UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
December 31, 2007
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-14131
ALKERMES, INC.
(Exact name of registrant as
specified in its charter)
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PENNSYLVANIA
(State or other jurisdiction
of
incorporation or organization)
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23-2472830
(I.R.S. Employer
Identification No.)
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88 Sidney Street, Cambridge, MA
(Address of principal
executive offices)
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02139-4234
(Zip Code)
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Registrants
telephone number including area code:
(617) 494-0171
(Former
name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated
filer
o
Non-accelerated
filer
o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act.): Yes
o
No
þ
The number of shares outstanding of each of the issuers
classes of common stock was:
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As of February 6,
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Class
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2008
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Common Stock, $.01 par value
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99,699,954
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Non-Voting Common Stock, $.01 par value
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382,632
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ALKERMES,
INC. AND SUBSIDIARIES
INDEX
2
PART 1.
FINANCIAL INFORMATION
Item 1.
Condensed
Consolidated Financial Statements:
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
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December 31,
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March 31,
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2007
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2007
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(In thousands, except share and per share amounts)
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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320,931
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|
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$
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80,500
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Investments
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190,535
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271,082
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Receivables
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40,256
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56,049
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Inventory
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23,054
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18,190
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Prepaid expenses and other current assets
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7,088
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7,054
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Total current assets
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581,864
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432,875
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PROPERTY, PLANT AND EQUIPMENT:
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Land
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301
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301
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Building and improvements
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32,602
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25,717
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Furniture, fixtures and equipment
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67,783
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64,203
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Equipment under capital lease
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463
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464
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Leasehold improvements
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33,349
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32,345
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Construction in progress
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47,705
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42,442
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182,203
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165,472
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Less: accumulated depreciation
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(50,687
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)
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(41,877
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)
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Total property, plant and equipment net
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131,516
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123,595
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RESTRICTED INVESTMENTS
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5,146
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5,144
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OTHER ASSETS
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11,958
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7,007
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TOTAL ASSETS
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$
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730,484
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$
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568,621
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LIABILITIES AND SHAREHOLDERS EQUITY
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CURRENT LIABILITIES:
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Accounts payable and accrued expenses
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$
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29,958
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$
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45,855
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Accrued interest
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2,975
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2,976
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Unearned milestone revenue current portion
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5,820
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11,450
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Deferred revenue current portion
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200
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Long-term debt current portion
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651
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1,579
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Total current liabilities
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39,404
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62,060
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NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES
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159,430
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156,851
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UNEARNED MILESTONE REVENUE LONG-TERM PORTION
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113,393
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117,300
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DEFERRED REVENUE LONG-TERM PORTION
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27,837
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22,153
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OTHER LONG-TERM LIABILITIES
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5,774
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6,796
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TOTAL LIABILITIES
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345,838
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365,160
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COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
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SHAREHOLDERS EQUITY:
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Capital stock, par value, $0.01 per share; 4,550,000 shares
authorized (includes 3,000,000 shares of preferred stock);
none issued and outstanding
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Common stock, par value, $0.01 per share;
160,000,000 shares authorized; 102,797,809 and
101,550,673 shares issued; 99,969,036 and
100,726,996 shares outstanding at December 31, 2007
and March 31, 2007, respectively
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1,028
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1,015
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Non-voting common stock, par value, $0.01 per share;
450,000 shares authorized; 382,632 shares issued and
outstanding at December 31, 2007 and March 31, 2007
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4
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4
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Treasury stock, at cost (2,828,773 and 823,677 shares at
December 31, 2007 and March 31, 2007, respectively)
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(41,599
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)
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(12,492
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)
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Additional paid-in capital
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864,362
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837,727
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Accumulated other comprehensive (loss) income
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(929
|
)
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753
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Accumulated deficit
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(438,220
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)
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(623,546
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)
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TOTAL SHAREHOLDERS EQUITY
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384,646
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203,461
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
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$
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730,484
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$
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568,621
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
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Three Months Ended
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Nine Months Ended
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December 31,
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December 31,
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2007
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2006
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2007
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2006
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(In thousands, except per share amounts)
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REVENUES:
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Manufacturing revenues
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$
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14,275
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$
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28,763
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$
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69,929
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$
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77,078
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Royalty revenues
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7,384
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5,673
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21,714
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16,625
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Research and development revenue under collaborative arrangements
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23,985
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19,532
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68,641
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51,620
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Net collaborative profit
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5,127
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8,445
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18,025
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29,798
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Total revenues
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50,771
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|
|
62,413
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|
|
|
178,309
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|
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175,121
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|
|
|
|
|
|
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EXPENSES:
|
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|
|
|
|
|
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|
|
|
|
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Cost of goods manufactured
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7,499
|
|
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12,989
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26,862
|
|
|
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34,149
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|
Research and development
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30,395
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|
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29,908
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91,331
|
|
|
|
85,588
|
|
Selling, general and administrative
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15,249
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16,365
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45,136
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|
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48,572
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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Total expenses
|
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|
53,143
|
|
|
|
59,262
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|
163,329
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168,309
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
OPERATING (LOSS) INCOME
|
|
|
(2,372
|
)
|
|
|
3,151
|
|
|
|
14,980
|
|
|
|
6,812
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment in Reliant Pharmaceuticals, Inc.
|
|
|
174,631
|
|
|
|
|
|
|
|
174,631
|
|
|
|
|
|
Interest income
|
|
|
4,292
|
|
|
|
4,260
|
|
|
|
12,940
|
|
|
|
13,329
|
|
Interest expense
|
|
|
(4,088
|
)
|
|
|
(4,141
|
)
|
|
|
(12,238
|
)
|
|
|
(13,648
|
)
|
Other (expense) income, net
|
|
|
(393
|
)
|
|
|
89
|
|
|
|
784
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total other income (expense)
|
|
|
174,442
|
|
|
|
208
|
|
|
|
176,117
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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INCOME BEFORE INCOME TAXES
|
|
|
172,070
|
|
|
|
3,359
|
|
|
|
191,097
|
|
|
|
6,705
|
|
INCOME TAXES
|
|
|
3,189
|
|
|
|
426
|
|
|
|
5,771
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET INCOME
|
|
$
|
168,881
|
|
|
$
|
2,933
|
|
|
$
|
185,326
|
|
|
$
|
5,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
BASIC
|
|
$
|
1.66
|
|
|
$
|
0.03
|
|
|
$
|
1.82
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
1.63
|
|
|
$
|
0.03
|
|
|
$
|
1.78
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
101,703
|
|
|
|
100,896
|
|
|
|
101,676
|
|
|
|
98,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
103,914
|
|
|
|
104,746
|
|
|
|
104,097
|
|
|
|
103,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
185,326
|
|
|
$
|
5,944
|
|
Adjustments to reconcile net income to cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
15,477
|
|
|
|
22,218
|
|
Depreciation
|
|
|
9,380
|
|
|
|
8,838
|
|
Other non-cash charges
|
|
|
3,580
|
|
|
|
2,645
|
|
Change in fair value of warrants
|
|
|
(1,425
|
)
|
|
|
510
|
|
Gain on sale of investment in Reliant Pharmaceuticals, Inc.
|
|
|
(174,631
|
)
|
|
|
|
|
Loss on disposal of equipment
|
|
|
645
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
14,368
|
|
|
|
(11,079
|
)
|
Inventory, prepaid expenses and other assets
|
|
|
(7,904
|
)
|
|
|
(10,040
|
)
|
Accounts payable, accrued expenses and accrued interest
|
|
|
(14,004
|
)
|
|
|
(11,598
|
)
|
Unearned milestone revenue
|
|
|
(9,537
|
)
|
|
|
58,760
|
|
Deferred revenue
|
|
|
6,909
|
|
|
|
18,516
|
|
Other liabilities
|
|
|
(180
|
)
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
28,004
|
|
|
|
84,916
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(17,618
|
)
|
|
|
(24,728
|
)
|
Proceeds from the sale of equipment
|
|
|
|
|
|
|
159
|
|
Purchases of investments
|
|
|
(371,342
|
)
|
|
|
(217,453
|
)
|
Sales and maturities of investments
|
|
|
453,403
|
|
|
|
214,193
|
|
Proceeds from the sale of investment in Reliant Pharmaceuticals,
Inc.
|
|
|
166,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
231,308
|
|
|
|
(27,829
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
9,510
|
|
|
|
5,868
|
|
Excess tax benefit from stock options
|
|
|
211
|
|
|
|
|
|
Payment of debt
|
|
|
(975
|
)
|
|
|
(817
|
)
|
Purchase of treasury stock
|
|
|
(27,627
|
)
|
|
|
(12,492
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
(18,881
|
)
|
|
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
240,431
|
|
|
|
49,646
|
|
CASH AND CASH EQUIVALENTS Beginning of period
|
|
|
80,500
|
|
|
|
33,578
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period
|
|
$
|
320,931
|
|
|
$
|
83,224
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
9,004
|
|
|
$
|
10,647
|
|
Cash paid for income taxes
|
|
$
|
980
|
|
|
$
|
896
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Conversion of 2.5% convertible subordinated notes into common
stock
|
|
$
|
|
|
|
$
|
125,000
|
|
Redemption of redeemable convertible preferred stock
|
|
$
|
|
|
|
$
|
15,000
|
|
Purchased capital expenditures included in accounts payable and
accrued expenses
|
|
$
|
328
|
|
|
$
|
|
|
Net share exercise of warrants into common stock of the issuer
|
|
$
|
2,994
|
|
|
$
|
|
|
Receipt of Alkermes shares for the purchase of stock options or
as payment to satisfy minimum withholding tax obligations
related to employee stock awards
|
|
$
|
1,480
|
|
|
$
|
|
|
Funds held in escrow from the sale of investment in Reliant
Pharmaceuticals, Inc.
|
|
$
|
7,766
|
|
|
$
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
ALKERMES,
INC. AND SUBSIDIARIES
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The accompanying condensed consolidated financial statements of
Alkermes, Inc. (the Company or Alkermes)
for the three and nine months ended December 31, 2007 and
2006 are unaudited and have been prepared on a basis
substantially consistent with the audited financial statements
for the year ended March 31, 2007. The year-end condensed
balance sheet data was derived from audited financial
statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America (commonly referred to as GAAP). In the
opinion of management, the condensed consolidated financial
statements include all adjustments, which are of a normal
recurring nature, that are necessary to present fairly the
results of operations for the reported periods.
These financial statements should be read in conjunction with
the Companys audited consolidated financial statements and
notes thereto which are contained in the Companys Annual
Report on
Form 10-K
for the year ended March 31, 2007, filed with the
Securities and Exchange Commission (SEC).
The results of the Companys operations for any interim
period are not necessarily indicative of the results of the
Companys operations for any other interim period or for a
full fiscal year.
Principles of Consolidation
The condensed
consolidated financial statements include the accounts of
Alkermes, Inc. and its wholly-owned subsidiaries: Alkermes
Controlled Therapeutics, Inc.; Alkermes Europe, Ltd. and RC
Royalty Sub LLC (Royalty Sub). The assets of Royalty
Sub are not available to satisfy obligations of Alkermes and its
subsidiaries, other than the obligations of Royalty Sub
including Royalty Subs non-recourse RISPERDAL CONSTA
secured 7% notes (the Non-Recourse
7% Notes). Intercompany accounts and transactions
have been eliminated.
Use of Estimates
The preparation of the
Companys condensed consolidated financial statements in
conformity with GAAP necessarily requires management to make
estimates and assumptions that affect the following:
(1) reported amounts of assets and liabilities;
(2) disclosure of contingent assets and liabilities at the
date of the condensed consolidated financial statements; and
(3) the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
Income
Taxes
Effective April 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation
No. 48,
Accounting for Uncertainty in Income
Taxes
(FIN No. 48).
FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
FIN No. 48 also prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of each tax position taken or
expected to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition. See
Note 9, Income Taxes, to the condensed consolidated
financial statements for a discussion of the Companys
accounting for uncertain tax positions.
New
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS No. 157), which establishes a
framework for measuring fair value in GAAP and expands
disclosures about the use of fair value to measure assets and
liabilities in interim and annual reporting periods subsequent
to initial recognition. Prior to SFAS No. 157, which
emphasizes that fair value is a market-based measurement and not
an entity-specific measurement, there were different definitions
6
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of fair value and limited guidance for applying those
definitions in GAAP. SFAS No. 157 is effective for the
Company for the reporting period beginning April 1, 2008.
The Company is in the process of evaluating the impact of the
adoption of SFAS No. 157 on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement
No. 115
(SFAS No. 159).
SFAS No. 159 permits entities to elect to measure
selected financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair
value option has been elected are recognized in earnings in each
reporting period. SFAS No. 159 is effective for the
Company for the reporting period beginning April 1, 2008.
The Company is in the process of evaluating the impact of the
adoption of SFAS No. 159 on its consolidated financial
statements.
In June 2007, the Emerging Issues Task Force (EITF)
of the FASB reached a consensus on Issue
No. 07-03,
Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities,
(EITF
No. 07-03),
which addresses the diversity that exists with respect to the
accounting for the non-refundable portion of a payment made by a
research and development entity for future research and
development activities. Under EITF
No. 07-03,
an entity would defer and capitalize non-refundable advance
payments made for research and development activities until the
related goods are delivered or the related services are
performed. EITF
No. 07-03
is effective for the Company for the reporting period beginning
April 1, 2008. The Company does not expect the adoption of
EITF
No. 07-03
to have a significant impact on its consolidated financial
statements.
In November 2007, the EITF of the FASB reached a consensus on
Issue
No. 07-01,
Accounting for Collaborative Arrangements,
(EITF
No. 07-01).
EITF
No. 07-01
defines a collaborative arrangement as a contractual arrangement
in which the parties are: (1) active participants to the
arrangement; and (2) exposed to significant risks and
rewards that depend upon the commercial success of the endeavor.
The issue also addresses the appropriate income statement
presentation for activities and payments between the
participants in a collaborative arrangement as well as for costs
incurred and revenue generated from transactions with third
parties. EITF
No. 07-01
is effective for the Company for the reporting period beginning
April 1, 2009. The Company is in the process of evaluating
the impact of the adoption of EITF
No. 07-01
on its consolidated financial statements.
Comprehensive income for the three and nine months ended
December 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
168,881
|
|
|
$
|
2,933
|
|
|
$
|
185,326
|
|
|
$
|
5,944
|
|
Unrealized losses on available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding losses
|
|
|
(1,469
|
)
|
|
|
(1,152
|
)
|
|
|
(2,019
|
)
|
|
|
(699
|
)
|
Reclassification of unrealized loss to realized loss on
available for sale securities during the period
|
|
|
337
|
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available for sale securities
|
|
|
(1,132
|
)
|
|
|
(1,152
|
)
|
|
|
(1,682
|
)
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
167,749
|
|
|
$
|
1,781
|
|
|
$
|
183,644
|
|
|
$
|
5,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
EARNINGS
PER COMMON SHARE
|
Basic earnings per common share is calculated based upon net
income available to holders of common shares divided by the
weighted average number of shares outstanding. For the
calculation of diluted earnings per common share, the Company
uses the weighted average number of common shares outstanding,
as adjusted for the effect of potential outstanding shares,
including stock options, stock awards, redeemable convertible
preferred stock and convertible debt.
Basic and diluted earnings per common share are calculated as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
168,881
|
|
|
$
|
2,933
|
|
|
$
|
185,326
|
|
|
$
|
5,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
101,703
|
|
|
|
100,896
|
|
|
|
101,676
|
|
|
|
98,690
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,159
|
|
|
|
2,723
|
|
|
|
2,354
|
|
|
|
3,633
|
|
Restricted stock awards
|
|
|
52
|
|
|
|
291
|
|
|
|
67
|
|
|
|
244
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
836
|
|
|
|
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common share equivalents
|
|
|
2,211
|
|
|
|
3,850
|
|
|
|
2,421
|
|
|
|
4,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted earnings per common share
|
|
|
103,914
|
|
|
|
104,746
|
|
|
|
104,097
|
|
|
|
103,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts are not included in the calculation of net
income per common share because their effects are anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Stock options
|
|
|
11,899
|
|
|
|
12,053
|
|
|
|
11,919
|
|
|
|
9,540
|
|
2.5% convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,461
|
|
3.75% convertible subordinated notes
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,899
|
|
|
|
12,063
|
|
|
|
11,919
|
|
|
|
12,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
SHARE-BASED
COMPENSATION
|
Share-based compensation expense for the three and nine months
ended December 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Cost of goods manufactured
|
|
$
|
319
|
|
|
$
|
931
|
|
|
$
|
1,279
|
|
|
$
|
2,094
|
|
Research and development
|
|
|
2,055
|
|
|
|
1,897
|
|
|
|
5,691
|
|
|
|
6,965
|
|
Selling, general and administrative
|
|
|
2,808
|
|
|
|
4,672
|
|
|
|
8,507
|
|
|
|
13,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,182
|
|
|
$
|
7,500
|
|
|
$
|
15,477
|
|
|
$
|
22,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and March 31, 2007,
$0.5 million and $0.6 million, respectively, of
share-based compensation cost was capitalized and recorded under
the caption Inventory in the condensed consolidated
balance sheets.
As of December 31, 2007 and March 31, 2007,
Investments of $190.5 million and $271.1 million,
respectively, consist of investments in U.S. government
obligations, corporate debt obligations and marketable equity
securities of publicly traded companies that the Company
collaborates with that are classified as available-for-sale and
recorded at fair value. Fair value is generally based on quoted
market prices. If quoted market prices are not available, fair
values are estimated based on dealer quotes or quoted prices for
instruments with similar characteristics. As of
December 31, 2007, gross unrealized gains and losses on the
investments were $1.0 million and $1.9 million,
respectively. The Company believes that the gross unrealized
losses are temporary, and the Company has the intent and ability
to hold these securities to recovery, which may be at maturity.
As of December 31, 2007 and March 31, 2007, Restricted
Investments of $5.1 million consists of investments in
U.S. government obligations and corporate debt obligations
that are restricted and classified as long-term held-to-maturity
securities and are recorded at amortized cost. The investments
are held as collateral under certain letters of credit related
to the Companys lease agreements.
As of December 31, 2007 and March 31, 2007, the
Company held investments of $0.2 million and
$0.7 million, respectively, in marketable equity securities
of publicly traded companies that the Company collaborates with
that are classified as long-term available-for-sale securities
and are recorded at fair value under Other Assets in
the condensed consolidated balance sheets.
Inventory is stated at the lower of cost or market value. Cost
is determined using the
first-in,
first-out method. Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
(In thousands)
|
|
2007
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
8,995
|
|
|
$
|
7,238
|
|
Work in process
|
|
|
6,895
|
|
|
|
4,291
|
|
Finished goods
|
|
|
7,164
|
|
|
|
6,661
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,054
|
|
|
$
|
18,190
|
|
|
|
|
|
|
|
|
|
|
9
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
(In thousands)
|
|
2007
|
|
|
2007
|
|
|
Accounts payable
|
|
$
|
9,127
|
|
|
$
|
12,097
|
|
Accrued expenses related to collaborative arrangements
|
|
|
747
|
|
|
|
16,155
|
|
Accrued compensation
|
|
|
9,385
|
|
|
|
10,917
|
|
Accrued other
|
|
|
10,699
|
|
|
|
6,686
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,958
|
|
|
$
|
45,855
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
SALE OF
INVESTMENT IN RELIANT PHARMACEUTICALS, INC.
|
In November 2007, Reliant Pharmaceuticals, Inc.
(Reliant) was acquired by GlaxoSmithKline
(GSK). Under the terms of the acquisition, Alkermes
received $166.9 million upon the closing of the transaction
in December 2007 in exchange for the Companys investment
in Series C convertible, redeemable preferred stock of
Reliant. The Company is entitled to receive up to an additional
$7.7 million of funds held in escrow subject to the terms
of an escrow agreement between GSK and Reliant. The escrowed
funds represent the maximum potential amount of future payments
that may be payable to GSK under the terms of the escrow
agreement, which is effective for a period of 15 months
following the closing of the transaction. The Company has not
recorded a liability related to the indemnification to GSK as
the Company currently believes that it is remote that any of the
escrowed funds will be needed to indemnify GSK for any losses it
might incur related to the representations and warranties made
by Reliant in connection with the acquisition.
This transaction was recorded as a non-operating gain on sale of
investment in Reliant Pharmaceuticals, Inc. of
$174.6 million in the three and nine months ended
December 31, 2007. The $7.7 million of funds held in
escrow is included within other assets in the condensed
consolidated balance sheet as of December 31, 2007. The
Company purchased the Series C convertible, redeemable
preferred stock of Reliant for $100.0 million in December
2001. The Companys investment in Reliant had a carrying
value of $0 at the time of the sale.
The Company records a deferred tax asset or liability based on
the difference between the financial statement and tax bases of
assets and liabilities, as measured by enacted tax rates assumed
to be in effect when these differences reverse. As of
December 31, 2007, the Company determined that it is more
likely than not that the deferred tax assets may not be realized
and a full valuation allowance continues to be recorded.
The provision for income taxes in the amount of
$3.2 million and $5.8 million for the three and nine
months ended December 31, 2007, respectively, and
$0.4 million and $0.8 million for the three and nine
months ended December 31, 2006, respectively, relates to
the U.S. alternative minimum tax (AMT). The
utilization of tax loss carryforwards is limited in the
calculation of AMT and as a result, a federal tax charge was
recorded in the three and nine months ended December 31,
2007 and 2006. The current AMT liability is available as a
credit against future tax obligations upon the full utilization
or expiration of the Companys net operating loss
carryforward. The provision for income taxes reflects tax
recognition of the portion of the nonrefundable milestone
payments the Company received from Cephalon, Inc.
(Cephalon) under its collaborative arrangement which
have not been fully recognized for financial reporting purposes
as of December 31, 2007.
The Company adopted FIN No. 48 on April 1, 2007.
The implementation of FIN No. 48 did not have a
material impact on the Companys condensed consolidated
financial statements. At the adoption date of
10
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
April 1, 2007, and also at December 31, 2007, the
Company had no significant unrecognized tax benefits. The tax
years 1993 through 2006 remain open to examination by major
taxing jurisdictions to which the Company is subject, which are
primarily in the United States (U.S.), as
carryforward attributes generated in years past may still be
adjusted upon examination by the Internal Revenue Service
(IRS) or state tax authorities if they have or will
be used in a future period. The Company is currently in the
process of conducting a study of its research and development
credit carryforwards. This study may result in an adjustment to
the Companys research and development credit
carryforwards, however, until the study is completed and any
adjustment is known, no amounts are being presented as an
uncertain tax position under FIN No. 48. A full
valuation allowance has been provided against the Companys
research and development credits and, if an adjustment is
required, this adjustment would be offset by an adjustment to
the valuation allowance. Thus, there would be no impact to the
condensed consolidated balance sheet or statement of income if
an adjustment were required.
In addition, the Company recently concluded a study of its net
operating loss (NOL) carryforwards to determine
whether such amounts are limited under IRC Sec. 382. The Company
does not believe the limitations will significantly impact its
ability to offset income with available NOLs.
The Company has elected to include interest and penalties
related to uncertain tax positions as a component of its
provision for taxes. For the three and nine months ended
December 31, 2007, the Company did not recognize any
accrued interest and penalties in its condensed consolidated
financial statements.
On October 10, 2006, a purported shareholder derivative
lawsuit, captioned Thomas Bennett, III vs. Richard
Pops et al. and docketed as CIV-06-3606, was filed
ostensibly on the Companys behalf in Middlesex County
Superior Court, Massachusetts. The complaint in that lawsuit
alleged, among other things that in connection with certain
stock option grants made by the Company, certain of its
directors and officers committed violations of state law,
including breaches of fiduciary duty. The complaint named the
Company as a nominal defendant, but did not seek monetary relief
from the Company. The lawsuit sought recovery of damages
allegedly caused to the Company as well as certain other relief,
including an order requiring the Company to take action to
enhance its corporate governance and internal procedures. The
defendants moved to dismiss the lawsuit and, following oral
argument, the Massachusetts Superior Court issued a decision
dated July 10, 2007 granting the defendants motion to
dismiss the lawsuit in its entirety. The plaintiff did not
appeal the Courts decision and the plaintiffs time
to appeal has expired.
The Company has received four letters, allegedly sent on behalf
of owners of its securities, which claim, among other things,
that certain of the Companys officers and directors
breached their fiduciary duties to the Company by, among other
allegations, allegedly violating the terms of its stock option
plans, allegedly violating GAAP by failing to recognize
compensation expenses with respect to certain option grants
during certain years, and allegedly publishing materially
inaccurate financial statements relating to the Company. The
letters demand, among other things, that the Companys
Board of Directors take action on its behalf to recover from the
current and former officers and directors identified in the
letters the damages allegedly sustained by the Company as a
result of their alleged conduct, among other amounts. The
letters do not seek any monetary recovery from the Company. The
Companys Board of Directors appointed a special
independent committee of the Board of Directors to investigate,
assess and evaluate the allegations contained in these and any
other demand letters relating to the Companys stock option
granting practices and to report its findings, conclusions and
recommendations to the Companys Board of Directors. The
special independent committee was assisted by independent
outside legal counsel. In November 2006, based on the results of
its investigation, the special independent committee of the
Companys Board of Directors concluded that the assertions
contained in the demand letters lacked merit, that nothing had
come to its attention that would cause it to believe that there
are any instances where management of the Company or the
Compensation Committee of the Company had retroactively selected
a date for the grant of stock options during the 1995 through
2006 period, and that it
11
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
would not be in the Companys best interests or the best
interests of the Companys shareholders to commence
litigation against its current or former officers or directors
as demanded in the letters. The findings and conclusions of the
special independent committee of the Companys Board of
Directors have been presented to and adopted by the
Companys Board of Directors.
From time to time, the Company may be subject to other legal
proceedings and claims in the ordinary course of business. The
Company is not aware of any such proceedings or claims that it
believes will have, individually or in the aggregate, a material
adverse effect on its business, financial condition or results
of operations.
The Company operates as one business segment, which is the
business of developing, manufacturing and commercializing
innovative medicines designed to yield better therapeutic
outcomes and improve the lives of patients with serious disease.
The Companys chief decision maker, the Chief Executive
Officer, reviews the Companys operating results on an
aggregate basis and manages the Companys operations as a
single operating unit.
During the nine months ended December 31, 2007, in
connection with the Companys publicly announced share
repurchase program, the Company repurchased
1,919,327 shares of treasury stock for $27.6 million.
In addition, the Company executed three broker-assisted trades
to purchase 358,867 shares of treasury stock at an
aggregate cost of $5.7 million in December 2007 that were
not settled until January 2008 and have not been reflected in
the Companys condensed consolidated financial statements.
On February 7, 2008, the Company entered into an agreement
for an Accelerated Share Repurchase Transaction (the
ASR) with Morgan Stanley & Co.
Incorporated (Morgan Stanley) pursuant to which the
Company will repurchase $60.0 million of its outstanding
common stock from Morgan Stanley. The Company is acquiring these
shares as part of a previously announced share repurchase
program of up to $175.0 million approved by the
Companys Board of Directors. Under the ASR, the final
price of shares repurchased will be determined based on a
discount to the volume weighted average trading price of the
Companys common stock over a period not to exceed three
months. Depending on the final price and number of shares being
repurchased, Morgan Stanley may deliver additional shares to the
Company at the completion of the transaction, or the Company
may, at its option, deliver to Morgan Stanley either cash or
shares. The Company expects that Morgan Stanley will purchase
shares of the Companys common stock from time to time in
the open market in connection with the ASR and may also sell
shares in the open market from time to time.
12
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Alkermes, Inc. (Alkermes or the Company
as used in this section, together with our subsidiaries,
us, we or our) is a
biotechnology company that uses proprietary technologies and
know-how to create innovative medicines designed to yield better
therapeutic outcomes for patients with serious disease. Alkermes
manufactures
RISPERDAL
®
CONSTA
®
,
marketed by divisions of Johnson & Johnson, and
developed and manufactures
VIVITROL
®
,
marketed in the U.S. primarily by Cephalon, Inc.
(Cephalon). The companys pipeline includes
extended-release injectable, pulmonary and oral products for the
treatment of prevalent, chronic diseases, such as central
nervous system disorders, addiction and diabetes. Alkermes is
headquartered in Cambridge, Massachusetts, with research and
manufacturing facilities in Massachusetts and Ohio.
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
received under research and development agreements and other
agreements with collaborators. We expect to incur significant
additional research and development and other costs in
connection with certain collaborative arrangements and as we
expand the development of our proprietary product candidates,
including costs related to preclinical studies, clinical trials
and facilities expansion. Our costs, including research and
development costs for our product candidates and selling,
marketing and promotion expenses for any future products to be
marketed by us or our collaborators, if any, may exceed revenues
in the future, which may result in losses from operations.
Forward-Looking
Statements
Any statements herein or otherwise made in writing or orally by
us with regard to our expectations as to financial results and
other aspects of our business may constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to,
statements concerning future operating results, the achievement
of certain business and operating goals, including those related
to commercialization of our products, manufacturing revenues,
royalty revenues, research and development revenues under
collaborative arrangements, net collaborative profit, research
and development activities and spending, plans for clinical
trials and regulatory approvals, spending relating to selling
and marketing, income taxes, financial goals and projections of
capital expenditures, recognition of revenues, and future
financings. These statements relate to our future plans,
objectives, expectations and intentions and may be identified by
words like believe, expect,
designed, may, will,
should, seek, or anticipate,
and similar expressions.
Although we believe that our expectations are based on
reasonable assumptions within the bounds of our knowledge of our
business and operations, the forward-looking statements
contained in this document are neither promises nor guarantees;
and our business is subject to significant risk and
uncertainties and there can be no assurance that our actual
results will not differ materially from our expectations.
Factors which could cause actual results to differ materially
from our expectations set forth in our forward-looking
statements include, among others: (i) manufacturing and
royalty revenues for RISPERDAL CONSTA may not grow, or even
decline, particularly because we rely on our partner, Janssen, a
division of Johnson & Johnson, to forecast and market
this product; (ii) we may be unable to manufacture
RISPERDAL CONSTA in sufficient quantities and with sufficient
yields to meet Janssens requirements or to add additional
production capacity for RISPERDAL CONSTA, or unexpected events
could interrupt manufacturing operations at our RISPERDAL CONSTA
facility, which is the sole source of supply for that product;
(iii) manufacturing and other revenues for VIVITROL may not
grow, or even decline; (iv) we may be unable to manufacture
VIVITROL in sufficient quantities and with sufficient yields to
meet commercial requirements, or unexpected events could
interrupt manufacturing operations at our VIVITROL facility,
which is the sole source of supply for that product; (v) we
may be unable to
scale-up
and
manufacture our product candidates, including AIR Insulin, ALKS
27 and ALKS 29 commercially or economically; (vi) our
product candidates, if approved for marketing, may not be
launched successfully in one or all indications for which
marketing is approved and, if launched, may not produce
significant revenues; (vii) clinical trials may take more
time or consume more resources than initially envisioned;
(viii) results of earlier clinical trials may not
necessarily be predictive of the safety and efficacy results in
larger clinical trials; (ix) our product candidates could
be ineffective or unsafe during preclinical studies and clinical
trials, and we and our collaborators may not be permitted by
regulatory authorities to
13
undertake new or additional clinical trials for product
candidates incorporating our technologies, or clinical trials
could be delayed or terminated; (x) after the completion of
clinical trials for our product candidates and the submission
for marketing approval, the U.S. Food and Drug
Administration (FDA) or foreign regulatory
authorities could refuse to accept such filings or could request
additional preclinical or clinical studies be conducted, each of
which could result in significant delays or the failure of such
product to receive marketing approval; (xi) even if our
product candidates appear promising at an early stage of
development, product candidates could fail to receive necessary
regulatory approvals, be difficult to manufacture on a large
scale, be uneconomical, fail to achieve market acceptance, be
precluded from commercialization by proprietary rights of third
parties or experience substantial competition in the
marketplace; (xii) technological change in the
biotechnology or pharmaceutical industries could render our
products
and/or
product candidates obsolete or non-competitive;
(xiii) difficulties or set-backs in obtaining and enforcing
our patents and difficulties with the patent rights of others
could occur; (xiv) we may continue to incur losses in the
future; (xv) we may need to raise substantial additional
funding to continue research and development programs and
clinical trials and other operations and could incur
difficulties or setbacks in raising such funds; (xvi) we
may not receive the full amount, or any, of the proceeds placed
in escrow in connection with the Reliant Pharmaceuticals, Inc.
(Reliant) transaction due to claims against the
escrow account; and (xvii) whether we will purchase up to
$175.0 million of our own stock.
The forward-looking statements made in this document are made
only as of the date hereof and we do not intend to update any of
these factors or to publicly announce the results of any
revisions to any of our forward-looking statements other than as
required under the federal securities laws.
Our
Strategy
We leverage our unique formulation expertise and drug
development technologies to develop, both with partners and on
our own, innovative and competitively advantaged drug products
that enhance patient outcomes in major therapeutic areas. We
enter into select collaborations with pharmaceutical and
biotechnology companies to develop significant new product
candidates, based on existing drugs and incorporating our
technologies. In addition, we develop our own proprietary
therapeutics by applying our innovative formulation expertise
and drug development capabilities to create new pharmaceutical
products. Each of these approaches is discussed in more detail
below.
Product
Developments
RISPERDAL
CONSTA
Using our proprietary
Medisorb
®
technology, we developed RISPERDAL CONSTA, a long-acting
formulation of Janssens antipsychotic drug RISPERDAL for
the treatment of schizophrenia. Schizophrenia is a brain
disorder characterized by disorganized thinking, delusions and
hallucinations. Studies have demonstrated that as many as
75 percent of patients with schizophrenia have difficulty
taking their oral medication on a regular basis, which can lead
to worsening of symptoms. Clinical data has shown that treatment
with RISPERDAL CONSTA may lead to improvements in symptoms,
sustained remission and decreases in hospitalization. RISPERDAL
CONSTA is administered via intramuscular injection every two
weeks, alleviating the need for daily dosing. Janssen markets
RISPERDAL CONSTA worldwide. We are the exclusive manufacturer of
RISPERDAL CONSTA for Janssen, and we earn both manufacturing
fees and royalties from Janssen.
RISPERDAL CONSTA was approved by regulatory authorities in the
United Kingdom (U.K) and Germany in August 2002 and
was approved by the FDA in October 2003. RISPERDAL CONSTA is
approved in approximately 83 countries and marketed in
approximately 63 countries, and Janssen continues to launch the
product around the world.
In February 2008, the results of a study sponsored by Janssen
were presented at the 14th Biennial Winter Workshop on
Schizophrenia and Bipolar Disorders in Montreux, Switzerland.
This one-year, phase 3 trial was the first placebo-controlled
study to explore the use of a long-acting injectable medication
in the maintenance treatment of frequently relapsing bipolar
disorder (FRBD). FRBD, defined as four or more manic or
depressive
14
episodes in the previous year that require a doctors care,
may affect 20% of the 27 million people with bipolar
disorder worldwide. The study found that patients with FRBD had
a significant delay in the time to an initial relapse when
risperidone long-acting injection (RLAI) was combined with
standard treatment.
The study compared patients who received RLAI and standard
treatment to those who received standard treatment combined with
placebo. The study evaluated the time to the next mood episode,
also known as a relapse, in FRBD patients receiving RLAI plus
standard treatment compared to patients receiving placebo plus
standard treatment. For most patients, standard treatment
consisted of mood stabilizers, antidepressants, anxiolytics or
combinations thereof. The trial showed that time to relapse was
significantly longer in patients receiving RLAI compared with
placebo (p=0.004), and the relative risk of relapse was 2.4
times higher with placebo. The relapse rates were 47.8% with
placebo and 22.2% with RLAI.
VIVITROL
We developed VIVITROL, an extended-release Medisorb formulation
of naltrexone, for the treatment of alcohol dependence in
patients who are able to abstain from drinking in an outpatient
setting and are not actively drinking prior to treatment
initiation. Alcohol dependence is a serious and chronic brain
disease characterized by cravings for alcohol, loss of control
over drinking, withdrawal symptoms and an increased tolerance
for alcohol. Adherence to medication is particularly challenging
with this patient population. In clinical trials, when used in
combination with psychosocial support, VIVITROL was shown to
reduce the number of drinking days and heavy drinking days and
to prolong abstinence in patients who abstained from alcohol the
week prior to starting treatment. Each injection of VIVITROL
provides medication for one month and alleviates the need for
patients to make daily medication dosing decisions. Cephalon is
primarily responsible for marketing VIVITROL in the U.S. We
are the exclusive manufacturer of VIVITROL.
VIVITROL was approved by the FDA in April 2006 and launched in
June 2006. In March 2007, we submitted a Marketing Authorization
Application (MAA) for VIVITROL to regulatory
authorities in the U.K. and Germany. The MAA for VIVITROL was
submitted under a decentralized procedure, in which the U.K.
will act as the Reference Member State and Germany will act as
the Concerned Member State for the application. If successful, a
filing under the decentralized procedure would result in a
simultaneous approval of VIVITROL as a treatment for alcohol
dependence in these two countries. The MAA submission reflects
the Companys targeted approach to commercialize VIVITROL
in Europe on a
country-by-country
basis.
In December 2007, we entered into an exclusive agreement with
Cilag GmbH International, a subsidiary of Johnson &
Johnson, to commercialize VIVITROL for the treatment of alcohol
and opioid dependence in Russia and other countries in the
Commonwealth of Independent States (CIS). Under the
terms of the agreement, Cilag GmbH International has primary
responsibility for filing the new drug application for VIVITROL
in Russia and other countries in the CIS. The product will be
commercialized by Janssen-Cilag, an affiliate company of Cilag
GmbH International. We will retain exclusive development and
marketing rights to VIVITROL in all markets outside the U.S.,
Russia and other countries in the CIS. We are responsible for
manufacturing VIVITROL and will receive from Cilag GmbH
International manufacturing fees and royalties based on product
sales in the CIS. Cilag GmbH International paid us
$5.0 million upfront and will pay milestone payments of up
to $34.0 million upon regulatory approvals for the product,
certain
agreed-upon
events and levels of VIVITROL sales. There was no revenue
recognized under this agreement in the three and nine months
ended December 31, 2007.
AIR
Insulin
We are collaborating with Eli Lilly and Company
(Lilly) to develop inhaled formulations of insulin
and other potential products for the treatment of diabetes based
on our AIR pulmonary technology. Diabetes is a disease in which
the body does not produce or properly use insulin. Diabetes can
result in serious health complications, including
cardiovascular, kidney and nerve disease. Our inhaled insulin
formulation, AIR Insulin, is currently in phase 3 clinical
development.
15
Exenatide
Once Weekly
We are collaborating with Amylin Pharmaceuticals, Inc.
(Amylin) on the development of exenatide once
weekly, an injectable formulation of Amylins exenatide
(exenatide) for the treatment of type 2 diabetes.
Exenatide injection (trade name
BYETTA
®
)
was approved by the FDA in April 2005 as adjunctive therapy to
improve blood sugar control in patients with type 2 diabetes who
have not achieved adequate control on metformin
and/or
sulfonylurea; two commonly used oral diabetes medications. In
December 2006, the FDA approved BYETTA as an add-on therapy for
people with type 2 diabetes unable to achieve adequate glucose
control on thiazolidinedione, a class of diabetes medications.
BYETTA is a twice-daily injection. Amylin entered into a
collaboration agreement with Lilly for the development and
commercialization of exenatide, including exenatide once weekly.
In October 2007, we, Amylin and Lilly announced positive results
from a 30-week comparator study of exenatide once weekly
injection and BYETTA taken twice daily in patients with type 2
diabetes. Exenatide once weekly showed a statistically
significant improvement in A1C of approximately
1.9 percentage points from baseline, compared to an
improvement of approximately 1.5 percentage points for
BYETTA. Approximately three out of four subjects treated with
exenatide once weekly achieved an A1C of 7 percent or less.
A1C of less than 7 percent is the target for good glucose
control as recommended by the American Diabetes Association.
After 30 weeks of treatment, both exenatide once weekly and
BYETTA treatment resulted in an average weight loss of
approximately eight pounds. Nearly 90 percent of subjects
in both groups completed the study, which enrolled patients not
achieving adequate glucose control with either diet and exercise
or with use of oral glucose-lowering agents. The companies
anticipate a regulatory submission to the FDA by the end of the
first half of 2009.
ALKS
29
We are developing ALKS 29, an oral compound for the treatment of
alcohol dependence, which could offer a new treatment option for
people suffering from this disease. In July 2007, we announced
positive preliminary results from a clinical trial of ALKS 29 in
alcohol dependent patients. Based on these results, we plan to
move forward with a development program for oral product
candidates to treat alcohol dependence. The clinical trial for
ALKS 29, a phase 1/2 multi-center, randomized, double-blind,
placebo-controlled, eight-week study was designed to assess the
efficacy and safety of ALKS 29 in approximately 150 alcohol
dependent patients. In the study, ALKS 29 was generally well
tolerated and led to both a statistically significant increase
in the percent of days abstinent and a decrease in drinking
compared to placebo when combined with psychosocial therapy. The
study endpoints included the percent of days abstinent, percent
of heavy drinking days and number of drinks per day. Heavy
drinking was defined as five or more drinks per day for men and
four or more drinks per day for women.
ALKS
27
Using our AIR pulmonary technology, we are developing ALKS 27,
an inhaled formulation of trospium chloride, with Indevus
Pharmaceuticals, Inc. (Indevus), for the treatment
of chronic obstructive pulmonary disease (COPD).
COPD is a serious, chronic disease characterized by a gradual
loss of lung function. Trospium chloride is a muscarinic
receptor antagonist that relaxes smooth muscle tissue and has
the potential to improve airflow in patients with COPD. Trospium
chloride is the active ingredient in
SANCTURA
®
,
Indevus currently marketed product for overactive bladder.
In September 2007, we and Indevus announced positive preliminary
results from a randomized, double-blind, placebo-controlled,
phase 2a clinical study of ALKS 27 in patients with COPD. In the
study, single doses of ALKS 27 demonstrated a rapid onset of
action and produced a significant improvement in lung function
(p<0.0001) over 24 hours compared to a placebo. ALKS
27 was well tolerated, and all enrolled patients completed the
study. No treatment related adverse events were reported in this
study. Based on these positive results, we are moving forward to
identify a partner for the future development and
commercialization of ALKS 27.
16
AIR
parathyroid hormone
We and Lilly completed a phase 1 study of inhaled formulations
of parathyroid hormone (PTH) in healthy, post
menopausal women. The data from the study indicates that
additional feasibility and formulation work are required. At
this time, we and Lilly are not planning to pursue further
development of inhaled formulations of PTH.
Critical
Accounting Policies
A summary of significant accounting policies and a description
of accounting policies that are considered critical may be found
in Part II, Item 7 of our Annual Report on
Form 10-K
for the year ended March 31, 2007 in the Critical
Accounting Policies section. Other than as described
below, our critical accounting policies and estimates are as set
forth in the
Form 10-K.
Provision for Income Taxes
We record a
deferred tax asset or liability based on the difference between
the financial statement and tax bases of assets and liabilities,
as measured by enacted tax rates assumed to be in effect when
these differences reverse. As of December 31, 2007, we
determined that it was more likely than not that the deferred
tax assets may not be realized and a full valuation allowance
continues to be recorded.
We adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN No. 48) on April 1, 2007.
The implementation of FIN No. 48 did not have a
material impact on our condensed consolidated financial
statements. At the adoption date of April 1, 2007, and also
at December 31, 2007, we had no significant unrecognized
tax benefits. The tax years 1993 through 2006 remain open to
examination by major taxing jurisdictions to which we are
subject, which are primarily in the U.S., as carryforward
attributes generated in years past may still be adjusted upon
examination by the IRS or state tax authorities if they have or
will be used in a future period. We are currently in the process
of conducting a study of our research and development credit
carryforwards. This study may result in an adjustment to our
research and development credit carryforwards, however, until
the study is completed and any adjustment is known, no amounts
are being presented as an uncertain tax position under
FIN No. 48. A full valuation allowance has been
provided against our research and development credits, and, if
an adjustment is required, this adjustment would be offset by an
adjustment to the valuation allowance. Thus, there would be no
impact to the condensed consolidated balance sheet or statement
of income if an adjustment were required.
In addition, we recently concluded a study of our net operating
loss (NOL) carryforwards to determine whether such
amounts are limited under IRC Sec. 382. We do not believe the
limitations will significantly impact our ability to offset
income with available NOLs.
We have elected to include interest and penalties related to
uncertain tax positions as a component of our provision for
taxes. For the three and nine months ended December 31,
2007, we did not recognize any accrued interest and penalties in
our condensed consolidated financial statements.
Results
of Operations
Net income for the three months ended December 31, 2007 was
$168.9 million, or $1.66 per common share basic
and $1.63 per common share diluted, as compared to
net income of $2.9 million, or $0.03 per common share
basic and diluted, for the three months ended
December 31, 2006.
Net income for the nine months ended December 31, 2007 was
$185.3 million, or $1.82 per common share basic
and $1.78 per common share diluted, as compared to
net income of $5.9 million, or $0.06 per common
share basic and diluted, for the nine months ended
December 31, 2006.
Total manufacturing revenues were $14.3 million and
$69.9 million for the three and nine months ended
December 31, 2007, respectively, as compared to
$28.8 million and $77.1 million for the three and nine
months ended December 31, 2006, respectively.
RISPERDAL CONSTA manufacturing revenues were $12.9 million
and $66.1 million for the three and nine months ended
December 31, 2007, respectively, as compared to
$23.6 million and $63.6 million for the three and nine
months ended December 31, 2006, respectively. The decrease
in RISPERDAL CONSTA
17
revenues for the three months ended December 31, 2007, as
compared to the three months ended December 31, 2006, was
primarily due to a decrease in units of RISPERDAL CONSTA shipped
to Janssen, partially offset by an increase in the net sales
price of units of RISPERDAL CONSTA shipped to Janssen. The
increase in RISPERDAL CONSTA revenues for the nine months ended
December 31, 2007, as compared to the nine months ended
December 31, 2006, was due to an increase in the net sales
price of units of RISPERDAL CONSTA shipped to Janssen, partially
offset by a slight decrease in units of RISPERDAL CONSTA shipped
to Janssen. The increase in the net sales price of RISPERDAL
CONSTA in the three and nine months ended December 31,
2007, as compared to the three and nine months ended
December 31, 2006, was due in part to fluctuations in the
exchange ratio of the U.S. dollar and the foreign
currencies of the countries in which the product was sold. See
Part I, Item 3. Quantitative and Qualitative
Disclosures about Market Risk for information on foreign
currency exchange rate risk related to RISPERDAL CONSTA
revenues. Shipments of RISPERDAL CONSTA were lower in the three
and nine months ended December 31, 2007, as compared to the
three and nine months ended December 31, 2006, as Janssen
manages its levels of product inventory, due in part to
increased efficiencies and reliability in our RISPERDAL CONSTA
processes. We expect manufacturing revenues related to RISPERDAL
CONSTA to increase for the three months ended March 31,
2008, as compared to the three months ended December 31,
2007.
Under our manufacturing and supply agreement with Janssen, we
earn manufacturing revenues when product is shipped to Janssen,
based on a percentage of Janssens estimated unit net sales
price. Revenues include a quarterly adjustment from
Janssens estimated unit net sales price to Janssens
actual unit net sales price for product shipped. For the three
and nine months ended December 31, 2007 and 2006, our
RISPERDAL CONSTA manufacturing revenues were based on an average
of 7.5% of Janssens unit net sales price of RISPERDAL
CONSTA. We anticipate that we will earn manufacturing revenues
at 7.5% of Janssens unit net sales price of RISPERDAL
CONSTA for product shipped in the fiscal year ending
March 31, 2008 and beyond.
VIVITROL manufacturing revenues were $1.4 million and
$3.8 million for the three and nine months ended
December 31, 2007, respectively, as compared to
$5.2 million and $13.5 million for the three and nine
months ended December 31, 2006, respectively. Under our
agreements with Cephalon, we bill Cephalon for all manufacturing
costs related to VIVITROL.
The decrease in VIVITROL manufacturing revenues for the three
and nine months ended December 31, 2007, as compared to the
three and nine months ended December 31, 2006, was due to
lower manufacturing activity and shipments of VIVITROL. We began
shipping VIVITROL to Cephalon for the first time during the
quarter ended June 30, 2006, and during that quarter and
the remainder of the fiscal year ended March 31, 2007 we
shipped quantities sufficient to build inventory to support the
commercial launch of the product. We are currently managing our
manufacturing volumes of VIVITROL to avoid excess inventory and
shipped a small quantity of product to Cephalon during the three
and nine months ended December 31, 2007. VIVITROL
manufacturing revenues for the three and nine months ended
December 31, 2007 included $0 and $2.2 million,
respectively, of billings for idle capacity costs, as compared
to $1.5 million for the three and nine months ended
December 31, 2006. In addition, VIVITROL manufacturing
revenues for the three and nine months ended December 31,
2007 included $0.1 million and $0.3 million,
respectively, of milestone revenue related to manufacturing
profit on VIVITROL, which is a 10% markup on VIVITROL cost of
goods manufactured, as compared to $0.5 million and
$1.2 million for the three and nine months ended
December 31, 2006, respectively.
All royalty revenues for the three and nine months ended
December 31, 2007 and 2006 were related to sales of
RISPERDAL CONSTA. Under our license agreements with Janssen, we
record royalty revenues equal to 2.5% of Janssens net
sales of RISPERDAL CONSTA in the period that the product is sold
by Janssen. Royalty revenues were $7.4 million for the
three months ended December 31, 2007, based on RISPERDAL
CONSTA sales of $295.1 million, and $21.7 million for
the nine months ended December 31, 2007, based on RISPERDAL
CONSTA sales of $867.4 million, as compared to
$5.7 million for the three months ended December 31,
2006, based on RISPERDAL CONSTA sales of $226.3 million,
and $16.6 million for the nine months ended
December 31, 2006, based on RISPERDAL CONSTA sales of
$663.6 million. The increase in the net sales of RISPERDAL
CONSTA in the three and nine months ended December 31,
2007, as compared
18
to the three and nine months ended September 30, 2006, was
due in part to fluctuations in the exchange ratio of the
U.S. dollar and the foreign currencies of the countries in
which the product was sold. See Part I,
Item 3. Quantitative and Qualitative Disclosures about
Market Risk for information on foreign currency exchange rate
risk related to RISPERDAL CONSTA revenues.
Research and development revenue under collaborative
arrangements (R&D revenue) was
$24.0 million and $68.6 million for the three and nine
months ended December 31, 2007, respectively, as compared
to $19.5 million and $51.6 million for the three and
nine months ended December 31, 2006, respectively. The
increase in R&D revenue for the three months ended
December 31, 2007, as compared to the three months ended
December 31, 2006, was primarily due to the recognition of
$5.0 million of revenue related to the application of the
proportional performance method we are using for this
collaboration with Amylin. We received a $5.0 million
payment in December 2007 related to the phase 3 clinical program
for exenatide once weekly, and based on the amount of effort
that has been expended to date we were able to recognize the
full amount as revenue. This increase was partially offset by a
decrease in revenues related to the completion of work on the
AIR PTH development program. The increase in R&D revenue
for the nine months ended December 31, 2007, as compared to
the nine months ended December 31, 2006, was primarily due
to an increase in revenues on the exenatide once weekly and AIR
Insulin development programs.
A component of revenue in the three and nine months ended
December 31, 2007 on the AIR PTH development program
included recognition of a portion of the $1.0 million
milestone payment we received from Lilly in June 2007 upon first
dosing in the phase 1 clinical trial. We recognized revenue
under the proportional performance method for the PTH
development program.
Net collaborative profit for the three and nine months ended
December 31, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Milestone revenue cost recovery(a)
|
|
$
|
|
|
|
$
|
7,250
|
|
|
$
|
5,256
|
|
|
$
|
50,836
|
|
Milestone revenue license
|
|
|
1,312
|
|
|
|
1,195
|
|
|
|
3,932
|
|
|
|
3,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total milestone revenue cost recovery and license
|
|
|
1,312
|
|
|
|
8,445
|
|
|
|
9,188
|
|
|
|
54,614
|
|
Payments to Cephalon to reimburse their net losses up to the
cumulative loss cap
|
|
|
|
|
|
|
|
|
|
|
(5,223
|
)
|
|
|
(24,816
|
)
|
Payments from Cephalon to reimburse our expenses incurred after
the cumulative loss cap was reached
|
|
|
3,815
|
|
|
|
|
|
|
|
14,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collaborative profit
|
|
$
|
5,127
|
|
|
$
|
8,445
|
|
|
$
|
18,025
|
|
|
$
|
29,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Through December 31, 2007, the cumulative net losses on
VIVITROL were $169.1 million, of which $65.3 million
was incurred by us on behalf of the collaboration and
$103.8 million was incurred by Cephalon on behalf of the
collaboration.
|
Gross sales of VIVITROL by Cephalon were $5.0 million and
$13.7 million for the three and nine months ended
December 31, 2007, respectively.
Net collaborative profit was $5.1 million and
$18.0 million for the three and nine months ended
December 31, 2007, respectively. For the three and nine
months ended December 31, 2007, we recognized $0 and
$5.3 million of milestone revenue cost
recovery, respectively, to offset net losses on VIVITROL that we
funded. We were responsible to fund the first
$124.6 million of cumulative net losses incurred on
VIVITROL (the cumulative loss cap). We reached this
cumulative loss cap in April 2007, at which time Cephalon became
responsible to fund all net losses incurred on VIVITROL through
December 31, 2007. In addition, during the three and nine
months ended December 31, 2007, we recognized
$1.3 million and $3.9 million, respectively, of
milestone revenue related to the licenses provided to Cephalon
to commercialize
19
VIVITROL. During the three and nine months ended
December 31, 2007, we made payments of $0 and
$5.2 million, respectively, to Cephalon to reimburse their
net losses on VIVITROL, and we received payments of
$3.8 million and $14.1 million, respectively, from
Cephalon to reimburse us for our expenses on VIVITROL, which we
incurred after the cumulative loss cap was reached. In the
aggregate, net collaborative profit of $5.1 million and
$18.0 million for the three and nine months ended
December 31, 2007, respectively, consisted of
$1.3 million and $9.2 million of milestone revenue,
respectively, in addition to net payments from Cephalon of
$3.8 million and $8.8 million, respectively.
Net collaborative profit was $8.4 million and
$29.8 million for the three and nine months ended
December 31, 2006, respectively. For the three and nine
months ended December 31, 2006, we recognized
$7.3 million and $50.8 million of milestone
revenue cost recovery, respectively, to offset net
losses on VIVITROL that we funded. In addition, during the three
and nine months ended December 31, 2006, following FDA
approval of VIVITROL, we recognized $1.2 million and
$3.8 million, respectively, of milestone revenue related to
the licenses provided to Cephalon to commercialize VIVITROL.
During the three and nine months ended December 31, 2006,
we made payments of $0 and $24.8 million, respectively, to
Cephalon to reimburse their net losses on VIVITROL. In the
aggregate, net collaborative profit of $8.4 million and
$29.8 million for the three and nine months ended
December 31, 2006, respectively, consisted of approximately
$8.4 million and $54.6 million of milestone revenue,
respectively, partially offset by $0 and $24.8 million,
respectively, of payments we made to Cephalon to reimburse their
net losses on VIVITROL.
Beginning January 1, 2008, all net profits or losses earned
on VIVITROL within the collaboration will be shared between us
and Cephalon. The net profits earned or losses incurred on
VIVITROL beginning January 1, 2008 will be dependent upon
end-market sales, which are difficult to predict at this time,
and on the level of expenditures by both us and Cephalon in
developing, manufacturing and commercializing VIVITROL, all of
which is subject to change.
Cost of goods manufactured was $7.5 million and
$26.9 million for the three and nine months ended
December 31, 2007, respectively, and $13.0 million and
$34.1 million for the three and nine months ended
December 31, 2006, respectively.
Cost of goods manufactured for RISPERDAL CONSTA was
$5.9 million and $23.0 million for the three and nine
months ended December 31, 2007, respectively, and
$8.2 million and $21.8 million for the three and nine
months ended December 31, 2006, respectively. The decrease
in cost of goods manufactured for RISPERDAL CONSTA for the three
months ended December 31, 2007, as compared to the three
months ended December 31, 2006, was due to a decrease in
units of RISPERDAL CONSTA shipped to Janssen, partially offset
by an increase in the unit cost of RISPERDAL CONSTA shipped to
Janssen. The increase in cost of goods manufactured for
RISPERDAL CONSTA for the nine months ended December 31,
2007, as compared to the nine months ended December 31,
2006, was due to an increase in the unit cost of RISPERDAL
CONSTA shipped to Janssen, partially offset by a slight decrease
in units of RISPERDAL CONSTA shipped to Janssen. Shipments of
RISPERDAL CONSTA were lower in the three and nine months ended
December 31, 2007, as compared to the three and nine months
ended December 31, 2006, as Janssen manages its levels of
product inventory, due in part to increased efficiencies and
reliability in our RISPERDAL CONSTA processes.
Cost of goods manufactured for VIVITROL was $1.6 million
and $3.9 million for the three and nine months ended
December 31, 2007, respectively, and $4.8 million and
$12.3 million for the three and nine months ended
December 31, 2006. The decrease in cost of goods
manufactured for VIVITROL for the three and nine months ended
December 31, 2007, as compared to the three and nine months
ended December 31, 2006, was due to reduced shipments of
VIVITROL to Cephalon. We began shipping VIVITROL to Cephalon for
the first time during the quarter ended June 30, 2006, and
during this period and the remainder of the fiscal year ended
March 31, 2007 we shipped quantities sufficient to build
inventory to support the commercial launch of the product. We
are currently managing our manufacturing volumes of VIVITROL to
avoid excess inventory and shipped a small quantity of product
to Cephalon during the three and nine months ended
December 31, 2007. VIVITROL cost of goods manufactured for
the three and nine months ended December 31, 2007 included
idle capacity costs of $0.5 million and $2.7 million,
respectively, as compared to
20
$1.5 million for the three and nine months ended
December 31, 2006. Idle capacity costs consist of current
period manufacturing costs related to underutilized VIVITROL
manufacturing capacity.
Research and development expenses were $30.4 million and
$91.3 million for the three and nine months ended
December 31, 2007, respectively, as compared to
$29.9 million and $85.6 million for the three and nine
months ended December 31, 2006, respectively. The increase
in research and development expenses for the three months ended
December 31, 2007, as compared to the three months ended
December 31, 2006, was primarily due to increased costs on
the exenatide once weekly development program, partially offset
by decreased costs on the AIR PTH development program due to
program completion. The increase in research and development
expenses for the nine months ended December 31, 2007, as
compared to the nine months ended December 31, 2006, was
primarily due to increased costs on the AIR Insulin and
exenatide once weekly development programs, partially offset by
decreased external costs related to legacy clinical trials for
VIVITROL and decreased share-based compensation costs.
A significant portion of our research and development expenses
(including laboratory supplies, travel, dues and subscriptions,
recruiting costs, temporary help costs, consulting costs and
allocable costs such as occupancy and depreciation) are not
tracked by project as they benefit multiple projects or our
technologies in general. Expenses incurred to purchase specific
services from third parties to support our collaborative
research and development activities are tracked by project and
are reimbursed to us by our partners. We generally bill our
partners under collaborative arrangements using a single
full-time equivalent or hourly rate. This rate has been
established by us taking into consideration our annual budget of
employee compensation, employee benefits and the billable
non-project-specific costs mentioned above and is generally
increased annually based on increases in the consumer price
index. Each collaborative partner is billed using a full-time
equivalent or hourly rate for the hours worked by our employees
on a particular project, plus direct external research costs, if
any. We account for our research and development expenses on a
departmental and functional basis in accordance with our budget
and management practices.
Selling, general and administrative expenses were
$15.2 million and $45.1 million for the three and nine
months ended December 31, 2007, respectively, as compared
to $16.4 million and $48.6 million for the three and
nine months ended December 31, 2006, respectively. The
decrease in selling, general and administrative expenses for the
three and nine months ended December 31, 2007, as compared
to the three and nine months ended December 31, 2006, was
primarily due to decreased share-based compensation costs.
Gain on sale of investment in Reliant Pharmaceuticals, Inc. was
$174.6 million for the three and nine months ended
December 31, 2007, as compared to $0 for the three and nine
months ended December 31, 2006. In November 2007, Reliant
was acquired by GlaxoSmithKline (GSK). Under the
terms of the acquisition, we received $166.9 million upon
the closing of the transaction in exchange for our investment in
Series C convertible, redeemable preferred stock of
Reliant, and we are entitled to receive up to an additional
$7.7 million of funds held in escrow subject to the terms
of an escrow agreement between GSK and Reliant. We purchased the
Series C convertible, redeemable preferred stock of Reliant
for $100.0 million in December 2001, and our
investment in Reliant had a carrying value of $0 at the time of
the sale.
Interest income was $4.3 million and $12.9 million for
the three and nine months ended December 31, 2007,
respectively, as compared to $4.3 million and
$13.3 million for the three and nine months ended
December 31, 2006, respectively. The decrease in interest
income for the nine months ended December 31, 2007, as
compared to the nine months ended December 31, 2006, was
due to lower interest earnings on our investments, partially
offset by higher average cash and investment balances held
during the period.
Interest expense was $4.1 million and $12.2 million
for the three and nine months ended December 31, 2007,
respectively, as compared to $4.1 million and
$13.6 million for the three and nine months ended
December 31, 2006. The decrease in interest expense for the
nine months ended December 31, 2007, as compared to the
nine months ended December 31, 2006, was primarily due to
the conversion of our 2.5% convertible subordinated notes due
2023 (the 2.5% Subordinated Notes) in June
2006. Interest expense for the three and nine months ended
December 31, 2006 included a one-time interest charge of
$0.6 million for a payment we made in June 2006 in
connection with the conversion of our 2.5% Subordinated
Notes to satisfy the three-year interest make-whole provision in
the note indenture. We incur approximately $4.0 million of
21
interest expense each quarter on our Non-Recourse Risperdal
Consta secured 7% Notes (the Non-Recourse
7% Notes) through the period until principal
repayment begins on April 1, 2009.
Other (expense) income, net was a net expense of
$0.4 million and a net income of $0.8 million for the
three and nine months ended December 31, 2007,
respectively, and a net income of $0.1 million and
$0.2 million for the three and nine months ended
December 31, 2006, respectively. Other (expense) income,
net consists primarily of income or expense recognized on the
changes in the fair value of warrants and realized losses on
available for sale securities of public companies held by us in
connection with collaboration and licensing arrangements, which
are recorded under the caption Other Assets in the
condensed consolidated balance sheets, and the accretion of
discounts related to restructuring and asset retirement
obligations. The recorded value of warrants we hold can
fluctuate significantly based on fluctuations in the market
value of the underlying securities. In September 2007, we
exercised warrants to purchase common stock of a collaborative
partner, which are considered marketable equity securities under
Statement of Financial Accounting Standards (SFAS)
No. 115,
Accounting for Certain Investments in
Debt and Equity Securities
and are recorded under the
caption Investments in the accompanying condensed
consolidated balance sheet as of December 31, 2007. Future
changes in the fair value of this common stock will be recorded
in other comprehensive income until realized. As a result of our
September 2007 warrant exercise, future recorded income or
expense on changes in the fair value of our remaining holdings
of warrants of public companies is expected to be less than the
amounts recorded in previous reporting periods.
Income taxes were $3.2 million and $5.8 million for
the three and nine months ended December 31, 2007,
respectively and $0.4 million and $0.8 million for the
three and nine months ended December 31, 2006. The
provision for income taxes for the three and nine months ended
December 31, 2007 and 2006 was related to the
U.S. alternative minimum tax (AMT). Utilization
of tax loss carryforwards is limited in the calculation of AMT.
As a result, a federal tax charge was recorded in the three and
nine months ended December 31, 2007 and 2006. The current
AMT liability is available as a credit against future tax
obligations upon the full utilization or expiration of our net
operating loss carryforward. The provision for income taxes
reflects tax recognition of a portion of the nonrefundable
milestone payments we received from Cephalon under our
collaborative arrangement which have not been fully recognized
for financial reporting purposes as of December 31, 2007.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
Financial
Condition
Cash and cash equivalents and unrestricted investments were
$511.5 million and $351.6 million as of
December 31, 2007 and March 31, 2007, respectively.
Unrestricted investments were $190.5 million and
$271.1 million as of December 31, 2007 and
March 31, 2007, respectively. During the nine months ended
December 31, 2007, combined cash and cash equivalents and
unrestricted investments increased by $159.9 million
primarily due to the receipt of $166.9 million from the
Reliant transaction, cash from our operating activities and the
issuance of common stock related to our equity compensation
plans, partially offset by the purchase of $27.6 million of
treasury stock under our stock repurchase program and the
acquisition of fixed assets.
We invest in cash equivalents, U.S. government obligations,
investment grade corporate notes and commercial paper. Our
investment objectives are, first, to assure liquidity and
conservation of capital and, second, to obtain investment
income. We held approximately $5.1 million of
U.S. government obligations and corporate debt obligations
that are classified as restricted long-term investments as of
December 31, 2007 and March 31, 2007, which are
pledged as collateral under certain letters of credit and lease
agreements. In response to the dislocation in the credit markets
beginning in the quarter ended September 30, 2007, our
investments in maturing securities have been reinvested
primarily in U.S. government obligations.
All of our investments in debt and equity securities classified
as available-for-sale are recorded at fair value. Fair value is
generally based on quoted market prices. If quoted market prices
are not available, fair values are estimated based on dealer
quotes or quoted prices for instruments with similar
characteristics. As of
22
December 31, 2007, gross unrealized gains and losses on the
investments were $1.0 million and $1.9 million,
respectively. The Company believes that the gross unrealized
losses are temporary, and the Company has the intent and ability
to hold these securities to recovery, which may be at maturity.
Receivables were $40.3 million and $56.0 million as of
December 31, 2007 and March 31, 2007, respectively.
The decrease of $15.7 million during the nine months ended
December 31, 2007 was primarily due to decreases in amounts
due from Janssen for RISPERDAL CONSTA product deliveries related
to the timing of shipments, invoices and payments.
Inventory was $23.1 million and $18.2 million as of
December 31, 2007 and March 31, 2007, respectively.
This consisted of RISPERDAL CONSTA inventory of
$14.8 million and $11.2 million as of
December 31, 2007 and March 31, 2007, respectively,
and VIVITROL inventory of $8.3 million and
$7.0 million as of December 31, 2007 and
March 31, 2007, respectively. The increase in RISPERDAL
CONSTA inventory during the nine months ended December 31,
2007 was primarily due to increases in work in process and
finished goods inventory due to the timing of manufacturing and
shipments to Janssen. The increase in VIVITROL inventory during
the nine months ended December 31, 2007 was primarily due
to increases in raw materials inventory. As of December 31,
2007 and March 31, 2007, inventory included
$0.5 million and $0.6 million of share-based
compensation costs, respectively.
Accounts payable and accrued expenses were $30.0 million
and $45.9 million as of December 31, 2007 and
March 31, 2007, respectively. The decrease during the nine
months ended December 31, 2007 was primarily due to
decreases in accrued expenses related to our collaborative
arrangement with Cephalon and decreases in accounts payable,
partially offset by an increase in accrued income taxes payable.
Unearned milestone revenue current and long-term
portions, combined, were $119.2 million and
$128.8 million as of December 31, 2007 and
March 31, 2007, respectively. The decrease during the nine
months ended December 31, 2007 was due to the recognition
of approximately $9.2 million and $0.4 million of
milestone revenue under the captions Net collaborative
profit and Manufacturing revenues,
respectively, in the condensed consolidated statement of income
during the nine months ended December 31, 2007.
Deferred revenue current and long-term portions,
combined, were $27.8 million and $22.4 million as of
December 31, 2007 and March 31, 2007, respectively.
The increase during the nine months ended December 31, 2007
was due to the receipt of an upfront payment of
$5.0 million from Cilag GmbH International in December 2007
upon the signing of an agreement to commercialize VIVITROL for
the treatment of alcohol and opioid dependence in Russia and
other countries in the CIS. The Company also received
$2.0 million from Cephalon for the cost of two VIVITROL
manufacturing lines currently under construction. These
increases were partially offset by the recognition of revenue
related to a portion of the upfront and milestone payments we
received from Lilly under the AIR PTH program. Because we will
operate and maintain the two VIVITROL manufacturing lines
currently under construction, and intend to do so for the
foreseeable future, the continued payments made by Cephalon are
being treated as additional consideration and recorded as
deferred revenue.
Cash flows provided by investing activities was
$231.3 million for the nine months ended December 31,
2007 due to the receipt of proceeds from the sale of Reliant and
the sales and maturities of investments, partially offset by the
purchases of investments and the acquisition of property, plant
and equipment. For the nine months ended December 31, 2006,
cash used by investing activities was $27.8 million and was
due primarily to the acquisition of property, plant and
equipment.
Cash flows used in financing activities were $18.9 million
and $7.4 million for the nine months ended
December 31, 2007 and 2006, respectively. For both the nine
months ended December 31, 2007 and 2006, cash used by
financing activities was primarily due to the purchase of
treasury stock under our publicly announced share repurchase
programs, partially offset by cash provided by the issuance of
common stock related to our equity compensation plans.
Item 2, Unregistered Sales of Equity Securities and Use of
Proceeds, in Part II of this report on
Form 10-Q
contains additional information related to our publicly
announced share repurchase programs.
23
Liquidity
and Capital Resources
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
received under research and development agreements and other
agreements with collaborators. We expect to incur significant
additional research and development and other costs in
connection with collaborative arrangements and as we expand the
development of our proprietary product candidates, including
costs related to preclinical studies, clinical trials and the
expansion of our facilities. Our costs, including research and
development costs for our product candidates and sales,
marketing and promotion expenses for any future products to be
marketed by us or our collaborators, if any, may exceed revenues
in the future, which may result in losses from operations.
We believe that our current cash and cash equivalents and
investments, combined with our unused equipment lease line,
anticipated interest income and anticipated revenues will
generate sufficient cash flows to meet our anticipated liquidity
and capital requirements through at least December 31, 2008.
We may continue to pursue opportunities to obtain additional
financing in the future. Such financing may be sought through
various sources, including debt and equity offerings, corporate
collaborations, bank borrowings, arrangements relating to assets
or other financing methods or structures. The source, timing and
availability of any financings will depend on market conditions,
interest rates and other factors. Our future capital
requirements will also depend on many factors, including
continued scientific progress in our research and development
programs (including our proprietary product candidates), the
magnitude of these programs, progress with preclinical testing
and clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting
and enforcing patent claims, competing technological and market
developments, the establishment of additional collaborative
arrangements, the cost of manufacturing facilities and of
commercialization activities and arrangements and the cost of
product in-licensing and any possible acquisitions and, for any
future proprietary products, the sales, marketing and promotion
expenses associated with marketing such products.
We may need to raise substantial additional funds for
longer-term product development, including development of our
proprietary product candidates, regulatory approvals and
manufacturing and sales and marketing activities that we might
undertake in the future. There can be no assurance that
additional funds will be available on favorable terms, if at
all. If adequate funds are not available, we may be required to
curtail significantly one or more of our research and
development programs
and/or
obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of
our technologies, product candidates or future products.
Our capital expenditures have been financed to date primarily
with proceeds from bank loans and the sales of debt and equity
securities. Under the provisions of our existing loans, General
Electric Capital Corporation (GE) and
Johnson & Johnson Finance Corporation have security
interests in certain of our capital assets.
Capital expenditures are expected in the range from
$20.0 million to $25.0 million for the year ending
March 31, 2008, net of reimbursements from our
collaborative partners.
On February 7, 2008, we entered into an Accelerated Share
Repurchase Transaction (the ASR) with Morgan
Stanley & Co. Incorporated (Morgan
Stanley) pursuant to which we will repurchase
$60.0 million of our outstanding common stock from Morgan
Stanley. We are acquiring these shares as part of a previously
announced share repurchase program of up to $175.0 million
approved by our Board of Directors. In addition, we may continue
to make open market purchases of our common stock during the
term of the ASR.
Contractual
Obligations
The contractual cash obligations disclosed in our Annual Report
on
Form 10-K
for the year ended March 31, 2007 have not changed
materially since the date of that report.
24
Off-Balance
Sheet Arrangements
As of December 31, 2007, we do not have any significant
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes,
except for as discussed in Note 8, Sale of Investment in Reliant
Pharmaceuticals, Inc., in the Notes to Condensed Consolidated
Financial Statements in Part I of this report on Form 10 Q which
is incorporated into this item by reference.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We hold financial instruments in our investment portfolio that
are sensitive to market risks. Our investment portfolio,
excluding marketable equity securities and warrants we receive
in connection with our collaborations and licensing activities,
is used to preserve capital until it is required to fund
operations. Although our investments, excluding marketable
equity securities and warrants we receive in connection with our
collaborations and licensing activities, are subject to credit
risk, our investment policies specify credit quality standards
for our investments and limit the amount of credit exposure from
any single issue, issuer or type of investment.
Our unrestricted and restricted long-term investments consist of
U.S. government obligations, investment grade corporate
notes and commercial paper. These debt securities are:
(i) classified as available-for-sale; (ii) are
recorded at fair value; and (iii) are subject to credit and
interest rate risk, and could decline in value if interest rates
increase. These debt securities are sensitive to changes in
interest rates, and interest rate changes would result in a
change in the fair value of these financial instruments due to
the difference between the market interest rate and the rate at
the date of purchase of the financial instruments. A 10%
increase or decrease in market interest rates would not have a
material impact on the condensed consolidated financial
statements.
We hold certain marketable equity securities of publicly traded
companies we collaborate with that are classified as
available-for-sale and are recorded at fair value under the
caption Investments in the condensed consolidated
balance sheets. We also hold other marketable equity securities,
including warrants to purchase the securities of publicly traded
companies we collaborate with, that are classified as
available-for-sale and are recorded at fair value under the
caption Other assets in the condensed consolidated
balance sheets. These marketable equity securities are sensitive
to changes in the market price of the underlying securities.
Market price changes would result in a change in the fair value
of these securities due to differences between their market
price and purchase price. A 10% increase or decrease in the
market price of our marketable equity securities would not have
a material impact on the condensed consolidated financial
statements.
As of December 31, 2007, the fair value of our Non-Recourse
7% Notes approximated the carrying value. The interest rate
on these notes, and our capital lease obligations, are fixed and
therefore not subject to interest rate risk.
As of December 31, 2007, we have a term loan in the amount
of $0.6 million that bears a floating interest rate equal
to the one-month London Interbank Offered Rate
(LIBOR) plus 5.45 basis points.
Foreign
Currency Exchange Rate Risk
The manufacturing and royalty revenues we receive on RISPERDAL
CONSTA are a percentage of the net sales made by our
collaborative partner, Janssen. Some of these sales are made in
foreign countries and are denominated in foreign currencies. The
manufacturing and royalty payment on these foreign sales is
calculated initially in the foreign currency in which the sale
is made and is then converted into U.S. dollars to
determine the amount that Janssen pays us for manufacturing and
royalty revenues. Fluctuations in the exchange ratio of the
U.S. dollar and these foreign currencies will have the
effect of increasing or decreasing our manufacturing and royalty
revenues even if there is a constant amount of sales in foreign
currencies. For example, if the U.S. dollar weakens against
a foreign currency, then our manufacturing and royalty revenues
will increase given a constant amount of sales in such foreign
currency.
25
The impact on our manufacturing and royalty revenues from
foreign currency exchange rate risk is based on a number of
factors, including the exchange rate (and the change in the
exchange rate from the prior period) between a foreign currency
and the U.S. dollar, and the amount of RISPERDAL CONSTA
sales by Janssen that are denominated in foreign currencies. We
do not currently hedge our foreign currency exchange rate risk.
|
|
Item 4.
|
Controls
and Procedures
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
We have carried out an evaluation, under the supervision and the
participation of our management, including our principal
executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended, or the
Securities Exchange Act) as of December 31, 2007. Based
upon that evaluation, our principal executive officer and
principal financial officer concluded that, as of
December 31, 2007, our disclosure controls and procedures
are effective in providing reasonable assurance that
(a) the information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and
(b) such information is accumulated and communicated to our
management, including our principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, our
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
|
|
(b)
|
Change
in Internal Control over Financial Reporting
|
During the period covered by this report, there have been no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
26
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Note 10, Legal Matters, in the Notes to Condensed
Consolidated Financial Statements in Part I of this report
on
Form 10-Q
is incorporated into this item by reference. Please see the
Legal Proceedings section of our Annual Report on
Form 10-K
for the year ended March 31, 2007 for more information on
litigation to which we are a party.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
A summary of our stock repurchase activity for the three months
ended December 31, 2007 is set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Value of Shares
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
that May Yet
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Repurchased as
|
|
|
be Repurchased
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Part of a Publicly
|
|
|
Under the
|
|
Period
|
|
Repurchased(a)
|
|
|
per Share
|
|
|
Announced Program(a)
|
|
|
Programs(a)
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
October 1 through October 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,508
|
|
November 1 through November 30
|
|
|
828,600
|
|
|
$
|
14.09
|
|
|
|
828,600
|
|
|
$
|
165,833
|
|
December 1 through December 31
|
|
|
1,090,727
|
|
|
$
|
14.62
|
|
|
|
1,090,727
|
|
|
$
|
149,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,919,327
|
|
|
$
|
14.39
|
|
|
|
1,919,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
In September 2005, our Board of Directors authorized a program
to repurchase up to $15.0 million of our common stock to be
repurchased at the discretion of management from time to time in
the open market or through privately negotiated transactions.
The repurchase program has no set expiration date and may be
suspended or discontinued at any time. We publicly announced the
share repurchase program in our press release for the fiscal
2006 second quarter financial results dated November 3,
2005. No shares were purchased under this program during the
nine months ended December 31, 2007. No repurchase
authorization remains outstanding under this program as of
December 31, 2007.
|
|
|
|
In November 2007, our Board of Directors authorized a program to
repurchase up to $175.0 million of our common stock to be
repurchased at the discretion of management from time to time in
the open market or through privately negotiated transactions.
The repurchase program has no set expiration date and may be
suspended or discontinued at any time. We publicly announced the
share repurchase program in our press release dated
November 21, 2007. The approximate dollar value of shares
that may yet be purchased under this program is
$149.9 million as of December 31, 2007.
|
In addition to the stock repurchases above, during the nine
months ended December 31, 2007, we acquired, by means of
net share settlements, 77,094 shares of Alkermes common
stock, at an average price of $17.31 per share, related to the
vesting of employee stock awards to satisfy withholding tax
obligations. In addition, during the nine months ended
December 31, 2007, we acquired 8,675 shares of
Alkermes common stock, at an average price of $16.77 per share,
tendered by employees as payment of the exercise price of stock
options granted under our equity compensation plans.
In December 2007, we executed three trades to repurchase
358,867 shares of treasury stock at an aggregate cost of
$5.7 million under our publicly announced share repurchase
programs. These broker-assisted transactions were not settled
until January 2008 and have not been reflected in the condensed
consolidated financial statements.
27
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We held our annual meeting of shareholders on October 9,
2007. For information on this shareholder meeting please see
Item 4 to our quarterly report on
form 10-Q
for the period ended September 30, 2007, and which
information is incorporated herein by reference.
(a) List of Exhibits:
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.1
|
|
Employment Agreement, dated as of December 12, 2007, by and
between Richard F. Pops and the Registrant.
|
|
10
|
.2
|
|
Employment Agreement, dated as of December 12, 2007, by and
between David A. Broecker and the Registrant.
|
|
10
|
.3
|
|
Form of Employment Agreement, dated as of December 12,
2007, by and between the Registrant and each of Kathryn L.
Biberstein, Elliot W. Ehrich, M.D., James M. Frates,
Michael J. Landine, Gordon G. Pugh.
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith).
|
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ALKERMES, INC.
(Registrant)
|
|
|
|
By:
|
/s/ David
A. Broecker
|
David A. Broecker
President and Chief Executive Officer
(Principal Executive Officer)
James M. Frates
Senior Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
Date: February 11, 2008
29
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No
|
|
|
|
|
10
|
.1
|
|
Employment Agreement, dated as of December 12, 2007, by and
between Richard F. Pops and the Registrant.
|
|
10
|
.2
|
|
Employment Agreement, dated as of December 12, 2007, by and
between David A. Broecker and the Registrant.
|
|
10
|
.3
|
|
Form of Employment Agreement, dated as of December 12,
2007, by and between the Registrant and each of Kathryn L.
Biberstein, Elliot W. Ehrich, M.D., James M. Frates,
Michael J. Landine, Gordon G. Pugh.
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith).
|
30
Exhibit
10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (Agreement) is made as of the 12th day of December 2007 between
Alkermes, Inc., a Pennsylvania corporation (the Company), and Richard F. Pops (Executive).
WHEREAS, the Company has previously entered into a letter agreement with Executive dated
February 27, 2007, as amended on November 5, 2007 (the Letter Agreement), and a change in control
employment agreement dated December 19, 2000 (the Change in Control Agreement);
WHEREAS, the Company and Executive wish to replace the Letter Agreement and the Change in
Control Agreement with the provisions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and
other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
1.
Employment
. The term of this Agreement shall extend from December 12, 2007 (the
Commencement Date) until April 1, 2010, unless this Agreement is earlier terminated by either the
Executive or the Company pursuant to Paragraph 4. The term of this Agreement may be referred to
herein as the Period of Employment.
2.
Position and Duties
. During the Period of Employment, Executive shall serve as the
Chairman of the Board of Directors of the Company, and shall be responsible for oversight of
strategic issues affecting the Company and maintaining key relationships in the industry and shall
have such other powers and duties as may from time to time be prescribed by the Board of Directors
of the Company (the Board), provided that such duties are consistent with Executives position or
other positions that he may hold from time to time. In addition until April 1, 2008, Executive
shall dedicate the time and resources necessary to ensure a smooth transition to David A. Broecker,
Executives successor as Chief Executive Officer of the Company.
3.
Compensation and Related Matters
.
(a)
Base Salary
. During the Period of Employment, Executives annual base salary
shall be his annual base salary on the Commencement Date, adjusted annually to account for
inflation. The base salary in effect at any given time is referred to herein as Base Salary.
The Base Salary shall be payable in substantially equal bi-weekly installments.
(b)
Incentive Compensation
. Until April 1, 2008, Executive shall be eligible to
receive his target bonus in effect on the date of this Agreement under the Company named-executive
bonus plan and shall also be eligible to receive restricted stock and/or stock options commensurate
with recent equity awards based on performance criteria to be determined by the Compensation
Committee of the Board (the Compensation Committee). Thereafter, any bonus and/or equity award
would be based on criteria established by the Compensation Committee from time to time.
(c)
Expenses
.
Executive shall be entitled to receive prompt reimbursement for all
reasonable business expenses incurred by him in performing services hereunder during the Period of
Employment, in accordance with the policies and procedures then in effect and established by the
Company.
(d)
Other Benefits
.
During the Period of Employment, Executive shall be entitled to
continue to participate in or receive benefits under all of the Companys Employee Benefit Plans in
effect on the date hereof, as these plans or arrangements may thereafter be amended from time to
time. As used herein, the term Employee Benefit Plans includes, without limitation, each pension
and retirement plan; supplemental pension, retirement and deferred compensation plan; savings and
profit-sharing plan; stock ownership plan; stock purchase plan; stock option plan; life insurance
plan; medical insurance plan; disability plan; and health and accident plan or arrangement
established and maintained by the Company on the date hereof for employees of the same status
within the hierarchy of the Company. Executive shall have the right in accordance with applicable
law and the Companys long-term disability plan to elect to pay the premiums for his disability
coverage with after-tax dollars. During the Period of Employment, Executive shall be entitled to
participate in or receive benefits under any Employee Benefit Plan or arrangement which may, in the
future, be made available by the Company to its executives and key management employees, subject to
and on a basis consistent with the terms, conditions and overall administration of such plan or
arrangement. Any payments or benefits payable to Executive under a plan or arrangement referred to
in this Subparagraph 3(d) in respect of any calendar year during which Executive is employed by the
Company for less than the whole of such year shall, unless otherwise provided in the applicable
plan or arrangement, be prorated in accordance with the number of days in such calendar year during
which he is so employed. Should any such payments or benefits accrue on a fiscal year (rather than
calendar year) basis, then the proration in the preceding sentence shall be on the basis of a
fiscal year rather than calendar year.
(e)
Vacations
. Executive shall be entitled to the number of paid vacation days in
each calendar year to which he is entitled on the Commencement Date, which vacation days shall be
accrued ratably during the calendar year and the number of which may be increased in accordance
with Company policies. Executive shall also be entitled to all paid holidays given by the Company
to its executives.
4.
Termination
. Executives employment hereunder may be terminated without any breach
of this Agreement under the following circumstances:
(a)
Death
. Executives employment hereunder shall terminate upon his death.
(b)
Disability
. If Executive is prevented from performing his duties hereunder by
reason of any physical or mental incapacity that results in Executives satisfaction of all
requirements necessary to receive benefits under the Companys long-term disability plan due to a
total disability, then, to the extent permitted by law, the Company may remove Executive from his
responsibilities. Notwithstanding any such removal, Executive will continue to receive his entire
Base Salary (less any disability pay or sick pay benefits to which Executive may be entitled under
any Employee Benefit Plan) and benefits (except to the extent Executive may be ineligible for one
or more such benefits under the applicable Employee Benefit Plan) for a period
2
of time equal to the lesser of (i) six (6) months or (ii) the balance of the Period of
Employment, and the Company may terminate the employment of Executive at any time thereafter.
Nothing in this Subparagraph 4(b) shall be construed to waive Executives rights, if any, under
existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C.
§2601
et seq
. and the Americans with Disabilities Act, 42 U.S.C. §12101
et seq.
(c)
Termination by Company for Cause
. At any time during the Period of Employment,
the Company may terminate Executives employment hereunder for Cause if such termination is
approved by not less than a majority of the Board at a meeting of the Board, at which Executive
would not participate, called and held for such purpose. For purposes of this Agreement, Cause
shall mean: (i) conduct by Executive constituting a material act of willful misconduct in
connection with the performance of his duties, including, without limitation, misappropriation of
funds or property of the Company or any of its affiliates other than the occasional, customary and
de minimis use of Company property for personal purposes; (ii) the commission by Executive of a
felony or any misdemeanor involving moral turpitude, deceit, dishonesty or fraud, or conduct by
Executive that would reasonably be expected to result in material injury to the Company if he were
retained in his position; (iii) continued, willful and deliberate non-performance by Executive of
his duties hereunder (other than by reason of Executives physical or mental illness, incapacity or
disability) which has continued for more than thirty (30) days following written notice of such
non-performance from the Company; (iv) a breach by Executive of any of the provisions contained in
Paragraph 7 of this Agreement; (v) a violation by Executive of the Companys employment policies
which has continued following written notice of such violation from the Company; or (vi) willful
failure to cooperate with a bona fide internal investigation or an investigation by regulatory or
law enforcement authorities, after being instructed by the Company to cooperate, or the willful
destruction or failure to preserve documents or other materials known to be relevant to such
investigation or the willful inducement of others to fail to cooperate or to produce documents or
other materials.
(d)
Termination Without Cause
. At any time during the Period of Employment, the
Company may terminate Executives employment hereunder without Cause if such termination is
approved by a majority of the Board at a meeting of the Board, at which Executive would not
participate, called and held for such purpose. Any termination by the Company of Executives
employment under this Agreement which does not constitute a termination for Cause under
Subparagraph 4(c) or result from the death or disability of Executive under Subparagraph 4(a) or
(b) shall be deemed a termination without Cause.
(e)
Termination by Executive
. At any time during the Period of Employment, Executive
may terminate his employment hereunder for any reason, including but not limited to Good Reason.
For purposes of this Agreement, Good Reason shall mean that Executive has complied with the Good
Reason Process (hereinafter defined) following the occurrence of any of the following events: (i)
a substantial diminution or other substantive adverse change, not consented to by Executive, in the
nature or scope of Executives responsibilities, authorities, powers, functions or duties; (ii) an
involuntary material reduction in Executives Base Salary except for across-the-board reductions
similarly affecting all or substantially all management employees; (iii) a breach by the Company of
any of its other material obligations under this Agreement, or (iv) a material change in the
geographic location at which Executive must perform his services. Good Reason Process shall mean
that (A) Executive reasonably
3
determines in good faith that a Good Reason event has occurred; (B) Executive notifies the
Company in writing of the occurrence of the Good Reason event within ninety (90) days of the
occurrence of such event; (C) Executive cooperates in good faith with the Companys efforts, for a
period not less than thirty (30) days following such notice, to modify Executives employment
situation in a manner acceptable to Executive and Company; (D) notwithstanding such efforts, one or
more of the Good Reason events continues to exist and has not been modified in a manner acceptable
to Executive; and (E) Executive terminates his employment no later than sixty (60) days after the
end of the thirty-day cure period. If the Company cures the Good Reason event in a manner
acceptable to Executive during the thirty-day period, Good Reason shall be deemed not to have
occurred.
(f)
Notice of Termination
. Except for termination as specified in Subparagraph 4(a),
any termination of Executives employment by the Company or any such termination by Executive shall
be communicated by written Notice of Termination to the other party hereto. For purposes of this
Agreement, a Notice of Termination shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(g)
Date of Termination
. Date of Termination shall mean: (i) if Executives
employment is terminated by his death, the date of his death; (ii) if Executives employment is
terminated on account of disability under Subparagraph 4(b) or by the Company for Cause under
Subparagraph 4(c), the date on which Notice of Termination is given; (iii) if Executives
employment is terminated by the Company under Subparagraph 4(d), thirty (30) days after the date on
which a Notice of Termination is given; and (iv) if Executives employment is terminated by
Executive under Subparagraph 4(e), thirty (30) days after the date on which a Notice of Termination
is given.
5.
Compensation Upon Termination
.
(a)
Termination Generally
. If Executives employment with the Company is terminated
for any reason during the Period of Employment, the Company shall pay or provide to Executive (or
to his authorized representative or estate) any earned but unpaid Base Salary, incentive
compensation earned but not yet paid, unpaid expense reimbursements, accrued but unused vacation
and any vested benefits Executive may have under any Employee Benefit Plan of the Company,
including without limitation any benefits that may accrue on Executives retirement from the
Company, to the extent applicable (the Accrued Benefit).
(b)
Termination by the Company Without Cause or by Executive with Good Reason
. If
Executives employment is terminated by the Company without Cause as provided in Subparagraph 4(d),
or Executive terminates his employment for Good Reason as provided in Subparagraph 4(e), then the
Company shall, through the Date of Termination, pay Executive his Accrued Benefit. The Company
shall within seven (7) days of the Date of Termination provide to Executive a general release of
claims in a form and manner satisfactory to the Company (the Release). If Executive signs the
Release and delivers it to Company within twenty-one (21) days of Executives receipt of the
Release and does not revoke it within seven (7) days thereafter:
4
(i) Company shall pay Executive an amount equal to two (2) times the sum of (A) the
average of Executives Base Salary in effect as of the date of the Notice of Termination and
Executives Base Salary for the immediately prior fiscal year, plus (B) Executives Average
Incentive Compensation (the Severance Amount). The Severance Amount shall be paid out in
substantially equal bi-weekly installments over twenty-four (24) months, in arrears
beginning on the first payroll date after the Date of Termination, or expiration of the
seven-day revocation period for the Release, if later. Solely for the purposes of Section
409A of the Internal Revenue Code of 1986, as amended (the Code), each bi-weekly payment
is considered a separate payment. For purposes of this Agreement, Average Incentive
Compensation shall mean the average of the annual cash incentive compensation under
Subparagraph 3(b) received by Executive for the two (2) immediately preceding fiscal years.
In no event shall Average Incentive Compensation include any sign-on bonus, retention
bonus or any other special bonus. Notwithstanding the foregoing, if Executive breaches any
of the provisions contained in Paragraph 7 of this Agreement, all payments of the Severance
Amount shall immediately cease.
(ii) Subject to Executives copayment of premium amounts at the active employees rate,
continued participation in the Companys group health, dental and vision program for
twenty-four (24) months;
provided, however
, that the continuation of health benefits
under this Subparagraph shall reduce and count against Executives rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA).
(iii) Anything in this Agreement to the contrary notwithstanding, if at the time of
Executives termination of employment, Executive is considered a specified employee within
the meaning of Section 409A(a)(2)(B)(i) of the Code, and if any payment or benefit that
Executive becomes entitled to under this Agreement is considered deferred compensation
subject to interest, penalties and additional tax imposed pursuant to Section 409A(a) of the
Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, then no such
payment shall be payable or benefit shall be provided prior to the date that is the earlier
of (A) six months after Executives separation from service, or (B) Executives death, and
the initial payment shall include a catch-up amount covering amounts that would otherwise
have been paid during the first six-month period but for the application of this
Subparagraph 5(b)(iii). The parties intend that this Agreement will be administered in
accordance with Section 409A of the Code. The parties agree that this Agreement may be
amended, as reasonably requested by either party, and as may be necessary to fully comply
with Section 409A of the Code and all related rules and regulations in order to preserve the
payments and benefits provided hereunder without additional cost to either party.
6.
Change in Control Payment
. The provisions of this Paragraph 6 set forth certain
terms of an agreement reached between Executive and the Company regarding Executives rights and
obligations upon the occurrence of a Change in Control of the Company. These provisions are
intended to assure and encourage in advance Executives continued attention and dedication to his
assigned duties and his objectivity during the pendency and after the occurrence of any such event.
These provisions shall apply in lieu of, and expressly supersede, the provisions of Subparagraph
5(b) regarding the amount of severance pay and benefits upon a termination of
5
employment, if such termination of employment occurs within twenty-four (24) months after the
occurrence of the first event constituting a Change in Control, provided that such first event
occurs during the Period of Employment. These provisions shall terminate and be of no further
force or effect beginning twenty-four (24) months after the occurrence of a Change in Control.
(a) A Change in Control shall be deemed to have occurred upon the occurrence of any one of
the following events:
(i) any Person, as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the
Act
) (other than the Company, any of its
subsidiaries, or any trustee, fiduciary or other person or entity holding securities under
any employee benefit plan or trust of the Company or any of its subsidiaries), together with
all affiliates and associates (as such terms are defined in Rule 12b-2 under the Act) of
such Person, shall become the beneficial owner (as such term is defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the Companys then outstanding
securities having the right to vote in an election of the Board (
Voting
Securities
) (in such case other than as a result of an acquisition of securities
directly from the Company); or
(ii) a majority of the members of the Board is replaced during any twelve-month period
by directors whose appointment or election is not endorsed by a majority of the Board before
the date of such appointment or election; or
(iii) the consummation of (A) any consolidation or merger of the Company where the
stockholders of the Company, immediately prior to the consolidation or merger, would not,
immediately after the consolidation or merger, beneficially own (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more
than fifty percent (50%) of the voting shares of the company issuing cash or securities in
the consolidation or merger (or of its ultimate parent corporation, if any), or (B) any sale
or other transfer (in one transaction or a series of transactions contemplated or arranged
by any party as a single plan) of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred
for purposes of the foregoing clause (i) solely as the result of an acquisition of
securities by the Company that, by reducing the number of shares of Voting Securities
outstanding, increases the proportionate number of shares of Voting Securities beneficially
owned by any person to fifty percent (50%) or more of the combined voting power of all then
outstanding Voting Securities;
provided, however
, that if any person referred to in
this sentence shall thereafter become the beneficial owner of any additional shares of
Voting Securities (other than pursuant to a stock split, stock dividend, or similar
transaction or as a result of an acquisition of securities directly from the Company) and
immediately thereafter beneficially owns fifty percent (50%) or more of the combined voting
power of all then outstanding Voting Securities, then a Change in Control shall be deemed
to have occurred for purposes of the foregoing clause (i).
6
(b)
Effect of a Change in Control
.
(i) If within twenty-four (24) months after a Change in Control occurs, the Executives
employment is terminated by the Company without Cause as provided in Subparagraph 4(d) or
the Executive terminates his employment for Good Reason as provided in Subparagraph 4(e),
then, the Company shall pay Executive a lump sum in cash equal to the sum of:
(A) to the extent not theretofore paid, an amount equal to the Executives
Base Salary through the Date of Termination;
(B) an amount equal to the following formula: A x (B ÷ 365); where A equals
Executives Average Incentive Compensation and B equals the number of days in the
current calendar year through the Date of Termination; and
(C) an amount equal to two (2) times the sum of (I) Executives Base Salary
(or Executives Base Salary in effect immediately prior to the Change in Control, if
higher) plus (II) Executives Average Incentive Compensation; and
(ii) Subject to Executives copayment of premium amounts at the active employees rate,
Executive shall continue to participate in the Companys group health, dental and vision
program for twenty-four (24) months;
provided, however
, that the continuation of
health benefits under this Section shall reduce and count against Executives rights under
COBRA.
(iii) Anything in this Agreement to the contrary notwithstanding, if at the time of
Executives separation from service within the meaning of Section 409A of the Code,
Executive is considered a specified employee within the meaning of Section
409A(a)(2)(B)(i) of the Code, and if any payment or benefit that Executive becomes entitled
to under this Agreement is considered deferred compensation subject to interest, penalties
and additional tax imposed pursuant to Section 409A(a) of the Code as a result of the
application of Section 409A(a)(2)(B)(i) of the Code, then no such payment shall be payable
or benefit shall be provided prior to the date that is the earlier of (A) six (6) months and
one day after Executives separation from service, or (B) Executives death. The parties
intend that this Agreement will be administered in accordance with Section 409A of the Code.
The parties agree that this Agreement may be amended, as reasonably requested by either
party, and as may be necessary to fully comply with Section 409A of the Code and all related
rules and regulations in order to preserve the payments and benefits provided hereunder
without additional cost to either party.
(c)
Gross-Up Payment
.
(i) Anything in this Agreement to the contrary notwithstanding, in the event it shall
be determined that any compensation, payment or distribution by the Company to or for the
benefit of Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (the Severance Payments), would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by
Executive with respect to such excise tax (such
7
excise tax, together with any such interest and penalties, are hereinafter collectively
referred to as the Excise Tax), then Executive shall be entitled to receive an additional
payment (a Gross-Up Payment) such that the net amount retained by Executive, after
deduction of any Excise Tax on the Severance Payments, any Federal, state, and local income
tax, employment tax and Excise Tax upon the payment provided by this Section, and any
interest and/or penalties assessed with respect to such Excise Tax, shall be equal to the
Severance Payments.
(ii) Subject to the provisions of Subparagraph 6(c)(iii) below, all determinations
required to be made under this Subparagraph 6(c)(ii), including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment, shall be made by a nationally
recognized accounting firm selected by the Company (the Accounting Firm), which shall
provide detailed supporting calculations both to the Company and the Executive within
fifteen (15) business days of the Date of Termination, if applicable, or at such earlier
time as is reasonably requested by the Company or Executive. For purposes of determining
the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income taxes at
the highest marginal rate of Federal income taxation applicable to individuals for the
calendar year in which the Gross-Up Payment is to be made, and state and local income taxes
at the highest marginal rates of individual taxation in the state and locality of
Executives residence on the Date of Termination, net of the maximum reduction in Federal
income taxes which could be obtained from deduction of such state and local taxes. The
initial Gross-Up Payment, if any, as determined pursuant to this Subparagraph 6(c)(ii),
shall be paid to the taxing authorities as withholding taxes on behalf of Executive at such
time or times when the Excise Tax is due. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made by the
Company should have been made (an Underpayment). In the event that the Company exhausts
its remedies pursuant to Subparagraph 6(c)(iii) below and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred, consistent with the calculations required to be made
hereunder, and any such Underpayment, and any interest and penalties imposed on the
Underpayment and required to be paid by Executive in connection with the proceedings
described in Subparagraph 6(c)(iii) below, shall be promptly paid by the Company to the
taxing authorities for the benefit of Executive.
(iii) Executive shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company of the
Gross-up Payment. Such notification shall be given as soon as practicable but no later than
ten (10) business days after Executive knows of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the thirty-day period
following the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such period that it desires
to contest such claim, provided that the Company has set aside adequate reserves
8
to cover the Underpayment and any interest and penalties thereon that may accrue,
Executive shall:
(A) give the Company any information reasonably requested by the Company
relating to such claim,
(B) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including, without
limitation, accepting legal representation with respect to such claim by an attorney
selected by the Company,
(C) cooperate with the Company in good faith in order to effectively contest
such claim, and
(D) permit the Company to participate in any proceedings relating to such
claim;
provided, however
, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive harmless, on
an after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Subparagraph 6(c)(iii), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any and
all administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
Executive to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
provided,
however
, that if the Company directs the Executive to pay such claim and sue for
a refund, the Company shall advance the amount of such payment to Executive on an
interest-free basis (to the extent not prohibited by applicable law) and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Companys control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest, as the case may be, any other
issues raised by the Internal Revenue Service or any other taxing authority.
(iv) If, after the receipt by Executive of an amount advanced by the Company pursuant
to Subparagraph 6(c)(iii), Executive becomes entitled to receive any refund with respect to
such claim, Executive shall (subject to the Companys complying
9
with the requirements of Subparagraph 6(c)(iii)) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant
to Subparagraph 6(c)(iii), a determination is made that Executive shall not be entitled to
any refund with respect to such claim and the Company does not notify Executive in writing
of its intent to contest such denial of refund prior to the expiration of thirty (30) days
after such determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
7.
Confidential Information, Nonsolicitation and Cooperation
.
(a)
Confidential Information
. As used in this Agreement, Confidential Information
means information belonging to the Company which is of value to the Company in the course of
conducting its business and the disclosure of which could result in a competitive or other
disadvantage to the Company. Confidential Information includes, without limitation, financial
information, reports, and forecasts; inventions, improvements and other intellectual property;
trade secrets; know-how; designs, processes or formulae; software; market or sales information or
plans; customer lists; and business plans, prospects and opportunities (such as possible
acquisitions or dispositions of businesses or facilities) which have been discussed or considered
by the management of the Company. Confidential Information includes information developed by
Executive in the course of Executives employment by the Company, as well as other information to
which Executive may have access in connection with Executives employment. Confidential
Information also includes the confidential information of others with which the Company has a
business relationship. Notwithstanding the foregoing, Confidential Information does not include
information in the public domain, unless due to breach of Executives duties under Subparagraph
7(b).
(b)
Confidentiality
. Executive understands and agrees that Executives employment
creates a relationship of confidence and trust between Executive and the Company with respect to
all Confidential Information. At all times, both during Executives employment with the Company
and after its termination, Executive will keep in confidence and trust all such Confidential
Information, and will not use or disclose any such Confidential Information without the written
consent of the Company, except as may be necessary in the ordinary course of performing Executives
duties to the Company.
(c)
Documents, Records, etc
. All documents, records, data, apparatus, equipment and
other physical property, whether or not pertaining to Confidential Information, which are furnished
to Executive by the Company or are produced by Executive in connection with Executives employment
will be and remain the sole property of the Company. Executive will return to the Company all such
materials and property as and when requested by the Company. In any event, Executive will return
all such materials and property immediately upon termination of Executives employment for any
reason. Executive will not retain with Executive any such material or property or any copies
thereof after such termination.
(d)
Nonsolicitation
. During the Period of Employment and for six (6) months
thereafter, Executive (i) will refrain from directly or indirectly recruiting or otherwise
soliciting,
10
inducing or influencing any person to leave employment with the Company (other than
terminations of employment of subordinate employees undertaken in the course of Executives
employment with the Company); and (ii) will refrain from soliciting or encouraging any customer or
supplier to terminate or otherwise modify adversely its business relationship with the Company.
However, nothing in this Subparagraph 7(d) will prohibit Executive from indirectly recruiting,
soliciting, inducing or influencing a person to leave employment with the Company through the use
of advertisements in trade journals and the like or from discussing employment opportunities with
such employees to the extent such employees contact Executive first. Executive understands that
the restrictions set forth in this Subparagraph 7(d) are intended to protect the Companys interest
in its Confidential Information and established employee, customer and supplier relationships and
goodwill, and agrees that such restrictions are reasonable and appropriate for this purpose.
(e)
Litigation and Regulatory Cooperation
. During and after Executives employment,
Executive shall cooperate fully with the Company in the defense or prosecution of any claims or
actions now in existence or which may be brought in the future against or on behalf of the Company
which relate to events or occurrences that transpired while Executive was employed by the Company.
Executives full cooperation in connection with such claims or actions shall include, but not be
limited to, being available to meet with counsel to prepare for discovery or trial and to act as a
witness on behalf of the Company at mutually convenient times. During and after Executives
employment, Executive also shall cooperate fully with the Company in connection with any
investigation or review of any federal, state or local regulatory authority as any such
investigation or review relates to events or occurrences that transpired while Executive was
employed by the Company. The Company shall reimburse Executive for any reasonable out-of-pocket
expenses incurred in connection with Executives performance of obligations pursuant to this
Subparagraph 7(e).
(f)
Injunction
. Executive agrees that it would be difficult to measure any damages
caused to the Company which might result from any breach by Executive of the promises set forth in
this Paragraph 7, and that in any event money damages would be an inadequate remedy for any such
breach. Accordingly, subject to Paragraph 9 of this Agreement, Executive agrees that if Executive
breaches, or proposes to breach, any portion of this Agreement, the Company shall be entitled, in
addition to all other remedies that it may have, to an injunction or other appropriate equitable
relief to restrain any such breach without showing or proving any actual damage to the Company.
8.
Arbitration of Disputes
. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof or otherwise arising out of Executives employment or the
termination of that employment (including, without limitation, any claims of unlawful employment
discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be
settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such
an agreement, under the auspices of the American Arbitration Association (AAA) in Boston,
Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA, including, but
not limited to, the rules and procedures applicable to the selection of arbitrators. In the event
that any person or entity other than Executive or the Company may be a party with regard to any
such controversy or claim, such controversy or claim shall be submitted to arbitration subject to
such other person or entitys agreement.
11
Judgment upon the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. This Paragraph 8 shall be specifically enforceable. Notwithstanding the
foregoing, this Paragraph 8 shall not preclude either party from pursuing a court action for the
sole purpose of obtaining a temporary restraining order or a preliminary injunction in
circumstances in which such relief is appropriate; provided that any other relief shall be pursued
through an arbitration proceeding pursuant to this Paragraph 8.
9.
Consent to Jurisdiction
. To the extent that any court action is permitted
consistent with or to enforce Paragraphs 7 or 8 of this Agreement, the parties hereby consent to
the jurisdiction of the Superior Court of the Commonwealth of Massachusetts and the United States
District Court for the District of Massachusetts. Accordingly, with respect to any such court
action, Executive (i) submits to the personal jurisdiction of such courts; (ii) consents to service
of process; and (iii) waives any other requirement (whether imposed by statute, rule of court, or
otherwise) with respect to personal jurisdiction or service of process.
10.
Integration
. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements between the parties
with respect to any related subject matter, including without limitation the Letter Agreement and
the Change in Control Agreement. Notwithstanding the foregoing, except to the extent in conflict
therewith, this Agreement does not supersede the Employee Agreement with respect to Inventions and
Proprietary Information dated July 10, 1998 between Executive and the Company.
11.
Assignment; Successors and Assigns
. Neither the Company nor Executive may make
any assignment of this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other party; provided that the Company may assign its rights under
this Agreement without the consent of Executive in the event that the Company shall effect a
reorganization, consolidate with or merge into any other corporation, partnership, organization or
other entity, or transfer all or substantially all of its properties or assets to any other
corporation, partnership, organization or other entity. This Agreement shall inure to the benefit
of and be binding upon the Company and Executive, their respective successors, executors,
administrators, heirs and permitted assigns.
12.
Enforceability
. If any portion or provision of this Agreement (including, without
limitation, any portion or provision of any section of this Agreement) shall to any extent be
declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this
Agreement, or the application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion
and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by
law.
13.
Waiver
. No waiver of any provision hereof shall be effective unless made in
writing and signed by the waiving party. The failure of any party to require the performance of
any term or obligation of this Agreement, or the waiver by any party of any breach of this
Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a
waiver of any subsequent breach.
12
14.
Notices
. Any notices, requests, demands and other communications provided for by
this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally
recognized overnight courier service or by registered or certified mail, postage prepaid, return
receipt requested, to Executive at the last address Executive has filed in writing with the Company
or, in the case of the Company, at its main offices, attention of the General Counsel, and shall be
effective on the date of delivery in person or by courier or three (3) days after the date mailed.
15.
Amendment
. This Agreement may be amended or modified only by a written instrument
referencing this Agreement signed by Executive and by a duly authorized representative of the
Company.
16.
Legal Expenses
. The Company agrees to reimburse Executive, to the full extent
permitted by law, for all costs and expenses (including, without limitation, reasonable attorneys
fees) which Executive may reasonably incur as a result of any contest of the validity or
enforceability of, or the Companys liability under, any provision of this Agreement, plus in each
case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however
, that such payment shall be made only if the Executive prevails on at
least one material issue.
17.
Governing Law
. This is a Massachusetts contract and shall be construed under and
be governed in all respects by the laws of the Commonwealth of Massachusetts, without giving effect
to the conflict of laws principles of such Commonwealth. With respect to any disputes concerning
Federal law, such disputes shall be determined in accordance with the law as it would be
interpreted and applied by the United States Court of Appeals for the First Circuit.
18.
Counterparts
. This Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall be taken to be an original; but such counterparts
shall together constitute one and the same document.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year
first above written.
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ALKERMES, INC.
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By:
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/s/ Madeline Coffin
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Its:
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VP, Human
Resources
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/s/ Richard F. Pops
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Richard F. Pops
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13
Exhibit
10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (Agreement) is made as of the 12
th
day of December 2007
between Alkermes, Inc., a Pennsylvania corporation (the Company), and David A. Broecker
(Executive).
WHEREAS, the Company has previously entered into a letter agreement with Executive dated
December 22, 2000, as amended on April 1, 2007 (the Letter Agreement), and a change in control
employment agreement dated June 27, 2001 (the Change in Control Agreement);
WHEREAS, the Company and Executive wish to replace the Letter Agreement and the Change in
Control Agreement with the provisions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and
other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
1.
Employment
. The term of this Agreement shall extend from December 12, 2007 (the
Commencement Date) until this Agreement is terminated by either the Executive or the Company
pursuant to Paragraph 4. The term of this Agreement may be referred to herein as the Period of
Employment.
2.
Position and Duties
. During the Period of Employment, Executive shall serve as the
President and Chief Executive Officer of the Company, and shall have supervision and control over
and responsibility for the day-to-day business and affairs of those functions and operations of the
Company and shall have such other powers and duties as may from time to time be prescribed by the
Board of Directors of the Company (the Board), provided that such duties are consistent with
Executives position or other positions that he may hold from time to time. Executive shall devote
his full working time and efforts to the business and affairs of the Company.
3.
Compensation and Related Matters
.
(a)
Base Salary
. Executives initial annual base salary shall be his annual base
salary on the Commencement Date. Executives base salary shall be redetermined annually by the
Compensation Committee of the Board (the Compensation Committee). The base salary in effect at
any given time is referred to herein as Base Salary. The Base Salary shall be payable in
substantially equal bi-weekly installments.
(b)
Incentive Compensation
. Executive shall be eligible to receive cash incentive
compensation as determined by the Compensation Committee from time to time, and shall also be
eligible to participate in such incentive compensation plans as the Compensation Committee shall
determine from time to time.
(c)
Expenses
.
Executive shall be entitled to receive prompt reimbursement for all
reasonable business expenses incurred by him in performing services hereunder during the
Period of Employment, in accordance with the policies and procedures then in effect and
established by the Company.
(d)
Other Benefits
.
During the Period of Employment, Executive shall be entitled to
continue to participate in or receive benefits under all of the Companys Employee Benefit Plans in
effect on the date hereof, as these plans or arrangements may thereafter be amended from time to
time. As used herein, the term Employee Benefit Plans includes, without limitation, each pension
and retirement plan; supplemental pension, retirement and deferred compensation plan; savings and
profit-sharing plan; stock ownership plan; stock purchase plan; stock option plan; life insurance
plan; medical insurance plan; disability plan; and health and accident plan or arrangement
established and maintained by the Company on the date hereof for employees of the same status
within the hierarchy of the Company. Executive shall have the right in accordance with applicable
law and the Companys long-term disability plan to elect to pay the premiums for his disability
coverage with after-tax dollars. During the Period of Employment, Executive shall be entitled to
participate in or receive benefits under any Employee Benefit Plan or arrangement which may, in the
future, be made available by the Company to its executives and key management employees, subject to
and on a basis consistent with the terms, conditions and overall administration of such plan or
arrangement. Any payments or benefits payable to Executive under a plan or arrangement referred to
in this Subparagraph 3(d) in respect of any calendar year during which Executive is employed by the
Company for less than the whole of such year shall, unless otherwise provided in the applicable
plan or arrangement, be prorated in accordance with the number of days in such calendar year during
which he is so employed. Should any such payments or benefits accrue on a fiscal year (rather than
calendar year) basis, then the proration in the preceding sentence shall be on the basis of a
fiscal year rather than calendar year.
(e)
Vacations
. Executive shall be entitled to the number of paid vacation days in
each calendar year to which he is entitled on the Commencement Date, which vacation days shall be
accrued ratably during the calendar year and the number of which may be increased in accordance
with Company policies. Executive shall also be entitled to all paid holidays given by the Company
to its executives.
4.
Termination
. Executives employment hereunder may be terminated without any breach
of this Agreement under the following circumstances:
(a)
Death
. Executives employment hereunder shall terminate upon his death.
(b)
Disability
. If Executive is prevented from performing his duties hereunder by
reason of any physical or mental incapacity that results in Executives satisfaction of all
requirements necessary to receive benefits under the Companys long-term disability plan due to a
total disability, then, to the extent permitted by law, Company may terminate the employment of
Executive at or after such time. Nothing in this Subparagraph 4(b) shall be construed to waive
Executives rights, if any, under existing law including, without limitation, the Family and
Medical Leave Act of 1993, 29 U.S.C. §2601
et seq
. and the Americans with Disabilities Act, 42
U.S.C. §12101
et seq.
2
(c)
Termination by Company for Cause
. At any time during the Period of Employment,
the Company may terminate Executives employment hereunder for Cause if such termination is
approved by not less than a majority of the Board at a meeting of the Board, at which Executive
would not participate, called and held for such purpose. For purposes of this Agreement, Cause
shall mean: (i) conduct by Executive constituting a material act of willful misconduct in
connection with the performance of his duties, including, without limitation, misappropriation of
funds or property of the Company or any of its affiliates other than the occasional, customary and
de minimis use of Company property for personal purposes; (ii) the commission by Executive of a
felony or any misdemeanor involving moral turpitude, deceit, dishonesty or fraud, or conduct by
Executive that would reasonably be expected to result in material injury to the Company if he were
retained in his position; (iii) continued, willful and deliberate non-performance by Executive of
his duties hereunder (other than by reason of Executives physical or mental illness, incapacity or
disability) which has continued for more than thirty (30) days following written notice of such
non-performance from the Company; (iv) a breach by Executive of any of the provisions contained in
Paragraph 7 of this Agreement; (v) a violation by Executive of the Companys employment policies
which has continued following written notice of such violation from the Company; or (vi) willful
failure to cooperate with a bona fide internal investigation or an investigation by regulatory or
law enforcement authorities, after being instructed by the Company to cooperate, or the willful
destruction or failure to preserve documents or other materials known to be relevant to such
investigation or the willful inducement of others to fail to cooperate or to produce documents or
other materials.
(d)
Termination Without Cause
. At any time during the Period of Employment, the
Company may terminate Executives employment hereunder without Cause if such termination is
approved by a majority of the Board at a meeting of the Board, at which Executive would not
participate, called and held for such purpose. Any termination by the Company of Executives
employment under this Agreement which does not constitute a termination for Cause under
Subparagraph 4(c) or result from the death or disability of Executive under Subparagraph 4(a) or
(b) shall be deemed a termination without Cause.
(e)
Termination by Executive
. At any time during the Period of Employment, Executive
may terminate his employment hereunder for any reason, including but not limited to Good Reason.
For purposes of this Agreement, Good Reason shall mean that Executive has complied with the Good
Reason Process (hereinafter defined) following the occurrence of any of the following events: (i)
a substantial diminution or other substantive adverse change, not consented to by Executive, in the
nature or scope of Executives responsibilities, authorities, powers, functions or duties; (ii) an
involuntary material reduction in Executives Base Salary except for across-the-board reductions
similarly affecting all or substantially all management employees; (iii) a breach by the Company of
any of its other material obligations under this Agreement, or (iv) a material change in the
geographic location at which Executive must perform his services. Good Reason Process shall mean
that (A) Executive reasonably determines in good faith that a Good Reason event has occurred; (B)
Executive notifies the Company in writing of the occurrence of the Good Reason event within ninety
(90) days of the occurrence of such event; (C) Executive cooperates in good faith with the
Companys efforts, for a period not less than thirty (30) days following such notice, to modify
Executives employment situation in a manner acceptable to Executive and Company; (D)
notwithstanding such efforts, one or more of the Good Reason events continues to exist and has not
been modified in a manner
3
acceptable to Executive; and (E) Executive terminates his employment no later than sixty (60)
days after the end of the thirty-day cure period. If the Company cures the Good Reason event in a
manner acceptable to Executive during the thirty-day period, Good Reason shall be deemed not to
have occurred.
(f)
Notice of Termination
. Except for termination as specified in Subparagraph 4(a),
any termination of Executives employment by the Company or any such termination by Executive shall
be communicated by written Notice of Termination to the other party hereto. For purposes of this
Agreement, a Notice of Termination shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(g)
Date of Termination
. Date of Termination shall mean: (i) if Executives
employment is terminated by his death, the date of his death; (ii) if Executives employment is
terminated on account of disability under Subparagraph 4(b) or by the Company for Cause under
Subparagraph 4(c), the date on which Notice of Termination is given; (iii) if Executives
employment is terminated by the Company under Subparagraph 4(d), thirty (30) days after the date on
which a Notice of Termination is given; and (iv) if Executives employment is terminated by
Executive under Subparagraph 4(e), thirty (30) days after the date on which a Notice of Termination
is given.
5.
Compensation Upon Termination
.
(a)
Termination Generally
. If Executives employment with the Company is terminated
for any reason during the Period of Employment, the Company shall pay or provide to Executive (or
to his authorized representative or estate) any earned but unpaid Base Salary, incentive
compensation earned but not yet paid, unpaid expense reimbursements, accrued but unused vacation
and any vested benefits Executive may have under any Employee Benefit Plan of the Company,
including without limitation any benefits that may accrue on Executives retirement from the
Company, to the extent applicable (the Accrued Benefit).
(b)
Termination by the Company Without Cause or by Executive with Good Reason
. If
Executives employment is terminated by the Company without Cause as provided in Subparagraph 4(d),
or Executive terminates his employment for Good Reason as provided in Subparagraph 4(e), then the
Company shall, through the Date of Termination, pay Executive his Accrued Benefit. The Company
shall within seven (7) days of the Date of Termination provide to Executive a general release of
claims in a form and manner satisfactory to the Company (the Release). If Executive signs the
Release and delivers it to Company within twenty-one (21) days of Executives receipt of the
Release and does not revoke it within seven (7) days thereafter:
(i) Company shall pay Executive an amount equal to one and one-half (1
1
/
2
) times the sum
of Executives Base Salary and his Average Incentive Compensation (the Severance Amount).
The Severance Amount shall be paid out in substantially equal bi-weekly installments over
eighteen (18) months, in arrears beginning on the first payroll date after the Date of
Termination, or expiration of the seven-day revocation period for the Release, if later.
Solely for the purposes of Section 409A of the Internal Revenue Code of 1986, as amended
(the Code), each bi-weekly payment is considered
4
a separate payment. For purposes of this Agreement, Average Incentive Compensation
shall mean the average of the annual cash incentive compensation under Subparagraph 3(b)
received by Executive for the two (2) immediately preceding fiscal years. In no event shall
Average Incentive Compensation include any sign-on bonus, retention bonus or any other
special bonus. Notwithstanding the foregoing, if Executive breaches any of the provisions
contained in Paragraph 7 of this Agreement, all payments of the Severance Amount shall
immediately cease.
(ii) Subject to Executives copayment of premium amounts at the active employees rate,
continued participation in the Companys group health, dental and vision program for
eighteen (18) months;
provided, however
, that the continuation of health benefits
under this Subparagraph shall reduce and count against Executives rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA).
(iii) Anything in this Agreement to the contrary notwithstanding, if at the time of
Executives termination of employment, Executive is considered a specified employee within
the meaning of Section 409A(a)(2)(B)(i) of the Code, and if any payment or benefit that
Executive becomes entitled to under this Agreement is considered deferred compensation
subject to interest, penalties and additional tax imposed pursuant to Section 409A(a) of the
Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, then no such
payment shall be payable or benefit shall be provided prior to the date that is the earlier
of (A) six months after Executives separation from service, or (B) Executives death, and
the initial payment shall include a catch-up amount covering amounts that would otherwise
have been paid during the first six-month period but for the application of this
Subparagraph 5(b)(iii). The parties intend that this Agreement will be administered in
accordance with Section 409A of the Code. The parties agree that this Agreement may be
amended, as reasonably requested by either party, and as may be necessary to fully comply
with Section 409A of the Code and all related rules and regulations in order to preserve the
payments and benefits provided hereunder without additional cost to either party.
6.
Change in Control Payment
. The provisions of this Paragraph 6 set forth certain
terms of an agreement reached between Executive and the Company regarding Executives rights and
obligations upon the occurrence of a Change in Control of the Company. These provisions are
intended to assure and encourage in advance Executives continued attention and dedication to his
assigned duties and his objectivity during the pendency and after the occurrence of any such event.
These provisions shall apply in lieu of, and expressly supersede, the provisions of Subparagraph
5(b) regarding the amount of severance pay and benefits upon a termination of employment, if such
termination of employment occurs within twenty-four (24) months after the occurrence of the first
event constituting a Change in Control, provided that such first event occurs during the Period of
Employment. These provisions shall terminate and be of no further force or effect beginning
twenty-four (24) months after the occurrence of a Change in Control.
(a) A Change in Control shall be deemed to have occurred upon the occurrence of any one of
the following events:
5
(i) any Person, as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the
Act
) (other than the Company, any of its
subsidiaries, or any trustee, fiduciary or other person or entity holding securities under
any employee benefit plan or trust of the Company or any of its subsidiaries), together with
all affiliates and associates (as such terms are defined in Rule 12b-2 under the Act) of
such Person, shall become the beneficial owner (as such term is defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the Companys then outstanding
securities having the right to vote in an election of the Board (
Voting
Securities
) (in such case other than as a result of an acquisition of securities
directly from the Company); or
(ii) a majority of the members of the Board is replaced during any twelve-month period
by directors whose appointment or election is not endorsed by a majority of the Board before
the date of such appointment or election; or
(iii) the consummation of (A) any consolidation or merger of the Company where the
stockholders of the Company, immediately prior to the consolidation or merger, would not,
immediately after the consolidation or merger, beneficially own (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more
than fifty percent (50%) of the voting shares of the company issuing cash or securities in
the consolidation or merger (or of its ultimate parent corporation, if any), or (B) any sale
or other transfer (in one transaction or a series of transactions contemplated or arranged
by any party as a single plan) of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred
for purposes of the foregoing clause (i) solely as the result of an acquisition of
securities by the Company that, by reducing the number of shares of Voting Securities
outstanding, increases the proportionate number of shares of Voting Securities beneficially
owned by any person to fifty percent (50%) or more of the combined voting power of all then
outstanding Voting Securities;
provided, however
, that if any person referred to in
this sentence shall thereafter become the beneficial owner of any additional shares of
Voting Securities (other than pursuant to a stock split, stock dividend, or similar
transaction or as a result of an acquisition of securities directly from the Company) and
immediately thereafter beneficially owns fifty percent (50%) or more of the combined voting
power of all then outstanding Voting Securities, then a Change in Control shall be deemed
to have occurred for purposes of the foregoing clause (i).
(b)
Effect of a Change in Control
.
(i) If within twenty-four (24) months after a Change in Control occurs, the Executives
employment is terminated by the Company without Cause as provided in Subparagraph 4(d) or
the Executive terminates his employment for Good Reason as provided in Subparagraph 4(e),
then, the Company shall pay Executive a lump sum in cash equal to the sum of:
6
(A) to the extent not theretofore paid, an amount equal to the Executives
Base Salary through the Date of Termination;
(B) an amount equal to the following formula: A x (B ÷ 365); where A equals
Executives Average Incentive Compensation and B equals the number of days in the
current calendar year through the Date of Termination; and
(C) an amount equal to two (2) times the sum of (I) Executives Base Salary
(or Executives Base Salary in effect immediately prior to the Change in Control, if
higher) plus (II) Executives Average Incentive Compensation; and
(ii) Subject to Executives copayment of premium amounts at the active employees rate,
Executive shall continue to participate in the Companys group health, dental and vision
program for twenty-four (24) months;
provided, however
, that the continuation of
health benefits under this Section shall reduce and count against Executives rights under
COBRA.
(iii) Anything in this Agreement to the contrary notwithstanding, if at the time of
Executives separation from service within the meaning of Section 409A of the Code,
Executive is considered a specified employee within the meaning of Section
409A(a)(2)(B)(i) of the Code, and if any payment or benefit that Executive becomes entitled
to under this Agreement is considered deferred compensation subject to interest, penalties
and additional tax imposed pursuant to Section 409A(a) of the Code as a result of the
application of Section 409A(a)(2)(B)(i) of the Code, then no such payment shall be payable
or benefit shall be provided prior to the date that is the earlier of (A) six (6) months and
one day after Executives separation from service, or (B) Executives death. The parties
intend that this Agreement will be administered in accordance with Section 409A of the Code.
The parties agree that this Agreement may be amended, as reasonably requested by either
party, and as may be necessary to fully comply with Section 409A of the Code and all related
rules and regulations in order to preserve the payments and benefits provided hereunder
without additional cost to either party.
(c)
Gross-Up Payment
.
(i) Anything in this Agreement to the contrary notwithstanding, in the event it shall
be determined that any compensation, payment or distribution by the Company to or for the
benefit of Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (the Severance Payments), would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the Excise Tax), then Executive
shall be entitled to receive an additional payment (a Gross-Up Payment) such that the net
amount retained by Executive, after deduction of any Excise Tax on the Severance Payments,
any Federal, state, and local income tax, employment tax and Excise Tax upon the payment
provided by this Section, and any interest and/or penalties assessed with respect to such
Excise Tax, shall be equal to the Severance Payments.
7
(ii) Subject to the provisions of Subparagraph 6(c)(iii) below, all determinations
required to be made under this Subparagraph 6(c)(ii), including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment, shall be made by a nationally
recognized accounting firm selected by the Company (the Accounting Firm), which shall
provide detailed supporting calculations both to the Company and the Executive within
fifteen (15) business days of the Date of Termination, if applicable, or at such earlier
time as is reasonably requested by the Company or Executive. For purposes of determining
the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income taxes at
the highest marginal rate of Federal income taxation applicable to individuals for the
calendar year in which the Gross-Up Payment is to be made, and state and local income taxes
at the highest marginal rates of individual taxation in the state and locality of
Executives residence on the Date of Termination, net of the maximum reduction in Federal
income taxes which could be obtained from deduction of such state and local taxes. The
initial Gross-Up Payment, if any, as determined pursuant to this Subparagraph 6(c)(ii),
shall be paid to the taxing authorities as withholding taxes on behalf of Executive at such
time or times when the Excise Tax is due. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made by the
Company should have been made (an Underpayment). In the event that the Company exhausts
its remedies pursuant to Subparagraph 6(c)(iii) below and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred, consistent with the calculations required to be made
hereunder, and any such Underpayment, and any interest and penalties imposed on the
Underpayment and required to be paid by Executive in connection with the proceedings
described in Subparagraph 6(c)(iii) below, shall be promptly paid by the Company to the
taxing authorities for the benefit of Executive.
(iii) Executive shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company of the
Gross-up Payment. Such notification shall be given as soon as practicable but no later than
ten (10) business days after Executive knows of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the thirty-day period
following the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such period that it desires
to contest such claim, provided that the Company has set aside adequate reserves to cover
the Underpayment and any interest and penalties thereon that may accrue, Executive shall:
(A) give the Company any information reasonably requested by the Company
relating to such claim,
(B) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including,
8
without limitation, accepting legal representation with respect to such claim
by an attorney selected by the Company,
(C) cooperate with the Company in good faith in order to effectively contest
such claim, and
(D) permit the Company to participate in any proceedings relating to such
claim;
provided, however
, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive harmless, on
an after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Subparagraph 6(c)(iii), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any and
all administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
Executive to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
provided,
however
, that if the Company directs the Executive to pay such claim and sue for
a refund, the Company shall advance the amount of such payment to Executive on an
interest-free basis (to the extent not prohibited by applicable law) and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Companys control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest, as the case may be, any other
issues raised by the Internal Revenue Service or any other taxing authority.
(iv) If, after the receipt by Executive of an amount advanced by the Company pursuant
to Subparagraph 6(c)(iii), Executive becomes entitled to receive any refund with respect to
such claim, Executive shall (subject to the Companys complying with the requirements of
Subparagraph 6(c)(iii)) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by Executive of an amount advanced by the Company pursuant to Subparagraph
6(c)(iii), a determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of its intent to
contest such denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall
9
not be required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
7.
Confidential Information, Nonsolicitation and Cooperation
.
(a)
Confidential Information
. As used in this Agreement, Confidential Information
means information belonging to the Company which is of value to the Company in the course of
conducting its business and the disclosure of which could result in a competitive or other
disadvantage to the Company. Confidential Information includes, without limitation, financial
information, reports, and forecasts; inventions, improvements and other intellectual property;
trade secrets; know-how; designs, processes or formulae; software; market or sales information or
plans; customer lists; and business plans, prospects and opportunities (such as possible
acquisitions or dispositions of businesses or facilities) which have been discussed or considered
by the management of the Company. Confidential Information includes information developed by
Executive in the course of Executives employment by the Company, as well as other information to
which Executive may have access in connection with Executives employment. Confidential
Information also includes the confidential information of others with which the Company has a
business relationship. Notwithstanding the foregoing, Confidential Information does not include
information in the public domain, unless due to breach of Executives duties under Subparagraph
7(b).
(b)
Confidentiality
. Executive understands and agrees that Executives employment
creates a relationship of confidence and trust between Executive and the Company with respect to
all Confidential Information. At all times, both during Executives employment with the Company
and after its termination, Executive will keep in confidence and trust all such Confidential
Information, and will not use or disclose any such Confidential Information without the written
consent of the Company, except as may be necessary in the ordinary course of performing Executives
duties to the Company.
(c)
Documents, Records, etc
. All documents, records, data, apparatus, equipment and
other physical property, whether or not pertaining to Confidential Information, which are furnished
to Executive by the Company or are produced by Executive in connection with Executives employment
will be and remain the sole property of the Company. Executive will return to the Company all such
materials and property as and when requested by the Company. In any event, Executive will return
all such materials and property immediately upon termination of Executives employment for any
reason. Executive will not retain with Executive any such material or property or any copies
thereof after such termination.
(d)
Nonsolicitation
. During the Period of Employment and for six (6) months
thereafter, Executive (i) will refrain from directly or indirectly recruiting or otherwise
soliciting, inducing or influencing any person to leave employment with the Company (other than
terminations of employment of subordinate employees undertaken in the course of Executives
employment with the Company); and (ii) will refrain from soliciting or encouraging any customer or
supplier to terminate or otherwise modify adversely its business relationship with the Company.
However, nothing in this Subparagraph 7(d) will prohibit Executive from indirectly recruiting,
soliciting, inducing or influencing a person to leave employment with the Company through the use
of advertisements in trade journals and the like or from discussing
10
employment opportunities with such employees to the extent such employees contact Executive
first. Executive understands that the restrictions set forth in this Subparagraph 7(d) are
intended to protect the Companys interest in its Confidential Information and established
employee, customer and supplier relationships and goodwill, and agrees that such restrictions are
reasonable and appropriate for this purpose.
(e)
Litigation and Regulatory Cooperation
. During and after Executives employment,
Executive shall cooperate fully with the Company in the defense or prosecution of any claims or
actions now in existence or which may be brought in the future against or on behalf of the Company
which relate to events or occurrences that transpired while Executive was employed by the Company.
Executives full cooperation in connection with such claims or actions shall include, but not be
limited to, being available to meet with counsel to prepare for discovery or trial and to act as a
witness on behalf of the Company at mutually convenient times. During and after Executives
employment, Executive also shall cooperate fully with the Company in connection with any
investigation or review of any federal, state or local regulatory authority as any such
investigation or review relates to events or occurrences that transpired while Executive was
employed by the Company. The Company shall reimburse Executive for any reasonable out-of-pocket
expenses incurred in connection with Executives performance of obligations pursuant to this
Subparagraph 7(e).
(f)
Injunction
. Executive agrees that it would be difficult to measure any damages
caused to the Company which might result from any breach by Executive of the promises set forth in
this Paragraph 7, and that in any event money damages would be an inadequate remedy for any such
breach. Accordingly, subject to Paragraph 9 of this Agreement, Executive agrees that if Executive
breaches, or proposes to breach, any portion of this Agreement, the Company shall be entitled, in
addition to all other remedies that it may have, to an injunction or other appropriate equitable
relief to restrain any such breach without showing or proving any actual damage to the Company.
8.
Arbitration of Disputes
. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof or otherwise arising out of Executives employment or the
termination of that employment (including, without limitation, any claims of unlawful employment
discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be
settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such
an agreement, under the auspices of the American Arbitration Association (AAA) in Boston,
Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA, including, but
not limited to, the rules and procedures applicable to the selection of arbitrators. In the event
that any person or entity other than Executive or the Company may be a party with regard to any
such controversy or claim, such controversy or claim shall be submitted to arbitration subject to
such other person or entitys agreement. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. This Paragraph 8 shall be specifically
enforceable. Notwithstanding the foregoing, this Paragraph 8 shall not preclude either party from
pursuing a court action for the sole purpose of obtaining a temporary restraining order or a
preliminary injunction in circumstances in which such relief is appropriate; provided that any
other relief shall be pursued through an arbitration proceeding pursuant to this Paragraph 8.
11
9.
Consent to Jurisdiction
. To the extent that any court action is permitted
consistent with or to enforce Paragraphs 7 or 8 of this Agreement, the parties hereby consent to
the jurisdiction of the Superior Court of the Commonwealth of Massachusetts and the United States
District Court for the District of Massachusetts. Accordingly, with respect to any such court
action, Executive (i) submits to the personal jurisdiction of such courts; (ii) consents to service
of process; and (iii) waives any other requirement (whether imposed by statute, rule of court, or
otherwise) with respect to personal jurisdiction or service of process.
10.
Integration
. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements between the parties
with respect to any related subject matter, including without limitation the Letter Agreement and
the Change in Control Agreement. Notwithstanding the foregoing, except to the extent in conflict
therewith, this Agreement does not supersede either the Employee Agreement with respect to
Inventions and Proprietary Information dated January 3, 2001 between Executive and the Company or
the Covenant Not to Compete dated January 3, 2001 between Executive and the Company.
11.
Assignment; Successors and Assigns
. Neither the Company nor Executive may make
any assignment of this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other party; provided that the Company may assign its rights under
this Agreement without the consent of Executive in the event that the Company shall effect a
reorganization, consolidate with or merge into any other corporation, partnership, organization or
other entity, or transfer all or substantially all of its properties or assets to any other
corporation, partnership, organization or other entity. This Agreement shall inure to the benefit
of and be binding upon the Company and Executive, their respective successors, executors,
administrators, heirs and permitted assigns.
12.
Enforceability
. If any portion or provision of this Agreement (including, without
limitation, any portion or provision of any section of this Agreement) shall to any extent be
declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this
Agreement, or the application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion
and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by
law.
13.
Waiver
. No waiver of any provision hereof shall be effective unless made in
writing and signed by the waiving party. The failure of any party to require the performance of
any term or obligation of this Agreement, or the waiver by any party of any breach of this
Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a
waiver of any subsequent breach.
14.
Notices
. Any notices, requests, demands and other communications provided for by
this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally
recognized overnight courier service or by registered or certified mail, postage prepaid, return
receipt requested, to Executive at the last address Executive has filed in writing with the Company
or, in the case of the Company, at its main offices, attention of the General Counsel
,
12
and shall be effective on the date of delivery in person or by courier or three (3) days after
the date mailed.
15.
Amendment
. This Agreement may be amended or modified only by a written instrument
referencing this Agreement signed by Executive and by a duly authorized representative of the
Company.
16.
Legal Expenses
. The Company agrees to reimburse Executive, to the full extent
permitted by law, for all costs and expenses (including, without limitation, reasonable attorneys
fees) which Executive may reasonably incur as a result of any contest of the validity or
enforceability of, or the Companys liability under, any provision of this Agreement, plus in each
case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however
, that such payment shall be made only if the Executive prevails on at
least one material issue.
17.
Governing Law
. This is a Massachusetts contract and shall be construed under and
be governed in all respects by the laws of the Commonwealth of Massachusetts, without giving effect
to the conflict of laws principles of such Commonwealth. With respect to any disputes concerning
Federal law, such disputes shall be determined in accordance with the law as it would be
interpreted and applied by the United States Court of Appeals for the First Circuit.
18.
Counterparts
. This Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall be taken to be an original; but such counterparts
shall together constitute one and the same document.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year
first above written.
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ALKERMES, INC.
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By:
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/s/ Madeline Coffin
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Its:
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VP, Human
Resources
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/s/ David A. Broecker
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David A. Broecker
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Exhibit 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (Agreement) is made as of the 12th day of December 2007 between
Alkermes, Inc., a Pennsylvania corporation (the Company), and ________________
(Executive).
WHEREAS, the Company has previously entered into a letter agreement with Executive dated
__________ (the Letter Agreement), and a change in control employment agreement
dated _________ (the Change in Control Agreement);
WHEREAS, the Company and Executive wish to replace the Letter Agreement and the Change in
Control Agreement with the provisions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and
other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
1.
Employment
. The term of this Agreement shall extend from December 12, 2007 (the
Commencement Date) until this Agreement is terminated by either the Executive or the Company
pursuant to Paragraph 4. The term of this Agreement may be referred to herein as the Period of
Employment.
2.
Position
and Duties
. During the Period of Employment, Executive shall serve as the
_________ of the Company, and shall have supervision and control over and
responsibility for the day-to-day business and affairs of those functions and operations of the
Company and shall have such other powers and duties as may from time to time be prescribed by the
Board of Directors of the Company (the Board), the Chief Executive Officer of the Company (the
CEO) or other authorized executive, provided that such duties are consistent with Executives
position or other positions that he may hold from time to time. Executive shall devote his full
working time and efforts to the business and affairs of the Company.
3.
Compensation and Related Matters
.
(a)
Base Salary
. Executives initial annual base salary shall be his annual base
salary on the Commencement Date. Executives base salary shall be redetermined annually by the
Compensation Committee of the Board (the Compensation Committee). The base salary in effect at
any given time is referred to herein as Base Salary. The Base Salary shall be payable in
substantially equal bi-weekly installments.
(b)
Incentive Compensation
. Executive shall be eligible to receive cash incentive
compensation as determined by the Compensation Committee from time to time, and shall also be
eligible to participate in such incentive compensation plans as the Compensation Committee shall
determine from time to time.
(c)
Expenses
.
Executive shall be entitled to receive prompt reimbursement for all
reasonable business expenses incurred by him in performing services hereunder during the
Period of Employment, in accordance with the policies and procedures then in effect and
established by the Company.
(d)
Other Benefits
.
During the Period of Employment, Executive shall be entitled to
continue to participate in or receive benefits under all of the Companys Employee Benefit Plans in
effect on the date hereof, as these plans or arrangements may thereafter be amended from time to
time. As used herein, the term Employee Benefit Plans includes, without limitation, each pension
and retirement plan; supplemental pension, retirement and deferred compensation plan; savings and
profit-sharing plan; stock ownership plan; stock purchase plan; stock option plan; life insurance
plan; medical insurance plan; disability plan; and health and accident plan or arrangement
established and maintained by the Company on the date hereof for employees of the same status
within the hierarchy of the Company. Executive shall have the right in accordance with applicable
law and the Companys long-term disability plan to elect to pay the premiums for his disability
coverage with after-tax dollars. During the Period of Employment, Executive shall be entitled to
participate in or receive benefits under any Employee Benefit Plan or arrangement which may, in the
future, be made available by the Company to its executives and key management employees, subject to
and on a basis consistent with the terms, conditions and overall administration of such plan or
arrangement. Any payments or benefits payable to Executive under a plan or arrangement referred to
in this Subparagraph 3(d) in respect of any calendar year during which Executive is employed by the
Company for less than the whole of such year shall, unless otherwise provided in the applicable
plan or arrangement, be prorated in accordance with the number of days in such calendar year during
which he is so employed. Should any such payments or benefits accrue on a fiscal year (rather than
calendar year) basis, then the proration in the preceding sentence shall be on the basis of a
fiscal year rather than calendar year.
(e)
Vacations
. Executive shall be entitled to the number of paid vacation days in
each calendar year to which he is entitled on the Commencement Date, which vacation days shall be
accrued ratably during the calendar year and the number of which may be increased in accordance
with Company policies. Executive shall also be entitled to all paid holidays given by the Company
to its executives.
4.
Termination
. Executives employment hereunder may be terminated without any breach
of this Agreement under the following circumstances:
(a)
Death
. Executives employment hereunder shall terminate upon his death.
(b)
Disability
. If Executive is prevented from performing his duties hereunder by
reason of any physical or mental incapacity that results in Executives satisfaction of all
requirements necessary to receive benefits under the Companys long-term disability plan due to a
total disability, then, to the extent permitted by law, Company may terminate the employment of
Executive at or after such time. Nothing in this Subparagraph 4(b) shall be construed to waive
Executives rights, if any, under existing law including, without limitation, the Family and
Medical Leave Act of 1993, 29 U.S.C. §2601
et seq
. and the Americans with Disabilities Act, 42
U.S.C. §12101
et seq.
2
(c)
Termination by Company for Cause
. At any time during the Period of Employment,
the Company may terminate Executives employment hereunder for Cause. For purposes of this
Agreement, Cause shall mean: (i) conduct by Executive constituting a material act of willful
misconduct in connection with the performance of his duties, including, without limitation,
misappropriation of funds or property of the Company or any of its affiliates other than the
occasional, customary and de minimis use of Company property for personal purposes; (ii) the
commission by Executive of a felony or any misdemeanor involving moral turpitude, deceit,
dishonesty or fraud, or conduct by Executive that would reasonably be expected to result in
material injury to the Company if he were retained in his position; (iii) continued, willful and
deliberate non-performance by Executive of his duties hereunder (other than by reason of
Executives physical or mental illness, incapacity or disability) which has continued for more than
thirty (30) days following written notice of such non-performance from the Company; (iv) a breach
by Executive of any of the provisions contained in Paragraph 7 of this Agreement; (v) a violation
by Executive of the Companys employment policies which has continued following written notice of
such violation from the Company; or (vi) willful failure to cooperate with a bona fide internal
investigation or an investigation by regulatory or law enforcement authorities, after being
instructed by the Company to cooperate, or the willful destruction or failure to preserve documents
or other materials known to be relevant to such investigation or the willful inducement of others
to fail to cooperate or to produce documents or other materials.
(d)
Termination Without Cause
. At any time during the Period of Employment, the
Company may terminate Executives employment hereunder without Cause. Any termination by the
Company of Executives employment under this Agreement which does not constitute a termination for
Cause under Subparagraph 4(c) or result from the death or disability of Executive under
Subparagraph 4(a) or (b) shall be deemed a termination without Cause.
(e)
Termination by Executive
. At any time during the Period of Employment, Executive
may terminate his employment hereunder for any reason, including but not limited to Good Reason.
For purposes of this Agreement, Good Reason shall mean that Executive has complied with the Good
Reason Process (hereinafter defined) following the occurrence of any of the following events: (i)
a substantial diminution or other substantive adverse change, not consented to by Executive, in the
nature or scope of Executives responsibilities, authorities, powers, functions or duties; (ii) an
involuntary material reduction in Executives Base Salary except for across-the-board reductions
similarly affecting all or substantially all management employees; (iii) a breach by the Company of
any of its other material obligations under this Agreement, or (iv) a material change in the
geographic location at which Executive must perform his services. Good Reason Process shall mean
that (A) Executive reasonably determines in good faith that a Good Reason event has occurred; (B)
Executive notifies the Company in writing of the occurrence of the Good Reason event within ninety
(90) days of the occurrence of such event; (C) Executive cooperates in good faith with the
Companys efforts, for a period not less than thirty (30) days following such notice, to modify
Executives employment situation in a manner acceptable to Executive and Company; (D)
notwithstanding such efforts, one or more of the Good Reason events continues to exist and has not
been modified in a manner acceptable to Executive; and (E) Executive terminates his employment no
later than sixty (60) days after the end of the thirty-day cure period. If the Company cures the
Good Reason event in
3
a manner acceptable to Executive during the thirty-day period, Good Reason shall be deemed not
to have occurred.
(f)
Notice of Termination
. Except for termination as specified in Subparagraph 4(a),
any termination of Executives employment by the Company or any such termination by Executive shall
be communicated by written Notice of Termination to the other party hereto. For purposes of this
Agreement, a Notice of Termination shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(g)
Date of Termination
. Date of Termination shall mean: (i) if Executives
employment is terminated by his death, the date of his death; (ii) if Executives employment is
terminated on account of disability under Subparagraph 4(b) or by the Company for Cause under
Subparagraph 4(c), the date on which Notice of Termination is given; (iii) if Executives
employment is terminated by the Company under Subparagraph 4(d), thirty (30) days after the date on
which a Notice of Termination is given; and (iv) if Executives employment is terminated by
Executive under Subparagraph 4(e), thirty (30) days after the date on which a Notice of Termination
is given.
5.
Compensation Upon Termination
.
(a)
Termination Generally
. If Executives employment with the Company is terminated
for any reason during the Period of Employment, the Company shall pay or provide to Executive (or
to his authorized representative or estate) any earned but unpaid Base Salary, incentive
compensation earned but not yet paid, unpaid expense reimbursements, accrued but unused vacation
and any vested benefits Executive may have under any Employee Benefit Plan of the Company,
including without limitation any benefits that may accrue on Executives retirement from the
Company, to the extent applicable (the Accrued Benefit).
(b)
Termination by the Company Without Cause or by Executive with Good Reason
. If
Executives employment is terminated by the Company without Cause as provided in Subparagraph 4(d),
or Executive terminates his employment for Good Reason as provided in Subparagraph 4(e), then the
Company shall, through the Date of Termination, pay Executive his Accrued Benefit. The Company
shall within seven (7) days of the Date of Termination provide to Executive a general release of
claims in a form and manner satisfactory to the Company (the Release). If Executive signs the
Release and delivers it to Company within twenty-one (21) days of Executives receipt of the
Release and does not revoke it within seven (7) days thereafter:
(i) Company shall pay Executive an amount equal to one (1) times the sum of Executives
Base Salary and his Average Incentive Compensation (the Severance Amount). The Severance
Amount shall be paid out in substantially equal bi-weekly installments over twelve (12)
months, in arrears beginning on the first payroll date after the Date of Termination, or
expiration of the seven-day revocation period for the Release, if later. Solely for the
purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the Code), each
bi-weekly payment is considered a separate payment. For purposes of this Agreement,
Average Incentive Compensation shall mean the average of the annual cash incentive
compensation under Subparagraph
4
3(b) received by Executive for the two (2) immediately preceding fiscal years. In no
event shall Average Incentive Compensation include any sign-on bonus, retention bonus or
any other special bonus. Notwithstanding the foregoing, if Executive breaches any of the
provisions contained in Paragraph 7 of this Agreement, all payments of the Severance Amount
shall immediately cease.
(ii) Subject to Executives copayment of premium amounts at the active employees rate,
continued participation in the Companys group health, dental and vision program for twelve
(12) months;
provided, however
, that the continuation of health benefits under this
Subparagraph shall reduce and count against Executives rights under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended (COBRA).
(iii) Anything in this Agreement to the contrary notwithstanding, if at the time of
Executives termination of employment, Executive is considered a specified employee within
the meaning of Section 409A(a)(2)(B)(i) of the Code, and if any payment or benefit that
Executive becomes entitled to under this Agreement is considered deferred compensation
subject to interest, penalties and additional tax imposed pursuant to Section 409A(a) of the
Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, then no such
payment shall be payable or benefit shall be provided prior to the date that is the earlier
of (A) six months after Executives separation from service, or (B) Executives death, and
the initial payment shall include a catch-up amount covering amounts that would otherwise
have been paid during the first six-month period but for the application of this
Subparagraph 5(b)(iii). The parties intend that this Agreement will be administered in
accordance with Section 409A of the Code. The parties agree that this Agreement may be
amended, as reasonably requested by either party, and as may be necessary to fully comply
with Section 409A of the Code and all related rules and regulations in order to preserve the
payments and benefits provided hereunder without additional cost to either party.
6.
Change in Control Payment
. The provisions of this Paragraph 6 set forth certain
terms of an agreement reached between Executive and the Company regarding Executives rights and
obligations upon the occurrence of a Change in Control of the Company. These provisions are
intended to assure and encourage in advance Executives continued attention and dedication to his
assigned duties and his objectivity during the pendency and after the occurrence of any such event.
These provisions shall apply in lieu of, and expressly supersede, the provisions of Subparagraph
5(b) regarding the amount of severance pay and benefits upon a termination of employment, if such
termination of employment occurs within twenty-four (24) months after the occurrence of the first
event constituting a Change in Control, provided that such first event occurs during the Period of
Employment. These provisions shall terminate and be of no further force or effect beginning
twenty-four (24) months after the occurrence of a Change in Control.
(a) A Change in Control shall be deemed to have occurred upon the occurrence of any one of
the following events:
(i) any Person, as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the
Act
) (other than the Company,
5
any of its subsidiaries, or any trustee, fiduciary or other person or entity holding
securities under any employee benefit plan or trust of the Company or any of its
subsidiaries), together with all affiliates and associates (as such terms are defined in
Rule 12b-2 under the Act) of such Person, shall become the beneficial owner (as such term
is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of the
Companys then outstanding securities having the right to vote in an election of the Board
(
Voting Securities
) (in such case other than as a result of an acquisition of
securities directly from the Company); or
(ii) a majority of the members of the Board is replaced during any twelve-month period
by directors whose appointment or election is not endorsed by a majority of the Board before
the date of such appointment or election; or
(iii) the consummation of (A) any consolidation or merger of the Company where the
stockholders of the Company, immediately prior to the consolidation or merger, would not,
immediately after the consolidation or merger, beneficially own (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more
than fifty percent (50%) of the voting shares of the company issuing cash or securities in
the consolidation or merger (or of its ultimate parent corporation, if any), or (B) any sale
or other transfer (in one transaction or a series of transactions contemplated or arranged
by any party as a single plan) of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred
for purposes of the foregoing clause (i) solely as the result of an acquisition of
securities by the Company that, by reducing the number of shares of Voting Securities
outstanding, increases the proportionate number of shares of Voting Securities beneficially
owned by any person to fifty percent (50%) or more of the combined voting power of all then
outstanding Voting Securities;
provided, however
, that if any person referred to in
this sentence shall thereafter become the beneficial owner of any additional shares of
Voting Securities (other than pursuant to a stock split, stock dividend, or similar
transaction or as a result of an acquisition of securities directly from the Company) and
immediately thereafter beneficially owns fifty percent (50%) or more of the combined voting
power of all then outstanding Voting Securities, then a Change in Control shall be deemed
to have occurred for purposes of the foregoing clause (i).
(b)
Effect of a Change in Control
.
(i) If within twenty-four (24) months after a Change in Control occurs, the Executives
employment is terminated by the Company without Cause as provided in Subparagraph 4(d) or
the Executive terminates his employment for Good Reason as provided in Subparagraph 4(e),
then, the Company shall pay Executive a lump sum in cash equal to the sum of:
(A) to the extent not theretofore paid, an amount equal to the Executives
Base Salary through the Date of Termination;
6
(B) an amount equal to the following formula: A x (B ÷ 365); where A equals
Executives Average Incentive Compensation and B equals the number of days in the
current calendar year through the Date of Termination; and
(C) an amount equal to one and one-half (1
1
/
2
) times the sum of (I) Executives
Base Salary (or Executives Base Salary in effect immediately prior to the Change in
Control, if higher) plus (II) Executives Average Incentive Compensation; and
(ii) Subject to Executives copayment of premium amounts at the active employees rate,
Executive shall continue to participate in the Companys group health, dental and vision
program for eighteen (18) months;
provided, however
, that the continuation of health
benefits under this Section shall reduce and count against Executives rights under COBRA.
(iii) Anything in this Agreement to the contrary notwithstanding, if at the time of
Executives separation from service within the meaning of Section 409A of the Code,
Executive is considered a specified employee within the meaning of Section
409A(a)(2)(B)(i) of the Code, and if any payment or benefit that Executive becomes entitled
to under this Agreement is considered deferred compensation subject to interest, penalties
and additional tax imposed pursuant to Section 409A(a) of the Code as a result of the
application of Section 409A(a)(2)(B)(i) of the Code, then no such payment shall be payable
or benefit shall be provided prior to the date that is the earlier of (A) six (6) months and
one day after Executives separation from service, or (B) Executives death. The parties
intend that this Agreement will be administered in accordance with Section 409A of the Code.
The parties agree that this Agreement may be amended, as reasonably requested by either
party, and as may be necessary to fully comply with Section 409A of the Code and all related
rules and regulations in order to preserve the payments and benefits provided hereunder
without additional cost to either party.
(c)
Gross-Up Payment
.
(i) Anything in this Agreement to the contrary notwithstanding, in the event it shall
be determined that any compensation, payment or distribution by the Company to or for the
benefit of Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (the Severance Payments), would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the Excise Tax), then Executive
shall be entitled to receive an additional payment (a Gross-Up Payment) such that the net
amount retained by Executive, after deduction of any Excise Tax on the Severance Payments,
any Federal, state, and local income tax, employment tax and Excise Tax upon the payment
provided by this Section, and any interest and/or penalties assessed with respect to such
Excise Tax, shall be equal to the Severance Payments.
7
(ii) Subject to the provisions of Subparagraph 6(c)(iii) below, all determinations
required to be made under this Subparagraph 6(c)(ii), including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment, shall be made by a nationally
recognized accounting firm selected by the Company (the Accounting Firm), which shall
provide detailed supporting calculations both to the Company and the Executive within
fifteen (15) business days of the Date of Termination, if applicable, or at such earlier
time as is reasonably requested by the Company or Executive. For purposes of determining
the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income taxes at
the highest marginal rate of Federal income taxation applicable to individuals for the
calendar year in which the Gross-Up Payment is to be made, and state and local income taxes
at the highest marginal rates of individual taxation in the state and locality of
Executives residence on the Date of Termination, net of the maximum reduction in Federal
income taxes which could be obtained from deduction of such state and local taxes. The
initial Gross-Up Payment, if any, as determined pursuant to this Subparagraph 6(c)(ii),
shall be paid to the taxing authorities as withholding taxes on behalf of Executive at such
time or times when the Excise Tax is due. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made by the
Company should have been made (an Underpayment). In the event that the Company exhausts
its remedies pursuant to Subparagraph 6(c)(iii) below and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred, consistent with the calculations required to be made
hereunder, and any such Underpayment, and any interest and penalties imposed on the
Underpayment and required to be paid by Executive in connection with the proceedings
described in Subparagraph 6(c)(iii) below, shall be promptly paid by the Company to the
taxing authorities for the benefit of Executive.
(iii) Executive shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company of the
Gross-up Payment. Such notification shall be given as soon as practicable but no later than
ten (10) business days after Executive knows of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the thirty-day period
following the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such period that it desires
to contest such claim, provided that the Company has set aside adequate reserves to cover
the Underpayment and any interest and penalties thereon that may accrue, Executive shall:
(A) give the Company any information reasonably requested by the Company
relating to such claim,
(B) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including,
8
without limitation, accepting legal representation with respect to such claim
by an attorney selected by the Company,
(C) cooperate with the Company in good faith in order to effectively contest
such claim, and
(D) permit the Company to participate in any proceedings relating to such
claim;
provided, however
, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive harmless, on
an after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Subparagraph 6(c)(iii), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any and
all administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
Executive to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
provided,
however
, that if the Company directs the Executive to pay such claim and sue for
a refund, the Company shall advance the amount of such payment to Executive on an
interest-free basis (to the extent not prohibited by applicable law) and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Companys control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest, as the case may be, any other
issues raised by the Internal Revenue Service or any other taxing authority.
(iv) If, after the receipt by Executive of an amount advanced by the Company pursuant
to Subparagraph 6(c)(iii), Executive becomes entitled to receive any refund with respect to
such claim, Executive shall (subject to the Companys complying with the requirements of
Subparagraph 6(c)(iii)) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by Executive of an amount advanced by the Company pursuant to Subparagraph
6(c)(iii), a determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of its intent to
contest such denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall
9
not be required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
7.
Confidential Information, Nonsolicitation and Cooperation
.
(a)
Confidential Information
. As used in this Agreement, Confidential Information
means information belonging to the Company which is of value to the Company in the course of
conducting its business and the disclosure of which could result in a competitive or other
disadvantage to the Company. Confidential Information includes, without limitation, financial
information, reports, and forecasts; inventions, improvements and other intellectual property;
trade secrets; know-how; designs, processes or formulae; software; market or sales information or
plans; customer lists; and business plans, prospects and opportunities (such as possible
acquisitions or dispositions of businesses or facilities) which have been discussed or considered
by the management of the Company. Confidential Information includes information developed by
Executive in the course of Executives employment by the Company, as well as other information to
which Executive may have access in connection with Executives employment. Confidential
Information also includes the confidential information of others with which the Company has a
business relationship. Notwithstanding the foregoing, Confidential Information does not include
information in the public domain, unless due to breach of Executives duties under Subparagraph
7(b).
(b)
Confidentiality
. Executive understands and agrees that Executives employment
creates a relationship of confidence and trust between Executive and the Company with respect to
all Confidential Information. At all times, both during Executives employment with the Company
and after its termination, Executive will keep in confidence and trust all such Confidential
Information, and will not use or disclose any such Confidential Information without the written
consent of the Company, except as may be necessary in the ordinary course of performing Executives
duties to the Company.
(c)
Documents, Records, etc
. All documents, records, data, apparatus, equipment and
other physical property, whether or not pertaining to Confidential Information, which are furnished
to Executive by the Company or are produced by Executive in connection with Executives employment
will be and remain the sole property of the Company. Executive will return to the Company all such
materials and property as and when requested by the Company. In any event, Executive will return
all such materials and property immediately upon termination of Executives employment for any
reason. Executive will not retain with Executive any such material or property or any copies
thereof after such termination.
(d)
Nonsolicitation
. During the Period of Employment and for six (6) months
thereafter, Executive (i) will refrain from directly or indirectly recruiting or otherwise
soliciting, inducing or influencing any person to leave employment with the Company (other than
terminations of employment of subordinate employees undertaken in the course of Executives
employment with the Company); and (ii) will refrain from soliciting or encouraging any customer or
supplier to terminate or otherwise modify adversely its business relationship with the Company.
However, nothing in this Subparagraph 7(d) will prohibit Executive from indirectly recruiting,
soliciting, inducing or influencing a person to leave employment with the Company through the use
of advertisements in trade journals and the like or from discussing
10
employment opportunities with such employees to the extent such employees contact Executive
first. Executive understands that the restrictions set forth in this Subparagraph 7(d) are
intended to protect the Companys interest in its Confidential Information and established
employee, customer and supplier relationships and goodwill, and agrees that such restrictions are
reasonable and appropriate for this purpose.
(e)
Litigation and Regulatory Cooperation
. During and after Executives employment,
Executive shall cooperate fully with the Company in the defense or prosecution of any claims or
actions now in existence or which may be brought in the future against or on behalf of the Company
which relate to events or occurrences that transpired while Executive was employed by the Company.
Executives full cooperation in connection with such claims or actions shall include, but not be
limited to, being available to meet with counsel to prepare for discovery or trial and to act as a
witness on behalf of the Company at mutually convenient times. During and after Executives
employment, Executive also shall cooperate fully with the Company in connection with any
investigation or review of any federal, state or local regulatory authority as any such
investigation or review relates to events or occurrences that transpired while Executive was
employed by the Company. The Company shall reimburse Executive for any reasonable out-of-pocket
expenses incurred in connection with Executives performance of obligations pursuant to this
Subparagraph 7(e).
(f)
Injunction
. Executive agrees that it would be difficult to measure any damages
caused to the Company which might result from any breach by Executive of the promises set forth in
this Paragraph 7, and that in any event money damages would be an inadequate remedy for any such
breach. Accordingly, subject to Paragraph 9 of this Agreement, Executive agrees that if Executive
breaches, or proposes to breach, any portion of this Agreement, the Company shall be entitled, in
addition to all other remedies that it may have, to an injunction or other appropriate equitable
relief to restrain any such breach without showing or proving any actual damage to the Company.
8.
Arbitration of Disputes
. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof or otherwise arising out of Executives employment or the
termination of that employment (including, without limitation, any claims of unlawful employment
discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be
settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such
an agreement, under the auspices of the American Arbitration Association (AAA) in Boston,
Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA, including, but
not limited to, the rules and procedures applicable to the selection of arbitrators. In the event
that any person or entity other than Executive or the Company may be a party with regard to any
such controversy or claim, such controversy or claim shall be submitted to arbitration subject to
such other person or entitys agreement. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. This Paragraph 8 shall be specifically
enforceable. Notwithstanding the foregoing, this Paragraph 8 shall not preclude either party from
pursuing a court action for the sole purpose of obtaining a temporary restraining order or a
preliminary injunction in circumstances in which such relief is appropriate; provided that any
other relief shall be pursued through an arbitration proceeding pursuant to this Paragraph 8.
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9.
Consent to Jurisdiction
. To the extent that any court action is permitted
consistent with or to enforce Paragraphs 7 or 8 of this Agreement, the parties hereby consent to
the jurisdiction of the Superior Court of the Commonwealth of Massachusetts and the United States
District Court for the District of Massachusetts. Accordingly, with respect to any such court
action, Executive (i) submits to the personal jurisdiction of such courts; (ii) consents to service
of process; and (iii) waives any other requirement (whether imposed by statute, rule of court, or
otherwise) with respect to personal jurisdiction or service of process.
10.
Integration
. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements between the parties
with respect to any related subject matter, including without limitation the Letter Agreement and
the Change in Control Agreement. Notwithstanding the foregoing, except to the extent in conflict
therewith, this Agreement does not supersede either the Employee Agreement with respect to
Inventions and Proprietary Information dated June 27, 1989 between Executive and the Company or the
Covenant Not to Compete dated June 27, 1989 between Executive and the Company.
11.
Assignment; Successors and Assigns
. Neither the Company nor Executive may make
any assignment of this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other party; provided that the Company may assign its rights under
this Agreement without the consent of Executive in the event that the Company shall effect a
reorganization, consolidate with or merge into any other corporation, partnership, organization or
other entity, or transfer all or substantially all of its properties or assets to any other
corporation, partnership, organization or other entity. This Agreement shall inure to the benefit
of and be binding upon the Company and Executive, their respective successors, executors,
administrators, heirs and permitted assigns.
12.
Enforceability
. If any portion or provision of this Agreement (including, without
limitation, any portion or provision of any section of this Agreement) shall to any extent be
declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this
Agreement, or the application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion
and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by
law.
13.
Waiver
. No waiver of any provision hereof shall be effective unless made in
writing and signed by the waiving party. The failure of any party to require the performance of
any term or obligation of this Agreement, or the waiver by any party of any breach of this
Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a
waiver of any subsequent breach.
14.
Notices
. Any notices, requests, demands and other communications provided for by
this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally
recognized overnight courier service or by registered or certified mail, postage prepaid, return
receipt requested, to Executive at the last address Executive has filed in writing with the Company
or, in the case of the Company, at its main offices, attention of the Chief Executive
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Officer, and shall be effective on the date of delivery in person or by courier or three (3)
days after the date mailed.
15.
Amendment
. This Agreement may be amended or modified only by a written instrument
referencing this Agreement signed by Executive and by a duly authorized representative of the
Company.
16.
Legal Expenses
. The Company agrees to reimburse Executive, to the full extent
permitted by law, for all costs and expenses (including, without limitation, reasonable attorneys
fees) which Executive may reasonably incur as a result of any contest of the validity or
enforceability of, or the Companys liability under, any provision of this Agreement, plus in each
case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however
, that such payment shall be made only if the Executive prevails on at
least one material issue.
17.
Governing Law
. This is a Massachusetts contract and shall be construed under and
be governed in all respects by the laws of the Commonwealth of Massachusetts, without giving effect
to the conflict of laws principles of such Commonwealth. With respect to any disputes concerning
Federal law, such disputes shall be determined in accordance with the law as it would be
interpreted and applied by the United States Court of Appeals for the First Circuit.
18.
Counterparts
. This Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall be taken to be an original; but such counterparts
shall together constitute one and the same document.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year
first above written.
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ALKERMES, INC.
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By:
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Its:
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[Name of Executive]
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