<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
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 currently
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
financial statements of AIR and pro forma financial statements of the Registrant
with respect to the Merger.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
This Item 7 amends and restates in its entirety the Item 7
in the Registrant's Current Report on Form 8-K dated
February 1, 1999.
(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.
(b) Unaudited Pro Forma Financial Information.
Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1998.
2
<PAGE> 3
Unaudited Pro Forma Combined Statement of Operations for the
Nine Months Ended December 31, 1998.
Unaudited Pro Forma Combined Statement of Operations for the
Nine Months Ended December 31, 1997.
Unaudited Pro Forma Combined Statement 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.
3
<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 3,898,874
Unearned deferred compensation (1,299,427)
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 -- 3,398,984 (3,398,984) -- --
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 $ 3,898,874 $(1,299,427) $(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 4 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 4-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 ("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 non-cancelable 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:
Preferred stock 791 375
Common stock 2,195 2,124
Additional paid-in capital 27,728,898 3,898,874
Unearned deferred compensation (6,488,061) (1,299,427)
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.
A-1
<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.
A-2
<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.
A-3
<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.
A-4
<PAGE> 18
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 and AIR, 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 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> 19
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 27,728,898 - 339,455,045
Other (196,821) (6,488,061) - (6,684,882)
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>
PF-2
<PAGE> 20
UNAUDITED PRO FORMA 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 8,690,949 1,446,318 10,137,267
Noncash compensation and consulting expense -- 13,115,175 13,115,175
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 24,602,792
========================================================
</TABLE>
PF-3
<PAGE> 21
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<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 6,066,354 61,017 6,127,371
Noncash compensation and consulting expense -- 587,013 587,013
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>
PF-4
<PAGE> 22
UNAUDITED PRO FORMA COMBINED STATEMENT 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
<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 8,133,760 324,987 8,458,747
Noncash compensation and consulting expense -- 2,099,557 2,099,557
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 7,689,625 6,285,700
Noncash compensation and consulting expense -- --
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.
PF-5
<PAGE> 23
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, which are included herein.
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> 24
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: April 16, 1999 ALKERMES, INC.
By: /s/ James M. Frates
--------------------------------------
Name: James M. Frates
Title: Vice President, Chief Financial
Officer and Treasurer
4
<PAGE> 25
EXHIBIT INDEX
Exhibit No. Exhibits
23.1 Consent of Deloitte & Touche LLP.
5
<PAGE> 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 financial statements of Advanced Inhalation
Research, Inc. appearing in this current report on Form 8-K/A of Alkermes, Inc.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 16, 1999
