<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) FEBRUARY 1, 1999
ALKERMES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 0-19267 23-2472830
(State of incorporation) (Commission File Number) (IRS Employer
Identification No.)
64 SIDNEY STREET
CAMBRIDGE, MA 02139-4136
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (617) 494-0171
<PAGE> 2
This 8-K/A amends and restates in its entirety the Registrant's Current Report
on Form 8-K/A dated February 1, 1999 and filed April 19, 1999.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 1, 1999, the Registrant acquired Advanced Inhalation
Research, Inc., a Delaware corporation ("AIR"), through the merger of Alkermes
Acquisition Sub, Inc., a wholly owned subsidiary of the Registrant (the "Sub"),
with and into AIR (the "Merger"), with AIR surviving the Merger as a wholly
owned subsidiary of the Registrant. Pursuant to the Agreement and Plan of Merger
by and among the Registrant, the Sub and AIR (the "Merger Agreement"), the
Registrant issued approximately 3,680,500 shares of its Common Stock to the
stockholders of AIR in a transaction intended to qualify as a tax-free pooling
of interests. The Registrant has agreed to register all of such shares for
resale under the Securities Act of 1933, as amended. An additional 119,474
shares of Common Stock were reserved for issuance upon the exercise of unvested
stock options granted to employees and consultants of AIR which were assumed by
the Registrant.
The purpose of this Form 8-K/A is to file the required audited and
unaudited financial statements of AIR, the audited and unaudited supplemental
consolidated financial statements of the Registrant and pro forma financial
statements of the Registrant with respect to the Merger.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a)(1) FINANCIAL STATEMENTS OF AIR:
Financial Statements of AIR and Independent Auditors'
Report thereon:
Balance Sheet, March 31, 1998.
Statement of Operations for the Period from May 7, 1997
(Date of Incorporation) through March 31, 1998.
Statement of Stockholders' Deficiency for the Period from
May 7, 1997 (Date of Incorporation) through March 31,
1998.
Statement of Cash Flows for the Period from May 7, 1997
(Date of Incorporation) through March 31, 1998.
Notes to Financial Statements.
(a)(2) UNAUDITED CONDENSED FINANCIAL STATEMENTS OF AIR:
Balance Sheets, December 31, 1998 and March 31, 1998.
Statements of Operations for the Nine Months Ended
December 31, 1998 and the Period from May 7, 1997 (Date
of Incorporation) through December 31, 1997.
Statements of Cash Flows for the Nine Months Ended
December 31, 1998 and the Period from May 7, 1997 (Date
of Incorporation) through December 31, 1997.
Notes to Unaudited Financial Statements.
(a)(3) SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF
ALKERMES, INC. AND SUBSIDIARIES:
Supplemental Consolidated Financial Statements of
Alkermes, Inc. and Subsidiaries and Independent Auditors'
Report thereon:
Supplemental Consolidated Balance Sheets, March 31, 1998
and 1997.
Supplemental Consolidated Statements of Operations for
the Years Ended March 31, 1998, 1997 and 1996.
Supplemental Consolidated Statements of Shareholders'
Equity for the Years Ended March 31, 1998, 1997 and 1996.
Supplemental Consolidated Statements of Cash Flows for
the Years Ended March 31, 1998, 1997 and 1996.
Notes to Supplemental Consolidated Financial Statements.
1
<PAGE> 3
(a)(4) UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS OF ALKERMES, INC. AND SUBSIDIARIES:
Unaudited Supplemental Condensed Consolidated Balance
Sheets, December 31, 1998 and March 31, 1998.
Unaudited Supplemental Condensed Consolidated Statements
of Operations for the Nine Months Ended December 31, 1998
and 1997.
Unaudited Supplemental Condensed Consolidated Statements
of Cash Flows for the Nine Months Ended December 31, 1998
and 1997.
Notes to Unaudited Supplemental Condensed Consolidated
Financial Statements.
(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION:
Unaudited Pro Forma Condensed Combined Financial
Statements.
Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1998.
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Nine Months Ended December 31, 1998.
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Nine Months Ended December 31, 1997.
Unaudited Pro Forma Condensed Combined Statements of
Operations for the Years Ended March 31, 1998, 1997 and
1996.
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
(c) Exhibits.
2.1 Form of Agreement and Plan of Merger by and among Alkermes,
Inc., Alkermes Acquisition Sub, Inc. and Advanced Inhalation
Research, Inc.*
4.1 Form of Agreement with the Company's Stockholders by and among
Alkermes, Inc., Advanced Inhalation Research, Inc. and the
stockholders of Advanced Inhalation Research, Inc.*
23.1 Consent of Deloitte & Touche LLP.
* Previously filed as exhibits to the Registrant's Current Report on Form
8-K dated February 1, 1999.
2
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
Board of Directors
Advanced Inhalation Research, Inc.
Cambridge, Massachusetts
We have audited the accompanying balance sheet of Advanced Inhalation Research,
Inc. as of March 31, 1998 and the related statement of operations, stockholders'
deficiency, and cash flows for the period from May 7, 1997 (date of
incorporation) through March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Advanced Inhalation Research, Inc. as of
March 31, 1998, and the results of its operations and its cash flows for the
period from May 7, 1997 (date of incorporation) through March 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 13, 1999
F-1
<PAGE> 5
ADVANCED INHALATION RESEARCH, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
MARCH 31, 1998
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 204,685
Prepaid expenses and other current assets 6,798
-----------
Total current assets 211,483
-----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 549,895
Less accumulated depreciation (42,198)
-----------
507,697
-----------
$ 719,180
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 200,347
Accrued expenses 165,457
Notes payable - stockholders 500,000
Deferred revenue 62,500
-----------
Total current liabilities 928,304
-----------
COMMITMENTS (Note 7)
STOCKHOLDERS' DEFICIENCY:
Series A convertible preferred stock, par value $.001 per share:
authorized and issued, 250,000 shares (liquidation preference
of $250,000) 250
Series AA convertible preferred stock, par value $.001 per
share: authorized 250,000 shares; issued 125,000 shares
(liquidation preference of $250,000) 125
Common stock, par value $.001 per share: authorized,
3,000,000 shares; issued 2,123,525 shares 2,124
Additional paid-in capital 5,406,212
Unearned deferred compensation (2,806,765)
Accumulated deficit (2,811,070)
-----------
Total stockholders' deficiency (209,124)
-----------
$ 719,180
===========
</TABLE>
See notes to financial statements.
F-2
<PAGE> 6
ADVANCED INHALATION RESEARCH, INC.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 7, 1997 (DATE OF INCORPORATION) THROUGH MARCH 31, 1998
- --------------------------------------------------------------------------------
<S> <C>
REVENUES:
Research and development revenue under
collaborative arrangements $ 37,500
Interest and other income 2,421
-----------
Total revenues 39,921
-----------
EXPENSES:
Research and development 422,420
General and administrative 324,987
Noncash compensation and consulting expense 2,099,557
Interest expense 4,027
-----------
Total expenses 2,850,991
-----------
NET LOSS $(2,811,070)
===========
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (1.80)
===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,564,946
===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 7
ADVANCED INHALATION RESEARCH, INC.
<TABLE>
<CAPTION>
STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM MAY 7, 1997 (DATE OF INCORPORATION) THROUGH MARCH 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES AA
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON
------------------------------- ----------------------------- STOCK
SHARES AMOUNT SHARES AMOUNT SHARES
--------------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 7, 1997 (Incorporation) -- $ -- -- $ -- --
Issuance of common stock, July 29, 1997
through March 31, 1998 -- -- -- -- 2,123,525
Issuance of Series A convertible
preferred stock 250,000 250 -- -- --
Issuance of Series AA convertible
preferred stock -- -- 125,000 125 --
Compensation relating to issuance of
common stock -- -- -- -- --
Amortization of compensation relating
to issuance of common stock -- -- -- -- --
Net loss for the period -- -- -- -- --
----------- ----------- ------- ----------- ---------
BALANCE, MARCH 31, 1998 250,000 $ 250 125,000 $ 125 2,123,525
=========== =========== ======= =========== =========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM MAY 7, 1997 (DATE OF INCORPORATION) THROUGH MARCH 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON ADDITIONAL UNEARNED
STOCK PAID-IN DEFERRED ACCUMULATED
AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 7, 1997 (Incorporation) $ -- $ -- $ -- $ -- $ --
Issuance of common stock, July 29, 1997
through March 31, 1998 2,124 265 -- -- 2,389
Issuance of Series A convertible
preferred stock -- 249,750 -- -- 250,000
Issuance of Series AA convertible
preferred stock -- 249,875 -- -- 250,000
Compensation relating to issuance of
common stock -- 4,906,322 (4,906,322) -- --
Amortization of compensation relating
to issuance of common stock -- -- 2,099,557 -- 2,099,557
Net loss for the period -- -- -- (2,811,070) (2,811,070)
----------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1998 $ 2,124 $ 5,406,212 $(2,806,765) $(2,811,070) $ (209,124)
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 8
ADVANCED INHALATION RESEARCH, INC.
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 7, 1997 (DATE OF INCORPORATION) THROUGH MARCH 31, 1998
- -------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,811,070)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 42,198
Noncash compensation and consulting expense related to
issuance of common stock 2,099,557
Changes in assets and liabilities:
Prepaid expenses and other current assets (6,798)
Accounts payable 200,347
Accrued expenses 165,457
Deferred revenue 62,500
-----------
Net cash used by operating activities (247,809)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (549,895)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A convertible
preferred stock 250,000
Proceeds from issuance of Series AA convertible
preferred stock 250,000
Proceeds from issuance of common stock 2,389
Proceeds from issuance of notes - stockholders 500,000
-----------
Net cash provided by financing activities 1,002,389
-----------
NET INCREASE IN CASH 204,685
CASH, BEGINNING OF PERIOD --
-----------
CASH, END OF PERIOD $ 204,685
===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 9
ADVANCED INHALATION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 7, 1997 (DATE OF INCORPORATION) THROUGH MARCH 31, 1998
- -------------------------------------------------------------------------------
1. FORMATION OF THE COMPANY
Advanced Inhalation Research, Inc. (the "Company" or "AIR") was
incorporated on May 7, 1997. AIR's focus is on the development of
pharmaceutical products based on proprietary pulmonary drug delivery
technologies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles 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 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, accounts payable and accrued
expenses approximate fair value because of their short-term nature. The
carrying amounts of the Company's debt instruments approximate fair value.
NET LOSS PER SHARE - Basic and diluted loss per share is computed using
the weighted average number of common shares outstanding during the
period. In fiscal year 1998, the effect of warrants and convertible
preferred stock was antidilutive and, therefore, not included in the
computation of diluted loss per share.
RESEARCH AND DEVELOPMENT REVENUES - Research and development revenues are
recorded as services are performed. Revenue earned upon the achievement of
research and development milestones is recorded when achieved.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses are
charged to operations as incurred.
NONCASH COMPENSATION AND CONSULTING EXPENSE - In connection with the
issuance of common stock and stock options to certain employees,
consultants and others, the Company has recorded a noncash charge for the
difference between fair market value at the measurement date and the
issuance price. The measurement date is generally the issuance date for
employees, while the vesting date is generally the measurement date for
consultants. The noncash charge has been recorded in the statement of
operations upon issuance or over the vesting period of the common stock.
INCOME TAXES - The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of
deferred tax assets and liabilities relating to the expected future tax
consequences of events that have been recognized in the Company's
financial statements and tax returns (see Note 5).
F-6
<PAGE> 10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT - Property and equipment are recorded at
cost. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, 3 to 7 years.
DEFERRED REVENUE - The Company received a prepayment for research and
development costs under a collaborative research project. Deferred revenue
is amortized over the minimum term of the agreement using the
straight-line method.
3. STOCKHOLDERS' DEFICIENCY
RESTRICTED STOCK PURCHASE AGREEMENTS - During fiscal year 1998 the Company
issued 2,123,525 shares of its common stock to certain employees and
consultants. Proceeds to the Company were approximately $2,400. Of the
2,123,525 shares issued, 2,029,725 shares were issued to key employees and
consultants and were subject to restricted stock purchase agreements. 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 nonvested shares from the
stockholder at the share price initially paid by the stockholder. The
restricted stock vests quarterly over a four-year period at different
amounts for each stockholder. 377,977 shares of restricted stock had
vested at March 31, 1998.
SERIES A CONVERTIBLE PREFERRED STOCK - In July 1997, the Company issued
250,000 shares of its Series A convertible preferred stock (the "Series A
Stock") at $1.00 per share and issued warrants to purchase 250,000 shares
of its Series AA convertible preferred stock (the "Series AA Stock") at
$2.00 per share. Net proceeds to the Company were $250,000.
The Series A Stock is convertible at the option of the holder at any time
into the Company's common stock at a conversion rate of one share of
common stock for each share of Series A Stock. The Company has reserved
250,000 common shares for issuance upon conversion. The initial conversion
rate is subject to an adjustment in certain events. The Company is not
required to pay dividends on the Series A Stock. The holders of the Series
A Stock have liquidation preference rights over the common stockholders.
SERIES AA CONVERTIBLE PREFERRED STOCK - In November 1997, the Company
issued 125,000 shares of its Series AA Stock at $2.00 per share upon the
exercise of outstanding warrants. Net proceeds to the Company were
$250,000.
The Series AA Stock is convertible at the option of the holder at any time
into the Company's common stock at a conversion rate of one share of
common stock for each share of Series AA Stock. The Company has reserved
250,000 common shares for issuance upon conversion. The initial conversion
rate is subject to an adjustment in certain events. The Company is not
required to pay dividends on the Series AA Stock. The holders of the
Series AA Stock have liquidation preference rights over the common
stockholders.
At March 31, 1998, the Company had 125,000 warrants outstanding to
purchase Series AA Stock. Each warrant entitles the holder thereof to
purchase one share of Series AA Stock at $2.00 per share, subject to
adjustment. The warrants are exercisable, in whole or in part, at any
time, expiring on July 31, 2002.
4. NOTES PAYABLE - STOCKHOLDERS
The Company has four unsecured promissory notes that total $500,000 in the
aggregate payable to two holders of Series A and Series AA Stock. The
notes are payable with interest, on demand, at a rate of 7% per annum.
F-7
<PAGE> 11
5. INCOME TAXES
At March 31, 1998, the Company has approximately $283,000 of net operating
loss ("NOL") carryforwards for U.S. federal income tax purposes and
approximately $36,000 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 2013.
The components of the net deferred income tax assets at March 31, 1998 are
as follows:
<TABLE>
<S> <C>
NOL carryforwards, federal and state $ 113,000
Tax credit carryforwards 36,000
Capitalized research and development expenses 171,000
Less valuation allowance (320,000)
--------
$ -
========
</TABLE>
The valuation allowance has been provided because of the uncertainty of
realizing the future benefits of the net deferred income tax assets.
6. RESEARCH AND DEVELOPMENT ARRANGEMENT
The Company has entered into a collaborative agreement with a corporate
partner (the "Partner") to provide research and development activities
relating to the Partner's products. The Company will receive payments upon
the achievement of certain milestones. Additionally, the Company may
obtain the right to manufacture and supply products developed under this
agreement.
7. COMMITMENTS
LEASE COMMITMENTS - The Company subleases certain of its offices and
research laboratories under noncancelable operating leases expiring
between 2001 and 2003. Total annual future minimum lease payments at March
31 are as follows:
<TABLE>
<S> <C>
1999 $ 752,000
2000 902,000
2001 465,000
2002 322,000
2003 148,000
</TABLE>
Rent expense charged to operations was approximately $28,000 for the
period ended March 31, 1998.
LICENSE COMMITMENTS - The Company has entered into license agreements with
certain corporations and universities that require the Company to pay
annual license fees. Amounts paid under these agreements were
approximately $30,000 for the period ended March 31, 1998.
F-8
<PAGE> 12
8. SUBSEQUENT EVENTS
COMMON STOCK - Subsequent to year end the Board of Directors and
stockholders of the Company approved an increase in the number of
authorized shares of common stock from 3,000,000 to 3,700,000.
SERIES B CONVERTIBLE PREFERRED STOCK - In April 1998, the Company issued
170,648 shares of its Series B convertible preferred stock (the "Series B
Stock") at $5.86 per share. Net proceeds to the Company were approximately
$1,000,000.
The Series B Stock is convertible at the option of the holder at any time
into the Company's common stock at a conversion rate of one share of
common stock for each share of Series B Stock. The Company has reserved
170,648 common shares for issuance upon conversion. The initial conversion
rate is subject to adjustment in certain events. The Company is not
required to pay dividends on the Series B Stock. The holders of the Series
B Stock have liquidation preference rights over the common stockholders.
SERIES C CONVERTIBLE PREFERRED STOCK - In June 1998 and July 1998, the
Company issued 184,366 shares of its Series C convertible preferred stock
(the "Series C Stock") at $13.56 per share. Net proceeds to the Company
were approximately $2,500,000.
The Series C Stock is convertible at the option of the holder at any time
into the Company's common stock at a conversion rate of one share of
common stock for each share of Series C Stock. The Company has reserved
184,366 common shares for issuance upon conversion. The initial conversion
rate is subject to adjustment in certain events. The Company is not
required to pay dividends on the Series C Stock. The holders of the Series
C Stock have liquidation preference rights over the common stockholders.
SERIES D CONVERTIBLE PREFERRED STOCK - In November 1998, the Company
issued 60,938 shares of its Series D convertible preferred stock (the
"Series D Stock") at $32.82 per share. Net proceeds to the Company were
approximately $2,000,000.
The Series D Stock is convertible at the option of the holder at any time
into the Company's common stock at a conversion rate of one share of
common stock for each share of Series D Stock. The Company has reserved
60,938 common shares for issuance upon conversion. The initial conversion
rate is subject to adjustment in certain events. The Company is not
required to pay dividends on the Series D Stock. The holders of the Series
D Stock have liquidation preference rights over the common stockholders.
1998 EQUITY INCENTIVE PLAN - In April 1998, the Company adopted the 1998
Equity Incentive Plan (the "Plan") to attract and retain key employees and
consultants of the Company. The Plan shall be administered by a Committee
of the Board of Directors. All employees and consultants of the Company or
any affiliate of the Company capable of contributing significantly to the
successful performance of the Company is eligible to participate under the
Plan. The Plan provides for stock awards in the form of incentive stock
options, nonqualified stock options and restricted stock grants.
The Plan has authorized the issuance of up to 500,000 shares of common
stock for awards of stock options or restricted stock. If any award
expires or is terminated unexercised or is forfeited or settled in a
manner that results in fewer shares outstanding than were awarded, the
shares subject to such award, to the extent of such expiration,
termination, forfeiture or decrease, shall again be available for award
under the Plan.
Stock Options - The Company may grant incentive stock options under the
Plan to eligible employees. The Committee shall determine the number of
shares subject to each option and the exercise price therefor, which shall
not be less than 100% of the fair market value of the common stock on the
date of grant. The Company may also grant nonqualified stock options under
the Plan, which may be granted below the fair market value of the
underlying stock at the time the option is granted.
F-9
<PAGE> 13
8. SUBSEQUENT EVENTS (CONTINUED)
Restricted Stock Grants - The Company may grant shares of common stock
subject to forfeiture ("Restricted Stock") and determine the duration of
the period during which, and the conditions under which, the shares may be
forfeited to the Company. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as
permitted by the Committee, during the restricted period. Any certificates
issued in respect of shares of Restricted Stock shall be registered in the
name of the Participant and unless otherwise determined by the Committee,
deposited by the Participant, together with a stock power endorsed in
blank, with the Company. At the expiration of the restricted period, the
Company shall deliver such certificates to the Participant.
ACQUISITION - On February 1, 1999, the Company was acquired by Alkermes,
Inc. ("Alkermes") of Cambridge, Massachusetts. Alkermes, a publicly
traded life sciences company that applies the tools of biotechnology to
the development of sophisticated proprietary drug delivery systems, issued
3,680,508 shares of its common stock to stockholders of the Company in a
tax-free pooling of interests. An additional 120,000 shares of Alkermes
common stock may be issued upon the vesting over time and exercise of
currently unvested employee stock options.
COLLABORATIVE AGREEMENTS - The Company has entered into several additional
collaborative agreements with corporate partners to provide research and
development activities relating to the partners' products. In connection
with one of 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 agreement.
* * * * * *
F-10
<PAGE> 14
ADVANCED INHALATION RESEARCH, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1998 MARCH 31, 1998
- ------------------------------------------------ ----------------- --------------
<S> <C> <C>
Current Assets:
Cash $1,961,417 $204,685
Short-term investments 39,000 --
Prepaid expenses and other current assets 571,480 6,798
---------- --------
Total current assets 2,571,897 211,483
---------- --------
Property and Equipment:
Furniture, fixtures and equipment 1,768,507 549,895
Leasehold improvements 248,558 --
---------- --------
2,017,065 549,895
Less accumulated depreciation and amortization (220,045) (42,198)
---------- --------
1,797,020 507,697
---------- --------
Other Assets 25,377 --
---------- --------
$4,394,294 $719,180
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- ------------------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 500,824 $ 365,804
Notes payable - stockholders 250,000 500,000
Deferred revenue 1,118,933 62,500
----------- ----------
Total current liabilities 1,869,757 928,304
----------- ----------
Stockholders' Equity (Deficiency):
Preferred stock 791 375
Common stock 2,195 2,124
Additional paid-in capital 32,322,253 5,406,212
Unearned deferred compensation (11,081,416) (2,806,765)
Accumulated deficit (18,719,286) (2,811,070)
----------- ----------
Total stockholders' equity (deficiency) 2,524,537 (209,124)
----------- ----------
$ 4,394,294 $ 719,180
=========== ==========
</TABLE>
See notes to condensed financial statements.
F-11
<PAGE> 15
ADVANCED INHALATION RESEARCH, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM MAY 7, 1997
NINE MONTHS (DATE OF INCORPORATION)
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------------
<S> <C> <C>
Revenues:
Research and development revenue under
collaborative arrangements $ 1,039,167 $ --
Interest and other income 6,859 1,304
------------ ---------
1,046,026 1,304
------------ ---------
Expenses:
Research and development 2,377,754 224,622
General and administrative 1,446,318 61,017
Noncash compensation and consulting expense 13,115,175 587,013
Interest expense 14,995 --
------------ ---------
16,954,242 872,652
------------ ---------
Net Loss $(15,908,216) $(871,348)
============ =========
Basic and diluted loss per common share $ (7.34) $ (0.64)
============ =========
Weighted average number of common shares outstanding 2,166,194 1,361,709
============ =========
</TABLE>
See notes to condensed financial statements.
F-12
<PAGE> 16
ADVANCED INHALATION RESEARCH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM MAY 7, 1997
NINE MONTHS (DATE OF INCORPORATION)
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,908,216) $(871,348)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 177,847 208
Noncash compensation and consulting expense related to
issuance of common stock and options 13,115,175 587,013
Changes in assets and liabilities:
Prepaid expenses and other current assets (564,682) (8,995)
Accounts payable and accrued expenses 135,020 82,657
Deferred revenue 1,056,433 --
------------ ---------
Net cash used by operating activities (1,988,423) (210,465)
------------ ---------
Cash flows from investing activities:
Increase in other assets (25,377) (74,655)
Purchases of short-term investments (39,000) --
Additions to property and equipment (1,467,170) (8,743)
------------ ---------
Net cash used by investing activities (1,531,547) (83,398)
------------ ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 5,499,989 500,000
Proceeds from issuance of common stock 26,713 2,094
Payments of notes - stockholders (250,000) --
------------ ---------
Net cash provided by financing activities 5,276,702 502,094
------------ ---------
Net increase in cash 1,756,732 208,231
Cash, beginning of period 204,685 --
------------ ---------
Cash, end of period $ 1,961,417 $ 208,231
============ =========
</TABLE>
See notes to condensed financial statements.
F-13
<PAGE> 17
ADVANCED INHALATION RESEARCH, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1998 AND PERIOD FROM MAY 7, 1997 (DATE
OF INCORPORATION) THROUGH DECEMBER 31, 1997
1. Basis of Presentation
Advanced Inhalation Research, Inc. (the "Company") was incorporated on May
7, 1997.
The unaudited financial statements for the nine months ended December 31,
1998 and the period from May 7, 1997 (date of incorporation) through
December 31, 1997 include all adjustments which, in the opinion of
management, are necessary to present fairly the results of operations for
the periods then ended. All such adjustments are of a normal recurring
nature. These financial statements should be read in conjunction with the
Company's audited financial statements for the period ended March 31, 1998.
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 financial statements in conformity with
generally accepted accounting principles 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 financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
2. Noncash Compensation and Consulting Expenses
In connection with the issuance of common stock and stock options to
certain employees, consultants, and others, the Company has recorded
noncash charges for the difference between fair market value at the date of
measurement date and the issuance price. The measurement date is generally
the issuance date for employees, while the vesting date is generally the
measurement date for consultants. A noncash charge has been recorded in the
statements of operations upon issuance over the vesting period of the
common stock and stock options.
F-14
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Alkermes, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Alkermes, Inc. and subsidiaries as of March 31, 1998 and 1997, and the related
supplemental consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Alkermes, Inc. and Advanced Inhalation Research, Inc. on February
1, 1999, which has been accounted for as a pooling of interests as described in
Notes 2 and 3 to the supplemental consolidated financial statements. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These supplemental
consolidated financial statements do not extend through the date of
consummation, however, they will become the historical consolidated financial
statements of Alkermes, Inc. and subsidiaries after financial statements
covering the date of consummation of the business combination are issued.
In our opinion, such supplemental consolidated financial statements present
fairly, in all material respects, the financial position of Alkermes, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles for financial
statements that are issued for a period which includes the date of consummation
of the Advanced Inhalation Research, Inc. business combination.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 13, 1999
S-1
<PAGE> 19
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,699,950 $ 2,799,012
Short-term investments 190,556,898 82,497,939
Prepaid expenses and other current assets 8,562,166 4,571,089
------------- -------------
Total current assets 202,819,014 89,868,040
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land 235,000 225,000
Building 1,275,000 1,275,000
Furniture, fixtures and equipment 15,332,236 11,963,945
Leasehold improvements 2,507,973 2,183,280
Construction in progress 4,275,985 90,000
------------- -------------
23,626,194 15,737,225
Less accumulated depreciation and amortization (9,620,769) (7,289,446)
------------- -------------
14,005,425 8,447,779
------------- -------------
INVESTMENTS 3,422,726 5,366,291
------------- -------------
OTHER ASSETS 466,712 582,732
------------- -------------
OTHER INVESTMENTS 263,400 432,176
------------- -------------
$ 220,977,277 $ 104,697,018
============= =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,433,776 $ 4,653,081
Deferred revenue 7,478,480 --
Long-term obligations - current portion 4,604,533 3,547,542
------------- -------------
Total current liabilities 19,516,789 8,200,623
------------- -------------
LONG-TERM OBLIGATIONS 12,933,333 10,914,127
------------- -------------
OTHER LONG-TERM LIABILITIES 2,072,212 1,430,832
------------- -------------
DEFERRED REVENUE 5,000,000 5,000,000
------------- -------------
COMMITMENTS (Note 10)
SHAREHOLDERS' EQUITY:
Capital stock, par value $.01 per share:
authorized, 2,700,000 shares; none issued
Convertible exchangeable preferred stock, par value $.01 per share:
authorized and issued, 2,300,000 shares at March 31, 1998
(liquidation preference of $115,000,000) 23,000 --
Common stock, par value $.01 per share:
authorized, 40,000,000 shares; issued, 24,027,976
and 20,718,790 shares at March 31, 1998 and 1997, respectively 240,280 207,188
Additional paid-in capital 316,592,909 198,844,191
Deferred compensation (2,926,484) (109,901)
Cumulative foreign currency translation adjustments (10,638) (16,869)
Unrealized (loss) gain on marketable securities (37,500) 71,250
Accumulated deficit (132,426,624) (119,844,423)
------------- -------------
Total shareholders' equity 181,454,943 79,151,436
------------- -------------
$ 220,977,277 $ 104,697,018
============= =============
</TABLE>
See notes to supplemental consolidated financial statements.
S-2
<PAGE> 20
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Research and development revenue under
collaborative arrangements $ 25,585,058 $ 15,968,317 $ 2,848,510
Research and development revenue under
collaborative arrangement with related party -- 1,415,313 11,182,741
Interest and other income 5,781,511 2,443,317 1,887,275
------------ ------------ ------------
Total revenues 31,366,569 19,826,947 15,918,526
------------ ------------ ------------
EXPENSES:
Research and development 31,761,541 29,553,988 21,586,316
General and administrative 8,374,931 7,516,531 6,106,334
Noncash compensation and consulting expense 2,183,373 173,094 179,366
Interest expense 1,628,925 1,381,152 1,043,594
Purchase of in-process research and development -- -- 750,000
------------ ------------ ------------
Total expenses 43,948,770 38,624,765 29,665,610
------------ ------------ ------------
NET LOSS $(12,582,201) $(18,797,818) $(13,747,084)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (0.55) $ (1.03) $ (0.93)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 23,018,876 18,288,334 14,774,584
============ ============ ============
</TABLE>
See notes to supplemental consolidated financial statements.
S-3
<PAGE> 21
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
CONVERTIBLE EXCHANGEABLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1995 -- $ -- 13,571,838 $135,718 $109,149,171
Issuance of common stock, April 1995
through March 1996, net of
issuance costs of $1,281,445 -- -- 2,395,104 23,951 15,002,862
Amortization of receivable for warrants -- -- -- -- --
Amortization of compensation relating to
grant of stock options and awards made -- -- -- -- 86,990
Cumulative foreign currency translation
adjustments -- -- -- -- --
Unrealized gain on marketable securities -- -- -- -- --
Net loss for year -- -- -- -- --
-------- -------- ---------- -------- ------------
BALANCE, MARCH 31, 1996 -- -- 15,966,942 159,669 124,239,023
Issuance of common stock, April 1996
through March 1997, net of
issuance costs of $390,705 -- -- 4,751,848 47,519 74,605,168
Amortization of receivable for warrants -- -- -- -- --
Amortization of compensation relating to
grant of stock options and awards made -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- --
Net loss for year -- -- -- -- --
-------- -------- ---------- -------- ------------
BALANCE, MARCH 31, 1997 -- -- 20,718,790 207,188 198,844,191
<CAPTION>
RECEIVABLE CUMULATIVE
FOR FOREIGN UNREALIZED
WARRANTS AND CURRENCY GAIN (LOSS) ON
DEFERRED TRANSLATION MARKETABLE ACCUMULATED
COMPENSATION ADJUSTMENTS SECURITIES DEFICIT TOTAL
--------- -------- --------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, APRIL 1, 1995 $(812,318) $(10,301) $ -- $ (87,299,521) $ 21,162,749
Issuance of common stock, April 1995
through March 1996, net of
issuance costs of $1,281,445 -- -- -- -- 15,026,813
Amortization of receivable for warrants 402,259 -- -- -- 402,259
Amortization of compensation relating to
grant of stock options and awards made 92,377 -- -- -- 179,367
Cumulative foreign currency translation
adjustments -- (14,053) -- -- (14,053)
Unrealized gain on marketable securities -- -- 502,500 -- 502,500
Net loss for year -- -- -- (13,747,084) (13,747,084)
--------- -------- --------- ------------- ------------
BALANCE, MARCH 31, 1996 (317,682) (24,354) 502,500 (101,046,605) 23,512,551
Issuance of common stock, April 1996
through March 1997, net of
issuance costs of $390,705 -- -- -- -- 74,652,687
Amortization of receivable for warrants 34,687 -- -- -- 34,687
Amortization of compensation relating to
grant of stock options and awards made 173,094 -- -- -- 173,094
Cumulative foreign currency translation
adjustments -- 7,485 -- -- 7,485
Unrealized loss on marketable securities -- -- (431,250) -- (431,250)
Net loss for year -- -- -- (18,797,818) (18,797,818)
--------- -------- --------- ------------- ------------
BALANCE, MARCH 31, 1997 (109,901) (16,869) 71,250 (119,844,423) 79,151,436
</TABLE>
(Continued)
S-4
<PAGE> 22
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
CONVERTIBLE EXCHANGEABLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997
(CARRIED FORWARD) -- -- 20,718,790 207,188 198,844,191
Issuance of common stock, April 1997 through
March 1998 -- -- 3,309,186 33,092 2,230,210
Issuance of convertible exchangeable
preferred stock, March 1998, net of issuance
costs of $441,043 2,300,000 23,000 -- -- 110,510,956
Compensation relating to issuance of common stock
and stock awards made -- -- -- -- 5,007,552
Amortization of compensation relating to issuance of
common stock and grant of stock options
and awards made -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- --
Net loss for year -- -- -- -- --
--------- ------- ---------- -------- ------------
BALANCE, MARCH 31, 1998 2,300,000 $23,000 24,027,976 $240,280 $316,592,909
========= ======= ========== ======== ============
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
RECEIVABLE FOR FOREIGN UNREALIZED
WARRANTS AND CURRENCY GAIN (LOSS) ON
DEFERRED TRANSLATION MARKETABLE ACCUMULATED
COMPENSATION ADJUSTMENTS SECURITIES DEFICIT TOTAL
----------- -------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997
(CARRIED FORWARD) (109,901) (16,869) 71,250 (119,844,423) 79,151,436
Issuance of common stock, April 1997 through
March 1998 -- -- -- -- 2,263,302
Issuance of convertible exchangeable
preferred stock, March 1998, net of issuance
costs of $441,043 -- -- -- -- 110,533,956
Compensation relating to issuance of common stock
and stock awards made (5,007,552) -- -- -- --
Amortization of compensation relating to issuance of
common stock and grant of stock options
and awards made 2,190,969 -- -- -- 2,190,969
Cumulative foreign currency translation
adjustments -- 6,231 -- -- 6,231
Unrealized loss on marketable securities -- -- (108,750) -- (108,750)
Net loss for year -- -- -- (12,582,201) (12,582,201)
----------- -------- --------- ------------- -------------
BALANCE, MARCH 31, 1998 $(2,926,484) $(10,638) $ (37,500) $(132,426,624) $ 181,454,943
=========== ======== ========= ============= =============
</TABLE>
See notes to supplemental consolidated financial statements. (Concluded)
S-5
<PAGE> 23
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,582,201) $(18,797,818) $(13,747,084)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 2,601,793 2,358,843 1,770,242
Amortization of amounts receivable for warrants and
compensation relating to grant of stock options and awards made 2,190,969 207,781 581,626
Adjustments to other investments 60,026 14,502 101,742
Gain on sale of equipment (567,623) -- --
Changes in assets and liabilities:
Prepaid expenses and other current assets (3,992,733) (2,617,365) 830,500
Accounts payable and accrued expenses 2,785,413 1,143,447 960,670
Deferred revenue 7,478,480 -- 5,000,000
Deferred revenue from Alkermes Clinical Partners, L.P. -- -- (1,585,000)
Other long-term liabilities 641,380 515,591 540,406
------------- ------------ ------------
Net cash used by operating activities (1,384,496) (17,175,019) (5,546,898)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,544,168) (2,243,476) (5,606,737)
Disposals of equipment 1,080,815 -- --
(Purchases) maturities of short-term investments, net (108,058,959) (50,568,725) (11,665,073)
Maturities (purchases) of long-term investments, net 1,943,565 (3,993,502) 2,994,437
(Increase) decrease in other assets (17,320) 10,500 (209,500)
Investment in Alkermes Clinical Partners, L.P. -- -- (2,122,463)
Repayment - loan to Alkermes Clinical Partners, L.P. -- -- 4,735,000
------------- ------------ ------------
Net cash used by investing activities (113,596,067) (56,795,203) (11,874,336)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible exchangeable
preferred stock, net 110,533,956 -- --
Proceeds from issuance of common stock, net 2,263,302 74,652,687 15,026,813
Proceeds from issuance of long-term debt 7,000,000 5,000,000 4,500,000
Payment of long-term obligations (3,923,366) (3,338,054) (2,733,061)
------------- ------------ ------------
Net cash provided by financing activities 115,873,892 76,314,633 16,793,752
------------- ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,609 9,451 (13,995)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 900,938 2,353,862 (641,477)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,799,012 445,150 1,086,627
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,699,950 $ 2,799,012 $ 445,150
============= ============ ============
SUPPLEMENTARY INFORMATION - Interest paid $ 915,808 $ 788,102 $ 492,731
============= ============ ============
</TABLE>
See notes to supplemental consolidated financial statements.
S-6
<PAGE> 24
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1. FORMATION OF THE COMPANY
Alkermes, Inc. (the "Company") was incorporated in July 1987 and is a
leader in the development of products based on sophisticated drug delivery
technologies. The Company has several areas of focus: (i) controlled,
sustained release of injectable drugs lasting several days to several
weeks, utilizing its ProLease(R) and Medisorb(R) technologies; (ii) the
delivery of drugs into the brain past the blood-brain barrier, utilizing
its Cereport(TM) technology; (iii) oral delivery of drugs using its
RingCap(TM) and dose sipping technologies ("DST"); and (iv) the
development of pharmaceutical products based on proprietary pulmonary drug
delivery technologies utilizing its recently acquired Advanced Inhalation
Research, Inc. ("AIR") technology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The supplemental consolidated financial statements
give retroactive effect to the merger of Alkermes, Inc. and AIR on
February 1, 1999 (see Note 3), which has been accounted for as a pooling
of interests. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include
the date of consummation. These supplemental consolidated financial
statements do not extend through the date of consummation, however, they
will become the historical consolidated financial statements of Alkermes,
Inc. and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
PRINCIPLES OF CONSOLIDATION - The supplemental 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") (see Note 4), 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 8). ADC II's investment in Clinical Partners is
accounted for under the equity method of accounting. Such carrying value
was zero at March 31, 1998 (see Note 8). All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
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.
S-7
<PAGE> 25
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are recorded in the
consolidated financial statements at fair value. The carrying amounts of
the Company's debt instruments approximate fair value.
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.
On December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." SFAS No. 128 requires companies to change the method used to
compute earnings per share and to restate all prior periods for
comparability. The adoption of SFAS No. 128 did not have any impact on the
Company's consolidated financial statements because the Company continues
to be in a net loss position and, consequently, common equivalent shares
from stock options, warrants and convertible exchangeable preferred stock
are excluded as their effect is antidilutive.
RESEARCH AND DEVELOPMENT REVENUES - Research and development revenues are
recorded as services are performed. Revenue earned upon the achievement of
research and development milestones is recorded when achieved.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses are
charged to operations as incurred.
NONCASH COMPENSATION AND CONSULTING EXPENSE - Noncash compensation and
consulting expense primarily relates to equity transactions in the
Company's subsidiary Advanced Inhalation Research, Inc. and has been
recorded at the difference between fair market value at the measurement
date and the issuance price for common stock issued and stock options
granted to certain employees, consultants and others. In addition, the
Company has also recorded noncash charges for stock options and stock
awards granted to certain employees, consultants and others for the
difference between fair market value at the measurement date and the
issuance price. The measurement date is generally the issuance date for
employees, while the vesting date is generally the measurement date for
consultants. The noncash charge 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." SFAS No. 109 requires the recognition of
deferred tax assets and liabilities relating to the expected future tax
consequences of events that have been recognized in the Company's
consolidated financial statements and tax returns (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 - Debt securities that the Company has the positive intent and
ability to hold to maturity are reported at amortized cost and are
classified as "held-to-maturity."
S-8
<PAGE> 26
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED) - Short-Term Investments and Investments consist
of U.S. Treasury and other government securities, commercial paper and
corporate notes which are classified as "held-to-maturity" and reported at
amortized cost. Short-Term Investments have maturity dates within one year
of the balance sheet date. Investments classified as long-term have
maturity dates up to fifteen months from March 31, 1998 and include
securities held as collateral. The carrying value of all Short-Term
Investments and Investments, individually and in the aggregate,
approximated market value at March 31, 1998 and 1997.
Included in Other Investments is an investment in Cortex Pharmaceutical,
Inc.'s common stock, which is classified as "available-for-sale" and
reported at fair market value.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives of the
assets: buildings - 25 years; furniture, fixtures and equipment - 3 to 7
years; or, in the case of leasehold improvements and capital leases, over
the lease terms - 3 to 10 years.
DEFERRED REVENUE - SHORT-TERM - During fiscal 1998, the Company received a
$10,000,000 upfront payment from ALZA Corporation ("ALZA") to fund
clinical development of Cereport. This amount has been recorded as
deferred revenue at March 31, 1998 and is being amortized based on actual
costs incurred for the clinical development of Cereport.
In addition, the Company received a prepayment for research and
development costs under a collaborative research project. Deferred revenue
is amortized over the minimum term of the agreement using the
straight-line method.
DEFERRED REVENUE - LONG-TERM - During fiscal 1996, the Company received a
$5,000,000 prepayment of royalties under a collaborative agreement. This
amount has been recorded as deferred revenue at March 31, 1998 and 1997
and accrues interest (included in other long-term liabilities) at a rate
(6.16875% at March 31, 1998) equal to .20% above the one-year LIBOR rate.
PURCHASED PATENTS - Purchased patents, included in other assets, are
amortized on a straight-line basis over a period of five years.
DEFERRED COMPENSATION - Deferred compensation is related to the
Company's 1991 Restricted Common Stock Award Plan, compensatory stock
options and common stock and is amortized over vesting periods ranging
from one to five years.
RECLASSIFICATIONS - Certain reclassifications have been made in fiscal
1997 and 1996 to conform to the presentation used in fiscal 1998.
NEW ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 requires companies to disclose
certain pertinent information relating to their various securities
outstanding. The Company has adopted SFAS No. 129 on March 31, 1998.
S-9
<PAGE> 27
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) - In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which require additional disclosures to be adopted during fiscal 1999.
Under SFAS No. 130, the Company is required to display comprehensive
income and its components as part of the Company's full set of
consolidated financial statements. SFAS No. 131 requires that the Company
report financial and descriptive information about its reportable
operating segments. The Company is evaluating the impact on its
disclosures, if any.
3. ACQUISITION OF AIR
On February 1, 1999 the Company acquired AIR, a private company focused on
the development of pharmaceutical products based on proprietary pulmonary
drug delivery technologies. The acquisition was accomplished by merging a
newly formed, wholly owned subsidiary of the Company with and into AIR and
has been accounted for as a pooling of interests. No adjustments to
conform accounting policies of AIR were required. The Company anticipates
merger costs of approximately $1,300,000 which will be charged to
operations primarily in the quarter ended March 31, 1999. Pursuant to the
merger agreement the Company issued 3,680,508 shares of its common stock
to the stockholders of AIR in a transaction accounted for as a tax-free
pooling of interests. An additional 119,474 shares of common stock were
reserved for issuance upon the exercise of currently unvested stock
options granted to employees and consultants of AIR which were assumed by
the Company.
4. ACQUISITION OF CERTAIN ASSETS AND TECHNOLOGY
On March 8, 1996, ACT II acquired certain assets and technology owned or
used by Medisorb Technologies International L.P., which developed
injectable controlled release drug delivery technologies for the
pharmaceutical industry. The assets acquired included a large-scale
pharmaceutical production facility and equipment. The Company paid
$4,000,000 in cash for the assets and certain drug delivery technology. A
nonrecurring charge totaling $750,000 for technology purchased but not yet
commercially viable was recorded by the Company at the acquisition date.
This charge represents that portion of the purchase price of the acquired
technology that was allocated to research and development in-process.
5. SHAREHOLDERS' EQUITY
RESTRICTED STOCK PURCHASE AGREEMENTS/COMMON STOCK - During fiscal year
1998, the Company's subsidiary, AIR, issued 2,401,115 shares of common
stock to key employees and consultants which were subject to restricted
stock purchase agreements. 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
nonvested shares from the shareholder at the share price initially paid by
the shareholder. The restricted stock vests quarterly over a four-year
period at different amounts for each shareholder. At March 31, 1998,
447,137 shares of restricted stock had vested.
In May 1996, the Company completed a direct public offering of 2,300,000
shares of its common stock at $10.00 per share. Net proceeds to the
Company were approximately $22,900,000.
In March 1997, the Company completed a private placement of 2,000,000
shares of its common stock at $25.00 per share. Net proceeds to the
Company were approximately $49,700,000.
S-10
<PAGE> 28
5. SHAREHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK - In March 1998, the Company completed a private placement
of 2,300,000 shares of its convertible exchangeable preferred stock (the
"Preferred Stock") at $50.00 per share. Net proceeds to the Company were
approximately $110,500,000.
The Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed or exchanged, into the Company's common
stock at an initial conversion rate of 1.6878 shares of common stock for
each share of Preferred Stock. The initial conversion rate is subject to
adjustment in certain events. The Company has reserved 3,881,940 common
shares for issuance upon conversion.
Dividends on the Preferred Stock will be cumulative from the date of
original issue and will be payable quarterly, commencing June 1, 1998 and
payable each September 1, December 1, March 1 and June 1 thereafter, at
the annual rate of $3.25 per share of Preferred Stock. The Board of
Directors of the Company has declared a dividend on the Preferred Stock
for shareholders of record on May 12, 1998, payable June 1, 1998. Prior to
March 6, 2001, the Preferred Stock is not redeemable at the option of the
Company. Thereafter the Preferred Stock is redeemable at the option of the
Company, in whole or in part, at declining redemption prices, together
with accrued dividends. If redeemed during the 12-month period beginning
March 1 (beginning March 6, 2001 and ending on February 28, 2002, in the
case of the first such period) the per share redemption prices are $52.275
in 2001, $51.950 in 2002, $51.625 in 2003, $51.300 in 2004, $50.975 in
2005, $50.650 in 2006, $50.325 in 2007 and $50 at March 1, 2008 and
thereafter. The Preferred Stock has a liquidation preference of $50 per
share, plus accrued and unpaid dividends.
The Preferred Stock is exchangeable, in whole but not in part, at the
option of the Company on any dividend payment date beginning March 1, 1999
(the "Exchange Date") for the Company's 6-1/2% Convertible Subordinated
Debentures (the "Debentures") at the rate of $50 principal amount of
Debentures for each share of Preferred Stock. The Debentures, if issued,
will mature on the tenth anniversary of the Exchange Date. The Debentures,
if issued, will contain conversion and optional redemption provisions
substantially identical to those of the Preferred Stock.
6. LONG-TERM OBLIGATIONS
Long-term obligations at March 31 consist of:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Notes payable to a bank bearing interest at fixed rates
(7.69%-8.58%), payable in monthly installments,
maturing 2001 through 2003 $10,533,333 $ 6,436,903
Note payable to a bank bearing interest at a fixed rate
(7.96%), payable in quarterly installments
of $375,000, maturing in 2000 3,000,000 4,500,000
Note payable to a corporate partner bearing interest at
the prime rate (8.50% at March 31, 1998), maturing in
2000 3,500,000 3,500,000
Notes payable - stockholders bearing interest at 7%,
payable on demand 500,000 --
Other 4,533 24,766
----------- -----------
17,537,866 14,461,669
Less current portion 4,604,533 3,547,542
----------- -----------
$12,933,333 $10,914,127
=========== ===========
</TABLE>
S-11
<PAGE> 29
6. LONG-TERM OBLIGATIONS (CONTINUED)
The first bank loan is secured by a building and real property pursuant to
a mortgage and certain of the Company's equipment pursuant to security
agreements. The loan is also secured by cash collateral (included in
long-term investments at March 31, 1998) 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 loan agreement, the Company is required to maintain
a minimum unencumbered balance of cash and permitted investments and a
minimum ratio of unencumbered cash and permitted investments to
indebtedness.
The second bank loan agreement requires the Company to maintain a minimum
net worth, a maximum ratio of total liabilities to net worth, a minimum
current ratio and a minimum unencumbered balance of cash and permitted
investments. Upon the breach of any of these financial covenants or the
occurrence of any other event of default under the loan agreement, the
Company would be required to deposit an amount equal to the then
outstanding principal balance of the loan plus three months' interest into
a restricted account at the bank. Under the terms of the loan agreement,
the bank would have the right to liquidate such account and apply the
proceeds to repayment of the loan if the Company's unencumbered cash and
investment balance falls below $5,000,000.
In January 1995, the Company borrowed $3,500,000 from a corporate partner.
The principal amount of the loan, together with interest, is payable in
the Company's common stock or cash, at the Company's option.
At March 31, 1998, the maturities of the long-term obligations are as
follows:
<TABLE>
<CAPTION>
NOTES PAYABLE
AND OTHER
<S> <C>
1999 $ 4,604,533
2000 7,600,000
2001 2,525,000
2002 1,883,333
2003 925,000
-----------
$17,537,866
===========
</TABLE>
7. INCOME TAXES
At March 31, 1998, the Company has approximately $62,558,000 of net
operating loss ("NOL") carryforwards for U.S. federal income tax purposes
and approximately $5,417,000 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 2013.
S-12
<PAGE> 30
7. INCOME TAXES (CONTINUED)
The components of the net deferred income tax assets at March 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Acquired technology $ 884,000 $ 884,000
Capitalized research and development
expenses, net of amortization 13,471,000 14,535,000
NOL carryforwards, federal and state 24,525,000 21,495,000
Tax credit carryforwards 6,961,000 4,840,000
Alkermes Europe NOL carryforward 3,030,000 2,152,000
Other 1,064,000 1,070,000
Less valuation allowance (49,935,000) (44,976,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
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 $10,816,000 from March 31, 1996 to March
31, 1997.
The ACTI NOL carryforwards and ACTI research and development credit
carryforwards of approximately $4,780,000 and $790,000, respectively,
acquired from Enzytech, Inc. are only available to offset future taxable
income of ACTI.
8. RELATED-PARTY TRANSACTIONS
On April 10, 1992, the Company and Clinical Partners, a limited
partnership of which ADC II is the general partner, sold in a private
placement (i) 920 Class A units, each unit (a "Class A Unit") consisting
of one Class A limited partnership interest in Clinical Partners, a 1992
warrant (a "Class A 1992 Warrant") to purchase 2,800 shares of the
Company's common stock and a 1995 warrant (a "Class A 1995 Warrant") to
purchase 300 shares of the Company's common stock; and (ii) one Class B
unit (the "Class B Unit"), consisting of one Class B limited partnership
interest in Clinical Partners, a 1992 warrant (the "Class B 1992 Warrant")
to purchase 5,600 shares of the Company's common stock and a 1995 warrant
(the "Class B 1995 Warrant") to purchase 600 shares of the Company's
common stock. The purchase price was $50,000 for each Class A Unit and
$100,000 for the Class B Unit.
The Company completed an exchange offer on January 27, 1995 with respect
to the warrants issued in 1992 in connection with the formation of
Clinical Partners. Pursuant to the exchange offer, Class A limited
partners had the option to exchange both their Class A 1992 Warrants and
Class A 1995 Warrants for a new 1994 Class A Warrant to purchase, at $5.00
per share, and during the period beginning on April 1, 1995 and ending on
March 31, 2000, 1,700 shares of the Company's common stock for every 3,100
shares of common stock issuable upon exercise of the Class A 1992 Warrant
and Class A 1995 Warrant exchanged therefor. The Class B limited partner
had the option to exchange both the Class B 1992 and Class B 1995 Warrants
for a new 1994 Class B Warrant to purchase 3,400 shares of the Company's
common stock at $5.00 per share. The 1994 Class B Warrant is exercisable
during the same period as the 1994 Class A Warrants.
S-13
<PAGE> 31
8. RELATED-PARTY TRANSACTIONS (CONTINUED)
The net proceeds of the offering were used primarily to fund the further
development and clinical testing of a family of molecules designated by
the Company as Receptor-Mediated Permeabilizers(TM) ("RMPs"(TM)) for human
pharmaceutical use in the United States and Canada. Proprietary RMP(TM)
molecules developed by the Company may enhance the passage of small drug
molecules from the bloodstream into the brain. Pursuant to the Product
Development Agreement entered into in March 1992, the Company licensed to
Clinical Partners certain of its technology relating to RMPs. Research and
development of RMPs is being conducted by the Company for Clinical
Partners pursuant to the Product Development Agreement. The Company was
reimbursed by Clinical Partners for its actual costs incurred in
conducting such research and development and also received a management
fee of 10% of such costs. Such funding ended during the quarter ended June
30, 1996. None of the partners of Clinical Partners is obligated to make
any further capital contributions. Since the funding was not sufficient to
complete clinical trials and seek regulatory approval of Cereport
(formerly known as RMP-7), Alkermes has used its own resources, and
intends to continue to use its own resources, to develop Cereport.
Alkermes has obtained and intends to continue to obtain such resources
through equity offerings, bank borrowings and collaborative arrangements.
The Company is required to fund the development of Cereport to maintain
its Purchase Option, as defined below, with the limited partners.
Clinical Partners has granted the Company an exclusive interim license to
manufacture and market RMPs for human pharmaceutical use in the United
States and Canada. Upon the first marketing approval of an RMP product by
the United States Food and Drug Administration, the Company is obligated
to make a payment (approximately $8,300,000) to Clinical Partners equal to
20% of the aggregate capital contributions of all partners (the "milestone
payment"). Additionally, the Company will make royalty payments to
Clinical Partners equal to 12% of United States and Canadian revenues and
10% of European revenues, in certain circumstances, from any sales of RMPs
by the Company. The interim license will terminate if the Company does not
exercise the Purchase Option.
The 1992 Warrants, the 1995 Warrants (collectively, the "Class A
Warrants"), the Class B 1992 Warrant and the Class B 1995 Warrant
(collectively, the "Class B Warrants") were issued by the Company in
consideration of the grant by each limited partner to the Company of an
option to purchase (the "Purchase Option"), under certain circumstances,
the limited partnership interests in Clinical Partners held by such
limited partner. Upon exercise of such Purchase Option, each Class A
limited partner will be entitled to receive an initial payment, at the
Company's option, of $40,000 in cash or approximately $42,100 in the
Company's common stock, as well as certain additional payments (which are
subject to certain limitations) based on the Company's net revenues from
sales of RMPs in the United States, Canada and Europe as follows:
- 12% of net revenues to the Company on sales of RMPs in the United
States and Canada and 10% of net revenues to the Company on sales of
RMPs in Europe, until each Class A limited partner has received an
aggregate of $400,000 per interest from the initial payment and the
royalty stream; thereafter,
- 9% of net revenues to the Company on sales of RMPs in the United
States, Canada and Europe, until each Class A limited partner has
received an aggregate of $500,000 per interest from the initial
payment and the royalty stream; and thereafter,
- 4% of net revenues to the Company on sales of RMPs in the United
States, Canada and Europe.
S-14
<PAGE> 32
8. RELATED-PARTY TRANSACTIONS (CONTINUED)
Royalties on sales of RMPs in Europe will be payable only to the extent
necessary to pay projected distributions in any year. If royalties on
sales of RMPs in the United States and Canada in any year equal or exceed
the projected distributions for such year, no royalties on European sales
will be paid in that year.
At March 31, 1998, warrants to purchase shares of the Company's common
stock were outstanding as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF COMMON PRICE
SHARES ISSUABLE UPON EXPIRATION PER
EXERCISE OF WARRANTS DATE SHARE
<S> <C> <C>
147,000 July 31, 1999 $ 20.03
908,100 March 31, 2000 5.00
15,150 April 14, 2000 3.54
---------
1,070,250
=========
</TABLE>
9. RESEARCH AND DEVELOPMENT ARRANGEMENTS
The Company has entered into several collaborative agreements 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. In addition to
research and development funding, during fiscal 1998 the Company received
$200,000, representing a milestone payment under one of these agreements.
Additionally, the Company may obtain the right to manufacture and supply
products developed under certain of these agreements.
During fiscal 1998 and 1997, research and development revenue under
collaborative arrangements from Genentech, Inc. ("Genentech") amounted to
30% and 27%, and Janssen Pharmaceutica International amounted to 27% and
41%, respectively, of total revenues. During fiscal 1996, research and
development revenue under collaborative arrangement with Schering-Plough
Corporation amounted to 11% of total revenues.
S-15
<PAGE> 33
10. COMMITMENTS
LEASE COMMITMENTS - The Company leases certain of its offices and research
laboratories under operating leases with initial terms of three to ten
years expiring between 2001 and 2008. Several of the leases contain
provisions for extensions for up to ten years. Total annual future minimum
lease payments are as follows:
<TABLE>
<S> <C>
1999 $ 3,327,000
2000 3,496,000
2001 2,480,000
2002 1,561,000
2003 449,000
Thereafter 1,677,000
</TABLE>
Rent expense charged to operations was approximately $3,618,000,
$3,342,000 and $2,439,000 for the years ended March 31, 1998, 1997 and
1996, respectively.
Additionally, a U.S. Treasury Bill with a total principal amount of
$250,000 is being held by a bank in the Company's name as a security
deposit on the leases and, accordingly, has been classified as a long-term
investment at March 31, 1998.
LICENSE AND ROYALTY COMMITMENTS - The Company has entered into license
agreements with certain corporations and universities which 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 $112,000, $92,000 and $127,000 for the years ended March 31,
1998, 1997 and 1996, respectively.
11. 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"), Amended
and Restated 1990 Omnibus Stock Option Plan, as amended (the "1990 Plan")
and the 1992 Non-Qualified Stock Option Plan (the "1992 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 nonemployee directors of the Company.
Nonqualified options to purchase up to 225,000 shares of the Company's
common stock may be granted under the 1989 Plan, nonqualified and
incentive options to purchase up to 2,500,000 shares of the Company's
common stock may be granted under the 1990 Plan, nonqualified options to
purchase up to 1,000,000 shares of the Company's common stock may be
granted under the 1992 Plan and nonqualified options to purchase up to
150,000 shares of the Company's common stock may be granted under the
Director Plan. Unless sooner terminated, the 1989 Plan will terminate on
July 18, 1999, the 1990 Plan will terminate on September 19, 2000, the
1992 Plan will terminate on November 11, 2002 and the Director Plan will
terminate on March 18, 2006.
S-16
<PAGE> 34
11. STOCK OPTIONS AND AWARDS (CONTINUED)
The Compensation Committee of the Board of Directors administers the 1989
Plan, the 1990 Plan and the 1992 Plan 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." The Board of
Directors administers the Director Plan. The option exercise price of
stock options granted under the 1989 Plan, the 1990 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 nonqualified stock option or at any time
during the term of such option but may only be granted with 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, 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. Through March 31, 1998, LSARs have been granted under the 1990
Plan with respect to options to purchase 425,750 shares.
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 250,000 shares of common stock. The Award
Plan is administered by the Compensation Committee. Awards generally vest
over five years. Through March 31, 1998, 1997 and 1996, an aggregate of
81,250, 77,000 and 77,000 shares of common stock, respectively, have been
awarded under the Award Plan, of which 2,400, 2,400 and 13,200 shares,
respectively, ceased to be subject to forfeiture and were issued during
the years ended March 31, 1998, 1997 and 1996. In addition, 1,800, zero
and 5,000 shares were canceled during the years ended March 31, 1998, 1997
and 1996, respectively. The Award Plan will terminate on November 15,
2001, unless sooner terminated by the Board of Directors.
The Company has reserved a total of 2,940,804 shares of common stock for
issuance under the five plans.
The Company has elected to continue to follow Accounting Principles Board
("APB") No. 25 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 in which 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.
S-17
<PAGE> 35
11. STOCK OPTIONS AND AWARDS (CONTINUED)
Pro forma information regarding net loss and basic and diluted loss per
common share in fiscal 1998, 1997 and 1996 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 disclosed below for
fiscal 1998, 1997 and 1996 is not 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, because fiscal 1996, 1997 and 1998 pro forma
results include the impact of only one, two and three years, respectively,
of grants and related vesting. The fair value of options was estimated at
the date of grant using the Black-Scholes option valuation model with the
following weighted average assumptions: risk-free interest rates ranging
from 5.56% - 5.90% for fiscal 1998, 6.60% - 6.84% for fiscal 1997 and
5.96% - 6.17% for fiscal 1996; dividend yields of 0% in fiscal 1998, 1997
and 1996; volatility factors of the expected market price of the Company's
common stock of 65% in fiscal 1998, 67% in fiscal 1997 and 65% in fiscal
1996; and a weighted average expected life of 2.5 years in fiscal 1998,
1997 and 1996. Using the Black-Scholes option valuation model, the
weighted average fair value of options granted in fiscal 1998, 1997 and
1996 was $10.39, $8.00 and $2.96, 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:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net loss - as reported $ (12,582,201) $ (18,797,818) $ (13,747,084)
Net loss - pro forma (15,112,287) (19,971,317) (13,972,561)
Basic and diluted loss per common share - as reported (0.55) (1.03) (0.93)
Basic and diluted loss per common share - pro forma (0.66) (1.09) (0.95)
</TABLE>
S-18
<PAGE> 36
11. STOCK OPTIONS AND AWARDS (CONTINUED)
A summary of option activity under the 1989, 1990, 1992 and Director Plans
is as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER PRICE AVERAGE
OF PER EXERCISE
SHARES SHARE PRICE
<S> <C> <C> <C>
Balance, April 1, 1995 1,457,293 $ 0.56 - $14.875 $ 3.09
Granted 445,450 2.81 - 10.31 5.73
Exercised (60,199) 0.56 - 3.69 1.63
Canceled (106,540) 1.00 - 9.13 3.80
---------- ---------------- ------
Balance, March 31, 1996 1,736,004 0.56 - 14.875 3.78
Granted 449,650 9.31 - 28.75 14.53
Exercised (142,575) 0.56 - 14.875 3.43
Canceled (70,670) 1.00 - 14.88 4.90
---------- ---------------- ------
Balance, March 31, 1997 1,972,409 0.56 - 28.75 6.22
Granted 487,800 12.81 - 26.94 17.33
Exercised (183,648) 0.56 - 14.75 5.02
Canceled (153,613) 2.13 - 28.75 13.58
---------- ---------------- ------
Balance, March 31, 1998 2,122,948 $ 0.56 - $ 27.69 $ 8.34
========== ================ ======
</TABLE>
Options granted generally vest 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, 1998:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
$ 0.56 - $ 3.69 900,748 5.68 $ 2.70 780,301 $ 2.62
3.75 - 15.75 764,025 7.68 9.61 368,937 7.84
15.88 - 27.69 458,175 9.43 17.31 19,376 16.64
---------------- --------- ---- ------ --------- ------
$ 0.56 - $27.69 2,122,948 7.21 $ 8.34 1,168,614 $ 4.50
================ ========= ==== ====== ========= ======
</TABLE>
S-19
<PAGE> 37
11. STOCK OPTIONS AND AWARDS (CONTINUED)
For certain common stock issued, stock options granted and awards made,
the Company recognizes, as compensation expense, the excess of the
intrinsic value for accounting purposes of the common stock issued in
excess of the issuance price, the common stock issuable upon exercise of
such stock options over the aggregate exercise price thereof and, in
connection with stock awards, the fair market value of the Company's
common stock on the date of the award. This compensation expense is
amortized ratably over the vesting period of each stock option and stock
award or upon issuance in connection with common stock. For the years
ended March 31, 1998, 1997 and 1996, compensation expense of $2,183,373,
$173,094 and $179,366, respectively, was recorded and will aggregate a
maximum of $2,926,484 over the remaining terms of such stock options
granted and stock awards made.
12. SUBSEQUENT EVENTS
ALZA AGREEMENT - In April 1998, Alkermes entered into an exclusive license
agreement with ALZA, a pharmaceutical and drug delivery company, for two
of ALZA's oral drug delivery technologies: RingCap and DST. The assets
acquired included equipment to be used in the development of the
technologies. A nonrecurring charge of approximately $3.2 million for
technology licensed but not yet commercially viable was recorded by the
Company at the acquisition date. This charge represents that portion of
the acquisition price of the acquired technology that was allocated to
research and development in-process.
1998 EQUITY INCENTIVE PLAN - During 1999, the Company adopted the AIR 1998
Equity Incentive Plan (the "AIR Plan") to attract and retain key employees
and consultants of the Company. The AIR Plan is administered by a
Committee of the Board of Directors. All employees and consultants of the
Company or any affiliate of the Company capable of contributing
significantly to the successful performance of the Company is eligible to
participate under the AIR Plan. The AIR Plan provides for stock awards in
the form of nonqualified stock options and restricted stock grants.
The AIR Plan has authorized the issuance of up to 591,487 shares of common
stock for awards of stock options or restricted stock. If any award
expires or is terminated unexercised or is forfeited or settled in a
manner that results in fewer shares outstanding than were awarded, the
shares subject to such award, to the extent of such expiration,
termination, forfeiture or decrease, shall again be available for award
under the AIR Plan.
Stock Options - The Company may grant nonqualified stock options under the
AIR Plan, which may be granted below the fair market value of the
underlying stock at the time the option is granted.
Restricted Stock Grants - The Company may grant shares of common stock
subject to forfeiture ("Restricted Stock") and determine the duration of
the period during which, and the conditions under which, the shares may be
forfeited to the Company. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as
permitted by the Committee, during the restricted period. Any certificates
issued with respect to shares of Restricted Stock shall be registered in
the name of the Participant and, unless otherwise determined by the
Committee, deposited by the Participant, together with a stock power
endorsed in blank, with the Company's transfer agent. At the expiration of
the restricted period, the Company's transfer agent shall deliver such
certificates to the Participant.
S-20
<PAGE> 38
12. SUBSEQUENT EVENTS (CONTINUED)
LONG-TERM OBLIGATIONS - In September 1998, the Company amended its loan
agreement with a bank to increase the principal amount available
thereunder up to a total of $20,000,000 and to grant a security interest
in certain building, equipment and leasehold improvements as security for
the entire principal of, and interest on, the loan. The additional
principal amount of $9,000,000 made available under the first tranche
("Tranche A") of the loan is payable over five years in equal quarterly
installments of $500,000 which will commence June 30, 1999. The additional
principal amount of $11,000,000 made available under the second tranche
("Tranche B") of the loan is payable over five years in equal quarterly
installments of $275,000 and a balloon payment of $6,325,000 due on
September 30, 2003. The principal payments of Tranche B will commence June
30, 1999. The loans bear interest at a fixed rate of interest ranging from
6.97% - 7.03%. The Company drew down the total of $20,000,000 during
September 1998 to March 1999.
GENENTECH AGREEMENT - In April 1999, the Company entered into an agreement
with Genentech to expand their collaboration for Nutropin Depot, an
injectable sustained release formulation of Genentech's human growth
hormone based on Alkermes' ProLease drug delivery system. Under the
agreement, the companies will conduct expanded development activities,
including clinical trials in an additional indication, process and
formulation development, and manufacturing. The terms of the collaboration
include the purchase by Genentech of $35 million of newly issued
redeemable convertible exchangeable preferred stock of the Company (the
"1999 Preferred Stock") with a conversion price of at least $45 per share.
The agreement includes potential milestone payments to the Company of
approximately $40 million.
The 1999 Preferred Stock will be junior to the Company's outstanding $115
million of convertible exchangeable preferred stock that was issued by the
Company in March 1998. Dividends on the 1999 Preferred Stock will be paid
at a floating three-month LIBOR rate. The Company has the option to redeem
the 1999 Preferred Stock in cash or in common stock at any time.
* * * * * *
S-21
<PAGE> 39
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 18,077,165 $ 3,699,950
Short-term investments 154,914,378 190,556,898
Prepaid expenses and other current assets 7,708,505 8,562,166
------------- -------------
Total current assets 180,700,048 202,819,014
------------- -------------
Property and Equipment:
Land 235,000 235,000
Building 3,576,297 1,275,000
Furniture, fixtures and equipment 30,003,789 15,332,236
Leasehold improvements 11,933,921 2,507,973
Construction in progress -- 4,275,985
------------- -------------
45,749,007 23,626,194
Less accumulated depreciation and amortization (13,040,811) (9,620,769)
------------- -------------
32,708,196 14,005,425
------------- -------------
Investments 8,409,943 3,422,726
------------- -------------
Other Assets 2,997,367 466,712
------------- -------------
Other Investments 99,300 263,400
------------- -------------
$ 224,914,854 $ 220,977,277
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 5,821,144 $ 7,433,776
Deferred revenue 9,932,594 7,478,480
Long-term obligations-current portion 6,544,991 4,604,533
------------- -------------
Total current liabilities 22,298,729 19,516,789
------------- -------------
Long-Term Obligations 31,873,264 12,933,333
------------- -------------
Other Long-Term Liabilities 1,550,582 2,072,212
------------- -------------
Deferred Revenue -- 5,000,000
------------- -------------
Shareholders' Equity:
Convertible exchangeable preferred stock 23,000 23,000
Common stock 248,506 240,280
Additional paid-in capital 344,014,581 316,592,909
Unearned deferred compensation (11,258,334) (2,926,484)
Cumulative foreign currency translation adjustments (19,903) (10,638)
Unrealized loss on marketable securities -- (37,500)
Accumulated deficit (163,815,571) (132,426,624)
------------- -------------
Total shareholders' equity 169,192,279 181,454,943
------------- -------------
$ 224,914,854 $ 220,977,277
============= =============
</TABLE>
See notes to supplemental condensed consolidated financial statements.
S-22
<PAGE> 40
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues:
Research and development revenue under
collaborative arrangements $ 29,456,873 $ 18,550,227
Interest and other income 7,565,141 3,620,740
------------ ------------
37,022,014 22,170,967
------------ ------------
Expenses:
Research and development 34,804,385 23,081,851
General and administrative 10,044,549 6,072,324
Noncash compensation and consulting expense 13,207,893 642,060
Interest expense 1,547,331 1,242,106
Acquisition of in-process research and development 3,221,253 --
------------ ------------
62,825,411 31,038,341
------------ ------------
Net Loss (25,803,397) (8,867,374)
Preferred stock dividends (5,585,550) --
------------ ------------
Net loss attributable to common shareholders $(31,388,947) $ (8,867,374)
============ ============
Basic and diluted loss per common share $ (1.28) $ (0.39)
============ ============
Weighted average number of common shares outstanding 24,610,918 22,639,446
============ ============
</TABLE>
See notes to supplemental condensed consolidated financial statements.
S-23
<PAGE> 41
ALKERMES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(25,803,397) $ (8,867,374)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 3,521,793 2,178,301
Noncash compensation and consulting expense related to
issuance of common stock and options and awards made 13,207,893 642,060
Loss on sale of equipment -- 8,527
Adjustments to other investments 201,600 60,026
Changes in assets and liabilities:
Prepaid expenses and other current assets 854,109 (1,277,643)
Accounts payable and accrued expenses (1,612,891) (566,246)
Deferred revenue 2,454,114 7,699,416
Other long-term liabilities 461,662 490,668
------------ ------------
Net cash (used by) provided by operating activities (6,715,117) 367,735
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (22,118,725) (5,271,657)
Maturities of short-term investments, net 35,681,520 7,017,243
Purchases of long-term investments, net (5,026,217) (1,032,406)
Increase in other assets (2,634,825) (91,975)
------------ ------------
Net cash provided by investing activities 5,901,753 621,205
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 5,890,155 1,337,123
Proceeds from issuance of long-term debt 18,026,630 2,500,000
Payment of preferred stock dividends (5,585,550) --
Payment of long-term obligations (3,129,532) (3,094,433)
------------ ------------
Net cash provided by financing activities 15,201,703 742,690
------------ ------------
Effect of exchange rate changes on cash (11,124) 3,471
------------ ------------
Net increase in cash and cash equivalents 14,377,215 1,735,101
Cash and cash equivalents, beginning of period 3,699,950 2,799,012
------------ ------------
Cash and cash equivalents, end of period $ 18,077,165 $ 4,534,113
============ ============
Supplementary information:
Interest paid $ 1,018,955 $ 702,600
============ ============
Deferred revenue and accrued interest converted to long-term obligations $ 5,983,292 $ --
============ ============
</TABLE>
See notes to supplemental condensed consolidated financial statements.
S-24
<PAGE> 42
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
1. Basis of Presentation
The supplemental condensed consolidated financial statements for the nine months
ended December 31, 1998 and December 31, 1997 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. All such adjustments are
of a normal recurring nature. The supplemental consolidated financial statements
give retroactive effect to the merger of Alkermes, Inc. and Advanced Inhalation
Research, Inc. ("AIR") on February 1, 1999, which has been accounted for as a
pooling of interests. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the date
of consummation. These unaudited supplemental consolidated financial statements
do not extend through the date of consummation, however, they will become the
historical financial statements of Alkermes, Inc. and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued. These financial statements should be read in conjunction
with the Company's audited supplemental consolidated financial statements,
included herein, for the year ended March 31, 1998, which includes supplemental
consolidated financial statements and notes thereto for the years ended March
31, 1998, 1997 and 1996. Certain reclassifications have been made in 1997 to
conform to the presentation used in 1998. In addition, the supplemental
financial statements include the accounts of Alkermes Controlled Therapeutics,
Inc., Alkermes Controlled Therapeutics Inc. II, Alkermes Investments, Inc.,
Alkermes Europe Ltd., Alkermes Development Corporation II and AIR, 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 financial statements in conformity with
generally accepted accounting principles 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 financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
2. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which the Company adopted on April 1, 1998. SFAS No. 130
requires companies to display comprehensive income and its components as part of
the Company's full set of consolidated financial statements. Comprehensive
income is comprised of net income and other comprehensive income. The
measurement and presentation of net loss will not change. Other comprehensive
income includes certain changes in equity of the Company that are excluded from
the net loss. Specifically, SFAS No. 130 requires unrealized holding gains and
losses on the Company's available-for-sale securities and cumulative foreign
currency translation adjustments, which are currently reported separately in
shareholders' equity, to be included in other comprehensive income.
S-25
<PAGE> 43
Comprehensive income (loss) for the nine months ended December 31, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss $(25,803,397) $( 8,867,374)
Cumulative foreign currency translation adjustments (9,265) 2,392
Carrying value adjustments 103,050 --
Unrealized loss on marketable securities (65,550) (146,250)
------------ ------------
Comprehensive loss $(25,775,162) $( 9,011,232)
============ ============
</TABLE>
The accumulated other comprehensive income (loss) is as follows:
<TABLE>
<S> <C>
Balance March 31, 1998 $(48,138)
Change for the nine months ended December 31, 1998 28,235
--------
Balance December 31, 1998 $(19,903)
========
</TABLE>
SFAS No. 131 requires that the Company report financial and descriptive
information about its reportable operating segments. The Company is evaluating
the impact on its disclosures, if any.
S-26
<PAGE> 44
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The following unaudited pro forma condensed combined financial statements give
effect to the merger using the pooling-of-interests method of accounting, after
giving effect to the pro forma adjustments described in the accompanying notes.
These unaudited pro forma condensed combined financial statements have been
prepared from, and should be read in conjunction with, the historical financial
statements and notes thereto of Alkermes, which are included in Alkermes' Annual
Report on Form 10-K for the year ended March 31, 1998 and Quarterly Reports on
Form 10-Q for the quarters ended June 30, 1998, September 30, 1998 and December
31, 1998 and AIR's audited financial statements for the period ended March 31,
1998 and the unaudited financial statements for the nine months ended December
31, 1998 included herein.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial position
that would have occurred had the merger been consummated at the dates indicated,
nor is it necessarily indicative of future operating results or financial
position of the merged companies.
The unaudited pro forma condensed combined balance sheet gives effect to the
merger as if it had occurred on December 31, 1998 and combines the unaudited
balance sheets of Alkermes and AIR at December 31, 1998. The unaudited condensed
combined statements of operations give effect to the merger as if it had
occurred at the beginning of the earliest period presented, combining the
results of Alkermes and AIR for each year in the three year period ended March
31, 1998, and for the nine month periods ended December 31, 1998 and 1997.
Merger Related Expenses
As a result of the merger, Alkermes anticipates a pretax charge of approximately
$1.3 million for direct merger related transaction costs. These costs consist
primarily of professional and registration fees and have been reflected as an
adjustment to the unaudited pro forma condensed combined balance sheet at
December 31, 1998. These costs have been excluded from the unaudited pro forma
condensed combined statement of operations for the nine months ended December
31, 1998 due to their nonrecurring nature.
PF-1
<PAGE> 45
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL HISTORICAL POOLING PRO FORMA
ASSETS ALKERMES AIR ADJUSTMENTS COMBINED
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 16,115,748 $ 1,961,417 $ -- $ 18,077,165
Short-term investments 154,875,378 39,000 -- 154,914,378
Prepaid expenses and other current assets 7,137,025 571,480 -- 7,708,505
------------- ------------ ----------- -------------
Total current assets 178,128,151 2,571,897 -- 180,700,048
------------- ------------ ----------- -------------
Property, Plant and Equipment:
Land 235,000 -- -- 235,000
Building 3,576,297 -- -- 3,576,297
Furniture, fixtures and equipment 28,235,282 1,768,507 -- 30,003,789
Leasehold improvements 11,685,363 248,558 -- 11,933,921
------------- ------------ ----------- -------------
43,731,942 2,017,065 -- 45,749,007
Less accumulated depreciation and amortization (12,820,766) (220,045) -- (13,040,811)
------------- ------------ ----------- -------------
30,911,176 1,797,020 -- 32,708,196
------------- ------------ ----------- -------------
Investments 8,409,943 -- -- 8,409,943
------------- ------------ ----------- -------------
Other Assets 2,971,990 25,377 -- 2,997,367
------------- ------------ ----------- -------------
Other Investments 99,300 -- -- 99,300
------------- ------------ ----------- -------------
$ 220,520,560 $ 4,394,294 $ -- $ 224,914,854
============= ============ =========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 5,320,320 $ 500,824 $ 1,300,000 $ 7,121,144
Deferred revenue 8,813,661 1,118,933 -- 9,932,594
Long-term obligations - current portion 6,294,991 250,000 -- 6,544,991
------------- ------------ ----------- -------------
Total current liabilities 20,428,972 1,869,757 1,300,000 23,598,729
------------- ------------ ----------- -------------
Long-Term Obligations 31,873,264 -- -- 31,873,264
------------- ------------ ----------- -------------
Other Long-Term Liabilities 1,550,582 -- -- 1,550,582
------------- ------------ ----------- -------------
Shareholders' Equity:
Preferred stock 23,000 791 -- 23,791
Common stock 211,701 2,195 -- 213,896
Additional paid-in capital 311,726,147 32,322,253 -- 344,048,400
Other (196,821) (11,081,416) -- (11,278,237)
Accumulated deficit (145,096,285) (18,719,286) (1,300,000) (165,115,571)
------------- ------------ ----------- -------------
Total shareholders' equity 166,667,742 2,524,537 (1,300,000) 167,892,279
------------- ------------ ----------- -------------
$ 220,520,560 $ 4,394,294 $ -- $ 224,914,854
============= ============ =========== =============
</TABLE>
See notes to pro forma condensed combined financial statements.
PF-2
<PAGE> 46
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
ALKERMES AIR COMBINED
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative arrangements $ 28,417,706 $ 1,039,167 $ 29,456,873
Interest and other income 7,558,282 6,859 7,565,141
--------------------------------------------------------
35,975,988 1,046,026 37,022,014
--------------------------------------------------------
Expenses:
Research and development 32,426,631 2,377,754 34,804,385
General and administrative 8,598,231 1,446,318 10,044,549
Noncash compensation and consulting expense 92,718 13,115,175 13,207,893
Interest expense 1,532,336 14,995 1,547,331
Purchase of in-process research and development 3,221,253 -- 3,221,253
--------------------------------------------------------
45,871,169 16,954,242 62,825,411
--------------------------------------------------------
Net Loss (9,895,181) (15,908,216) (25,803,397)
Preferred stock dividends (5,585,550) -- (5,585,550)
--------------------------------------------------------
Net loss attributable to common shareholders $(15,480,731) $(15,908,216) $(31,388,947)
========================================================
Basic and diluted loss per common share $ (0.73) $ (7.34) $ (1.28)
========================================================
Weighted average number of common shares outstanding 21,120,494 2,166,194 24,610,918
========================================================
</TABLE>
See notes to pro forma condensed combined financial statements.
PF-3
<PAGE> 47
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 FOR ALKERMES
AND FOR THE PERIOD FROM MAY 7, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 FOR AIR
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
ALKERMES AIR COMBINED
---------------------------------------------------
<S> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative arrangements $ 18,550,227 $ -- $ 18,550,227
Interest and other income 3,619,436 1,304 3,620,740
----------------------------------------------------
22,169,663 1,304 22,170,967
----------------------------------------------------
Expenses:
Research and development 22,857,229 224,622 23,081,851
General and administrative 6,011,307 61,017 6,072,324
Noncash compensation and consulting expense 55,047 587,013 642,060
Interest expense 1,242,106 -- 1,242,106
----------------------------------------------------
30,165,689 872,652 31,038,341
----------------------------------------------------
Net Loss $ (7,996,026) $ (871,348) $ (8,867,374)
====================================================
Basic and diluted loss per common share $ (0.38) $ (0.64) $ (0.39)
====================================================
Weighted average number of common shares outstanding 20,792,230 1,361,709 22,639,446
====================================================
</TABLE>
See notes to pro forma condensed combined financial statements.
PF-4
<PAGE> 48
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR
ENDED MARCH 31, 1998 FOR ALKERMES AND FOR THE PERIOD FROM MAY 7, 1997 (DATE OF
INCORPORATION) THROUGH MARCH 31, 1998 FOR AIR AND FOR THE YEARS ENDED MARCH 31,
1997 AND 1996
<TABLE>
<CAPTION>
MARCH 31, 1998
HISTORICAL HISTORICAL PRO FORMA
ALKERMES AIR COMBINED
-----------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative arrangements $ 25,547,558 $ 37,500 $ 25,585,058
Research and development revenue under
collaborative arrangements with related party -- -- --
Interest and other income 5,779,090 2,421 5,781,511
------------ ------------ ------------
31,326,648 39,921 31,366,569
------------ ------------ ------------
Expenses:
Research and development 31,339,121 422,420 31,761,541
General and administrative 8,049,944 324,987 8,374,931
Noncash compensation and consulting expense 83,816 2,099,557 2,183,373
Interest expense 1,624,898 4,027 1,628,925
Purchase of in-process research and development -- -- --
------------ ------------ ------------
41,097,779 2,850,991 43,948,770
------------ ------------ ------------
Net Loss $ (9,771,131) $ (2,811,070) $(12,582,201)
============ ============ ============
Basic and diluted loss per common share $ (0.47) $ (1.80) $ (0.55)
============ ============ ============
Weighted average number of common shares outstanding 20,834,085 1,564,946 23,018,876
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996
PRO FORMA PRO FORMA
COMBINED (1) COMBINED (1)
----------------------------------
<S> <C> <C>
Revenues:
Research and development revenue under
collaborative arrangements $ 15,968,317 $ 2,848,510
Research and development revenue under
collaborative arrangements with related party 1,415,313 11,182,741
Interest and other income 2,443,317 1,887,275
------------ ------------
19,826,947 15,918,526
------------ ------------
Expenses:
Research and development 29,553,988 21,586,316
General and administrative 7,516,531 6,106,334
Noncash compensation and consulting expense 173,094 179,366
Interest expense 1,381,152 1,043,594
Purchase of in-process research and development -- 750,000
------------ ------------
38,624,765 29,665,610
------------ ------------
Net Loss $(18,797,818) $(13,747,084)
============ ============
Basic and diluted loss per common share $ (1.03) $ (0.93)
============ ============
Weighted average number of common shares outstanding 18,288,334 14,774,584
============ ============
</TABLE>
(1) The pro forma combined information for 1997 and 1996 is the same as
Alkermes' information for the related periods because AIR was not
incorporated until May 7, 1997.
See Notes to pro forma condensed combined financial statements.
PF-5
<PAGE> 49
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Historical Presentation
The foregoing unaudited pro forma condensed combined financial statements are
derived from, and should be read in conjunction with, the financial statements,
including the notes thereto, of Alkermes which are included in Alkermes' Annual
Report on Form 10-K for the year ended March 31, 1998 and Quarterly Reports on
Form 10-Q for the quarters ended June 30, 1998, September 30, 1998 and December
31, 1998 and AIR for the period ended March 31, 1998 and the unaudited financial
statements for the nine months ended December 31, 1998, which are included
herein. Certain reclassifications have been made in 1996 and 1997 to conform to
the presentation used in 1998. The unaudited pro forma condensed combined
financial statements are presented for illustrative purposes only. They are not
necessarily indicative of the operating results or financial position that would
have occurred if the merger had been consummated in accordance with the
assumptions set forth in these notes, nor are they necessarily indicative of the
future operating results or financial position.
2. Pro Forma Combined Loss Per Share
Under the merger agreement, each outstanding share of AIR common stock was
converted into 1.1829754 shares of Alkermes common stock. This exchange ratio
was used in computing share and per share amounts in the accompanying unaudited
pro forma condensed combined financial statements.
3. Merger Costs
The pro forma condensed combined balance sheet at December 31, 1998 reflects an
adjustment of $1.3 million for direct merger related transaction costs,
primarily consisting of professional and registration fees. These costs have
been excluded from the unaudited pro forma condensed combined statement of
operations for the nine months ended December 31, 1998 due to their nonrecurring
nature.
PF-6
<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
Dated: May 12, 1999 ALKERMES, INC.
By: /s/ James M. Frates
--------------------------------------
Name: James M. Frates
Title: Vice President, Chief Financial
Officer and Treasurer
4
<PAGE> 51
EXHIBIT INDEX
Exhibit No. Exhibits
23.1 Consent of Deloitte & Touche LLP.
5
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-75645, 333-75649, 333-50157, 333-19955 and 33-90736 of Alkermes, Inc. on
Form S-3 and Registration Statement Nos. 333-71011, 333-50357, 333-13283,
33-97468, 33-58330 and 33-44752 of Alkermes, Inc. on Form S-8 of our report
dated April 13, 1999, on the historical financial statements of Advanced
Inhalation Research, Inc. as of March 31, 1998 and for the period from May 7,
1997 (date of incorporation) through March 31, 1998, and of our report dated
April 13, 1999 on the supplemental consolidated financial statements of
Alkermes, Inc. and subsidiaries as of March 31, 1998 and 1997 and for each of
the three years in the period ended March 31, 1998, appearing in Amendment No. 2
to this Current Report on Form 8-K/A dated February 1, 1999 of Alkermes, Inc.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
May 12, 1999
