the United Kingdom. Under
our agreement with Janssen and based on the foregoing, certain minimum revenues
relating to our sales of Risperdal Consta under a manufacturing and supply
agreement are to be paid by Janssen to us in minimum annual amounts for up to
ten years beginning in calendar 2003. The actual amount of such minimum revenues
will be determined by a formula and are currently estimated to aggregate
approximately $150 million. The minimum revenue obligation will be satisfied
upon receipt by us of revenues relating to our sales of Risperdal Consta
equaling such aggregate amount of minimum revenues.
We have funded our operations primarily through public offerings and
private placements of debt and equity securities, bank loans and payments under
research and development agreements with collaborators. We expect to incur
significant additional research and development and other costs in connection
with collaborative arrangements and as we expand the development of our
proprietary product
78
candidates, including costs related to preclinical studies, clinical trials and
facilities expansion. We expect that our costs, including research and
development costs for our product candidates, will exceed our revenues
significantly for the next few years, which will result in continuing losses
from operations.
Capital expenditures were approximately $10.3 million and $26.9 million
for the three and six months ended September 30, 2002 and $33.4 million for the
year ended March 31, 2002, principally reflecting equipment purchases and
building expansion and improvements. We expect our capital expenditures to be
approximately $49 million in fiscal 2003, primarily as a result of the expansion
of certain facilities in both Massachusetts and Ohio. Our capital expenditures
for equipment, facilities and building improvements have been financed to date
primarily with proceeds from bank loans and the sales of debt and equity
securities. Under the provisions of our existing loans, Fleet National Bank has
a security interest in certain of our assets.
We have summarized below our material contractual cash obligations as
of March 31,
2002:
(in thousands)
Less Than One One to Three Four to Five After Five
Year (Fiscal Years (Fiscal Years (Fiscal Years (After
Contractual Cash Obligations Total 2003) 2004-2006) 2007-2008) Fiscal 2008)
---------------------------------- ------------ ------------ ------------ ------------ ------------
Existing Notes - principal ....... $ 200,000 $ -- $ -- $ 200,000 $ --
Existing Notes - interest ........ 37,500 7,500 22,500 7,500 --
Long-term Debt ................... 21,825 14,025 7,800 -- --
Operating Leases ................. 217,693 12,051 34,640 20,663 150,339
Capital Expansion Programs ....... 42,000 42,000 -- -- --
------------ ------------ ------------ ------------ ------------
Total Contractual Cash Obligations $ 519,018 $ 75,576 $ 64,940 $ 228,163 $ 150,339
============ ============ ============ ============ ============
We will continue to pursue opportunities to obtain additional financing
in the future. Such financing may be sought through various sources, including
debt and equity offerings, corporate collaborations, bank borrowings,
arrangements relating to assets or other financing methods or structures. The
source, timing and availability of any financings will depend on market
conditions, interest rates and other factors. Our future capital requirements
will also depend on many factors, including continued scientific progress in our
research and development programs (including our proprietary product
candidates), the magnitude of these programs, progress with preclinical testing
and clinical trials, the time and costs involved in obtaining regulatory
approvals, the costs involved in filing, prosecuting and enforcing patent
claims, competing technological and market developments, the establishment of
additional collaborative arrangements, the cost of manufacturing facilities and
of commercialization activities and arrangements and the cost of product
in-licensing and any possible acquisitions.
We may need to raise substantial additional funds for longer-term
product development, including development of our proprietary product
candidates, regulatory approvals and manufacturing and marketing activities that
we might undertake in the future. There can be no assurance that additional
funds will be available on favorable terms, if at all. If adequate funds are not
available, we may be required to curtail significantly one or more of our
research and development programs and/or obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates or future products.
We believe that our current cash and cash equivalents and short-term
investments, combined with anticipated interest income and research and
development revenues under collaborative arrangements, will be sufficient to
meet our anticipated capital requirements through at least March 31, 2004.
79
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 is effective for any business combinations
initiated after June 30, 2001. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. On April 1, 2002, we adopted this statement
and we are in the process of evaluating the impact that such adoption will have
on our financial statements. Under the new rules, goodwill is no longer being
amortized but will be subject to annual impairment tests in accordance with the
statements. Other identifiable intangible assets continue to be amortized over
their useful lives should they be determinable; otherwise they will be subject
to the same annual impairment test. As described in notes to our consolidated
financial statements included in this prospectus, we did apply SFAS No. 141 to
our equity method investment in Reliant since such investment occurred
subsequent to June 30, 2001. Its impact is discussed in such notes to our
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement will supersede SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets or for Long-Lived
Assets to Be Disposed Of," in its entirety, and Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," only for segments to be
disposed of. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. On April
1, 2002, we adopted this statement, which will have no significant impact on our
financial statements.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This
statement is effective for fiscal years beginning after May 15, 2002. SFAS No.
145 rescinds Statement No. 4, which requires all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion No. 30 will be used to classify those
gains and losses. SFAS No. 145 also amends Statement No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
We adopted this statement effective April 1, 2002 and the adoption did not have
an impact on our financial statements and result of operations.
In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. We do not believe that the adoption will have a material impact on our
financial statements and result of operations. The restructuring charge recorded
in the Consolidated Statements of Operations in the quarter ended September 30,
2002 was, and any future charges or credits related to the restructuring program
undertaken on August 26, 2002 will also be, accounted for under the guidance set
forth in EITF Issue No. 94-3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our investment portfolio we own financial instruments that
are sensitive to market risks. The investment portfolio, excluding our December
2001 $100 million investment in Reliant, is
80
used to preserve our capital until it is required to fund operations, including
our research and development activities. Our short-term investments and
investments consist of U.S. Government obligations, high-grade corporate notes
and commercial paper. All of our investments in debt securities are classified
as "available-for-sale" and are recorded at fair value. Our investments,
excluding our investment in Reliant, are subject to interest rate risk, and
could decline in value if interest rates increase. Due to the conservative
nature of our short-term investments and investments we do not believe that we
have a material exposure to interest rate risk. Although our investments,
excluding our investment in Reliant, are subject to credit risk, our investment
policies specify credit quality standards for our investments and limit the
amount of credit exposure from any single issue, issuer or type of investment.
Our "available-for-sale" marketable securities are sensitive to
changes in interest rates. Interest rate changes would result in a change in the
fair value of these financial instruments due to the difference between the
market interest rate and the rate at the date of purchase of the financial
instrument. A 10% decrease in quarter-end market interest rates would result in
no material impact on the net fair value of such interest-sensitive financial
instruments.
The interest rate on our existing notes is fixed and, therefore, is
not subject to interest rate risk.
81
BUSINESS
GENERAL
We are an emerging pharmaceutical company that develops therapeutic
products based on our formulation expertise and proprietary drug delivery
technologies. Our product development strategy is twofold. We partner with many
of the world's finest pharmaceutical companies and we also develop novel,
proprietary drug candidates for our own account. We have a broad pipeline of
products and product candidates, including two marketed products, several
product candidates at various stages of clinical development and others at
earlier stages of development. Our products are based on controlled,
extended-release dosage forms of injectable drugs using our ProLease and
Medisorb delivery systems, and the development of inhaled pharmaceuticals based
on our proprietary AIR pulmonary delivery system. In addition to our Cambridge,
Massachusetts headquarters and research and manufacturing facilities, we operate
research and manufacturing facilities in Ohio.
OUR STRATEGY
We are building a fully integrated pharmaceutical company leveraging our
unique drug delivery capabilities and technologies as the means to develop our
first commercial products -- initially with partners, then on our own. The key
elements to our strategy are to:
DEVELOP AND ACQUIRE BROADLY APPLICABLE DRUG DELIVERY SYSTEMS. We develop
and acquire drug delivery systems that have the potential to be applied to
multiple proteins, peptides and small molecule pharmaceutical compounds to
create new product opportunities.
COLLABORATE WITH PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES TO DEVELOP AND
FINANCE PRODUCT CANDIDATES. We have entered into multiple collaborations with
pharmaceutical and biotechnology companies to develop product candidates
incorporating our technologies, to provide us with funding for product
development independent of capital markets and to share development risk.
APPLY DRUG DELIVERY SYSTEMS TO BOTH APPROVED DRUGS AND DRUGS IN
DEVELOPMENT. We are applying our drug delivery technologies to novel
applications and formulations of pharmaceutical products that have already been
approved by the FDA or other regulatory authorities. In such cases, we and our
partners may develop a novel dosage form or application with the knowledge of a
drug's safety and efficacy profile and a body of clinical experience from which
to draw information for the design of clinical trials and for regulatory
submissions. We also apply our technologies to pharmaceuticals in development
that could benefit from one of our delivery systems.
ESTABLISH INDEPENDENT PRODUCT DEVELOPMENT CAPABILITIES AND INFRASTRUCTURE.
Based upon the knowledge we have learned and the best practices we have adopted
from our pharmaceutical company partners, our experienced scientists have built
an in-house product development organization that enables us to develop product
candidates for our collaborators and for ourselves. Our product development
experience and infrastructure give us flexibility in structuring development
programs and the ability to conduct both feasibility studies and clinical
development programs for our collaborators and for ourselves.
EXPAND OUR PIPELINE WITH ADDITIONAL PRODUCT CANDIDATES FOR OUR OWN
ACCOUNT. We are now developing product candidates for our own account by
applying our drug delivery technologies to certain off-patent pharmaceuticals.
For example, we are developing Vivitrex, a Medisorb formulation of naltrexone,
for the treatment of alcoholism and opiate dependence and inhaled epinephrine
based on AIR
82
pulmonary drug delivery for the treatment of anaphylaxis. In addition, we may
in-license or acquire certain compounds to develop on our own.
PRODUCT CANDIDATES IN DEVELOPMENT
The following table summarizes the primary indications, technology,
development stage and collaborative partner for our key product candidates. This
table is qualified in its entirety by reference to the more detailed
descriptions appearing elsewhere in this prospectus. The results from
preclinical testing and early clinical trials may not be predictive of results
obtained in subsequent clinical trials and there can be no assurance that our or
our collaborators' clinical trials will demonstrate the safety and efficacy of
any product candidates necessary to obtain regulatory approval.
COLLABORATIVE
PRODUCT CANDIDATE INDICATION TECHNOLOGY STAGE(1) PARTNER
----------------- ---------- ---------- -------- -------
Risperdal Consta Schizophrenia Medisorb (2) Janssen
Nutropin Depot Growth Hormone ProLease Marketed Genentech
(hGH) Deficiency - Pediatric
Vivitrex Alcohol Dependence Medisorb Phase III Alkermes(3)
Vivitrex Opioid Dependence Medisorb Phase II Alkermes(3)
Nutropin Depot Growth Hormone ProLease Phase III Genentech
(hGH) Deficiency - Adults
Epinephrine Anaphylaxis AIR Phase I completed Alkermes
r-hFSH Infertility ProLease Phase I completed Serono
(recombinant human
follicle stimulating
hormone)
AC2993 (Exendin-4) Diabetes Medisorb Phase II Amylin
Insulin Diabetes AIR Clinical phase Lilly
undisclosed
hGH Growth Hormone AIR Phase I completed Lilly
Deficiency
Multiple small molecule Respiratory Disease AIR Phase I GlaxoSmithKline
products completed/
Preclinical
Others Various AIR, Medisorb Preclinical Undisclosed
and ProLease
------------
(1) See "Government Regulation" for definitions of "Phase I," "Phase II" and
"Phase III" clinical trials. "Phase I/II" clinical trials indicates that
the compound is being tested in humans for safety and preliminary
indications of biological activity in a limited patient population. "Phase
II/III" clinical trials indicates that the trial is being conducted in
patients and is testing the safety and efficacy of the compound.
"Preclinical" indicates that we or our partners are conducting
formulation, efficacy, pharmacology and/or toxicology testing of a
compound in animal models or biochemical assays.
(2) Approved for marketing in the United Kingdom, Germany, Mexico, Austria,
New Zealand, Switzerland, Iceland and the Netherlands. An affiliate of our
collaborative partner received a non-approvable letter from the FDA. See
"Risk Factors."
(3) This program has been funded in part with federal funds from the National
Institute on Alcohol Abuse and Alcoholism, National Institutes of Health.
(4) This clinical trial is being sponsored and conducted by the Pediatric
Branch of the National Cancer Institute.
83
KEY PRODUCTS UNDER DEVELOPMENT
RISPERDAL CONSTA. We have developed a Medisorb long-acting formulation of
Janssen's anti-psychotic drug RISPERDAL (Risperdal Consta). Janssen is an
affiliate of Johnson & Johnson. RISPERDAL is the most commonly prescribed drug
for the treatment of schizophrenia and had sales of over $1.8 billion in 2001.
In August 2001, Janssen Pharmaceutica Products, LP submitted an NDA for
Risperdal Consta with the FDA. Similar regulatory filings have been submitted in
more than 30 countries around the world. On June 28, 2002, J&J PRD, an affiliate
of Janssen, received a non-approvable letter from the FDA and is currently
working to respond to the FDA's concerns. Since August 2002, Risperdal Consta
has been approved in eight countries around the world and launched in Austria,
Germany and the United Kingdom. Risperdal tablets are currently used for relief
of symptoms associated with schizophrenia. Schizophrenia is a brain disorder the
symptoms of which include disorganized thinking, delusions and hallucinations.
We are the exclusive manufacturer of Risperdal Consta for Janssen.
There can be no assurance that the issues raised in the non-approvable
letter from the FDA will be resolved on a timely basis or other foreign
regulatory filings will be approved. See "Risk Factors - Risks Related to
Alkermes - J&J PRD received a non-approvable letter for Risperdal Consta from
the FDA and the future of Risperdal Consta in the United States is uncertain."
Even if Risperdal Consta is approved by the FDA or other regulatory agencies,
the anti-psychotic market is highly competitive and the revenues received from
the sale of Risperdal Consta may not be significant and will depend on numerous
factors outside of our control. Additionally, we cannot assure you that we will
be able to manufacture Risperdal Consta on a commercial scale or economically.
Any failure to obtain (or significant delay in obtaining), regulatory approval,
gain market share, derive significant revenues or manufacture at commercial
scale or economically would have a material adverse effect on our business and
financial position.
NUTROPIN DEPOT. We have developed and are manufacturing a ProLease
formulation of Genentech's recombinant human growth hormone (rhGH) Nutropin,
known as Nutropin Depot, in collaboration with Genentech. rhGH is approved for
use in the treatment of children with growth hormone deficiency, or GHD, which
results in short stature and potentially other developmental deficits, Turner's
syndrome, chronic renal insufficiency and other indications. Our
extended-release formulation, approved by the FDA in December 1999 for use in
GHD children and commercially launched by Genentech in June 2000, requires only
one or two doses a month (which may require more than one injection per dose)
compared to current growth hormone therapies that require multiple doses per
week.
We and Genentech have also agreed to continue the clinical development for
Nutropin Depot in adults with growth hormone deficiency. This decision follows
completion of a Phase I trial of Nutropin Depot in growth hormone deficient
adults. We have initiated a Phase III clinical trial, funded by Genentech, which
commenced in December 2001.
The GHD market is highly competitive and we cannot assure you that the
marketing and sales of Nutropin Depot will be successful or that it will gain
significant market share. Additionally, we cannot assure you that we will be
able to continue to manufacture Nutropin Depot on a commercial scale or
economically, or that we will be able to derive significant revenues from sales
of Nutropin Depot. If we cannot continue to manufacture Nutropin Depot on a
commercial scale or economically or if we do not derive significant revenues
from Nutropin Depot, a material adverse effect on our business and financial
position could occur.
VIVITREX. We are developing a Medisorb formulation of naltrexone, an
FDA-approved drug used for the treatment of alcohol and opioid abuse, which is
currently available in daily oral dosage form. It is estimated that there are
currently 2.3 million people in the United States who seek treatment for
84
alcoholism, a number which is projected to grow at a rate of 2% per year. We
believe there is a significant need for a product that will help improve
compliance in this patient population. Vivitrex, which is our most advanced
proprietary product, is based on our Medisorb injectable extended-release
technology and is designed to provide once-a-month dosing to enhance patient
adherence by removing the need for daily dosing. In October 2001, we completed a
second trial, which was a multi-center clinical trial, of Vivitrex, the data
from which was presented at the Annual Meeting of the American College of
Neuropsychopharmacology. This trial tested the safety, tolerability and
pharmacokinetics of repeat doses of Vivitrex administered monthly to
alcohol-dependent patients. In March 2002, we initiated a Phase III clinical
trial in alcohol-dependent patients testing the safety and efficacy of repeat
doses of Vivitrex. We plan to manufacture Vivitrex for both clinical trials and
commercial sales, if any.
INHALED EPINEPHRINE. We are developing an AIR formulation of epinephrine
for the treatment of anaphylaxis, which is a sudden, often severe, systemic
allergic reaction. Inhaled epinephrine is our leading proprietary product based
on our AIR pulmonary delivery technology. Currently, patients self-administer
epinephrine by injection. We believe that an inhaled dosage form of epinephrine
may offer patients significant advantages over the injection method, such as
ease of use and titration of doses. In August 2002, we completed our second
Phase I study of inhaled epinephrine.
r-hFSH (RECOMBINANT HUMAN FOLLICLE STIMULATING HORMONE). We are developing
a ProLease formulation of r-hFSH with Serono for the treatment of infertility.
This long-acting formulation is designed to provide patients with an alternative
to multiple daily injections. A Phase I clinical trial for this product
candidate has been completed. Serono has decided to move forward with the
clinical development of the product candidate and development work is underway.
We expect to commence a Phase I/II study of r-hFSH in the first quarter of 2003.
Serono is responsible for clinical studies for this program. We will manufacture
the long-acting formulation of r-hFSH for clinical trials and commercial sales,
if any.
AC2993 (SYNTHETIC EXENDIN-4). We are developing a Medisorb formulation of
AC2993, a drug being developed for use in the treatment of diabetes. Phase I
clinical trials have been completed for our Medisorb formulation of AC2993 and
Phase II clinical trials have been commenced. Amylin is responsible for clinical
trials and we will manufacture the Medisorb formulation of AC2993 for both
clinical trials and commercial sales, if any.
INHALED INSULIN. We are working with Lilly to develop inhaled formulations
of insulin including short- and long-acting insulin and other potential products
for the treatment of diabetes based on our AIR pulmonary drug delivery
technology. Multiple early stage clinical trials have been completed for a
short-acting formulation, which is currently in clinical development. Lilly is
responsible for clinical trials and we will manufacture the formulations of
insulin for clinical trials. Upon commercial launch, if any, we will manufacture
such products in quantities anticipated for initial commercial launch and beyond
and Lilly will otherwise manufacture such products for commercial sales, if any.
In February 2002, Lilly signed an agreement to invest in our commercial-scale
production facility for inhaled pharmaceutical products based in Chelsea,
Massachusetts.
INHALED HUMAN GROWTH HORMONE. We are working with Lilly to develop an
inhaled formulation of human growth hormone based on our AIR pulmonary drug
delivery technology. In January, we announced the decision to move forward with
multiple-dose Phase I clinical studies for inhaled human growth hormone
following the successful completion of a single dose Phase I trial. Lilly is
responsible for clinical trials and we will manufacture the formulation of human
growth hormone for both clinical trials and commercial sales, if any.
85
RESPIRATORY DISEASES. We have worked with GlaxoSmithKline ("Glaxo") to
develop certain product candidates for indications in four respiratory disease
categories based on our AIR pulmonary drug delivery technology. In September
2001, we announced the completion of the first clinical trial pursuant to the
collaboration. Additional development work has been completed. However, Glaxo
has not met all of its obligations to develop product candidates under two
disease categories in a timely manner as required by the license agreement we
entered into with Glaxo in May of 2000 and, if Glaxo does not fulfill such
obligations by November 30, 2002, two of the disease categories will
automatically revert to us. The remaining two categories will remain under the
control of Glaxo. We and Glaxo each have certain rights and obligations with
regard to manufacturing any formulations for commercial sales, if any.
COLLABORATIVE ARRANGEMENTS
Our business strategy includes forming collaborations to provide
technological, financial, marketing, manufacturing and other resources. We have
entered into several corporate collaborations.
GENENTECH
Pursuant to a development agreement with Genentech, Genentech exercised
its option to obtain from us a license for a ProLease formulation of rhGH. In
April 1999, we and Genentech amended and restated the November 1996 license
agreement to expand our collaboration for Nutropin Depot, an injectable
long-acting formulation of Genentech's recombinant human growth hormone based
upon our ProLease drug delivery system. Nutropin Depot for pediatric use was
launched in the U.S. in June 2000 by Genentech. Under the agreement, we and
Genentech have been conducting expanded development activities, including
clinical trials in an additional indication (adult growth hormone deficiency),
process development and manufacturing. We will be responsible for conducting
additional clinical trials and for manufacturing Nutropin Depot for the adult
indication and are to receive manufacturing revenues and royalties on product
sales in this indication, if any.
Genentech has the right to terminate the agreement for any reason upon six
months' written notice. In addition, either party may terminate the agreement
upon the other party's material default, which is not cured within 90 days of
written notice, or upon the other party's insolvency or bankruptcy.
We executed a Manufacture and Supply Agreement with Genentech in April
2001 for the manufacture and supply of Nutropin Depot to Genentech for
commercial sales. Pursuant to the terms of the agreement we are the sole
supplier and manufacturer of Nutropin Depot. The Manufacture and Supply
Agreement terminates on expiration of the license agreement. In addition, either
party may terminate the agreement upon a material breach by the other party
which is not cured within 90 days' written notice, upon 60 days' written notice
in the event of the other party's insolvency or bankruptcy or upon 90 days'
written notice in the event a force majeure event occurs and continues for more
than six months.
JANSSEN
Pursuant to a development agreement, we are collaborating with Janssen, an
affiliate of Johnson & Johnson, in the development of Risperdal Consta an
extended-release formulation of Risperdal utilizing our Medisorb technology.
Under the development agreement, Janssen provided development funding to us for
the development of Risperdal Consta and is responsible for securing all
necessary regulatory approvals. In August 2001, Janssen Pharmaceutica Products,
LP submitted an NDA to the FDA and also submitted similar filings to other drug
regulatory agencies worldwide. On June 28, 2002, J&J PRD received a
non-approvable letter for Risperdal Consta from the FDA. See "Risk Factors -
Risks Related
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to Alkermes - J&J PRD received a non-approvable letter for Risperdal Consta from
the FDA and the future of Risperdal Consta in the United States is uncertain."
We will manufacture Risperdal Consta for commercial sale, if and when it is
approved, and will receive manufacturing revenues and royalties on sales, if
any.
Under related license agreements, Janssen and an affiliate have exclusive
worldwide licenses from us to manufacture, use and sell Risperdal Consta. Under
the license agreements, Janssen is required to pay us certain royalties with
respect to all Risperdal Consta sold to customers. Janssen can terminate the
development agreement or the license agreements upon 30 days' prior written
notice.
Pursuant to a manufacture and supply agreement, Janssen has appointed us
as the exclusive supplier of Risperdal Consta for commercial sales, if any. The
agreement terminates on expiration of the license agreements. In addition,
either party may terminate the agreement upon a material breach by the other
party which is not resolved within 60 days' written notice or upon written
notice in the event of the other party's insolvency or bankruptcy. Janssen may
terminate the agreement upon six-months' written notice after such event;
provided, however, Janssen cannot terminate the agreement without good cause
during the two-year period following commencement of commercial manufacturing
unless it also terminates the license agreements. In August 2002, we announced
the regulatory approval and expected commercial launch of Risperdal Consta in
Germany and the United Kingdom. Under our agreement with Janssen and based on
the foregoing, certain minimum revenues relating to our sales of Risperdal
Consta under a manufacturing and supply agreement are to be paid by Janssen to
us in minimum annual amounts for up to ten years beginning in calendar 2003.
The actual amount of such minimum revenues will be determined by a formula and
are currently estimated to aggregate approximately $150 million. The minimum
revenue obligation will be satisfied upon receipt by us of revenues relating
to our sales of Risperdal Consta equaling such aggregate amount of minimum
revenues.
SERONO
Pursuant to a development agreement dated December 1999, we are
collaborating with Serono for the development of a ProLease formulation of
r-hFSH (recombinant human follicle stimulating hormone) for the treatment of
infertility. Serono is to provide us with research and development funding and
milestone payments. We are responsible for formulation and preclinical testing
and Serono will be responsible for conducting clinical trials and securing
regulatory approvals and, together with its affiliates, for the marketing of any
products that result from the collaboration. We will manufacture any such
products for clinical trials and commercial sale and will receive manufacturing
revenues and royalties on sales, if any.
Serono may terminate the development agreement for any reason, upon 90
days' written notice if such termination notice occurs prior to the first
commercial launch of a product under the development agreement, or upon six
months' written notice if such notice occurs subsequent to such event. In
addition, either party may terminate the development agreement upon a material
breach by the other party of such agreement which is not cured within 60 days'
written notice.
ELI LILLY
Insulin
We entered into a development and license agreement with Lilly in April
2001 for the development of inhaled formulations of insulin, including short-
and long-acting insulin and other potential products for the treatment of
diabetes, based on our AIR pulmonary drug delivery technology. Pursuant to the
agreement, we are responsible for formulation and preclinical testing as well as
development of a device to use in connection with any products. Lilly has paid
or will pay to us certain initial fees, research funding and milestone payments
upon achieving certain development and commercialization goals. Lilly has
exclusive worldwide rights to make, use and sell products resulting from such
development. Lilly will be responsible for clinical trials, obtaining all
regulatory approvals and
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marketing any insulin products. We will manufacture any such products for
clinical trials and both we and Lilly will manufacture such products for
commercial sales, if any. We will receive certain royalties based upon such
product sales, if any.
Lilly has the right to terminate the agreement upon 90 days' written
notice at any time prior to the first commercial launch of a product, or upon
six months' written notice at any time after such first commercial launch. In
addition, either party may terminate the agreement upon a material breach or
default by the other party which is not cured within 90 days' written notice.
We entered into an agreement with Lilly in February 2002 that provides for
an investment by Lilly in our commercial-scale production facility for inhaled
pharmaceutical products based on our AIR pulmonary drug delivery technology.
This new facility is designed to accommodate the manufacturing of multiple
products and is currently under construction in Chelsea, Massachusetts. Lilly's
investment will be used to fund pulmonary insulin production and packaging
capabilities. This funding will be secured by Lilly's ownership of specific
equipment to be located and used in the facility. We have the right to purchase
the equipment from Lilly, at any time, at the then-current net book value.
hGH
We entered into a development and license agreement with Lilly in February
2000 for the development of an inhaled formulation of human growth hormone based
on our AIR pulmonary drug delivery technology. Pursuant to the agreement, we are
responsible for formulation and preclinical testing as well as development of a
device to use in connection with any products. Lilly has paid or will pay to us
certain initial fees, research funding and milestone payments upon achieving
certain development and commercialization goals and we will also receive royalty
payments based on product sales, if any. Lilly has exclusive worldwide rights to
make, use and sell products resulting from such development. Lilly will be
responsible for clinical trials, obtaining all regulatory approvals and
marketing any products. We will manufacture any such products for clinical
trials and commercial sales and receive manufacturing revenues and royalties on
product sales, if any.
Lilly has the right to terminate the agreement upon 90 days' written
notice at any time prior to the first commercial launch of a product, or upon
six months' written notice at any time after such first commercial launch. In
addition, either party may terminate the agreement upon a material breach or
default by the other party which is not cured within 90 days' written notice.
GLAXOSMITHKLINE
We entered into a license agreement with Glaxo in May 2000 for the use of
our AIR technology in the development of multiple product candidates for
indications in four respiratory disease categories. Under the agreement, Glaxo
has exclusive worldwide rights to products resulting from the collaboration in
exchange for development funding, milestones and royalties. Glaxo is responsible
for conducting clinical trials, obtaining regulatory approvals and marketing any
resulting products on a worldwide basis. We each have manufacturing rights for
commercial sales and we will receive certain manufacturing revenues and
royalties on product sales, if any. Glaxo has not met all of its obligations to
develop product candidates under two disease categories in a timely manner as
required by the license agreement. As a result, under the terms of the license
agreement, if Glaxo does not fulfill such obligations by November 30, 2002,
these two of the four respiratory disease categories covered by the license
agreement will automatically revert to us. Glaxo will retain its rights to the
two remaining disease categories.
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Glaxo has the right to terminate the agreement at any time with 60-days'
written notice. In addition, either party may terminate the agreement upon a
material breach or default by the other party which is not cured within 90 days'
written notice.
AMYLIN
We entered into a development and license agreement with Amylin in May
2000 for the development of a Medisorb formulation of AC2993 (synthetic
Exendin-4) for the treatment of type 2 diabetes.
Pursuant to the development agreement, Amylin has an exclusive, worldwide
license to the Medisorb technology for the development and commercialization of
injectable extended-release formulations of exendins and other related compounds
that Amylin may develop. We will receive funding for research and development
and milestone payments comprised of cash and warrants for Amylin common stock
upon achieving certain development and commercialization goals and will also
receive a combination of royalty payments and manufacturing fees based on any
future product sales. We are initially responsible for developing and testing
several formulations, manufacturing for clinical trials and for commercial sales
of any products that may be developed pursuant to the agreement. Amylin is
responsible for conducting clinical trials securing regulatory approvals and
marketing any products resulting from the collaboration on a worldwide basis.
Amylin may terminate the development agreement for any reason on 90 days'
written notice if such termination occurs before filing an NDA with the FDA or
six months' written notice after such event. In addition, either party may
terminate the development agreement upon a material default or breach by the
other party that is not cured within 60 days' written notice.
DRUG DELIVERY TECHNOLOGY
Our current focus is on the development of broadly applicable, proprietary
drug delivery technologies addressing several important drug delivery
opportunities, including injectable extended-release of proteins, peptides and
small molecule pharmaceutical compounds, the pulmonary delivery of both small
molecules and proteins and peptides and drug delivery to the brain across the
blood-brain barrier. We partner our proprietary technology systems and drug
delivery expertise with many of the world's finest pharmaceutical companies and
we also develop novel, proprietary drug candidates for our own account.
PROLEASE: INJECTABLE EXTENDED-RELEASE OF FRAGILE PROTEINS AND PEPTIDES
ProLease is our proprietary technology for the stabilization and
encapsulation of fragile proteins and peptides in microspheres made of common
medical polymers. Our proprietary expertise in this field lies in our ability to
preserve the biological activity of fragile drugs over an extended period of
time and to manufacture these formulations using components and processes
believed to be suitable for human pharmaceutical use. ProLease is designed to
enable novel formulations of proteins and peptides by replacing frequent
injections with controlled, extended-release over time. We believe ProLease
formulations have the potential to improve patient compliance and ease of use by
reducing the need for frequent self-injection, to lower costs by reducing the
need for frequent office visits and to improve safety and efficacy by reducing
both the variability in drug levels inherent in frequent injections and the
aggregate amount of drug given over the course of therapy. In addition, ProLease
may provide access to important new markets currently inaccessible to drugs that
require frequent injections or are administered orally.
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The ProLease formulation process has been designed to assure stability of
fragile compounds during the manufacturing process, during storage and
throughout the release phase in the body. The formulation and manufacturing
process consists of two basic steps. First, the drug is formulated with
stabilizing agents and dried to create a fine powder. Second, the powder is
microencapsulated in the polymer at very low temperatures. Incorporation of the
drug substance as a stabilized solid under very low temperatures is critical to
protecting fragile molecules from degradation during the manufacturing process
and is a key element of the ProLease technology. The microspheres are suspended
in a small volume of liquid prior to administration to a patient by injection
under the skin or into a muscle. We believe drug release from the ProLease drug
delivery system can be controlled to last from a few days to several months.
Drug release from the microsphere is controlled by diffusion of the drug
through the microsphere and by biodegradation of the polymer. These processes
can be modulated through a number of formulation and fabrication variables,
including drug substance and microsphere particle sizing and choice of polymers
and excipients.
Our experience with the application of ProLease to a wide range of
proteins and peptides has shown that high incorporation efficiencies and high
drug loads can be achieved. Proteins and peptides incorporated into ProLease
microspheres have maintained their integrity, stability and biological activity
when tested for up to 30 days in in vitro experiments conducted on formulations
manufactured at the preclinical, clinical trial and commercial scale.
MEDISORB: INJECTABLE EXTENDED-RELEASE OF TRADITIONAL SMALL MOLECULE
PHARMACEUTICALS
Medisorb is our proprietary technology for encapsulating traditional small
molecule pharmaceuticals in microspheres made of common medical polymers. Like
ProLease, Medisorb is designed to enable novel formulations of pharmaceuticals
by providing controlled, extended-release over time. We believe Medisorb is
suitable for encapsulating stable, small molecule pharmaceuticals and certain
peptides at a large scale. We believe that Medisorb formulations may have
superior features of safety, efficacy, compliance and ease of use for drugs
currently administered by frequent injection or administered orally. Drug
release from the microsphere is controlled by diffusion of the pharmaceutical
through the microsphere and by biodegradation of the polymer. These processes
can be modulated through a number of formulation and fabrication variables,
including drug substance and microsphere particle sizing and choice of polymers
and excipients.
The Medisorb drug delivery system uses manufacturing processes different
from the ProLease manufacturing process. The formulation and manufacturing
process consists of three basic steps. First, the drug is combined with a
polymer solution. Second, the drug/polymer solution is mixed in water to form
liquid microspheres (an emulsion). Third, the liquid microspheres are dried to
produce finished product. The microspheres are suspended in a small volume of
liquid prior to administration to a patient by injection under the skin or into
a muscle. We believe drug release from the Medisorb system can be controlled to
last from a few days to several months.
AIR: PULMONARY DRUG DELIVERY
The AIR technology is our proprietary pulmonary delivery system that
enables the delivery of both small molecules and macromolecules to the lungs.
Our proprietary technology allows us to formulate drugs into dry powders made up
of highly porous particles with low mass density. These particles can be
efficiently delivered to the deep lung by a small, simple inhaler. The AIR
technology is useful for small molecules, proteins or peptides and allows for
both local delivery to the lungs and systemic delivery via the lungs.
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AIR particles can be aerosolized and inhaled efficiently with simple
inhaler devices because low forces of cohesion allow the particles to
deaggregate easily. AIR is developing a family of relatively inexpensive,
compact, easy to use inhalers. The AIR devices are breath activated and made
from injection molded plastic. The powders are designed to quickly discharge
from the device over a range of inhalation flow rates, which may lead to low
patient-to-patient variability and high lung deposition of the inhaled dose. By
varying the ratio and type of excipients used in the formulation, we believe we
can deliver a range of drugs from the device that may provide both immediate and
sustained release.
MANUFACTURING
We currently have manufacturing facilities in Cambridge, Massachusetts and
Wilmington, Ohio. The manufacture of our product candidates for clinical trials
and commercial purposes is subject to current good manufacturing practices and
other agency regulations. Prior to our manufacture of Nutropin Depot, we had
never operated an FDA-approved commercial manufacturing facility. There can be
no assurance that we will maintain the necessary approvals for commercial
manufacturing or obtain approvals for any additional facilities, including our
facility in Wilmington, Ohio for the manufacture of for Risperdal Consta, if and
when it is approved.
If we are not able to develop and maintain manufacturing capacity and
experience, or to continue to contract for manufacturing capabilities on
acceptable terms, our ability to supply product for commercial sales, clinical
trials and preclinical testing will be compromised. In addition, delays in
obtaining regulatory approvals might result, as well as delays of commercial
sales if approvals are not obtained on a timely basis. Such delays could
materially adversely affect our competitive position and our business, financial
condition and results of operations.
PROLEASE
ProLease manufacturing involves microencapsulation of drug substances
provided to us by our collaborators in small polymeric microspheres using
extremely cold processing conditions suitable for fragile molecules. The
ProLease manufacturing process consists of two basic steps. First, the drug is
formulated with stabilizing agents and dried to create a fine powder. Second,
the powder is microencapsulated in polymer at very low temperatures. Pursuant to
agreements with certain of our collaborators, we have the right to manufacture
ProLease products for commercial sale.
We have a commercial scale ProLease manufacturing facility of
approximately 32,000 square feet in Cambridge, Massachusetts. The facility
includes two manufacturing suites, one of which is dedicated to the production
of Nutropin Depot at commercial scale. The facility has had a successful
pre-approval inspection by the FDA for the manufacture of Nutropin Depot and we
are currently manufacturing Nutropin Depot to supply product to Genentech for
commercial sale.
We also have a clinical production facility that we have validated for
manufacturing in accordance with current good manufacturing practices. The
facility is being used to manufacture product candidates incorporating our
ProLease extended-release delivery system for use in clinical trials.
MEDISORB
The Medisorb manufacturing process is significantly different from the
ProLease process and is based on a method of encapsulating small molecule drugs
in polymers using a large-scale emulsification. The Medisorb manufacturing
process consists of three basic steps. First, the drug is combined with a
polymer solution. Second, the drug/polymer solution is mixed in water to form
liquid microspheres (an emulsion). Third, the liquid microspheres are dried to
produce finished product.
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We operate a 50,000 square foot current good manufacturing practices
manufacturing facility for commercial scale Medisorb manufacturing in
Wilmington, Ohio. We manufacture Risperdal Consta for Janssen at this facility.
In August 2001, Janssen Pharmaceutica Products, LP submitted an NDA with the FDA
and made similar regulatory filings with health organizations worldwide. On June
28, 2002, J&J PRD received a non-approvable letter from the FDA for Risperdal
Consta. See "Risk Factors - Risks Related to Alkermes - J&J PRD received a
non-approvable letter for Risperdal Consta from the FDA and the future of
Risperdal Consta in the United States is uncertain." The facility has been
inspected by regulatory authorities and is producing product for sales outside
of the United States. We are currently expanding in Wilmington, Ohio for
additional Medisorb manufacturing capacity, which will be used to manufacture
Risperdal Consta and other Medisorb products at large scale.
AIR
The AIR manufacturing process uses spray drying. We take drugs provided by
our partners or purchased from generic manufacturers, combine the drugs with
certain excipients commonly used in other aerosol formulations and spray dry the
solution in commercial spray dryers. During the manufacturing process, solutions
of drugs and excipients are spray dried to form a free flowing powder and the
powder is filled and packaged into final dosage units. AIR has a clinical
manufacturing facility which is part of our 49,000 square foot facility which
AIR leases in Cambridge, Massachusetts, where powders and final dosage units are
prepared under current good manufacturing practices for use in clinical trials.
Our current manufacturing facility and equipment have the capacity to produce
commercial scale quantities of certain product candidates. In February 2002, we
entered into an agreement with Lilly that provides for an investment by Lilly in
our commercial-scale production facility for inhaled pharmaceutical products
based on our AIR pulmonary drug delivery technology. This new 90,000 square foot
facility is designed to accommodate the manufacturing of multiple products and
is currently under construction in Chelsea, Massachusetts. AIR's inhalation
devices are produced under current good manufacturing practices at two contract
manufacturers in the U.S.
MARKETING
We intend to market the majority of our ProLease, Medisorb and AIR
products through corporate partners. We have entered into development
agreements, which include sales and marketing arrangements, for ProLease product
candidates with Genentech and Serono, for Medisorb product candidates with
Janssen and Amylin and for AIR product candidates with Lilly. For our
proprietary products, we will determine whether to market the products ourselves
or to find a marketing partner.
Alkermes is building the infrastructure necessary for commercialization of
our proprietary products. We have increased our manufacturing capacity, we are
expanding our product portfolio and we are developing the capabilities for
marketing and selling our own products. In furtherance of such efforts we
entered into an agreement with Reliant in December 2001.
We currently have no experience in marketing or selling pharmaceutical
products. In order to achieve commercial success for any product candidate
approved by the FDA or other regulatory authorities, we must either develop a
marketing and sales force or enter into arrangements with third parties to
market and sell our products. There can be no assurance that we will
successfully develop such experience or that we will be able to enter into
marketing and sales agreements with others on acceptable terms, if at all. If we
develop our own marketing and sales capability, we will compete with other
companies that currently have experienced and well-funded marketing and sales
operations. To the extent we enter into co-promotion or other sales and
marketing arrangements with other companies, any
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revenues received by us will be dependent on the efforts of others, and there
can be no assurance that such efforts will be successful.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
substantial technological change. We face, and will continue to face, intense
competition in the development, manufacturing, marketing and commercialization
of our product candidates from academic institutions, government agencies,
research institutions, biotechnology and pharmaceutical companies, including our
collaborators, and drug delivery companies. There can be no assurance that
developments by others will not render our product candidates or technologies
obsolete or noncompetitive, or that our collaborators will not choose to use
competing drug delivery methods. At the present time, we have no sales force or
marketing experience and we have only limited commercial manufacturing
experience. In addition, many of our competitors and potential competitors have
substantially greater capital resources, manufacturing and marketing experience,
research and development resources and production facilities than we do. Many of
these competitors also have significantly greater experience than we do in
undertaking preclinical testing and clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals.
With respect to ProLease and Medisorb, we are aware that there are other
companies developing extended-release delivery systems for pharmaceutical
products. With respect to AIR, we are aware that there are other companies
marketing or developing pulmonary delivery systems for pharmaceutical products.
In many cases, there are products on the market or in development that may be in
direct competition with our product candidates. In addition, other companies are
developing new chemical entities or improved formulations of existing products
which, if developed successfully, could compete against our formulations of any
products we develop or those of our collaborators. These chemical entities are
being designed to have different mechanisms of action or improved safety and
efficacy. In addition, our collaborators may develop, either alone or with
others, products that compete with the development and marketing of our product
candidates.
There can be no assurance that we will be able to compete successfully
with such companies. The existence of products developed by our competitors, or
other products or treatments of which we are not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of products developed by us.
PATENTS AND PROPRIETARY RIGHTS
Our success will be dependent, in part, on our ability to obtain patent
protection for our product candidates and those of our collaborators,
maintaining trade secret protection and operating without infringing upon the
proprietary rights of others.
We have a proprietary portfolio of patent rights and exclusive licenses to
patents and patent applications. We have filed numerous U.S. and international
patent applications directed to composition of matter as well as processes of
preparation and methods of use, including applications relating to
permeabilizers, certain rights to which have been licensed to Clinical Partners,
and to each of our delivery technologies. We own approximately 74 issued U.S.
patents. No U.S. patent issued to us that is currently material to our business
will expire prior to 2009. In the future, we plan to file further U.S. and
foreign patent applications directed to new or improved products and processes.
We intend to file additional patent applications when appropriate and defend our
patent position aggressively.
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We have exclusive rights through licensing agreements with third parties
to approximately 37 issued U.S. patents, a number of U.S. patent applications
and corresponding foreign patents and patent applications in many countries,
subject in certain instances to the rights of the U.S. government to use the
technology covered by such patents and patent applications. No issued U.S.
patent to which we have licensed rights and which is currently material to our
business will expire prior to 2016. Under certain licensing agreements, we
currently pay annual license fees and/or minimum annual royalties. During the
fiscal year ended March 31, 2002, these fees totaled $261,000. In addition,
under all licensing agreements, we are obligated to pay royalties on future
sales of products, if any, covered by the licensed patents.
We know of several U.S. patents issued to other parties that relate to our
product candidates. One of those parties has asked us to compare our Medisorb
technology to that party's patented technology. Another such party has asked a
collaborative partner to substantiate how our ProLease microspheres are
different from that party's patented technology. The manufacture, use, offer for
sale, sale or importing of these product candidates might be found to infringe
on the claims of these patents. A party might file an infringement action
against us. Our cost of defending such an action is likely to be high and we
might not receive a favorable ruling.
We also know of patent applications filed by other parties in the U.S. and
various foreign countries that may relate to some of our product candidates if
issued in their present form. If patents are issued to any of these applicants,
we may not be able to manufacture, use, offer for sale, or sell some of our
product candidates without first getting a license from the patent holder. The
patent holder may not grant us a license on reasonable terms or it may refuse to
grant us a license at all. This could delay or prevent us from developing,
manufacturing or selling those of our product candidates that would require the
license.
We try to protect our proprietary position by filing U.S. and foreign
patent applications related to our proprietary technology, inventions and
improvements that are important to the development of our business. Because the
patent position of biopharmaceutical companies involves complex legal and
factual questions, enforceability of patents cannot be predicted with certainty.
Patents, if issued, may be challenged, invalidated or circumvented. Thus, any
patents that we own or license from others may not provide any protection
against competitors. Our pending patent applications, those we may file in the
future, or those we may license from third parties, may not result in patents
being issued. And, if issued, they may not provide us with proprietary
protection or competitive advantages against competitors with similar
technology. Furthermore, others may independently develop similar technologies
or duplicate any technology that we have developed. The laws of certain foreign
countries do not protect our intellectual property rights to the same extent as
do the laws of the U.S.
We also rely on trade secrets, know-how and technology, which are not
protected by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality agreements with parties that
have access to it, such as our corporate partners, collaborators, employees and
consultants. Any of these parties may breach the agreements and disclose our
confidential information or our competitors might learn of the information in
some other way. If any trade secret, know-how or other technology not protected
by a patent were to be disclosed to or independently developed by a competitor,
our business, results of operations and financial condition could be adversely
affected.
GOVERNMENT REGULATION
The manufacture and marketing of pharmaceutical products in the U.S.
require the approval of the FDA under the Federal Food, Drug and Cosmetic Act.
Similar approvals by comparable agencies are
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required in most foreign countries. The FDA has established mandatory procedures
and safety standards which apply to the preclinical testing and clinical trials,
manufacture and marketing of pharmaceutical products. Pharmaceutical
manufacturing facilities are also regulated by state, local and other
authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess the drug's efficacy
and to identify potential safety problems. The results of these studies must be
submitted to the FDA as part of an Investigational New Drug application ("IND"),
which must be reviewed by the FDA before proposed clinical testing can begin.
Typically, clinical testing involves a three-phase process. Phase I trials are
conducted with a small number of subjects and are designed to provide
information about both product safety and the expected dose of the drug. Phase
II trials are designed to provide additional information on dosing and
preliminary evidence of product efficacy. Phase III trials are large-scale
studies designed to provide statistical evidence of efficacy and safety in
humans. The results of the preclinical testing and clinical trials of a
pharmaceutical product are then submitted to the FDA in the form of an NDA, or
for a biological product in the form of a Product License Application ("PLA"),
for approval to commence commercial sales. Preparing such applications involves
considerable data collection, verification, analysis and expense. In responding
to an NDA or PLA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the application does
not satisfy its regulatory approval criteria.
Prior to marketing, any product developed by us or our collaborators must
undergo an extensive regulatory approval process, which includes preclinical
testing and clinical trials of such product candidate to demonstrate safety and
efficacy. This regulatory process can require many years and the expenditure of
substantial resources. Data obtained from preclinical testing and clinical
trials are subject to varying interpretations, which can delay, limit or prevent
FDA approval. In addition, changes in FDA approval policies or requirements may
occur or new regulations may be promulgated which may result in delay or failure
to receive FDA approval. Similar delays or failures may be encountered in
foreign countries. Delays, increased costs and failures in obtaining regulatory
approvals would have a material adverse effect on our business, financial
condition and results of operations.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with GMP. Before approval of an NDA or PLA, the FDA will
perform a pre-approval inspection of the facility to determine its compliance
with GMP and other rules and regulations. In complying with GMP, manufacturers
must continue to expend time, money and effort in the area of production and
quality control to ensure full technical compliance. After the establishment is
licensed, it is subject to periodic inspections by the FDA.
The requirements which we must satisfy to obtain regulatory approval by
governmental agencies in other countries prior to commercialization of our
products in such countries can be as rigorous and costly as those described
above.
We are also subject to various laws and regulations relating to safe
working conditions, laboratory and manufacturing practices, experimental use of
animals and use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with our research. Compliance with laws and regulations relating to
the protection of the environment has not had a material effect on capital
expenditures, earnings or our competitive position. However, the extent of
government regulation which might result from any legislative or administrative
action cannot be accurately predicted.
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EMPLOYEES
As of November 1, 2002, we had approximately 440 full-time employees. A
significant number of our management and professional employees have prior
experience with pharmaceutical, biotechnology or medical product companies. We
believe that we have been successful in attracting skilled and experienced
scientific and senior management personnel; however, competition for such
personnel is intense. None of our employees are covered by a collective
bargaining agreement. We consider our relations with employees to be good.
PROPERTIES
We lease and occupy approximately 128,000 square feet of laboratory,
manufacturing and office space in Cambridge, Massachusetts under several leases
expiring in the years 2002 to 2012. Additionally, we have entered into a new
lease in October 2000, for new corporate headquarters for approximately 145,000
square feet of laboratory, clinical manufacturing and office space. The term of
this lease commenced in June 2002 and will terminate in 2012. Several of the
leases contain provisions permitting us to extend the term of such leases for up
to two ten-year periods. We have a GMP clinical suite at one of our
Massachusetts facilities, which is for the manufacture of product candidates
incorporating the ProLease delivery system. We operate a GMP manufacturing
facility for our AIR technology at another of our Massachusetts facilities. We
also have a 32,000 square foot commercial scale ProLease manufacturing facility
in Cambridge, Massachusetts.
During fiscal 2001, we entered into a new lease for a 90,000 square foot
building which we are developing as a commercial scale AIR manufacturing
facility in Chelsea, Massachusetts. The lease term is for fifteen years with an
option to extend the term of such lease for up to two five-year periods.
We own and occupy approximately 50,000 square feet of manufacturing,
office and laboratory space in Wilmington, Ohio. The facility contains a GMP
production facility designed for the production of Medisorb microspheres on a
commercial scale. Additionally, we are currently expanding our facility in
Wilmington, Ohio for commercial manufacturing of Medisorb microspheres on a
commercial scale. We also lease and occupy approximately 30,000 square feet of
laboratory and office space in Blue Ash, Ohio under a lease expiring in 2003.
Alkermes Europe, Ltd., one of our wholly owned subsidiaries, leases
approximately 4,600 square feet of office space in Cambridge, England under a
lease expiring during the year 2007. We ceased operations in this office space
on November 15, 2002.
We believe that our current and planned facilities in Massachusetts and
Ohio are adequate for our current and near-term preclinical, clinical and
commercial operations.
96
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors of Alkermes, Inc. ("Alkermes") who were each elected
for a one-year term at our 2002 annual meeting of shareholders, which was held
on July 29, 2002, are:
NAME AGE PRINCIPAL OCCUPATION/EMPLOYER
---- --- -----------------------------
Michael A. Wall 73 Chairman of the Board, Alkermes, Inc.
Floyd E. Bloom, M.D. 65 Chairman, Department of Neuropharmacology, The
Scripps Research Institute
Robert A. Breyer 58 Former President, Alkermes, Inc.
John K. Clarke 48 General Partner, DSV Partners and Managing General
Partner, Cardinal Health Partners
Richard F. Pops 40 Chief Executive Officer, Alkermes, Inc.
Alexander Rich, M.D. 77 William Thompson Sedgwick Professor of Biophysics
and Biochemistry, Massachusetts Institute of
Technology
Paul Schimmel, Ph.D. 61 Skaggs Institute for Chemical Biology, The Scripps
Research Institute
Mr. Wall is a founder of Alkermes and has been Chairman of the Board of
Alkermes since 1987. From April 1992 until June 1993, he was a director and
Chairman of the Executive Committee of Centocor, Inc. ("Centocor"), a
biopharmaceutical company. From November 1987 to June 1993, he was Chairman
Emeritus of Centocor. Mr. Wall is a director of Kopin Corporation, a
manufacturer of high definition imaging products.
Dr. Bloom is a founder of Alkermes and has been a director of Alkermes
since 1987. Dr. Bloom has been active in neuropharmacology for more than 35
years, holding positions at Yale University, the National Institute of Mental
Health and The Salk Institute. Since 1983, he has been at The Scripps Research
Institute where he is currently Chairman, Department of Neuropharmacology. Dr.
Bloom served as Chief Executive Officer of Neurome, Inc., a biotechnology
company, from 2000 to 2002 while on sabbatical from The Scripps Research
Institute. Dr. Bloom served as Editor-in-Chief of Science from 1995 to May 2000.
He holds an A.B. (Phi Beta Kappa) from Southern Methodist University and an M.D.
(Alpha Omega Alpha) from Washington University School of Medicine in St. Louis.
He is a member of the National Academy of Science, the Institute of Medicine and
the Royal Swedish Academy of Science.
Mr. Breyer has been a director of Alkermes since July 1994. He served as
the President of Alkermes from July 1994 until his retirement in December 2001
and Chief Operating Officer from July 1994 to February 2001. From August 1991 to
December 1993, Mr. Breyer was President and General Manager of Eli Lilly Italy,
a subsidiary of Eli Lilly and Company. From September 1987 to August 1991, he
was Senior Vice President, Marketing and Sales of IVAC Corporation, a medical
device company and a subsidiary of Eli Lilly and Company.
Mr. Clarke has been a director of Alkermes since 1987. He is a general
partner of DSV Partners III and DSV Management, the general partner of DSV
Partners IV. DSV Partners III and DSV Partners IV are venture capital investment
partnerships. Mr. Clarke has been associated with DSV since 1982. Mr. Clarke has
been the managing general partner of Cardinal Partners, a venture capital fund,
since October 1997. Mr. Clarke is a director of Cubist Pharmaceuticals, Inc., a
biotechnology company, and a director of a number of private health care
companies.
Mr. Pops has been a director and the Chief Executive Officer of Alkermes
since February 1991. Mr. Pops currently serves on the Board of Directors of
Neurocrine Biosciences, Inc., a biotechnology company, the Biotechnology
Industry Organization (BIO) and the Massachusetts Biotechnology Council
97
(MBC). He serves as Chair for the Harvard Medical School Advisory Council for
Biological Chemistry & Molecular Pharmacology (BCMP) and is a member of the
Harvard Medical School Board of Fellows.
Dr. Rich is a founder of Alkermes and has been a director of Alkermes
since 1987. Dr. Rich has been a professor at the Massachusetts Institute of
Technology since 1958, and is the William Thompson Sedgwick Professor of
Biophysics and Biochemistry. Dr. Rich earned both an A.B. (magna cum laude) and
an M.D. (cum laude) from Harvard University. Dr. Rich is a member of the
National Academy of Sciences, the American Academy of Arts and Sciences and the
Institute of Medicine. Dr. Rich is Co-Chairman of the Board of Directors of
Repligen Corporation, a biopharmaceutical company, and is a member of the
Scientific Advisory Board of U.S. Genomics.
Dr. Schimmel is a founder of Alkermes and has been a director of Alkermes
since 1987. Dr. Schimmel is the Ernest and Jean Hahn Professor of Molecular
Biology and Chemistry and a member of the Skaggs Institute for Chemical Biology
at The Scripps Research Institute. Dr. Schimmel was the John D. and Catherine T.
MacArthur Professor of Biophysics and Biochemistry at the Massachusetts
Institute of Technology, where he was employed from 1967 through 1997. A member
of the National Academy of Sciences and the American Academy of Arts and
Sciences, Dr. Schimmel graduated from Ohio Wesleyan University, completed his
doctorate at Cornell University and the Massachusetts Institute of Technology
and did post doctoral work at Stanford University. Dr. Schimmel is Co-Chairman
of the Board of Directors of Repligen Corporation and is a member of the
Scientific Advisory Board of Illumina, Inc., a biotechnology company.
Our other executive officers are as follows:
NAME AGE POSITION
---- --- --------
David A. Broecker 41 President and Chief Operating Officer
J. Duncan Higgons 47 Senior Vice President, Marketing and Business
Development
James L. Wright, Ph.D. 54 Senior Vice President, Pharmaceutical Research and
Development
James M. Frates 35 Vice President, Chief Financial Officer and Treasurer
Michael J. Landine 48 Vice President, Corporate Development
Mr. Broecker has been President since January 2002 and Chief Operating
Officer of Alkermes since February 2001. From August 1985 to January 2001, he
was employed at Eli Lilly and Company. During his tenure at Eli Lilly, Mr.
Broecker managed Eli Lilly's largest pharmaceutical manufacturing facility
outside of the U.S., located in Kinsale, Ireland, where as General Manager he
led manufacturing operations for products accounting for 50% of worldwide Eli
Lilly sales. He also worked as a General Manager in Eli Lilly's packaging and
distribution operations in Germany, and Director of Marketing for Advanced
Cardiovascular Systems, now a part of Guidant Corporation. Mr. Broecker holds a
B.A. in
98
Chemistry from Wabash College, an M.S. in Chemical Engineering from M.I.T. and
an M.B.A. in Marketing and Finance from the University of Chicago.
Mr. Higgons has held various positions at Alkermes since 1994 related to
business development and proprietary products, most recently as Senior Vice
President, Marketing and Business Development. Mr. Higgons holds a B.S. (1st
Class) in Mathematics from King's College, London University and an M.B.A. from
London Business School.
Dr. Wright became Senior Vice President, Pharmaceutical Research and
Development of Alkermes in December 2001 and has been a Senior Vice President of
Advanced Inhalation Research, Inc. since September 1999. From December 1994 to
September 1999, Dr. Wright was Vice President, Pharmaceutical Development of
Alkermes. Dr. Wright received a B.A. in Chemistry and Biology from the
University of California, Santa Barbara and a Ph.D. in Pharmacy from the
University of Wisconsin.
Mr. Frates has been Vice President, Chief Financial Officer and Treasurer
of Alkermes since July 1998. From June 1996 to July 1998, he was employed at
Robertson, Stephens & Company, most recently as a Vice President in Investment
Banking. Prior to that time he was employed at Robertson, Stephens & Company and
at Morgan Stanley & Co. In June 1996, he obtained his M.B.A. from Harvard
University.
Mr. Landine has been Vice President, Corporate Development of Alkermes
since March 1999. From March 1988 until June 1998, he was Chief Financial
Officer and Treasurer of Alkermes. Mr. Landine is also currently an advisor to
Walker Magnetics Group, an international manufacturer of industrial equipment.
99
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of the compensation paid by
Alkermes during its last three fiscal years to its Chief Executive Officer, to
each of the four other most highly compensated executive officers of Alkermes
whose total annual salary and bonus exceeded $100,000 during the fiscal year
ended March 31, 2002 and to Alkermes' former President, who retired on December
31, 2001 (collectively, the "Named Executive Officers").
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES RESTRICTED
NAME AND FISCAL UNDERLYING STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS($) OPTIONS (#)(1) AWARDS ($)(2) COMPENSATION($)
------------------ ---- ------ -------- -------------- ------------- ---------------
Richard F. Pops 2002 438,665 200,000 250,000 1,833,300 5,100 (3)
Chief Executive Officer 2001 406,462 175,000 500,000 0 275,100 (3)(4)
2000 395,192 175,000 500,000 0 274,800 (3)(4)
Robert A. Breyer 2002 241,692 200,000 0 0 4,269 (3)(6)
President (5) 2001 294,685 100,000 200,000 0 184,800 (3)(4)(6)
2000 285,000 100,000 200,000 0 184,558 (3)(4)(6)
David A. Broecker 2002 286,346 100,000 150,000 261,900 126,174 (3)(7)
President and Chief 2001 24,327 194,791 400,000 0 0
Operating Officer (5)
James L. Wright 2002 237,766 75,000 75,500 261,900 5,100 (3)
Senior Vice President, 2001 211,335 70,000 70,500 0 113,100 (3)(4)
Pharmaceutical Research 2000 202,102 40,000 80,000 0 112,800 (3)(4)
and Development
James M. Frates 2002 275,948 75,000 60,000 261,900 5,100 (3)
Vice President, Chief 2001 259,119 60,000 100,000 0 5,100 (3)
Financial Officer and 2000 246,029 40,000 100,000 0 4,800 (3)
Treasurer
Michael J. Landine 2002 244,564 55,000 50,000 130,950 5,100 (3)
Vice President, Corporate 2001 232,654 35,000 70,000 0 5,100 (3)
Development 2000 219,861 30,000 80,000 0 4,712 (3)
----------
(1) Alkermes granted no limited stock appreciation rights.
(2) Restricted Stock Award of Common Stock. The average share price on
November 15, 2001, the date of the award, was $26.19. The awards vest in
equal installments annually over two years. As of March 31, 2002, the
average share price of Alkermes Common Stock was $26.15 and no awards had
vested.
(3) 401(k) match.
(4) Includes compensation as a result of Alkermes' forgiveness of one-half of
an "incentive loan" made on October 16, 1998, pursuant to Alkermes'
Incentive Loan Program.
(5) Mr. Breyer retired as President and became a part-time employee on
December 31, 2001. Mr. Broecker became Chief Operating Officer of Alkermes
in February 2001 (and received a sign-on bonus and reimbursement for
related taxes at that time) and President on January 1, 2002 upon Mr.
Breyer's retirement.
(6) Includes a payment of $1,154 in fiscal 2002 and of $1,500 in each of
fiscal years 2001 and 2000 to Mr. Breyer for opting out of Alkermes'
health insurance plan.
(7) Includes $121,618 for reimbursement of moving expenses and related taxes.
100
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options
granted during the fiscal year ended March 31, 2002 to each of the Named
Executive Officers.
INDIVIDUAL GRANTS
---------------------------------------------------------------
Potential Realizable
Number of Percent of Total Value at Assumed
Securities Options Granted Annual Rates of
Underlying to Employees in Exercise or Stock Price
Options Fiscal Year Base Price Expiration Appreciation for
Name Granted (#)(1) (%) ($/Share) Date Option Term
---- -------------- --- --------- ---- -------------------------
5% ($) 10% ($)
------ -------
Richard F. Pops 250,000 9.13 19.40 10/2/11 3,050,139 7,729,651
Robert A. Breyer 0 0 0 N/A 0 0
David A. Broecker 150,000 5.48 19.40 10/2/11 1,830,083 4,637,791
James L. Wright 75,000 2.74 19.40 10/2/11 915,042 2,318,895
500 * 25.87 01/2/12 8,135 20,615
James M. Frates 60,000 2.19 19.40 10/2/11 732,033 1,855,116
Michael J. Landine 50,000 1.83 19.40 10/2/11 610,028 1,545,930
----------
(1) Each option granted vests ratably over a four year period.
* Represents less than one percent (1%)
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth the number of shares acquired upon exercise
of options exercised by the Named Executive Officers during the fiscal year
ended March 31, 2002, the value realized upon exercise of such options, the
number of shares issuable on exercise of options held by such persons at the end
of the last fiscal year and the value of such unexercised options as of such
date.
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options/SARs at In-the-Money Options/SARs
Name Exercise (#) Realized($) FY-End (#) at FY-End($)(1)
---- ------------ ----------- ---------- ---------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Richard F. Pops 132,812 2,790,297 699,854 925,000 8,891,361 5,013,500
Robert A. Breyer 165,334 3,645,702 211,618 275,000 2,053,518 1,440,000
David A. Broecker 0 0 100,000 450,000 0 999,000
James L. Wright 25,000 717,563 132,359 183,375 2,000,958 1,176,195
James M. Frates 54,000 968,820 152,083 247,500 1,820,690 1,970,350
Michael J. Landine 42,500 855,395 118,000 142,500 1,471,060 707,800
----------
(1) Value is measured by the difference between the closing price of Common
Stock on the NASDAQ National Market on March 28, 2002, $26.06, and the
exercise price of the options.
101
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT CHANGE-IN-CONTROL
AGREEMENTS
Under agreements between Alkermes and Messrs. Pops, Broecker and Frates in
the event their employment with Alkermes is terminated for any reason other than
as a result of their taking certain actions against, or that have a significant
deleterious effect on, Alkermes, Mr. Pops shall be entitled to receive a payment
equal to two-thirds of his then-current annual base salary and Messrs. Broecker
and Frates shall each be entitled to receive payments at the monthly rate of his
then current annual base salary for up to nine months or until he finds other
employment, whichever occurs first. Under an agreement between Alkermes and Mr.
Landine, in the event his employment with Alkermes is terminated for any reason
other than as a result of his taking certain actions against, or that have a
significant deleterious effect on, Alkermes, Mr. Landine shall be entitled to
receive a payment equal to 100% of his then-current base salary for a period of
six months.
Messrs. Pops and Landine have been granted LSARs in connection with a
portion of the stock options previously granted to them. Each LSAR provides that
after the occurrence of one of several triggering events, including a
reorganization or merger of Alkermes, a sale of the assets of Alkermes or the
acquisition by a person or group of more than 51% of the common stock, Messrs.
Pops and Landine will receive an amount in cash equal to the amount by which the
fair market value per share of Common Stock issuable upon exercise of the option
on the date such a triggering event occurs exceeds the exercise price per share
of the option to which the LSAR relates. A triggering event shall be deemed to
have occurred only when the fair market value of the shares subject to the
underlying option exceeds the exercise price of such option. When a triggering
event occurs, the related option will cease to be exercisable.
Alkermes has entered into change-in-control agreements with each of
Messrs. Pops, Broecker, Frates and Landine and Dr. Wright. Under the terms of
these agreements, each of the aforementioned executives are entitled to receive
certain compensation and benefits in the event of a "change-in-control" of
Alkermes, which, in summary, is defined as: the acquisition by a person, entity
or group (with certain exceptions) of beneficial ownership of 50% or more of the
Common Stock; a change in a majority of the incumbent directors on the Board of
Directors; a reorganization, merger or consolidation of Alkermes; or a
liquidation, dissolution or sale of all or substantially all of the assets of
Alkermes.
In the event of a change-in-control, each of Messrs. Pops, Broecker,
Frates and Landine and Dr. Wright will be entitled to continue their employment
with Alkermes for a period of two years following the change-in-control at a
monthly base salary at least equal to the highest monthly base salary paid to
him by Alkermes in the twelve-month period immediately preceding the
change-in-control, an annual cash bonus at least equal to the annual bonus paid
to him for the last calendar year prior to the change-in-control and continued
participation in Alkermes' welfare and benefit plans.
In the event Alkermes terminates any of these executives without cause
during such two-year period or if any of these executives terminates his
employment for "good reason" (e.g., material diminution in the executive's
responsibilities, assignment to the executive of responsibilities not consistent
with his position or transfer of the executive to a location more than 40 miles
from his then current place of employment) each is entitled to receive a
prorated bonus (based upon the prior year's annual bonus) for the year in which
the date of termination occurs. Additionally, each of Messrs. Broecker, Frates
and Landine and Dr. Wright will receive a lump sum payment equal to the
executive's base salary plus his annual bonus for the last calendar year before
the date of termination and continued participation in the Alkermes' welfare and
benefit plans (or reimbursement therefor) for one year following the date of
termination; Mr. Pops will receive a lump sum payment equal to two times his
base salary plus his annual bonus for the last calendar year before the date of
termination and continued participation in Alkermes' welfare and benefit plans
(or reimbursement therefor) for two years following
102
the date of termination. Each executive is also entitled to a "gross-up payment"
equal to the excise tax imposed upon the severance payments under the
change-in-control agreement in the event any payment or benefit to the
executive, whether pursuant to the change-in-control agreement or otherwise, is
considered an "excess parachute payment" and subject to an excise tax under the
Internal Revenue Code.
COMPENSATION OF DIRECTORS
In June 2002, the Board of Directors determined, after analyzing board
compensation paid by comparable biotechnology and pharmaceutical companies, that
it was in the best interests of Alkermes to change the manner in which it
compensates its non-employee directors. Under the terms of the new compensation
arrangement, non-employee directors will not receive any options to purchase
shares of common stock except for the yearly grant of options to purchase 20,000
shares of Alkermes' common stock. Additionally, as of the date of the July 29,
2002 annual meeting of shareholders, each of Floyd E. Bloom, Alexander Rich and
Paul Schimmel no longer receive consulting fees from Alkermes that were
previously paid to such directors. Mr. Wall continues to receive $6,667 per
month for work that he performs for Alkermes outside of his capacity as a
director. Each non-employee director now receives:
- an annual retainer fee of $15,000;
- an attendance fee of $1,500 per Board of Directors' meeting and $750
for each telephonic Board of Directors' meeting;
- an attendance fee of $500 for each committee meeting, if such
meeting is held on a date other than a date on which a Board of
Directors' meeting is held and $250 for each telephonic committee
meeting;
- options to purchase 20,000 shares of Alkermes common stock on the
date of Alkermes' annual meeting of shareholders; and
- reimbursement for all reasonable travel expenses incurred in
connection with Board of Directors' meetings and meetings of
committees of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, the Compensation Committee consisted of John
K. Clarke, Paul Schimmel and Michael A. Wall. The Compensation Sub-Committee
consisted of John K. Clarke and Paul Schimmel. Mr. Wall is a consultant to
Alkermes and receives the consulting fees described above under "Compensation of
Directors."
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is responsible for reviewing
and establishing the cash compensation of, and the Compensation Sub-Committee
(the "Sub-Committee") is responsible for reviewing and establishing compensation
in the form of stock options and restricted common stock awards to, Alkermes'
executive officers.
Executive Compensation Policies
The Company's executive compensation program is designed to attract,
retain and motivate experienced and well-qualified executive officers who will
promote the Company's research and product development and commercialization
efforts. In establishing executive compensation levels, the
103
Committee is guided by a number of considerations. Because the Company is still
in the process of developing its portfolio of product candidates, and because of
the volatile nature of biotechnology stocks, the Committee believes that
traditional performance criteria, such as revenue growth, net income, profit
margins and share price are inappropriate for evaluating and rewarding the
efforts of the Company's executive officers. Rather, the Committee bases
executive compensation on the achievement of certain product development,
corporate partnering, financial, strategic planning and other goals of the
Company and the executive officers. In establishing compensation levels, the
Committee also evaluates each officer's individual performance using certain
subjective criteria, including an evaluation of each officer's initiative,
contribution to overall corporate performance and managerial ability. No
specific numerical weight is given to any of the above-noted subjective or
objective performance criteria. In making its evaluations, the Committee
consults on an informal basis with other members of the Board of Directors and,
with respect to officers other than the Chief Executive Officer, reviews the
recommendations of the Chief Executive Officer.
Another consideration which affects the Committee's decisions regarding
executive compensation is the high demand for well-qualified personnel in the
biotechnology industry. Given such demand, the Committee strives to maintain
compensation levels which are competitive with the compensation of other
executives in the industry. To that end, the Committee reviews data obtained
from a generally available outside survey of compensation and benefits in the
biotechnology industry, an internally prepared survey based on peer
biotechnology companies' proxy statements and personal knowledge regarding
executive compensation at comparable companies.
A third factor which affects compensation levels is the Committee's belief
that stock ownership by management is beneficial in aligning management's and
shareholders' interests in the enhancement of shareholder value. In accordance
with such belief, the Sub-Committee seeks to provide a significant portion of
executive compensation in the form of stock options. The Sub-Committee has not,
however, targeted a range or specific number of options for each executive
position. Rather, it makes its decisions based on the above-mentioned surveys
and the general experience of the Sub-Committee members.
Compensation Mix
The Company's executive compensation packages generally include three
components: base salary; a discretionary annual cash bonus; and stock options
and restricted common stock awards. The Committee generally reviews and
establishes the base salary and bonus of each executive officer at of the end of
each calendar year.
Base Salary
The Committee seeks to establish base salaries which are competitive for
each position and level of responsibility with those of executive officers at
various other biotechnology companies of comparable size and stage of
development.
Discretionary Cash Bonus
The Committee believes that discretionary cash bonuses are useful on a
case by case basis to motivate and reward executive officers. Bonuses for
executive officers are not guaranteed, but are awarded from time to time,
generally annually, only in the discretion of the Committee; cash bonuses are
used to bring annual cash compensation into a competitive range with comparable
positions at comparable companies. Criteria for bonuses for executive officers
range from success in attracting capital to success in conducting clinical
trials, entering into new and expanded collaborations and establishing the
Company's manufacturing capabilities.
104
Stock Options and Restricted Common Stock Awards
Grants of stock options and awards of restricted common stock awards under
the Company's equity compensation plans are designed to promote the identity of
the long-term interests between the Company's executives and its shareholders
and to assist in the retention of executives. Since stock options granted by the
Company generally become exercisable over a four-year period and forfeiture
provisions with respect to restricted common stock awards lapse over a two-year
period, their ultimate value is dependent upon the long-term appreciation of the
Company's stock price and the executive's continued employment with the Company.
In addition, grants of stock options and awards of restricted common stock
awards may result in an increase in executive officers' equity interests in the
Company, thereby providing such persons with the opportunity to share in the
future value they are responsible for creating.
When granting stock options and awarding restricted common stock, the
Sub-Committee considers the relative performance and contributions of each
officer compared to that of other officers within the Company with similar
levels of responsibility. The number of options and awards granted to each
executive officer is generally determined by the Sub-Committee on the basis of
data obtained from a generally available outside survey of stock option grants
and restricted common stock awards in the biotechnology industry, an internally
prepared survey of peer biotechnology companies' proxy statements and personal
knowledge of the Sub-Committee members regarding executive stock options and
restricted common stock awards at comparable companies.
Section 162(m) of the Code limits the deductibility of annual compensation
over $1 million to the Chief Executive Officer and the other Named Executive
Officers unless certain conditions are met. The Company's Chief Executive
Officer and the other Named Executive Officers have not received annual
compensation over $1 million, and the Company has not yet determined what
measures, if any, it should take to comply with Section 162(m).
Compensation of the Chief Executive Officer
In establishing Mr. Pops' compensation package, the Committee seeks to
maintain a level of total current compensation that is competitive with that of
chief executives of certain other companies in the biotechnology industry at
comparable stages of development. In addition, in order to align Mr. Pops'
interests with the long-term interests of the Company's shareholders, the
Committee and the Sub-Committee attempt to make a significant portion of the
value of his total compensation dependent on the long-term appreciation of the
Company's stock price.
At the Company's current stage of development, the Committee believes that
Mr. Pops' performance as Chief Executive Officer of the Company must be
evaluated almost exclusively using subjective criteria, including the
Committee's evaluation of the Company's progress in attracting and retaining
senior management, identifying new product candidates, identifying and securing
corporate collaborators for the development of product candidates, identifying
and acquiring new proprietary product development and technology opportunities,
identifying and acquiring companies with interesting technology and product
candidates, advancing the Company's existing product candidates through the
complex drug development and regulatory approval process and raising the
necessary capital to fund its research and development efforts and manufacturing
capabilities.
In evaluating and establishing Mr. Pops' current compensation package, the
Committee considered the following accomplishments of the Company during
calendar 2001:
105
In January 2001, Genentech, Inc. and the Company announced their decision
to continue clinical development of Nutropin Depot in adults with growth hormone
deficiency by proceeding with a Phase III clinical trial of Nutropin Depot in
growth hormone deficient adults.
In February 2001, Janssen Pharmaceutica and the Company announced the
successful completion of two multi-center Phase III clinical trials on Risperdal
Consta, an intra-muscular long-acting injectable formulation of the
anti-psychotic drug Risperdal (risperidone), which utilizes the Company's
Medisorb technology. Also, the Company announced the hiring of David A.
Broecker, formerly with Eli Lilly & Company, as Chief Operating Officer of the
Company.
In March 2001, Amylin Pharmaceuticals, Inc. and the Company initiated the
first Phase I study of AC2993 LAR, a long-acting release formulation of Amylin's
drug candidate AC2993 (synthetic exendin-4), which is being developed by Amylin
as a potential treatment for type 2 diabetes.
In April 2001, Eli Lilly and Company and Alkermes announced the signing of
a mutually exclusive agreement for the development of inhaled formulations of
insulin and other products for the treatment of diabetes.
In May 2001, Serono S.A. and the Company announced their intention to
proceed with the clinical development of a novel, long-acting formulation of
recombinant human follicle stimulating hormone (r-hFSH) for the treatment of
infertility based on Alkermes' ProLease injectible sustained-release drug
delivery technology.
In August 2001, Janssen Pharmaceutica Products, LP filed a new drug
application for Risperdal Consta with the FDA and commenced submitting similar
filings with health authorities worldwide.
In September 2001, the Company and GlaxoSmithKline announced the
successful completion of the first clinical trial of a respiratory drug
formulation pursuant to their collaboration.
In October 2001, Janssen Pharmaceutica and the Company signed an agreement
providing for the expansion of the Company's manufacturing capacity for
production of Risperdal Consta, which agreement included certain financial
guarantees.
In December 2001, the Company presented positive results of a Phase II
clinical trial of Vivitrex (Medisorb naltrexone) for alcohol dependency at the
Annual Meeting of the American College of Neuropsychopharmacology. Additionally,
the Company invested $100 million in Reliant Pharmaceuticals, LLC and formed a
strategic alliance with Reliant to explore collaborations, marketing or
co-marketing of products and the co-development of new product candidates.
During the year, the Company also initiated a number of feasibility
programs with partners and on internal programs that were not disclosed
publicly.
Given the significant role played by Mr. Pops in each of the above-noted
accomplishments, the Committee increased Mr. Pops' annual base salary effective
January 1, 2002 from $428,000 to $475,000 and granted Mr. Pops a cash bonus of
$200,000. As additional recognition of Mr. Pops' efforts in calendar 2001, and
in furtherance of the Sub-Committee's belief that a significant portion of Mr.
Pops' total compensation should be dependent on the long-term appreciation of
the Company's stock price, in October 2001, the Sub-Committee granted Mr. Pops
options to purchase 250,000 shares of Common Stock and in November 2001, the
Sub-Committee awarded Mr. Pops 70,000 shares of restricted Common Stock, which
award vests annually over a two-year period. The Committee and Sub-Committee
believe that each of these actions was particularly appropriate given Mr. Pops'
performance during calendar 2001
106
and in order to maintain his compensation at a competitive level compared to
that of the chief executive officers of other similarly sized and positioned
biotechnology companies.
Compensation Committee
John K. Clarke Paul Schimmel
Michael A. Wall
Compensation Sub-Committee
John K. Clarke Paul Schimmel
CERTAIN TRANSACTIONS
STOCK OPTIONS
During the last fiscal year, executive officers and non-employee directors
were granted common stock awards and options to purchase shares of common stock
pursuant to Alkermes' 1991 Restricted Common Stock Award Plan, 1999 Stock Option
Plan, 1998 Equity Incentive Plan and Stock Option Plan for Non-Employee
Directors.
EXECUTIVE OFFICER LOANS
In the calendar year 2001, Alkermes, Inc. made two loans to David A.
Broecker in connection with hiring him as its new Chief Operating Officer. The
first loan, made in February 2001 in the principal amount of $300,000, was
amended to extend its maturity date to May 31, 2003 or, if earlier, upon
termination of Mr. Broecker's employment. The first loan does not bear interest.
The second loan, made in June 2001 in the principal amount of $300,000, bears
interest at the prime rate. Twenty percent of the principal of and accrued
interest on the second loan will be forgiven annually on Mr. Broecker's
employment anniversary, or in full upon a change-in-control of Alkermes, so long
as he continues to be employed by Alkermes, Inc. Any balance of the second loan
remaining upon the termination of Mr. Broecker's employment must be paid in
full.
107
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on our common stock for the last five fiscal years,
with the cumulative total return on the NASDAQ Stock Market (U.S.) Index and the
NASDAQ Pharmaceutical Index, which includes biotechnology companies. The
comparison assumes $100 was invested on March 31, 1997, in our common stock and
in each of the foregoing indices and further assumes reinvestment of any
dividends. Alkermes, Inc. did not declare or pay any dividends on its common
stock during the comparison period.
[PERFORMANCE GRAPH]
NASDAQ Stock NASDAQ
Alkermes, Inc. Market (U.S.) Index Pharmaceutical Index
3/31/1997 100.00 100.00 100.00
3/31/1998 177.69 151.58 119.23
3/31/1999 194.64 204.75 151.12
3/30/2000 660.71 380.32 318.79
3/31/2001 313.40 152.10 240.03
3/31/2002 372.29 153.18 247.12
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES WEIGHTED AVERAGE UNDER EQUITY
TO BE ISSUED UPON EXERCISE PRICE OF COMPENSATION PLANS
EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS, REFLECTED IN COLUMN
PLAN CATEGORY WARRANTS, AND RIGHTS AND RIGHTS (a))
---------------------------------------------------------------------------------------
Equity Compensation
Plans Approved by 10,504,684 $20.03 2,500,165
Security Holders
Equity Compensation
Plans not Approved 859,464 $17.49 162,150
by Security Holders
Total 11,364,148 $19.84 2,662,315
The above share and share price information is as of July 19, 2002. For a
description of the material features of the 1998 Equity Incentive Plan, which
was adopted by AIR prior to its acquisition by the Company and is the only
equity compensation plan not approved by the Company's shareholders, please see
Note 12 to the Company's Consolidated Financial Statements for the year ended
March 31, 2002, contained in this prospectus.
108
MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of our common stock as of November 18, 2002 by: (i) each person who is known by
Alkermes, Inc. ("Alkermes") to be the owner of 5% or more of the outstanding
shares of common stock; (ii) each director of Alkermes; (iii) each of the Named
Executive Officers; and (iv) all the directors and executive officers of
Alkermes as a group.
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OWNED BENEFICIALLY OWNED (1)
------------------ ----------------------
Citigroup Inc. (2)........................................ 10,162,222 15.79%
425 Park Avenue
New York, NY 10043
T. Rowe Price Associates, Inc. (3)........................ 7,490,454 11.64%
100 E. Pratt Street
Baltimore, MD 21202
Floyd E. Bloom (4)........................................ 285,375 *
Robert A. Breyer (5)...................................... 411,025 *
John K. Clarke (6)........................................ 123,936 *
Richard F. Pops (7)....................................... 1,304,370 1.99%
Alexander Rich (8)........................................ 423,400 *
Paul Schimmel (8)......................................... 462,600 *
Michael A. Wall (8)....................................... 814,450 1.26%
David A. Broecker (9)..................................... 142,500 *
James L. Wright (10)...................................... 208,859 *
James M. Frates (11)...................................... 309,000 *
Michael J. Landine (12)................................... 274,300 *
All directors and executive officers as a group (12 persons)
(13)...................................................... 4,978,757 7.42%
----------
* Represents less than one percent (1%) of the outstanding shares of
common stock.
(1) As of November 18, 2002, there were 64,374,993 shares of common
stock outstanding.
(2) Represents shares over which Salomon Smith Barney Inc., Salomon
Brothers Holding Company Inc., Salomon Smith Barney Holdings Inc.
and/or Citigroup Inc. have shared voting and dispositive power.
Includes shares that may be received upon conversion of the existing
notes. The holdings are as of December 31, 2001.
(3) These securities are owned by various individual and institutional
investors for which T. Rowe Price Associates, Inc. ("Price
Associates") serves as investment advisor with power to direct
investments and/or sole power to vote the securities. Includes
shares that may be received upon conversion of the existing notes.
For purposes of the securities laws, Price Associates is deemed to
be a beneficial owner of such securities; however, Price Associates
expressly disclaims that it is the beneficial owner of such
securities. The holdings are as of May 10, 2002.
(4) Includes 210,375 shares of common stock held by The Corey Bloom
Family Trust, of which Dr. Bloom is a Trustee. Also includes, 75,000
shares of common stock subject to options which are exercisable.
(5) Includes 309,743 shares of common stock subject to options which are
exercisable or will become exercisable within 60 days of November
18, 2002.
(6) Includes 95,000 shares of common stock subject to options which are
exercisable.
(7) Includes 1,062,354 shares of common stock subject to options which
are exercisable or which will become exercisable within 60 days of
November 18, 2002.
(8) Includes 75,000 shares of common stock subject to options which are
exercisable.
(9) Consists of 137,500 shares of common stock subject to options which
are exercisable or which will become exercisable within 60 days of
November 18, 2002.
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(10) Consists of 203,859 shares of common stock subject to options which
are exercisable or which will become exercisable within 60 days of
November 18, 2002.
(11) Includes 279,583 shares of common stock subject to options which
will become exercisable within 60 days of November 18, 2002.
(12) Includes 168,000 shares of common stock subject to options which
will become exercisable within 60 days of November 18, 2002.
(13) Includes 2,712,918 shares of common stock subject to options which
are exercisable or which will become exercisable within 60 days of
November 18, 2002. Also includes 210,375 shares of common stock held
in trust.
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DESCRIPTION OF CAPITAL STOCK
Alkermes, Inc. is authorized to issue 165,000,000 shares of capital
stock, $0.01 par value per share, of which 160,000,000 shares have been
designated as common stock par value $0.01 per share, 64,356,696 of which are
issued and outstanding as of November 8, 2002; 3,000,000 shares have been
designated as preferred stock, par value $0.01 per share, none of which are
issued and outstanding; 450,000 shares have been designated as non-voting common
stock, 382,632 of which are issued and outstanding as of November 8, 2002; and
1,550,000 shares are undesignated capital stock. The following description of
Alkermes, Inc. capital stock is subject to and qualified in its entirety by the
provisions of Alkermes, Inc.'s Third Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws and by the provisions of
applicable Pennsylvania law. As used in this description, the words "we," "us"
or "our" do not include any current or future subsidiary of Alkermes, Inc.
COMMON STOCK
The majority of our authorized capital stock consists of common stock,
par value $.01 per share. The holders of common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
shareholders. Subject to preferences applicable to any series or class of
capital stock with superior dividend rights that may be outstanding, holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding up, holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any series or class of capital
stock with superior liquidation rights that may be outstanding. The outstanding
shares of common stock are, and the common stock to be issued upon conversion of
the new notes will be, fully paid and nonassessable. No pre-emptive rights,
conversion rights, redemption rights or sinking fund provisions are applicable
to the common stock.
The 1988 Pennsylvania Business Corporation Law, as amended, ("1988
BCL") includes certain shareholder protection provisions, which apply to us.
The following is a description of those provisions of the 1988 BCL that
apply to us and that may have an anti-takeover effect. This description of the
1988 BCL is only a summary thereof, does not purport to be complete and is
qualified in its entirety by reference to the full text of the 1988 BCL.
(i) Upon a control-share acquisition (acquiring person
acquires or proposes to acquire 20%, 33 1/3% or 50% or more of the
voting power of our common stock) the 1988 BCL operates to suspend the
voting rights of the control shares (the newly acquired shares upon
such an acquisition, plus any shares acquired within 180 days of
exceeding a threshold) held by an acquiring person upon a control share
acquisition. The acquiring person can regain his right to vote such
control shares upon the approval of a majority of the outstanding
disinterested shares and a majority of all common stock.
(ii) The disgorgement provisions require a controlling person
(a person who acquired, offered to acquire or publicly disclosed the
intention of acquiring at least 20% of the voting power of Alkermes,
Inc.) to disgorge "greenmail" profits, or profits realized from the
disposition of our securities within 18 months after becoming a
controlling person and the security was acquired by the controlling
person within 24 months before or 18 months after becoming a
controlling person.
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(iii) The control transaction provisions of the 1988 BCL allow
holders of voting shares of a corporation to "put" their stock to an
acquiror for fair value in the event of a control transaction (the
acquisition of 20% of voting power over our common stock). Fair value
is defined as not less than the highest price paid by the acquiror
during a certain 90-day period.
(iv) An interested shareholder (the beneficial owner of 20% of
the voting stock either of a corporation or of an affiliate of the
corporation who was at any time within the five-year period immediately
prior to the date in question the beneficial owner of 20% of the voting
stock of the corporation) cannot engage in a business combination with
the corporation for a period of five years unless: (a) the board
approves the business combination prior to the interested shareholder
becoming such or approves the acquisition of shares in advance, or (b)
if the interested shareholder owns 80% of such stock, the business
combination is approved by a majority of the disinterested shareholders
and the transaction satisfies certain "fair price" provisions. After
the five-year period, the same restrictions apply, unless the
transaction either is approved (a) by a majority of the disinterested
shareholders and satisfies the fair price provisions or (b) by all
shareholders.
(v) Corporations may adopt shareholders' rights plans with
discriminatory provisions (sometimes referred to as poison pills)
whereby options to acquire shares or corporate assets are created and
issued which contain terms that limit persons owning or offering to
acquire a specified percentage of outstanding shares from exercising,
converting, transferring or receiving options and allows the exercise
of options to be limited to shareholders or triggered based upon
control transactions. Such poison pills take effect only in the event
of a control transaction. Pursuant to the 1988 BCL, such poison pills
may be adopted by the Board without shareholder approval.
(vi) Shareholders of a corporation do not have a statutory
right to call special meetings of shareholders or to propose amendments
to the articles under the provisions of the 1988 BCL.
(vii) In discharging the duties of their respective positions,
the board of directors, committees of the board and individual
directors may, in considering the best interests of the corporation,
consider to the extent they deem appropriate, (i) the effects of any
action upon shareholders, employees, suppliers, customers and creditors
of the corporation and the community in which the corporation is
located, (ii) the short-term and long-term interests of the
corporation, including benefits that may accrue to the corporation from
its long-term plans and the possibility that these interests may be
best served by the continued independence of the corporation, (iii) the
resources, intent and conduct (past, stated and potential) of any
person seeking to acquire control of the corporation and (iv) all other
pertinent factors. Further, the board of directors, committees of the
board and individual directors are not required, in considering the
best interests of the corporation or the effects of any action, to
regard any corporate interest or the interests of any particular group
affected by such action as a dominant or controlling interest or
factor. The consideration of the foregoing factors shall not constitute
a violation of the applicable standard of care.
NON-VOTING COMMON STOCK
We have designated 450,000 shares of its capital stock as non-voting
common stock of which 382,632 are currently outstanding. The holder of
non-voting common stock is not entitled to vote on any matters submitted to a
vote of shareholders except for (a) such statutory voting rights provided under
the 1988 BCL or (b) any matter submitted to a vote of the shareholders which
would amend, alter or repeal
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any provision of our Articles of Incorporation or the Bylaws so as to adversely
affect the rights of the non-voting common stock.
The holders of non-voting common stock (a) shall be entitled to receive
the same dividends or distributions, in cash, shares of stock or other property,
as the holders of common stock receive; (b) shall be entitled to the same
liquidation rights as, and on a parity with, the holders of common stock; and
(c) shall be entitled to any other rights or privileges as, and on a parity
with, the holders of the common stock.
The non-voting common stock is convertible, at the option of the
holder, on a one-for-one basis into common stock. Additionally, each share of
non-voting common stock shall automatically be converted into one share of
common stock immediately upon the transfer of ownership by the initial holder or
an "affiliate" of the initial holder to a third party which is not an
"affiliate" of such holder.
PREFERRED STOCK
Our board of directors has the authority, from time to time and without
further action by the shareholders, to divide the designated and unissued
preferred stock into one or more classes and one or more series within any class
and to make determinations of the designation and number of shares of any class
or series and determinations of the voting rights, preferences, limitations and
special rights, if any, of the shares of any class or series. The rights,
preferences, limitations and special rights of different classes of capital
stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters.
BOOK-ENTRY SYSTEM - THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as depository for the new
notes. The certificates representing the new notes will be in fully registered,
global form without interest coupons registered in the name of Cede & Co. (DTC's
partnership nominee) or such other name as may be requested by an authorized
representative of DTC. Ownership of beneficial interests in a global note will
be limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Ownership of beneficial interests in a
global note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
global notes, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the new notes represented by such global notes
for all purposes under the new notes indenture. No beneficial owner of an
interest in the global notes will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the new notes indenture.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds the new notes that its participants deposit
with DTC. DTC also facilitates the settlement among participants of new notes
transactions, such as transfers and pledges, in deposited new notes through
electronic computerized book-entry changes in participants' accounts, thereby
eliminating the need for physical movement of new notes certificates.
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other
113
organizations. DTC is owned by a number of its participants and by the New York
Stock Exchange, Inc., the American Stock Exchange LLC, and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the SEC.
Purchases of new notes under the DTC system must be made by or through
participants, which will receive a credit for the new notes on DTC's records.
The beneficial ownership interest of each actual purchaser of each new note is
in turn to be recorded on the participants' records. Beneficial owners will not
receive written confirmation from DTC of their purchase, but they are expected
to receive written confirmations providing details of the transaction, as well
as periodic statements of their holdings, from the participant through which the
beneficial owner entered into the transaction. Transfers of ownership interests
in the new notes are to be accomplished by entries made on the books of
participants acting on behalf of beneficial owners. Beneficial owners will not
receive certificates representing their ownership interests in new notes, except
in the event that use of the book-entry system for the new notes is
discontinued.
To facilitate subsequent transfers, all new notes deposited by
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. or such other name as may be requested by an authorized
representative of DTC. The deposit of new notes with DTC and their registration
in the name of Cede & Co. or such other nominee do not effect any change in
beneficial ownership. DTC has no knowledge of the actual beneficial owners of
the new notes; DTC's records reflect only the identity of the participants to
whose accounts such new notes are credited, which may or may not be the
beneficial owners. The participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to participants
and by participants to beneficial owners will be governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time. Beneficial owners of new notes may wish to take certain steps
to augment transmission to them of notices of significant events with respect to
the new notes, such as redemptions, tenders, defaults, and proposed amendments
to the new notes documents. Beneficial owners of new notes may wish to ascertain
that the nominee holding the new notes for their benefit has agreed to obtain
and transmit notices to beneficial owners, or in the alternative, beneficial
owners may wish to provide their names and addresses to the registrar and
request that copies of the notices be provided directly to them.
Payments of the principal of and interest on the global notes will be
made to DTC or its nominee, as the case may be, as the registered owner thereof.
We understand that DTC's practice is to credit participants' accounts, upon
DTC's receipt of funds and corresponding detail information from us or the new
notes trustee on payable date in accordance with their respective holdings shown
on DTC's records. Payments by participants to beneficial owners will be governed
by standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such participant and not of DTC, the
new notes trustee, or us, subject to any statutory or regulatory requirements as
may be in effect from time to time. Payment of redemption proceeds,
distributions, and dividends to Cede & Co. (or such other nominee as may be
requested by an authorized representative of DTC) is our responsibility or the
responsibly of the new notes trustee, disbursement of such payments to
participants shall be the responsibility of DTC, and disbursement of such
payments to the beneficial owners shall be the responsibility of participants.
We will send any redemption notices to Cede & Co. We understand that if
less than all of the new notes are being redeemed, DTC's practice is to
determine by lot the amount of the holdings of each
114
participant to be redeemed. We also understand that neither DTC nor Cede & Co.
will consent or vote with respect to the new notes. We have been advised that
under its usual procedures, DTC will mail an "omnibus proxy" to us as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those participants to whose accounts the new
notes are credited on the record date identified in a listing attached to the
omnibus proxy.
A beneficial owner shall give notice to elect to have its new notes
purchased or tendered, through its participant, to the new notes trustee, and
shall effect delivery of such new notes by causing the participant to transfer
the participant's interest in the new notes, on DTC's records, to the new notes
trustee. The requirement for physical delivery of new notes in connection with
an optional tender or a mandatory purchase will be deemed satisfied when the
ownership rights in the new notes are transferred by participants on DTC's
records and followed by a book-entry credit of tendered new notes to the new
notes trustee DTC account.
DTC may discontinue providing its services as new notes depositary with
respect to the new notes at any time by giving reasonable notice to us or the
new notes trustee. If DTC is at any time unwilling or unable to continue as a
depositary for the global notes and a successor depositary is not appointed
within 90 days, we will issue definitive, certificated original new notes in
exchange for the global notes.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that we believe to be reliable, but we
take no responsibility for the accuracy thereof.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income
tax consequences relating to the exchange offer and the ownership and
disposition of the new notes and common stock received upon a conversion of new
notes. This discussion does not purport to address all aspects of U.S. federal
income taxation that may be relevant to particular holders in light of their
personal circumstances and the U.S. federal income tax consequences to certain
types of holders subject to special treatment under the Internal Revenue Code of
1986 (the "Code"). This discussion does not address the tax considerations
arising under the laws of any foreign, state or local jurisdiction, or under
U.S. federal estate or gift tax laws (except as specifically described below
with respect to non-U.S. holders). In addition, this discussion does not address
all tax considerations that may be applicable to a holder's particular
circumstances or to holders that may be subject to special tax rules: holders
subject to the alternative minimum tax; banks, insurance companies, or other
financial institutions; foreign persons or entities (except to the extent
specifically set forth below); tax-exempt organizations; dealers in securities
or commodities; traders in securities that elect to use a mark-to-market method
of accounting for their securities holdings; holders whose "functional currency"
is not the U.S. dollar; holders that hold the existing notes or the new notes as
a position in a hedging transaction, "straddle," "conversion transaction" or
other risk reduction transaction; or persons deemed to sell the existing notes
or the new notes under the constructive sale provisions of the Code. The
discussion assumes that the existing notes are held, and the new notes will be
held, as "capital assets" within the meaning of Section 1221 of the Code. The
discussion also assumes that the new notes will be treated as debt for U.S.
federal income tax purposes.
This discussion is based upon provisions of the Code, the Treasury
Regulations, and judicial and administrative interpretations of the Code and
Treasury Regulations, all as in effect as of the date hereof, and all of which
are subject to change (possibly on a retroactive basis) or different
interpretation. There can be no assurance that the Internal Revenue Service (the
"Service") will not challenge one or more of the tax consequences described
herein, and we have not obtained, nor do we intend to obtain, a ruling from the
Service with respect to the U.S. federal income tax consequences of the exchange
offer.
115
As used herein, a "U.S. holder" means a beneficial owner of existing
notes or new notes received in the exchange offer that is a citizen or resident
(within the meaning of Section 7701(b) of the Code) of the United States, a
corporation (including a non-corporate entity taxable as a corporation), formed
under the laws of the U.S. or any political subdivision thereof, an estate the
income of which is subject to U.S. federal income taxation regardless of its
source and a trust subject to the primary supervision of a court within the
United States and the control of a United States fiduciary as described in
Section 7701(a)(30) of the Code or any other person whose income or gain with
respect to a new note is effectively connected with the conduct of a U.S. trade
or business. If an entity treated as a partnership for Federal income tax
purposes holds existing or new notes, the tax treatment of a partner depends
upon the status of the partner and the activities of the partnership. A
"non-U.S. holder" is any beneficial owner of existing notes or new notes other
than a U.S. holder.
We intend to treat the new notes as indebtedness for U.S. federal
income tax purposes. Such characterization is binding on us (but not the Service
or a court). Each holder of a new note also must treat the new notes as
indebtedness unless the holder makes adequate disclosure on its income tax
return; however, by participating in the exchange, a holder of a new note agrees
to treat the new note as indebtedness under these rules.
INVESTORS CONSIDERING THE EXCHANGE OF EXISTING NOTES IN THE EXCHANGE
OFFER OR PURCHASING NEW NOTES IN THE CASH OFFER ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS TO DETERMINE THEIR PARTICULAR TAX CONSEQUENCES OF THE EXCHANGE
OFFER AND THE OWNERSHIP AND DISPOSITION OF THE NEW NOTES UNDER FEDERAL AND
APPLICABLE STATE, LOCAL AND FOREIGN TAX LAWS.
TREATMENT OF EXCHANGE OFFER
The tax treatment of a U.S. holder's exchange of existing notes for new
notes pursuant to the exchange offer will depend on whether that exchange is
treated as a "recapitalization" as provided in Section 368(a)(1)(E) of the Code.
The exchange will be treated as a recapitalization only if both the existing
notes and the new notes constitute "securities" within the meaning of the
provisions of the Code governing reorganizations. This, in turn, depends upon
the facts and circumstances surrounding the origin and nature of these debt
instruments and upon the interpretation of numerous judicial decisions.
If the exchange of existing notes for new notes constitutes a
recapitalization, since the principal amount of the existing notes exceeds the
principal amount of the new notes, a U.S. holder: (a) will not recognize gain or
loss on the exchange; (b) will have a tax basis in the new notes equal to the
U.S. holder's adjusted tax basis in the existing notes exchanged for the new
notes; and (c) will have a holding period for the new notes that includes the
period during which the U.S. holder held the existing notes. A U.S. holder who
receives cash for a fractional new note, generally will recognize gain or loss
on the payment for such fractional new note. See "Tax Treatment of the Ownership
and Disposition of New Notes and Common Stock - Sale, exchange or retirement of
the new notes" below for a more complete discussion of the treatment of any such
payment.
If the exchange of existing notes for new notes does not constitute a
recapitalization, a U.S. holder: (a) generally will recognize gain or loss on
the exchange of existing notes for new notes equal to the difference between (i)
the issue price of the new notes received (which, since the new notes will be
publicly traded as defined in the regulations under Code Section 1273, will be
the fair market value of the new notes on the issue date) and (ii) the U.S.
holder's adjusted tax basis in the existing notes; (b) will have a tax basis in
the new notes equal to the fair market value of the new notes; and (c) will have
a holding period for the new notes commencing on the day after the expiration
date. Any gain or loss recognized by a U.S. holder will be long-term capital
gain or loss if the U.S. holder has held the existing notes as capital assets
for more than one year, except to the extent attributable to accrued interest
which
116
will be taxable as ordinary income. However, under the market discount rules,
any gain recognized by a U.S. holder will be ordinary income to the extent of
any accrued market discount which has not previously been included in income.
A non-U.S. holder generally will not recognize gain or loss for U.S.
federal income tax purposes on the exchange of existing notes for new notes,
except in the instances comparable to those described in "Non-U.S. holders--Gain
on disposition of the new notes and common stock" with respect to sales of the
new notes and common stock.
For tax purposes, the exchange generally should be considered to take
place on the expiration date.
TAX TREATMENT OF THE OWNERSHIP AND DISPOSITION OF NEW NOTES AND COMMON STOCK
Stated interest and original issue discount on the new notes
As described above, the new notes provide that we may pay stated
interest on the notes by delivering shares of our common stock equal to the
number obtained by dividing the interest due by 90% of the average of the common
stock's closing price for each of the five trading days immediately preceding
the second trading day prior to the interest payment date. If we elect this
option, the amount of interest received by a U.S. holder of a new note on any
interest payment date may not exactly equal the note's stated return. It is
possible that the Service could seek to analyze the U.S. federal income tax
consequences of owning a new note under Treasury Regulations governing
contingent payment debt instruments (the "Contingent Payment Debt Regulations").
As discussed below under "Potential contingent payment treatment," we intend to
take the position that the Contingent Debt Regulations do not apply to the new
notes. The discussion in this section assumes such regulations do not apply to
the new notes.
The stated interest on the existing notes will be includable in a U.S.
holder's gross income as ordinary income for U.S. federal income tax purposes at
the time it is paid or accrued in accordance with the U.S. holder's regular
method of tax accounting. In addition, if any interest is paid in our common
stock, a U.S. holder's interest income will be equal to the fair market value of
the stock received on the payment date.
We do not anticipate that the new notes will be issued with original
issue discount. As a result, we anticipate that a U.S. holder will not be
subject to tax on original issue discount but instead will be subject to tax
only on stated interest (or our shares received as interest) on the new notes.
If, however, the issue price of the new notes, which for this purpose is their
fair market value, is determined to be significantly less than the stated
redemption price at maturity of the new notes so that the original issue
discount on the new notes is not considered to be de minimis, the U.S. federal
income tax consequences set forth below will apply.
The amount of original issue discount on a debt instrument generally is
equal to the difference between the stated redemption price at maturity of the
debt instrument and the debt instrument's issue price. However, if the original
issue discount on a debt instrument is less than 1/4 of 1 percent of the stated
redemption price at maturity of the debt instrument multiplied by the number of
complete years to maturity, the original issue discount on the debt instrument
is considered de minimis and will be deemed to be zero. The stated redemption
price at maturity of a debt instrument will equal the sum of all amounts
provided under the debt instrument, regardless of whether denominated as
principal or interest, other than "qualified stated interest" payments. For such
purposes, "qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property, other than debt instruments of the
issuer, at
117
least annually at a single fixed rate. The stated interest on the new notes will
constitute "qualified stated interest."
A U.S. holder, other than holders with amortizable bond premium or
offsetting acquisition premium, must include any original issue discount on the
new notes as ordinary interest income as it accrues (in advance of the receipt
of any cash payments attributable to such income) in accordance with a constant
yield method based on a compounding of interest, regardless of such U.S.
holder's regular method of tax accounting. Subject to making an appropriate
election, a U.S. holder generally will be permitted to include all interest that
accrues or is to be paid on the new notes in income under the constant yield
method applicable to original issue discount, subject to certain limitations and
exceptions.
Potential contingent payment debt treatment
For purposes of the Contingent Payment Debt Regulations, a payment is
not a contingent payment if the payment is subject to a remote or incidental
contingency. A contingency is "remote" if there is a remote likelihood that the
contingency will occur. A contingency is "incidental" if the potential amount of
the payment under all reasonably anticipated market conditions is insignificant
relative to the total expected payments on the debt instrument. Payments on a
debt instrument are not contingent merely because the instrument is convertible
into stock of the issuer. Where an option is exercisable by an issuer of notes,
original issue discount initially will be calculated based on the assumption
that the issuer will take the position that minimizes the yield on such debt
instruments.
We intend to take the position that the possibility of payment of one
or more interest payments in stock is either remote or incidental. In the
alternative, because the yield on the new notes would likely increase if we
exercise the option to pay in stock, we believe that our option to pay in stock
should be disregarded at the outset. The Service could, however, adopt a
different position and assert that contingent original issue discount should be
imputed on the new notes, and such position could potentially be sustained. As a
result, the amount includible in income by U.S. holders could be increased as
described above. If we actually do exercise our option to pay in stock, the new
notes will be deemed reissued with a new payment schedule which could have a
similar result of increasing the amount includible in income by U.S. holders.
Our determination that a contingency is either remote or incidental is
binding on all holders.
Amortizable bond premium and acquisition premium
As discussed above, a U.S. holder's initial tax basis in the new notes
will depend in part on the tax treatment of the exchange offer to such U.S.
holder, including whether the U.S. holder reports a gain as a result thereof. If
a U.S. holder's initial tax basis in the new notes is greater than the stated
redemption price at maturity, such U.S. holder generally will not be required to
include original issue discount, if any, in income. In addition, such U.S.
holder will have "amortizable bond premium" with respect to the new notes, to
the extent that the premium is not attributable to the conversion feature on the
new note, which may be deductible to the U.S. holder over the term of the new
notes.
If a U.S. holder's initial tax basis in the new notes is greater than
the issue price of the new notes but less than the stated redemption price at
maturity, such U.S. holder generally will be considered to have "acquisition
premium" with respect to the new notes, which may reduce the amount of original
issue discount, if any, that the U.S. holder is required to include in income.
118
Sale, exchange or retirement of the new notes
A U.S. holder generally will recognize gain or loss on the sale,
exchange or retirement of new notes equal to the difference between the amount
realized on the sale, exchange or retirement of the new notes and the U.S.
holder's adjusted tax basis in the new notes. Any gain or loss recognized on the
sale, exchange or retirement of new notes will generally be long-term capital
gain or loss if the U.S. holder has held the new notes as capital assets for
more than one year, other than amounts attributable to accrued interest.
However, under the market discount rules, any gain recognized by a U.S. holder
will be ordinary income to the extent of the accrued market discount which has
not previously been included in income. For these purposes, if the exchange
constitutes a recapitalization, any accrued market discount that the U.S. holder
had in the existing notes that had not been previously included in income will
be considered to be market discount with respect to the new notes. The amount
realized on a redemption by us of a new note for stock is the fair market value
of the stock on the redemption payment date. To the extent any cash is received
by the holder of a new note in lieu of fractional shares, the cash will be
treated as if received in exchange for the fractional share.
Constructive dividend
If at any time we make a distribution of property to shareholders that
would be taxable to such shareholders as a dividend for U.S. federal income tax
purposes and, pursuant to the anti-dilution provisions of the indenture, the
conversion rate of the new notes is increased, such increase may be deemed to be
the payment of a taxable dividend to U.S. holders of new notes. If the
conversion rate is increased at our discretion, this increase may be deemed to
be the payment of a taxable dividend to U.S. holders of new notes.
Conversion of new notes into common stock
A U.S. holder's conversion of a new note into common stock generally
will not be a taxable event. The U.S. holder's tax basis in the common stock
received on conversion of new notes will be the same as the U.S. holder's
adjusted tax basis in the new notes at the time of conversion, exclusive of any
tax basis allocable to a fractional share for which the holder receives cash.
The holding period for the common stock received on conversion will include the
holding period of the new notes converted. The receipt of cash in lieu of
fractional shares of common stock should generally result in capital gain or
loss. This capital gain or loss will be measured by the difference between the
cash received for the fractional share interest and the U.S. holder's tax basis
in the fractional share interest.
Common stock
Distributions, if any, paid on the common stock after a conversion, to
the extent made from our current or accumulated earnings and profits, will be
included in a U.S. holder's income as ordinary income as they are paid.
Distributions in excess of our current and accumulated earnings and profits will
reduce a U.S. holder's basis for the common stock until the basis is zero and
any additional distributions in excess of our current and accumulated earnings
and profits will be short term or long term capital gain, depending upon whether
the U.S. holder's holding period for the common stock exceeds one year. Gain or
loss realized on a sale or exchange of common stock will equal the difference
between the amount realized on such sale or exchange and the holder's adjusted
tax basis in such stock. Such gain or loss will generally be long-term capital
gain or loss if the U.S. holder's holding period in the common stock is more
than one year. However, under the market discount rules, any gain recognized by
a U.S. holder will be ordinary income to the extent of the accrued market
discount that has not previously been included in income. For these purposes,
any market discount that the U.S. holder had in the existing notes that
119
carried over to the new notes, and has not been previously included in income,
will be considered to be market discount with respect to the common stock.
NON-U.S. HOLDERS
The following discussion is a summary of the principal U.S. federal
income and estate tax consequences resulting from the ownership of the new notes
or common stock by non-U.S. holders.
Withholding tax on payments of principal and interest on new notes
The payment of principal and interest on new notes to a non-U.S. holder
will not be subject to U.S. federal withholding tax if:
- such interest is not effectively connected with an office or
other fixed place of business in the U.S.;
- the non-U.S. holder does not actually or constructively own
10% or more of the total voting power of all of our voting
stock, including any common stock that may be received as a
result of the conversion of new notes, and is not a controlled
foreign corporation that is related to us within the meaning
of the Code; and
- the beneficial owner of the new notes certifies to us or our
agent, under penalties of perjury, that it is not a U.S.
holder and provides its name and address on United States
Treasury Form W-8 BEN (or a suitable substitute form) or a
securities clearing organization, bank or other qualified
financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial
institution") and holds the new note certifies under penalties
of perjury that such a Form W-8 BEN (or suitable substitute
form) has been received from the beneficial owner by it or by
a financial institution between it and the beneficial owner
and furnishes the payor with a copy thereof.
Gain on disposition of the new notes and common stock
Provided that we are at no time a United States real property holding
corporation within the meaning of Section 897(c) of the Code (a "USRPHC"), a
non-U.S. holder generally will not be subject to U.S. federal income tax on gain
or income realized on the sale, exchange or redemption of new notes, including
the conversion of new notes for common stock, or the sale or exchange of common
stock unless in the case of an individual non-U.S. holder:
- such holder is present in the U.S. for 183 days or more in the
year of such sale, exchange or redemption;
- has a "tax home" in the U.S. and the gain or income is not
attributable to an office or other fixed place of business
maintained by such non-U.S. holder outside of the U.S.; or
- the gain from the disposition is attributable to an office or
other fixed place of business in the U.S.
Even if we are determined to be a USRPHC, a non-U.S. holder not
described in the preceding sentence will not be subject to U.S. federal income
tax on any such gain or income provided that such holder does not actually or
constructively own more than 5% of the common stock, including any common stock
that may be received as a result of the conversion of new notes and does not
own, on any
120
date on which the holder acquires new notes, new notes with an aggregate value
of 5% or more of the aggregate value of the outstanding common stock on such
date. Under present law we would not at any time within a specified (generally
five-year) period be a USRPHC so long as during a specified (generally
five-year) period:
- the fair market value of our U.S. real property interests is
less than 50% of the sum of the fair market value of our U.S.
real property interests, our interests in real property
located outside the U.S. and other of our assets that are used
or held for use in a trade or business.
We believe that we are not presently a USRPHC, but there can be no
assurance that we will not become a USRPHC in the future.
Common stock
Dividends, if any, paid on the common stock to a non-U.S. holder
generally will be subject to a 30% U.S. federal withholding tax, subject to
reduction for non-U.S. holders eligible for the benefits of certain income tax
treaties. Common stock held by an individual who at the time of death is not a
citizen or resident of the U.S. (as specially defined for U.S. federal estate
tax purposes) will be included in the individual's gross estate subject to
reduction of such estate tax if the individual is eligible for the benefits of
an estate tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Payments on the new notes, and payments of dividends on the common
stock to certain non-corporate holders generally will be subject to information
reporting and possible to "backup withholding" at a rate of 30% (29% in 2003 and
28% beginning January 1, 2004). Information reporting and backup withholding
will not apply, however, to payments made on a new note if the certification
described under "Non-U.S. Holders - Withholding tax on payments of principal and
interest on new notes" above is received, provided in each case that the payor
does not have actual knowledge that the holder is a U.S. holder, or to payments
made on the common stock if such payments are subject to the 30% or lower rate
as described above (or reduced treaty rate) withholding tax described above
under "Non-U.S. holders - Common stock."
Payment of proceeds from the sale of a new note or common stock to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
non-U.S. status or otherwise establishes an exemption from information reporting
and backup withholding. Payment outside the U.S. of the proceeds of the sale of
a new note or common stock to or through a foreign office of a "broker" (as
defined in applicable Treasury Regulations) will not be subject to information
reporting or backup withholding, except that, if the broker is a U.S. person, a
controlled foreign corporation for U.S. tax purposes or a foreign person 50
percent or more of whose gross income is from a U.S. trade or business,
information reporting will apply to such payment unless the broker has
documentary evidence in its records that the beneficial owner is not a U.S.
holder and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption.
Any amounts withheld from a payment to a non-U.S. holder under the
backup withholding rules will be allowed as a credit against such holder's U.S.
federal income tax, and may entitle such holder to a refund, provided that the
required information is furnished to the Service.
121
TAX CONSEQUENCES TO US
We anticipate recognizing taxable income from discharge of indebtedness
in the amount that the principal amount of the existing notes exchanged for new
notes exceeds the issue price (in this instance, fair market value) of the new
notes. We have net operating losses and current operating loss carryovers that
will off set this income for federal income tax purposes. As a result, we do not
anticipate paying any federal income tax; however, we may be required to pay
income tax in certain states in which we do business. Also, because we can pay
the interest on the new notes, at our option, in shares of our common stock, we
will not be able to deduct the interest we pay on the new notes.
PLAN OF DISTRIBUTION
We have engaged U.S. Bancorp Piper Jaffray, Inc. to use its best
efforts to find purchasers for any or all of the $50 million of additional new
notes, which will be offered to holders of existing notes which are tendered and
accepted for exchange in the exchange offer. U.S. Bancorp Piper Jaffray, Inc. is
not obligated to take or pay for any of the additional new notes. The purchase
price for the additional new notes is 100% of the principal amount of the new
notes, plus accrued interest from the issue date. As compensation for its
services, we have agreed to pay U.S. Bancorp Piper Jaffray, Inc. a selling
commission, payable in cash equal to 3-1/2% of the aggregate principal amount of
new notes sold in the cash offer. U.S. Bancorp Piper Jaffray, as placement agent
in the cash offer, may allow, and dealers may reallow, a discount not in excess
of $8.00 per new note to other dealers. We also will pay U.S. Bancorp Piper
Jaffray, Inc. its costs and expenses relating to the performance of its
obligation in connection with the offer of additional new notes, including fees
and expenses of U.S. Bancorp Piper Jaffray, Inc.'s counsel. We are also paying
U.S. Bancorp Piper Jaffray, Inc., a dealer manager fee of up to $1.5 million in
connection with the exchange offer which is discussed under the heading "The
Exchange Offer -- Fees and Expenses."
The placement agreement provides that the obligations of U.S. Bancorp
Piper Jaffray, Inc. are subject to enumerated conditions.
U.S. Bancorp Piper Jaffray, Inc. has advised us that it proposes to
offer for sale the additional new notes to holders submitting their existing
notes in the exchange offer that wish to purchase new notes in addition to those
received in exchange for their existing notes.
Indemnity. The dealer manager agreement and the placement agreement
provide that we will indemnify U.S. Bancorp Piper Jaffray, Inc. against certain
liabilities, including liabilities under the Securities Act.
Lock-up agreements. All of our executive officers and directors as of
the expiration date of the exchange offer have agreed, for a period of 90 days
after the expiration date, not to offer, sell, contract to sell or otherwise
transfer, dispose of, loan, pledge, assign or grant (whether with or without
consideration and whether voluntarily or involuntarily or by operation of law)
any rights to, or interests in, any shares of common stock, any options or
warrants to purchase any shares of common stock, any securities convertible into
or exchangeable for shares of common stock owned as of the date of this
prospectus or subsequently acquired directly by the holders or to which they
have or subsequently acquire the power of disposition, without the prior written
consent of U.S. Bancorp Piper Jaffray, Inc. Our executive officers and directors
also have agreed or will agree not to enter into any transaction (including a
derivative transaction) having an economic effect similar to that of a sale of
new notes, any shares of common stock or any securities of ours which are
substantially similar to the new notes or the shares of common stock or which
are convertible into or exchangeable for, or represent the right to receive,
shares of common stock or securities that are substantially similar to the
shares of common stock, subject to certain exceptions,
122
without the prior consent of U.S. Bancorp Piper Jaffray, Inc. There are no
agreements between U.S. Bancorp Piper Jaffray, Inc. and any of our directors and
officers providing consent by U.S. Bancorp Piper Jaffray, Inc. to the sale of
securities prior to the expiration of the lock-up period.
Future sales. In addition, we have agreed that during the period of 90
days after the date of this prospectus, we will not, without the prior written
consent of U.S. Bancorp Piper Jaffray, Inc., issue, sell, contract to sell or
otherwise dispose of any shares of any common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock, other than our sale
of new notes in this offering, the issuance of shares of common stock upon the
exercise of outstanding options or warrants and the grant of options to purchase
shares of common stock under our existing stock and incentive award plans or the
issuance of shares of common stock upon conversion of the existing notes and the
new notes. We also have agreed not to enter into any transaction (including a
derivative transaction) having an economic effect similar to that of an issuance
of, any of our securities which are substantially similar to the shares or which
are convertible into or exchangeable for, or represent the right to receive,
shares or securities that are substantially similar to the shares, subject to
certain exceptions, without the prior consent of U.S. Bancorp Piper Jaffray,
Inc.
No prior market for new notes. Prior to this offering, there has been
no market for the new notes. Consequently, the offering price for the additional
new notes to be sold in this offering was determined through negotiations
between us and U.S. Bancorp Piper Jaffray, Inc. Among the factors considered in
those negotiations were prevailing market conditions, our financial information,
the price of the existing notes, market valuations of other companies that we
and U.S. Bancorp Piper Jaffray, Inc. believe to be comparable to us, estimates
of our business potential and the present state of our development.
We do not intend to list the new notes for trading on any securities
exchange. We have been advised by U.S. Bancorp Piper Jaffray, Inc. that it
presently intends to make a market in the new notes as permitted by applicable
laws and regulations. U.S. Bancorp Piper Jaffray, Inc. has no obligation,
however, to make a market in the new notes and may discontinue market making at
any time without notice.
Stabilization. We have been advised by U.S. Bancorp Piper Jaffray, Inc.
that certain persons participating in this offering may engage in transactions,
including stabilizing bids that may have the effect of stabilizing or
maintaining the market price of the new notes. Stabilization bids are bids for,
or the purchase of, new notes on behalf of U.S. Bancorp Piper Jaffray, Inc. for
the purpose of fixing or maintaining the price of the new notes.
LEGAL MATTERS
Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania will
pass upon the validity of the new notes. Morris Cheston, Jr., a partner at
Ballard Spahr Andrews & Ingersoll, LLP, is corporate secretary of Alkermes.
Customary legal matters will be passed upon for the dealer manager by Shearman &
Sterling, Washington, D.C. and Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements of Alkermes, Inc. and its
subsidiaries as of March 31, 2002 and 2001 and for each of the three years in
the period ended March 31, 2002, included in this prospectus, have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report, which
are included herein, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
123
The financial statements of Reliant Pharmaceuticals, LLC as of December
31, 2001 and 2000 and for each of the three years in the period ended December
31, 2001 included in this prospectus have been audited by Arthur Andersen LLP,
independent auditors. Because Arthur Andersen LLP has ceased conducting
business, we have been unable to obtain Arthur Andersen LLP's written consent to
use their report on such financial statements in this prospectus. Accordingly,
we have omitted Arthur Andersen LLP's consent in reliance upon Rule 437a under
the Securities Act, which permits us to dispense with the requirement to file
the written consent of Arthur Andersen LLP under the circumstances. Since Arthur
Andersen LLP has not consented to the use of their report in this prospectus,
you will not be able to recover against Arthur Andersen LLP under Section 11 of
the Securities Act for any untrue statements of a material fact contained in the
financial statements of Reliant audited by Arthur Andersen LLP or for any
omission to state a material fact required to be stated in those financial
statements.
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INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF ALKERMES, INC.
INDEX
I. Consolidated Financial Statements (unaudited) for the quarter ended September 30, 2002:
Consolidated Balance Sheets (Unaudited)............................................................. F-2
Consolidated Statements of Operations (Unaudited)................................................... F-3
Consolidated Statements of Cash Flows (Unaudited)................................................... F-4
Notes to Unaudited Consolidated Financial Statements ............................................... F-5
II. Consolidated Financial Statements for the year ended March 31, 2002:
Independent Auditors' Report........................................................................ F-10
Consolidated Balance Sheets......................................................................... F-11
Consolidated Statements of Operations and Comprehensive Loss........................................ F-12
Consolidated Statements of Shareholders' Equity..................................................... F-13
Consolidated Statements of Cash Flows............................................................... F-15
Notes to Consolidated Financial Statements.......................................................... F-16
FINANCIAL STATEMENTS OF RELIANT PHARMACEUTICALS, LLC
INDEX
Financial Statements for the year ended December 31, 2001:
Report of Independent Public Accountants............................................................ F-31
Balance Sheets...................................................................................... F-32
Statements of Operations............................................................................ F-33
Statements of Changes in Members' (Deficit) Capital................................................. F-34
Statement of Cash Flows............................................................................. F-35
Notes to Financial Statements....................................................................... F-37
F-1
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
2002 2002
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 12,746,397 $ 16,023,074
Short-term investments 58,946,147 136,323,768
Receivables from collaborative arrangements 15,321,019 19,039,706
Prepaid expenses and other current assets 2,274,483 5,249,797
------------- -------------
Total current assets 89,288,046 176,636,345
------------- -------------
Property, Plant and Equipment:
Land 235,000 235,000
Building 5,076,961 5,058,936
Furniture, fixtures and equipment 58,963,489 49,558,745
Leasehold improvements 30,419,474 15,016,553
Construction in progress 28,464,587 26,497,064
------------- -------------
123,159,511 96,366,298
Less accumulated depreciation and amortization (39,235,129) (34,530,467)
------------- -------------
83,924,382 61,835,831
------------- -------------
Investments 9,240,130 9,126,093
------------- -------------
Investment in Reliant Pharmaceuticals, LLC 35,126,982 94,596,536
------------- -------------
Other Assets 6,542,066 8,155,472
------------- -------------
Total Assets $ 224,121,606 $ 350,350,277
============= =============
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 17,929,549 $ 20,764,375
Accrued interest 1,002,597 1,013,521
Accrued restructuring costs 2,493,897 --
Deferred revenue 6,519,376 7,083,516
Long-term obligations-- current portion 3,700,000 14,025,000
------------- -------------
Total current liabilities 31,645,419 42,886,412
------------- -------------
Long-Term Obligations 6,050,000 7,800,000
------------- -------------
Convertible Subordinated Notes 200,000,000 200,000,000
------------- -------------
Shareholders' (Deficiency) Equity:
Capital stock, par value $.01 per share: authorized, 4,550,000
shares; none issued; includes 3,000,000 shares of preferred
stock
Common stock, par value $.01 per share:
authorized, 160,000,000 shares; issued, 64,334,418 and
64,225,395 shares at September 30, 2002 and March 31, 2002,
respectively 643,345 642,254
Non-voting common stock, par value $.01 per share:
authorized, 450,000 shares; issued, 382,632 at September 30,
2002 and March 31, 2002 3,826 3,826
Additional paid-in capital 444,831,637 444,425,742
Deferred compensation (2,039,123) (3,162,448)
Accumulated other comprehensive (loss) income (47,100) 1,619,541
Accumulated deficit (456,966,398) (343,865,050)
------------- -------------
Total shareholders' (deficiency) equity (13,573,813) 99,663,865
------------- -------------
Total Liabilities and Shareholders'
(Deficiency) Equity $ 224,121,606 $ 350,350,277
============= =============
See notes to unaudited consolidated financial statements.
F-2
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
Research and development revenue under
collaborative arrangements $ 9,471,105 $ 14,505,003 $ 19,762,496 $ 30,031,678
------------- ------------- ------------- -------------
Expenses:
Research and development 28,186,162 22,592,697 52,785,835 43,302,728
General and administrative 9,196,723 6,410,854 15,212,763 11,785,132
Restructuring costs 3,681,719 -- 3,681,719 --
------------- ------------- ------------- -------------
Total expenses 41,064,604 29,003,551 71,680,317 55,087,860
------------- ------------- ------------- -------------
Net operating loss (31,593,499) (14,498,548) (51,917,821) (25,056,182)
------------- ------------- ------------- -------------
Other income (expense):
Interest income 1,067,939 4,216,637 2,433,875 8,741,652
Interest expense (2,066,714) (2,330,861) (4,147,848) (4,640,788)
------------- ------------- ------------- -------------
Total other (expense) income (998,775) 1,885,776 (1,713,973) 4,100,864
------------- ------------- ------------- -------------
Equity in losses of Reliant Pharmaceuticals,
LLC 35,256,654 -- 59,469,554 --
------------- ------------- ------------- -------------
Net loss attributable to common shareholders $ (67,848,928) $ (12,612,772) $(113,101,348) $ (20,955,318)
============= ============= ============= =============
Basic and diluted loss per common share $ (1.05) $ (0.20) $ (1.76) $ (0.33)
============= ============= ============= =============
Weighted average number of common shares
outstanding 64,317,587 63,399,285 64,289,400 63,318,533
============= ============= ============= =============
See notes to unaudited consolidated financial statements.
F-3
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $(113,101,348) $ (20,955,318)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation, amortization and other noncash expenses 6,396,505 5,262,634
Equity in losses of Reliant Pharmaceuticals, LLC 59,469,554 --
Restructuring costs 2,493,897 --
Noncash interest expense -- 316,430
Adjustments to other assets -- 509,232
Changes in assets and liabilities:
Receivables from collaborative arrangements 3,718,687 (9,472,870)
Prepaid expenses and other current assets 2,971,535 733,198
Accounts payable and accrued expenses (2,824,606) 1,022,668
Deferred revenue (564,140) (895,871)
------------- -------------
Net cash used by operating activities (41,439,916) (23,479,897)
------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment (26,945,822) (7,900,394)
Proceeds from the sale of equipment 50,000 --
Purchases of available-for-sale short-term investments (63,012,129) (94,695,430)
Sales of available-for-sale short-term investments 139,574,812 91,843,792
Purchases of held-to-maturity short-term investments, net -- (20,499,839)
Maturities of long-term investments, net -- 63,719,034
Decrease (increase) in other assets 12,094 (300,000)
------------- -------------
Net cash provided by investing activities 49,678,955 32,167,163
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 512,061 2,134,515
Repayment of loan (10,000,000) --
Payment of long-term obligations (2,075,000) (2,700,000)
------------- -------------
Net cash used by financing activities (11,562,939) (565,485)
------------- -------------
Effect of exchange rate changes on cash 47,223 3,099
------------- -------------
Net (decrease) increase in cash and cash equivalents (3,276,677) 8,124,880
Cash and cash equivalents, beginning of period 16,023,074 5,923,282
------------- -------------
Cash and cash equivalents, end of period $ 12,746,397 $ 14,048,162
============= =============
Supplementary information:
Cash paid for interest $ 4,156,971 $ 4,256,955
============= =============
See notes to unaudited consolidated financial statements.
F-4
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of Alkermes, Inc. (the "Company") for the
three and six months ended September 30, 2002 and 2001 are unaudited and include
all adjustments which, in the opinion of management, are necessary to present
fairly the results of operations for the periods then ended. Such adjustments
consisted of normal recurring items, approximately $2.7 million in non-recurring
expenses in the second quarter related to the termination of the merger with
Reliant Pharmaceuticals, LLC ("Reliant") (See Note 4 below) and approximately
$3.7 million in non-recurring restructuring expenses in the second quarter (See
Note 6 below). These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the years
ended March 31, 2002, 2001 and 2000, which are contained in Amendment No. 1 to
the Company's Annual Report for the year ended March 31, 2002 filed on Form
10-K/A. In addition, the financial statements include the accounts of Alkermes
Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II,
Advanced Inhalation Research, Inc. ("AIR"), Alkermes Investments, Inc., Alkermes
Europe, Ltd. and Alkermes Development Corporation II ("ADC II"), wholly owned
subsidiaries of the Company.
The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for any other
interim period or for a full fiscal year.
The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes certain
changes in the shareholders' (deficiency) equity of the Company that are
excluded from net income (loss). Specifically, other comprehensive income (loss)
includes unrealized holding gains and losses on the Company's
"available-for-sale" securities and changes in cumulative foreign currency
translation adjustments.
F-5
2. COMPREHENSIVE INCOME (LOSS) (CONTINUED)
Comprehensive income (loss) for the three and six months ended September 30,
2002 and 2001 is as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
Net loss $ (67,848,928) $ (12,612,772)
Foreign currency translation adjustments 5,352 14,813
Unrealized loss on marketable securities (744,650) (1,886,923)
---------------- ----------------
Comprehensive loss $ (68,618,226) $ (14,484,882)
================ ================
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
Net loss $ (113,101,348) $ (20,955,318)
Foreign currency translation adjustments 55,260 4,238
Unrealized loss on marketable securities (1,721,901) (1,877,741)
---------------- ----------------
Comprehensive loss $ (114,767,989) $ (22,828,821)
================= ================
3. NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding during the period. Basic net loss per share
excludes any dilutive effect from stock options and the 3 3/4% Convertible
Subordinated Notes due 2007 (the "3 3/4% Notes"). The Company continues to be in
a net loss position and, therefore, diluted net loss per share is the same
amount as basic net loss per share. Certain securities were not included in the
computations of diluted net loss per share for the three and six months ended
September 30, 2002 and 2001 because they would have an antidilutive effect due
to net losses for such periods. These securities include (i) outstanding stock
options and awards with respect to 12,334,949 and 9,523,679 shares of common
stock in the three and six months ended September 30, 2002 and 2001 and (ii)
2,952,030 shares of common stock issuable upon conversion of the 3 3/4% Notes in
the three and six months ended September 30, 2002 and 2001, respectively.
4. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC
In December 2001, the Company announced a strategic relationship with Reliant
Pharmaceuticals, LLC, a privately held pharmaceutical company marketing branded,
prescription pharmaceutical products to primary care physicians in the U.S.
As part of the strategic relationship, in December 2001, the Company purchased
approximately 63% of an offering by Reliant of its Series C Convertible
Preferred Units, representing approximately 19% of the equity interest in
Reliant, for a purchase price of $100 million. The investment is being accounted
for under the equity method of accounting because Reliant is organized as a
F-6
4. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC (CONTINUED)
limited liability company which is treated in a manner similar to a partnership.
Because, at the time of the Company's investment, Reliant had an accumulated
deficit from operations and a deficit in members capital, under applicable
accounting rules, the Company's share of Reliant's losses from the date of the
investment is being recognized in proportion to the Company's percentage
participation in the Series C financing, and not in proportion to its percentage
ownership interest in Reliant. The Company records its equity in the income or
losses of Reliant three months in arrears. Reliant is a privately held company
over which the Company does not exercise control and it relies on the unaudited
financial statements prepared by Reliant and provided to the Company to
calculate its share of Reliant's losses in the Company's consolidated statements
of operations. The Company anticipates that Reliant will have substantial net
losses through 2003, and accordingly, recorded its 63% share of such losses in
its consolidated financial statements beginning in the quarter ended March 31,
2002.
Summarized financial information of Reliant for the three and six months ended
June 30, 2002 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, 2002 JUNE 30, 2002
---------------------------- ------------- -------------
Revenues $ 42,159 $ 100,769
Costs and expenses 89,353 177,814
Net Loss (47,048) (76,692)
In connection with the Company's $100 million equity investment in Reliant, the
Company is in the process of allocating its proportionate share of the assets
acquired and liabilities assumed in accordance with the guidance set forth in
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." The Company took a $2.7 million noncash charge for in-process
research and development through the Consolidated Statements of Operations under
the caption "Equity in losses of Reliant Pharmaceuticals, LLC" in fiscal 2002.
The $2.7 million noncash charge is related to management's current estimate of
the amount of the purchase price to be allocated to in-process research and
development. This analysis of the purchase price allocation is preliminary and
the amount of in-process research and development is subject to future
adjustment.
TERMINATION OF PROPOSED MERGER TRANSACTION WITH RELIANT
On March 20, 2002, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Reliant. On August 14, 2002, the Company and Reliant announced
the mutual termination of the Merger Agreement. The companies agreed to
terminate due to general market conditions. There were no payments triggered by
the mutual termination and each company will bear its own legal and transaction
fees. As a result of the termination of the Merger Agreement, the Company
expensed approximately $2.7 million in the three months ended September 30, 2002
of deferred merger costs.
5. MINIMUM REVENUE AGREEMENT
In August 2002, the Company announced the regulatory approval and expected
commercial launch of Risperdal Consta(TM) in Germany and the United Kingdom.
Under the Company's agreements with Janssen Pharmaceutica, Inc. ("Janssen") and
based on the foregoing, certain minimum revenues relating to the Company's sales
of Risperdal Consta under a manufacturing and supply agreement are to be paid by
Janssen to the Company in minimum annual amounts for up to ten years beginning
in calendar 2003. The actual amount of such minimum revenues will be determined
by a formula and are currently estimated to aggregate approximately $150
million. The minimum revenue obligation will be satisfied upon receipt by the
Company of revenues relating to the sales of Risperdal Consta equaling such
aggregate amount of minimum revenues.
F-7
6. RESTRUCTURING OF OPERATIONS
On August 26, 2002, the Company announced a restructuring program to reduce its
cost structure as a result of the Company's expectations regarding the financial
impact of a delay in the U.S. launch of Risperdal Consta by its partner Janssen.
The restructuring program reduced the Company's workforce by 122 employees,
representing 23% of its total workforce and includes plans for consolidation and
closure of certain leased facilities in Cambridge, Massachusetts, closure of the
Company's medical affairs office in Cambridge, England, write-off of leasehold
improvements at leased facilities being vacated and reductions of other
expenses. The workforce reductions were made across all functions of the
Company. Under the restructuring plan, the Company is focusing its development
activities on those programs that are in the later stages of clinical
development and those programs that involve the most productive collaborations.
The Company is moving aggressively forward in evaluating and prioritizing the
programs that offer the greatest commercial potential.
In connection with the restructuring program, the Company recorded a charge of
approximately $3.7 million in the Consolidated Statements of Operations in the
quarter ended September 30, 2002, which consisted of approximately $1.5 million
in employee separation costs, including severance and related benefits, and
approximately $2.2 million in facility consolidation and closure costs,
including significant estimates relating to a lease cancellation fee and the
length of time it will take to sublease certain of the Company's facilities. As
of September 30, 2002, the Company had paid out approximately $978,000 and
$210,000 in employee separation costs and facility closure costs, respectively.
The employee separation costs and the facility consolidation and closure costs
were accrued under Emerging Issues Task Force ("EITF") No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)."
Pursuant to the restructuring plan, the following charges and payments have been
recorded during the quarter ended September 30, 2002:
BALANCE, PAYMENTS BALANCE,
JUNE 30, CHARGE FOR FOR THE SEPTEMBER 30,
TYPE OF LIABILITY 2002 THE PERIOD PERIOD 2002
------------------------------------- ---------- ----------- ----------- -------------
Employee termination benefit costs $ -- $ 1,461,881 $ (977,845) $ 484,036
Facility closure costs -- 2,219,838 (209,977) 2,009,861
---------- ----------- ----------- -----------
Total $ -- $ 3,681,719 $(1,187,822) $ 2,493,897
========== =========== =========== ===========
F-8
7. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement is
effective for fiscal years beginning after May 15, 2002. SFAS No. 145 rescinds
Statement No. 4, which requires all gains and losses from extinguishment of debt
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. As a result, the criteria in Accounting Principles
Board Opinion No. 30 will be used to classify those gains and losses. SFAS No.
145 also amends Statement No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. The Company adopted this
statement effective April 1, 2002 and the adoption did not have an impact on its
financial statements and result of operations.
In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company does
not believe that the adoption will have a material impact on its financial
statements and result of operations. The restructuring charge recorded in the
Consolidated Statements of Operations in the quarter ended September 30, 2002
was, and any future charges or credits related to the restructuring program
undertaken on August 26, 2002 will also be, accounted for under the guidance set
forth in EITF Issue No. 94-3.
8. SUBSEQUENT EVENT
On November 7, 2002, the Company announced that it had filed registration
statements with the Securities and Exchange Commission relating to a proposed
exchange offer involving holders of its currently outstanding 3.75% Convertible
Subordinated Notes due 2007. In the proposed exchange offer, the Company will
offer up to $115 million aggregate principal amount of its new 6.52% Convertible
Senior Subordinated Notes due 2009 for up to an aggregate principal amount of
$200 million of its currently outstanding 3.75% convertible notes. In addition,
Alkermes will offer to the holders of its existing notes that participate in the
exchange offer, the right to purchase for cash up to an additional $50 million
of its new notes.
F-9
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alkermes, Inc.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of Alkermes, Inc.
and subsidiaries (the "Company") as of March 31, 2002 and 2001, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Alkermes, Inc. and subsidiaries as
of March 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
May 15, 2002
F-10
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
--------------------------------------------------------------------------------
ASSETS
2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 16,023,074 $ 5,923,282
Short-term investments 136,323,768 249,004,850
Receivables from collaborative arrangements 19,039,706 10,951,763
Prepaid expenses and other current assets 5,249,797 5,726,610
------------- -------------
Total current assets 176,636,345 271,606,505
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land 235,000 235,000
Building 5,058,936 4,888,469
Furniture, fixtures and equipment 49,558,745 43,432,360
Leasehold improvements 15,016,553 14,401,828
Construction in progress 26,497,064 562,331
------------- -------------
96,366,298 63,519,988
Less accumulated depreciation and amortization (34,530,467) (27,200,590)
------------- -------------
61,835,831 36,319,398
------------- -------------
INVESTMENTS 9,126,093 73,416,252
------------- -------------
INVESTMENT IN RELIANT PHARMACEUTICALS, LLC 94,596,536 --
------------- -------------
OTHER ASSETS 8,155,472 9,955,060
------------- -------------
TOTAL ASSETS $ 350,350,277 $ 391,297,215
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
2002 2001
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 20,764,375 $ 9,414,327
Accrued interest 1,013,521 2,158,087
Deferred revenue 7,083,516 8,523,326
Long-term obligations - current portion 14,025,000 10,966,626
------------- -------------
Total current liabilities 42,886,412 31,062,366
------------- -------------
LONG-TERM OBLIGATIONS 7,800,000 11,825,000
------------- -------------
CONVERTIBLE SUBORDINATED NOTES 200,000,000 200,000,000
------------- -------------
COMMITMENTS (Note 11)
SHAREHOLDERS' EQUITY:
Capital stock, par value $.01 per share:
authorized, 4,550,000 shares; none issued
Common stock, par value $.01 per share:
authorized, 160,000,000 shares; issued, 64,225,395 and 63,124,248
shares at March 31, 2002 and 2001, respectively 642,254 631,243
Non-voting common stock, par value $.01 per share:
authorized, 450,000 shares; issued, 382,632
shares at March 31, 2002 and 2001 3,826 3,826
Additional paid-in capital 444,425,742 427,129,226
Deferred compensation (3,162,448) (1,024,303)
Accumulated other comprehensive income 1,619,541 4,179,938
Accumulated deficit (343,865,050) (282,510,081)
------------- -------------
Total shareholders' equity 99,663,865 148,409,849
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 350,350,277 $ 391,297,215
============= =============
See notes to consolidated financial statements.
F-11
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
2002 2001 2000
REVENUES:
Research and development revenue under collaborative
arrangements $ 54,101,513 $ 56,029,865 $ 22,920,357
------------- ------------- -------------
EXPENSES:
Research and development 92,092,381 68,773,691 54,482,672
General and administrative 24,386,425 19,611,284 14,878,753
Noncash compensation (income) expense - attributed to research
and development -- (2,447,663) 29,492,656
------------- ------------- -------------
Total expenses 116,478,806 85,937,312 98,854,081
------------- ------------- -------------
NET OPERATING LOSS (62,377,293) (29,907,447) (75,933,724)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest and other income 15,301,885 22,436,856 11,538,884
Interest expense (8,876,097) (9,398,724) (3,652,498)
------------- ------------- -------------
Total other income 6,425,788 13,038,132 7,886,386
------------- ------------- -------------
EQUITY IN LOSSES OF RELIANT PHARMACEUTICALS, LLC (5,403,464) -- --
------------- ------------- -------------
NET LOSS (61,354,969) (16,869,315) (68,047,338)
PREFERRED STOCK DIVIDENDS -- 7,267,331 9,388,803
------------- ------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (61,354,969) $ (24,136,646) $ (77,436,141)
============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.96) $ (0.43) $ (1.52)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 63,668,596 55,746,462 51,014,956
============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NET LOSS $ (61,354,969) $ (16,869,315) $ (68,047,338)
Foreign currency translation adjustments (27,952) (72,876) (17,813)
Unrealized (loss) gain on marketable securities (2,532,445) (2,489,250) 6,806,750
------------- ------------- -------------
COMPREHENSIVE LOSS $ (63,915,366) $ (19,431,441) $ (61,258,401)
============= ============= =============
See notes to consolidated financial statements.
F-12
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
$3.25 CONVERTIBLE 1999 CONVERTIBLE
EXCHANGEABLE EXCHANGEABLE
PREFERRED STOCK PREFERRED STOCK
---------------------- --------------------- COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES
---------- ---------- --------- --------- ------------
BALANCE, MARCH 31, 1999 2,300,000 $ 23,000 -- $ -- 49,964,918
Issuance of common stock upon exercise of options or
vesting of restricted stock awards -- -- -- -- 1,692,850
Issuance of common stock with warrants exercised -- -- -- -- 1,755,002
Issuance of 1999 convertible exchangeable preferred
stock -- -- 3,500 35 --
Conversion and redemption of $3.25 convertible
exchangeable preferred stock (1,000) (10) -- -- 3,374
Conversion of 1999 convertible exchangeable preferred
stock -- -- (3,500) (35) 322,376
Conversion of note payable to corporate partner -- -- -- -- 215,476
Options and restricted awards canceled -- -- -- -- --
Noncash compensation -- -- -- -- --
Amortization of noncash compensation -- -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- -- --
Unrealized gain on marketable securities -- -- -- -- --
Net loss for year -- -- -- -- --
Preferred stock dividends -- -- -- -- --
--------- ---------- --------- --------- -----------
BALANCE, MARCH 31, 2000 2,299,000 22,990 -- -- 53,953,996
--------- ---------- --------- --------- -----------
[Additional columns below]
[Continued from above table, first column(s) repeated]
NON-VOTING
COMMON STOCK ADDITIONAL
COMMON STOCK -------------------- PAID-IN
AMOUNT SHARES AMOUNT CAPITAL
------------ -------- ------- --------------
BALANCE, MARCH 31, 1999 $ 499,649 -- $ -- $ 346,599,608
Issuance of common stock upon exercise of options or vesting of
restricted stock awards 16,928 -- -- 6,249,901
Issuance of common stock with warrants exercised 17,550 -- -- 6,217,628
Issuance of 1999 convertible exchangeable preferred stock -- -- -- 34,999,965
Conversion and redemption of $3.25 convertible exchangeable
preferred stock 34 -- -- (24)
Conversion of 1999 convertible exchangeable preferred stock 3,224 382,632 3,826 157,445
Conversion of note payable to corporate partner 2,155 -- -- 5,247,030
Options and restricted awards canceled -- -- -- (754,849)
Noncash compensation -- -- -- 28,861,232
Amortization of noncash compensation -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
Unrealized gain on marketable securities -- -- -- --
Net loss for year -- -- -- --
Preferred stock dividends -- -- -- --
---------- -------- --------- -------------
BALANCE, MARCH 31, 2000 539,540 382,632 3,826 427,577,936
---------- -------- --------- -------------
[Additional columns below]
[Continued from above table, first column(s) repeated]
OTHER COMPREHENSIVE
INCOME (LOSS)
----------------------------
FOREIGN UNREALIZED
CURRENCY GAIN (LOSS) ON
DEFERRED TRANSLATION MARKETABLE ACCUMULATED
COMPENSATION ADJUSTMENTS SECURITIES DEFICIT TOTAL
------------ ----------- ------------ ------------- ------------
BALANCE, MARCH 31, 1999 $(9,932,199) $ (46,873) $ -- $(180,937,294) $156,205,891
Issuance of common stock upon exercise of
options or vesting of restricted stock awards -- -- -- -- 6,266,829
Issuance of common stock with warrants exercised -- -- -- -- 6,235,178
Issuance of 1999 convertible exchangeable
preferred stock -- -- -- -- 35,000,000
Conversion and redemption of $3.25 convertible
exchangeable preferred stock -- -- -- -- --
Conversion of 1999 convertible exchangeable
preferred stock -- -- -- -- 164,460
Conversion of note payable to corporate partner -- -- -- -- 5,249,185
Options and restricted awards canceled 754,849 -- -- -- --
Noncash compensation (28,861,232) -- -- -- --
Amortization of noncash compensation 29,492,656 -- -- -- 29,492,656
Cumulative foreign currency translation
adjustments -- (17,813) -- -- (17,813)
Unrealized gain on marketable securities -- -- 6,806,750 -- 6,806,750
Net loss for year -- -- -- (68,047,338) (68,047,338)
Preferred stock dividends -- -- -- (9,388,803) (9,388,803)
----------- -------- ----------- ------------ ------------
BALANCE, MARCH 31, 2000 (8,545,926) (64,686) 6,806,750 (258,373,435) 167,966,995
----------- -------- ----------- ------------ ------------
[Continued]
F-13
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
$3.25 CONVERTIBLE 1999 CONVERTIBLE
EXCHANGEABLE EXCHANGEABLE NON-VOTING
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
---------------------- ---------------- -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ------- ------ --------- ------ ------- -------
BALANCE, MARCH 31, 2000 2,299,000 22,990 -- -- 53,953,996 539,540 382,632 3,826
Issuance of common stock upon
exercise of options or vesting of
restricted stock awards -- -- -- -- 1,251,334 12,513 -- --
Issuance of common stock to
collaborative partner -- -- -- -- 160,030 1,600 -- --
Conversion and redemption of $3.25
convertible exchangeable preferred
stock (2,299,000) (22,990) -- -- 7,758,888 77,590 -- --
Noncash compensation -- -- -- -- -- -- -- --
Amortization of noncash compensation -- -- -- -- -- -- -- --
Cumulative foreign currency
translation adjustments -- -- -- -- -- -- -- --
Unrealized gain on marketable
securities -- -- -- -- -- -- -- --
Net loss for year -- -- -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- -- -- --
--------- ------- ------ ------ ---------- ------- ------- -----
BALANCE, MARCH 31, 2001 -- -- -- -- 63,124,248 631,243 382,632 3,826
Issuance of common stock upon
exercise of options or vesting of
restricted stock awards -- -- -- -- 772,502 7,725 -- --
Conversion of note payable to
corporate partner -- -- -- -- 328,645 3,286 -- --
Options and restricted awards canceled -- -- -- -- -- -- -- --
Noncash compensation -- -- -- -- -- -- -- --
Amortization of noncash compensation -- -- -- -- -- -- -- --
Cumulative foreign currency
translation adjustments -- -- -- -- -- -- -- --
Unrealized gain on marketable
securities -- -- -- -- -- -- -- --
Net loss for year -- -- -- -- -- -- -- --
--------- ------- ------ ------ ---------- ------- ------- -----
BALANCE, MARCH 31, 2002 -- $ -- -- $-- 64,225,395 $ 642,254 382,632 $3,826
========= ======= ====== ====== ========== ========= ======= ======
[Additional columns below]
[Continued from above table, first column(s) repeated]
OTHER COMPREHENSIVE
INCOME (LOSS)
------------------------------
FOREIGN UNREALIZED
ADDITIONAL CURRENCY GAIN (LOSS) ON
PAID-IN DEFERRED TRANSLATION MARKETABLE ACCUMULATED
CAPITAL COMPENSATION ADJUSTMENTS SECURITIES DEFICIT TOTAL
------------ ----------- --------- ----------- ------------- -------------
BALANCE, MARCH 31, 2000 427,577,936 (8,545,926) (64,686) 6,806,750 (258,373,435) 167,966,995
Issuance of common stock upon
exercise of options or vesting
of restricted stock awards 4,601,681 -- -- -- -- 4,614,194
Issuance of common stock to
collaborative partner 4,998,378 -- -- -- -- 4,999,978
Conversion and redemption of $3.25
convertible exchangeable
preferred stock (79,483) -- -- -- -- (24,883)
Noncash compensation (9,969,286) 9,969,286 -- -- -- --
Amortization of noncash compensation -- (2,447,663) -- -- -- (2,447,663)
Cumulative foreign currency
translation adjustments -- -- (72,876) -- -- (72,876)
Unrealized gain on marketable
securities -- -- -- (2,489,250) -- (2,489,250)
Net loss for year -- -- -- -- (16,869,315) (16,869,315)
Preferred stock dividends -- -- -- -- (7,267,331) (7,267,331)
------------ ----------- --------- ----------- ------------- -------------
BALANCE, MARCH 31, 2001 427,129,226 (1,024,303) (137,562) 4,317,500 (282,510,081) 148,409,849
Issuance of common stock upon
exercise of options or vesting
of restricted stock awards 5,711,634 -- -- -- -- 5,719,359
Conversion of note payable to
corporate partner 7,503,044 -- -- -- -- 7,506,330
Options and restricted awards
canceled (198,783) 198,783 -- -- -- --
Noncash compensation 3,631,656 (3,631,656) -- -- -- --
Amortization of noncash compensation 648,965 1,294,728 -- -- -- 1,943,693
Cumulative foreign currency
translation adjustments -- -- (27,952) -- -- (27,952)
Unrealized gain on marketable
securities -- -- -- (2,532,445) -- (2,532,445)
Net loss for year -- -- -- -- (61,354,969) (61,354,969)
------------ ----------- --------- ----------- ------------- -------------
BALANCE, MARCH 31, 2002 $444,425,742 $(3,162,448) $(165,514) $ 1,785,055 $(343,865,050) $ 99,663,865
============ =========== ========= =========== ============= =============
(Concluded)
See notes to consolidated financial statements.
F-14
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (61,354,969) $ (16,869,315) $ (68,047,338)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation, amortization and other noncash expenses 10,501,303 7,697,662 6,430,934
Equity in losses of Reliant Pharmaceuticals, LLC 5,403,464 -- --
Noncash interest expense 328,626 509,229 776,347
Compensation relating to issuance of common stock and
grant of stock options and awards made -- (2,447,663) 29,492,656
Adjustments to other assets 89,536 270,064 (304,917)
Changes in assets and liabilities:
Receivables from collaborative arrangements (8,087,943) (7,804,381) 367,639
Prepaid expenses and other current assets 476,309 (1,331,415) (2,162,290)
Accounts payable and accrued expenses 11,402,018 3,343,574 1,429,472
Deferred revenue (1,439,810) (131,736) (932,871)
Other long-term liabilities -- (1,224,258) (79,591)
------------- ------------- -------------
Net cash used by operating activities (42,681,466) (17,988,239) (33,029,959)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Reliant Pharmaceuticals, LLC (100,000,000) -- --
Additions to property, plant and equipment (33,384,402) (10,019,024) (5,756,987)
Proceeds from the sale of equipment 371,385 -- --
Purchases of available-for-sale short-term investments (180,541,438) (158,203,910) --
Sales of available-for-sale short-term investments 306,549,599 103,348,135 --
(Purchases) maturities of held-to-maturity short-term
investments, net (14,901,024) 139,909,645 (176,963,500)
Maturities (purchases) of held-to-maturity long-term
investments, net 64,290,159 (53,321,814) (11,658,371)
Increase in other assets (310,000) (521,456) (131,823)
------------- ------------- -------------
Net cash provided by (used in) investing activities 42,074,279 21,191,576 (194,510,681)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 5,719,359 4,614,194 12,502,007
Proceeds from loans 35,000,000 -- --
Repayment of loan (25,000,000) -- --
Payment of long-term obligations (4,983,334) (5,625,000) (7,200,000)
Proceeds from issuance of common stock to collaborative
partner -- 4,999,978 --
Payment of preferred stock dividends -- (7,267,331) (9,224,343)
Payment for redemption of $3.25 convertible exchangeable
preferred stock -- (24,883) --
Proceeds from issuance of 1999 convertible exchangeable
preferred stock -- -- 35,000,000
Proceeds from issuance of convertible subordinated notes -- -- 200,000,000
Payment of financing costs in connection with convertible
subordinated notes -- -- (6,532,740)
------------- ------------- -------------
Net cash provided by (used in) financing activities 10,736,025 (3,303,042) 224,544,924
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (29,046) (77,655) (19,073)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,099,792 (177,360) (3,014,789)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,923,282 6,100,644 9,115,432
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,023,074 $ 5,923,284 $ 6,100,643
============= ============= =============
SUPPLEMENTARY INFORMATION:
Cash paid for interest $ 7,792,031 $ 8,396,088 $ 2,029,011
============= ============= =============
Noncash activities:
Note payable and accrued interest converted to common
stock $ 7,506,330 $ -- $ 5,249,185
============= ============= =============
Conversion of $3.25 convertible exchangeable preferred
stock to common stock $ -- $ 110,459,074 $ 50,000
============= ============= =============
1999 preferred stock dividends exchanged for common stock $ -- $ -- $ 164,460
============= ============= =============
See notes to consolidated financial statements.
F-15
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
1. THE COMPANY
Alkermes, Inc. (the "Company") is an emerging pharmaceutical company
developing products based on its sophisticated drug delivery technologies.
The Company has several areas of focus, including controlled,
extended-release of injectable drugs utilizing its ProLease(R) and
Medisorb(R) delivery systems and the development of inhaled pharmaceutical
products based on its proprietary Advanced Inhalation Research, Inc.
("AIR(TM)") pulmonary delivery system. The Company's business strategy is
twofold. The Company partners its technology systems and drug delivery
expertise with many of the world's finest pharmaceutical companies and
also develops novel, proprietary drug candidates for its own account.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Alkermes, Inc. and its wholly owned subsidiaries,
Alkermes Controlled Therapeutics, Inc. ("ACTI"), Alkermes Controlled
Therapeutics Inc. II ("ACT II"), Alkermes Investments, Inc., Alkermes
Development Corporation II ("ADC II"), Alkermes Europe, Ltd. and AIR. ADC
II serves as the one percent general partner of Alkermes Clinical
Partners, L.P. ("Clinical Partners"), a limited partnership engaged in a
research and development project with the Company (see Note 9). ADC II's
investment in Clinical Partners is accounted for under the equity method
of accounting, for which the carrying value was zero at March 31, 2002 and
2001 (see Note 9). All significant intercompany balances and transactions
have been eliminated.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain financial
instruments. The carrying amounts of cash, cash equivalents, accounts
payable and accrued expenses approximate fair value because of their
short-term nature. Marketable equity securities have been designated as
"available-for-sale" and are recorded as other assets in the consolidated
financial statements at fair value with any unrealized gains or losses
included as a component of accumulated other comprehensive income,
included in shareholders' equity. The carrying amounts of the Company's
debt instruments with its bank and corporate partner approximate fair
value. The carrying amount of the Company's 3 3/4% Convertible
Subordinated Notes due 2007 (the "3 3/4% Notes") was $200,000,000. The
fair value of the 3 3/4% Notes was $211,107,000 at March 31, 2002. The
fair value of the 3 3/4% Notes was determined from a quoted market source.
F-16
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE - Basic and diluted net loss per share are computed
using the weighted average number of common shares outstanding during the
period. Basic net loss per share excludes any dilutive effect from stock
options, warrants, convertible exchangeable preferred stock and
convertible subordinated notes. The Company continues to be in a net loss
position and, therefore, diluted net loss per share is the same amount as
basic net loss per share. Certain securities were not included in the
computation of diluted net loss per share for the years ended March 31,
2002, 2001 and 2000 because they would have an antidilutive effect due to
net losses for such periods. These securities include (i) options and
awards with respect to 11,644,972, 9,674,703 and 7,706,790 shares of
common stock in fiscal 2002, 2001 and 2000, respectively; (ii) warrants to
purchase 1,800 shares of common stock in fiscal 2000; (iii) 7,760,504
shares of common stock issuable upon conversion of the $3.25 convertible
exchangeable preferred stock in fiscal 2000; and (iv) 2,952,030 shares of
common stock issuable upon conversion of the 3 3/4% Notes in fiscal 2002,
2001 and 2000.
REVENUE RECOGNITION - Research and development revenue consists of
non-refundable research and development funding under collaborative
arrangements with various corporate partners. Research and development
funding generally compensates the Company for formulation, preclinical and
clinical testing related to the collaborative research programs, and is
recognized as revenue at the time the research and development activities
are performed under the terms of the related agreements, when the
corporate partner is obligated to pay and when no future performance
obligations exist.
Fees for the licensing of product rights on initiation of collaborative
arrangements are recorded as deferred revenue upon receipt and recognized
as income on a systematic basis (based upon the timing and level of work
performed or on a straight-line basis if not otherwise determinable) over
the period that the related products or services are delivered or
obligations as defined in the agreement are performed. Revenue from
milestone or other upfront payments is recognized as earned in accordance
with the terms of the related agreements. These agreements may require
deferral of revenue recognition to future periods.
RESEARCH AND DEVELOPMENT EXPENSES - The Company's research and development
expenses include salaries and related benefits, laboratory supplies,
temporary help costs, external research costs, consulting costs, occupancy
costs, depreciation expense and other allocable costs directly related to
its research and development activities. Research and development expenses
are incurred in conjunction with the development of the Company's
technologies, proprietary product candidates, collaborators' product
candidates and in-licensing arrangements. External research costs relate
to toxicology studies, pharmacokinetic studies and clinical trials that
are performed under contract by external companies, hospitals or medical
centers for the Company. All such costs are charged to research and
development expenses as incurred.
STOCK OPTIONS AND AWARDS - The Company has elected to continue to follow
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," for accounting for its employee stock options. Under
APB No. 25, no compensation expense is recognized with respect to the
grant of any stock options to employees if the exercise price of the
Company's employee stock options equals the fair market price of the
underlying stock on the date the option is granted.
F-17
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NONCASH COMPENSATION (INCOME) EXPENSE - In fiscal 2002, noncash
compensation expense was primarily related to restricted stock awards
granted during fiscal 2002 and is included in research and development
expenses and general and administrative expenses, as appropriate. Prior to
fiscal 2002, noncash compensation (income) expense primarily related to
equity transactions at the Company's subsidiary, AIR. Noncash compensation
expense has been recorded in accordance with the intrinsic-value method
prescribed by APB No. 25, "Accounting for Stock Issued to Employees," for
common stock issued and stock options and awards granted to employees.
Stock or other equity-based compensation for non-employees must be
accounted for under the fair value-based method as required by SFAS No.
123, "Accounting for Stock-Based Compensation," and Emerging Issues Task
Force ("EITF") No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." Under this method, the equity-based
instrument is measured at the fair value of the equity instrument on the
date of vesting. The measurement date is generally the issuance date for
employees and directors and the vesting date for consultants. The
resulting noncash (income) expense has been recorded in the statements of
operations upon issuance or over the vesting period of the common stock,
stock option or award.
INCOME TAXES - The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes are recognized at
rates expected to be in effect when temporary differences between the
financial reporting and income tax basis of assets and liabilities
reverse. Deferred taxes are not provided on the undistributed earnings of
subsidiaries operating outside the U.S. that have been, or are intended to
be, permanently reinvested (see Note 7).
CASH EQUIVALENTS - Cash equivalents, with purchased maturities of three
months or less, consist of money market accounts, mutual funds and an
overnight repurchase agreement. The repurchase agreement is fully
collateralized by U.S. Government securities.
INVESTMENTS - At March 31, 2002, debt securities classified as
"available-for-sale" are recorded at fair value, which was determined
based on quoted market prices. In order to provide more flexibility with
the Company's investment portfolio during fiscal 2002, the Company began
to treat the remaining portion of its "held-to-maturity" portfolio as
"available-for-sale."
At March 31, 2001, debt securities that the Company had the positive
intent and ability to hold to maturity were reported at amortized cost and
were classified as "held-to-maturity." All other debt securities were
classified as "available-for-sale" and were recorded at fair value. Fair
value was determined based on quoted market prices. In order to provide
more flexibility with the Company's investment portfolio, during fiscal
2001, the Company began to treat a portion of its short-term investments,
amounting to approximately $119,400,000 (which approximated fair market
value) as "available-for-sale." Short-term investments classified as
"held-to-maturity" had maturity dates within one year from March 31, 2001.
All short-term and long-term investments consist of U.S. Treasury and
other government securities, commercial paper and corporate notes.
Investments classified as long-term at March 31, 2002 and March 31, 2001
include securities totaling $9,126,093 and $5,861,000, respectively, held
as collateral under certain letters of credit, lease and loan agreements.
F-18
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term investments and investments consist of the following:
Amortized Cost
--------------------------------
Due Due Amortized Gross Unrealized Aggregate
Under 1 Year After 1 Year Cost Gains Losses Fair Value
-------------- -------------- ---------- ----------- ----------- -------------
March 31, 2002
Available-for-sale
securities:
Investments--
long-term -
U.S.
Government
obligations..... $ 9,126,093 $ -- $ 9,126,093 $ -- $ -- $ 9,126,093
------------ ------------ ------------ ---------- -------- ------------
Short-term
investments:
U.S. Government
obligations...... 25,973,400 10,549,046 36,522,446 735,428 (2,884) 37,254,990
Corporate debt
securities....... 53,408,802 45,174,465 98,583,267 491,579 (6,068) 99,068,778
------------ ------------ ------------ ---------- -------- ------------
79,382,202 55,723,511 135,105,713 1,227,007 (8,952) 136,323,768
------------ ------------ ------------ ---------- -------- ------------
Total.............. $ 88,508,295 $ 55,723,511 $144,231,806 $1,227,007 $ (8,952) $145,449,861
============ ============ ============ ========== ======== ============
March 31, 2001
Held-to-maturity
securities:
U.S. Government
obligations....... $ 14,866,529 $ 49,177,530 $ 64,044,059 $ 420,188 $ -- $ 64,464,247
Corporate debt
securities....... 114,875,685 18,377,987 133,253,672 2,308,989 (17,552) 135,545,109
------------ ------------ ------------ ---------- -------- ------------
129,742,214 67,555,517 197,297,731 2,729,177 (17,552) 200,009,356
------------ ------------ ------------ ---------- -------- ------------
Available-for-sale
securities:
U.S. Government
obligations...... 10,708,654 33,554,543 44,263,197 2,354,979 (1,541) 46,616,635
Corporate debt
securities....... 54,709,256 23,359,160 78,068,416 467,207 (28,887) 78,506,736
------------ ------------ ------------ ---------- -------- ------------
65,417,910 56,913,703 122,331,613 2,822,186 (30,428) 125,123,371
------------ ------------ ------------ ---------- -------- ------------
Total.............. $195,160,124 $124,469,220 $319,629,344 $5,551,363 $(47,980) $325,132,727
============ ============ ============ ========== ======== ============
The Company also has investments in marketable equity securities
(approximately $1,429,000 and $3,574,000 at March 31, 2002 and 2001,
respectively) that are currently classified as "available-for-sale"
securities under the caption "other assets." This caption also includes
non-marketable warrants to purchase securities. The warrants are recorded
at the lower of cost or market. Unrealized gains (losses) are included in
accumulated other comprehensive income in shareholders' equity.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Depreciation and amortization are recorded using the straight-line
method over the following estimated useful lives of the assets: building -
25 years; furniture, fixtures and equipment - 3 to 7 years; or, in the case
of leasehold improvements, over the lease terms - 1 to 20 years.
OTHER ASSETS - Other assets consist primarily of unamortized debt offering
costs and purchased patents, which are being amortized over seven and five
years, respectively, and certain equity securities (see discussion in
"Investments" above). Other assets also include merger costs related to the
proposed merger transaction with Reliant Pharmaceuticals, LLC ("Reliant").
F-19
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE - Short Term - During fiscal 1998, the Company received
an upfront payment from ALZA Corporation ("ALZA") to fund clinical
development of Cereport(R). This amount has been recorded as deferred
revenue and is being amortized based on actual costs incurred for the
clinical development of Cereport. In addition, the Company received
prepayments for research and development costs under collaborative
research projects with other corporate partners that are being amortized
over the estimated term of the agreements using the straight-line method.
The Company has also received cash milestone payments that are creditable
against future royalty payments which are being recognized upon product
sales of Nutropin Depot.
DEFERRED COMPENSATION - Deferred compensation is related to awards under
the Company's 1991 Restricted Common Stock Award Plan and pursuant to
compensatory stock options and restricted common stock and is amortized
over vesting periods ranging from one to five years.
401(K) PLAN - The Company's 401(k) Retirement Savings Plan (the "401(k)
Plan") covers substantially all of its employees. Eligible employees may
contribute up to 100% of their eligible compensation, subject to certain
Internal Revenue Service limitations. The Company matches a portion of
employee contributions. The match is equal to 50% of the first 6% of
deferrals and is fully vested when made. During fiscal 2002, 2001 and
2000, the Company contributed approximately $863,000, $632,000 and
$505,000, respectively, to match employee deferrals under the 401(k) Plan.
RECLASSIFICATIONS - Certain reclassifications have been made in fiscal
2001 and 2000 to conform to the presentation used in fiscal 2002.
COMPREHENSIVE INCOME - Comprehensive income is composed of net income and
other comprehensive income. Other comprehensive income includes certain
changes in the equity of the Company that are excluded from the net loss.
Specifically, other comprehensive income includes unrealized gains and
losses on the Company's "available-for-sale" securities and changes in the
cumulative foreign currency translation adjustments.
SEGMENTS - The Company's operations are treated as one operating segment
reporting to the chief operating decision-makers of the Company.
Accordingly, the segment disclosures contemplated by SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," are
not applicable.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - The Company adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," on
April 1, 2001. The adoption did not have any impact on the financial
position or results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is
effective for any business combinations initiated after June 30, 2001.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. On April 1, 2002 the Company adopted this statement and is in the
process of evaluating the impact that such adoption will have on its
financial statements. Under the new rules, goodwill is no longer be
amortized but will be subject to annual impairment tests in accordance
with the statements. Other identifiable intangible assets continue to be
amortized over their useful lives should they be determinable; otherwise,
they will be subject to the same annual impairment test. The Company, as
described in Note 8, did apply SFAS No. 141 to its equity method
investment since such investment occurred subsequent to June 30, 2001. Its
impact is discussed in Note 8.
F-20
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) - In August 2001, the FASB
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets or for Long-Lived Assets to Be
Disposed Of," in its entirety, and APB No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," only for segments to be disposed of. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. On April 1, 2002, the Company adopted
this statement, and such adoption had no significant impact on its
financial statements.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at March
31:
2002 2001
---------------- --------------
Accounts payable............... $ 14,829,096 $ 5,831,589
Accrued compensation........... 2,603,413 1,821,644
Accrued other.................. 3,331,866 1,761,094
---------------- --------------
$ 20,764,375 $ 9,414,327
================ ==============
4. SHAREHOLDERS' EQUITY
RESTRICTED STOCK PURCHASE AGREEMENTS/COMMON STOCK - During fiscal 1999,
the Company issued 7,361,016 shares of its common stock in conjunction
with its acquisition of AIR. Of these shares, 4,802,230 shares of common
stock were issued to key employees and consultants of AIR, the unvested
shares of which are subject to restricted stock purchase agreements. The
Company assumed these restricted stock purchase agreements entered into by
AIR. The restricted stock vests quarterly over a four-year period at
different amounts for each shareholder. At March 31, 2002 and 2001,
approximately 4,802,000 and 4,537,000 shares of restricted stock,
respectively, had vested. The agreements state that if the consulting or
employment relationship terminates within four years of issuance, the
Company shall have the right, but not the obligation, to repurchase the
non-vested shares from the shareholder at the share price initially paid
by the shareholder. During fiscal 2000, the Company exercised its right to
repurchase 83,602 shares of non-vested restricted stock.
F-21
4. SHAREHOLDERS' EQUITY (CONTINUED)
$3.25 PREFERRED STOCK - In March 1998, the Company completed a private
placement of 2,300,000 shares of its convertible exchangeable preferred
stock (the "$3.25 Preferred Stock") at $50.00 per share. Net proceeds to
the Company were approximately $110,500,000. The $3.25 Preferred Stock was
convertible at the option of the holder at any time, unless previously
redeemed or exchanged, into the Company's common stock at a conversion
rate of 3.3756 shares of common stock for each share of $3.25 Preferred
Stock.
In February 2001, the Company called, without penalty, for redemption the
then-outstanding 1,768,200 shares of the $3.25 Preferred Stock. In March
2001, prior to the redemption date, the holders of 1,767,724 shares of the
$3.25 Preferred Stock converted their shares into 5,967,124 shares of the
Company's common stock. The Company redeemed the remaining shares at a
redemption price of $52.275 per share plus accrued and unpaid dividends,
or approximately $25,000. Prior to February 2001, holders of 530,800
shares of $3.25 Preferred Stock converted their shares into 1,791,764
shares of the Company's common stock. During fiscal 2000, the holders of
1,000 shares of the $3.25 Preferred Stock converted their shares into
3,374 shares of the Company's common stock.
Dividends on the $3.25 Preferred Stock were cumulative from the date of
original issue and were paid quarterly, commenced on June 1, 1998, and
were paid each September 1, December 1, March 1 and June 1 thereafter, at
the annual rate of $3.25 per share. The final dividend payment was made on
March 1, 2001.
1999 PREFERRED STOCK - In April 1999, the Company amended its license
agreement with Genentech, Inc. ("Genentech") to expand its collaboration
for Nutropin Depot, an injectable long-acting formulation of Genentech's
recombinant human growth hormone based on the Company's ProLease drug
delivery system. Under the agreement, the companies have been conducting
expanded development activities, including clinical trials in an
additional indication, process and formulation development and
manufacturing. The agreement included milestone payments to reimburse the
Company for its past research expenditures incurred from January 1, 1999
through December 31, 2000 plus an additional $5 million. The milestone
payment for past research expenditures was earned in June 2000 when
Genentech launched Nutropin Depot for sale in the United States.
The terms of the collaboration included the purchase by Genentech of $35
million (3,500 shares) of newly issued redeemable convertible exchangeable
preferred stock of the Company (the "1999 Preferred Stock"). The 1999
Preferred Stock was convertible at Genentech's option into shares of
common stock and non-voting common stock during any period after September
1, 1999 that the closing price of the Company's common stock was above
$22.50 per share for at least 10 consecutive trading days. In February
2000, Genentech exercised its option to convert the 1999 Preferred Stock
together with accrued and unpaid dividends into 322,376 shares of voting
and 382,632 shares of non-voting common stock.
Dividends on the 1999 Preferred Stock were paid quarterly through March
2000 at a floating three-month LIBOR rate.
F-22
5. LONG-TERM OBLIGATIONS
Long-term obligations at March 31 consist of the following:
2002 2001
----------- -----------
Notes payable to a bank, bearing interest at fixed rates (6.97%-8.58%), payable
in monthly or quarterly installments, maturing in fiscal 2003 and 2004.......... $11,825,000 $16,808,334
Note payable to a corporate partner, bearing interest (8.50% at March 31, 2001)
at 2.5% above the one-year LIBOR, matured in fiscal 2002......................... -- 5,983,292
Other............................................................................... 10,000,000 --
----------- -----------
21,825,000 22,791,626
Less current portion................................................................ 14,025,000 10,966,626
----------- -----------
$ 7,800,000 $11,825,000
=========== ===========
The bank notes listed above are secured by a building and real property
pursuant to a mortgage and certain of the Company's equipment pursuant to
security agreements. The bank notes are also secured by cash collateral
(included in long-term investments at March 31, 2002) having a minimum
market value of the lesser of $1,000,000 or the outstanding principal
amount of the loan. Under the terms of the bank note agreement, the Company
is required to maintain a minimum unencumbered balance of cash and
permitted investments and a minimum ratio of unencumbered cash and net
quick assets to total liabilities as well as a minimum consolidated capital
base.
In October 1998, the Company converted a prepayment of royalties from a
former corporate partner, plus accrued interest, to a convertible
promissory note in the principal amount of $5,983,292 as a result of the
discontinuation of a collaboration. In accordance with the terms of the
convertible promissory note, the debt could be satisfied, at the Company's
option, in cash or the Company's common stock. In October 2001, and in
accordance with the scheduled maturity, the principal amount of the note,
together with accrued interest of $1,523,038, was converted into 328,645
shares of the Company's common stock.
In March 2002, the Company borrowed $10 million from one of its investment
managers under a loan agreement that is collateralized by a portion of its
short-term investments. The balance of the loan was $10 million at March
31, 2002 and was included in long-term obligations - current portion.
Interest is at the Federal Funds Rate plus 75 basis points (2.5% at March
31, 2002). The loan was repaid in April 2002.
At March 31, 2002, the maturities of the long-term obligations are as
follows:
2003.................. $ 14,025,000
2004.................. 7,800,000
------------
$ 21,825,000
============
F-23
6. 3 3/4% CONVERTIBLE SUBORDINATED NOTES
In February 2000, the Company issued $200 million principal amount of its
3 3/4% Notes which are due in 2007. The 3 3/4% Notes are convertible into
the Company's common stock, at the option of the holder, at a price of
$67.75 per share, subject to adjustment upon certain events. The 3 3/4%
Notes bear interest at 3 3/4% payable semi-annually, which commenced on
August 15, 2000. The 3 3/4% Notes are redeemable by the Company in cash at
any time prior to February 19, 2003 if the Company's stock price exceeds
$135.50 per share for at least 20 of the 30 trading days immediately prior
to the Company's delivery of the redemption notice. The 3 3/4% Notes are
also redeemable at any time on or after February 19, 2003 at certain
declining redemption prices. In certain circumstances, at the option of
the holders, the Company may be required to repurchase the 3 3/4% Notes.
The required repurchase may be in cash or, at the option of the Company,
in common stock, at 105% of the principal amount of the 3 3/4% Notes, plus
accrued and unpaid interest. As a part of the sale of the 3 3/4% Notes,
during fiscal 2000, the Company incurred approximately $6,530,000 of
offering costs which were recorded as other assets and are being amortized
over seven years, the term of the 3 3/4% Notes. The net proceeds to the
Company after offering costs were approximately $193,470,000. The Company
has reserved 2,952,030 shares of its common stock for issuance upon
conversion of the 3 3/4% Notes.
7. INCOME TAXES
At March 31, 2002, the Company has approximately $260,834,000 of net
operating loss ("NOL") carryforwards for United States federal income tax
purposes and approximately $18,806,000 of research and development tax
credits available to offset future federal income tax, subject to
limitations for alternative minimum tax. The NOL and research and
development credit carryforwards are subject to examination by the tax
authorities and expire in various years from 2002 through 2023.
The components of the net deferred income tax assets at March 31 are as
follows:
2002 2001
-------------- ---------------
NOL carryforwards, federal and state............... $ 70,680,000 $ 54,190,000
Tax benefit from stock option exercises............ 32,770,000 27,350,000
Tax credit carryforwards........................... 24,920,000 19,130,000
Capitalized research and development expenses, net
of amortization................................. 8,010,000 9,010,000
Alkermes Europe NOL carryforward................... 7,500,000 6,140,000
Other.............................................. 6,230,000 2,410,000
Less valuation allowance........................... (150,110,000) (118,230,000)
------------- -------------
$ -- $ --
============= =============
Tax benefits from stock option exercises will be credited to additional
paid-in capital when realized.
The valuation allowance has been provided because of the uncertainty of
realizing the future benefits of the net deferred income tax assets. The
valuation allowance increased by $22,488,000 from March 31, 2000 to March
31, 2001.
8. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC
In December 2001, the Company announced a strategic alliance with Reliant,
a privately held pharmaceutical company marketing branded, prescription
pharmaceutical products to primary care physicians in the U.S.
F-24
8. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC (CONTINUED)
As part of the alliance, in December 2001, the Company purchased
approximately 63% of an offering by Reliant of its Series C Convertible
Preferred Units, representing approximately 19% of the equity interest in
Reliant, for a purchase price of $100 million. The investment is being
accounted for under the equity method of accounting because Reliant is
organized as a limited liability company which is treated in a manner
similar to a partnership. Because, at the time of the Company's
investment, Reliant had an accumulated deficit from operations and a
deficit in members' capital, under applicable accounting rules, the
Company's share of Reliant's losses from the date of the investment will
be recognized in proportion to the Company's percentage participation in
the Series C financing, and not in proportion to its percentage ownership
interest in Reliant. The Company records its equity in the income or
losses of Reliant three months in arrears. The Company anticipates that
Reliant will have substantial net losses through 2003, and accordingly,
recorded its 63% share of such losses in its consolidated financial
statements beginning in the quarter ended March 31, 2002.
Summarized financial information with regard to Reliant as of December
31, 2001 and for the year then ended is as follows:
(IN THOUSANDS)
Current assets $ 155,993
Noncurrent assets 52,333
Current liabilities 164,687
Noncurrent liabilities --
Redeemable preferred units 286,018
Revenues 276,665
Costs and expenses 472,713
Net loss (198,021)
In connection with the Company's $100 million equity investment in
Reliant, the Company is in the process of allocating its proportionate
share of the assets acquired and liabilities assumed in accordance with
the guidance set forth in SFAS No. 141. The Company has taken a $2.7
million noncash charge for in-process research and development through
the Statements of Operations under the caption "Equity in Losses of
Reliant Pharmaceuticals, LLC." The $2.7 million noncash charge is related
to management's current estimate of the amount of the purchase price to
be allocated to in-process research and development. This analysis of the
purchase price allocation is preliminary and the amount allocated to
in-process research and development is subject to future adjustment.
9. RELATED-PARTY TRANSACTIONS
In March 1992, the Company licensed to Clinical Partners, a limited
partnership of which ADC II is the general partner, certain of its
technology relating to Receptor-Mediated Permeabilizers(TM) ("RMPs(TM)").
Research and development of RMPs is being conducted by the Company for
Clinical Partners. The Company also has an obligation to fund the
development of the technology and the on-going operations of Clinical
Partners in order to maintain its option to purchase the limited
partnership interests in Clinical Partners. Amounts expended to, or on
behalf of, Clinical Partners were $31,068, $32,158 and $64,638 for fiscal
2002, 2001 and 2000, respectively.
10. RESEARCH AND DEVELOPMENT ARRANGEMENTS
The Company has entered into several collaborative arrangements with
corporate partners (the "Partners") to provide research and development
activities relating to the Partners' products. In connection with these
agreements, the Company has granted certain licenses or the right to
obtain certain licenses to technology developed by the Company. In return
for such grants, the Company will receive certain payments upon the
achievement of certain milestones and will receive royalties on sales of
products developed under the terms of the agreements. Additionally, the
Company has, or may obtain, the right to manufacture and supply products
developed under certain of these arrangements.
The Company is currently expanding its Medisorb manufacturing facility in
Wilmington, Ohio in anticipation of the commercial manufacture of
Risperdal Consta(TM). Pursuant to the terms of an agreement with Janssen
Pharmaceutica ("Janssen"), Janssen has committed to make certain payments
to the Company. In addition, Janssen has agreed to reimburse the Company
for certain cumulative payments made by the Company for the expansion of
its Medisorb manufacturing facility in Wilmington, Ohio, in the event
Janssen terminates the collaborative arrangement with the Company prior
to any commercial launch of Risperdal Consta.
F-25
10. RESEARCH AND DEVELOPMENT ARRANGEMENTS (CONTINUED)
Pursuant to the terms of an agreement with Eli Lilly & Company ("Lilly"),
Lilly has agreed to provide funding of certain amounts for the design and
construction of a portion of AIR's manufacturing facility in Chelsea,
Massachusetts. Lilly's investment will be used to fund pulmonary insulin
production and packaging capabilities. This funding will be secured by
Lilly's ownership of specific equipment to be located and used in the
facility. The Company has the right to purchase the equipment from Lilly,
at any time, at the then-current net book value.
During fiscal 2002, 2001 and 2000, research and development revenue under
collaborative arrangements from Genentech amounted to 9%, 51% and 18%,
from Johnson & Johnson amounted to 22%, 21% and 41%, from Serono S.A.
amounted to 13%, 3% and 7%, from GlaxoSmithKline amounted to 19%, 7% and
2%, and from Lilly amounted to 25%, 5% and 2%, respectively, of research
and development revenue. At March 31, 2002 and 2001, amounts receivable
under these collaborative arrangements totaled approximately $17,105,000
and $8,893,000, respectively.
11. COMMITMENTS
Lease Commitments - The Company leases certain of its offices, research
laboratories and manufacturing facilities under operating leases with
initial terms of one to twenty years, expiring between 2002 and 2022.
Several of the leases contain provisions for extensions of up to ten
years. These lease commitments include a commitment for a building for
new corporate headquarters, which is expected to be completed during
fiscal 2003. Total annual future minimum lease payments are as follows:
2003 $ 12,051,000
2004 12,313,000
2005 11,875,000
2006 10,452,000
2007 10,101,000
Thereafter 160,901,000
Rent expense charged to operations was approximately $8,044,000,
$6,213,000 and $5,223,000 for the years ended March 31, 2002, 2001 and
2000, respectively.
License and Royalty Commitments - The Company has entered into license
agreements with certain corporations and universities that require the
Company to pay annual license fees and royalties based on a percentage of
revenues from sales of certain products and royalties from sublicenses
granted by the Company. Amounts paid under these agreements were
approximately $261,000, $124,000 and $165,000 for the years ended
March 31, 2002, 2001 and 2000, respectively, and are included in research
and development expenses.
F-26
12. STOCK OPTIONS AND AWARDS
The Company's Stock Option Plans (the "Plans") include the Amended and
Restated 1989 Non-Qualified Stock Option Plan (the "1989 Plan"), the
Amended and Restated 1990 Omnibus Stock Option Plan, as amended (the
"1990 Plan"), the 1992 Non-Qualified Stock Option Plan (the "1992 Plan"),
the 1998 Equity Incentive Plan (the "1998 Plan") and the 1999 Stock
Option Plan (the "1999 Plan"), which provide for the granting of stock
options to employees, officers and directors of and consultants to, the
Company. In addition, the Stock Option Plan for Non-Employee Directors
(the "Director Plan") provides for the granting of stock options to
non-employee directors of the Company. Non-qualified options were
initially authorized to purchase up to 450,000 shares of the Company's
common stock under the 1989 Plan, non-qualified and incentive options
were initially authorized to purchase up to 6,500,000 shares of the
Company's common stock under the 1990 Plan, non-qualified options were
initially authorized to purchase up to 2,000,000 shares of the Company's
common stock under the 1992 Plan, non-qualified and incentive stock
options and restricted stock were initially authorized to purchase up to
1,156,262 shares under the 1998 Plan, non-qualified and incentive options
were initially authorized to purchase up to 9,900,000 shares under the
1999 Plan and non-qualified options were initially authorized to purchase
up to 500,000 shares of the Company's common stock under the Director
Plan. The 1989 Plan terminated on July 18, 1999 and the 1990 Plan
terminated on September 19, 2000. Unless sooner terminated, the 1992 Plan
will terminate on November 11, 2002, the 1998 Plan will terminate on
April 1, 2008, the 1999 Plan will terminate on June 2, 2009 and the
Director Plan will terminate on March 18, 2006. The Company has reserved
a total of 14,112,176 shares of common stock for issuance upon exercise
of options that have been or may be granted under the Plans.
The Compensation Committee of the Board of Directors administers the
Plans and determines who is to receive options and the exercise price and
terms of such options. The Compensation Committee has delegated its
authority to the Compensation Sub-Committee to make grants and awards
under the Plans to "officers" and has delegated its authority to the
Limited Compensation Sub-Committee to make grants under the Plans up to
5,000 shares per individual grantee. The Board of Directors administers
the Director Plan. The option exercise price of stock options granted
under the 1989 Plan, the 1990 Plan, the 1998 Plan, the 1999 Plan and the
Director Plan may not be less than 100% of the fair market value of the
common stock on the date of grant. Under the terms of the 1992 Plan, the
option exercise price may be below the fair market value, but not below
par value, of the underlying stock at the time the option is granted.
The 1989 Plan, the 1990 Plan and the 1992 Plan also provide that the
Compensation Committee may grant Limited Stock Appreciation Rights
("LSARs") with respect to all or any portion of the shares covered by
stock options granted to directors and executive officers. LSARs may be
granted with the grant of a non-qualified stock option or at any time
during the term of such option but may only be granted at the time of the
grant of an incentive stock option. The grant of LSARs will not be
effective until six months after their date of grant. Upon the occurrence
of certain triggering events, including a change of control, the options
with respect to which LSARs have been granted shall become immediately
exercisable and the persons who have received LSARs will automatically
receive a cash payment in lieu of shares. At March 31, 2002, there are
115,000 LSARs outstanding which have been granted under the 1990 Plan. No
LSARs were granted during fiscal 2002, 2001 or 2000.
F-27
12. STOCK OPTIONS AND AWARDS (CONTINUED)
The Company has also adopted the 1991 Restricted Common Stock Award Plan
(the "Award Plan"). The Award Plan provides for the award to certain
eligible employees, officers and directors of, and consultants to, the
Company of up to a maximum of 500,000 shares of common stock. The Award
Plan is administered by the Compensation Committee. Awards generally vest
over five years. During fiscal 2002, 2001 and 2000, 135,000, 2,500, and
7,000 shares of common stock, respectively, were awarded under the Award
Plan and 1,250, zero, and 8,200 shares, respectively, ceased to be
subject to forfeiture and were issued. In addition, zero shares were
canceled during each of the years ended March 31, 2002, 2001 and 2000,
respectively. At March 31, 2002, 2001 and 2000, there were awards for
195,850, 62,100 and 59,600 shares outstanding under the Award Plan,
respectively. The Award Plan terminated on November 15, 2001.
Noncash compensation expense of $1,943,693 in fiscal 2002 primarily
resulted from the grant of restricted stock awards to certain employees
and has been charged to research and development and general and
administrative expenses, as appropriate. Included in the statement of
shareholders' equity is deferred compensation of $3,631,656 related to
option and award grants in fiscal 2002, which will be amortized over the
vesting periods.
Pro forma information regarding net loss and basic and diluted loss per
common share in fiscal 2002, 2001 and 2000 has been determined as if the
Company had accounted for its employee stock options under the fair-value
method prescribed by SFAS No. 123. The resulting effect on pro forma net
loss and basic and diluted loss per common share is not necessarily
likely to be representative of the effects on net loss and basic and
diluted loss per common share on a pro forma basis in future years, due
to (i) grants made prior to fiscal 1996 being excluded from the
calculation and (ii) the uncertainty regarding the magnitude of future
grants. The fair value of options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates ranging from 3.93% - 4.97%
in fiscal 2002, 4.64% - 6.30% in fiscal 2001 and 5.81% - 6.50% in fiscal
2000; dividend yields of 0% in fiscal 2002, 2001 and 2000; volatility
factors for the expected market price of the Company's common stock of
70% in fiscal 2002 and in fiscal 2001 and 67% in fiscal year 2000; and a
weighted average expected life of 4 years in fiscal 2002, 2001 and 2000.
Using the Black-Scholes option pricing model, the weighted average fair
value of options granted in fiscal 2002, 2001 and 2000 was $11.29, $16.99
and $9.38, respectively. For purposes of pro forma disclosures, the
estimated fair value of options is amortized to pro forma expense over
the vesting period of the option. Pro forma information for the years
ended March 31 is as follows:
2002 2001 2000
--------------- --------------- ---------------
Net loss - as reported $ (61,354,969) $ (24,136,646) $ (77,436,141)
Net loss - pro forma (98,045,246) (49,346,718) (87,469,415)
Basic and diluted loss per common share - as
reported (0.96) (0.43) (1.52)
Basic and diluted loss per common share - pro
forma (1.54) (0.89) (1.71)
F-28
12. STOCK OPTIONS AND AWARDS (CONTINUED)
A summary of option activity under the 1989, 1990, 1992, 1998, 1999 and
Director Plans is as follows:
EXERCISE WEIGHTED
NUMBER PRICE AVERAGE
OF PER EXERCISE
SHARES SHARE PRICE
------------ ----------------- -----------
Balance, March 31, 1999 6,623,632 $ 0.28 - $15.92 $ 5.41
Granted 3,214,700 11.61 - 96.88 17.29
Exercised (1,768,252) 0.28 - 5.50 3.56
Canceled (422,890) 1.66 - 17.27 8.79
---------- ----------------- --------
Balance, March 31, 2000 7,647,190 0.30 - 96.88 10.60
Granted 3,478,450 23.19 - 48.03 30.67
Exercised (1,250,434) 0.30 - 22.13 3.69
Canceled (262,603) 5.00 - 94.10 18.19
---------- ----------------- -------
Balance, March 31, 2001 9,612,603 0.30 - 96.88 18.43
Granted 2,858,575 18.28 - 35.89 21.17
Exercised (771,252) 0.30 - 23.88 7.42
Canceled (250,804) 1.66 - 85.53 21.12
---------- ----------------- -------
Balance, March 31, 2002 11,449,122 $ 0.30 - $96.88 $ 19.85
---------- ----------------- -------
Options granted generally vest ratably over four years, except options
granted under the Director Plan which vest after six months.
The following table summarizes information concerning outstanding and
exercisable options at March 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
---------------------- ----------- ----------- -------- ----------- --------
$0.30 - $ 7.94 1,949,235 5.41 $ 5.77 1,594,471 $ 5.72
8.16 - 15.20 733,439 6.42 10.69 506,748 10.55
15.24 - 16.69 2,370,101 7.58 16.68 1,161,631 16.68
16.94 - 19.40 2,167,921 9.46 19.35 23,496 18.08
19.50 - 27.33 752,275 9.21 25.19 216,100 23.04
28.03 - 29.31 2,547,913 8.67 29.25 618,393 29.29
29.34 - 96.88 928,238 8.55 35.86 311,008 37.40
-------------------- ----------- ----------- -------- ----------- --------
$0.30 - $96.88 11,449,122 7.92 $ 19.85 4,431,847 $ 15.62
==================== =========== =========== ======== =========== ========
F-29
13. PROPOSED MERGER TRANSACTION WITH RELIANT PHARMACEUTICALS, LLC
On March 20, 2002 the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Reliant Pharmaceuticals, LLC
pursuant to which, if consummated, each Reliant unit would be converted
into the right to receive 1.3297 shares of our common stock (the
"Exchange Ratio"). Reliant is a privately held pharmaceutical company
marketing branded, prescription pharmaceutical products to primary care
physicians in the U.S. The transactions contemplated by the Merger
Agreement are structured as a tax-free exchange. In addition, the Company
would assume the equity incentive plans of Reliant.
At the time of the announcement of the merger, the estimated purchase
price was approximately $885 million, which included the estimated fair
value of the Company's common stock to be issued, the value of the
Reliant options and restricted common units to be assumed and the
Company's direct transaction costs. If the merger is approved and
consummated, the Company would issue a maximum of 31.25 million shares of
common stock. The final purchase price would be determined based upon the
number of Reliant units, restricted units and options outstanding at the
effective time. The closing is subject to various conditions, including
the approval by the shareholders of the Company and members of Reliant
and the receipt of customary regulatory approvals. In addition, both we
and Reliant have rights to terminate the merger agreement before closing
in certain circumstances, including if the closing has not occurred prior
to August 31, 2002, if certain representations, warranties and covenants
have been breached or if the average closing price of Alkermes common
stock is below $17.70 per share for the ten trading days before the
closing of the transaction.
F-30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Managers of
Reliant Pharmaceuticals, LLC:
We have audited the accompanying balance sheets of Reliant
Pharmaceuticals, LLC (a Delaware limited liability company) (the "Company") as
of December 31, 2001 and 2000, and the related statements of operations, changes
in members' capital and cash flows for the years ended December 31, 2001 and
2000 and the period from inception (August 31, 1999) to December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Reliant Pharmaceuticals, LLC
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years ended December 31, 2001 and 2000 and the period from
inception (August 31, 1999) to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 15, 2002
This is a hard copy of a report previously issued by Arthur Andersen LLP.
This report has not been reissued by Arthur Andersen LLP nor has Arthur Andersen
LLP provided a consent to the inclusion of its report in this prospectus.
F-31
RELIANT PHARMACEUTICALS, LLC
BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
--------- ---------
(DOLLARS IN THOUSANDS
EXCEPT FOR LIQUIDATION
PREFERENCE AMOUNTS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 66,109 $ 96,171
Accounts receivable, net of allowance for doubtful accounts of
$460 as of December 31, 2001 and $26 as of December 31, 2000 10,417 22,203
Inventory, net of inventory reserves of $367 as of December 31,
2001 and $0 as of December 31, 2000 44,824 14,199
Other current assets 34,643 23,271
--------- ---------
Total current assets 155,993 155,844
FIXED ASSETS, net of accumulated depreciation of $436 as of
December 31, 2001 and $54 as of December 31, 2000 1,968 650
INTANGIBLE ASSETS, net of accumulated amortization of $35,746 as of
December 31, 2001 and $13,183 as of December 31, 2000 48,408 90,971
OTHER LONG TERM ASSETS 1,957 --
--------- ---------
Total assets $ 208,326 $ 247,465
========= =========
LIABILITIES, REDEEMABLE PREFERRED UNITS
AND MEMBERS' (DEFICIT) CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 66,316 $ 65,587
Accrued expenses 98,072 25,315
Other current liabilities 299 60,167
--------- ---------
Total current liabilities 164,687 151,069
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED UNITS:
Series A redeemable preferred units; 425,000 units issued at
December 31, 2001 (liquidation preference cap-- $14,737,689) 4,275 --
Series B redeemable preferred units; 13,500,000 units issued at
December 31, 2001 (liquidation preference cap-- $449,874,912) 135,714 --
Series C redeemable preferred units; 7,500,000 units issued at
December 31, 2001 (liquidation preference-- $150,495,833) 146,029 --
MEMBERS' (DEFICIT) CAPITAL:
Common units; 4,219,359 units issued at December 31, 2001 and
3,831,659 units issued at December 31, 2000 3,915 38
Series A preferred units; 425,000 units issued at December 31, 2000 -- 4,250
Series B preferred units; 13,500,000 issued at December 31, 2000 -- 135,000
Subscriptions and loans receivables (5,138) (1,116)
Accumulated deficit (241,156) (41,776)
--------- ---------
Total members' (deficit) capital (242,379) 96,396
--------- ---------
Total liabilities, redeemable preferred units and members'
(deficit) capital $ 208,326 $ 247,465
========= =========
The accompanying notes are an integral part of these balance sheets.
F-32
RELIANT PHARMACEUTICALS, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND
THE PERIOD FROM INCEPTION (AUGUST 31, 1999) TO DECEMBER 31, 1999
FROM
INCEPTION
FOR THE YEARS ENDED (AUGUST 31,
DECEMBER 31, 1999) TO
----------------------------------- DECEMBER 31,
2001 2000 1999
------------ --------------- ------------
(DOLLARS IN THOUSANDS)
REVENUES:
Net product sales $ 234,113 $ 68,817 $ --
Promotion revenues 42,552 1,837 --
----------- --------- ----------
Total revenues 276,665 70,654 --
----------- --------- ----------
COSTS AND EXPENSES:
Cost of product sales 174,705 39,702 --
Cost of promotion revenues 102,591 10,874 --
Selling, general and administrative 145,672 55,612 386
Research and development 49,745 5,341 240
----------- --------- ----------
Total costs and expenses 472,713 111,529 626
----------- --------- ----------
LOSS FROM OPERATIONS (196,048) (40,875) (626)
----------- --------- ----------
INTEREST EXPENSE, net
Interest income 1,879 1,419 --
Interest expense (3,852) (1,683) (11)
----------- --------- ----------
Interest expense, net (1,973) (264) (11)
----------- --------- ----------
Net loss $ (198,021) $ (41,139) $ (637)
============ ========= ==========
The accompanying notes are an integral part of these financial statements.
F-33
RELIANT PHARMACEUTICALS, LLC
STATEMENTS OF CHANGES IN MEMBERS' (DEFICIT) CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND
THE PERIOD FROM INCEPTION (AUGUST 31, 1999) TO DECEMBER 31, 1999
SERIES A COMMON
PREFERRED STOCK STOCK
----------------- --------------------- SERIES A PREFERRED SERIES B PREFERRED
PAR PAR ---------------------- -------------------------
SHARES VALUE SHARES VALUE UNITS AMOUNT UNITS AMOUNT
------ ----- ------ ----- ----- ------ ----- ------
(DOLLARS IN THOUSANDS)
BALANCE, August 31,
1999 (Inception) -- $ -- -- $ -- -- $ -- -- $ --
Initial
capitalization
of the Company -- -- 100 -- -- -- -- --
Net loss from
Inception
(August 31,
1999) to
December 31,
1999 -- -- -- -- -- -- -- --
-------- -------- ------- -------- ---------- -------- ------------ ----------
BALANCE, December 31,
1999 -- -- 100 -- -- -- -- --
Conversion of
promissory note
into Series A
Preferred Stock
and Founders
warrant to
acquire common
stock 425,000 4 -- -- -- -- -- --
Termination of
C Corporation--
Exchange of
Series A
Preferred Stock
for Series A
Preferred Units (425,000) (4) -- -- 425,000 4,250 -- --
Exchange of Common
Stock for
Common Units -- -- (100) -- -- -- -- --
Sale of Series B
Preferred Units -- -- -- -- -- -- 13,500,000 135,000
Exercise of
Founders Warrant -- -- -- -- -- -- -- --
Interest on
subscriptions
receivable -- -- -- -- -- -- -- --
Issuance of
Founders Units
including units
originally
issued
pre-conversion
as Founder
Options -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
-------- -------- ------- ------- ---------- -------- ------------ ----------
BALANCE, December 31,
2000 -- -- -- -- 425,000 4,250 13,500,000 135,000
Exercise of
employee stock
options -- -- -- -- -- -- -- --
Proceeds from
Subscriptions
and Loans
Receivables -- -- -- -- -- -- -- --
Reclassification of
Series A
Preferred and
Series B
Preferred -- -- -- -- (425,000) (4,250) (13,500,000) (135,000)
Series A, B and C
preferred
dividends -- -- -- -- -- -- -- --
Interest on
subscriptions
and loans
receivables -- -- -- -- -- -- -- --
Issuance of
warrants -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
-------- -------- ------- ------- ---------- -------- ------------ ----------
BALANCE, December 31,
2001 -- $ -- -- $ -- -- $ -- -- $ --
======== ======== ======= ======= ========== ========= ============ ==========
The accompanying notes are an integral part of these financial statements.
F-34
RELIANT PHARMACEUTICALS, LLC
STATEMENTS OF CHANGES IN MEMBERS' (DEFICIT) CAPITAL -- (CONTINUED)
COMMON ADDITIONAL SUBSCRIPTIONS MEMBERS'
---------------------- PAID-IN AND LOANS ACCUMULATED (DEFICIT)
UNITS AMOUNT CAPITAL RECEIVABLES DEFICIT CAPITAL
--------- -------- ------------ --------------- -------------- -------------
(DOLLARS IN THOUSANDS)
BALANCE, August 31, 1999
(Inception) -- $ -- $ -- $ -- $ -- $ --
Initial capitalization of
the Company -- -- -- -- -- --
Net loss from Inception
(August 31, 1999) to
December 31, 1999 -- -- -- -- (637) (637)
--------- --------- ----------- ------------- ------------- -----------
BALANCE, December 31, 1999 -- -- -- -- (637) (637)
Conversion of promissory
note into Series A
Preferred Stock and
Founders warrant to
acquire common stock -- -- 4,246 -- -- 4,250
Termination of C
Corporation--
Exchange of Series A
Preferred Stock for
Series A Preferred Units -- -- (4,246) -- -- --
Exchange of Common Stock
for Common Units 100 -- -- -- -- --
Sale of Series B Preferred
Units -- -- -- (1,073) -- 133,927
Exercise of Founders Warrant 2,181,016 22 -- -- -- 22
Interest on subscriptions
receivable -- -- -- (27) -- (27)
Issuance of Founders Units
including units
originally issued
pre-conversion as Founder
Options 1,650,543 16 -- (16) -- --
Net loss -- -- -- -- (41,139) (41,139)
--------- --------- ----------- ------------- ------------- -----------
BALANCE, December 31, 2000 3,831,659 38 -- (1,116) (41,776) 96,396
Exercise of employee stock
options 387,700 3,877 -- (3,877) -- --
Proceeds from Subscriptions
and Loans Receivables -- -- -- 98 -- 98
Reclassification of Series A
Preferred and Series B
Preferred -- -- -- -- -- (139,250)
Series A, B and C preferred
dividends -- -- -- -- (1,367) (1,367)
Interest on subscriptions
and loans receivables -- -- -- (243) -- (243)
Issuance of warrants -- -- -- -- 8 8
Net loss -- -- -- -- (198,021) (198,021)
--------- --------- ----------- ------------- ------------- -----------
BALANCE, December 31, 2001 4,219,359 $ 3,915 $ -- $ (5,138) $ (241,156) $ (242,379)
========= ========= =========== ============= ============= ===========
The accompanying notes are an integral part of these financial statements.
F-35
RELIANT PHARMACEUTICALS, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM
INCEPTION (AUGUST 31, 1999) TO DECEMBER 31, 1999
FROM
INCEPTION
FOR THE YEARS ENDED (AUGUST 31,
DECEMBER 31 1999) TO
---------------------------------- DECEMBER 31,
2001 2000 1999
--------- --------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(198,021) $ (41,139) $ (637)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities--
Depreciation 406 54 --
Loss on inventory purchase commitment 30,000 -- --
Amortization of intangible assets 37,748 13,183 --
Write-down of intangible asset 4,815 -- --
Loss on disposal of assets 8 -- --
Provision for doubtful accounts 434 26 --
Changes in operating assets and liabilities--
Decrease (increase) in accounts receivable 11,352 (22,229) --
Increase in inventory (30,625) (14,199) --
Increase in other current assets (11,372) (23,271) --
Increase in other assets (1,957) -- --
Increase in accounts payables and accrued expenses 43,486 90,462 440
Increase in other current liabilities 299 -- --
--------- --------- ---------
Net cash (used in) provided by operating activities (113,427) 2,887 (197)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for the acquisitions of licenses (60,167) (43,987) --
Capital expenditures (1,732) (704) --
--------- --------- ---------
Net cash used in investing activities (61,899) (44,691) --
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to Founders -- 1,050 4,200
Repayment of note payable -- (1,000) --
Exercise of Founders Warrants -- 22 --
Proceeds from subscriptions and loan receivables (145) -- --
Sale of Series B Preferred Units -- 133,900 --
Net borrowings under bridge financing 50,000 -- --
Sale of Series C Redeemable Preferred Units, net 95,409 -- --
--------- --------- ---------
Net cash provided by financing activities 145,264 133,972 4,200
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (30,062) 92,168 4,003
CASH AND CASH EQUIVALENTS, beginning of period 96,171 4,003 --
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 66,109 $ 96,171 $ 4,003
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 4,685 $ 913 $ --
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
In 2001, the Company converted $50.0 million of bridge loans into Series C
Redeemable Preferred Units (see Notes 9 and 12).
In 2000, the Company converted a $4.25 million convertible demand note
into Series A Preferred Stock and a common stock warrant, which subsequently
converted into Series A Preferred Units and a common unit warrant (see Notes 1
and 12).
The accompanying notes are an integral part of these financial statements.
F-36
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
1. THE COMPANY
Reliant Pharmaceuticals, LLC (the "Company" or "Reliant"), a Delaware
limited liability company, was formed July 6, 2000, as the successor to Reliant
Pharmaceuticals, Inc., a Delaware corporation, which was originally incorporated
on August 31, 1999, as Bay City Pharmaceuticals, Inc. The name of the Company
was changed from Bay City Pharmaceuticals, Inc. to Reliant Pharmaceuticals, Inc.
on April 17, 2000. The Company commenced operating activities in July 2000.
The Company is a privately owned U.S. based ethical, branded
pharmaceutical company. The Company has acquired rights to certain marketed and
distributed branded prescription pharmaceutical products from companies in the
pharmaceutical industry. The Company is advancing several clinical development
projects and may acquire rights to additional branded prescription
pharmaceutical products and compounds that are in clinical development.
The Company was founded by Joseph Krivulka and Stefan Aigner together with
Jack L. Bowman, Herbert Conrad, Irwin Lerner, David V. Milligan and Bay City
Capital ("BCC"), collectively referred to as the "Founders." In connection with
the formation of the Company, each Founder received a specified Founder's
interest in the Company based on a predetermined percentage of defined
contributed equity of $125.0 million (the "Predetermined Amount") of the
Company, and upon receipt by the Company of the Predetermined Amount. Each
Founder's equity interest in the Company based upon the Predetermined Amount was
initially established as follows-
BCC 15.0%
Joseph Krivulka 5.0%
Stefan Aigner 2.5%
Jack L. Bowman 0.5%
Herbert Conrad 0.5%
Irwin Lerner 0.5%
David V. Milligan 0.5%
Each Founder owns preferred units in the Company as a result of
participation in both the Series B Financing and Series C Financing (see Notes
12 and 19). Up to the Predetermined Amount, the Founders' interest was not
diluted. In connection with and subsequent to the Series B Financing, as well as
the Series C Financing, the Founders ownership percentage with respect to their
Founders' equity has been diluted.
BCC initially contributed $100 for 100 shares of common stock and agreed
to fund up to $4.25 million in the form of a convertible demand note (the
"Note") bearing interest at the applicable federal rate provided under the
Internal Revenue Code of 1986, as amended. The Note was convertible, at BCC's
option, into (a) Series A Preferred Stock of the Company (see Note 12) at such
time the preferred stock was designated by the Company, and (b) a warrant (the
"Founder's Warrant") to purchase common stock of Reliant, which warrant upon
exercise and together with the preferred and common stock owned by BCC at the
time of exercise would give BCC its 15% Founder's interest. The Warrant was
exercisable at $0.01 per share. The Note was fully drawn upon by the Company,
and in April 2000 BCC converted the Note into 425,000 shares of Series A
Preferred Stock and the Founder's Warrant.
The remaining Founders received their Founders interest in the form of
options (the "Founders' Options"). The options were exercisable at $0.01 per
share, which approximated fair value.
F-37
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon Reliant's conversion to a limited liability company ("LLC") and
pursuant to the Agreement and Plan of Conversion (the "Plan of Conversion"), the
shares of common stock and Series A Preferred Stock owned by BCC automatically
converted into an equal number of Class One Common Units ("Common Units") and
Series A Preferred Units, respectively, of the LLC. Similarly, the Founder's
Warrant was replaced by an LLC Common Unit Purchase Warrant ("Founders' LLC
Warrant"). The Founders' Options were cancelled and automatically replaced, in
equal number, with LLC Common Units pursuant to the Plan of Conversion (see Note
13).
In July 2000, the Company accepted subscriptions for $135.0 million of its
Series B Preferred Units (the "Series B Financing") (see Note 12). Following the
initial closing of the Series B Financing, the Founders' LLC Warrant was
exercised and the remaining Founders' Units were issued (see Note 13).
In December 2001, the Company accepted subscriptions for $150.0 million of
its Series C Preferred Units (the "Series C Financing") (see Notes 12 and 19).
The Company's business is subject to significant risks including, but not
limited to, (i) its ability to obtain funding, (ii) its uncertainty of future
profitability, (iii) the risks inherent in its clinical development efforts,
(iv) uncertainties associated with obtaining and enforcing its patents and with
the patent rights of others, (v) the lengthy, expensive and uncertain process of
seeking regulatory approvals, (vi) uncertainties regarding government reforms
and product pricing and reimbursement levels, (vii) technological change and
competition, (viii) manufacturing uncertainties and (ix) dependence on
collaborative partners and other third parties.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. Cash and cash equivalents are stated at
cost, which approximates market value.
INVENTORY
Inventories are valued at the lower of first-in, first-out ("FIFO") cost
or market. Inventory consists of approximately $44.6 million and $14.2 million
of finished goods and approximately $225,000 and $0 of raw materials at December
31, 2001 and 2000, respectively.
Axid(R) and DynaCirc(R) volume-based purchase price adjustments (see Note
3) are recorded as contra-inventory and are recognized as a reduction to cost of
product sales in the period the product is sold. Eli Lilly and Company ("Lilly")
and Novartis Pharmaceuticals Corporation, an indirect subsidiary of Novartis AG
("Novartis") have a security interest in the Axid(R) and DynaCirc(R)
inventories, respectively. Axid(R) is a registered trademark of Lilly.
DynaCirc(R) is a registered trademark of Novartis.
REVENUE RECOGNITION
Revenues from sales of pharmaceutical products are recognized upon
shipment of products and are net of certain rebates estimated at the time of
sale. Sales terms are FOB shipping point. Promotion revenues received from
Novartis in connection with sales of the Lescol(R) brands are recognized as
revenues by the Company once contractual sales performance measures contained in
the promotion agreement with Novartis have been met. Promotional costs in
connection with the selling of the Lescol(R) brands are classified as costs of
promotion revenues and expensed as incurred. Lescol(R) is a registered trademark
of Novartis.
F-38
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FIXED ASSETS
Property and equipment are carried at historical cost. Expenditures for
maintenance and repairs are charged to operations as incurred.
DEPRECIATION
Depreciation is provided over the estimated useful lives of the assets
using the straight-line method. The estimated useful lives range from three to
seven years for computer and office equipment, furniture and accessories,
warehouse fixtures and vehicles. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the assets.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred.
INTANGIBLE ASSETS
Acquired intangible assets, which consist primarily of product licenses
(see Note 3), are recorded at the net present value of the license payments.
These intangible assets are amortized on a straight-line basis over the shorter
of the estimated useful life of the license or the underlying patent or
agreement term. As of December 31, 2001 and 2000, intangible assets are
comprised of gross product licenses of $84.2 million and $104.2 million, net of
accumulated amortization of $35.8 million and $13.2 million, respectively. The
Company evaluates the carrying value of intangible assets to determine if facts
and circumstances suggest they may be impaired. Impairments would be recognized
when the expected discounted future operating cash flows derived from such
intangible assets is less than their respective carrying value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents and accounts
receivable. The Company maintains cash balances and cash equivalents in
financial institutions with strong credit ratings. At times, amounts invested
with financial institutions may be in excess of FDIC insurance limits. As of
December 31, 2001 and 2000, the Company had not experienced any losses on its
cash and cash equivalents.
The Company also monitors the creditworthiness of its customers to whom it
grants credit terms in the normal course of business. The Company does not
normally require collateral or any other security to support credit sales.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed" ("SFAS 121"). This statement establishes financial accounting and
reporting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 requires, among other things, that an entity review its
long-lived assets and certain related intangibles for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable (see Note 3).
F-39
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
allows companies to account for stock-based compensation for employees either
under the provisions of SFAS 123 or under the provisions of Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), but requires pro forma disclosure for net income in the
notes to the financial statements as if the measurement provisions of SFAS 123
had been adopted. The Company has elected to account for its stock-based
compensation for employees in accordance with the provisions of APB 25.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation," an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the application of APB 25 for certain issues, including the definition
of an employee, the treatment of the acceleration of stock options vesting and
the accounting treatment for options assumed in business combinations. FIN 44
became effective July 1, 2000, but is applicable for certain transactions dating
back to December 1998. The adoption of FIN 44 did not have a material impact on
the Company's results of operations, cash flows, or financial position.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair values due to their short-term maturity.
INCOME TAXES
Federal and state income tax regulations provide that the profit and loss
of a limited liability company that has elected to be treated as a partnership
for tax purposes, be allocated and reported on the tax return of each member.
Accordingly, no Federal or state taxes have been provided for in the
accompanying financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of FASB Statement No. 133" ("SFAS 138"). SFAS 138 was
issued to address a limited number of issues causing implementation difficulties
for entities that apply SFAS 133. SFAS 133 and 138 require that all derivatives
be measured at fair value and recognized as assets or liabilities on the balance
sheet. Changes in the fair value of derivatives should be recognized in either
net income (loss) or other comprehensive income (loss), depending on the
designated purpose of the derivative. The Company was required to and did adopt
SFAS 133 and SFAS 138 in the first quarter of fiscal 2001. The adoption of these
pronouncements did not have an impact on the Company's results of operations,
cash flows, or financial position since the Company has not utilized derivative
financial instruments or entered into hedging transactions.
In June 2001, FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
141 changes the accounting for business combinations in APB Opinion No. 16 in
that it requires all business combinations to be accounted for by a single
method -- the purchase method. In addition, SFAS 141 requires that all
intangible assets be recognized as assets apart from goodwill, provided certain
criteria are met. Disclosure requirements for SFAS 141 includes disclosure of
the primary reasons for a business combination as well as the allocation of the
purchase price paid to the assets acquired and the liabilities assumed by major
balance sheet caption. With the adoption of SFAS 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill will be
subject to at least an annual assessment for impairment
F-40
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
by applying a fair-value-based test. SFAS 142 requires that all acquired
intangible assets be separately recognized if the benefit of the intangible
asset is obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. Intangible assets that have finite
lives will continue to be amortized over their useful lives. SFAS 141 applies to
all business combinations initiated after June 30, 2001. SFAS 142 is required to
be adopted in the first quarter of 2002. Adoption of SFAS 141 and 142 is not
expected to have a material effect on the Company's results of operations, cash
flows, or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143 is
required to be adopted in the first quarter of 2003. Adoption of SFAS 143 is not
expected to have a material effect on the Company's results of operations, cash
flows, or financial position.
During October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS 121 and replaces the accounting and reporting provisions of APB Opinion No.
30, "Reporting Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," as it relates to the disposal of a segment of a
business. SFAS 144 requires the use of a single accounting model for long-lived
assets to be disposed of by sale, including discontinued operations, by
requiring those long-lived assets to be measured at the lower of carrying
amount, or fair value less costs to sell. The impairment recognition and
measurement provisions of SFAS 121 were retained for all long-lived assets to be
held and used with the exception of goodwill. The Company will adopt this
standard on January 1, 2002. SFAS 144 is not expected to have a material effect
on the Company's results of operations, cash flows, or financial position.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
3. PRODUCT LICENSES/ PROMOTION AGREEMENTS
DYNACIRC(R)
In July 2000, the Company entered into an agreement with Novartis to
acquire an exclusive U.S. license through December 2002 to use, market, promote,
sell, distribute and warehouse the DynaCirc(R) brands of anti-hypertensive
agents. Under this agreement, the Company is required to purchase all of its
requirements for DynaCirc(R) brand products and product samples from Novartis
during the license term at predetermined prices. The Company earns favorable,
volume-based purchase price adjustments on these purchases upon reaching
specified minimum purchases (see Note 2). The Company has capitalized the
present value of the $47.6 million license payments as an intangible asset that
is being amortized over the life of the license, 2.5 years.
F-41
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In July 2000, the Company was also granted an exclusive, irrevocable
option to purchase all of the assets related to the DynaCirc(R) brands prior to
December 2002. Upon exercise of the option by the Company and satisfaction of
certain contractual commitments by Novartis, the Company will be required to
make two payments to Novartis totaling $12.5 million (see Note 11). In December
2001, the Company gave written notice of its exercise of this option. Net
product sales from the sale of DynaCirc(R) products amounted to approximately
$32.2 million and $19.6 million for the years ended December 31, 2001 and 2000,
respectively, and have been included in net product sales in the accompanying
statements of operations.
AXID(R)
In October 2000, the Company entered into an agreement with Lilly to
acquire certain patent rights, trademarks and copyrights (by way of a license
and/or assignment) for $20.0 million for the antiulcer agent Axid(R) from Lilly.
Under this agreement, subject to specified minimums, the Company is required to
purchase all of its requirements of Axid(R) brand products and product samples
from Lilly through April 2002 at 95% of the Company's estimated net selling
price of the product (see Note 11). The Company earns favorable volume-based
purchase price adjustments on these purchases upon reaching specified minimum
purchases (see Note 2). The Company has capitalized the above license payment as
an intangible asset, which was being amortized over the remaining life of the
underlying patent, which expires in April 2002. Net product sales from the sale
of Axid(R) products amounted to approximately $201.9 million and $49.2 million
for the years ended December 31, 2001 and 2000, respectively, and have been
included in net product sales in the accompanying statements of operations.
During the fourth quarter of 2001, based on estimated future sales of
Axid(R) products, the Company determined it would not be able to realize the
value of contractually required and committed product purchases to be made in
2002. Additionally, as a direct result of this estimate, the Company
re-evaluated the carrying value of the intangible asset related to the above
license agreement. Based on expected cash flows, the Company recorded a charge
of $30.0 million to cost of goods sold in the fourth quarter of 2001 related to
the above purchase commitments and a charge of approximately $4.8 million to
selling, general and administrative expenses related to a write-down of the
product license carrying value.
LESCOL(R)
In November 2000, the Company entered into an agreement to acquire the
U.S. marketing rights through December 2005 for the Lescol(R) and Lescol XL(R)
cholesterol-controlling agents for $40.0 million from Novartis under a promotion
agreement. Under this agreement, the Company is entitled to receive a
substantial percentage of Lescol(R) and Lescol XL(R) net sales recorded by
Novartis over and above a contract-specified sales baseline. Commencing on
January 1, 2003 and annually thereafter during the term of the agreement,
Novartis shall be entitled to terminate the agreement if certain net sales
targets are not met. The promotion agreement may be extended up to an additional
four years provided certain future minimum sales levels are achieved. The
Company has capitalized the present value of the above payments as an intangible
asset that is being amortized over the initial five-year term of the promotion
agreement.
The Company is required to provide promotional, selling and marketing
support over the period of the agreement (see Note 11). Promotional revenues
received under the terms of this agreement amounted to approximately $42.6
million and $1.8 million for the years ended December 31, 2001 and 2000,
respectively, and have been included in promotion revenues in the accompanying
statements of operations. Direct costs associated with the promotion of the
Lescol(R) brands are expensed as incurred and have been included in the cost of
promotion revenues in the accompanying statements of operations.
F-42
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FENOFIBRATE(R)
In May 2001, the Company obtained an exclusive license from Ethypharm, SA,
of Saint-Cloud, France ("Ethypharm") to market, sell and distribute Ethypharm's
proprietary micronized fenofibrate product for the treatment of hyperlipidemia
in the U.S., Canada and Mexico. The Company is responsible for all clinical
development and regulatory activities in the identified markets. The initial
term of the agreement is fifteen years from the first commercial sale of the
product in the U.S. with automatic two-year renewals if notice of termination is
not received from either party. Product for use in clinical development
programs, as well as eventual commercial sales, are required to be purchased at
predetermined prices from Ethypharm during the license term. The Company is
required to make approximately $2.4 million in payments to Ethypharm based on
the achievement of predetermined milestones and to pay a 5% royalty of all
future net sales of this product. To date the Company has paid $500,000 in
milestone payments, which have been expensed as incurred.
4. ACCOUNTS RECEIVABLE
Trade receivables are primarily comprised of amounts billed to
pharmaceutical wholesalers. The Company's top three wholesalers accounted for
$187.3 million and $44.6 million of net product sales for the year ended
December 31, 2001 and 2000, respectively. Accounts receivable from these
wholesalers totaled $6.6 million and $18.1 million at December 31, 2001 and
2000, respectively. The Company's largest customer accounted for 34% and 30% of
net product sales for the year ended December 31, 2001 and the period ended
December 31, 2000, respectively and 12% and 50% of the gross accounts receivable
balance as of December 31, 2001 and 2000, respectively.
5. OTHER CURRENT ASSETS
Other current assets were comprised of the following--
DECEMBER 31
-------------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Due from Lilly $ 10,240 $ 11,155
Due from Novartis 19,819 8,589
Other 4,584 3,527
--------- ---------
Total $ 34,643 $ 23,271
========= =========
6. FIXED ASSETS
Fixed assets consisted of the following--
DECEMBER 31
------------------------
2001 2000
---------- --------
(IN THOUSANDS)
Computer and Office Equipment $ 1,295 $ 351
Furniture and Accessories 830 212
Building and Leasehold Improvements 246 108
Vehicles 33 33
---------- --------
Gross fixed assets 2,404 704
Less: accumulated depreciation (436) (54)
---------- --------
Fixed assets, net $ 1,968 $ 650
========== ========
F-43
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCOUNTS PAYABLE
As of December 31, 2001 and 2000, the accounts payable balance consisted
primarily of amounts payable to Lilly and Novartis for the purchase of finished
product and product samples.
8. ACCRUED EXPENSES
Accrued expenses were comprised of the following--
DECEMBER 31
---------------------------
2001 2000
----------- -----------
Managed care and Medicaid rebates $ 30,409 $ 8,782
Accrued contract loss reserve (see Note 3) 30,000 --
Contract sales force expenses 17,112 9,553
Research and development expenses 7,218 194
Other 13,333 6,786
----------- -----------
Total $ 98,072 $ 25,315
=========== ===========
9. NOTES PAYABLE
Effective June 29, 2001, the Company obtained a two-year revolving line of
credit (the "Revolver") with a credit limit of $20.0 million. The lending
formula of the Revolver is currently 85% of qualifying receivables, subject to
certain limitations. During 2001, the Company borrowed up to $19.9 million on
the Revolver. At December 31, 2001, there were no outstanding balances under the
Revolver. Interest on amounts outstanding under the Revolver accrued at 1% per
annum above the prime rate, as determined by a major bank. The Company is liable
for an unutilized loan fee of 0.37% per annum of the difference between the
credit limit and the average outstanding loan amount calculated on a monthly
basis. The lender has a first priority security interest in the Company's
accounts receivable from its customers. Interest expense on the Revolver for the
period ended December 31, 2001, was approximately $180,000.
On July 30, 2001 the Company obtained from certain existing members or
affiliates thereof (the "Lenders"), an $80.0 million bridge loan facility in the
form of two secured demand promissory notes of $40.0 million each (the "Bridge
Loan"). Interest on the Bridge Loan accrued at an initial rate of 10% per annum
and automatically increased by an additional 2% every three months following the
initial draw. Interest compounded quarterly and was payable in arrears on the
last day of the calendar quarter. The outstanding amount on the Bridge Loan is
payable in full on demand. The holders of the Bridge Loan have a first priority
security interest in certain property and assets of the Company. On December 16,
2001, the Company had approximately $54.0 million outstanding on the Bridge
Loan. On December 17, 2001, $50.0 million of the outstanding balance on the
Bridge Loan was exchanged for Series C Convertible Preferred Units (as defined
below) of the Company at a price per Series C Convertible Preferred Unit of $20.
The Company repaid the remaining $4.0 million balance outstanding on the Bridge
Loan with proceeds from the Series C Financing transaction (see Note 12).
In conjunction with the Series C Financing, the Company issued to the
Lenders warrants to purchase a total of up to 833,334 Common Units at a purchase
price per unit of $0.01, as a consideration for the exchange of $50.0 million in
Bridge Loan for Series C Units. The lenders also agreed to keep available to the
Company $30.0 million in Bridge Loan capacity and to reduce the Bridge Loan
interest rate to 2% above the prime lending rate (the prime lending rate was
4.75% as of December 31, 2001) (see Note 12). The terms of the two demand
promissory notes were amended to expire on February 28, 2003. The warrants may
be exercised at any time up to the expiration date of December 18, 2006.
Interest expense on the Bridge Loan for the period ended December 31, 2001, was
approximately $1.7 million.
F-44
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 2000, the Company received a $1.0 million loan from BCC, which was
repaid in 2000 with proceeds from the Series B Financing (see Note 12). The
interest rate of 6.53% on the loan is the IRS' Applicable Federal Rate (AFR) for
June 2000. Interest expense on this loan for the period ended December 31, 2000,
was approximately $4,500.
10. OTHER CURRENT LIABILITIES
As of December 31, 2000, other current liabilities represented license
payments to be made by the Company to Novartis pursuant to the license agreement
relating to the DynaCirc(R) brands and the promotion agreement relating to the
Lescol(R) brands. These amounts were paid during 2001.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leased approximately 12,800 square feet of office space in
Bridgewater, New Jersey under a sublease through December 31, 2001. On June 30,
2001, the Company was released from its obligations under the sublease. In
February 2001, the Company entered into a lease agreement, which expires in June
2011, for approximately 52,400 square feet of office space in Liberty Corner,
New Jersey. The Company provided a security deposit in the form of an
irrevocable letter of credit issued by Bank One, NA for the benefit of the
landlord in the amount of approximately $2.0 million. The letter of credit was
applied for by Diversified Capital, L.P. (a related party) on behalf of the
Company. As such, Diversified Capital is responsible to Bank One, NA for
reimbursement obligations. In connection with the foregoing, the Company has
agreed to (i) reimburse Diversified Capital for any amounts that Diversified
Capital is required to pay over to Bank One, NA and (ii) pay Diversified Capital
customary fees. The Company's payment obligations to Diversified Capital are
collateralized by a cash deposit equal to the face amount of the letter of
credit. Such deposit is included in other long-term assets as at December 31,
2001. In addition, the Company leases vehicles, office equipment and other
assets used in the operation of the business under operating leases. Certain
leases provide that the Company pays for taxes, maintenance, insurance and other
expenses.
The approximate minimum rental payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
at December 31, 2001 are:
(IN THOUSANDS)
2002 $ 1,769
2003 1,742
2004 1,668
2005 1,645
2006 1,797
After 2006 8,029
--------
Total $ 16,650
========
Rental expense amounted to approximately $1.6 million, $281,000 and
$18,000 for the years ended December 31, 2001 and 2000, and for the period from
Inception (August 31, 1999) through December 31, 1999, respectively.
OTHER COMMITMENTS
Pursuant to various agreements, the Company has purchase commitments
totaling $57.5 million for trade products and samples (which includes the $30
million loss on Axid(R) inventory purchase commitment
F-45
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(see Note 3)) and obligations to provide at least $155.0 million of promotional,
selling and marketing support.
The Company also has contractual arrangements with pharmaceutical product
development companies and clinical research organizations to design formulations
and perform clinical trials with respect to compounds under development.
Pursuant to these contractual agreements, the Company has funding commitments
totaling $609,000 through December 2002.
As of December 31, 2001, aggregate minimum commitments (excluding leases),
by year, related to such contractual arrangements are as follows:
(IN THOUSANDS)
2002 $ 98,084
2003 40,000
2004 40,000
2005 35,000
----------
Total $ 213,084
==========
The Company is contractually obligated to pay $4.6 million in the
aggregate upon the achievement of specific milestones in clinical research and
development programs.
In addition, provided Novartis satisfies certain contractual obligations,
the Company will be required to pay Novartis $12.5 million in connection with
the exercise of its option to purchase all of Novartis' rights related to the
DynaCirc(R) brands (see Note 3).
LEGAL PROCEEDINGS
The Company received letters dated April 27, 2001 and June 4, 2001 from
counsel to the Fountainhead Group LLC ("TFG"), claiming compensation for
investment banking services allegedly rendered by TFG. On December 20, 2001, TFG
and Joel C. Newman served a complaint on the Company, Joseph Krivulka and Stefan
Aigner as defendants making a demand for payment of a finder's fee in relation
to services allegedly provided by TFG as well as damages in the amount of $5.5
million (the "Services"). Management of the Company believes that this complaint
is without merit and intends to vigorously defend the claims. Although the
outcome of the aforementioned complaint cannot be predicted with certainty, in
the opinion of management, the outcome is not expected to have a material
adverse effect on the Company's results of operations, cash flows, or financial
position.
From time to time, the Company may be involved in various legal
proceedings and other regulatory matters arising in the normal course of
business. At December 31, 2001, the Company was not involved in any proceedings
that it believes would have a material adverse effect on the Company's results
of operations, cash flows, or financial position.
12. REDEEMABLE PREFERRED LLC UNITS
In April 2000, BCC converted the Note into 425,000 shares of Series A
Preferred Stock, which were subsequently converted to 425,000 Series A Preferred
Units (the "A Units") upon the conversion of the Company to an LLC (see Note 1).
In July 2000, the Company accepted subscriptions for 13,500,000 Series B
Preferred Units (the "B Units") at a price of $10 per unit pursuant to a private
placement (the "Series B Financing"). Under the subscription agreement, 50% of
the B Unit proceeds were drawn and paid in July 2000 with the balance subject to
a capital draw notice by the Company. The Company made a capital draw on the
F-46
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
remaining 50% in December 2000. At December 31, 2001, the Company had
subscriptions receivable totaling approximately $1.1 million, which included a
$1.0 million note from a Founder. The interest rate on this note is the prime
rate as determined by a major bank (4.75% at December 31, 2001).
In December 2001, the Company accepted subscriptions for $150.0 million of
its Series C Convertible Preferred Units ("C Units") (the "Series C Financing").
The financing was comprised of the receipt of a cash payment of $100.0 million
from a publicly traded entity and an exchange of an aggregate of $50.0 million
of the outstanding balance on the Bridge Loan (see Note 9). The Company may
issue and sell C Units to additional purchasers at any time on or before the
earlier to occur of (a) June 30, 2002 or (b) the filing of a registration
statement under the Securities Act of 1933 (see Note 19). The Company incurred
costs of approximately $4.6 million related to the closing of the Series C
Financing, which includes $2.6 million paid to the Advisor (see Note 17).
Warrants to purchase up to 833,334 Common Units of the Company at a purchase
price of $0.01 per Common Unit (the "Series C Warrants") were issued to holders
of the Bridge Loan as consideration for the exchange of $50.0 million in Bridge
Loan for the C Units. The fair value of the warrants as determined by an
independent valuation, was approximately $8,300. The holders of the Bridge Loan
also agreed to keep available to the Company $30.0 million in Bridge Loan
capacity and to reduce the Bridge Loan interest rate to 2% above the prime
lending rate (see Note 9). The Series C Unit proceeds net of the issuance costs
and the fair value of the warrants are being accreted up to their redemption
value. The accretion is being recorded as preferred dividends. The Series C
Warrants expire on the earlier to occur of (a) December 18, 2006, and (b) the
mutual agreement of the Holder of the warrants and the Company.
The A, B and C Units are convertible into common units at a 1 to 1 ratio,
(i) at the option of the holder, at any time, (ii) upon a Qualified IPO (as
defined in the Company's LLC Operating Agreement) or (iii) upon the occurrence
of certain other specified events. The conversion price shall initially be $10
for the A and B Units and $20 for the C Units. The conversion price is subject
to adjustment pursuant to the Company's LLC Operating Agreement for
distributions made in Common Units, subdivision or splitting its Common Units
and the issuance of Common Units or options or warrants for Common Units at a
price per unit that is less than the applicable conversion price.
The A, B and C Units have voting rights equal to the largest number of
whole common units into which each respective Unit is convertible. The C Units
rank senior to the A, B and Common Units. The A and B Units rank equally and
rank senior to the Common Units.
The A, B and C Units are entitled to receive a preferred return at an
annual rate of 8.5%, compounded quarterly, of the capital contributed to acquire
each A, B and C Unit when, and if declared by the Board of Managers (the
"Board").
Prior to December 17, 2001, the A and B Units were non-redeemable. In
connection with the Series C Financing, the LLC Operating Agreement was amended
to provide redemption rights to the Series A, B, and C Unit holders. At the
option of the holder, fifty percent of the A, B, and C Units are redeemable on
December 17, 2005 for $214.9 million and the remaining 50% are redeemable on
December 17, 2006 for $229.8 million. As a result of the additional
subscriptions for the Series C Convertible Preferred Units (see Note 19), the
redemption values of the A, B and C Units at December 17, 2005 and December 17,
2006, increased to $221.3 million and $236.8 million, respectively.
As defined in the Company's Amended LLC Operating Agreement, upon any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary (each, a "Liquidation Event"), the holders of the C Units shall be
entitled, before any distribution or payment is made, to be paid an amount equal
to their liquidation preference (the "Series C Liquidation Preference Cap").
Once the C Unit holders have been paid, to the extent proceeds are available,
the A and B Units shall be entitled to be paid, in accordance with their
proportionate ownership of their respective units, an amount equal to three
F-47
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
times the sum of $10 per Unit plus all accumulated and unpaid preferred returns,
to the date of final distribution (the "Series A/B Liquidation Preference Caps")
before any distribution or payment is made upon any unit ranking junior to the
respective units; provided, however, that in the event the unit holders would
realize proceeds in excess of the sum of the Series A/B Liquidation Preference
Caps and the Series C Liquidation Preference Cap, in connection with a
Liquidation Event, the A, B and C Units shall automatically convert into Common
Units at the then applicable conversion price.
If a proposed liquidation event was initiated but not effective by
December 17, 2003 due to certain circumstances as defined in the Amended LLC
Operating Agreement, then holders of C Units who are not also A and B Unit
holders ("New Holders") may, upon the request of New Holders holding not less
than 50% of the Series C Preferred Units then held by the New Holders, request
and the Company shall redeem 33.33% of the then outstanding C Units held by such
holders requesting redemption on December 17, 2003 and the remaining C Units on
December 17, 2004.
13. COMMON LLC UNITS
In connection with the conversion to an LLC (see Note 1), and upon
exercise of the Founder's LLC Warrant, BCC received 2,181,116 Common Units in
the Company. Similarly, pursuant to the Plan of Conversion, the Founders
(excluding BCC) collectively received 1,650,543 restricted Common Units. Of the
1,650,543 Common Units issued to the remaining Founders, 434,353 were fully
vested upon issuance and 1,216,190 vest over a four-year period beginning
September 1, 1999. Of the restricted units subject to vesting, at December 31,
2001, 608,095 were fully vested and 608,095 remain subject to vesting.
14. EQUITY INCENTIVE PLAN
The Company has granted options to employees under an Equity Incentive
Plan (the "Plan") to purchase Common Units in the Company. Options granted under
the Plan are granted at an exercise price per unit not less than the estimated
fair market value of the Unit at the date of grant and have a maximum term of
ten years. Options granted under the Plan generally vest ratably over four years
on the anniversary of the grant date. All options have been granted at an
exercise price of $10 per unit.
The Company has made available to certain employees, who have been or may
in the future be granted options, a loan in the amount of 100% of the total
exercise price up to a maximum amount of $1.0 million to effect the early
exercise of all or a portion of such option holders' options. These loans
provide for exercise with 50/50 recourse/nonrecourse notes, bearing interest at
the prime rate (4.75% as at December 31, 2001). The loans are full recourse with
respect to interest. In 2001, 387,700 options were exercised in the amount of
approximately $3.9 million, with the full exercise price of these options being
paid for through loans from the Company to employees. At December 31, 2001,
$25,000 of these loans was repaid.
F-48
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The activity under the Plan is as follows:
PLAN
OPTIONS
---------
Options outstanding, January 1, 2000 --
Granted 2000 561,100
Cancelled 2000 --
---------
Options outstanding, December 31, 2000 561,100
Granted 2001 1,224,550
Exercised 2001 (387,700)
Cancelled 2001 (27,000)
---------
Options outstanding, December 31, 2001 1,370,950
=========
At December 31, 2001, 212,125 options were vested and 1,158,825 were
unvested. At December 31, 2001 and 2000, the weighted average remaining life of
options outstanding was 9.3 years and 9.4 years, respectively.
The Company does not recognize compensation cost for its Plan. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at the grant date, there would have been no effect on the
net loss of the Company for the years ended December 31, 2001 and 2000.
Compensation cost was estimated using the Black-Scholes option-pricing
model with the following assumptions:
TWELVE MONTHS
ENDED
DECEMBER 31
-----------------------
2001 2000
------- -------
Expected dividend 0.0% 0.0%
Risk-free interest rate 4.84% 5.16%
Expected volatility 0.0% 0.0%
Expected life (in years) 6.6 6.7
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company has used a volatility of zero, as there is no market for the Company's
Units and there have not been any fluctuations in the estimated fair value of
the underlying Common Units since the inception of the Plan. In management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's options. This is a result of the fact
that the Company's employee stock options have characteristics significantly
different from those of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimate.
15. EMPLOYEE AGREEMENTS
The Company has entered into employment agreements with certain officers
and employees of the Company. The agreements provide for salaries aggregating
approximately $2.2 million on an annualized basis. The agreements also have
termination clauses that, under certain circumstances, entitle the employee to
receive severance benefits upon termination. Certain agreements provide for
bonus payments upon the achievement of specified quantitative and qualitative
targets.
F-49
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. BOARD CONSULTING AND NON-COMPETE AGREEMENTS
In May 2000, consulting agreements, that include non-compete provisions,
were entered into between the Company and each of the following individuals:
Jack L. Bowman, Herbert Conrad, Irwin Lerner, David V. Milligan, and Gerald
Cohn. The consulting fee payments for the years ended December 31, 2001 and 2000
were $490,000 and $540,000, respectively. Concurrent with the commencement of
his employment as chief executive officer, the consulting agreement between the
Company and Irwin Lerner was terminated. The employment agreement with Irwin
Lerner lapsed on December 31, 2001. For each calendar year during the consulting
period in which the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") and free cash flow targets for acquired products and
developed products, as set by the Board of Managers (the "Board"), are
satisfied, the Company shall pay a bonus of $100,000 to each consultant. For
each calendar year in which the Company's EBITDA and free cash flow targets for
acquired products and developed products, as set by the Board, are exceeded by
25 percent or more, the Company shall pay an additional bonus of $100,000 to
each consultant. For the years ended December 31, 2001 and 2000, bonus payments
of $400,000 and $1.08 million respectively, were made.
17. BCC BD ARRANGEMENTS
Bay City Capital BD LLC (the "Advisor"), a related party, provides the
Company with (i) business advice and (ii) financial advisory services in
connection with defined business transactions involving the acquisition or
disposition by the Company of pharmaceutical and/or biotechnology related assets
and general corporate acquisition/divestiture transactions. The Advisor is
providing the services for a three-year period that commenced in September 1999
pursuant to an arrangement order. Either party may terminate the arrangement
upon ninety days prior notice. The Company pays the Advisor a monthly fee of
$25,000 as compensation for services and reimburses the Advisor for related
business expenses incurred. For each of the years ended December 31, 2001 and
2000, the Company had charged $300,000 to expense, respectively, for the
Advisor's service fee. Additionally, the Company has agreed under specified
conditions to pay the Advisor two percent (2%) of the total consideration (the
"Fee") with respect to general corporate acquisition/divestiture transactions.
In consideration for an advance of $1.0 million in 2001, the Advisor has agreed
to reduce the Fee to 0.8% of the total consideration. Such advance is
nonrefundable, but will be credited against future fees that may become due up
to $1.0 million. Since the amount is nonrefundable, the amount was expensed in
2001. As of December 31, 2001, the Company had not incurred a liability for the
Fee.
In December 2001, in connection with closing the Series C Financing, the
Company paid the Advisor $2.6 million for their services in relation to the
financing.
18. 401(K) EMPLOYEE BENEFIT PLAN
Effective May 29, 2001 the Company established the Reliant Pharmaceuticals
401(k) Plan (the "Plan") for all eligible employees. Employees can elect to
defer up to 15% of their compensation on a pretax basis, subject to maximum
limits as set forth by the IRS. The Company may, but is not required to, provide
matching contributions to be determined each year by the Company's Board. All
employee contributions are 100% vested. Employer contributions vest over a
three-year period beginning with the employee's full-time date of hire. The
Company made no matching contributions during 2001.
F-50
RELIANT PHARMACEUTICALS, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
19. EVENTS SUBSEQUENT TO DECEMBER 31, 2001
FINANCING ACTIVITIES
On February 4, 2002, the Company accepted subscriptions for approximately
$9.3 million of additional Series C Convertible Preferred Units pursuant to a
rights offering to existing members.
SALES FORCE ROLLOVER
On February 5, 2002, the Company announced that it had exercised its
option to convert its contracted sales force, who are currently employed by
Ventiv Health, Inc., to full-time Reliant employees as of April 1, 2002.
F-51
THE EXCHANGE AGENT:
STATE STREET BANK AND TRUST COMPANY
By Mail or Overnight Courier
Mr. Ralph Jones
State Street Bank and Trust Company
Corporate Trust, 5th Floor
2 Avenue de Lafayette
Boston, MA 02111
By Facsimile Transmission:
(617) 662-1452
Confirm by Telephone:
(617) 662-1548
THE INFORMATION AGENT:
GEORGESON SHAREHOLDER COMMUNICATIONS INC.
17 State Street, 10th Floor
New York, New York 10004
Banks and Brokers Call Collect: (212) 440-9800
Call Toll Free: (866) 318-0506
Any questions or requests for assistance or additional copies of this
prospectus and the letter of transmittal may be directed to the information
agent at its telephone number and location set forth above. You may also contact
your broker, dealer, commercial bank or trust company or other nominee for
assistance concerning the exchange offer.
THE DEALER MANAGER FOR THE EXCHANGE OFFER:
U.S. BANCORP PIPER JAFFRAY
345 California Street, Suite 2200
San Francisco, CA 94104
(877) 420-2321
Attention: Convertible Securities Desk
Jeff Winaker or Brian Sullivan
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the amounts of expenses attributed to
the issuance of the securities offered pursuant to this registration statement
which shall be borne by us. All of the expenses listed below, except the SEC
registration fee and the NASD filing fee, represent estimates only.
ESTIMATED
---------
SEC registration fee.................................................... $ 23,161
NASD filing fee......................................................... 19,152
Exchange agent fees..................................................... 3,750
Information agent fees.................................................. 10,000
Printing expenses....................................................... 35,000
Accounting fees and expenses............................................ 75,000
"Blue Sky" fees and expenses (including legal fees)..................... 2,000
Legal fees and expenses................................................. 200,000
Miscellaneous fees and expenses......................................... 1,937
--------
Total......................................................... $370,000
========
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 1741 through 1750 of the Pennsylvania Business Corporation Law
of 1988, as amended, permits, and in some cases requires, the indemnification of
officers, directors and employees of the Registrant. Section 5.1 of the
Registrant's bylaws provides that the Registrant shall indemnify any director or
officer of the Registrant against expenses (including legal fees), damages,
punitive damages, judgments, penalties, fines and amounts paid in settlement,
actually and reasonably incurred by him or her, to the fullest extent now or
hereafter permitted by law in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, brought or threatened to be brought against him or her, including
actions or suits by or in the right of the Registrant, by reason of the fact
that he or she is or was a director or officer of the Registrant or any of its
subsidiaries or acted as a director or officer or in any other capacity on
behalf of the Registrant or any of its subsidiaries or is or was serving at the
request of the Registrant as a director, officer, partner, fiduciary or trustee
of another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise.
Section 5.2 of the Registrant's bylaws provides that the Registrant
will pay the expenses (including attorneys' fees and disbursements) actually and
reasonably incurred in defending a proceeding on behalf of any officer or
director entitled to indemnification in advance of the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of such officer or
director to repay such amount if it shall ultimately be determined that such
officer or director is not entitled to be indemnified by the Registrant as
authorized. The financial ability of such officer or director to make such
repayment shall not be prerequisite to the making of an advance.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit Number Description
-------------- -----------
1.1 Form of Dealer Manager Agreement.
1.2 Form of Placement Agreement.
3.1 Third Amended and Restated Articles of Incorporation as filed
with the Pennsylvania Secretary of State on June 7, 2001
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Report on Form 10-K for the fiscal year ended March 31, 2001).
3.2 Amended and Restated Bylaws of Alkermes, Inc., effective as of
February 11, 2002 (Incorporated by reference to Exhibit 3.2 to
the Registrant's Report on Form 10-K for the fiscal year ended
March 31, 2001).
4.1 Form of Indenture between Registrant and State Street Bank and
Trust Company, as trustee, relating to the Registrant's 6.52%
Convertible Senior Subordinated Notes due December 31, 2009.
4.2 Form of 6.52% Convertible Senior Subordinated Note due
December 31, 2009 (Included as Exhibit A to Exhibit 4.1).
4.3 Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-1, as amended (Registration
No. 33-40250)).
4.4 Indenture, dated February 18, 2000, between the Registrant and
State Street Bank and Trust Company (relating to the existing
notes) (Incorporated by reference to Exhibit 4.6 to the
Registrant's Registration Statement on Form S-3 (Registration
No. 333-31354)).
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
10.1 Amended and Restated 1989 Non-Qualified Stock Option Plan, as
amended (Incorporated by reference to Exhibit 4.2(c) to the
Registrant's Registration Statement on Form S-8 (File No.
33-44752)).
10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as
amended (Incorporated by reference to Exhibit 10.2 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1998).
10.3 1991 Restricted Common Stock Award Plan (Incorporated by
reference to Exhibit 4.2(a) to the Registrant's Registration
Statement on Form S-8 (File No. 33-58330)).
10.4 1992 Non-Qualified Stock Option Plan (Incorporated by
reference to Exhibit 10.26 to the Registrant's Registration
Statement on Form S-4, as amended (File No. 33-54932)).
II-2
10.5 Stock Option Plan for Non-Employee Directors (Incorporated by
reference to Exhibit 10.5 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1996).
10.6 Alkermes, Inc. 1998 Equity Incentive Plan (Incorporated by
reference to Exhibit 10.6 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1999).
10.7 1999 Stock Option Plan, as amended (Incorporated by reference
to Exhibit 10.1 to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 2002).
10.8 2002 Restricted Stock Award Plan (Incorporated by reference to
Exhibit 10.2 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 2002).
10.9 Lease, dated as of October 26, 2000, between FC88 Sidney, Inc.
and Alkermes, Inc. (Incorporated by reference to Exhibit 10.3
to the Registrant's Report on Form 10-Q for the quarter ended
December 31, 2000).
10.10 Lease, dated as of October 26, 2000, between Forest City 64
Sidney Street, Inc. and Alkermes, Inc. (Incorporated by
reference to Exhibit 10.4 to the Registrant's Report on Form
10-Q for the quarter ended December 31, 2000).
10.11 Lease, dated July 26, 1993, between the Massachusetts
Institute of Technology and Alkermes, Inc. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1997).
10.11(a) First Amendment of Lease, dated June 9, 1997, between the
Massachusetts Institute of Technology and Alkermes, Inc.
(Incorporated by reference to Exhibit 10.8(a) to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1997).
10.12 Product Development Agreement, dated as of March 6, 1992,
between Alkermes Clinical Partners, L.P. and the Registrant
(Incorporated by reference to Exhibit 10.21 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1992).
10.13 Purchase Agreement, dated as of March 6, 1992, by and among
the Registrant and each of the Limited Partners, from time to
time, of the Partnership (Incorporated by reference to Exhibit
10.22 to the Registrant's Report on Form 10-K for the fiscal
year ended March 31, 1992).
10.14 Alkermes Clinical Partners, L.P. Agreement of Limited
Partnership, dated as of February 7, 1992 (Incorporated by
reference to Exhibit 10.23 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1992).
II-3
10.14(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement
of Limited Partnership, dated as of September 29, 1992
(Incorporated by reference to Exhibit 10.22(a) to the
Registrant's Registration Statement on Form S-4, as amended
(File No. 33-54932)).
10.14(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement
of Limited Partnership, dated as of March 30, 1993
(Incorporated by reference to Exhibit 10.22(b) to the
Registrant's Registration Statement on Form S-3, as amended
(File No. 33-64964)).
10.15 Class A Note of Alkermes Development Corporation II, dated
April 10, 1992, to PaineWebber Development Corporation in the
amount of $100.00 (Incorporated by reference to Exhibit 10.24
to the Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1992).
10.16 License Agreement, dated as of April 14, 1999, by and between
Genentech, Inc. and Alkermes Controlled Therapeutics, Inc.
(Incorporated by reference to Exhibit 10.18 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1999).**
10.17 Manufacture and Supply Agreement, entered into April 5, 2001,
by and between Alkermes, Inc. and Genentech, Inc.
(Incorporated by reference to Exhibit 10.16 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 2001).****
10.18 License Agreement, dated as of February 13, 1996, between
Medisorb Technologies International L.P. and Janssen
Pharmaceutica International (United States) (assigned to
Alkermes Controlled Therapeutics Inc. II in March 1996)
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1996).***
10.19 License Agreement, dated as of February 21, 1996, between
Medisorb Technologies International L.P. and Janssen
Pharmaceutica International (worldwide except the United
States) (assigned to Alkermes Controlled Therapeutics Inc. II
in March 1996) (Incorporated by reference to Exhibit 10.20 to
the Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1996).***
10.20 Manufacturing and Supply Agreement, dated August 6, 1997, by
and among Alkermes Controlled Therapeutics Inc. II, Janssen
Pharmaceutica International and Janssen Pharmaceutica Inc.
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 2002).+
10.20(a) Letter Agreement and Exhibits to Manufacturing and Supply
Agreement, dated February 1, 2002, by and among Alkermes
Controlled Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica Inc. (Incorporated by
reference to Exhibit 10.19(a) to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 2002).+
II-4
10.20(b) Addendum to Manufacturing and Supply Agreement, dated August
2001, by and among Alkermes Controlled Therapeutics Inc. II,
Janssen Pharmaceutica International and Janssen Pharmaceutica
Inc. (Incorporated by reference to Exhibit 10.19(b) to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 2002).+
10.21 Patent License Agreement, dated as of August 11, 1997, between
Massachusetts Institute of Technology and Advanced Inhalation
Research, Inc., as amended (Incorporated by reference to
Exhibit 10.25 to the Registrant's Report on Form 10-K for the
fiscal year ended March 31, 1999).**
10.22 Letter Agreement, dated September 27, 1996, by and among Fleet
National Bank, Alkermes Controlled Therapeutics, Inc.,
Alkermes Controlled Therapeutic Inc. II and the Registrant
(Incorporated by reference to Exhibit 10.3 to the Registrant's
Report on Form 10-Q for the quarter ended September 30, 1996).
10.23(a) Second Loan Supplement and Modification Agreement, dated as of
March 19, 1998, by and among Fleet National Bank, Alkermes
Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant (Incorporated by
reference to Exhibit 10.29(b) to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1998).
10.23(b) Third Loan Supplement and Modification Agreement, dated as of
September 24, 1998, by and among Fleet National Bank, Alkermes
Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant (Incorporated by
reference to Exhibit 10.1 to the Registrant's Report on Form
10-Q for the quarter ended September 30, 1998).
10.24 Security Agreement, dated as of September 27, 1996, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutic Inc. II to Fleet National Bank
(Incorporated by reference to Exhibit 10.4 to the Registrant's
Report on Form 10-Q for the quarter ended September 30, 1996).
10.25 Pledge Agreement, dated as of September 27, 1996, from the
Registrant to Fleet National Bank (Incorporated by reference
to Exhibit 10.5 to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1996).
10.26 Mortgage and Security Agreement, dated as of September 27,
1996, from Alkermes Controlled Therapeutics Inc. II to Fleet
National Bank (Incorporated by reference to Exhibit 10.6 to
the Registrant's Report on Form 10-Q for the quarter ended
September 30, 1996).
10.27 Environmental Indemnity Agreement, dated as of September 27,
1996, from the Registrant and Alkermes Controlled Therapeutics
Inc. II to Fleet National Bank (Incorporated by reference to
Exhibit 10.7 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1996).
II-5
10.28 Promissory Note, dated March 19, 1998, from the Registrant,
Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled
Therapeutics Inc. II to Fleet National Bank (Incorporated by
reference to Exhibit 10.38 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1998).
10.29 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet National
Bank ($11,000,000) (Incorporated by reference to Exhibit 10.2
to the Registrant's Report on Form 10-Q for the quarter ended
September 30, 1998).
10.30 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet National
Bank ($9,000,000) (Incorporated by reference to Exhibit 10.3
to the Registrant's Report on Form 10-Q for the quarter ended
September 30, 1998).
10.31 Employment Agreement, entered into as of February 7, 1991,
between Richard F. Pops and the Registrant (Incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1, as amended (File No. 33-40250)).
10.32 Change in Control Employment Agreement, dated as of December
19, 2000, between Alkermes, Inc. and Richard F. Pops
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Report on Form 10-Q for the quarter ended December 31, 2000).
10.33 Change in Control Employment Agreement, dated as of December
19, 2000, between Alkermes, Inc. and each of Raymond T.
Bartus, J. Duncan Higgons, James L. Wright, James M. Frates
and Michael J. Landine and dated as of June 27, 2001, between
Alkermes, Inc. and David A. Broecker (Form of agreement
incorporated by reference to Exhibit 10.2 to Registrant's
Report on Form 10-Q for the quarter ended December 31, 2000).
10.34 Employment Agreement, dated December 22, 2000 by and between
David A. Broecker and the Registrant (Incorporated by
reference to Exhibit 10.32 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 2001).
12.1 Statement regarding computation of ratio of earnings to fixed
charges.
21.1 Subsidiaries of Alkermes, Inc.
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included on signature page).
II-6
25.1 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of State Street Bank and Trust
Company.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.4 Form of Letter to Clients.
99.5 Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9.
----------
* Previously filed.
** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted August 19, 1999. Such provisions
have been filed separately with the Commission.
*** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted September 3, 1996. Such
provisions have been filed separately with the Commission.
**** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted September 27, 2001. Such
provisions have been filed separately with the Commission.
+ Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted September 16, 2002. Such
provisions have been filed separately with the Commission.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
RECENT SALES OF UNREGISTERED SECURITIES
3-3/4% Convertible Subordinated Notes due 2007
In February 2000, we issued and sold $200 million aggregate principal
amount of our existing notes to Robertson Stephens, Adams, Harkness & Hill,
Inc., ING Barings, J.P. Morgan & Co., PaineWebber Incorporated, SG Cowen and
U.S. Bancorp Piper Jaffray (the "Existing Notes Initial Purchasers"). The
underwriting commissions and discounts totaled $6.0 million. The existing notes
were issued and sold in transactions exempt from the registration requirements
of the Securities Act, to persons reasonably believed by the Existing Notes
Initial Purchasers to be "qualified institutional buyers" ("QIBs") as defined in
Rule 144A under the Securities Act or institutional accredited investors or
sophisticated investors. For more information on the existing notes see
"Description of Existing Notes" in Part I of this Registration Statement.
Conversion of Convertible Promissory Note
In October 2001, we converted approximately $7.5 million of principal
and interest that was due under a promissory note payable to Schering
Corporation ("Schering"), into 328,645 shares of our common stock in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act. We reasonably believed Schering
was an accredited investor based on representations made to us by Schering and
by our review of Schering's filings with the SEC under the Exchange Act.
Private Placement to Collaborative Partner
In August 2000, in connection with the execution of the license
agreement with GlaxoSmithKline ("Glaxo"), we issued and sold 160,030 shares of
our common stock to an affiliate of Glaxo for an aggregate purchase price of
$5.0 million, in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act. We reasonably
believed Glaxo was an accredited investor, based on representations made to us
by Glaxo and by our review of Glaxo's filings with the SEC under the Exchange
Act.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to its Registration Statement on
Form S-4 and Registration Statement on Form S-1 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Cambridge,
Commonwealth of Massachusetts, on November 26, 2002.
ALKERMES, INC.
By: /s/ Richard F. Pops
-----------------------------------------
Richard F. Pops, Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard F. Pops and James M. Frates and
each or any one of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the registrant's Registration Statement on Form S-4 and
Registration Statement on Form S-1 have been signed by the following persons in
the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
Director and Chairman of the Board November , 2002
------------------------------------
Michael A. Wall
/s/ Richard F. Pops Director and Chief Executive Officer November 26, 2002
------------------------------------ (Principal Executive Officer)
Richard F. Pops
/s/ James M. Frates
------------------------------------ Director and Vice President and
James M. Frates Treasurer (Principal Financial November 26, 2002
Officer and Principal Accounting
Officer)
/s/ Floyd E. Bloom Director November 26, 2002
------------------------------------
Floyd E. Bloom
II-9
Signature Title Date
--------- ----- ----
/s/ Robert A. Breyer Director November 26, 2002
------------------------------------
Robert A. Breyer
/s/ John K. Clarke Director November 26, 2002
------------------------------------
John K. Clarke
/s/ Alexander Rich Director November 26, 2002
------------------------------------
Alexander Rich
/s/ Paul Schimmel Director November 26, 2002
------------------------------------
Paul Schimmel
II-10
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
1.1 Form of Dealer Manager Agreement.
1.2 Form of Placement Agreement.
3.1 Third Amended and Restated Articles of Incorporation as
filed with the Pennsylvania Secretary of State on June
7, 2001 (Incorporated by reference to Exhibit 3.1 to the
Registrant's Report on Form 10-K for the fiscal year
ended March 31, 2001).
3.2 Amended and Restated Bylaws of Alkermes, Inc., effective
as of February 11, 2002 (Incorporated by reference to
Exhibit 3.2 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 2001).
4.1 Form of Indenture between Registrant and State Street
Bank and Trust Company, as trustee, relating to the
Registrant's 6.52% Convertible Senior Subordinated Notes
due December 31, 2009.
4.2 Form of 6.52% Convertible Senior Subordinated Notes due
December 31, 2009 (Included as Exhibit A to Exhibit 4.1).
4.3 Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-1, as
amended (Registration No. 33-40250)).
4.4 Indenture, dated February 18, 2000, between the
Registrant and State Street Bank and Trust Company
(relating to the existing notes) (Incorporated by
reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-3 (Registration No.
333-31354)).
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
10.1 Amended and Restated 1989 Non-Qualified Stock Option
Plan, as amended (Incorporated by reference to Exhibit
4.2(c) to the Registrant's Registration Statement on
Form S-8 (File No. 33-44752)).
10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as
amended (Incorporated by reference to Exhibit 10.2 to
the Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1998).
10.3 1991 Restricted Common Stock Award Plan (Incorporated by
reference to Exhibit 4.2(a) to the Registrant's
Registration Statement on Form S-8 (File No. 33-58330)).
10.4 1992 Non-Qualified Stock Option Plan (Incorporated by
reference to Exhibit 10.26 to the Registrant's
Registration Statement on Form S-4, as amended (File No.
33-54932)).
10.5 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 10.5 to the
Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1996).
10.6 Alkermes, Inc. 1998 Equity Incentive Plan (Incorporated
by reference to Exhibit 10.6 to the Registrant's Report
on Form 10-K for the fiscal year ended March 31, 1999).
10.7 1999 Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.1 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 2002).
10.8 2002 Restricted Stock Award Plan (Incorporated by
reference to Exhibit 10.2 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 2002).
10.9 Lease, dated as of October 26, 2000, between FC88
Sidney, Inc. and Alkermes, Inc. (Incorporated by
reference to Exhibit 10.3 to the Registrant's Report on
Form 10-Q for the quarter ended December 31, 2000).
10.10 Lease, dated as of October 26, 2000, between Forest City
64 Sidney Street, Inc. and Alkermes, Inc. (Incorporated
by reference to Exhibit 10.4 to the Registrant's Report
on Form 10-Q for the quarter ended December 31, 2000).
10.11 Lease, dated July 26, 1993, between the Massachusetts
Institute of Technology and Alkermes, Inc. (Incorporated
by reference to Exhibit 10.8 to the Registrant's Report
on Form 10-K for the fiscal year ended March 31, 1997).
10.11(a) First Amendment of Lease, dated June 9, 1997, between
the Massachusetts Institute of Technology and Alkermes,
Inc. (Incorporated by reference to Exhibit 10.8(a) to
the Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1997).
10.12 Product Development Agreement, dated as of March 6,
1992, between Alkermes Clinical Partners, L.P. and the
Registrant (Incorporated by reference to Exhibit 10.21
to the Registrant's Report on Form 10-K for the fiscal
year ended March 31, 1992).
10.13 Purchase Agreement, dated as of March 6, 1992, by and
among the Registrant and each of the Limited Partners,
from time to time, of the Partnership (Incorporated by
reference to Exhibit 10.22 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1992).
10.14 Alkermes Clinical Partners, L.P. Agreement of Limited
Partnership, dated as of February 7, 1992 (Incorporated
by reference to Exhibit 10.23 to the Registrant's Report
on Form 10-K for the fiscal year ended March 31, 1992).
10.14(a) Amendment No. 1 to Alkermes Clinical Partners, L.P.
Agreement of Limited Partnership, dated as of September
29, 1992 (Incorporated by reference to Exhibit 10.22(a)
to the Registrant's Registration Statement on Form S-4,
as amended (File No. 33-54932)).
10.14(b) Amendment No. 2 to Alkermes Clinical Partners, L.P.
Agreement of Limited Partnership, dated as of March 30,
1993 (Incorporated by reference to Exhibit 10.22(b) to
the Registrant's Registration Statement on Form S-3, as
amended (File No. 33-64964)).
10.15 Class A Note of Alkermes Development Corporation II,
dated April 10, 1992, to PaineWebber Development
Corporation in the amount of $100.00 (Incorporated by
reference to Exhibit 10.24 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1992).
10.16 License Agreement, dated as of April 14, 1999, by and
between Genentech, Inc. and Alkermes Controlled
Therapeutics, Inc. (Incorporated by reference to Exhibit
10.18 to the Registrant's Report on Form 10-K for the
fiscal year ended March 31, 1999).**
10.17 Manufacture and Supply Agreement, entered into April 5,
2001, by and between Alkermes, Inc. and Genentech, Inc.
(Incorporated by reference to Exhibit 10.16 to the
Registrant's Report on Form 10-K for the fiscal year
ended March 31, 2001).****
10.18 License Agreement, dated as of February 13, 1996,
between Medisorb Technologies International L.P. and
Janssen Pharmaceutica International (United States)
(assigned to Alkermes Controlled Therapeutics Inc. II in
March 1996) (Incorporated by reference to Exhibit 10.19
to the Registrant's Report on Form 10-K for the fiscal
year ended March 31, 1996).***
10.19 License Agreement, dated as of February 21, 1996,
between Medisorb Technologies International L.P. and
Janssen Pharmaceutica International (worldwide except
the United States) (assigned to Alkermes Controlled
Therapeutics Inc. II in March 1996) (Incorporated by
reference to Exhibit 10.20 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1996).***
10.20 Manufacturing and Supply Agreement, dated August 6,
1997, by and among Alkermes Controlled Therapeutics Inc.
II, Janssen Pharmaceutica International and Janssen
Pharmaceutica Inc. (Incorporated by reference to
Exhibit 10.19 to the Registrant's Report on Form 10-K
for the fiscal year ended March 31, 2002).+
10.20(a) Letter Agreement and Exhibits to Manufacturing and
Supply Agreement, dated February 1, 2002, by and among
Alkermes Controlled Therapeutics Inc. II, Janssen
Pharmaceutica International and Janssen Pharmaceutica
Inc. (Incorporated by reference to Exhibit 10.19(a) to
the Registrant's Report on Form 10-K for the fiscal year
ended March 31, 2002).+
10.20(b) Addendum to Manufacturing and Supply Agreement, dated
August 2001, by and among Alkermes Controlled
Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica Inc.
(Incorporated by reference to Exhibit 10.19(b) to the
Registrant's Report on Form 10-K for the fiscal year
ended March 31, 2002).+
10.21 Patent License Agreement, dated as of August 11, 1997,
between Massachusetts Institute of Technology and
Advanced Inhalation Research, Inc., as amended
(Incorporated by reference to Exhibit 10.25 to the
Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1999).**
10.22 Letter Agreement, dated September 27, 1996, by and among
Fleet National Bank, Alkermes Controlled Therapeutics,
Inc., Alkermes Controlled Therapeutic Inc. II and the
Registrant (Incorporated by reference to Exhibit 10.3 to
the Registrant's Report on Form 10-Q for the quarter
ended September 30, 1996).
10.23(a) Second Loan Supplement and Modification Agreement, dated
as of March 19, 1998, by and among Fleet National Bank,
Alkermes Controlled Therapeutics, Inc., Alkermes
Controlled Therapeutics Inc. II and the Registrant
(Incorporated by reference to Exhibit 10.29(b) to the
Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1998).
10.23(b) Third Loan Supplement and Modification Agreement, dated
as of September 24, 1998, by and among Fleet National
Bank, Alkermes Controlled Therapeutics, Inc., Alkermes
Controlled Therapeutics Inc. II and the Registrant
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1998).
10.24 Security Agreement, dated as of September 27, 1996, from
the Registrant, Alkermes Controlled Therapeutics, Inc.
and Alkermes Controlled Therapeutic Inc. II to Fleet
National Bank (Incorporated by reference to Exhibit 10.4
to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 1996).
10.25 Pledge Agreement, dated as of September 27, 1996, from
the Registrant to Fleet National Bank (Incorporated by
reference to Exhibit 10.5 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996).
10.26 Mortgage and Security Agreement, dated as of September
27, 1996, from Alkermes Controlled Therapeutics Inc. II
to Fleet National Bank (Incorporated by reference to
Exhibit 10.6 to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1996).
10.27 Environmental Indemnity Agreement, dated as of September
27, 1996, from the Registrant and Alkermes Controlled
Therapeutics Inc. II to Fleet National Bank
(Incorporated by reference to Exhibit 10.7 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1996).
10.28 Promissory Note, dated March 19, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet
National Bank. (Incorporated by reference to Exhibit
10.38 to the Registrant's Report on Form 10-K for the
fiscal year ended March 31, 1998).
10.29 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet
National Bank ($11,000,000) (Incorporated by reference
to Exhibit 10.2 to the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1998).
10.30 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet
National Bank ($9,000,000) (Incorporated by reference to
Exhibit 10.3 to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1998).
10.31 Employment Agreement, entered into as of February 7,
1991, between Richard F. Pops and the Registrant
(Incorporated by reference to Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1, as
amended (File No. 33-40250)).
10.32 Change in Control Employment Agreement, dated as of
December 19, 2000, between Alkermes, Inc. and Richard F.
Pops (Incorporated by reference to Exhibit 10.1 to the
Registrant's Report on Form 10-Q for the quarter ended
December 31, 2000).
10.33 Change in Control Employment Agreement, dated as of
December 19, 2000, between Alkermes, Inc. and each of
Raymond T. Bartus, J. Duncan Higgons, James L. Wright,
James M. Frates and Michael J. Landine and dated as of
June 27, 2001, between Alkermes, Inc. and David A.
Broecker (Form of agreement incorporated by reference to
Exhibit 10.2 to Registrant's Report on Form 10-Q for the
quarter ended December 31, 2000).
10.34 Employment Agreement, dated December 22, 2000 by and
between David A. Broecker and the Registrant
(Incorporated by reference to Exhibit 10.32 to the
Registrant's Report on Form 10-K for the fiscal year
ended March 31, 2001).
12.1 Statement regarding computation of ratio of earnings to
fixed charges.
21.1 Subsidiaries of Alkermes, Inc.
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP
(included in Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included on signature page).
25.1 Form T-1 Statement of Eligibility under the Trust
Indenture Act of 1939, as amended, of State Street Bank
and Trust Company.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.
99.4 Form of Letter to Clients.
99.5 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
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* Previously filed.
** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted August 19, 1999. Such provisions
have been filed separately with the Commission.
*** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted September 3, 1996. Such
provisions have been filed separately with the Commission.
**** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted September 27, 2001. Such
provisions have been filed separately with the Commission.
+ Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted September 16, 2002. Such
provisions have been filed separately with the Commission.