-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oi1+BrNSIG6IkKsIdoaPC6kOE7ShzfO3FJAwIPDWn1LUjkpngn/1onAW2FyrvUED DyDhs62rcMgRydBV5Gwqrw== 0000950135-97-002856.txt : 19970630 0000950135-97-002856.hdr.sgml : 19970630 ACCESSION NUMBER: 0000950135-97-002856 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALKERMES INC CENTRAL INDEX KEY: 0000874663 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 232472830 STATE OF INCORPORATION: PA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19267 FILM NUMBER: 97631829 BUSINESS ADDRESS: STREET 1: 64 SIDNEY ST CITY: CAMBRIDGE STATE: MA ZIP: 02139-4136 BUSINESS PHONE: 6174940171 10-K 1 ALKERMES FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________to _________ Commission file number 0-19267 ALKERMES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2472830 State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization 64 Sidney Street, Cambridge, MA 02139-4234 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 494-0171 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share ("Common Stock") 1994 Class A Warrants to purchase shares of Common Stock -------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based upon the last sale price of the Registrant's Common Stock on June 6, 1997, the aggregate market value of the 19,366,270 outstanding shares of voting and non-voting common equity held by non-affiliates of the Registrant was $331,647,374. As of June 6, 1997, 20,765,518 shares of the Registrant's Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Report on Form 10-K: 1) Proxy Statement dated June 27, 1997 for the Registrant's Annual Shareholders' Meeting to be held on July 25, 1997 (Part III). 2 PART I ITEM 1. BUSINESS GENERAL Alkermes, Inc. (together with its subsidiaries, "Alkermes" or the "Registrant"), a Pennsylvania corporation organized in 1987, is applying the tools of biotechnology to the development of sophisticated proprietary drug delivery systems. The Registrant is developing product candidates based on three independent drug delivery technologies: ProLease(R), which is designed to enable single injections lasting a few days to several months to be made of proteins or peptides otherwise given by more frequent injection; RMP-7(TM), which is designed to enable increased drug delivery to the brain by transiently opening the blood-brain barrier; and Medisorb(R), which extends Alkermes' technology for injectable sustained release and is designed for more traditional small molecule pharmaceutical compounds. Utilizing these drug delivery systems, the Registrant is currently in various stages of preclinical and clinical development of several product candidates. OVERVIEW OF DRUG DELIVERY Drug delivery companies apply proprietary technologies to create new pharmaceutical products based on drugs developed by others. These products are generally novel, cost-effective dosage forms that provide any of several benefits including control of drug concentration in the blood, improved safety and efficacy, improved patient compliance and ease of use and expanded indications. Drug delivery technologies can provide pharmaceutical companies with a means of developing new products as well as expanding existing drug franchises. The drug delivery industry emerged to address the opportunities for advanced delivery of traditional pharmaceutical compounds. These compounds are generally stable, small molecules manufactured by conventional synthetic methods, for which oral or transdermal (through the skin) delivery could be enabled or enhanced by drug delivery technologies. Technologies such as passive transdermal systems (patches) and advanced tablets and capsules have been developed and successfully applied to a range of pharmaceutical products. In addition, certain traditional small molecule pharmaceuticals are delivered by means of encapsulation in polymeric microspheres. With the advent of biotechnology, new opportunities in drug delivery have arisen. Advances in biotechnology have facilitated the development of a new generation of biopharmaceutical products based on proteins, peptides and nucleic acids. At the same time, the scientific tools of biotechnology have enabled new approaches to drug delivery based on exploiting particular biological phenomena, for example utilizing natural properties of the blood-brain barrier to facilitate drug delivery to the central nervous system. Proteins and peptides present drug delivery challenges because they are often large molecules which degrade rapidly in the bloodstream, have limited ability to cross cell membranes and generally cannot be delivered orally. As a result, many biopharmaceuticals must be administered by injection, often multiple times per day or per week. Consequently, the methods of administration of 2 3 biopharmaceuticals can limit their clinical applications to certain disease states that warrant the expense and inconvenience of frequent injection. Drug delivery to the central nervous system is complicated by the existence of the blood-brain barrier, the layer of tightly joined endothelial cells which comprise the walls of the capillaries of the brain and limit the free flow of many blood constituents into the brain. Many drugs cannot easily cross the blood-brain barrier, and therefore must be administered in relatively high doses that may result in systemic toxicity or high cost. Drugs with limited ability to cross the blood-brain barrier include many water soluble chemotherapeutic and anti-infective agents that are frequently used in the treatment of diseases outside of the central nervous system. BUSINESS STRATEGY Alkermes' business strategy is to develop and acquire drug delivery systems to address significant new drug delivery opportunities arising in the pharmaceutical industry. There are four key elements to Alkermes' strategy: Develop and Acquire Broadly Applicable Drug Delivery Systems and Apply Them to Multiple Pharmaceutical Products. The Registrant develops or acquires drug delivery systems that have the potential to be applied to multiple proteins, peptides and small molecule pharmaceutical compounds to create new product opportunities. For example, the Registrant has developed RMP-7 technology independently and acquired the ProLease and Medisorb technologies. The Registrant currently has several product candidates utilizing those technologies in development. Collaborate to Develop and Finance Product Candidates. In addition to conducting product development activities on its own, the Registrant has entered into collaborations with pharmaceutical and biotechnology companies and others to develop product candidates incorporating the Registrant's technologies, provide capital for product development independent of capital markets and share development risk. Currently, the Registrant is collaborating with major pharmaceutical companies, including Genentech, Inc. ("Genentech"), Schering-Plough Corporation ("Schering-Plough"), Johnson & Johnson and Janssen Pharmaceutica International ("Janssen"). Apply Drug Delivery Systems to Both Approved Drugs and Drugs in Development. The Registrant is applying its drug delivery technologies to novel applications and formulations of pharmaceutical products that have already been approved by the FDA or other regulatory authorities. In such cases, the Registrant and its partners can develop a novel dosage form or application with the knowledge of a drug's safety and efficacy profile and a body of clinical experience from which to draw information for the design of clinical trials and for regulatory submissions. The Registrant is also applying its technologies to new pharmaceuticals that require a sustained release delivery system for successful development. Establish Independent Product Development Capabilities. Alkermes has assembled its own product development organization to enable it to develop product candidates for itself and its collaborators based on its drug delivery technologies. This capability gives the Registrant flexibility in structuring development programs and the ability to conduct both feasibility studies and clinical development programs for its collaborators. For example, the Registrant has developed RMP-7 3 4 independently and is currently conducting clinical trials of ProLease human growth hormone ("hGH") for Genentech. DRUG DELIVERY TECHNOLOGY The Registrant's current focus is on the development of broadly applicable drug delivery technologies addressing two important drug delivery opportunities: injectable sustained release of proteins, peptides and small molecule pharmaceutical compounds, and drug delivery to the brain across the blood-brain barrier. The Registrant is developing product candidates based on three independent drug delivery technologies. ProLease: injectable sustained release of fragile proteins and peptides ProLease is Alkermes' proprietary technology for the stabilization and encapsulation of fragile proteins and peptides in microspheres made of common medical polymers. The Registrant's proprietary expertise in this field lies in its ability to preserve the biological activity of fragile drugs over an extended period of time and to manufacture these formulations using components and processes believed to be suitable for human pharmaceutical use. ProLease is designed to enable novel formulations of proteins and peptides by replacing frequent injections with controlled, sustained release over time. The Registrant believes ProLease formulations have the potential to improve patient compliance and ease of use by reducing the need for frequent self-injection, to lower costs by reducing the need for frequent office visits and to improve safety and efficacy by reducing both the variability in drug levels inherent in frequent injections and the aggregate amount of drug given over the course of therapy. In addition, ProLease may provide access to important new markets currently inaccessible to drugs that require frequent injections or are administered orally. The ProLease formulation process has been designed to assure stability of fragile compounds during the manufacturing process, during storage and throughout the release phase in the body. The formulation and manufacturing process consists of two basic steps. First, the drug is formulated with stabilizing agents and dried to create a fine powder. Second, the powder is microencapsulated at very low temperatures. Incorporation of the drug substance as a stabilized solid under very low temperatures is critical to protecting fragile molecules from degradation during the manufacturing process and is a key element of the ProLease technology. The microspheres are suspended in a small volume of liquid prior to administration to a patient by injection under the skin or into a muscle. The Registrant believes drug release from the ProLease drug delivery system can be controlled to last from a few days to several months. Drug release from the microsphere is controlled by diffusion of the drug through the microsphere and by biodegradation of the polymer. These processes can be modulated through a number of formulation and fabrication variables including drug substance and microsphere particle sizing and choice of polymers and excipients. The Registrant's experience with the application of ProLease to a wide range of proteins and peptides has shown that high incorporation efficiencies and high drug loads can be achieved. Proteins and peptides incorporated into ProLease microspheres have maintained their integrity, stability and 4 5 biological activity for up to 30 days in in vitro experiments conducted on formulations manufactured at the preclinical and clinical trials scale. The results of animal studies with several different ProLease formulations have shown that ProLease can release targeted levels of drugs over extended periods of time and that the pharmacodynamic response with ProLease formulations can match that of continuous drug infusion. Suitable in vivo delivery patterns in rodents and primates have been achieved with different therapeutic proteins. In July 1996, Alkermes' scientists and their collaborators published results of primate studies of ProLease hGH in Nature Medicine, a peer-reviewed scientific journal. These results showed that single injections of ProLease hGH could provide sustained release and biological effect of hGH in primates for several weeks. RMP-7: drug delivery across the blood-brain barrier RMP-7, a member of a family of Receptor-Mediated Permeabilizers(TM) ("RMPs(TM)"), is a nine amino acid peptide based on bradykinin, a compound occurring naturally in the body and known to affect vascular permeability. RMP-7 is a proprietary, synthetic analog of bradykinin developed by Alkermes to increase transiently the permeability of the blood-brain barrier. Following injection, RMP-7 increases permeability by triggering a brief relaxation of the tight cellular junctions of the blood-brain barrier. During the time the tight junctions are relaxed, permeability is increased and drug molecules in the bloodstream can diffuse into the brain in concentrations greater than can usually be achieved without RMP-7. Preclinical and clinical data also suggest that RMP-7 increases the uptake of pharmaceuticals in the region of brain tumor and other pathology. RMP-7 exerts a pharmacologic effect on the vasculature of the brain and does not itself bind to or serve as a carrier for the drug of which it is facilitating delivery. The Registrant is developing RMP-7 to be manufactured, packaged and dispensed as a standalone product. In the clinical setting, RMP-7 is administered in conjunction with the therapeutic or diagnostic agent. Timing of RMP-7 administration relative to that of the therapeutic or diagnostic agent is determined on a drug by drug basis to optimize barrier permeability during the time of peak drug plasma concentrations. RMP-7 is intended to be marketed as an independent agent to increase the utility of other therapeutic and diagnostic compounds given with it. The Registrant believes RMP-7 may be administered along with cancer chemotherapeutic and anti-infective agents not currently used in the treatment of central nervous system disorders because of their limited ability to penetrate the blood-brain barrier. Medisorb: injectable sustained release of traditional small molecule pharmaceuticals Medisorb is a proprietary technology for encapsulating traditional small molecule pharmaceuticals in microspheres made of common medical polymers. Like ProLease, Medisorb is designed to enable novel formulations of pharmaceuticals by providing controlled, sustained release over time. The Registrant believes Medisorb is suitable for encapsulating stable, water soluble, small molecule pharmaceuticals at a large scale. The Registrant believes that Medisorb formulations may have superior features of safety, efficacy, compliance and ease of use for drugs currently administered by frequent injection or administered orally. Drug release from the microsphere is controlled by 5 6 diffusion of the pharmaceutical through the microsphere and by biodegradation of the polymer. These processes can be modulated through a number of formulation and fabrication variables, including drug substance and microsphere particle sizing and choice of polymers and excipients. The Medisorb drug delivery system uses manufacturing processes different from the ProLease manufacturing process. The formulation and manufacturing process consists of three basic steps. First, the drug is combined with a polymer solution. Second, the drug/polymer solution is mixed in water to form liquid microspheres (an emulsion). Third, the liquid microspheres are dried to produce finished product. The microspheres are suspended in a small volume of liquid prior to administration to a patient by injection under the skin or into a muscle. Drug release from Medisorb can be controlled to last from a few days to several weeks. PROLEASE Product Development Strategy. The Registrant's strategy is to generate multiple product opportunities by applying ProLease technology to the development of superior formulations of proteins and peptides that the Registrant believes address significant market opportunities. The Registrant believes these formulations have the potential to expand the utilization of these products and improve the competitive advantage of its collaborators in major markets. The product development plan for individual ProLease formulations is expected to proceed in several stages. First, the Registrant, either on its own or pursuant to a collaboration, conducts initial feasibility work to test various ProLease formulations for a particular drug in vitro and in vivo. Following the successful completion of the feasibility stage, preclinical development and manufacturing scale-up activities directed toward the initiation of clinical trials of the ProLease formulation would be conducted in collaboration with a partner. ProLease Human Growth Hormone. Alkermes is developing a ProLease formulation of Genentech's hGH in collaboration with Genentech. Growth hormone deficiency results in short stature and potentially other developmental defects. Genentech is the leading supplier of hGH in the United States. hGH is approved for use in the treatment of children with growth hormone deficiency, Turner's syndrome, chronic renal insufficiency and other indications and is being tested in additional indications in adults. hGH is currently administered frequently, often daily, by subcutaneous injection. In February 1996, Alkermes commenced a Phase I clinical trial of ProLease hGH in 13 growth hormone deficient adults. The study was completed in August 1996. In November 1996, Alkermes commenced a multi-center Phase I/II clinical trial of ProLease hGH in growth hormone deficient children. The trial is being conducted in up to 11 medical centers in the United States and is expected to enroll up to 62 patients. ProLease Alpha Interferon. Alkermes is developing a ProLease formulation of Schering-Plough's Intron(R) A (interferon alpha 2b) product in collaboration with Schering-Plough. Schering-Plough is the leading supplier of alpha interferon in the world. Intron A is approved for use in several infectious diseases and certain oncology indications. Intron A is currently administered by 6 7 frequent injection. Schering-Plough is conducting preclinical studies and will be responsible for clinical development. ProLease Product for Hormone Mediated Disorders. Alkermes is developing a ProLease formulation of a product for the treatment of hormone-mediated disorders with Johnson & Johnson. The product development program was announced in November 1996 following the successful completion by Alkermes of a feasibility study initiated in early 1996. Johnson & Johnson is conducting preclinical studies and will be responsible for clinical development. Additional ProLease Formulations. Alkermes continues to develop Prolease formulations of other unspecified compounds pursuant to feasibility agreements with several pharmaceutical and biotechnology companies. RMP-7 Product Development Strategy. The Registrant's strategy to date has been to advance RMP-7 through clinical trials while establishing its safety, permeability effects in humans and efficacy when used in combination with other drugs. To support the clinical development of RMP-7, Alkermes formed, and transferred substantially all of its rights to the RMP(TM) technology to, Alkermes Clinical Partners, L.P. (the "Partnership"), which completed a $46 million unit offering in April 1992. Alkermes has the option to purchase all of the limited partnership interests in the Partnership. See "Collaborative Arrangements -- Alkermes Clinical Partners, L.P." RMP-7 has the potential to be used in combination with a variety of agents in various disease settings. The Registrant's goal is to expand the applications of RMP-7 through its own development activities, and, when appropriate, collaborations with pharmaceutical companies. First, Alkermes may collaborate with companies having drugs whose uses could be expanded to include central nervous system indications. In such cases, Alkermes and its partner could collaborate in the clinical development of the combination without any exchange of product rights. Second, Alkermes may collaborate with development and marketing partners for RMP-7 in various business areas and geographic territories. In such cases, Alkermes could license rights to RMP-7 to its partner, subject to the rights of the Partnership. See "Collaborative Arrangements -- Alkermes Clinical Partners, L.P." Brain Tumor. RMP-7 is being tested initially for the treatment of recurrent malignant glioma, an aggressive form of brain tumor. Alkermes believes that RMP-7 may have applicability to the treatment and diagnosis of other types of brain tumors. In that regard, the Registrant initiated, in February 1996, a Phase I/II clinical trial of RMP-7 in patients with metastatic brain tumor. The Registrant, in collaboration with the National Cancer Institute ("NCI"), also initiated a Phase I/II clinical trial in August 1996 in pediatric patients with brain tumors. Brain tumors can be classified into two major groups: primary brain tumors, which originate and recur in the brain, and metastatic brain tumors, which are tumors that have spread to the brain from other parts of the body. Each year in the United States and Europe a total of 40,000 patients are diagnosed with primary brain tumors, of which approximately 60%-70% are malignant glioma, and 150,000 patients are diagnosed with metastatic brain tumors. 7 8 Current treatment for brain tumors is limited and inadequate. Standard treatment typically involves surgery to remove cancerous tissue, followed by radiation therapy. After initial treatment with surgery and/or radiotherapy, brain tumors often recur. Upon recurrence, tumors typically progress rapidly, neurological function and quality of life deteriorate and patients die within months. Chemotherapy has played only a limited role in treatment, in part due to the limited access of many chemotherapeutic agents to the brain because of the normally restrictive blood-brain barrier. Carboplatin is a chemotherapeutic approved for use by the FDA and other regulatory authorities worldwide for use in the treatment of various tumor types outside of the brain, but is limited in its ability to penetrate into the brain. RMP-7 is designed to enable more effective use of chemotherapeutic agents like carboplatin in the treatment of brain tumors by transiently increasing the permeability of the blood-brain barrier. Alkermes is pursuing two alternative treatment strategies for RMP-7 and carboplatin in patients with malignant brain tumor: intravenous and intra-arterial administration. By pursuing both treatment methods, the Registrant believes it strengthens the scientific foundation of the clinical trials program and increases the likelihood of observing a treatment effect in patients. Recurrent Malignant Glioma Clinical Trials. The Registrant's clinical strategy for RMP-7 has been to establish a foundation of safety and pharmacologic effect of increasing blood-brain barrier permeability prior to entering Phase II efficacy trials of RMP-7 administered in combination with carboplatin. To date, over 600 human subjects have received RMP-7 in a series of clinical trials in all indications studied. Through the Phase I and Phase I/II clinical trials, RMP-7 was shown to have a good safety profile in volunteers and patients. Transient flushing was the most consistent adverse event noted and nausea and vomiting were determined to be the dose limiting toxicity. There was no evidence of increased toxicity associated with the combination of RMP-7 and carboplatin, and the drug combination was generally well tolerated by patients. Based on the successful completion of Phase I and Phase I/II clinical trials, Alkermes initiated multiple Phase II clinical trials both of intravenous and intra-arterial RMP-7 and carboplatin in patients with recurrent malignant glioma. Three multi-center Phase II clinical trials of intravenous RMP-7 and carboplatin and one multi-center Phase II clinical trial of intra-arterial RMP-7 and carboplatin were designed and initiated. The results of the three Phase II intravenous RMP-7 clinical trials provides a strong rationale for the Registrant's decision to proceed in the United States and Europe into Phase III efficacy trials of intravenous RMP-7 and carboplatin in patients with brain tumors. European Intravenous Phase II Clinical Trials: ALK01-013 and ALK01-019. In Europe, two separate non-controlled, open label Phase II clinical trials of intravenous RMP-7 and carboplatin in patients with recurrent malignant glioma commenced in the first quarter of 1995. Patient enrollment was completed in May 1996, and preliminary results from the two clinical trials were announced in December 1996. The two clinical trials enrolled differing patient populations. ALK01-013 ("Study-013") enrolled patients whose brain tumors had recurred following previous treatment with surgery and radiotherapy. Such patients had not previously been treated with chemotherapy. ALK01-019 8 9 ("Study-019") enrolled patients whose brain tumors had recurred following previous treatment with surgery, radiotherapy and chemotherapy. In both clinical trials, patients received treatment cycles of RMP-7 and carboplatin approximately once every four weeks. Each cycle consisted of a 15-minute intravenous infusion of carboplatin and a concurrent 10-minute intravenous infusion of RMP-7. The prospectively defined endpoints of the clinical trials included response rates over the first four cycles of treatment as determined by stabilization or improvement for a minimum of two cycles of treatment as measured by three standardized tests of neurological impairment and patient performance status and stabilization or reduction in tumor volume for a minimum of two cycles as measured with contrast-enhanced MRI. In Study-013, 45 patients were treated at nine medical centers in the United Kingdom. The combination of RMP-7 and carboplatin was generally well tolerated. Of the patients treated, 61% to 91% responded to treatment as measured by three tests of neurological impairment and performance status. In addition, 79% of patients responded to the treatment as measured by the size of their tumor as measured with contrast-enhanced MRI. An independent analysis conducted by a statistician from the Medical Research Council ("MRC"), Cambridge, England, compared the effect on survival of treatment with RMP-7 and carboplatin versus a group of historical control patients matched on important prognostic factors. All comparisons favored the group treated with RMP-7 and carboplatin versus the control group. This finding was statistically significant (hazard ratio 1.9-2.2, p< = 0.02), after accounting for the effects of prognostic factors. In Study-019, 42 patients were treated at 11 medical centers in the United Kingdom, France and Sweden. Treatment with the combination of RMP-7 and carboplatin was generally well tolerated. Of the patients treated, 40% to 59% responded to treatment as measured by three tests of neurological impairment and performance status. In addition, 24% of patients responded to the treatment as measured by the size of their tumor with contrast-enhanced MRI. The MRC did not perform a comparison of patients in Study-019 to historical controls due to the lack of a database of comparable patients who had failed surgery, radiotherapy and chemotherapy. There can be no assurance that the results of the European clinical trials will be sufficient for the Registrant to obtain approval to market RMP-7 in Europe, or that the European regulatory bodies will not require additional clinical trials. In addition, there can be no assurance that the results of a Phase III trial will support the results of the European trials. United States Intravenous Phase II Clinical Trial: ALK01-017. In the United States, a Phase II clinical trial of intravenous RMP-7 and carboplatin commenced in March 1995 and was conducted at 10 medical centers. Enrollment of 121 patients was completed in May 1996 and preliminary results from the clinical trial were announced in March 1997. The clinical trial was designed as a double-blind, placebo-controlled study comparing treatment with intravenous RMP-7 and carboplatin to treatment with carboplatin alone in patients with recurrent malignant glioma. Patients received treatment cycles of RMP-7 and carboplatin once approximately every four weeks. Each cycle consisted of an approximately 45-minute intravenous 9 10 infusion of carboplatin and a 10-minute intravenous infusion of RMP-7. The prospectively defined endpoints included time to tumor progression as measured by an increase of tumor volume measured with contrast-enhanced MRI of greater than 50%, and three separate measurements of patients' functional capacity, neurological impairment and quality of life. The study did not meet its primary endpoint of time to tumor progression as measured by changes in tumor volume on MRI. The study was designed to include multiple additional endpoints. Observed trends toward increased survival time, six months survival rate and slowed progression of functional impairment for patients receiving the combination of RMP-7 and carboplatin compared to patients receiving treatment with carboplatin alone are being analyzed. The results of the three Phase II clinical trials provide a strong rationale for the Registrant's decision to proceed in the United States and Europe into Phase III efficacy trials of intravenous RMP-7 and carboplatin in patients with brain tumors. United States Intra-arterial Phase II Clinical Trial: ALK01-031. Alkermes initiated a multi-center Phase II clinical trial in the United States of intra-arterial RMP-7 and carboplatin in March 1996. Enrollment of 51 patients was completed in September 1996 at nine medical centers. Preliminary results from the study are expected during fiscal 1998. The clinical trial is designed as a non-controlled open label study of the treatment with RMP-7 and carboplatin administered intra-arterially in patients with recurrent malignant glioma. Patients receive treatment cycles of RMP-7 and carboplatin once approximately every four weeks. Each cycle consists of an approximately 45-minute intra-arterial infusion of carboplatin and a 10-minute intra-arterial infusion of RMP-7. The prospectively defined endpoints include time to tumor progression as measured by an increase to tumor volume measured with contrast-enhanced MRI of greater than 50%, and three separate measurements of patients' functional capacity, neurological impairment and quality of life. Metastatic Brain Tumor Clinical Trials. Alkermes initiated a multi-center Phase I/II non-controlled, open label clinical trial in Europe of intravenous RMP-7 and carboplatin in patients with metastatic brain tumor in April 1996. The study is being conducted at two medical centers and is expected to enroll approximately 50 patients. Alkermes also initiated a Phase I/II non-controlled, open label clinical trial in the United States of intra-arterial RMP-7 and carboplatin in patients with metastatic brain tumor in October 1995. The study is being conducted at one medical center and is expected to enroll approximately 18 patients. Pediatric Brain Tumor Clinical Trial. In August 1996, Alkermes, in collaboration with the NCI, initiated a non-controlled, open label Phase I/II clinical trial of intravenous RMP-7 and carboplatin in pediatric brain tumor patients who had failed other therapies. The study is being sponsored and conducted by the Pediatric Branch of the NCI and is expected to enroll approximately 24 patients. 10 11 MEDISORB Product Development Strategy. The Registrant's strategy is to generate multiple product opportunities by applying Medisorb technology to the development of superior formulations of small molecule pharmaceutical products. The Registrant believes these formulations have the potential to expand the utilization of these products and improve the competitive advantage of its collaborators in major markets. The product development plan for individual Medisorb formulations is expected to proceed in several stages. First, the Registrant, either on its own or pursuant to a collaboration, conducts initial feasibility work to test various Medisorb formulations for a particular drug in vitro and in vivo. Following the successful completion of the feasibility stage, preclinical development and manufacturing scale-up activities directed toward the initiation of clinical trials of the Medisorb formulation would be conducted in collaboration with a partner. Undisclosed Medisorb Product Candidate. Alkermes is developing and manufacturing a Medisorb product candidate in collaboration with Janssen, a subsidiary of Johnson & Johnson. In 1996, Janssen completed initial Phase I clinical trials of the Medisorb product candidate. The collaboration is focused on process scale-up and manufacturing in anticipation of late-stage clinical trials and, if successful, product commercialization. Janssen is responsible for conducting all clinical trials. COLLABORATIVE ARRANGEMENTS The Registrant's business strategy includes forming collaborations to provide technological, financial, marketing, manufacturing and other resources. The Registrant has entered into several corporate collaborations. Genentech, Inc. In November 1996, Alkermes announced the completion of a Phase I clinical trial of a ProLease hGH formulation in adults. Based in part on the successful completion of the Phase I trial, Genentech exercised its option to enter into a license agreement, and obtained from Alkermes a license coexclusive in the United States and exclusive in the rest of the world for a ProLease formulation of hGH. Under the terms of the agreement, Genentech could provide an estimated $20.0 million in development funding for scale-up activities, clinical trials materials, manufacturing and clinical trial expenses over the development period. In addition, Alkermes could receive milestone payments of approximately $10.0 million, if the ProLease hGH formulation is successfully developed and is approved by regulatory authorities. Alkermes will be responsible for conducting Phase I/II clinical trials and manufacturing the ProLease hGH formulation and is to receive manufacturing revenues and royalties on sales. Alkermes also granted Genentech an extension until November 1997 of its option to license ProLease for another Genentech undisclosed protein. Genentech has the right to terminate the agreement for any reason upon 30 days' written notice or, if the Registrant has begun manufacturing the ProLease product for commercial sale, upon six months' written notice. In addition, either party may terminate the agreement upon the other 11 12 party's material default which is not cured within 90 days of written notice, or upon the other party's insolvency or bankruptcy. To fund the Registrant's activities during the initial phase of the collaboration, Genentech has loaned the Registrant the aggregate amount of $3.5 million pursuant to a Convertible Promissory Note dated January 31, 1995 (the "Note"). The outstanding principal amount of the Note accrues interest at the prime rate of interest as reported by the Bank of America NT & SA from time to time. The outstanding principal amount of the Note and accrued but unpaid interest thereon becomes due and payable on January 31, 2000. Under the terms of the Note, Alkermes has the option to convert, at any time, all outstanding principal and accrued but unpaid interest thereon (as such amount may exist from time to time, the "Conversion Amount") into shares of Common Stock at the average closing price of the Common Stock for the 20 trading days ending the day before the conversion date (the "Conversion Price"). In addition, Genentech shall have the right to convert the Conversion Amount into shares of Common Stock at the Conversion Price if at any time the total cash, cash equivalents and marketable debt instruments of the Registrant shall be less than the sum of (i) all indebtedness which ranks senior to the indebtedness evidenced by the Note, and (ii) the Conversion Amount. Genentech also has the right to demand that the Common Stock be registered under certain circumstances. Schering-Plough Corporation Under an amended development and license agreement with Schering-Plough, the Registrant has agreed to develop an injectable delivery system which incorporates Intron A as an active ingredient utilizing the Registrant's ProLease delivery system and has granted to Schering-Plough an exclusive worldwide royalty bearing license to manufacture, use and sell any such system that may be developed pursuant to the amended agreement. Under the amended agreement, Schering-Plough will also be responsible for conducting clinical trials and securing regulatory approvals. The amended agreement provides for development funding to the Registrant and provides for certain payments to be made by Schering-Plough to the Registrant for its achievement of certain milestones. The Registrant and Schering-Plough entered into a prepaid royalty agreement pursuant to which Schering-Plough has prepaid certain royalties. Payments to the Registrant were approximately $7.0 million through March 31, 1997, and future milestone payments could exceed an additional $5.0 million, not including royalties. Schering-Plough has the right to terminate the amended agreement upon 60 days' written notice upon the occurrence of certain events, including if the Registrant fails to meet product specifications or an agreed upon delivery schedule, the results of a safety and pharmacokinetics study provide Schering-Plough with reasonable justification not to proceed to a Phase II clinical trial, the use of the product results in adverse effects that justify termination of clinical trials, Schering-Plough is unable to manufacture the product on a commercial scale, or upon completion or permanent discontinuation of the clinical trials. Either party may terminate the amended agreement upon the insolvency or bankruptcy of the other party or upon a breach by the other party which has not been cured after 60 days' notice. Schering-Plough also has the right to terminate the amended agreement upon 90 days' written notice or continue the development project on its own in the event Alkermes fails by an agreed upon date to deliver batches of a ProLease formulation of Intron A that meet 12 13 agreed upon specifications. In the event Schering-Plough elects to continue the development project after termination, it will remain obligated to pay Alkermes milestone payments and royalties upon commercial sale. In the event Schering-Plough terminates the amended agreement for any reason, Alkermes must repay the prepaid royalties received from Schering-Plough with interest. Such repayment obligation would be evidenced by an interest-bearing note and would be payable in full on the third anniversary of the date of the note. Alkermes will have the right, subject to the satisfaction of certain conditions, to satisfy its repayment obligation through the issuance of shares of its Common Stock. The number of shares that may be issued would be based upon the average closing price of Alkermes Common Stock on the Nasdaq National Market for the 30 business days immediately preceding the date on which the shares are delivered. Any Common Stock issued to Schering-Plough must be freely resalable. Johnson & Johnson In November 1996, the Registrant entered into a development and license agreement with Ortho Pharmaceutical Corporation, an affiliate of Johnson & Johnson, for the development of a ProLease formulation of a Johnson & Johnson proprietary compound (the "J&J Product Candidate"). The Registrant is developing a sustained release formulation of this compound to treat hormone-mediated disorders. Pursuant to the development agreement, Johnson & Johnson obtained an exclusive, worldwide, royalty bearing license to make, use and sell products resulting from such agreement. In exchange, Johnson & Johnson is to provide the Registrant with research and development funding, milestone payments and royalty payments based on sales, if any, of the J&J Product Candidate. Development funding and milestone payments could aggregate approximately $20 million, assuming the development of the J&J Product Candidate proceeds in accordance with its development plan. Johnson & Johnson is to be responsible for conducting clinical trials and securing regulatory approvals and, together with its affiliates, is to be responsible for the marketing of any products that result from the collaboration. The Registrant expects to manufacture any such products for commercial sales. Johnson & Johnson may terminate the development agreement for any reason, upon 90 days' written notice if such termination notice occurs prior to filing a New Drug Application ("NDA") with the FDA, or upon six months' written notice if such notice occurs subsequent to such a filing. In addition, either party may terminate the development agreement and the related manufacturing agreement upon a material default or breach by the other party of such agreement which is not cured within 60 days' notice, or upon the other party's insolvency or bankruptcy. Janssen Pharmaceutica International Pursuant to a development agreement, the Registrant is collaborating with Janssen in the development of sustained release formulations, utilizing the Medisorb technology, of an undisclosed Janssen product candidate. Under the development agreement, the Registrant is responsible for production of the Janssen product candidate for clinical trials. Janssen is responsible for conducting clinical trials of the Janssen product candidate and securing all necessary regulatory approvals. 13 14 In October 1996, the Registrant announced the expansion of the development agreement. Janssen has agreed to provide development funding of approximately $20 million over a two year period, assuming the product continues in clinical development. The funding will be used for manufacturing clinical trials material and scale-up for commercial sale. Under related license agreements, Janssen and an affiliate have exclusive world-wide licenses from the Registrant to manufacture, use and sell the Janssen product candidate. If Janssen decides to employ third-party suppliers of the commercialized Janssen product developed under the development agreement, the Registrant has a right of first refusal for the manufacture and supply of such product, and component bio-absorbable polymers thereof. Under the license agreements, Janssen is required to pay Alkermes certain royalties with respect to all Medisorb formulations of the Janssen product sold to customers. Janssen can terminate the development agreement or the license agreement upon 30 days' prior written notice. Alkermes Clinical Partners, L.P. In April 1992, Units consisting of limited partnership interests in the Partnership and warrants to purchase the Registrant's Common Stock were sold to investors in a private placement (the "Private Placement"). The proceeds of the $46 million Private Placement have been used to fund the further development and clinical testing of RMPs for human pharmaceutical use in the United States, Canada and Europe. Such funding was not sufficient to complete clinical trials and seek regulatory approval of RMP-7. Since the completion of funding from the Partnership, which ended during the quarter ended June 30, 1996, Alkermes has used, and intends to continue to use, its own resources to develop RMP-7, but may be forced to seek alternative sources of funding, including additional collaborators. Pursuant to a product development agreement, dated March 6, 1992, Alkermes transferred substantially all of its rights to the RMP technology to the Partnership. Alkermes has an option to purchase all of the limited partnership interests in the Partnership (the "Purchase Option") and thereby reacquire the transferred technology. The Registrant is required to fund the development of RMP-7 to maintain its Purchase Option. The Partnership may terminate the research program for any or all products upon the affirmative vote of 75% of the directors of the general partner of the Partnership, Alkermes Development Corporation II ("ADC II"), a wholly owned subsidiary of Alkermes, that such research is not feasible or is uneconomic. The Partnership may terminate the marketing program for any or all products upon the affirmative vote of 75% of the directors of ADC II based on the directors' good faith business judgment. The Partnership may also terminate the research or marketing program if Alkermes has materially breached the agreement and not cured such breach within 30 days' written notice. Both parties may terminate the research or marketing program upon mutual consent to terminate or upon the insolvency or bankruptcy of the other party. The Partnership has granted Alkermes an exclusive interim license to manufacture and market RMPs for human pharmaceutical use in the United States and Canada. Upon the first marketing approval of an RMP product by the FDA, Alkermes is obligated to make a payment to the Partnership equal to 20% of the aggregate capital contributions of all limited partners. Additionally, 14 15 Alkermes will pay royalty payments equal to 12% of United States and Canadian revenues and, in certain circumstances, 10% of European revenues from any sales of RMPs by Alkermes. The interim license will terminate if Alkermes does not exercise the Purchase Option. Alkermes can exercise the Purchase Option by making a payment to the partnership equal to 80% of the aggregate capital contributions of all limited partners in addition to royalty payments in the same percentages as provided for under the interim license agreement. The general partner of the Partnership is ADC II. Fifty percent of the members of the board of directors of ADC II are persons not affiliated with Alkermes. Such non-affiliated persons were nominated by the sales agent for the Private Placement. The sales agent will continue to have the right to nominate at least half of the members of ADC II's board of directors until ADC II or some other affiliate of Alkermes ceases to be the general partner of the Partnership, the Partnership terminates in accordance with the terms of the Limited Partnership Agreement or the sales agent's venture capital investment partnership ceases to be a limited partner of the Partnership. ALZA Corporation In February 1997, the Registrant agreed to collaborate with ALZA Corporation on the development of a to-be-determined product candidate, based on either the Medisorb or ProLease drug delivery system. The economic terms of such a collaboration are to be negotiated. MANUFACTURING Each of the Registrant's three drug delivery systems utilizes a distinct manufacturing process. ProLease ProLease manufacturing involves microencapsulation of drug substances provided to Alkermes by its collaborators in small polymeric microspheres using extremely cold processing conditions suitable for fragile molecules. The ProLease manufacturing process consists of two basic steps. First, the drug is formulated with stabilizing agents and dried to create a fine powder. Second, the powder is microencapsulated at very low temperatures. Alkermes has completed construction of an in-house pilot production facility that has been validated by the Registrant for manufacturing in accordance with Good Manufacturing Practices ("GMP"). The facility is being used to manufacture product candidates incorporating its ProLease sustained-release delivery system for use in clinical trials. This facility is not capable of manufacturing products on a commercial scale. Pursuant to agreements with certain of its collaborators, Alkermes has the right to manufacture ProLease products for commercial sale. Alkermes expects to begin construction of a new commercial scale ProLease manufacturing facility of approximately 30,000 square feet during fiscal 1998. RMP-7 RMP-7 is a small peptide manufactured using standard synthetic techniques. Alkermes relies on an independent European pharmaceutical company for the manufacture and supply of RMP-7. 15 16 Scale-up of RMP-7 manufacturing process to support international clinical trials and commercial launch has been completed. Alkermes believes that, if necessary, there are other companies which could manufacture and supply its requirements for RMP-7. Medisorb The Medisorb manufacturing process is significantly different from the ProLease process and is based on a method of encapsulating small molecule drugs, provided by the Registrant's collaborator, in polymers using a large-scale emulsification. The Medisorb manufacturing process consists of three basic steps. First, the drug is combined with a polymer solution. Second, the drug/polymer solution is mixed in water to form liquid microspheres (an emulsion). Third, the liquid microspheres are dried to produce finished product. Alkermes owns a 14,000 square foot GMP sterile manufacturing facility in Wilmington, Ohio. Alkermes is manufacturing a product candidate incorporating its Medisorb sustained-release delivery system for use by Janssen in clinical trials at this facility. It does not manufacture such product candidates on a commercial scale. During fiscal 1998, Alkermes intends to expand its current manufacturing facility by an additional 20,000 square feet, so that it can manufacture Medisorb product candidates on a commercial scale. The manufacture of the Registrant's products for clinical trials and commercial purposes is subject to current GMP and other federal regulations. The Registrant has never operated an FDA-approved manufacturing facility, and there can be no assurance that it will obtain necessary approvals for commercial manufacturing. If Alkermes is not able to develop manufacturing capacity and experience or to continue to contract for manufacturing capabilities on acceptable terms, its ability to conduct preclinical testing and clinical trials will be compromised, and delays in obtaining regulatory approvals might result, as well as commercial sales if approvals are obtained. Such delays could materially adversely affect the Registrant's competitive position and its business, financial condition and results of operations. MARKETING Alkermes plans to market and sell RMP-7, if successfully developed and approved, either directly or through co-promotion or other licensing arrangements with third parties. Such arrangements may be exclusive or nonexclusive and may provide for marketing rights worldwide or in a specific market. Alkermes intends to market any ProLease and Medisorb products through its corporate partners. Alkermes has entered into development agreements, including sales and marketing, for ProLease product candidates with Genentech, Schering-Plough and Johnson & Johnson, and for a Medisorb product candidate with Janssen. See "Collaborative Arrangements." Alkermes currently has no experience in marketing or selling pharmaceutical products. In order to achieve commercial success for any product candidate approved by the FDA, Alkermes must 16 17 either develop a marketing and sales force or enter into arrangements with third parties to market and sell its products. There can be no assurance that Alkermes will successfully develop such experience or that it will be able to enter into marketing and sales agreements with others on acceptable terms, if at all. If the Registrant develops its own marketing and sales capability, it will compete with other companies that currently have experienced and well funded marketing and sales operations. To the extent the Registrant enters into co-promotion or other sales and marketing arrangements with other companies, any revenues received by the Registrant will be dependent on the efforts of others, and there can be no assurance that such efforts will be successful. COMPETITION The biotechnology and pharmaceutical industries are subject to rapid and substantial technological change. Alkermes faces, and will continue to face, intense competition in the development, manufacturing, marketing and commercialization of its product candidates from academic institutions, government agencies, research institutions, biotechnology and pharmaceutical companies, including its collaborators, and drug delivery companies. There can be no assurance that developments by others will not render the Registrant's product candidates or technologies obsolete or noncompetitive, or that the Registrant's collaborators will not choose to use competing drug delivery methods. At the present time, Alkermes has no sales force or marketing or commercial manufacturing experience. In addition, many of the Registrant's competitors and potential competitors have substantially greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than does Alkermes. Many of these competitors also have significantly greater experience than Alkermes in undertaking preclinical testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals. With respect to RMP-7, the Registrant believes that there are currently no products approved by the FDA for increasing the permeability of the blood-brain barrier. There are, however, many novel experimental therapies for the treatment of brain tumor and central nervous system infections being tested in the United States and Europe. With respect to ProLease and Medisorb, the Registrant is aware that there are other companies developing sustained-release delivery systems for pharmaceutical products. In addition, other companies are developing new chemical entities which, if developed successfully, could compete against sustained-release formulations of products of the Registrant's collaborators. These chemical entities are being designed to have different mechanisms of action or improved safety and efficacy. In addition, the Registrant's collaborators may develop, either alone or with others, products that compete with the development and marketing of the Registrant's product candidates. There can be no assurance that the Registrant will be able to compete successfully with such companies. The existence of products developed by the Registrant's competitors, or other products or treatments of which the Registrant is not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by the Registrant. 17 18 PATENTS AND PROPRIETARY RIGHTS The Registrant's success will be dependent, in part, on its ability to obtain patent protection for its product candidates and those of its collaborators, maintaining trade secret protection and operating without infringing upon the proprietary rights of others. The Registrant has a proprietary portfolio of patent rights and exclusive licenses to patents and patent applications. The Registrant has filed numerous United States and international patent applications directed to composition of matter as well as processes of preparation and methods of use, including applications relating to: permeabilizers, certain rights to which have been licensed to the Partnership, of which one United States patent was issued in each of May 1992, December 1993, April 1996 and December 1996; carriers for enabling passage into the brain of therapeutic compounds, of which one United States patent was issued in each of October 1992, January 1993 and June 1996; a ProLease microencapsulation process, of which one United States patent was issued in May 1991; the formulation of ProLease composition of which one United States patent was issued in May 1995; a Medisorb microencapsulation process of which one United States patent was issued in June 1983; and 11 additional United States patents related to Medisorb methods and compositions that were issued between July 1985 and June 1995. In the future, the Registrant plans to file further United States and foreign patent applications directed to new or improved products and processes. The United States patents issued to the Registrant will expire between 2000 and 2014. Alkermes intends to file additional patent applications when appropriate and intends to defend its patent position aggressively. Alkermes has exclusive rights through licensing agreements with several institutions to nine issued United States patents, a number of United States patent applications and to corresponding foreign patents and patent applications in many countries, subject in certain instances to the rights of the United States government to use the technology covered by such patents and patent applications. The United States patents that have been licensed to the Registrant will expire between the years 2003 and 2013. Under certain licensing agreements, the Registrant currently pays annual license fees and/or minimum annual royalties. During the fiscal year ended March 31, 1997, such fees were approximately $92,000. In addition, under all licensing agreements, Alkermes is obligated to pay royalties on future sales of products, if any, covered by the licensed patents. The Registrant is aware of several United States patents issued to third parties containing claims which could be construed to cover some of the Registrant's product candidates utilizing its ProLease, RMP-7, and Medisorb delivery systems. In one case, the Registrant has received a letter from the owner of a patent asking the Registrant to compare the Registrant's Medisorb technology disclosed in a published international patent application with such owner's patented technology. There can be no assurance that the claims of the issued United States patents are not infringed by the proposed manufacture, use, offer for sale, or sale of these products by the Registrant or its collaborators. There can be no assurance that a third party will not file an infringement action, or that the Registrant would prevail in any such action. There can be no assurance that the cost of defending an infringement action would not be substantial, and would not have a material adverse effect on the Registrant's business, financial condition and results of operations. The Registrant is also aware of patent applications filed by third parties in the United States and in various foreign countries which may cover some of the Registrant's product candidates utilizing its ProLease, RMP-7 18 19 or Medisorb delivery systems. Patents may issue from these applications which could preclude the Registrant from manufacturing, using, offering for sale, or selling some of its ProLease, RMP-7 or Medisorb product candidates. Furthermore, there can be no assurance that any licenses under such patents would be made available on commercially viable terms, if at all. Failure to obtain any required license could prevent the Registrant from commercializing one or more of its products. The patent positions of pharmaceutical, biopharmaceutical and biotechnology firms, including Alkermes, are generally uncertain and involve complex legal and factual questions. In addition, there can be no assurance that the Registrant's or its licensors' current patent applications will be allowed or that the claims of any patents issued to Alkermes or its licensors (in connection with either or both the Registrant's product candidates or the Partnership's product candidate) will be sufficiently broad to protect the Registrant's or the Partnership's technology or to provide Alkermes or the Partnership with any competitive advantages. Moreover, no assurance can be given that patents issued to Alkermes (in connection with either or both the Registrant's product candidates or the Partnership's product candidate), or its respective licensors, if any, will not be contested, invalidated or circumvented. In addition, if Alkermes or the Partnership is required to bring or defend against a narrowed charge of patent infringement or to protect its own proprietary rights against third parties, substantial costs could be incurred. In the future, Alkermes may be required to obtain additional licenses to patents or other proprietary rights of third parties. There can be no assurance that any such licenses will be available on acceptable terms, if at all, and failure to obtain such licenses could result in delays in marketing the Registrant's products or the inability to proceed with the development, manufacture or sale of product candidates requiring such licenses. The Registrant also relies upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position which it seeks to protect, in part, by confidentiality agreements with its corporate partners, collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Registrant would have adequate remedies for any breach, or that the Registrant's trade secrets will not otherwise become known or be independently discovered by competitors. The Registrant's practice is to require its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Registrant. The agreements provide that all confidential information developed or made known to an individual during the course of the employment or consulting relationship shall be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual while employed by the Registrant shall be the exclusive property of the Registrant. There can be no assurance, however, that these agreements will provide meaningful protection for the Registrant's trade secrets in the event of unauthorized use or disclosure of such information. GOVERNMENT REGULATION The manufacture and marketing of pharmaceutical products in the United States require the approval of the FDA under the Federal Food, Drug and Cosmetic Act. Similar approvals by 19 20 comparable agencies are required in most foreign countries. The FDA has established mandatory procedures and safety standards which apply to the preclinical testing and clinical trials, manufacture and marketing of pharmaceutical products. Pharmaceutical manufacturing facilities are also regulated by state, local and other authorities. As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animal models to assess the drug's efficacy and to identify potential safety problems. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application ("IND"), which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. Phase I trials are conducted with a small number of subjects and are designed to provide information about both product safety and the expected dose of the drug. Phase II trials are designed to provide additional information on dosing and preliminary evidence of product efficacy. Phase III trials are large scale studies designed to provide statistical evidence of efficacy and safety in humans. The results of the preclinical testing and clinical trials of a pharmaceutical product are then submitted to the FDA in the form of a New Drug Application ("NDA"), or for a biological product in the form of a Product License Application ("PLA"), for approval to commence commercial sales. Preparing such applications involves considerable data collection, verification, analysis and expense. In responding to an NDA or PLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. Prior to marketing, any product developed by Alkermes or its collaborators must undergo an extensive regulatory approval process, which includes preclinical testing and clinical trials of such product candidate to demonstrate safety and efficacy. This regulatory process can require many years and the expenditure of substantial resources. Data obtained from preclinical testing and clinical trials are subject to varying interpretations, which can delay, limit or prevent FDA approval. In addition, changes in FDA approval policies or requirements may occur or new regulations may be promulgated which may result in delay or failure to receive FDA approval. Similar delays or failures may be encountered in foreign countries. Delays and costs in obtaining regulatory approvals would have a material adverse effect on the Registrant's business, financial condition and results of operations. Among the conditions for NDA or PLA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform on an ongoing basis with GMP. Before approval of an NDA or PLA, the FDA will perform a prelicensing inspection of the facility to determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. After the establishment is licensed, it is subject to periodic inspections by the FDA. The requirements which the Registrant must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of its products in such countries can be as rigorous and costly as those described above. The Registrant is also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and 20 21 infectious disease agents, used in connection with the Registrant's research. Compliance with laws and regulations relating to the protection of the environment has not had a material effect on capital expenditures, earnings or the competitive position of the Registrant. However, the extent of government regulation which might result from any legislative or administrative action cannot be accurately predicted. EMPLOYEES As of June 6, 1997, the Registrant had 177 full-time employees. A significant number of the Registrant's management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. Alkermes believes that it has been highly successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense. None of the Registrant's employees is covered by a collective bargaining agreement. ITEM 2. PROPERTIES The Registrant leases and occupies approximately 97,000 square feet of laboratory and office space in Cambridge, Massachusetts under five leases expiring in the years 1998 to 2008. The leases contain provisions permitting the Registrant to extend the term of such leases for up to ten years. The Registrant has completed construction of a GMP pilot suite at its Massachusetts facility. Such suite is for the manufacture of product candidates incorporating the ProLease delivery system for preclinical and clinical trials. The Registrant also expects to begin construction of a new commercial scale ProLease manufacturing facility in Cambridge, Massachusetts during fiscal 1998. The Registrant believes that its Massachusetts facilities are adequate for its preclinical and clinical operations. The Registrant does not manufacture and does not expect to manufacture RMPs for clinical trials. The Registrant has engaged a third party to manufacture preclinical, clinical and commercial supplies of RMPs. Alkermes Europe, Ltd., a wholly owned subsidiary of the Registrant, leases and occupies approximately 4,600 square feet of office space in Cambridge, England under a lease expiring in the year 2002. The Registrant believes that such office space is adequate for the operations of Alkermes Europe, Ltd. The Registrant owns and occupies approximately 14,000 square feet of manufacturing, office and laboratory space in Wilmington, Ohio. The facility contains a state-of-the-art GMP sterile production facility specifically designed for the production of Medisorb microspheres. The Registrant also expects to begin an expansion of its Medisorb manufacturing facility during fiscal 1998. The Registrant believes that its Wilmington facility is adequate for its preclinical and clinical operations. The Registrant also leases and occupies approximately 25,000 square feet of laboratory and office space in Blue Ash, Ohio under a lease expiring in 1998. The Registrant believes that the Blue Ash facility is adequate for its operations. ITEM 3. LEGAL PROCEEDINGS Not applicable. 21 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant, who are elected to serve at the pleasure of the Board of Directors, are as follows:
Name Age Position ---- --- -------- Richard F. Pops 35 Chief Executive Officer and Director Robert A. Breyer 53 President, Chief Operating Officer and Director Raymond Bartus 50 Senior Vice President, Preclinical Research and Development Michael J. Landine 43 Senior Vice President, Chief Financial Officer and Treasurer Don G. Burstyn 42 Vice President, Regulatory Affairs J. Duncan Higgons 42 Vice President, Business Development Dennis M. Meka 44 Vice President, Operations Scott D. Putney 43 Vice President, Protein and Molecular Biology Cornelis H. Wortel 41 Vice President, Medical Affairs James L. Wright 49 Vice President, Pharmaceutical Development
Mr. Pops has been Chief Executive Officer and a Director of the Registrant since February 1991. From February 1991 to June 1994, Mr. Pops was also President of the Registrant. Mr. Pops currently serves on the Board of Directors of Immulogic Pharmaceutical Corporation, the Biotechnology Industry Organization (BIO) and The Brain Tumor Society (a non-profit organization). Mr. Breyer has been President and Chief Operating Officer and a Director of the Registrant since July 1994. From August 1991 to December 1993, Mr. Breyer was President and General Manager of Eli Lilly Italy, a subsidiary of Eli Lilly & Co. From September 1987 to August 1991, he was Senior Vice President, Marketing and Sales of IVAC Corporation, a medical device company and a subsidiary of Eli Lilly & Co. 22 23 Dr. Bartus has been Senior Vice President, Preclinical Research and Development since November 1996. From November 1992 to November 1996, Dr. Bartus served as Senior Vice President, Neurobiology of the Registrant. From June 1988 to November 1992, Dr. Bartus held various positions with Cortex Pharmaceutical, Inc., most recently as Executive Vice President and Chief Operating Officer. He holds an M.S. in Experimental Psychology and a Ph.D. in Physiological Psychology from North Carolina State University. Mr. Landine has been the Chief Financial Officer of the Registrant since March 1988. From March 1988 to December 1994, he also served as a Vice President, and since December 1994 as a Senior Vice President. He has also been Treasurer of the Registrant since April 1991. He is currently an advisor to Walker Magnetics Group, an international manufacturer of industrial equipment. Mr. Landine is a certified public accountant. Dr. Burstyn became Vice President, Regulatory Affairs in December 1993. From 1987 to 1993, Dr. Burstyn was employed in various capacities at Biogen, Inc., most recently as Director, Development Operations. Dr. Burstyn received his B.S., M.S. and Ph.D. from the University of Maryland. Mr. Higgons became Vice President, Business Development in December 1994. From 1986 to 1994, he was employed in various capacities at IVAC Corporation, most recently as Senior Director of Sales, Western Area. Mr. Meka became Vice President, Operations of the Registrant in January 1997. From 1994 to December 1996 he was employed by Dupont Merck Pharmaceuticals as Vice President, Manufacturing and Corporate Services. From 1991 to 1994 he was employed by Dupont Merck Pharma (Puerto Rico) as President and General Manager. Dr. Putney has been Vice President, Protein and Molecular Biology since November 1996 after having served as Vice President, Molecular Biology since October 1991. From 1985 to October 1991, Dr. Putney served as Director of Molecular Biology at Repligen Corporation, a biotechnology company, and from 1988 to October 1991, Dr. Putney was also a Vice President at Repligen Corporation. Dr. Putney received a B.S. in Biology and a B.A. in Chemistry from the University of California, Irvine and a Ph.D. in Chemistry from the Massachusetts Institute of Technology. Dr. Wortel became Vice President, Medical Affairs in July 1996. From 1995 to 1996, he was employed by Procept, Inc., from 1993 to 1995, he was employed by Repligen, Inc. and from 1991 to 1993, he was employed by Centocor, Inc. Dr. Wright became Vice President, Pharmaceutical Development in December 1994. From 1989 to 1994, he was employed at Boehringer Ingelheim Pharmaceutical, Inc., most recently as a Director. Dr. Wright received a B.A. in Chemistry and Biology from the University of California, Santa Barbara, and an M.S. in Pharmacy and a Ph.D. in Pharmacy from the University of Wisconsin. 23 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Registrant's common stock is traded on the Nasdaq National Market under the symbol ALKS. Set forth below for the indicated periods are the high and low sale prices for Alkermes' common stock.
Fiscal 1997 Fiscal 1996 ----------- ----------- High Low High Low ---- --- ---- --- 1st Quarter $17 $ 8 1/2 $ 4 1/2 $2 5/8 2nd Quarter 16 1/8 8 1/2 9 1/4 3 5/8 3rd Quarter 25 1/2 11 7/8 8 5/8 5 3/4 4th Quarter 29 5/8 13 1/4 11 1/4 7 1/8
The number of shareholders of record on June 6, 1997 was 591. No dividends have been paid on the common stock to date, and the Registrant does not expect to pay cash dividends in the foreseeable future. 24 25 ITEM 6. SELECTED FINANCIAL DATA Alkermes, Inc. and Subsidiaries (In thousands, except per share data)
Year Ended March 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues $ 19,827 $ 15,919 $ 13,903 $ 9,460 $ 11,806 ---------------------------------------------------------------------- Research and development expenses 29,554 21,586 18,955 20,480 16,709 ---------------------------------------------------------------------- Total expenses 38,625 29,666 25,807 26,736 51,953 (1) ---------------------------------------------------------------------- Net loss $(18,798) $(13,747) $(11,904) $(17,275) $(40,147)(1) ---------------------------------------------------------------------- Net loss per weighted average number of common shares $ (1.03) $ (0.93) $ (0.88) $ (1.29) $ (3.77)(1) ---------------------------------------------------------------------- Weighted average number of common shares outstanding 18,288 14,775 13,535 13,362 10,653 ----------------------------------------------------------------------
March 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents and short-term investments $ 85,297 $ 32,374 $ 21,351 $ 27,948 $ 32,859 -------------------------------------------------------------------- Total assets 104,697 45,752 36,708 46,322 54,025 -------------------------------------------------------------------- Long-term obligations 10,914 9,876 8,376 6,598 2,149 -------------------------------------------------------------------- Shareholders' equity 79,151 23,513 21,163 31,874 47,731 --------------------------------------------------------------------
(1) Includes a one time non-cash charge of $31.3 million for the purchase of in-process research and development as a result of the Company's acquisition of Enzytech, Inc. 25 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Alkermes, Inc. and Subsidiaries INTRODUCTION Alkermes develops innovative pharmaceutical products based on three proprietary drug delivery systems: ProLease(R), RMP-7(TM) and Medisorb(R). Since its inception in 1987, the Company has devoted substantially all of its resources to its research and development programs. Alkermes has not received any revenue from the sales of products. The Company has been unprofitable since inception and expects to incur substantial additional operating losses over the next several years. At March 31, 1997, the Company had an accumulated deficit of $119.8 million. The Company has funded its operations primarily through public offerings and private placements of equity securities, bank loans and payments under research and development agreements with collaborators, including Alkermes Clinical Partners, L.P. ("Clinical Partners"), a research and development limited partnership whose operations commenced in April 1992. The Company intends to develop its product candidates in collaboration with others on whom the Company will rely for funding, development, manufacturing and/or marketing. FORWARD-LOOKING STATEMENTS Any statements set forth below or otherwise made in writing or orally by the Company with regard to its expectations as to financial results and other aspects of its business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company makes such statements based on assumptions which it believes to be reasonable, the Company's business is subject to significant risks and there can be no assurance that actual results will not differ materially from the Company's expectations. Accordingly, the Company hereby identifies the following important factors, among others, which could cause its results to differ from any results which might be projected, forecasted or estimated by the Company in any such forward-looking statements: (i) the Company and its collaborators could not be permitted by regulatory authorities to undertake additional clinical trials for ProLease, RMP-7, or Medisorb product candidates; (ii) product candidates could be ineffective or unsafe during clinical trials; (iii) the Company could incur difficulties or set-backs in obtaining the substantial additional funding required to continue research and development programs and clinical trials; (iv) even if 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; (v) technological change in the biotechnology or pharmaceutical industries could render the Company's product candidates obsolete or noncompetitive; (vi) disputes with collaborators, termination of collaborations or failure to negotiate acceptable new collaborative arrangements for ProLease and Medisorb technologies, which are not independently commercializable, could occur; (vii) disputes with Clinical Partners over rights to the RMP-7 and related technology could occur, or the Company could fail to purchase this technology from Clinical Partners pursuant to the purchase option (the "Purchase Option"), or, if the Company did purchase RMP(TM) technology from Clinical Partners (a) in shares of the Company's common stock, the Company's shareholders would be substantially diluted or (b) in cash, the Company's capital resources would be significantly depleted; and (viii) difficulties or set-backs in obtaining and enforcing Alkermes' patents and difficulties with the patent rights of others could occur. 26 27 RESULTS OF OPERATIONS The Company's research and development revenue under collaborative arrangement with related party was $1,415,313, $11,182,741 and $9,277,371 for the fiscal years ended in 1997, 1996 and 1995, respectively. This revenue was received from Clinical Partners under a product development agreement entered into in March 1992. The decrease in such revenue for fiscal 1997 as compared to fiscal 1996 was a result of the completion of funding from Clinical Partners pursuant to the product development agreement during the quarter ended June 30, 1996. The increase in such revenue for fiscal 1996 as compared to fiscal 1995 was a result of increased reimbursable costs incurred by the Company pursuant to such product development agreement. The Company's research and development revenue under collaborative arrangements was $15,968,317, $2,848,510 and $3,049,106 for the fiscal years ended in 1997, 1996 and 1995, respectively. The increase in such revenue for fiscal 1997 as compared to fiscal 1996 was mainly the result of the funding earned and milestones achieved under new or expanded collaborative agreements related to the Company's ProLease and Medisorb technologies. The decrease in such revenue for fiscal 1996 as compared to fiscal 1995 was primarily a result of the completion of the feasibility phase of a collaborative agreement with Boehringer Mannheim GmbH, partially offset by an expanded collaboration with Schering-Plough Corporation. Interest income was $2,443,317, $1,887,275 and $1,576,794 for the fiscal years ended in 1997, 1996 and 1995, respectively. The increase in such revenue for fiscal 1997 as compared to fiscal 1996 was primarily a result of the investment of the net proceeds of approximately $22.9 million received upon the consummation of a public offering of the Company's common stock in May 1996 as well as the investment of the net proceeds of approximately $49.7 million from the sale to ALZA Corporation of 2,000,000 shares of the Company's common stock in March 1997. The increase in fiscal 1996 as compared to fiscal 1995 was primarily a result of the investment of the net proceeds of approximately $14.8 million received upon the consummation of a public offering of the Company's common stock in September and October 1995. The Company's total operating expenses were $38,624,765 for the fiscal year ended in 1997 as compared to $29,665,610 and $25,807,424 for the fiscal years ended in 1996 and 1995, respectively. The Company separately recorded a $750,000 nonrecurring charge in March 1996 for Medisorb technology purchased but not yet commercially viable. The Company's research and development expenses were $29,553,988 for the fiscal year ended in 1997 compared to $21,586,316 and $18,955,347 for the fiscal years ended in 1996 and 1995, respectively. The increase for fiscal 1997 as compared to fiscal 1996 was mainly as a result of salary and related benefits and other operating costs associated with the acquisition of the Medisorb technology and certain related assets in March 1996. There was also an increase in the purchase of lab supplies and clinical expenses related primarily to the Company's ProLease and RMP-7 programs, partially offset by a reduction in the costs of preclinical work in the Company's RMP-7 program which was completed during the prior year. The increase for fiscal 1996 as compared to fiscal 1995 was mainly the result of an increase in the purchase of lab supplies and preclinical and clinical expenses related primarily to the Company's RMP-7 and ProLease programs. General and administrative expenses were $7,689,625, $6,285,700 and $5,104,062 for the fiscal years ended in 1997, 1996 and 1995, respectively. The increase for fiscal 1997 as compared to fiscal 1996 was primarily as a result of salary and related benefits and other operating costs associated with the acquisition of the Medisorb technology and certain related assets in March 1996 as well as an increase in patent legal costs. The increase for fiscal 1996 as compared to fiscal 1995 was primarily the result of non-cash charges related to the write-down of the Company's investments in Clinical Partners and an increase in patent legal costs and other legal costs associated with financing and other transactions. In February and April 1996, the Company purchased, for approximately $2.1 million, 74 Class A units that were owned by investors who defaulted on their obligations to make installment payments for such units. The Company wrote down its investment in these Class A units ratably over the period February through June 1996 as Clinical Partners used these and other funds to complete its obligation to Alkermes to fund research and development of RMP-7. The Company does not believe that inflation and changing prices has had a material impact on its results of operations. 27 28 LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company had current assets totaling $89,868,040, primarily consisting of $2,799,012 in cash and cash equivalents and $82,497,939 in U.S. Treasury Notes and other Government obligations having a maturity of less than one year; and current liabilities of $8,200,623. The Company's short-term investment objectives are, first, to assure conservation of principal, and second, to obtain investment income. As a result, the Company invests primarily in high grade government or government-backed securities. During fiscal 1997, the Company announced three new or expanded collaborative agreements. Development funding and milestone payments to Alkermes under these collaborations could exceed $70 million in the aggregate (of which $14.5 million was earned during fiscal 1997), assuming the development of the product candidates proceeds as planned. In March 1997, the Company completed a private placement of 2,000,000 shares of its common stock at $25 per share. Net proceeds to the Company were approximately $49.7 million. In May 1996, the Company completed a direct public offering of 2,300,000 shares of its common stock at $10 per share. Net proceeds to the Company were approximately $22.9 million. In September 1996, the Company amended its loan agreement with a bank to increase the principal amount of the loan by $5 million, securing the existing and the additional principal amount of the loan with a building and real property pursuant to a mortgage and certain of the Company's equipment pursuant to a security agreement. The Company's research and development costs to date have been financed primarily by sales of equity securities and research and development collaborative arrangements. The Company expects to incur significant research and development and other costs, including costs related to preclinical studies, clinical trials and facilities expansion. The research and development revenue from Clinical Partners ended during the quarter ended June 30, 1996. Such funding was not sufficient to complete clinical trials and seek regulatory approval of RMP-7. Since the completion of funding from Clinical Partners, Alkermes has used and intends to continue to use its own resources to develop RMP-7, but may be forced to seek alternative sources of funding, including additional collaborators. The Company is required to fund the development of RMP-7 to maintain its purchase option relating to Clinical Partners. Therefore, the Company expects that such costs will exceed revenues significantly for the next several years, which will result in continuing losses from operations. The Company expects to begin construction of a new commercial scale ProLease manufacturing facility in Cambridge, Massachusetts during fiscal 1998. The Company also expects to begin an expansion of its Medisorb manufacturing facility in Wilmington, Ohio during fiscal 1998. The total cost for both facilities is expected to be approximately $15 to $20 million. The Company's capital expenditures for equipment, facilities and building improvements have been financed to date primarily with proceeds from bank loans and the sales of equity securities. The Company will continue to pursue opportunities to obtain additional financing in the future. Such financing may be sought through various sources, including equity offerings, bank borrowings, lease arrangements relating to fixed assets or other financing methods. The source, timing and availability of any financings will depend on market conditions, interest rates and other factors. The Company believes its current cash, cash equivalents and short-term investments, combined with anticipated interest income and research and development revenues under collaborative arrangements, will be sufficient to meet its anticipated capital requirements through at least March 31, 1999. The Company's future capital requirements will depend on many factors, including continued scientific progress in its research and development programs, the magnitude of these programs, progress with preclinical 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. 28 29 The Company will need to raise substantial additional funds for longer-term product development, regulatory approvals and manufacturing or marketing activities that it 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, the Company may be required to curtail significantly one or more of its research and development programs and/or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or future products. As disclosed in Note 2 to the Consolidated Financial Statements, the adoption of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" in the quarter ended December 31, 1997 is not expected to have any impact on the Company's consolidated financial statements because the Company continues to be in a net loss position and, consequently, common equivalent shares from stock options and warrants are excluded as their effect is antidilutive. 29 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1997 AND 1996 AND FOR THE THREE YEARS IN THE PERIOD ENDED MARCH 31, 1997 AND INDEPENDENT AUDITORS' REPORT 30 31 INDEPENDENT AUDITORS' REPORT Board of Directors Alkermes, Inc. Cambridge, Massachusetts We have audited the accompanying consolidated balance sheets of Alkermes, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Alkermes, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP May 23, 1997 Boston, Massachusetts 31 32 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND 1996 - --------------------------------------------------------------------------------
ASSETS 1997 1996 ------------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 2,799,012 $ 445,150 Short-term investments 82,497,939 31,929,214 Prepaid expenses and other current assets 4,571,089 1,957,477 ------------- ------------ Total current assets 89,868,040 34,331,841 ------------- ------------ PROPERTY, PLANT AND EQUIPMENT: Land 225,000 225,000 Building 1,275,000 1,275,000 Furniture, fixtures and equipment 11,963,945 9,864,501 Leasehold improvements 2,183,280 2,008,193 Construction in progress 90,000 147,326 ------------- ------------ 15,737,225 13,520,020 Less accumulated depreciation and amortization (7,289,446) (5,097,882) ------------- ------------ 8,447,779 8,422,138 INVESTMENTS 5,366,291 1,372,789 ------------- ------------ OTHER ASSETS 582,732 747,377 ------------- ------------ OTHER INVESTMENTS 432,176 877,928 ------------- ------------ $ 104,697,018 $ 45,752,073 ============= ============
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 ------------- ------------- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 4,653,081 $ 3,522,178 Long-term obligations - current portion 3,547,542 2,925,756 ------------- ------------- Total current liabilities 8,200,623 6,447,934 ------------- ------------- LONG-TERM OBLIGATIONS 10,914,127 9,876,347 ------------- ------------- OTHER LONG-TERM LIABILITIES 1,430,832 915,241 ------------- ------------- DEFERRED REVENUE 5,000,000 5,000,000 ------------- ------------- COMMITMENTS SHAREHOLDERS' EQUITY: Capital stock, par value $.01 per share: authorized, 5,000,000 shares; none issued Common stock, par value $.01 per share: authorized, 40,000,000 shares; issued, 20,718,790 shares in 1997 and 15,966,942 shares in 1996 207,188 159,669 Additional paid-in capital 198,844,191 124,239,023 Receivable for warrants and deferred compensation (109,901) (317,682) Cumulative foreign currency translation adjustments (16,869) (24,354) Unrealized gain on marketable securities 71,250 502,500 Accumulated deficit (119,844,423) (101,046,605) ------------- ------------- Total shareholders' equity 79,151,436 23,512,551 ------------- ------------- $ 104,697,018 $ 45,752,073 ============= =============
32 See notes to consolidated financial statements. 33 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ------------ ------------ ------------ REVENUES: Research and development revenue under collaborative arrangements $ 15,968,317 $ 2,848,510 $ 3,049,106 Research and development revenue under collaborative arrangement with related party 1,415,313 11,182,741 9,277,371 Interest income 2,443,317 1,887,275 1,576,794 ------------ ------------ ------------ Total revenues 19,826,947 15,918,526 13,903,271 ------------ ------------ ------------ EXPENSES: Research and development 29,553,988 21,586,316 18,955,347 General and administrative 7,689,625 6,285,700 5,104,062 Interest expense 1,381,152 1,043,594 608,015 Purchase of in-process research and development -- 750,000 -- Write-down of other investment -- -- 1,140,000 ------------ ------------ ------------ Total expenses 38,624,765 29,665,610 25,807,424 ------------ ------------ ------------ NET LOSS $(18,797,818) $(13,747,084) $(11,904,153) ============ ============ ============ NET LOSS PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES $ (1.03) $ (0.93) $ (0.88) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,288,334 14,774,584 13,535,339 ============ ============ ============
See notes to consolidated financial statements. 33 34 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
RECEIVABLE CUMULATIVE FOR FOREIGN UNREALIZED ADDITIONAL WARRANTS AND CURRENCY GAIN (LOSS) ON COMMON STOCK PAID-IN DEFERRED TRANSLATION MARKETABLE SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENTS SECURITIES BALANCE, APRIL 1, 1994 13,520,091 $135,201 $ 109,498,650 $(2,019,775) $(14,451) $(330,000) Issuance of common stock, April 1994 through March 1995 51,747 517 39,228 -- -- -- Warrant exchange and amortization of receivable for warrants -- -- (354,090) 841,719 -- -- Compensation relating to grant of stock options and awards made -- -- 103,320 (103,320) -- -- Amortization of compensation relating to grant of stock options and awards made -- -- (137,937) 469,058 -- -- Carrying value adjustments -- -- -- -- -- 330,000 Cumulative foreign currency translation -- -- -- -- 4,150 -- adjustments Net loss for year -- -- -- -- -- -- ---------- -------- ------------- ----------- -------- --------- BALANCE, MARCH 31, 1995 13,571,838 135,718 109,149,171 (812,318) (10,301) -- Issuance of common stock, April 1995 through March 1996, net of issuance costs of $1,281,445 2,395,104 23,951 15,002,862 -- -- -- Amortization of receivable for warrants -- -- -- 402,259 -- -- Amortization of compensation relating to grant of stock options and awards made -- -- 86,990 92,377 -- -- Unrealized gain on marketable securities -- -- -- -- -- 502,500 Cumulative foreign currency translation -- -- -- -- (14,053) -- adjustments Net loss for year -- -- -- -- -- -- ---------- -------- ------------- ----------- -------- --------- BALANCE, MARCH 31, 1996 15,966,942 159,669 124,239,023 (317,682) (24,354) 502,500
ACCUMULATED DEFICIT TOTAL BALANCE, APRIL 1, 1994 $ (75,395,368) $ 31,874,257 Issuance of common stock, April 1994 through March 1995 -- 39,745 Warrant exchange and amortization of receivable for warrants -- 487,629 Compensation relating to grant of stock options and awards made -- -- Amortization of compensation relating to grant of stock options and awards made -- 331,121 Carrying value adjustments -- 330,000 Cumulative foreign currency translation -- 4,150 adjustments Net loss for year (11,904,153) (11,904,153) ------------- ------------ BALANCE, MARCH 31, 1995 (87,299,521) 21,162,749 Issuance of common stock, April 1995 through March 1996, net of issuance costs of $1,281,445 -- 15,026,813 Amortization of receivable for warrants -- 402,259 Amortization of compensation relating to grant of stock options and awards made -- 179,367 Unrealized gain on marketable securities -- 502,500 Cumulative foreign currency translation -- (14,053) adjustments Net loss for year (13,747,084) (13,747,084) ------------- ------------ BALANCE, MARCH 31, 1996 (101,046,605) 23,512,551
(Continued) 34 35 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
RECEIVABLE CUMULATIVE FOR FOREIGN UNREALIZED ADDITIONAL WARRANTS AND CURRENCY GAIN (LOSS) ON COMMON STOCK PAID-IN DEFERRED TRANSLATION MARKETABLE SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENTS SECURITIES BALANCE, MARCH 31, 1996 (CARRIED FORWARD) 15,966,942 159,669 124,239,023 (317,682) (24,354) 502,500 Issuance of common stock, April 1996 through March 1997, net of issuance costs of $390,705 4,751,848 47,519 74,605,168 -- -- -- Amortization of receivable for warrants -- -- -- 34,687 -- -- Amortization of compensation relating to grant of stock options and awards made -- -- -- 173,094 -- -- Unrealized loss on marketable securities -- -- -- -- -- (431,250) Cumulative foreign currency translation -- -- -- -- 7,485 -- adjustments Net loss for year -- -- -- -- -- -- ---------- -------- ------------ --------- -------- --------- BALANCE, MARCH 31, 1997 20,718,790 $207,188 $198,844,191 $(109,901) $(16,869) $ 71,250 ========== ======== ============ ========= ======== =========
ACCUMULATED DEFICIT TOTAL BALANCE, MARCH 31, 1996 (CARRIED FORWARD) (101,046,605) 23,512,551 Issuance of common stock, April 1996 through March 1997, net of issuance costs of $390,705 -- 74,652,687 Amortization of receivable for warrants -- 34,687 Amortization of compensation relating to grant of stock options and awards made -- 173,094 Unrealized loss on marketable securities -- (431,250) Cumulative foreign currency translation -- 7,485 adjustments Net loss for year (18,797,818) (18,797,818) ------------- ------------ BALANCE, MARCH 31, 1997 $(119,844,423) $ 79,151,436 ============= ============
See notes to consolidated financial statements. (Concluded) 35 36 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(18,797,818) $(13,747,084) $(11,904,153) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 2,358,843 1,770,242 1,426,068 Amortization of amounts receivable for warrants and compensation relating to grant of stock options and awards made 207,781 581,626 818,750 Adjustments to other investments 14,502 101,742 1,474,934 Changes in assets and liabilities: Prepaid expenses and other current assets (2,617,365) 830,500 26,049 Accounts payable and accrued expenses 1,143,447 960,670 256,067 Deferred revenue from Alkermes Clinical Partners, L.P. -- (1,585,000) (1,215,000) Other long-term liabilities 515,591 540,406 61,611 Deferred revenue -- 5,000,000 -- ------------ ------------ ------------ Net cash used by operating activities (17,175,019) (5,546,898) (9,055,674) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment, net (2,243,476) (5,606,737) (629,935) (Purchases) sales of short-term investments, net (50,568,725) (11,665,073) 5,031,130 (Purchases) sales of investments, net (3,993,502) 2,994,437 1,133,969 Other assets 10,500 (209,500) 20,500 Investment in Alkermes Clinical Partners, L.P. -- (2,122,463) (126,959) Repayment of loan to Alkermes Clinical Partners, L.P. -- 4,735,000 -- ------------ ------------ ------------ Net cash (used by) provided by investing activities (56,795,203) (11,874,336) 5,428,705 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net 74,652,687 15,026,813 39,745 Proceeds from issuance of long-term debt 5,000,000 4,500,000 4,500,000 Payment of long-term obligations (3,338,054) (2,733,061) (2,479,359) ------------ ------------ ------------ Net cash provided by financing activities 76,314,633 16,793,752 2,060,386 ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 9,451 (13,995) 619 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,353,862 (641,477) (1,565,964) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 445,150 1,086,627 2,652,591 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,799,012 $ 445,150 $ 1,086,627 ============ ============ ============ SUPPLEMENTARY INFORMATION - Interest paid $ 788,102 $ 492,731 $ 568,198 ============ ============ ============
See notes to consolidated financial statements. 36 37 ALKERMES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- 1. FORMATION OF THE COMPANY Alkermes, Inc. (the "Company") was incorporated in July 1987 and is a leader in the development of products based on sophisticated drug delivery technologies. Alkermes' focus is on two important drug delivery opportunities: (i) controlled, sustained release of injectable drugs lasting several days to several weeks, utilizing its ProLease(R) and Medisorb(R) technologies; and (ii) the delivery of drugs into the brain past the blood-brain barrier, utilizing RMP-7(TM) technology. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Alkermes, Inc. and its wholly owned subsidiaries, Alkermes Controlled Therapeutics, Inc. ("ACTI"), Alkermes Controlled Therapeutics, Inc. II ("ACT II") (see Note 3), Alkermes Investments, Inc., Alkermes Development Corporation II ("ADC II") and Alkermes Europe, Ltd. ADC II serves as the one percent general partner of Alkermes Clinical Partners, L.P. ("Clinical Partners"), a limited partnership engaged in a research and development project with the Company (see Note 7). ADC II's investment in Clinical Partners is accounted for under the equity method of accounting. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. The carrying amounts of cash, cash equivalents, accounts payable and accrued expenses approximate fair value because of their short-term nature. Marketable equity securities are recorded in the consolidated financial statements at amortized cost which approximates fair value. The carrying amounts of the Company's debt instruments approximate fair value. NET LOSS PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES - Net loss per share is computed using the weighted average number of common shares outstanding during the period. RESEARCH AND DEVELOPMENT REVENUES - Research and development revenues are recorded as services are performed. Revenue earned upon the attainment of research and development milestones is recorded when achieved. RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses are charged to operations as incurred. INCOME TAXES - The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred tax assets and liabilities relating to the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements and tax returns (see Note 6). 37 38 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS - Cash equivalents, with purchased maturities of three months or less, consist of money market accounts. INVESTMENTS - Securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost and are classified as "held-to-maturity." Short-term investments and investments consist of U.S. Treasury and other government securities which are classified as "held-to-maturity" and reported at amortized cost. Short-term investments and investments have maturity dates within one year of the balance sheet date. Investments classified as long-term include securities held as collateral. The carrying value of all investments approximated market value at March 31, 1997 and 1996. Included in other investments is an investment in Cortex Pharmaceutical Inc.'s common stock, which is classified as "available-for-sale" and reported at fair market value. During the year ended March 31, 1995, the Company recorded a charge to operations of $1,140,000 due to other than temporary reductions in the market value of such investment. Other investments also include ADC II's investment in Clinical Partners. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives of the assets: buildings - 25 years; furniture, fixtures and equipment - 3 to 5 years; or, in the case of leasehold improvements and capital leases, over the lease terms - 3 to 10 years. DEFERRED REVENUE - LONG-TERM - During fiscal 1996, the Company received a $5,000,000 prepayment of royalties under a collaborative agreement. This amount has been recorded as deferred revenue at March 31, 1997 and 1996 and accrues interest (included in other long-term liabilities) at a rate (6.15625% at March 31, 1997) equal to .20% above the one-year LIBOR rate. LICENSE AGREEMENTS AND PURCHASED PATENTS - License agreements and purchased patents, included in other assets, are amortized on a straight-line basis over a period of five years. RECEIVABLE FOR WARRANTS AND DEFERRED COMPENSATION - Receivable for warrants is comprised of amounts receivable related to warrants issued in connection with the capitalization of Clinical Partners and was amortized as revenues were earned from Clinical Partners. Deferred compensation is related to both the Company's 1991 Restricted Common Stock Award Plan and compensatory stock options and is amortized over vesting periods ranging from one to five years. NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. The Company adopted SFAS No. 121 during fiscal 1997. The adoption did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. 38 39 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) - In fiscal 1997, the Company also implemented the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company continues to account for its stock-based transactions with employees in accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and will provide pro forma disclosures of net loss and net loss per share as if the fair value basis method prescribed by SFAS No. 123 had been applied in measuring employee compensation expense (see Note 10). In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," in which the Company is required to adopt in the quarter ending December 31, 1997. SFAS No. 128 requires companies to change the method currently used to compute earnings per share and to restate all prior periods for comparability. The adoption of SFAS No. 128 is not expected to have any impact on the Company's consolidated financial statements because the Company continues to be in a net loss position and, consequently, common equivalent shares from stock options and warrants are excluded as their effect is antidilutive. 3. ACQUISITION OF CERTAIN ASSETS AND TECHNOLOGY On March 8, 1996, ACT II acquired certain assets and technology owned or used by Medisorb Technologies International L.P., a leader in the development of injectable controlled release drug delivery technologies for the pharmaceutical industry. The assets acquired included a large scale pharmaceutical production facility and equipment. The Company paid $4,000,000 in cash for the assets and technology. A nonrecurring charge totaling $750,000 for technology purchased but not yet commercially viable was recorded by the Company at the acquisition date. This charge represents that portion of the purchase price of the acquired technology that was allocated to research and development in-process. 4. SHAREHOLDERS' EQUITY In September and October 1995, the Company completed an underwritten public offering of 2,300,000 shares of its common stock at $7.00 per share. Net proceeds to the Company were approximately $14,800,000. In May 1996, the Company completed a direct public offering of 2,300,000 shares of its common stock at $10.00 per share. Net proceeds to the Company were approximately $22,900,000. In March 1997, the Company completed a private placement of 2,000,000 shares of its common stock at $25.00 per share. Net proceeds to the Company were approximately $49,700,000. 39 40 5. LONG-TERM OBLIGATIONS Long-term obligations at March 31 consist of:
1997 1996 Notes payable to a bank bearing interest at fixed rates (8.00%-8.54%), payable in monthly installments, maturing 1997 through 2001 $ 6,436,903 $ 3,246,427 Notes payable to a bank bearing interest at fixed rates (6.35%-7.96%), payable in quarterly installments of $375,000, maturing in 2000 4,500,000 6,000,000 Note payable to corporate partner bearing interest at the prime rate (8.50% at March 31, 1997), maturing in 2000 3,500,000 3,500,000 Other 24,766 55,676 ----------- ----------- 14,461,669 12,802,103 Less current portion 3,547,542 2,925,756 ----------- ----------- $10,914,127 $ 9,876,347 =========== ===========
The first bank loan is secured by a building and real property pursuant to a mortgage and certain of the Company's equipment pursuant to security agreements. The loan is also secured by cash collateral (included in long-term investments at March 31, 1997) having a minimum market value of the lesser of $1,000,000 or the outstanding principal amount of the loan. Under the terms of the loan agreement, the Company is required to maintain a minimum unencumbered balance of cash and permitted investments and a minimum ratio of unencumbered cash and permitted investments to indebtedness. The second bank loan agreement requires the Company to maintain a minimum net worth, a maximum ratio of total liabilities to net worth, a minimum current ratio and a minimum unencumbered balance of cash and permitted investments. Upon the breach of any of these financial covenants or the occurrence of any other event of default under the loan agreement, the Company would be required to deposit an amount equal to the then outstanding principal balance of the loan plus three months' interest into a restricted account at the bank. Under the terms of the loan agreement, the bank would have the right to liquidate such account and apply the proceeds to repayment of the loan if the Company's unencumbered cash and investment balance falls below $5,000,000. In January 1995, the Company borrowed $3,500,000 from a corporate partner. The principal amount of the loan, together with interest, is payable in the Company's common stock or cash, at the Company's option. 40 41 5. LONG-TERM OBLIGATIONS (CONTINUED) At March 31, 1997, the maturities of the long-term obligations are as follows:
NOTES PAYABLE AND OTHER 1998 $3,547,542 1999 2,805,794 2000 6,300,000 2001 1,225,000 2002 583,333 ----------- $14,461,669 ===========
6. INCOME TAXES At March 31, 1997, the Company has approximately $53,522,000 of net operating loss ("NOL") carryforwards for U.S. federal income tax purposes and approximately $3,802,000 of research and development tax credits available to offset future federal income tax, subject to limitations for alternative minimum tax. The NOL and research and development credit carryforwards are subject to examination by the tax authorities and expire in various years from 2002 through 2012. The components of the net deferred income tax assets at March 31 are as follows:
1997 1996 Acquired technology $884,000 $884,000 Capitalized research and development expenses, net of amortization 14,535,000 12,146,000 U.S. NOL carryforwards 21,495,000 15,557,000 Tax credit carryforwards 4,840,000 3,491,000 Alkermes Europe NOL carryforward 2,152,000 1,373,000 Other 1,070,000 709,000 Less valuation allowance (44,976,000) (34,160,000) ----------- ----------- $ - $ - =========== ===========
The valuation allowance has been provided because of the uncertainty of realizing the future benefits of the net deferred income tax assets. In fiscal 1996, the valuation allowance increased by $5,241,000. The ACTI NOL carryforwards and ACTI research and development credit carryforwards of approximately $4,780,000 and $790,000, respectively, acquired from Enzytech, Inc. are only available to offset future taxable income of ACTI. 41 42 7. RELATED-PARTY TRANSACTIONS On April 10, 1992, the Company and Clinical Partners, a limited partnership of which ADC II is the general partner, sold in a private placement (i) 920 Class A units, each unit (a "Class A Unit") consisting of one Class A limited partnership interest in Clinical Partners, a 1992 warrant (a "1992 Warrant") to purchase 2,800 shares of the Company's common stock and a 1995 warrant (a "1995 Warrant") to purchase 300 shares of the Company's common stock; and (ii) one Class B unit (the "Class B Unit"), consisting of one Class B limited partnership interest in Clinical Partners, a 1992 warrant (the "Class B 1992 Warrant") to purchase 5,600 shares of the Company's common stock and a 1995 warrant (the "Class B 1995 Warrant") to purchase 600 shares of the Company's common stock. The purchase price was $50,000 for each Class A Unit and $100,000 for the Class B Unit, the unpaid portions of which were evidenced by investor notes which were payable in annual installments through April 15, 1995. In connection with the offering, the Company also issued, to an affiliate of the sales agent for the Class A Units, warrants (the "Incentive Warrants") to purchase 77,100 shares of the Company's common stock and issued, to another affiliate of the sales agent, a warrant (the "Affiliate Warrant") to purchase 13,300 shares of the Company's common stock. The net proceeds of the offering were used primarily to fund the further development and clinical testing of a family of molecules designated by the Company as Receptor-Mediated Permeabilizers(TM) ("RMPs"(TM)) for human pharmaceutical use in the United States and Canada. Proprietary RMP(TM) molecules developed by the Company may enhance the passage of small drug molecules from the bloodstream into the brain. Pursuant to the Product Development Agreement entered into in March 1992, the Company licensed to Clinical Partners certain of its technology relating to RMPs. Research and development of RMPs is being conducted by the Company for Clinical Partners pursuant to the Product Development Agreement. The Company was reimbursed by Clinical Partners for its actual costs incurred in conducting such research and development and also received a management fee of 10% of such costs. Such funding ended during the quarter ended June 30, 1996. Such funding was not sufficient to complete clinical trials and seek regulatory approval of RMP-7. Since the completion of funding from Clinical Partners, Alkermes has used its own resources to develop RMP-7, but may be forced to seek alternative sources of funding, including additional collaborators. The Company is required to fund the development of RMP-7 to maintain the Purchase Option as defined below. Clinical Partners has granted the Company an exclusive interim license to manufacture and market RMPs for human pharmaceutical use in the United States and Canada. Upon the first marketing approval of an RMP product by the United States Food and Drug Administration, the Company is obligated to make a payment to Clinical Partners equal to 20% of the aggregate capital contributions (approximately $8,300,000) of all partners (the "milestone payment"). Additionally, the Company will make royalty payments to Clinical Partners equal to 12% of United States and Canadian revenues and 10% of European revenues, in certain circumstances, from any sales of RMPs by the Company. The interim license will terminate if the Company does not exercise the Purchase Option. 42 43 7. RELATED-PARTY TRANSACTIONS (CONTINUED) The 1992 Warrants, the 1995 Warrants (collectively, the "Class A Warrants"), the Class B 1992 Warrant and the Class B 1995 Warrant (collectively, the "Class B Warrants") were issued by the Company in consideration of the grant by each limited partner to the Company of an option to purchase (the "Purchase Option"), under certain circumstances, the limited partnership interest in Clinical Partners held by such limited partner. Upon exercise of such purchase option, each Class A limited partner will be entitled to receive an initial payment, at the Company's option, of $40,000 in cash or approximately $42,100 in the Company's common stock, as well as certain additional payments (which are subject to certain limitations) based on the Company's net revenues from sales of RMPs in the United States, Canada and Europe as follows: - 12% of net revenues to the Company on sales of RMPs in the United States and Canada and 10% of net revenues to the Company on sales of RMPs in Europe, until each Class A limited partner has received an aggregate of $400,000 per interest from the initial payment and the royalty stream; thereafter, - 9% of net revenues to the Company on sales of RMPs in the United States, Canada and Europe, until each Class A limited partner has received an aggregate of $500,000 per interest from the initial payment and the royalty stream; and thereafter, - 4% of net revenues to the Company on sales of RMPs in the United States, Canada and Europe. Royalties on sales of RMPs in Europe will be payable only to the extent necessary to pay projected distributions in any year. If royalties on sales of RMPs in the United States and Canada in any year equal or exceed the projected distributions for such year, no royalties on European sales will be paid in that year. The 1992 Warrants and the Class B 1992 Warrant may be exercised during the period beginning on August 1, 1994 and ending on July 31, 1999, and upon the payment of a warrant exercise price per share of $20.03. The 1995 Warrants and the Class B 1995 Warrant may be exercised during the period beginning on April 15, 1995 and ending on April 14, 2000, and upon the payment of a warrant exercise price of $3.54. The Company completed an exchange offer on January 27, 1995 with respect to the warrants issued in 1992 in connection with the formation of Clinical Partners. Pursuant to the exchange offer, Class A limited partners had the option to exchange both their Class A 1992 Warrants and Class A 1995 Warrants for a new 1994 Class A Warrant to purchase, at $5.00 per share, and during the period beginning on April 1, 1995 and ending on March 31, 2000, 1,700 shares of the Company's common stock for every 3,100 shares of common stock issuable upon exercise of the Class A 1992 Warrant and Class A 1995 Warrant exchanged therefor. The Class B limited partner had the option to exchange both the Class B 1992 and Class B 1995 Warrants for a new 1994 Class B Warrant to purchase 3,400 shares of the Company's common stock at $5.00 per share. The 1994 Class B Warrant is exercisable during the same period as the 1994 Class A Warrants. 43 44 7. RELATED-PARTY TRANSACTIONS (CONTINUED) Of the Class A 1992 Warrants and Class A 1995 Warrants originally issued, approximately 92% were exchanged in response to the exchange offer. The Class B 1992 Warrant and the Class B 1995 Warrant, the Affiliate Warrant and the Incentive Warrants were also exchanged in the exchange offer for new warrants entitling the holders thereof to purchase an aggregate of 3,400, 7,293 and 42,280 shares of common stock, respectively. The exchange offer resulted in a decrease of 1,225,927 shares of common stock which are issuable upon exercise of the Company's outstanding warrants. In order to fund organizational and offering costs, the Company loaned Clinical Partners, at the closing of the private placement, $4,735,000. The loan was secured by a pledge of the investor notes, bore interest at 7.5% per annum, payable annually in arrears, and was paid in April 1995. In February and April 1996, the Company purchased from Clinical Partners an aggregate of 74 Class A Units that were owned by investors who defaulted on their payment obligations. The total purchase price for such Units was the aggregate amount of unpaid installments, approximately $2,052,000. The Company wrote down its investment in these Class A Units ratably over the period February through June 1996 as Clinical Partners used these and other funds to complete its obligation to the Company to fund research and development of RMP-7. 8. RESEARCH AND DEVELOPMENT ARRANGEMENTS The Company has entered into several collaborative agreements with corporate partners ("partners") to provide research and development activities relating to the partners' products. In connection with these agreements, the Company has granted certain licenses or the right to obtain certain licenses to technology developed by the Company. In return for such grants, the Company will receive certain payments upon the achievement of certain milestones and will receive royalties on sales of products developed under the terms of the agreements. In addition to research and development funding, during fiscal 1997 the Company received $900,000 representing three milestone payments under these agreements. Additionally, the Company may obtain the right to manufacture and supply products developed under certain of these agreements. 9. COMMITMENTS LEASE COMMITMENTS - The Company leases certain of its offices and research laboratories under operating leases with initial terms of one to ten years expiring between 1998 and 2008. The leases contain provisions for extensions for up to ten years. Total annual future minimum lease payments are as follows: 1998 $2,684,000 1999 2,016,000 2000 2,035,000 2001 1,497,000 2002 1,175,000 Thereafter 1,789,000
Rent expense charged to operations was approximately $3,342,000, $2,439,000 and $2,589,000 for the years ended March 31, 1997, 1996 and 1995, respectively. 44 45 9. COMMITMENTS (CONTINUED) LEASE COMMITMENTS (CONTINUED) - Additionally, a U.S. Treasury Bill with a total principal amount of $257,000 is being held by a bank in the Company's name as a security deposit on the leases and, accordingly, has been classified as a long-term investment at March 31, 1997. LICENSE AND ROYALTY COMMITMENTS - The Company has entered into license agreements with certain corporations and universities which require the Company to pay annual license fees and royalties based on a percentage of revenues from sales of certain products and royalties from sublicenses granted by the Company. Amounts paid under these agreements were approximately $92,000, $127,000 and $117,000 for the years ended March 31, 1997, 1996 and 1995, respectively. 10. STOCK OPTIONS AND AWARDS During fiscal 1996, the Company adopted the Stock Option Plan for Non-Employee Directors (the "Director Plan"), which provides for the granting of stock options to non-employee directors of the Company. The Company's Amended and Restated 1989 Non-Qualified Stock Option Plan (the "1989 Plan"), Amended and Restated 1990 Omnibus Stock Option Plan, as amended (the "1990 Plan"), and 1992 Non-Qualified Stock Option Plan (the "1992 Plan") provide for the granting of stock options to employees, officers and directors of, and consultants to, the Company. Nonqualified options to purchase up to 225,000 shares of the Company's common stock may be granted under the 1989 Plan, nonqualified and incentive options to purchase up to 1,750,000 shares of the Company's common stock may be granted under the 1990 Plan, nonqualified options to purchase up to 1,000,000 shares of the Company's common stock may be granted under the 1992 Plan and nonqualified options to purchase up to 150,000 shares of the Company's common stock may be granted under the Director Plan. Unless sooner terminated, the 1989 Plan will terminate on July 18, 1999, the 1990 Plan will terminate on September 19, 2000, the 1992 Plan will terminate on November 11, 2002 and the Director Plan will terminate on March 18, 2006. The Compensation Committee of the Board of Directors administers the 1989 Plan, the 1990 Plan and the 1992 Plan and determines who is to receive options and the exercise price and terms of such options. The Board of Directors administers the Director Plan. The option exercise price of stock options granted under the 1989 Plan, the 1990 Plan and the Director Plan may not be less than 100% of the fair market value of the common stock on the date of grant. Under the terms of the 1992 Plan, the option exercise price may be below the fair market value, but not below par value, of the underlying stock at the time the option is granted. The 1989 Plan, the 1990 Plan and the 1992 Plan also provide that the Compensation Committee may grant Limited Stock Appreciation Rights ("LSARs") with respect to all or any portion of the shares covered by stock options granted to directors and executive officers. LSARs may be granted with the grant of a nonqualified stock option or at any time during the term of such option but may only be granted with the grant of an incentive stock option. The grant of LSARs will not be effective until six months after their date of grant. Upon the occurrence of certain triggering events, the options with respect to which LSARs have been granted shall become immediately exercisable and the persons who have received LSARs will automatically receive a cash payment in lieu of shares. Through March 31, 1997, LSARs have been granted under the 1990 Plan with respect to options to purchase 425,750 shares. 45 46 10. STOCK OPTIONS AND AWARDS (CONTINUED) The Company has also adopted the 1991 Restricted Common Stock Award Plan (the "Award Plan"). The Award Plan provides for the award to certain eligible employees, officers and directors of, and consultants to, the Company of up to a maximum of 250,000 shares of common stock. The Award Plan is administered by the Compensation Committee. Awards generally vest over five years. Through March 31, 1997, 1996 and 1995, an aggregate of 77,000, 77,000 and 77,000 shares of common stock , respectively, have been awarded under the Award Plan, of which 2,400, 13,200 and 7,900 shares ceased to be subject to forfeiture and were issued during the years ended March 31, 1997, 1996 and 1995, respectively. In addition, zero, 5,000 and 6,900 shares were canceled during the years ended March 31, 1997, 1996 and 1995, respectively. The Award Plan will terminate on November 15, 2001, unless sooner terminated by the Board of Directors. The Company has reserved a total of 2,376,852 shares of common stock for issuance under the five plans. The Company has elected to continue to follow APB No. 25 for accounting for its employee stock options. Under APB No. 25, no compensation expense is recognized with respect to the grant of any stock options in which the exercise price of the Company's employee stock options equals the fair market price of the underlying stock on the date the option is granted. Pro forma information regarding net loss and net loss per share in fiscal 1997 and 1996 has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123. The resulting effect on pro forma net loss and net loss per share disclosed below for fiscal 1997 and 1996 is not likely to be representative of the effects on net loss and net loss per share on a pro forma basis in future years, because fiscal 1996 and 1997 pro forma results include the impact of only one and two years, respectively, of grants and related vesting. The fair value of options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: risk-free interest rates ranging from 6.60% - 6.84% for fiscal 1997 and 5.96% - 6.17% for fiscal 1996; dividend yields of 0% in fiscal 1997 and 1996; volatility factors of the expected market price of the Company's common stock of 67% in fiscal 1997 and 65% in fiscal 1996; and a weighted average expected life of 2.5 years in fiscal 1997 and 1996. Using the Black-Scholes option valuation model, the weighted average fair value of options granted in fiscal 1997 and 1996 was $8.00 and $2.96, respectively. For purposes of pro forma disclosures, the estimated fair value of options is amortized to pro forma expense over the vesting period of the option. Pro forma information for the years ended March 31 is as follows:
1997 1996 Net loss - as reported $(18,797,818) $(13,747,084) Net loss - pro forma $(19,971,317) $(13,972,561) Net loss per share - as reported $ (1.03) $ (0.93) Net loss per share - pro forma $ (1.09) $ (0.95)
46 47 10. STOCK OPTIONS AND AWARDS (CONTINUED) A summary of option activity under the 1989, 1990, 1992 and Director Plans is as follows:
EXERCISE WEIGHTED NUMBER PRICE AVERAGE OF PER EXERCISE SHARES SHARE PRICE Balance, April 1, 1994 1,328,501 $ .56 - $21.00 $ 7.22 Granted 1,210,765 2.01 - 7.00 3.53 Exercised (43,847) .56 - 1.00 .90 Canceled (1,038,126) .60 - 21.00 8.98 --------- Balance, March 31, 1995 1,457,293 .56 - 14.875 3.09 Granted 445,450 2.81 - 10.31 5.73 Exercised (60,199) .56 - 3.69 1.63 Canceled (106,540) 1.00 - 9.13 3.80 --------- Balance, March 31, 1996 1,736,004 .56 - 14.875 3.78 Granted 449,650 9.31 - 28.75 14.53 Exercised (142,575) .56 - 14.875 3.43 Canceled (70,670) 1.00 - 14.88 4.90 --------- Balance, March 31, 1997 1,972,409 $ .56 - $28.75 $ 6.22 ========= ============== =======
During fiscal 1995, a significant number of outstanding options were canceled in exchange for the grant of fewer options with an exercise price equal to the fair market value of the common stock on the date of grant of $3.69 per share. These options vest over three years. Other options granted generally vest over four years, except options granted under the Director Plan which vest after six months. The following table summarizes information concerning outstanding and exercisable options as of March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE $0.56-$3.50 590,026 6.38 $2.09 363,032 $1.43 3.63-4.00 676,020 7.28 3.78 406,817 3.77 4.06-14.31 587,613 9.12 11.01 104,848 8.25 14.44-28.75 118,750 9.27 16.81 10,000 14.88 ------- ------- 1,972,409 7.68 6.22 884,697 3.46 ========= =======
47 48 10. STOCK OPTIONS AND AWARDS (CONTINUED) For certain stock options granted and awards made, the Company recognizes, as compensation expense, the excess of the intrinsic value for accounting purposes of the common stock issuable upon exercise of such stock options over the aggregate exercise price thereof and, in connection with stock awards, the fair market value of the Company's common stock on the date of the award. This compensation expense is amortized ratably over the vesting period of each stock option and stock award. For the years ended March 31, 1997, 1996 and 1995, compensation expense of $173,094, $179,367 and $331,121, respectively, was recorded and will aggregate a maximum of $109,901 over the remaining terms of such stock options granted and stock awards made. * * * * * * 48 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors. The information with respect to directors required by this item is incorporated herein by reference to pages 2, 3, 12 and 18-20 of the Registrant's Proxy Statement dated June 27, 1997 for the Registrant's annual shareholders' meeting to be held on July 25, 1997 (the "1997 Proxy Statement"). (b) Executive Officers. The information with respect to executive officers required by this item is set forth in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated herein by reference to pages 7 through 17 of the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to pages 18 through 20 of the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to page 20 of the 1997 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of the Report: (1) Consolidated Financial Statements of the Registrant and Independent Auditors' Report thereon: Consolidated Balance Sheets, March 31, 1997 and 1996. 49 50 Consolidated Statements of Operations for the Years Ended March 31, 1997, 1996 and 1995. Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. (2) Financial Statement Schedules: Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto. (3) Exhibits Exhibit No. - ----------- 3.1(a) Second Amended and Restated Articles of Incorporation of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(a) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(b) Statement of Change of Registered Office of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(b) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(c) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on November 1, 1991. (Incorporated by reference to Exhibit 4.1(c) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1991.) 3.1(d) Amendment to the Second Amended and Restated Articles of Incorporation, as amended, as filed with the Pennsylvania Secretary of State on February 12, 1993. (Incorporated by reference to Exhibit 4.1(d) to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1992.) 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of July 1, 1994. (Incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1994.) 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).) 50 51 4.2 Form of 1992 Warrant to purchase 2,800 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.3 Form of 1995 Warrant to purchase 300 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.4 Form of Global Warrant Certificate for 1994 Class A Warrants. (Incorporated by reference to Exhibit 4.6 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.5 Form of Global Warrant Certificate for 1994 Class B Warrants. (Incorporated by reference to Exhibit 4.7 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.6 Form of Global Warrant Certificate for 1994 Affiliate Warrants. (Incorporated by referenced to Exhibit 4.8 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.7 Form of Global Warrant Certificate for 1994 Incentive Warrants. (Incorporated by reference to Exhibit 4.9 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.8 Warrant Agreement, dated as of November 18, 1994, by and between the Registrant and The First National Bank of Boston. (Incorporated by reference to Exhibit 4.10 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.9 Stock Purchase Agreement, dated as of February 13, 1997, between the Registrant and ALZA Corporation. (Incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-19955).) 10.1 Amended and Restated 1989 Non-Qualified Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4.2(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-44752).)+ 10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as amended.+ 10.3 1991 Restricted Common Stock Award Plan. (Incorporated by reference to Exhibit 4.2(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-44752).)+ 10.4 1992 Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)+ 51 52 10.5 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)+ 10.6 Lease, dated as of September 18, 1991, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.6(a) First Amendment of Lease, dated September 18, 1992, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33- 54932).) 10.7 Lease, dated as of March 16, 1990, between Forest City 64 Sidney Street, Inc. and Enzytech, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.8 Lease, dated July 26, 1993, between the Massachusetts Institute of Technology and Alkermes, Inc. 10.8(a) First Amendment of Lease, dated June 9, 1997, between the Massachusetts Institute of Technology and Alkermes, Inc. 10.9 Product Development Agreement, dated as of March 6, 1992, between the Partnership and the Registrant. (Incorporated by reference to Exhibit 10.21 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.10 Purchase Agreement, dated as of March 6, 1992, by and among the Registrant and each of the Limited Partners, from time to time, of the Partnership. (Incorporated by reference to Exhibit 10.22 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.11 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992. (Incorporated by reference to Exhibit 10.23 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.11(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992. (Incorporated by reference to Exhibit 10.22(a) to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.11(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993. (Incorporated by reference to Exhibit 10.22(b) to the Registrant's Registration Statement on Form S-3, as amended (File No. 33-64964).) 10.12 Class A Note of Alkermes Development Corporation II, dated April 10, 1992, to PaineWebber Development Corporation in the amount of $100.00. (Incorporated 52 53 by reference to Exhibit 10.24 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.13 License Agreement, dated February 5, 1990, between Enzytech, Inc. and Massachusetts Institute of Technology. (Incorporated by reference to Exhibit 10.36 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)* 10.14 Development and License Agreement, dated February 4, 1992, between Enzytech, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.38 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)* 10.14(a) Amendment to Development and License Agreement, dated July 26, 1995, between Alkermes Controlled Therapeutics, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995.)** 10.15 Prepaid Royalty Agreement, dated July 26, 1995, between Alkermes Controlled Therapeutics, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995.)** 10.16 Development and License Agreement, dated as of August 1, 1996, by and between The R.W. Johnson Pharmaceutical Research Institute, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 8-K dated November 14, 1996.)*** 10.17 Supply and License Agreement dated as of August 1, 1996, by and between The R.W. Johnson Pharmaceutical Research Institute, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 8-K dated November 14, 1996.)*** 10.18 Collaborative Development Agreement, dated as of January 9, 1995, by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.27 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.)**** 10.19 Note Purchase Agreement, dated as of January 9, 1995, by the between the Registrant and Genentech, Inc. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.20 Convertible Promissory Note of the Registrant dated January 31, 1995. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.21 License Agreement, dated as of November 13, 1996, by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to 53 54 Exhibit 10.3 to the Registrant's Report on Form 8-K dated November 14, 1996.)*** 10.22 Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18 to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.)# 10.22(a) First Amendment to Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18(a) to the Registrant's report on Form 10-K for the Fiscal year ended March 31, 1996.)# 10.22(b) Second Amendment to the Development Agreement, dated April 28, 1997, by and between Alkermes Controlled Therapeutics Inc. II, Janssen Pharmaceutica International and Janssen Pharmaceutica Inc. 10.23 License Agreement, dated as of February 13, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (United States). (Incorporated by reference to Exhibit 10.19 to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.)# 10.24 License Agreement, dated as of February 21, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (worldwide except United States). (Incorporated by reference to Exhibit 10.20 to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.)# 10.25 Loan Agreement, dated December 30, 1993, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.33 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1993.) 10.25(a) Amendment No. 1 to Loan Agreement, dated as of December 31, 1994, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.21(a) to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.) 10.25(b) Amendment to Loan Agreement, dated as of December 29, 1995, by and among Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995.) 10.25(c) Omnibus Amendment to Loan Documents, dated as of July 26, 1996, among the Registrant, Alkermes Investments, Inc. and The Sumitomo Bank, Limited (as assignee of The Daiwa Bank, Limited). (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 54 55 10.26 Second Amended and Restated Note, dated July 26, 1996, by Registrant and Alkermes Investments, Inc. to The Sumitomo Bank, Limited. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 10.27 Letter Agreement, dated September 27, 1996, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutic Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.)## 10.27(a) Loan Supplement and Modification Agreement, dated as of June 2, 1997, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. 10.28 Security Agreement, dated as of September 27, 1996, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutic Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.29 Pledge Agreement, dated as of September 27, 1996, from the Registrant to Fleet National Bank. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.30 Mortgage and Security Agreement, dated as of September 27, 1996, from Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.6 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.31 Environmental Indemnity Agreement, dated as of September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.7 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.32 Promissory Note of the Registrant, dated December 23, 1994, to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.20 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.32(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.33 Promissory Note, dated December 19, 1995, by Registrant to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on From 10-Q for the quarter ended December 31, 1995.) 10.33(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. 55 56 (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.34 Promissory Note, dated September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.35 Promissory Note, dated June 2, 1997, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. 10.36 Employment Agreement, entered into as of February 7, 1991, between Richard F. Pops and the Registrant. (Incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).)+ 10.37 Employment Agreement, entered into as of June 13, 1994, by and between Robert A. Breyer and the Registrant. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1994.)+ 11 Statement re: computation of per share earnings. 21 Subsidiaries of the Registrant. 22 Proxy Statement dated June 27, 1997. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. * Confidential status has been granted for certain provisions thereof pursuant to a Commission Order granted January 8, 1993. Such provisions have been filed separately with the Commission. ** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 19, 1995. Such provisions have been filed separately with the Commission. *** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted April 25, 1997. Such provisions have been filed separately with the Commission. **** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted March 24, 1995. Such provisions have been filed separately with the Commission. 56 57 # Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 3, 1996. Such provisions have been filed separately with the Commission. ## Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted April 17, 1997. Such provisions have been filed separately with the Commission. + Constitutes a management contract or compensatory plan required to be filed as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K. (b) Since the beginning of the quarter ended March 31, 1997, the Registrant filed on January 3, 1997, a report on Form 8-K, dated November 14, 1996, and also filed reports on Form 8-K dated February 13, 1997 and March 31, 1997, each reporting under Item 5. UNDERTAKING For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8, Nos. 33-44752, 33-58330, 33-97468, and 333-13283. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 57 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. June 27, 1997 By: /s/ Richard F. Pops ------------------------------ Richard F. Pops Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Michael A. Wall Director and Chairman of the June 27, 1997 - --------------------------- Board Michael A. Wall /s/ Richard F. Pops Director and Chief Executive Officer June 27, 1997 - --------------------------- (Principal Executive Officer) Richard F. Pops /s/ Michael J. Landine Senior Vice President, Chief June 27, 1997 - --------------------------- Financial Officer and Michael J. Landine Treasurer (Principal Financial and Accounting Officer) /s/ Floyd Bloom Director June 27, 1997 - --------------------------- Floyd Bloom /s/ Robert A. Breyer President and Chief Operating June 27, 1997 - --------------------------- Officer and Director Robert A. Breyer /s/ John K. Clarke Director June 27, 1997 - --------------------------- John K. Clarke
58 59
/s/ Robert S. Langer Director June 27, 1997 - --------------------------- Robert S. Langer /s/ Alexander Rich Director June 27, 1997 - --------------------------- Alexander Rich /s/ Paul Schimmel Director June 27, 1997 - --------------------------- Paul Schimmel
59 60 Exhibit Index 3.1(a) Second Amended and Restated Articles of Incorporation of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(a) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(b) Statement of Change of Registered Office of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(b) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(c) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on November 1, 1991. (Incorporated by reference to Exhibit 4.1(c) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1991.) 3.1(d) Amendment to the Second Amended and Restated Articles of Incorporation, as amended, as filed with the Pennsylvania Secretary of State on February 12, 1993. (Incorporated by reference to Exhibit 4.1(d) to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1992.) 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of July 1, 1994. (Incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1994.) 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).) 4.2 Form of 1992 Warrant to purchase 2,800 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.3 Form of 1995 Warrant to purchase 300 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.4 Form of Global Warrant Certificate for 1994 Class A Warrants. (Incorporated by reference to Exhibit 4.6 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.5 Form of Global Warrant Certificate for 1994 Class B Warrants. (Incorporated by reference to Exhibit 4.7 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 61 4.6 Form of Global Warrant Certificate for 1994 Affiliate Warrants. (Incorporated by referenced to Exhibit 4.8 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.7 Form of Global Warrant Certificate for 1994 Incentive Warrants. (Incorporated by reference to Exhibit 4.9 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.8 Warrant Agreement, dated as of November 18, 1994, by and between the Registrant and The First National Bank of Boston. (Incorporated by reference to Exhibit 4.10 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.9 Stock Purchase Agreement, dated as of February 13, 1997, between the Registrant and ALZA Corporation. (Incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-19955).) 10.1 Amended and Restated 1989 Non-Qualified Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4.2(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-44752).)+ 10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as amended.+ 10.3 1991 Restricted Common Stock Award Plan. (Incorporated by reference to Exhibit 4.2(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-44752).)+ 10.4 1992 Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)+ 10.5 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)+ 10.6 Lease, dated as of September 18, 1991, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.6(a) First Amendment of Lease, dated September 18, 1992, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.7 Lease, dated as of March 16, 1990, between Forest City 64 Sidney Street, Inc. and Enzytech, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.8 Lease, dated July 26, 1993, between the Massachusetts Institute of Technology and Alkermes, Inc. 10.8(a) First Amendment of Lease, dated June 9, 1997, between the Massachusetts Institute of Technology and Alkermes, Inc. 62 10.9 Product Development Agreement, dated as of March 6, 1992, between the Partnership and the Registrant. (Incorporated by reference to Exhibit 10.21 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.10 Purchase Agreement, dated as of March 6, 1992, by and among the Registrant and each of the Limited Partners, from time to time, of the Partnership. (Incorporated by reference to Exhibit 10.22 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.11 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992. (Incorporated by reference to Exhibit 10.23 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.11(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992. (Incorporated by reference to Exhibit 10.22(a) to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.11(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993. (Incorporated by reference to Exhibit 10.22(b) to the Registrant's Registration Statement on Form S-3, as amended (File No. 33-64964).) 10.12 Class A Note of Alkermes Development Corporation II, dated April 10, 1992, to PaineWebber Development Corporation in the amount of $100.00. (Incorporated by reference to Exhibit 10.24 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.13 License Agreement, dated February 5, 1990, between Enzytech, Inc. and Massachusetts Institute of Technology. (Incorporated by reference to Exhibit 10.36 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)* 10.14 Development and License Agreement, dated February 4, 1992, between Enzytech, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.38 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)* 10.14(a) Amendment to Development and License Agreement, dated July 26, 1995, between Alkermes Controlled Therapeutics, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995.)** 10.15 Prepaid Royalty Agreement, dated July 26, 1995, between Alkermes Controlled Therapeutics, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995.)** 10.16 Development and License Agreement, dated as of August 1, 1996, by and between The R.W. Johnson Pharmaceutical Research Institute, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 8-K dated November 14, 1996.)*** 63 10.17 Supply and License Agreement dated as of August 1, 1996, by and between The R.W. Johnson Pharmaceutical Research Institute, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 8-K dated November 14, 1996.)*** 10.18 Collaborative Development Agreement, dated as of January 9, 1995, by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.27 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.)**** 10.19 Note Purchase Agreement, dated as of January 9, 1995, by the between the Registrant and Genentech, Inc. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.20 Convertible Promissory Note of the Registrant dated January 31, 1995. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.21 License Agreement, dated as of November 13, 1996, by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 8-K dated November 14, 1996.)*** 10.22 Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18 to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.)# 10.22(a) First Amendment to Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18(a) to the Registrant's report on Form 10-K for the Fiscal year ended March 31, 1996.)# 10.22(b) Second Amendment to the Development Agreement, dated April 28, 1997, by and between Alkermes Controlled Therapeutics Inc. II, Janssen Pharmaceutica International and Janssen Pharmaceutica Inc. 10.23 License Agreement, dated as of February 13, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (United States). (Incorporated by reference to Exhibit 10.19 to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.)# 10.24 License Agreement, dated as of February 21, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (worldwide except United States). (Incorporated by reference to Exhibit 10.20 to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.)# 64 10.25 Loan Agreement, dated December 30, 1993, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.33 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1993.) 10.25(a) Amendment No. 1 to Loan Agreement, dated as of December 31, 1994, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.21(a) to the Registrant's report on Form 10-K for the fiscal year ended March 31, 1996.) 10.25(b) Amendment to Loan Agreement, dated as of December 29, 1995, by and among Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995.) 10.25(c) Omnibus Amendment to Loan Documents, dated as of July 26, 1996, among the Registrant, Alkermes Investments, Inc. and The Sumitomo Bank, Limited (as assignee of The Daiwa Bank, Limited). (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 10.26 Second Amended and Restated Note, dated July 26, 1996, by Registrant and Alkermes Investments, Inc. to The Sumitomo Bank, Limited. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 10.27 Letter Agreement, dated September 27, 1996, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutic Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.)## 10.27(a) Loan Supplement and Modification Agreement, dated as of June 2, 1997, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. 10.28 Security Agreement, dated as of September 27, 1996, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutic Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.29 Pledge Agreement, dated as of September 27, 1996, from the Registrant to Fleet National Bank. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.30 Mortgage and Security Agreement, dated as of September 27, 1996, from Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.6 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.31 Environmental Indemnity Agreement, dated as of September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by 65 reference to Exhibit 10.7 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.32 Promissory Note of the Registrant, dated December 23, 1994, to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.20 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.32(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.33 Promissory Note, dated December 19, 1995, by Registrant to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on From 10-Q for the quarter ended December 31, 1995.) 10.33(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.34 Promissory Note, dated September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.35 Promissory Note, dated June 2, 1997, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. 10.36 Employment Agreement, entered into as of February 7, 1991, between Richard F. Pops and the Registrant. (Incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).)+ 10.37 Employment Agreement, entered into as of June 13, 1994, by and between Robert A. Breyer and the Registrant. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1994.)+ 11 Statement re: computation of per share earnings. 21 Subsidiaries of the Registrant. 22 Proxy Statement dated June 27, 1997. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. 66 * Confidential status has been granted for certain provisions thereof pursuant to a Commission Order granted January 8, 1993. Such provisions have been filed separately with the Commission. ** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 19, 1995. Such provisions have been filed separately with the Commission. *** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted April 25, 1997. Such provisions have been filed separately with the Commission. **** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted March 24, 1995. Such provisions have been filed separately with the Commission. # Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 3, 1996. Such provisions have been filed separately with the Commission. ## Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted April 17, 1997. Such provisions have been filed separately with the Commission. + Constitutes a management contract or compensatory plan required to be filed as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K. EX-10.2 2 AMENDED & RESTATED 1990 OMNIBUS STOCK OPITION PLAN 1 EXHIBIT 10.2 ALKERMES, INC. AMENDED AND RESTATED 1990 OMNIBUS STOCK OPTION PLAN (ADOPTED ON SEPTEMBER 19, 1990, AS AMENDED THROUGH JUNE 11, 1997) 1. OBJECTIVES The objectives of this Plan are to assist Alkermes, Inc. (the "Company") in attracting and retaining employees, officers and directors of and consultants to the Company and in promoting the identification of such persons' interests with those of the Company's shareholders. 2. DEFINITIONS "Board" shall mean the Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute or codification of the income tax laws of the United States. "Committee" shall mean the Stock Option Committee of the Board of Directors, which shall consist of at least two directors, each of whom is a disinterested person within the meaning of Rule 16b-3(c)(2)(i) under the Exchange Act. "Common Stock" shall mean the Company's Common Stock, par value $.01 per share. "Date of Grant" in relation to any option granted under this Plan shall mean the date on which, or the future date as of which, the Board or the Committee grants that option. "Eligible Person" shall mean any employee, consultant, officer or director of the Company or any Parent or Subsidiary. For the purposes of Incentive Stock Options, Eligible Persons must meet all the requirements under Section 422 of the Code. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Exercise" in respect of an option shall mean the delivery by the Optionee to the Company of (a) written notice of exercise of the option as to a specified number of Shares; (b) payment of the option exercise price for such Shares; and (c) any other statement or evidence required pursuant to Section 9 hereof. "Fair Market Value" of a Share with respect to any day shall mean (i) the average of the high and low price on such day for a share of Common Stock as reported on the principal securities 2 exchange on which shares of Common Stock are then listed or as quoted on the NASDAQ National Market System, (ii) if not so listed or quoted, the average of the closing bid and asked prices on such day as reported on NASDAQ, and (iii) if not so listed, quoted or reported, the value as determined in good faith by the Board or the Committee, as the case may be. "Incentive Stock Option" shall mean any option that, at the time of grant, meets the requirements of Section 422 of the Code and is identified as an incentive stock option. "ISO Plans" shall mean the Plan and all other incentive stock option plans under Section 422 of the Code adopted or assumed by corporations that are Qualified Employers. "NASDAQ" shall mean the National Association of Securities Dealers Automated Quotation System. "Non-Qualified Stock Option" shall mean any option granted under the Plan other than an Incentive Stock Option. "Non-Section 16 Eligible Person" shall mean an Eligible Person who is not an Officer or a director of the Company. "Officer" shall mean a person who has been designated by the Board as an officer of the Company within the meaning of Rule 16a-1(f) of the Exchange Act. "Optionee" shall mean a person holding an option granted under this Plan which has not been exercised or surrendered and has not expired. "Parent" shall mean a corporation which, at the time in question, owns at least 50% of the total combined voting power of all classes of outstanding stock of the Company (or of a corporation that has issued or assumed a stock option of the Company in a transaction to which Section 424(a) of the Code applies) and a corporation which, at such time, owns at least 50% of the total combined voting power of all classes of stock in another Parent. "Plan" means this Amended and Restated 1990 Omnibus Stock Option Plan, as amended from time to time. "Qualified Employer" shall mean the Company, any Parent or any Subsidiary. "Section 16 Eligible Person" shall mean an Eligible Person who is an Officer or a director of the Company. "Shares" shall mean shares of Common Stock of the Company for which options may be granted hereunder. "Subsidiary" shall mean a corporation in which, at the time in question, the Company (or a corporation that issued or assumed a stock option of the Company in a transaction to which Section 424(a) of the Code applies) owns at least 50% of the total combined voting power of all classes of stock 2 3 outstanding and a corporation in which, at such time, another Subsidiary owns at least 50% of the total combined voting power of all classes of stock outstanding. "Ten Percent Shareholder" shall mean an Eligible Person who owns at the Date of Grant more than 10% of the total combined voting power of all classes of stock of a Qualified Employer. 3. MAXIMUM NUMBER OF SHARES TO BE OPTIONED AND ADJUSTMENTS IN OPTIONED SHARES The maximum number of Shares for which options may be granted hereunder is 1,750,000. This number shall be adjusted if the number of outstanding shares of Common Stock of the Company is increased or reduced by split-up, reclassification, stock dividend, or the like. The number of Shares previously optioned and not theretofore delivered and the option exercise price per Share shall likewise be adjusted whenever the number of outstanding shares of Common Stock is increased or reduced by any such procedure. Shares for which options have expired or have been surrendered may again be optioned pursuant to the Plan. 4. ADMINISTRATION AND INTERPRETATION Except to the extent provided below, this Plan shall be administered by the Board. The Board may delegate responsibility for administration to the Committee. The Board, or such Committee, may make such rules and establish such procedures as it deems appropriate for the administration of the Plan. In the event of any disagreement as to the interpretation of the Plan or any rule or procedure thereunder, the decision of the Board, or such Committee, shall be final and binding upon all persons in interest. Members of the Board who are eligible to participate in or have been granted options under the Plan may vote on matters affecting administration of the Plan; provided, however, that the Committee shall have the authority and sole responsibility for granting options to Section 16 Eligible Persons and authorizing the issuance of Shares upon the exercise thereof, and for the administration of the Plan with respect thereto. 5. GRANTING OF OPTIONS The Board is authorized to grant options to Non-Section 16 Eligible Persons pursuant to this Plan. The number of Shares, if any, optioned in each year, the Non-Section 16 Eligible Persons to whom and the time or times at which options are granted, the number of Shares optioned to each Non-Section 16 Eligible Person and the other terms and provisions of such options shall be wholly within the discretion of the Board, subject to the limitation that no option shall be granted (notwithstanding any other provisions of this Plan to the contrary) later than September 19, 2000. The Committee is authorized to grant options to Section 16 Eligible Persons pursuant to this Plan. The number of Shares, if any, optioned in each year, the Section 16 Eligible Persons to whom and the time or times at which options are granted, the number of Shares optioned to each Section 16 Eligible Person and the other terms and provisions of such options shall be wholly within the discretion of the Committee, subject to the limitation that no option shall be granted (notwithstanding any other provisions of this Plan to the contrary) later than September 19, 2000. 3 4 6. TYPE OF OPTIONS This Plan permits the grant of Non-Qualified Stock Options, as well as Incentive Stock Options. Options granted under the Plan will be designated as Non-Qualified Stock Options or Incentive Stock Options at the time of their grant. 7. OPTION TERMS Subject to the limitation prescribed in Section 5 above, the options granted under this Plan shall be on the terms stated in clauses (a) through (h) below. The Board or the Committee, as the case may be, may specify additional terms not inconsistent with this Plan by rules of general application or by specific direction in connection with a particular option or group of options. (a) The option exercise price shall be fixed by the Board or the Committee, as the case may be, but shall not be less than 100% (110% in the case of an Incentive Stock Option granted to a Ten Percent Shareholder) of the Fair Market Value of the underlying Shares on the Date of Grant. (b) The option exercise price shall be payable in cash, property, services rendered or, under certain circumstances, in shares of Common Stock of the Company having a Fair Market Value equal to the option exercise price on the date of exercise, or any combination thereof, or any other means which the Board or the Committee, as the case may be, determines are consistent with the Plan's purpose and applicable laws. (c) The option shall not be transferable otherwise than by will or the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by the Optionee or after his death by the person or persons entitled thereto by will or the laws of descent and distribution. (d) The term of the option shall be fixed by the Board or the Committee, as the case may be, but no option shall be granted for a term to exceed ten years or, in the case of an Incentive Stock Option being granted to a Ten Percent Shareholder, for a term to exceed five years. (e) The option shall terminate and may not be exercised if the Optionee ceases for any reason (including death, retirement or disability) to be an employee of the Qualified Employer, except to the extent provided in Section 9 hereof. (f) In the event that the Company is succeeded by another company in a reorganization, merger, consolidation, acquisition of property or stock, separation or liquidation, the successor company shall assume the outstanding options granted under this Plan or shall substitute new options for them, which shall provide that the Optionee, at the same cost, shall be entitled upon the exercise of such option to receive such securities of the surviving or resulting corporation as the Board of Directors of such corporation shall determine to be equivalent, as nearly as practicable, to the nearest whole number and class of shares of stock or other securities to which the Optionee would have been entitled under the terms of the agreement governing the reorganization, merger, consolidation, acquisition of property or stock, separation or liquidation as if, immediately prior to such event, the Optionee had been the holder of record of the number of Shares which were then subject to such option. 4 5 (g) The aggregate Fair Market Value (determined as of the Date of Grant) of the Shares for which Incentive Stock Options are granted under the ISO Plans to any one Eligible Person that are exercisable for the first time during any calendar year shall not exceed $100,000. (h) The terms and conditions of the grant of each option granted hereunder shall be embodied in a written award certificate in a form prescribed by the Board or by the Committee, as the case may be, which (i) has been completed with the date, name of Optionee, number of Shares to which it relates, type of option, term of option, option price per Share, name of Optionee's employing company and (with respect to Incentive Stock Options) the conditions required to qualify as an incentive stock option under Section 422 of the Code, (ii) has been signed by a member of the Board or the Committee or an officer of the Company designated by the Board or by the Committee, as the case may be, and (iii) has been delivered to the Optionee. 8. LIMITED STOCK APPRECIATION RIGHTS (a) The Committee is authorized, in its discretion, to grant limited stock appreciation rights ("LSARs") with respect to all or any portion of the Shares covered by stock options granted hereunder to Officers and directors of the Company, simultaneously with the grant of, or at any time during the term of, non-qualified options or simultaneously with the grant of incentive stock options. The grant of the LSAR will not be effective until six months after the date of its grant. Those options with respect to which an LSAR has been granted and become effective shall become immediately exercisable upon the occurrence of any of the following events (each, a "Triggering Event"): (i) the consummation by the Company of a reorganization, merger, or consolidation after approval of any such transaction by shareholders, other than Section 16 Eligible Persons, holding at least the minimum number of shares necessary to approve such transaction under the Company's Articles of Incorporation and applicable law, (ii) the consummation by the Company of a sale of substantially all its assets after approval of any such transaction by shareholders, other than Section 16 Eligible Persons, holding at least the minimum number of shares necessary to approve such transaction under the Company's Articles of Incorporation and applicable law, or (iii) the acquisition by a single purchaser or group of related purchasers of in excess of 51% of the issued and outstanding shares of Common Stock from shareholders of the Company other than Section 16 Eligible Persons, in any case other than in a transaction in which the surviving corporation or the purchaser is the Company or a Subsidiary of the Company (other than a transaction in which the surviving corporation or the purchaser is the Company or a Subsidiary of the Company but the capital stock of the Company or a Subsidiary of the Company is converted into capital stock of any entity other than the Company or any such Subsidiary) or an entity controlled by Section 16 Eligible Persons. (b) The LSARs shall provide that upon the occurrence of any Triggering Event, the Optionee shall receive from the Company, for each LSAR, an amount in cash equal to the amount by which the option exercise price per Share of the option to which the LSAR relates is exceeded by the Fair Market Value of the Shares issuable upon exercise of such option on the date such Triggering Event occurs. When a Triggering Event occurs, the option to which the LSAR relates will cease to be exercisable, but will be deemed to have been exercised for purposes of determining the number of Shares for which options may be granted hereunder. (c) An LSAR shall be expressly subject to the following additional requirements: (i) the LSAR shall expire no later than the expiration of the underlying option; (ii) the LSAR shall be 5 6 transferable only when the underlying option is transferable, and under the same conditions; and (iii) a Triggering Event shall be deemed to have occurred only when the Fair Market Value of the Shares subject to the underlying option exceeds the exercise price of such option. 9. EXERCISE RIGHTS UPON CEASING TO BE AN EMPLOYEE, OFFICER, CONSULTANT OR DIRECTOR (a) If an Optionee becomes permanently and totally disabled, he may exercise his option for up to one year after the date he ceases to be an employee, officer or director of or a consultant to a Qualified Employer on account of such disability, but in no event later than the date on which the option would have expired if the Optionee had not become disabled. During such period, the option may be exercised only to the extent that the Optionee was entitled to do so at the date of disability and, to the extent the option is not so exercised, it shall expire at the end of such period. For purposes of this Section 9(a), an Optionee shall be deemed to be disabled if, in the determination of the Board or the Committee, as the case may be, he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. (b) If an Optionee dies during a period in which he is entitled to exercise an option (including the period referred to in subsection (a) above), the option shall terminate one year after the date of death, but in no event later than the date on which the option would have expired if the Optionee had lived. During such period, the option may be exercised by the Optionee's executor or administrator or by any person or persons who shall have acquired the option directly from the Optionee by bequest or inheritance or by reason of the death of the Optionee, but only to the extent that the Optionee was entitled to do so at the date of death and, to the extent the option is not so exercised, it shall expire at the end of such period. (c) If an Optionee ceases to be an employee, officer or director of or consultant to any and all Qualified Employers in circumstances other than those described in subsections (a) or (b) above, he may exercise options granted hereunder for a period not to exceed three months after the date of such cessation, but in no event later than the date on which the option would have expired if the Optionee had remained an employee, officer or director of or consultant to a Qualified Employer. During such period, the option may be exercised only to the extent that the Optionee was entitled to do so on the date of cessation and, to the extent the option is not so exercised, it shall expire at the end of such three-month period. This provision shall not apply if the Optionee's employment or consultant relationship was terminated for "cause," or if the officer or director was removed for "cause," which shall include theft, falsification of records, fraud, embezzlement, gross negligence or willful misconduct, causing a Qualified Employer to violate any federal, state, or local law, or administrative regulation or ruling having the force and effect of law, insubordination, conflict of interest, diversion of corporate opportunity, or conduct that results in publicity that reflects unfavorably on a Qualified Employer. (d) For purposes of this section an Optionee who is an employee shall not be treated as having ceased employment if (1) the Optionee is on military, sick leave or other bona fide leave of absence (such as temporary employment by the United States Government); and (2) the period of such leave does not exceed 90 days, or, if longer, so long as the Optionee's right to reemployment with a Qualified Employer is guaranteed by statute or by contract. Where the period of leave exceeds 90 days and the Optionee's right to reemployment is not guaranteed by statute or by contract, such Optionee shall be deemed to have ceased being an employee on the 91st day of such leave. 6 7 10. ADDITIONAL REQUIREMENTS Upon the exercise of an option granted hereunder the Board or the Committee, as the case may be, may require the Optionee to deliver the following: (a) A written statement satisfactory to the Company or its counsel that the Optionee is purchasing the Shares for investment and not with a view toward their distribution or sale and will not sell or transfer any Shares received upon the exercise of the option except in accordance with the Securities Act of 1933 and applicable state securities laws; and (b) Evidence reasonably satisfactory to the Company that at the time of exercise the Optionee meets such other requirements as the Board or the Committee, as the case may be, may determine. 11. SHARES SUBJECT TO OPTION The Shares issuable upon exercise of options granted hereunder may be unissued shares or treasury shares, including shares bought on the open market. The Company at all times during the term of this Plan shall reserve for issuance the number of Shares issuable upon exercise of options granted hereunder. 12. COMPLIANCE WITH GOVERNMENTAL AND OTHER REGULATIONS The Company will not be obligated to issue and sell the Shares issued pursuant to options granted hereunder if, in the opinion of its counsel, such issuance and sale would violate any applicable federal or state securities laws. The Company will seek to obtain from each regulatory commission or agency having jurisdiction such authority as may be required to issue and sell Shares issuable upon exercise of any option granted hereunder. Inability of the Company to obtain from any such regulatory commission or agency authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares upon exercise of an option granted hereunder shall relieve the Company from any liability for failure to issue and sell such Shares until the time when such authority is obtained or is obtainable. 13. NONASSIGNMENT OF OPTIONS Except as otherwise provided in Paragraph 7(c) hereof, any option granted hereunder and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law otherwise) and shall not be subject to execution, attachment, or similar process. Upon any attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of such option, right or privilege contrary to the provisions hereof, or upon the levy or any attachment or similar process upon the rights and privileges conferred hereby, such option and the rights and privileges conferred hereby shall immediately terminate. 7 8 14. RIGHTS OF OPTIONEE IN SHARES Neither any Optionee nor the legal representatives, heirs, legatees, or distributees of any Optionee, shall be deemed to be the holder of, or to have any rights of a holder with respect to, any Shares issuable upon exercise of an option granted hereunder unless and until such Shares are issued to him or them. 15. DELIVERY OF SHARES ISSUED PURSUANT TO OPTION Subject to the other terms and conditions of this Plan, upon the exercise of an option granted hereunder, the Company shall sell to the Optionee the Shares with respect to which the option has been exercised. 16. WITHHOLDING OF APPLICABLE TAXES A Qualified Employer shall have the right to reduce the number of Shares otherwise required to be issued upon exercise of an option granted hereunder by an amount which would have a Fair Market Value on the date of such exercise equal to all Federal, state, city, or other taxes as shall be required to be withheld by the Qualified Employer pursuant to any statute or other governmental regulation or ruling. In connection with all such withholding obligations (whether arising in connection with an exercise of an option granted hereunder or in connection with a disqualifying disposition (as defined in Section 421(b) of the Code) of stock obtained upon exercise of an Incentive Stock Option granted hereunder), a Qualified Employer may make any other arrangements consistent with this Plan as it may deem appropriate, including but not limited to withholding such taxes from cash compensation payable to the Optionee and requiring the Optionee to remit cash in an amount equal to the taxes required to be withheld. 17. PLAN AND OPTIONS NOT TO AFFECT EMPLOYMENT OR OTHER AFFILIATION Neither this Plan nor any options granted hereunder shall confer upon any Eligible Person any right to continue employment or affiliation with any Qualified Employer. 18. AMENDMENT OF PLAN The Board may make such amendments to this Plan as it deems necessary or advisable, provided that, without further action by the shareholders of the Company, no such amendment shall (a) materially increase the maximum number of Shares for which options may be granted, except as provided in Section 3, (b) materially increase the benefits under the Plan, or (c) materially modify the requirements as to eligibility for participation in the Plan, and in no event shall any such amendment impair the rights of any participant under any option theretofore granted. 19. NOTICES Any notice required or permitted hereunder shall be sufficiently given only if sent by registered or certified mail, postage prepaid, addressed to the Company, 26 Landsdowne Street, Cambridge, MA 02139 and to the Optionee at the address on file with the Company at the time of grant 8 9 hereunder, or to such other address as either party may hereafter designate in writing by notice similarly given by one party to the other. 20. SUCCESSORS The Plan shall be binding upon and inure to the benefit of any successor, successors or assigns of the Company. 21. SEVERABILITY If any part of this Plan shall be determined to be invalid or void in any respect, such determination shall not affect, impair, invalidate, or nullify the remaining provisions of this Plan which shall continue in full force and effect. 22. TERMINATION OF THE PLAN The Board may terminate this Plan at any time; otherwise this Plan shall terminate September 19, 2000. Termination of the Plan shall not deprive Optionees of their rights under previously granted options. 23. GRANTS OF OPTIONS AFTER AMENDMENTS TO PLAN The grant of any option hereunder on or after the date the Board has adopted any amendments to the Plan that require shareholder approval pursuant to Section 18 hereof, is subject to the express condition that within 12 months after such date, the holders of a majority of the outstanding shares of Common Stock present, or represented, and entitled to vote thereon shall have approved the Plan at a duly held meeting of the shareholders of the Company. 9 EX-10.8 3 LEASE DATED 7/26/93 1 Exhibit 10.8 LEASE DATED: JULY 26, 1993 BY MASSACHUSETTS INSTITUTE OF TECHNOLOGY, LESSOR TO ALKERMES, INC., LESSEE 281 ALBANY STREET, CAMBRIDGE MASSACHUSETTS 2 Page i ------ TABLE OF CONTENTS ----------------- 1. Parties and Premises................................................... 1 2. Expansion.............................................................. 1 3. Lease Term; Commencement Date; Extension Options....................... 3 3.1 Lease Term; Commencement Date................................. 3 3.2 Extension Option.............................................. 3 4. Rent; Determination of Fair Market Rent; Preliminary Entry; Net Lease....................................................... 4 4.1 Payment of Rent............................................... 4 4.2 Determination of Fair Market Rent............................. 5 4.3 Preliminary Entry............................................. 7 4.4 Net Lease..................................................... 7 5. Permitted Use.......................................................... 7 6. Taxes.................................................................. 8 6.1 Taxes......................................................... 8 6.2 Payment of Taxes.............................................. 8 6.3 Abatement of Taxes............................................ 9 7. Utilities and Services................................................. 9 8. Insurance.............................................................. 11 8.1 Public Liability Insurance.................................... 11 8.2 Casualty Insurance............................................ 11 8.3 Certificate of Insurance...................................... 12 8.4 Lessor's Insurance............................................ 12 8.5 Waiver of Subrogation......................................... 12 8.6 Waiver of Rights.............................................. 13 9. Assignment and Subletting.............................................. 13 10. Parking................................................................ 17 11. Late Payment of Rent................................................... 17 12. Lessee's Covenants..................................................... 17 13. Construction........................................................... 26 13.1 Work Letter................................................... 26 13.2 Roof Load Capacity............................................ 26 13.3 Floor Loads................................................... 27 14. Eminent Domain and Casualty............................................ 27 14.1 Substantial Taking............................................ 27 14.2 Awards........................................................ 27 14.3 Substantial Casualty.......................................... 28 14.4 Repair and Restoration........................................ 28 14.5 Casualty During Last 12 Months................................ 30 (i) 3 Page ii ------- 15. Defaults; Events of Default; Remedies.................................. 30 15.1 Defaults; Events of Default................................... 30 15.2 Termination................................................... 31 15.3 Survival of Covenants......................................... 32 15.4 Right to Relet................................................ 33 15.5 Right to Equitable Relief..................................... 33 15.6 Right to Self Help............................................ 33 15.7 Further Remedies.............................................. 34 16. Intentionally Deleted.................................................. 34 17. Real Estate Broker..................................................... 34 18. Notices................................................................ 34 19. No Waivers............................................................. 35 20. Lessor's Obligations................................................... 35 20.1 Generally..................................................... 35 20.2 Lessor's Maintenance.......................................... 36 21. Ground Leases; Mortgages............................................... 36 21.1 Rights of Ground Lessors and Mortgagees....................... 36 21.2 Lease Subordinate............................................. 37 22. Notice of Lease; Estoppel Certificates................................. 38 23. Holding Over........................................................... 38 24. Force Majeure.......................................................... 38 25. Signs.................................................................. 38 26. Entire Agreement....................................................... 39 27. Applicable Law, Severability and Construction.......................... 39 28. Successors and Assigns................................................. 40 29. Security Deposit....................................................... 40 30. Authority.............................................................. 41 EXHIBIT A: PLAN OF THE PREMISES EXHIBIT B: PLAN OF THE LAND EXHIBIT C: WORK LETTER EXHIBIT D: COMMENCEMENT DATE AGREEMENT (ii) 4 LEASE Dated: July 26, 1993 1. PARTIES AND PREMISES. MASSACHUSETTS INSTITUTE OF TECHNOLOGY ("Lessor") hereby LEASES unto ALKERMES, INC. ("Lessee"), the following premises: 25,500 square feet of rentable area on the first floor (shown as the hatched area on EXHIBIT A attached hereto) (the "Premises"), of the building known as and numbered 281 Albany Street, Cambridge, Massachusetts (the "Building"), which Building contains 32,000 rentable square feet and is located on the parcel of land (the "Land") identified as Assessors Plan #67, Lots 32 and 33 as shown on the plan attached hereto as EXHIBIT B attached hereto, together with the benefit of, and subject to (as the case may be) all rights, easements, covenants, conditions, encumbrances, encroachments and restrictions of record as of the date of this Lease. Lessor shall have the right, without the necessity of obtaining Lessee's consent thereto or joinder therein, to grant, permit, or enter into during the term of this Lease such additional rights, easements, covenants, conditions, encumbrances, encroachments and restrictions with respect to the Land as Lessor may deem appropriate, PROVIDED THAT no such rights, easements, covenants, conditions, encumbrances, encroachments or restrictions shall materially affect Lessee's use of the Premises for the Permitted Uses hereunder. Lessor hereby grants to Lessee, as appurtenant to the Premises, the right in common with Lessor and others to whom Lessor may have previously or may hereafter grant rights, to enter into the basement of the Building for the purpose of (i) installing an acid neutralization tank as part of "Lessee's Work" (as defined in the Work Letter) and maintaining, repairing, replacing and removing the same, and (ii) installing as part of Lessee's Work additional equipment intended to service the Premises and maintaining, repairing, replacing and removing the same, PROVIDED that such rights shall be exercised so as not to interfere with any Building system serving the second floor of the Building (whether solely or together with the first floor thereof). 2. EXPANSION. Subject to the provisions of this Section, Lessee shall have the option (the "Expansion Option") to subject the second floor of the Building, containing 5 approximately 6,500 rentable square feet (the "Expansion Premises"), to all of the terms of this Lease (except for Basic Rent, which shall be calculated in the manner provided below). Lessee acknowledges that the Expansion Premises are currently occupied by another lessee ("Current Occupant") whose lease expires on or about December 31, 1994. Provided that both (i) an "Event of Default" (as hereinafter defined) has not occurred and is not then continuing as of the day on which Lessee purports to exercise the option herein granted, and (ii) as of such date the Lessee named herein is actually occupying at least twenty-five (25%) percent of the Premises, Lessee shall have the right to lease the Expansion Premises for a term commencing on the date on which Lessor delivers possession thereof to Lessee, and ending on the last day of the "Lease Term" (as hereinafter defined), by giving written notice of exercise to Lessor not later than July 1, 1994. If Lessee exercises its right under this Section to lease the Expansion Premises, then such space shall become subject to all of the terms of this Lease EXCEPT that "Basic Rent" for such space shall be in an amount equal to the "Fair Market Value" thereof (as these terms are hereinafter defined). In the event that Lessee, for any reason whatsoever, fails or refuses to give such notice by July 1, 1994, Lessee shall be deemed to have waived its rights under this Section with respect to the Expansion Premises for the remainder of the Lease Term. If Lessee exercises the Expansion Option, then Lessor shall deliver the Expansion Premises vacant and broom clean but otherwise in its "as is" condition. Lessor shall use due diligence to deliver the Expansion Premises to Lessee as soon as practicable, Effective upon the date on which Lessor delivers to Lessee possession of the Expansion Premises, such space shall be deemed to be part of the Premises for all purposes of this Lease, Lessee shall commence paying Basic Rent and "Additional Rent" on account thereof, and "Lessee's Share" (as these terms are hereinafter defined) shall be appropriately modified. Notwithstanding the foregoing provisions of this Section 2.0, in the event that Lessor learns that the Expansion Premises will become vacant prior to January 1, 1995, Lessor shall so notify Lessee. Provided that both (i) an "Event of Default" (as hereinafter defined) has not occurred and is not then continuing as of the day on which Lessee purports to exercise the right herein granted, and (ii) as of such date the Lessee named herein is actually occupying at least 2 6 twenty-five (25%) percent of the Premises, Lessee shall have the right to accelerate the exercise of the Expansion Option by giving written notice of exercise to Lessor within twenty (20) days of receipt of Lessor's notice. If Lessee exercises its right to accelerate the Expansion Option, then such space shall become subject to all of the terms of this Lease as provided hereinabove in this Section as of the date on which Lessor delivers possession thereof to Lessee. If Lessee declines to accelerate the exercise of the Expansion Option, then Lessee shall be deemed to have waived all rights to exercise the Expansion Option at any time under this Section 2.0. 3. Lease Term; Commencement Date; Extension Options. ------------------------------------------------ 3.1 LEASE TERM; COMMENCEMENT DATE. The initial term of this Lease (the "Initial Lease Term") shall commence on the date (the "Commencement Date") which is the first to occur of (i) the first day on which Lessee occupies any portion of the Premises for the conduct of its business operations, or (ii) August 15, 1993, and shall expire, unless sooner terminated as hereinafter provided, on the day immediately preceding the fifth (5th) anniversary of the Commencement Date. As used in this Lease, "Lease Term" means the Initial Lease Term, as the same may be extended pursuant to Section 3.2 below. On request of either party, Lessor and Lessee shall execute and deliver a Commencement Date Agreement in the form attached hereto as EXHIBIT D setting forth the Commencement Date. 3.2 EXTENSION OPTION. Provided that both (i) an "Event of Default" (as hereinafter defined) has not occurred and is not then continuing as of either the day on which Lessee purports to give Lessor a "Lessee's Notice of Exercise" (as hereinafter defined) or on the first day of the "Extension Term" (as hereinafter defined), and (ii) the Lessee named herein is actually occupying at least twenty-five (25%) percent of the Premises as of each of said dates, Lessee shall have one (1) option ("Extension Option"), to extend the Lease Term of this Lease for a period of five (5) years ("Extension Term"), unless sooner terminated as hereinafter provided, subject to all the terms of this Lease except for the change in Basic Rent as provided in Section 4.2 of this Lease. Lessee shall exercise the Extension Option, if at all, by giving written notice of Lessee's exercise thereof ("Lessee's Notice of Exercise") to Lessor not earlier than fifteen (18) months prior to, nor later than nine 3 7 (9) months prior to, the last day of the Initial Lease Term as the case may be. If Lessee fails to give such Lessee's Notice of Exercise within such time, Lessee shall be deemed to have waived the right to exercise the Extension Option. The dates described in this paragraph are summarized in the following table: Notification Dates Extension Term Not Before: Not After: Begins: Ends: ----------- ---------- ------- ----- 5/15/1997 11/14/1997 8/15/1998 8/14/2003 Basic Rent shall be due and payable in the manner hereinafter provided in Section 4.1 below. 4. Rent; Determination of Fair Market Rent; Preliminary Entry; Net Lease --------------------------------------------------------------------- 4.1 PAYMENT OF RENT. From and after the Commencement Date, Lessee shall pay Lessor, without offset or deduction and without previous demand therefor, as items constituting rent (collectively, "Rent"): (a) Basic rent ("Basic Rent") at the following rates: (i) for each of the first five (5) Lease Years, $4.00 per rentable square foot of the Premises ($102,000.00 per year; $8,500.00 per month); and (ii) for each Lease Year in the Extension Term, $6.00 per rentable square foot of the Premises $153,000.00 per year; $12,750.00 per month). Basic Rent as set forth above does not include, and is in addition to, any Basic Rent which may become due and payable with respect to the Expansion Premises, calculated in the manner provided in Section 4.2 below. Basic Rent shall be due and payable in equal monthly installments, in advance, commencing on the Commencement Date, and continuing thereafter on the first day of each calendar month or portion thereof during the Lease Term. Basic Rent shall be PRO-RATED for partial months occurring at the beginning or the end of the Lease Term; and (b) All other costs, charges, or expenses which Lessee in this Lease agrees to pay, or which Lessor pays or incurs as the result of a default by Lessee 4 8 hereunder, including any penalty or interest which may be added for nonpayment or late payment thereof as provided in this Lease (collectively, "Additional Rent"). As used in this Lease, "Lease Year" means the twelve (12) month period commencing on the Commencement Date, and each successive twelve (12) month period included in the Lease Term commencing on an anniversary of that day, but if the expiration of the Lease Term or the earlier termination of the Lease does not coincide with the termination of such a twelve (12) month period, the term "Lease Year" shall mean the portion of such twelve (12) month period before such expiration or termination. All payments shall be made to Lessor or such agent, and at such place, as Lessor shall, from time to time, in writing designate, the following being now so designated: Meredith & Grew, Inc. 160 Federal Street Boston, MA 02110-1701 Attention: Kristin Blount 4.2 DETERMINATION OF FAIR MARKET RENT. As used in this Lease, "Fair Market Rent" means the fair market rent for the portion of the Building with respect to which "Fair Market Rent" is being determined in its "as is" condition, excluding the value of the improvements completed by Lessee therein but including the value of improvements made by Lessor, as of the day with respect to which such determination is being made. Fair Market Rent shall be based upon the rents generally in effect for similar premises for first-class research and development/ manufacturing/ office uses in similar buildings in the Cambridge, Massachusetts area in which the Premises is located, adjusted to a "net" lease basis, taking into account all facts and circumstances customarily taken into account by prudent and commercially reasonable lessors and lessees (including, without limitation, concessions typically offered in such market to renewing tenants). Within twenty (20) days after Lessor receives Lessee's notice of exercise of the Expansion Option), Lessor shall provide to Lessee Lessor's good faith determination of the Fair Market Rent of the Expansion Premises. If Lessor and Lessee are unable to agree on such Fair Market Rent within twenty (20) days 5 9 thereafter, then Lessor and Lessee shall, not later than sixty (60) days after Lessor receives Lessee's notice, each retain a real estate appraiser with at least ten (10) years' continuous experience in the business of appraising or marketing commercial real estate in the Cambridge, Massachusetts vicinity, who shall, within thirty (30) days of his or her selection, prepare a written report summarizing his or her conclusion as to Fair Market Rent. Lessor and Lessee shall simultaneously exchange such reports; PROVIDED, HOWEVER, that if one party has not obtained such a report within one hundred (100) days after Lessor receives Lessee's notice of exercise, then the determination set forth in the other party's report shall be final and binding upon the parties. If both parties receive reports within such time and the lesser of the two determinations is within ten (10%) percent of the higher determination, then the average of these determinations shall be deemed to be Fair Market Rent. If these determinations differ by more than ten (10%) percent, then Lessor and Lessee shall mutually select a person with the qualifications stated above (the "Final Appraiser") to resolve the dispute as to Fair Market Rent. If Lessor and Lessee cannot agree upon the designation of the Final Appraiser within thirty (30) days of the exchange of the first appraisal reports, either party may apply to the American Arbitration Association, the Greater Boston Real Estate Board, or any successor thereto for the designation of a Final Appraiser. Within ten (10) days of the selection of the Final Appraiser, Lessor and Lessee shall each submit to the Final Appraiser a copy of their respective appraiser's determination of Fair Market Rent. The Final Appraiser shall not perform his own appraisal but rather shall, within thirty (30) days after such submissions, select the submission which is closest to the determination of Fair Market Rent which the Final Appraiser would have made acting alone. The Final Appraiser shall give notice of his selection to Lessor and Lessee and such decision shall be final and binding upon Lessor and Lessee. Each party shall pay the fees and expenses of its appraiser and counsel, if any, in connection with any proceeding under this paragraph, and the parties shall each pay one-half of the fees and expenses of the Final Appraiser. In the event that Fair Market Rent has not been finally determined in the manner provided above with respect to the Expansion Premises as of the day on which Basic Rent commences to be due and payable on account of such space, then Basic Rent shall be due and payable at the 6 10 rate provided by the Lessor, and Lessor and Lessee shall make such adjustment (and payment or credit as necessary) within thirty (30) days after Fair Market Rent is finally determined. 4.3 PRELIMINARY ENTRY. Provided that an "Event of Default" (as hereinafter defined) has not occurred hereunder, Lessee shall have the right to enter upon the Premises prior to the Commencement Date to perform "Lessee's Work" (as defined in the Work Letter). Such entry shall be subject to the full and punctual performance by Lessee of all of Lessee's covenants hereunder with respect to the Premises from and after the date upon which Lessee first makes such entry except that Lessee shall not be required to pay any Rent. If during this time Lessee takes occupancy of any portion of the Premises and conducts it business operations therein, then the first date of such occupancy shall be deemed to be the Commencement Date as provided in Section 3.2 above. The period of such preliminary entry for the purposes of performing Lessee's Work shall in all events end no later than the Commencement Date. 4.4 NET LEASE. It is the intention of the Lessor and the Lessee that this is a "net" lease and that the Rent herein specified shall be paid to the Lessor in each month during the Lease Term, and that all costs, expenses, and obligations of every kind relating to the Premises whether usual or unusual, ordinary or extraordinary, foreseen or unforeseen, which may arise or become due during the Lease Term, shall be paid by Lessee except as otherwise specifically provided herein. 5. PERMITTED USE. The Premises shall be occupied by Lessee and used for the following purposes (the "Permitted Uses") only and for no other: office, research and development, laboratory, manufacturing and distribution office uses, and ancillary uses thereto; in each case to the extent permitted as a matter of right under the Zoning Ordinance of the City of Cambridge, as amended from time to time. Notwithstanding anything herein contained to the contrary, provided that Lessee is not in default hereunder beyond the cure period provided in this Lease, Lessee may discontinue its occupancy of the Premises or any part thereof for any period of time during the Lease Term, provided that during any such period, Lessee shall be bound by all of the 7 11 obligations of Lessee under this Lease, including without limitation, the obligation to pay Rent. If Lessee discontinues actual occupancy of the entire portion of the Premises not then subleased pursuant to this Lease (if any), and such discontinuance lasts for more than six (6) consecutive months, Lessor shall have the right, in its sole discretion, to terminate this Lease as to the entire portion of the Premises not so subleased (if any) upon thirty (30) days' written notice to Lessee and payment to Lessee of the "Termination Payment" (as defined in the next sentence), in which event the Lease shall terminate as to that portion of the Premises as if the date specified in such termination notice was the last day of the Lease Term. As used in this Lease, the term "Termination Payment" shall mean the unamortized portion (based on straight-line amortization over a 5-year period commencing on the Commencement Date) of the cost of "Lessee's Work" as of the effective date of such termination notice. Upon request by Lessor during any period that Lessee has ceased to occupy the Premises as aforesaid, Lessee shall provide to Lessor a reasonably detailed breakdown of the cost of Lessee's Work paid or incurred by Lessee to enable Lessor to calculate the amount of the Termination Payment. 6. Taxes. ----- 6.1 TAXES. As used in this Lease, "Taxes" means all taxes, special or general assessments, water rents, rates and charges, sewer rents and other impositions and charges imposed by governmental authorities of every kind and nature whatsoever, extraordinary as well as ordinary and each and every installment thereof which shall or may during the Lease Term be charged, levied, laid, assessed, imposed, become due and payable or become liens upon or for or with respect to the Premises, the Building, the Land or any part thereof, or appurtenances or equipment owned by Lessor thereon or therein or any part thereof or on this Lease, and any tax based on a percentage fraction or capitalized value of the Rent (whether in lieu of or in addition to the taxes hereinbefore described). Taxes shall not include inheritance, estate, excise, succession, transfer, gift, franchise, income, gross receipt, or profit taxes except to the extent such are in lieu of or in substitution for Taxes as now imposed on the Building or the Land. 6.2 PAYMENT OF TAXES. Lessee shall pay to Lessor, as Additional Rent, (i) "Lessee's Share" (which term shall mean shall be seventy-nine and sixty-eight hundredths percent (79.68%)) of Taxes, and (ii) Lessee's pro-rata 8 12 share of Taxes with respect to each of the "Off-Site Lots" (as defined in Section 10 below) in which any of the parking spaces leased hereunder by Lessee are located. Lessee shall make such payment in the manner provided in Section 7 below. Lessee's obligations under this Section 6 shall be pro-rated for partial tax years at the beginning or end of the Lease Term. 6.3 ABATEMENT OF TAXES. Lessor may at any time and from time to time make application to the appropriate governmental authority for an abatement of Taxes with respect to the Land and/or the Building. If Lessor files such an abatement application, Lessor shall pursue the same at its sole cost and expense (subject to potential reimbursement as provided below in this Section). If Lessor's application is successful and Lessee has made any payment in respect of Taxes pursuant to Section 6.2 above for the period with respect to which the abatement was granted, Lessor shall (a) deduct from the amount of the abatement all expenses reasonably incurred by it in connection with the application, (b) pay to Lessee Lessee's Share (adjusted for any period for which Lessee had made a partial payment) of the abatement, with interest, if any, paid by the governmental authority on such abatement, and (c) retain the balance, if any. Lessee shall have the right to file an application for abatement of Taxes with respect to the Land and/or the Building only if (i) Lessee first inquires in writing to Lessor whether Lessor intends to file such an abatement application, and either (ii) (a) Lessor responds in writing that Lessor does not intend to file such an application or, (b) Lessee does not receive a response from Lessor within seven (7) business days after the day such request is made. If Lessee files such an abatement application, Lessee shall pursue the same at its sole cost and expense (subject to potential reimbursement as provided below in this Section) and shall keep Lessor informed of the status thereof. If Lessee's application is successful, Lessee shall (a) deduct from the amount of the abatement all expenses reasonably incurred by it in connection with the application, (b) retain Lessee's Share (adjusted for any period for which Lessee had made a partial payment) of the abatement, with interest, if any, paid by the governmental authority on such abatement, and (c) pay over the balance, if any, to Lessor. 7. UTILITIES AND SERVICES. Lessee shall make its own arrangements for the provision of all utilities and 9 13 services, including, without limitation, electricity, gas, heating fuels, trash removal, telephone service, and all maintenance and service agreements which are required for the Permitted Uses of the Premises, and shall pay when due all charges therefor directly to the company which provides such utility or service. The only services which Lessor shall provide to the Premises, the Building or the Land during the Lease Term (collectively, "Lessor's Services") shall be: (i) common area maintenance, (ii) extermination, (iii) alarm services, (iv) water and sewer, (v) snowplowing, paving, striping and general maintenance of the parking lots in which are located parking spaces leased by Lessee pursuant to Section 10.0 below, and (vi) such other services (if any) as Lessor may reasonably determine from time to time are necessary for the maintenance and operation of the Premises and which either are not provided by Lessee or cannot as a matter of law be provided to the Premises in the name of Lessee. It is agreed that property manager's fees shall not exceed seven (7%) percent of gross rental revenue of the Building. It is further agreed that the work performed (and the costs incurred) by Lessor in initially placing in serviceable condition the parking lot(s) in which the parking spaces are leased by Lessee pursuant to Section 10.0 below shall not be included in "Lessor's Services" or charged to Lessee. Within a reasonable time after the execution of this Lease, and thereafter within a reasonable time after the end of each of Lessor's fiscal years (or portion thereof) occurring during the Lease Term, Lessor shall deliver to Lessee (i) a statement of (a) the cost of Lessor's Services and (b) Taxes for the fiscal year just ended (the "Statement"), and (ii) a projection of (a) the cost of Lessor's Services and (b) Taxes for the then-current fiscal year. Commencing on the Commencement Date, and continuing on the first day of each calendar month thereafter, Lessee shall pay to Lessor, as Additional Rent, 1/12th of the total annualized amount of Lessee's Share of (a) the cost of Lessor's Services and (b) Taxes. Upon delivery to Lessee of the Statement for the preceding fiscal year, Lessor shall adjust Lessee's account accordingly. If the total amount paid by Lessee on account of the preceding fiscal year is less than the amount due hereunder, Lessee shall pay the balance due within thirty (30) days after delivery by Lessor of such Statement. If the total amount paid by Lessee on account of the preceding fiscal year exceeds the amount due hereunder, such excess shall be credited by Lessor against the monthly installment of Additional Rent next falling due or refunded to Lessee upon the expiration or termination of this Lease (unless such expiration or termination is the result of an Event of 10 14 Default). Lessor's current fiscal year is July 1 - June 30, but Lessor reserves the right to change the fiscal year at any time during the Lease Term. Lessor shall not be held liable to anyone for the cessation of any of Lessor's Services due to any accident, to the making of repairs, alterations or improvements, or to the occurrence of an event of "Force Majeure" (as hereinafter defined). Lessor shall have no obligation to provide any services to the Premises, the Building, the Land or the Parking Area other than those expressly identified above in this Section. In no event shall Lessor be responsible for charges for any utilities or services consumed by Lessee or provided to Lessee at the Premises. 8. Insurance --------- 8.1 PUBLIC LIABILITY INSURANCE. Lessee shall take out and maintain in force throughout the Lease Term comprehensive public liability insurance naming Lessor, Lessee, and persons claiming under them, if any, as additional insureds against all claims and demands for any injury to persons or property which may be claimed to have occurred in the Premises, the Building, on the Land or on ways adjoining the Land, in an amount which at the beginning of the Lease Term shall not be less than $1,000,000 for injury or death of one person, $3,000,000 for injury or death of more than one person in a single accident and $500,000 for property damage, or such higher amounts as Lessor shall reasonably determine are required by reason of Lessee's use of the Premises, and which thereafter, if Lessor requires, shall be in such higher amounts as are then consistent with sound commercial practice in Cambridge, Massachusetts. 8.2 CASUALTY INSURANCE. Lessee shall take out and maintain throughout the Lease Term a policy of fire, vandalism, malicious mischief, extended coverage and so-called all risk coverage insurance insuring all of "Lessee's Work", "Lessee's Property" and all "Alterations" (as these terms are hereinafter defined) for the benefit of Lessor and Lessee, as their respective interests may appear, in an amount equal to the replacement value thereof. Lessor shall be named as a certificate holder on such policy. Lessor shall, at Lessee's cost and expense, cooperate fully with Lessee and execute any and all consents and other instruments and take all other actions necessary to obtain the largest possible recovery. Lessor shall not carry any insurance concurrent in coverage and contributing in the event of 11 15 loss with any insurance required to be furnished by Lessee hereunder if the effect of such separate insurance would be to reduce the protection or the payment to be made under Lessee's insurance. All insurance policies maintained pursuant to this Section 8.2 shall include insurance against payment of rents in an amount sufficient to pay all Rent which would otherwise be required to be paid under this Lease during the period of restoration. 8.3 CERTIFICATE OF INSURANCE. All insurance required to be maintained by Lessee hereunder: shall be placed with insurers reasonably satisfactory to Lessor and authorized to do business in Massachusetts; shall provide that it may not be canceled without at least thirty (30) days prior written notice to each additional insured or certificate holder named therein; and shall provide that it may not be amended without at least ten (10) days prior written notice to each such person. Lessee shall furnish to Lessor certificates of insurance for all insurance required to be maintained by Lessee under this Lease, together with evidence reasonably satisfactory to Lessor of the payment of all premiums for such policies. Lessee, at Lessor's request, shall also deliver such certificates and evidence of payment to the holder of any mortgage affecting the Premises, the Building, the Land or any portion thereof. 8.4 LESSOR'S INSURANCE. Lessor shall take out and maintain in force throughout the Lease Term, in a company or companies authorized to do business in Massachusetts, casualty insurance on the Building (excluding "Lessee's Work", "Lessee's Property" and all "Alterations" (as hereinafter defined)) in an amount equal to the full replacement value of the Building (exclusive of foundations and those items set forth in the preceding parenthetical in this sentence), covering all risks of direct physical loss or damage and so-called "extended coverage" risks. This insurance may be maintained in the form of a blanket policy covering the Building as well as other properties owned by Lessor. Notwithstanding the foregoing provisions of this Section 8.4, Lessor shall have the right, at any time during the Lease Term, to self-insure all or any portion of the coverages required by this Section. 8.5 WAIVER OF SUBROGATION. To the extent to which a waiver of subrogation clause is available, Lessor and Lessee shall obtain a provision in all insurance policies 12 16 carried by such party covering the Premises, including but not limited to contents, fire and casualty insurance, expressly waiving any right on the part of the insurer against the other party. If extra cost is chargeable for such provision, then the party requesting such waiver shall be responsible for the payment of such extra cost. Notwithstanding the foregoing, with respect to such portion of the Lease Term during which Lessor elects to self-insure under Section 8.4 above, then for purposes of this Section 8.5, Lessor shall be deemed to have maintained fire and all-risk coverage in an amount equal to one hundred (100%) percent of the insurable value of the Building (subject to the exceptions and exclusions set forth in Section 8.4 above) with a waiver of subrogation clause contained therein. 8.6 WAIVER OF RIGHTS. All claims, causes of action and rights of recovery for any damage to or destruction of persons, property or business which shall occur on or about the Premises, the Building or the Land, which result from any of the perils insured under any and all policies of insurance maintained by Lessor or Lessee, are waived by each party as against the other party, and the officers, directors, employees, contractors, servants and agents thereof, regardless of cause, including the negligence of the other party and its respective officers, directors, employees, contractors, servants and agents, but only to the extent of recovery, if any, under such policy or policies of insurance; PROVIDED, HOWEVER, that (i) this waiver shall be null and void to the extent that any such insurance shall be invalidated by reason of this waiver, and (ii) with respect to such portion of the Lease Term during which Lessor elects to self-insure under Section 8.4 above, then for purposes of this Section 8.6, Lessor shall be deemed to have maintained fire and all-risk coverage in an amount equal to one hundred (100%) percent of the insurable value of the Building (subject to the exceptions and exclusions set forth in Section 8.4 above). 9. Assignment and Subletting. ------------------------- (a) Lessee shall not mortgage, pledge, hypothecate, or assign this Lease or sublease the Premises or any portion thereof (the term "sublease" shall be deemed to include any arrangement pursuant to which a third party is permitted by Lessee to occupy all or any portion of the Premises), without obtaining, on each occasion, the prior written consent of Lessor, which consent (in the 13 17 case of a proposed assignment or sublease) shall not be unreasonably withheld, delayed or conditioned. Notwithstanding anything to the contrary contained in this Lease, Lessee shall not have more than three (3) subleases in effect at any one time (exclusive of subleases entered into pursuant to paragraph 9.0(i) below), nor shall Lessee have the right to assign this Lease or to sublet any portion of the Premises during the first twelve (12) months after the Commencement Date. (b) If Lessee wishes to assign this Lease or sublease all or any portion of the Premises, Lessee shall so notify Lessor in writing and request Lessor's consent thereto. Such notice shall include (i) the name of the proposed assignee or sublessee, (ii) a general description of the types of business conducted by the proposed assignee or sublessee and a reasonably detailed description of the business operations proposed to be conducted in the Premises by such person or entity, (iii) such financial information concerning the proposed assignee or sublessee as Lessor may reasonably require, and (iv) all terms and provisions upon which such assignment or sublease is proposed to be made, including a copy of the assignment or sublease agreement which Lessee proposes to execute. Lessor shall have twenty (20) days from the day on which it receives Lessee's notice and such required information to give notice to Lessee that either (i) Lessor consents to such assignment or sublease, or (ii) Lessor withholds its consent to such assignment or sublease. (c) If Lessor consents to an assignment or sublease: (i) Lessee shall promptly deliver to Lessor a fully executed copy of said assignment or sublease; (ii) Lessee shall remain primarily liable to Lessor hereunder (which liability shall be joint and several with the assignee or sublessee); and (iii) if the aggregate rent and other amounts payable to Lessee under or in connection with such assignment or sublease, after deduction of the costs reasonably incurred by Lessee in entering into such assignment or sublease (including, without limitation, reasonable attorneys' fees and expenses, brokerage commissions, and alteration costs amortized on a straight-line basis over the term of such sublease), exceeds the Rent payable hereunder, Lessee shall pay to Lessor immediately upon receipt thereof by Lessee, as Additional Rent, (i) during the Initial Term, twenty-five (25%) percent of such excess, and (ii) during the Extension Term, fifty (50%) percent of such excess. 14 18 (d) If Lessor withholds its consent to such assignment or sublease, Lessee shall not enter into the proposed assignment or sublease with such person or entity. (e) Regardless of whether Lessor grants such consent, Lessee shall reimburse Lessor on demand, as Additional Rent, for all out of pocket costs and expenses (including, without limitation, attorneys' fees) reasonably incurred by Lessor in responding to a request for such consent. (f) Lessee shall not be entitled to enter into any assignment or sublease, or to request Lessor's consent thereto, during the continuance of an Event of Default hereunder by Lessee. (g) Any assignment or sublease entered into pursuant to this Section 9.0 shall be subject to all of the terms and provisions of this Lease, including without limitation this Section 9.0. If Lessee enters into any such assignment or sublease, Lessor may, at any time and from time to time after the occurrence of a default hereunder, collect rent from such assignee or sublessee, and apply the net amount collected against Lessee's obligations hereunder, but no such assignment or sublease or collection shall be deemed an acceptance by Lessee of such assignee or sublessee as a lessee hereunder or as a release of the original named Lessee hereunder. (h) Notwithstanding anything contained in this Lease, Lessee shall not enter into any assignment or sublease with any person or entity if the identity of the assignee or sublessee is inconsistent with the investment policies of Lessor as set forth in writing by the Executive Committee of Lessor prior to its receipt of Lessee's notice of such proposed assignment or sublease, and any such transaction shall be void AB INITIO. From time to time during the Term, Lessee may request in writing that Lessor deliver to it copies of all investment policies set forth in writing by the Executive Committee of Lessor since the last request made by Lessee which are relevant to the Premises or to this Lease, and Lessor shall provide the same within a reasonable time after receiving such request. Lessee shall maintain the confidentiality of all investment policies provided by Lessor pursuant to this Section, and shall not disclose the contents thereof or distribute copies thereof to any persons whatsoever 15 19 (other than Lessee's counsel) without the prior written consent of Lessor. (i) In the event that Lessee desires to assign this Lease or to sublease the Premises (or any portion thereof) to any corporation, partnership, association or other business organization directly or indirectly controlling or controlled by Lessee or under common control with Lessee, or to any successor by merger, consolidation or purchase of all or substantially all of the assets of Lessee, Lessee shall give at least twenty (20) days' prior written notice thereof to Lessor (unless Lessee is prohibited by applicable laws, codes, rules or regulations, or by the terms of the operative merger agreement or purchase and sale agreement from providing notice to Lessor at such time, in which event such notice shall be provided to Lessor as soon as Lessee is no longer subject to such prohibition). No consent of Lessor shall be required for any such assignment or sublease EXCEPT that Lessor shall have the right to withhold its consent if the identity of the assignee or sublessee is inconsistent with the investment policies identified in the foregoing paragraph (h) of this Section. Any assignee or sublessee which claims an interest in this Lease pursuant to a transfer of the type described in this paragraph (i) shall be bound by all of the terms and conditions of this Lease including, without limitation, those of the foregoing paragraph (h) of this Section, and if the identity of such assignee or successor is inconsistent with such investment policies, Lessor shall have the right to terminate this Lease and to exercise against such assignee or sublessee the remedies available to Lessor under this Lease, at law or in equity for a breach of the provisions hereof by Lessee. For the purpose of this Lease, the sale of Lessee's capital stock through any public exchange shall not be deemed an assignment or sublease of the Lease or of the Premises. (j) Notwithstanding anything contained in this Lease, Lessee shall not, either voluntarily or by operation of law, make any transfer of this Lease or the Premises (or any portion thereof) which results in Lessee (or anyone claiming by, through or under Lessee) collecting in connection with the Premises any rental or other charge based on the net income or on the profits of any person so as to render any part of the Rent due hereunder "unrelated business taxable income" of Lessor as described in Section 512 of the Internal Revenue 16 20 Code of 1986, as amended, and any such transfer shall be void AB INITIO. 10. PARKING. During the Initial Term, Lessee shall have the right, to use a total of thirty-eight (38) parking spaces, subject to City of Cambridge parking and zoning ordinances. These spaces may be located in one or more parking lots located within 1,000 feet of the Land (collectively, the "Off-Site Lots"). Such parking spaces shall be designated for use by Lessee (but Lessor shall not be responsible for policing the use thereof). It is agreed that initially the off-site parking spaces will be located on Lessor's property at 252 Albany Street, but Lessor shall have the right to relocate such spaces to other Off-Site Lots within 1,000 feet of the Land from time to time during the Lease Term on thirty (30) days' prior written notice to Lessee. Lessee shall pay on account of such parking spaces, as Additional Rent, on the same day and in the same manner in which payments are to be made pursuant to Section 6.2 above, a percentage share of the Taxes assessed upon each of the Off-Site Lots in which any of the leased parking spaces are located, such percentage to be determined by dividing the number of parking spaces leased by Lessee pursuant to this Section in each of such Off-Site Lots as of the first day of the municipal fiscal year by the total number of parking spaces contained in each if such Off-Site Lots. During the Extension Term, Lessee shall pay, as Additional Rent, on the same day on which Basic Rent is due and payable hereunder, rent on account of each parking space leased at the then Fair Market Rent thereof, which amount may be adjusted by Lessor from year to year. 11. LATE PAYMENT OF RENT. Lessee agrees that in the event that any payment of Basic Rent or Additional Rent shall remain unpaid at the close of business on the tenth business day after the same is due and payable hereunder, there shall become due to Lessor from Lessee, as Additional Rent and as compensation for Lessor's extra administrative costs in investigating the circumstances of late Rent, a late charge of two percent (2%) of the amount overdue. The assessment or collection of such a charge shall not be deemed to be a waiver by Lessor of any default by Lessee arising out of such failure to pay Rent when due. 12. LESSEE'S COVENANTS. Lessee acknowledges that the Building is in good and satisfactory order, repair and condition, and covenants, at its sole cost and expense, during the Lease Term and such further time as Lessee holds any part of the Premises: 17 21 (a) to pay when due the Basic Rent and all Additional Rent, and all charges for utilities and services supplied to the Premises pursuant to agreements between Lessee and the appropriate utility company or provider of such services; (b) to keep the Premises, including, without limitation, the Building systems (such as plumbing, heating, ventilation and air conditioning, and electrical) located within or serving the Premises and window glass and the non-structural portions of the roof (e.g., roof membrane) (but EXCLUDING the exterior skin of the Building, the structural components of the Building and the roof, and the Parking Area), in as good order, repair and condition as the same are in as of the date of this Lease or are hereafter put pursuant to the Work Letter, excepting only damage by fire or other casualty or taking which Lessee is not otherwise required by the terms of this Lease to repair or restore, reasonable wear and tear, and damage caused by other tenants of the Building; (c) not to injure, overload or deface the Premises, nor to suffer or commit any waste therein, nor to place a load upon any floor which exceeds the floor load which the floor was designed to carry (Lessor hereby represents and warrants to Lessee that the floor load of the first floor of the Building is not less than 125 pounds per square foot), nor to connect any equipment or apparatus to any Building system which exceeds the capacity of such system, nor to permit on the Premises any auction sale or any inflammable fluids or chemicals which are not used, stored and disposed of in compliance with all laws, ordinances, codes, rules and regulations, and the provisions of any license, permit or other governmental consent or approval required for or applicable now or at any time during the Lease Term to the Premises or any portion thereof or Lessee's use thereof (collectively, "Legal Requirements"), nor to permit any nuisance or the emission from the Premises of any objectionable vibration, noise, or odor, nor to permit the use of the Premises for any purpose other than the Permitted Uses, nor any use thereof which is contrary to any Legal Requirements, or which is liable to invalidate or increase the premiums for any insurance on the Building or its contents, or liable to render necessary any alterations or additions to the Building; 18 22 (d) not to obstruct in any manner any portion of the sidewalks or approaches to the Building or any portion of the Parking Area; (e) to comply with all Legal Requirements and all recommendations of Lessor's fire insurance rating organization now or hereafter in effect, to keep the Premises equipped with all reasonable and necessary safety appliances, and to procure (and maintain in full force and effect) all licenses, permits and other governmental consents and approvals required by any Legal Requirement or by the provisions of any applicable insurance policy because of the use made of the Premises by Lessee (without intending hereby to vary the provisions of Section 5.0 above), and, if requested by Lessor, to make all repairs, alterations, replacements or additions so required in and to the Premises, and to cooperate with Lessor in the obtaining and renewal by Lessor of all licenses, permits and other governmental consents and approvals with respect to the Premises, the Building or the Land which Lessor is required by applicable laws, ordinances, codes, rules or regulations to obtain in its own name; (f) not to make any alterations, renovations, improvements and/or additions to the Premises (collectively, "Alterations"), without on each occasion obtaining prior written consent of Lessor, which consent may be withheld by Lessor in its reasonable discretion (taking into account the effect of such proposed Alterations on the structural integrity of the Building, whether such proposed Alterations would be detrimental to the Building systems as modified by Lessee's Work, and the effect of such proposed Alterations on the external appearance of the Building), (except that no such prior written consent of Lessor shall be required for Alterations which (i) shall not exceed $10,000 in each instance, and (ii) do not affect the structural integrity of the Building, and (iii) are not detrimental to the Building systems as modified by Lessee's Work, and (iv) do not affect the exterior appearance of the Building, PROVIDED that in each such case (x) Lessee shall still provide advance notice to Lessor of the intended Alterations, and (y) such Alterations shall be subject to all of the provisions of this paragraph (f) other than the requirement of Lessor's prior consent); or to make any holes in any part of the Building or paint or place any signs, awnings, aerials or flagpoles, or the like, visible from outside of the Premises and not previously consented to in writing by Lessor. Prior to commencing 19 23 any Alterations, Lessee shall: secure all necessary licenses, permits and other governmental consents and approvals; obtain the written approval of Lessor as to the plans and specifications for such work (where such approval is required under this paragraph (f)); obtain the written approval of Lessor as to the general contractor (not to be unreasonably withheld, delayed or conditioned); cause each contractor and subcontractor to carry worker's compensation insurance in statutory amounts covering all of the contractor's and subcontractor's employees; and cause each general contractor (or each trade contractor if there is no general contractor) to carry comprehensive public liability insurance in amounts reasonably satisfactory to Lessor (such insurance to be written by companies reasonably satisfactory to Lessor and insuring Lessee and Lessor as well as the contractors). After the first two (2) requests for Lessor's approval of proposed Alterations, Lessee shall reimburse Lessor, promptly upon demand therefor, for one-half (1/2) of all out-of-pocket costs and expenses reasonably incurred by Lessor in reviewing any plans, drawings and specifications submitted by Lessee pursuant to this paragraph (f) (but Lessee shall not be required to pay to Lessor more than $3,000.00 in connection with any one set of Alterations and this charge shall not apply to any Alterations proposed to be constructed by Lessee in the Expansion Premises in anticipation of the initial occupancy thereof by Lessee), which reimbursement shall be due and payable as Additional Rent. All Alterations (other than Tenant's removable personal property and trade fixtures) shall remain part of the Premises and shall not be removed upon the expiration or earlier termination of the Lease Term EXCEPT for those items which (i) either Lessor or Lessee designates for removal in a notice given to the other party at the time that Lessee requests Lessor's approval of such Alteration (if such approval is required hereunder), or (ii) Lessee designates for removal at the time that it notifies Lessor of its intent to make such Alteration (where Lessor's prior approval is not required hereunder), or (iii) Lessor designates for removal in a notice given to Lessee within ten (10) days after Lessee notifies Lessor of its intent to make such Alteration (where Lessor's prior approval is not required hereunder). Lessee shall pay promptly when due the entire cost of such work. Lessee shall not cause or permit any liens for labor or materials performed or furnished in connection therewith to attach to the Land or the Building, and shall discharge or bond any such liens which may be 20 24 filed or recorded within thirty (30) days after the filing or recording thereof. All such work shall be performed in a good and workmanlike manner and in compliance with all Legal Requirements and the provisions of all applicable insurance policies. Promptly after the completion of any Alterations, Lessee shall provide an as-built plan (or, where appropriate in light of the nature or scope of the Alterations, an as-built sketch) thereof to Lessor. Lessee shall indemnify and hold Lessor harmless from and against any and all suits, demands, causes of action, claims, losses, debts, liabilities, damages, penalties or judgments, including, without limitation, reasonable attorneys' fees, arising from injury to any person or damage to any property occasioned by or growing out of such work performed prior to the last day of the Lease Term, which indemnity shall survive the expiration or termination of this Lease provided that such claim is asserted not later than three (3) years after the expiration or earlier termination of the Lease Term. The provisions of this paragraph (f) shall not apply to the performance of "Lessee's Work" (as defined in the Work Letter) but shall apply to any Alterations proposed by Lessee to be constructed in any space leased pursuant to Section 2.0 above); (g) to save Lessor harmless and indemnified from any loss, cost and expense (including, without limitation, reasonable attorney's fees) arising out of or relating to (i) a claim of injury to any person or damage to any property while in the Premises, if not due to the negligence or willful misconduct of Lessor or its officers, agents, employees, servants or contractors, or the breach of Lessor's obligations under this Lease; or to (ii) a claim of injury to any person or damage to any property while in the Building (but not within the Premises) or on the Land or on the sidewalks or ways adjoining the Land, occasioned by any omission, neglect or default of Lessee or of anyone claiming by, through, or under Lessee, or any officer, agent, employee, servant, contractor or invitee of any of the foregoing. The provisions of this clause (g) shall survive the expiration or termination of this Lease with respect to any claim arising prior to the last day of the Lease Term regardless of whether such claim has been asserted by the last day of the Lease Term; (h) consistent with the provisions of this paragraph (h) concerning Lessor's access to the Premises, to permit Lessor and Lessor's agents to examine the Premises at reasonable times, and if Lessor shall so elect (without 21 25 hereby imposing any obligation on Lessor to do so), to permit Lessor to make any repairs or additions Lessor may deem necessary; and at Lessee's expense to remove any Alterations, signs, awnings, aerials or flagpoles, or the like, not consented to in writing; and to permit Lessor to show the Premises to prospective purchasers and tenants (at reasonable times on reasonable advance notice to Lessee) and to keep affixed to any suitable part of the Premises, during the nine (9) months preceding the expiration of the Lease Term, appropriate notices for letting or selling. Notwithstanding anything to the contrary contained herein, except in the event of an emergency requiring prompt attention in order to prevent damage to life or serious property damage, Lessor shall be permitted access to the Premises only upon at least twenty-four (24) hours' prior written notice to Dr. William Kelley or such other management level employee designated by Lessee, and when accompanied by a representative of Lessee designated by Lessee. Any such access shall only be permitted during Lessee's normal business hours and shall not unreasonably interfere with Lessee's operations. Lessor shall take all reasonable precautions necessary to minimize any disruption of Lessee's activities. All persons entering the Premises shall comply with all reasonable safety and security requirements of Lessee. No access shall be permitted into those portions of the Premises designated by Lessee as a "clean room" or as a secured area except in the event of an emergency or at other times upon the conditions set forth in the preceding provisions of this paragraph (h). In the event of an emergency which occurs during traditional business hours, prior to entering the Premises, Lessor shall provide oral notice to Lessee. In the event of an emergency which does not occur during traditional business hours, prior to entering the Premises, Lessor shall provide notice to Lessee via telephonic transmission to such telecopier numbers and telephonic pager numbers as Lessee may provide from time to time; (i) that all merchandise, furniture, fixtures, effects and property of every kind of Lessee and of all persons claiming by, through or under Lessee which may be on the Premises from time to time (collectively, "Lessee's Property") shall be at the sole risk of Lessee, and Lessor shall not be liable if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes, or other pipes, or by theft or from 22 26 any other cause unless caused by the negligence or willful misconduct of Lessor; (j) to pay promptly when due, all taxes of any kind levied, imposed or assessed on Lessee's Property, which taxes shall be the sole obligation of Lessee, whether the same is assessed to Lessee or to any other person and whether the property on which such tax is levied, imposed or assessed shall be considered part of the Premises or personal property; PROVIDED, HOWEVER, that Lessee shall have the right to contest the amount of any such taxes by appropriate legal proceedings diligently conducted in good faith, without cost, expense, liability or damage to Lessor, provided in each case that: (i) no lien or encumbrance shall attach to the Land, Building or any equipment and improvements therein by reason of non-payment or otherwise by reason of such contest; (ii) Lessee shall indemnify Lessor against liability resulting from or incurred in connection with such contest; and (iii) Lessee shall keep Lessor regularly advised as to the status of such contest; (k) by the end of business on the last day of the Lease Term (or the effective date of any earlier termination of this Lease as herein provided), to remove all of Lessee's Property, and those Alterations designated for removal as provided in paragraph (f) above, whether the same be permanently affixed to the Premises or not, and to repair any damage caused by any such removal to Lessor's reasonable satisfaction; and to remove the contents of all neutralization tanks installed by Lessee in the Premises; and peaceably to yield up the Premises clean and in good order, repair and condition (excepting only reasonable wear and tear, and damage by fire or other casualty or taking which Lessee is not otherwise required by the terms of this Lease to repair or restore); and to deliver the keys to the Premises to Lessor. Any of Lessee's Property or those Alterations designated for removal as provided in paragraph (f) above, which is not removed by such date shall be deemed abandoned and may be removed and disposed of by Lessor in such manner as Lessor may determine, and Lessee shall pay to Lessor on demand, as Additional Rent, the entire cost of such removal and disposition, together with the costs and expenses incurred by Lessor in making any incidental repairs and replacements to the Premises necessitated by Lessee's failure to remove Lessee's Property or any of those Alterations designated for removal as provided in paragraph (f) above, as required herein or by any other failure of 23 27 Lessee to comply with the terms of this Lease, and for use and occupancy during the period after the expiration of the Lease Term and prior to Lessee's performance of its obligations under this paragraph (k). Lessee hereby acknowledges that any failure or delay on Lessee's part in surrendering the Premises as above provided shall subject Lessor to the expense of performing such work and the risk of losing a successor tenant; (l) to pay Lessor's reasonable expenses, including reasonable attorneys' fees, incurred in enforcing any obligations of Lessee under this Lease; (m) not to generate, store or use any "Hazardous Materials" (as hereinafter defined) in or on the Premises except those identified in writing to Lessor from time to time (such identification may take the form of delivery by Lessee to Lessor of material safety data sheets for such Hazardous Materials), and then only in compliance with any and all applicable Legal Requirements, or dispose of Hazardous Materials from the Premises to any other location, except a properly approved disposal facility and then only in compliance with any and all applicable Legal Requirements, nor permit any occupant of the Premises to do so. As used in this Lease, "Hazardous Materials" means and includes any chemical, substance, waste, material, gas or emission which is radioactive or is deemed hazardous, toxic, a pollutant, or a contaminant under any statute, ordinance, by-law, rule, regulation, executive order or other administrative order, judgment, decree, injunction or other judicial order of or by any governmental authority, now or hereafter in effect, relating to pollution or protection of human health or the environment, including, without limitation, those enumerated in the following sentence (collectively, "Environmental Laws"). By way of illustration and not limitation, "Hazardous Materials" includes "oil", "hazardous materials", "hazardous waste", and "hazardous substance" as defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ., as amended, the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6902 ET SEQ., as amended, and the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ., as amended, the regulations promulgated thereunder, and Massachusetts General Laws, Chapter 21C and Chapter 21E and the regulations promulgated thereunder. If at any time during the Lease Term, any governmental authority, by reason of the use of the Premises made by Lessee or 24 28 anyone claiming by, through or under Lessee, requires testing to determine whether there has been any release of Hazardous Materials by Lessee, then Lessee shall reimburse Lessor upon demand, as Additional Rent, for the reasonable costs thereof. If, in anticipation of the commencement of the Lease Term or at any time during the Lease Term, Lessee performs any testing to determine whether there has been any release of Hazardous Materials onto or below the surface of the Premises, Lessee shall promptly provide a copy of such report to Lessor at no charge to Lessor. Lessee shall execute such affidavits as may be reasonably requested by Lessor from time to time, concerning Lessee's best knowledge and belief concerning the presence of Hazardous Materials in or on the Premises. Subject to the provisions of Section 12(h) above, Lessor reserves the right to enter the Premises at reasonable times (provided twenty-four (24) hours' notice is given to Lessee, except in case of emergency) to inspect the same for Hazardous Materials. Lessee's obligations under this paragraph (m) shall include, if at any time during the Lease Term Lessee uses or stores radioactive materials on the Premises, compliance with all so-called "close-out" procedures of the Nuclear Regulatory Commission or other federal, state or local governmental authorities having jurisdiction over radioactive materials, regardless of whether or not such procedures are completed prior to the expiration or earlier termination of the Lease Term. Lessee shall indemnify, defend, and hold harmless Lessor, and the holder of any mortgage on the Premises or any portion thereof, from and against any claim, cost, expense, liability, obligation or damage, including, without limitation, reasonable attorneys' fees and the cost of litigation, arising from or relating to the breach by Lessee of the provisions of this clause (m), and shall immediately discharge or cause to be discharged any lien imposed upon the Building or the Land in connection with any such claim. Lessee shall not be responsible for any noncompliance with Environmental Laws or Legal Requirements to the extent attributable to conditions already existing on the date hereof, or contamination caused by Lessor or any other tenant of Lessor (excluding Lessee and anyone claiming by, through or under Lessee) or their respective employees, agents and invitees after the date hereof. Nothing herein shall be deemed to create an obligation on the part of Lessee with respect to (1) contamination already existing before the date hereof, or (2) contamination caused by Lessor or any other 25 29 tenant of Lessor (excluding Lessee and anyone claiming by, through or under Lessee) or their respective agents, employees or invitees after the date hereof. For purposes of this paragraph 12(m) and this Lease, the term "contamination" shall mean the uncontained presence of Hazardous Materials at the Premises, or arising from the Premises, which requires remediation under any applicable Environmental Law or Legal Requirement. Nothing herein shall be deemed to impair Lessee's right to contest any governmental agency's orders or directives with respect to environmental matters PROVIDED that (i) such contest is diligently conducted in good faith, in the name of Lessee, without cost, expense, liability or damage to Lessor; (ii) such contest shall not subject Lessor to civil or criminal penalty or to prosecution for a crime, nor subject the Land, the Building or any part thereof to being condemned or vacated, or subject to any lien or encumbrance, by reason of such contest; (iii) before the commencement of such contest, Lessee shall furnish to Lessor the bond of a surety company reasonably satisfactory to Lessor, in form and substance reasonably satisfactory to Lessor, or other security in a form reasonably acceptable to Lessor, in an amount equal to one hundred percent (100%) of the cost of compliance with such order or directive (as reasonably estimated by Landlord); (iv) Lessee shall indemnify Lessor against the cost of such compliance and liability resulting from or incurred in connection with such contest or non-compliance; and (v) Lessee shall keep Lessor regularly advised as to the status of such proceedings in good faith. The provisions of this clause (m) shall survive the expiration or termination of this Lease; and (n) not to permit any officer, agent, employee, servant, contractor or visitor of Lessee to violate any covenant or obligation of Lessee hereunder. 13. Construction ------------ 13.1 WORK LETTER. The Premises shall be renovated and finished in accordance with the provisions of the Work Letter attached hereto as EXHIBIT C. 13.2 ROOF LOAD CAPACITY. Lessee shall cause its structural engineer to inspect the roof of the Building in those locations in which Lessee intends to install roof-top 26 30 equipment as part of "Lessee's Work" (as defined in the Work Letter). If such engineer determines that the roof load capacity is less than 30 pounds per square foot in any of such locations: (i) Lessee shall notify Lessor in writing; and (ii) as part of Lessee's Work, Lessee shall reinforce such portions of the roof as reasonably required for the roof-top equipment which Lessee intends to install; and (iii) upon completion of Lessee's Work (as evidenced by a "Certificate of Substantial Completion" issued by Lessee's architect) and the commencement of the payment of Rent by Lessee, Lessee shall be entitled to submit to Lessor for reimbursement paid invoices for the cost of such reinforcement of the roof. Provided that such invoices are reasonably satisfactory in form and content to Lessor, then Lessor shall promptly reimburse Lessee for such cost. The amount of such reimbursement shall be fully amortized over the portion of the Initial Lease Term remaining as of the date of such payment by Lessor to Lessee, on a straight-line basis. Lessee shall pay such amounts in equal monthly installments, as Additional Rent, at the same time and in the same manner as Basic Rent. 13.3 FLOOR LOADS. In the event that at any time during the performance of Lessee's Work, Lessee's structural engineer determines that the floor load of the first floor of the Premises is less than 125 pounds per square foot, Lessee shall notify Lessor in writing. If requested by Lessee, Lessor shall, at its sole cost and expense and without reimbursement from Lessee, be responsible for reinforcing such portions of the first floor of the Building so as to achieve a floor load of at least 125 pounds per square foot. 14. Eminent Domain and Casualty. ---------------------------- 14.1 SUBSTANTIAL TAKING. In the event that (i) more than fifty (50%) percent of the rentable area of the Premises then occupied by the named Lessee itself, shall be taken by any exercise of the right of eminent domain or other lawful power in pursuance of any public or other authority during the Lease Term, then this Lease shall terminate as of the time that possession is taken by the taking authority. 14.2 AWARDS. Lessor reserves and excepts all rights to damage to the Premises, the Building, the Land and the leasehold hereby created, now accrued or hereafter accruing by reason of any exercise of eminent domain, or by reason of anything lawfully done in pursuance of 27 31 any public or other authority, and by way of confirmation, Lessee grants to Lessor all of Lessee's rights to such damages and covenants to execute and deliver such further instruments of assignment thereof as Lessor may from time to time request. Lessee shall be entitled only to such award, if any, as is specifically allocated by the taking authority to Lessee on account of relocation expenses or other damages suffered by Lessee as a result of such taking. 14.3 SUBSTANTIAL CASUALTY. If the Premises are damaged by fire or other casualty, Lessee shall promptly notify Lessor thereof. If the Premises or any part thereof shall be so damaged to the extent that more than fifty (50%) percent of the rentable area of the Premises then occupied by the named Lessee itself is rendered unusable by Lessee for the operation of its business in the Premises (whether by reason of direct or indirect damage from the casualty), or if the Building is so damaged (regardless of whether or not the Premises are damaged) that Lessee is deprived of all reasonable access to the Premises or all reasonable use of the Premises, then in either case either Lessor or Lessee may terminate this Lease by giving written notice of such termination to the other party within sixty (60) days after the date of such damage, in which event this Lease shall terminate on the date set forth in such notice. In the event that this Lease is terminated pursuant to this Section 14.3: (i) Rent shall be abated, to the extent the Premises are unusable for the Permitted Uses, from and after the date of such damage to the date of such termination of this Lease, and no further Rent shall accrue or be payable after the date of such termination; and (ii) Lessee shall turn over and assign to Lessor all insurance proceeds (and rights to receive the same) relating to Lessee's Work and any Alterations EXCEPT for the portion (if any) of such proceeds which is allocable to the actual cash value of the components thereof which had previously been designated in writing to by one party to the other as items to be removed upon the expiration of the Lease Term. 14.4 REPAIR AND RESTORATION. In the event of a taking which does not result in the termination of this Lease pursuant to Section 14.1 above, or a casualty which does not result in the termination of this Lease pursuant to Section 14.3 above, the Premises shall be repaired and restored in the manner provided in this Section. Lessor shall diligently act to restore the Building and the Premises (exclusive of Lessee's Work, 28 32 any Alterations made by Lessee, and Lessee's Property) or, in case of taking, what remains thereof, to substantially the condition in which they existed prior to the occurrence of such taking or casualty, provided, however, that: (i) in no event shall Lessor be required to spend in connection with restoring the Premises more than the amount of insurance proceeds or taking award actually received and allocable thereto (except that this limitation with respect to insurance proceeds shall not apply to casualties occurring during such time as Lessor self-insures pursuant to Section 8.4 above); (ii) Lessor shall not be required to restore or replace any of Lessee's Work, Alterations or Lessee's Property; and (iii) promptly upon completion of such work by Lessor, Lessee shall diligently act to restore and/or replace Lessee's Work, the Alterations and all of Lessee's Property to substantially the same condition they were in prior to the occurrence of such taking or casualty. All work performed by Lessor or by Lessee pursuant to this Section shall be performed in a good and workerlike manner, and in compliance with all Legal Requirements. Lessor shall not be liable for any inconvenience or annoyance to Lessee or injury to the business of Lessee resulting in any way from such taking or damage or the repair thereof. Rent shall be abated from and after the date of such taking or damage to the date on which Lessor substantially completes the restoration described above, to the extent the Premises are unusable for the Permitted Uses, but the amount of such abatement shall in no event exceed the amount received by Lessor under the rental loss insurance policy required by Section 8.2 above. Notwithstanding the foregoing provisions of this Section: (a) in the event that Lessor has not substantially completed, within one (1) year after the date of such taking or damage (which period shall be extended by the duration of any and all events of Force Majeure), the restoration work which it is required by this Section to perform, then Lessee shall have the right to terminate this Lease by giving thirty (30) days' written notice to Lessor within thirty (30) days after the end of such 1-year period (as such 1-year period may be extended as provided above); and (b) in the event that Lessor determines that the amount of insurance proceeds available for the repair and restoration work for which Lessor is 29 33 responsible under this Section and Lessor refuses to provide the funds necessary to make up such deficit, Lessor shall notify Lessee within thirty (30) days of the occurrence of such casualty. Lessee shall then have the right to terminate this Lease by giving written notice to Lessor within fifteen (15) days after Lessee's receipt of Lessor's notice. 14.5 CASUALTY DURING LAST 12 MONTHS. Notwithstanding anything to the contrary contained in this Lease, in the event that a material portion of the Premises is damaged by a fire or other casualty occurring during the last twelve (12) months of the Lease Term, either party may terminate this Lease by giving written notice to the other within thirty (30) days of the occurrence of such damage. If this Lease is so terminated, Lessee shall turn over and assign to Lessor all insurance proceeds (and rights to receive the same) relating to the Building EXCEPT as otherwise provided in the last sentence of Section 14.3 above. However, if Lessee has exercised an Extension Option prior to the occurrence of such casualty, then this Section 14.5 shall not apply and neither party shall have the right to terminate this Lease pursuant to this Section 14.5. 15. Defaults; Events of Default; Remedies. -------------------------------------- 15.1 DEFAULTS; EVENTS OF DEFAULT. The following shall, if any requirement for notice or lapse of time or both has not been met, constitute defaults hereunder, and, if such requirements have been met, constitute "Events of Default" hereunder: (a) The failure of Lessee to perform or observe any of Lessee's covenants or agreements hereunder concerning the payment of money for a period of ten (10) business days after written notice thereof, PROVIDED, HOWEVER, that Lessee shall not be entitled to such notice if Lessor has given notice to Lessee of two or more previous such failures within a twelve-month period, in which event such failure shall constitute an Event of Default hereunder upon the expiration of ten (10) business days after such payment was due; (b) The failure of Lessee to maintain the insurance required hereunder in full force and effect; (c) The failure of Lessee to perform or observe any of Lessee's other covenants or agreements hereunder 30 34 for a period of thirty (30) days after written notice thereof (provided that, in the case of defaults not reasonably curable in thirty (30) days through the exercise of reasonable diligence, such 30-day period shall be extended for so long as Lessee commences cure within such period and thereafter prosecutes such cure to completion continuously and with reasonable diligence); and (d) if the leasehold hereby created shall be taken on execution, or by other process of law, and such taking is not vacated by a final order of a court of competent jurisdiction within sixty (60) days thereafter; or if any assignment shall be made of Lessee's property for the benefit of creditors; or if a receiver, guardian, conservator, trustee in bankruptcy or similar officer shall be appointed to take charge of all or any part of Lessee's property by a court of competent jurisdiction, and such appointment is not vacated by a final order of a court of competent jurisdiction within sixty (60) days thereafter; or if a petition is filed by Lessee under any bankruptcy or insolvency law; or if a petition is filed against Lessee under any bankruptcy or insolvency law and the same shall not be dismissed within sixty (60) days from the date upon which it is filed; or if a lien or other involuntary encumbrance is filed against Lessee's leasehold (or against the Premises, the Building or the Land based on a claim against Lessee) and is not discharged or bonded within thirty (30) days after the filing thereof. 15.2 TERMINATION. If an Event of Default shall occur, Lessor may, at its option, immediately or any time thereafter and without demand or notice, enter upon the Premises or any part thereof in the name of the whole and repossess the same as of Lessor's former estate and dispossess Lessee and those claiming through or under Lessee and remove their effects, without being deemed guilty of any manner of trespass and without prejudice to any remedies which might otherwise be used for arrears of rent or preceding breach of covenant, and upon such entry this Lease shall terminate. In lieu of making such entry, Lessor may terminate this Lease upon five (5) business days' prior written notice to Lessee. Upon any termination of this Lease as the result of an Event of Default, Lessee shall quit and peacefully surrender the Premises to Lessor. 31 35 15.3 SURVIVAL OF COVENANTS. No such termination of this Lease shall relieve Lessee of its liability and obligations under this Lease and such liability and obligations shall survive any such termination. Lessee shall indemnify and hold Lessor harmless from all loss, cost, expense, damage or liability arising out of or in connection with such termination. In the event of any such termination, Lessee shall pay to Lessor the Rent up to the time of such termination. Lessee shall remain liable for, and shall pay on the days originally fixed for such payment hereunder, the full amount of all Basic Rent and Additional Rent as if this Lease had not been terminated; PROVIDED, HOWEVER, if Lessor relets the Premises, there shall be credited against such obligation the amount actually received by Lessor each month from such lessee after first deducting all costs and expenses incurred by Lessor in connection with reletting the Premises. At any time within one (1) year after such termination, and regardless of whether Lessee has made any payments to Lessor pursuant to the preceding paragraph of this Section, Lessor may demand and Lessee agrees to pay to Lessor on such demand, as and for liquidated and agreed damages for Lessee's default, the present value of the amount by which: (a) the aggregate Rent which would have been payable under this Lease by Lessee from the date of such termination until what would have been the last day of the Lease Term but for such termination, EXCEEDS (b) the greater of (i) the fair and reasonable rental value of the Premises for the same period, less Lessor's reasonable estimate of expenses to be incurred in connection with reletting the Premises, including, without limitation, all repossession costs, brokerage commissions, legal expenses, reasonable attorneys' fees, alteration costs, and expenses of preparation for such reletting, or (ii) the sum of (A) the amount actually received or to be by Lessor from reletting the Premises pursuant to leases which are in effect as of the date on which Lessor elects to proceed under this paragraph, and (B) the amount (if any) actually received by Lessor from Lessee pursuant to the preceding paragraph of this Section on account of any period after such termination. 32 36 If the Premises or any part thereof are relet by Lessor for the period prior to what would have been the last day of the Lease Term but for such termination, or any portion thereof, the amount of rent reserved upon such reletting shall be, PRIMA FACIE, the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. In the event of the filing of a petition by or against Lessee under any federal bankruptcy or insolvency law now or hereafter in effect, nothing herein contained shall limit or prejudice the right of Lessor to prove and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. 15.4 RIGHT TO RELET. At any time or from time to time after any such termination, Lessor may relet the Premises or any part thereof for such a term (which may be greater or less than the period which would otherwise have constituted the balance of the Lease Term) and on such conditions (which may include concessions or free rent) as Lessor, in its reasonable discretion, may determine, and may collect and receive the rents therefor. Lessor shall in no way be responsible or liable for any failure to relet the Premises or any part thereof, or for any failure to collect any rent due upon any such reletting. 15.5 RIGHT TO EQUITABLE RELIEF. In the event of the occurrence of an Event of Default hereunder, Lessor shall be entitled to seek to enjoin the continuance thereof and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise as though re-entry and other remedies were not provided for in this Lease. 15.6 RIGHT TO SELF HELP. In the event of the occurrence of an Event of Default hereunder, Lessor shall have the right to perform such defaulted obligation of Lessee, including the right to enter upon the Premises to do so. Lessor shall, as a courtesy only, notify Lessee of its intention to perform such obligation. In the event of a default by Lessee hereunder which has not yet continued beyond the expiration of the applicable grace period but which Lessor determines constitutes an emergency threatening imminent injury to persons or 33 37 damage to property, Lessor shall have the right to perform such defaulted obligation of Lessee (including the right to enter upon the Premises to do so) after giving Lessee such notice (if any) as is reasonable under the circumstances. In either event, the aggregate of (i) all sums so paid by Lessor, (ii) interest at the rate of the "prime" rate from time to time thereafter published in THE WALL STREET JOURNAL plus 1-1/2% per annum on such sum, and (iii) all necessary incidental costs and expenses in connection with the performance of any such act by Lessor, shall be deemed to be Additional Rent under this Lease and shall be payable to Lessor immediately upon demand. Lessor may exercise its rights under this Section 15.6 without waiving any other of its rights or releasing Lessee from any of its obligations under this Lease. 15.7 FURTHER REMEDIES. Nothing in this Lease contained shall require Lessor to elect any remedy for an Event of Default by Lessee hereunder, and all rights herein provided shall be cumulative with one another and with any other rights and remedies which Lessor may have at law or in equity in the case of such Event of Default. 16. Intentionally Deleted. --------------------- 17. REAL ESTATE BROKER. Lessor and Lessee each represent to the other that they have dealt with no broker in connection with this Lease other than Meredith & Grew, Inc. ("Broker"). Lessor shall pay the Broker as part of a separate agreement. Lessee agrees to indemnify and hold Lessor harmless from and against any claims for commissions or fees by any person other than the Broker arising from a breach by Lessee of the foregoing representation. Lessor agrees to indemnify and hold Lessee harmless from and against any claims for commissions or fees by the Broker or any other person by reason of a breach by Lessor of the foregoing representation. 18. NOTICES. Whenever by the terms of this Lease notice, demand, or other communication shall or may be given either to Lessor or to Lessee, the same shall be in writing and shall be sent by hand, or by registered or certified mail, postage prepaid, or by Federal Express or other similar overnight delivery service, to: 34 38 Lessor: Massachusetts Institute of Technology Suite 200 238 Main Street Cambridge, Massachusetts 02142 Attention: Philip A. Trussell, Director of Real Estate with a copy to: Peter Friedenberg, Esquire Rackemann, Sawyer & Brewster One Financial Center Boston, Massachusetts 02111 Lessee: Alkermes, Inc. 64 Sidney Street Cambridge, Massachusetts 02139 Attention: Michael J. Landine, Chief Financial Officer Any notice, demand or other communication shall be effective upon receipt by or tender for delivery to the intended recipient thereof. 19. NO WAIVERS. Failure of either Lessor or Lessee to complain of any act or omission on the part of the other, no matter how long the same may continue, shall not be deemed to be a waiver by such non-complaining party of any of its rights hereunder. No waiver by either Lessor or Lessee at any time, expressed or implied, of any breach of any provision of this Lease shall be deemed a waiver of a breach of any other provision of this Lease or a consent to any subsequent breach of the same or any other provision. No acceptance by Lessor of any partial payment shall constitute an accord or satisfaction but shall only be deemed a partial payment on account; nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such installment or pursue any other remedy available to Lessor in this Lease or at law or in equity. 20. Lessor's Obligations. -------------------- 20.1 Generally. Lessor shall: --------- (a) not obstruct in any manner any portion of the sidewalks or approaches to the Building or any portion of the Parking Area leased to Lessee hereunder; 35 39 (b) pay Lessee's reasonable expenses, including reasonable attorneys' fees, incurred in enforcing any obligations of Lessor under this Lease; and (c) save Lessee harmless and indemnified from any loss, cost and expense (including, without limitation, reasonable attorney's fees) arising out of or relating to a claim of injury to any person or damage to any property while on the Premises, in the Building, on the Land or on the sidewalks or ways adjoining the Land occasioned by any omission, neglect or default of Lessor or any officer, agent, employee, servant, contractor or invitee of Lessor. The provisions of this paragraph (c) shall survive the expiration or termination of this Lease with respect to any claim arising prior to the last day of the Lease Term regardless of whether such claim is asserted prior to the last day of the Lease Term. 20.2 LESSOR'S MAINTENANCE. Lessor shall maintain: (i) the structural components of the Building, (ii) the roof and exterior skin of the Building, and (iii) the Parking Area in good order, repair and condition, excepting only (a) damage by fire or other casualty or taking which Lessor is not otherwise required by the terms of this Lease to repair or restore, (b) reasonable wear and tear, or (c) the negligent acts or omissions or willful misconduct of Lessee, anyone claiming by, through or under Lessee, or any of the officers, employees, agents, servants, contractors or invitees of any of the foregoing. Notwithstanding the foregoing, any and all maintenance, repair or replacement required to be made to any of the structural components of the Building, or to the roof or the exterior skin of the Building or to the Parking Area by reason of (i) any of Lessee's Work, or any Alterations made by or on behalf of Lessee, or (ii) any act or omission of Lessee, anyone claiming by, through or under Lessee, or any of the officers, employees, agents, servants, contractors or invitees of any of the foregoing, shall be solely the responsibility of Lessee. 21. Ground Leases; Mortgages. ------------------------ 21.1 RIGHTS OF GROUND LESSORS AND MORTGAGEES. No act or failure to act on the part of Lessor which would entitle Lessee under the terms of this Lease, or by law, to be relieved of Lessee's obligations hereunder or to terminate this Lease, shall result in a release 36 40 or termination of such obligations or a termination of this Lease unless (i) Lessee shall have first given written notice to Lessor's ground lessors and mortgagees of record of the act or failure to act on the part of Lessor which Lessee claims as the basis of Lessee's rights; and (ii) such ground lessors and mortgagees, after receipt of such notice, have failed or refused to correct or cure the condition within a reasonable time thereafter, but nothing in this Lease shall be deemed to impose any obligation on any such ground lessor or mortgagee to correct or cure any such condition. No ground lessor shall be liable for the failure to perform any of the obligations of Lessor hereunder unless and until such ground lessor terminates its ground lease and takes possession of the Premises, nor shall any mortgagee be liable for the failure to perform any of the obligations of Lessor hereunder unless and until such mortgagee enters upon and takes possession of the Premises for purposes of foreclosure. 21.2 LEASE SUBORDINATE. This Lease is and shall be subject and subordinate to any ground lease or mortgage now or hereafter on the Premises, and to all advances under any such mortgage and to all renewals, amendments, extensions and consolidations thereof, provided that the holder of such ground lessor's interest or mortgagee's interest enters into a non-disturbance and attornment agreement with Lessee which provides that in the event that such ground lessor or mortgagee succeeds to Lessor's interest hereunder, then, provided that Lessee is not in default hereunder beyond the cure period provided in this Lease, such party shall recognize and be bound by the terms of this Lease. In the event that any ground lessor or the holder of any mortgage succeeds to Lessor's interest in the Premises or any portion thereof, Lessee hereby agrees to attorn to such ground lessor or mortgagee. In confirmation of such subordination, Lessee shall execute and deliver promptly any certificate in recordable form that Lessor or any ground lessor or any mortgagee may reasonably request. Notwithstanding the foregoing provisions of this Section, the holder of any mortgage on the Premises may at any time subordinate its mortgage to this Lease by written notice to Lessee. Lessor hereby represents to Lessee that as of the date of this Lease, there are no mortgages or ground leases encumbering the Premises or any portion thereof. 37 41 22. NOTICE OF LEASE; ESTOPPEL CERTIFICATES. Lessor and Lessee agree that this Lease shall not be recorded. However, upon the request of either party, Lessor and Lessee shall execute and acknowledge a Notice of Lease in mutually acceptable and recordable form. From time to time during the Lease Term, and without charge, either party shall, within fifteen (15) business days of request by the other, certify by written instrument duly executed and acknowledged, to the requesting party or to any person reasonably specified by the requesting party, regarding (a) the existence of any amendments or supplements to this Lease; (b) the validity and force and effect of this Lease; (c) the existence of any known default or Event of Default; (d) the existence of any offsets, counterclaims or defenses; (e) the Commencement Date and the expiration date of the Lease Term; (f) the amount of Rent due and payable and the date to which Rent has been paid; and (g) any other matter reasonably requested. 23. HOLDING OVER. If Lessee occupies the Premises after the day on which the Lease Term expires (or the effective date of any earlier termination as herein provided) without having entered into a new lease thereof with Lessor, Lessee shall be a tenant-at-sufferance only, subject to all of the terms and provisions of this Lease at two and one-half (2 1/2) times the then-effective Basic Rent stated in Section 4.0 above. Such a holding over, even if with the consent of Lessor, shall not constitute an extension or renewal of this Lease. For purposes of this Section, the failure of Lessee to complete by the last day of the Lease Term or the effective date of any earlier termination as herein provided the "close-out" procedures required by the Nuclear Regulatory Commission or any other federal, state or local governmental agency having jurisdiction over the use of radioactive materials within the Premises shall constitute a holding over and subject Lessee to the provisions of this Section. 24. FORCE MAJEURE. Neither Lessor nor Lessee shall be deemed to be in default hereunder (and the time for performance of any of their respective obligations hereunder other than the payment of money shall be postponed) for so long as the performance of such obligation is prevented by strike, lock- out, act of God, absence of materials or any other matter not reasonably within the control of the party which must perform the obligation (collectively, "Force Majeure"). 25. SIGNS. Lessee shall have the right to install up to two signs on the Building, identifying its name and business, provided that (i) Lessee shall obtain Lessor's reasonable prior written approval as to the location, size, shape and 38 42 appearance of each sign, and as to the plans and specifications relating to such installation; (ii) Lessee shall install each such sign at its sole cost; (iii) Lessee shall, at its sole cost, obtain all licenses, permits and other governmental consents and approvals required by applicable Legal Requirements to install the signs; (iv) Lessee shall cause such installation to be done in a good and workmanlike manner and in accordance with all applicable Legal Requirements, the provisions of applicable insurance policies, and the requirements of all existing restrictions, easements and encumbrances of record affecting the Land; (v) Lessee shall, at its sole cost, maintain the signs in good operating condition and in accordance with all applicable Legal Requirements, the provisions of applicable insurance policies, and the requirements of all existing restrictions, easements and encumbrances of record affecting the Land; and (vi) Lessee shall, at its sole cost, remove the signs on or prior to the date on which the Lease Term expires or this Lease is terminated and restore the surface of the Land and/or the Building to the condition in which it was prior to the installation of the signs. Lessor shall cooperate with Lessee, at no cost to Lessor, in connection with the filing of any application with the City of Cambridge necessary to obtain approval of the signs as approved by Lessor. All work done by or on behalf of Lessee pursuant to this Section shall be subject to the requirements set forth in Section 12.0(f) above. Lessor may inspect such work at any time or times and shall promptly give notice to Lessee of any observed defects. Lessee shall indemnify, defend and hold harmless Lessor from and against any and all liability, damage, penalties or judgments and from and against any claims, actions, proceedings and expenses and costs in connection therewith, including reasonable attorneys' fees, resulting from any work performed by or on behalf of Lessee pursuant to this Section. Such signs shall be at Lessee's sole risk, and Lessor shall not have no responsibility to maintain any insurance on them or otherwise be responsible for any damage or destruction thereto. 26. ENTIRE AGREEMENT. No oral statement or prior written matter shall have any force or effect. This Agreement shall not be modified or canceled except by writing subscribed to by all parties. 27. APPLICABLE LAW, SEVERABILITY AND CONSTRUCTION. This Lease shall be governed by and construed in accordance with the laws of Massachusetts and, if any provisions of this Lease shall to any extent be invalid, the remainder of this Lease, and the application of such provisions in other 39 43 circumstances, shall not be affected thereby. The titles of the several Sections contained herein are for convenience only and shall not be considered in construing this Lease. Whenever the singular is used and when required by the context it shall include the plural, and the neuter gender shall include the masculine and feminine. The Exhibits attached to this Lease are incorporated into this Lease by reference. This Lease may be executed in several counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. The term "Lessor" whenever used herein, shall mean only the owner at the time of Lessor's interest herein, and no covenant or agreement of Lessor, express or implied, shall be binding upon any person except for defaults occurring during such person's period of ownership nor binding individually upon any officer, director, employee, fiduciary, shareholder or any beneficiary under any trust, and the liability of Lessor, in any event, shall be limited to Lessor's interest in the Building. If Lessee is several persons or a partnership, Lessee's obligations are joint or partnership and also several. Unless repugnant to the context, "Lessor" and "Lessee" mean the person or persons, natural or corporate, named above as Lessor and as Lessee respectively, and their respective heirs, executors, administrators, successors and assigns. 28. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions of this Lease shall be binding upon and inure to the benefit of Lessor and Lessee and their respective successors and permitted assigns. 29. SECURITY DEPOSIT. Lessee has deposited with Lessor contemporaneously with its delivery to Lessor of executed counterparts of this Lease $8,500.00 (the "Security Deposit") as security for the full and faithful payment and performance by Lessee of its obligations under this Lease from and after the date of execution hereof by Lessee, and not as a prepayment of Rent. The Security Deposit shall be kept in a money market savings account separate from other funds of Lessor, and shall bear interest at the rate in effect from time to time on such account, which interest shall be paid to Lessee annually. Lessor may use the Security Deposit to cure any Event of Default by Lessee (whether occurring prior to the Rent Commencement Date hereunder or thereafter), and Lessee shall immediately pay to Lessor on demand, as Additional Rent, the amount so expended and such additional amount as is required to cause the Security Deposit to equal the amount of $8,500.00. Lessor shall assign the Security Deposit to any successor owner of the Building and thereafter Lessor shall have no further responsibility therefor. Upon the expiration (or 40 44 earlier termination) of the Lease Term, Lessor shall inspect the Premises, make such deductions from the Security Deposit as may be required to cure any Event of Default by Lessee hereunder, and, if Lessee is not then in default hereunder, pay the balance of the Security Deposit, if any, to Lessee within thirty (30) days of such expiration or termination. If Lessee is in default hereunder at the time of such expiration or termination, then Lessor shall be entitled to retain so much of the Security Deposit as Lessor reasonably estimates to be Lessee's liability to Lessor hereunder and shall pay the balance, if any, to Lessee within such 30-day period. 30. AUTHORITY. Lessee hereby represents and warrants to Lessor that Michael J. Landine has the authority to execute this Lease on behalf of Lessee. Lessee shall furnish to Lessor a certified copy of the resolution of the Board of Directors of Lessee ratifying Lessee's execution of the Lease promptly after the July 1993 Board meeting. Lessor shall furnish appropriate evidence of the authority of Lessor to enter into this Lease. WITNESS the execution hereof in multiple counterparts under seal the day and year first above written. LESSOR: MASSACHUSETTS INSTITUTE OF TECHNOLOGY Date: July 28, 1993 By: /s/ Philip A. Trussell --------------------------------- ----------------------------------- Philip A. Trussell, Director of Real Estate Hereunto duly authorized LESSEE: ALKERMES, INC. Date: July 26, 1993 By: /s/ Michael J. Landine --------------------------------- ----------------------------------- Michael J. Landine Chief Financial Officer Hereunto duly authorized 41 45 EXHIBIT A PREMISES -------- See attached plan. A-1 46 EXHIBIT B THE LAND -------- See attached plan. B-1 47 EXHIBIT C WORK LETTER ----------- This Work Letter is incorporated by reference into the Lease dated July 26, 1993 by and between Massachusetts Institute of Technology, as Lessor, and Alkermes, Inc. as Lessee. Terms defined in or by reference in the Lease not otherwise defined herein shall have the same meaning herein as therein. 1. ADDITIONAL DEFINITIONS. Each of the following terms shall have the meaning stated immediately after it: CONSTRUCTION AUTHORIZATIONS. Collectively, all permits, licenses and other consents and approvals required from any governmental authority for the construction of Lessee's Work. LESSEE'S GENERAL CONTRACTOR. A general contractor selected by Lessee and approved in writing by Lessor, who will be engaged by Lessee to construct Lessee's Work. LESSEE'S WORK. All improvements, alterations and additions which Lessee wishes to make to the Premises as part of the initial preparation thereof for Lessee's occupancy. WORKING DRAWINGS. The working drawings and specifications for Lessee's Work, to be prepared by Lessee and Lessee's architect in accordance with this Work Letter. The Working Drawings shall be prepared in compliance with all applicable Legal Requirements and stamped by registered Massachusetts professionals, and shall consist of all architectural and engineering plans and specifications which are required to finish the Premises or to obtain any Construction Authorization required therefor. 2. PREPARATION OF THE PREMISES. Lessor is leasing the Premises to Lessee in its "as is" condition, and Lessor shall have no obligation to perform any repairs or make any improvements to the Premises in anticipation of Lessee's occupancy thereof. Lessee shall perform Lessee's Work at Lessee's sole cost and expense. Prior to the commencement of any design work on Lessee's Work, Lessee shall provide to Lessor an original certificate of insurance, in customary form, for each architect and C-1 48 engineer retained by Lessee in connection with the design and/or construction of Lessee's Work, which certificate shall evidence a current "errors and omissions" insurance policy as in effect, in an amount reasonably acceptable to Lessor. Prior to the commencement of the construction of Lessee's Work, Lessee shall provide to Lessor an original certificate of insurance for the general contractor (or, if no general contractor is used, each trade contractor) employed by Lessee in connection with the construction of Lessee's Work, which certificate shall evidence a current general liability insurance policy as in effect, in an amount reasonably acceptable to Lessor, naming Lessor as an additional insured. 3. WORKING DRAWINGS. Lessee shall be solely responsible for the preparation and completion of all preliminary and final Working Drawings. Lessee shall retain its own architects and engineers to prepare Working Drawings, provided that Lessor first approves such engineers and architects so selected by Lessee, which approval shall not be unreasonably withheld or delayed. Lessee shall provide copies of the preliminary Working Drawings to Lessor, together with a list of elements of Lessee's Work which Lessee intends to remove from the Premises upon the expiration or earlier termination of this Lease. Lessor shall provide to Lessee within ten (10) business days thereafter a list of corrections and modifications which Lessor requires to be made to the Working Drawings. Lessor shall also provide to Lessee within such 10-business day period a list of those elements of Lessee's Work which Lessee must remove at the expiration or earlier termination of this Lease. Lessee shall revise the preliminary Working Drawings to incorporate the corrections and modifications requested by Lessor and shall submit final Working Drawings to Lessor for its approval. Lessor shall review the final Working Drawings and, within ten (10) business days after receipt thereof, Lessor shall either (a) notify Lessee that Lessor has approved the final Working Drawings, or (b) provide to Lessee a list of corrections and modifications which Lessor requires to be made to the Working Drawings. Lessor shall also provide to Lessee within such 10-business day period a supplementary list of those elements of Lessee's Work which Lessee must remove at the expiration or earlier termination of this Lease (if any). In the event Lessor returns the Working Drawings to Lessee for correction or modification, Lessee shall diligently correct the Working Drawings and resubmit them to Lessor for approval pursuant to the preceding provisions of this paragraph. No work shall be performed until final Working Drawings have been approved in writing by Lessor. C-2 49 The review and/or approval by Lessor or its architect or engineers of any plans, sketches or Working Drawings submitted by Lessee relating to Lessee's Improvements shall not (i) constitute an opinion or representation by Lessor that the same are in compliance with all applicable Legal Requirements and the provisions of all applicable insurance policies or as to the feasibility of constructing the work shown thereon, or (ii) impose on Lessor any responsibility for a design defect, it being agreed that all such responsibility shall remain solely with Lessee. Lessee shall reimburse Lessor promptly upon demand therefor for all out-of-pocket costs and expenses reasonably incurred by Lessor in connection with the review by Lessor's architect, engineer or other consultant (but not for Lessor's "in-house" review) of any plans, drawings and specifications submitted by Lessee pursuant to this Work Letter, which reimbursement shall be due and payable as Additional Rent. 4. LESSEE'S GENERAL CONTRACTOR. Lessee shall obtain the prior reasonable written approval of Lessor as to Lessee's General Contractor. 5. LESSEE'S WORK. Lessee shall be solely responsible for obtaining all Construction Authorizations required for Lessee's Work. Promptly after receiving the same, Lessee shall cause Lessee's General Contractor to commence construction and diligently to proceed to completion thereof. All construction shall be performed in a good and workmanlike manner, using new materials and in compliance with the Working Drawings, the Construction Authorizations, all Legal Requirements, and the provisions of all applicable insurance policies. 6. DELAYS. No delays in the preparation of preliminary drawings, plans or specifications, or in the preparation of Working Drawings, or in the performance and completion of Lessee's Work, regardless of the cause thereof, shall affect the Commencement Date or the Rent Commencement Date. A breach of any provision of this Work Letter shall constitute a default under the Lease, for which Lessor shall have all remedies therein provided. 7. LESSOR'S AND LESSEE'S REPRESENTATIVES. Prior to the commencement of any design work for the Premises, each party hereto shall designate in writing to the other a person as "Lessor's Representative" and "Lessee's Representative" respectively, which person shall be available during ordinary business hours to review the progress of the work C-3 50 and to respond to issues which arise during construction. Each party may rely on the other's Representative with respect to all matters which pertain to this Work Letter, each party having authorized its Representative to make decisions binding upon such party with respect to such matters. C-4 51 EXHIBIT D FORM OF COMMENCEMENT DATE AGREEMENT ----------------------------------- This Exhibit is incorporated by reference into the Lease dated July 26, 1993 by and between Massachusetts Institute of Technology, as Lessor, and Alkermes, Inc. as Lessee. COMMENCEMENT DATE AGREEMENT --------------------------- THIS COMMENCEMENT DATE AGREEMENT is made this __ day of ________, 199_ by and between MASSACHUSETTS INSTITUTE OF TECHNOLOGY ("Lessor") and ALKERMES, INC. ("Lessee"). Reference is made to a Lease between Lessor and Lessee dated July 26, 1993 (the "Lease"), pursuant to which Lessor leased to Lessee a portion of the building located at 281 Albany Street, as more particularly described in the Lease (the "Premises"). Capitalized terms used in this Commencement Date Agreement which are defined in the Lease and not otherwise defined herein shall have the same meaning herein as therein. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree that the Commencement Date for all purposes of the Lease is _______________________________, and that the last day of the Initial Lease Term is ___________________. WITNESS the execution hereof under seal the day and year first above written. LESSOR: MASSACHUSETTS INSTITUTE OF TECHNOLOGY By: ------------------------------------ Philip A. Trussell, Director of Real Estate Hereunto duly authorized Date: ______________, 199_ LESSEE: ALKERMES, INC. By: ------------------------------------ Name: Title: Hereunto duly authorized Date: ______________, 199_ D-1 EX-10.8(A) 4 1 ST AMENDMENT TO LEASE 1 Exhibit 10.8(a) FIRST AMENDMENT TO LEASE ------------------------ THIS FIRST AMENDMENT TO LEASE is made as of the 9th day of June, 1997 by and between MASSACHUSETTS INSTITUTE OF TECHNOLOGY, a Massachusetts educational corporation with an address of 238 Main Street, Cambridge, Massachusetts 02142 ("Lessor"), and ALKERMES, INC., a Pennsylvania corporation with an address of 64 Sidney Street, Cambridge, Massachusetts 02139 ("Lessee"). Reference is made to a lease dated July 26, 1993 by and between Lessor and Lessee (the "Original Lease"), concerning certain premises located at 281 Albany Street, Cambridge, Massachusetts, as more particularly described in the Lease. As used in the Original Lease or in this Amendment, the term "Lease" shall mean the Original Lease as amended hereby. Lessee desires to extend the Lease Term, to expand the premises demised to it pursuant to the Original Lease, and to provide for an option to expand the Building. Lessor is willing to agree to the foregoing subject to the terms and conditions of the Original Lease, as hereby amended. FOR GOOD AND VALUABLE CONSIDERATION, the receipt and legal sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree to amend the Original Lease as follows: 1. DEFINITIONS. Capitalized terms used in this Amendment which are defined in the Original Lease and not otherwise defined herein shall have the same meaning in this Amendment as in the Original Lease. The following terms shall have the meanings set forth below: ADDITION WORK. As defined in the Supplementary Work Letter. ADJACENT BUILDING. The building currently existing on the Adjacent Land. ADJACENT LAND. That certain parcel of land adjoining the Land, known as and numbered 295 Albany Street, Cambridge, Massachusetts. ADJACENT PREMISES. Collectively, the Adjacent Land and the Adjacent Building. BASIC RENT. As defined in Paragraph 4 below. 2 BROKER. Meredith & Grew, Inc. BUILDING ADDITION. An addition to the Building to be constructed by Lessor and Lessee on the Adjacent Land, subject to the terms and conditions of this Amendment. BUILDING ADDITION OPTION. The option on the part of Alkermes, Inc. to cause Lessor to construct the shell of the Building Addition (or to construct the entire Building Addition itself), subject to the terms and conditions of this Amendment. The Building Addition Option shall be personal to Alkermes, Inc. and may not be exercised by any sublessee, assignee or successor of or to Alkermes, Inc. BUILDING ADDITION RENT COMMENCEMENT DATE. As defined in the Supplementary Work Letter. EXPANSION PREMISES. The entire second floor of the Building, containing approximately 6,500 rentable square feet. EXPANSION PREMISES COMMENCEMENT DATE. July 1, 1997. EXPANSION WORK. As defined in the Supplementary Work Letter. EXTENSION TERM. As defined in Paragraph 3(b) below. INITIAL LEASE TERM. As defined in Paragraph 3(a) below. INITIAL PREMISES. The first floor of the Building, as described in Section 1.0 of the Original Lease. LEASE TERM. Collectively, (i) the Initial Lease Term and (ii) the Extension Term (if Lessee duly exercises the Extension Option). LESSEE'S ADDITION WORK. As defined in the Supplementary Work Letter. LESSEE'S WORKING DRAWINGS. As defined in the Supplementary Work Letter. LESSOR'S ADDITION WORK. As defined in the Supplementary Work Letter. 2 3 LESSOR'S WORKING DRAWINGS. As defined in the Supplementary Work Letter. NOTICE DATE. As defined in Paragraph 5(b) below. SUPPLEMENTARY WORK LETTER. The Supplementary Work Letter attached hereto as Exhibit I. 2. PREMISES. Effective on the Expansion Premises Commencement Date: (a) Lessee shall lease the Expansion Premises, subject to all of the terms and conditions of the Lease, (b) the term "Premises" as used in the Original Lease shall mean and include both the Initial Premises and the Expansion Premises, and (c) the Expansion Premises shall be considered to be part of the Premises for all purposes of the Lease. The expansion of the Premises described in the preceding sentence of this Paragraph shall be deemed an exercise in full of Lessee's Expansion Option set forth in Section 2.0 of the Lease, and Section 2.0 of the Lease shall thereafter be null and void and of no further force or effect. The Expansion Premises shall be delivered by Lessor to Lessee broom clean, but otherwise in the condition in which the same are redelivered to Lessor by the current occupant thereof. Lessor shall have no obligation to perform any work in or to the Expansion Premises. 3. INITIAL LEASE TERM; EXTENSION TERM; LEASE TERM. (a) Section 3.1 of the Original Lease is hereby amended by deleting therefrom the first sentence in its entirety and substituting therefor the following: "The initial term of this Lease (the "Initial Lease Term") shall commence on August 15, 1993 and shall expire, unless sooner terminated as hereinafter provided, on August 14, 2008; PROVIDED, HOWEVER, that if Lessee duly exercises the Building Addition Option and the Building Addition is constructed as provided in Paragraph 15 below, then the Initial Lease Term shall automatically be further extended as of the Building Addition Rent Commencement Date to the date which is the earlier of (i) the day immediately preceding the tenth (10th) anniversary of the Building Addition Rent Commencement Date, or (ii) August 14, 2013." 3 4 (b) Section 3.2 of the Original Lease is hereby amended as follows: (i) The "Extension Term" shall be the period commencing on the day after the last day of the Initial Lease Term and expiring on August 14, 2013, unless sooner terminated as provided in the Lease; (ii) In the second paragraph of said Section 3.2, line 4, the number in parenthesis shall be changed from "18" to "15"; and (iii) The table appearing at the top of page 4 of the Original Lease is hereby deleted. 4. BASIC RENT. Effective on the Expansion Premises Commencement Date, Section 4.1(a) of the Original Lease shall be deleted in its entirety and the following substituted therefor: "(a) Basic rent ("Basic Rent"), which term shall mean, collectively, the sums identified in the following subparagraphs (i) and (ii): "(i) with respect to the Initial Premises and the Expansion Premises: (w) for the period commencing on July 1, 1997 and ending on August 14, 1998, the sum of $141,000.00 per Lease Year (PRO-RATED for partial Lease Years), payable in equal monthly installments of $11,750.00; (x) for the period commencing on August 15, 1998 and ending on August 14, 2003, the sum of $192,000.00 per Lease Year, payable in equal monthly installments of $16,000.00; (y) for the period commencing on August 15, 2003 and ending on August 14, 2008, the sum of $232,000.00 per Lease Year, payable in equal monthly installments of $19,333.33; and (z) for the Extension Term, if any, the "Fair Market Rent" of the Initial Premises and the Expansion Premises, determined in accordance with the provisions of Section 4.2 below; 4 5 PROVIDED, HOWEVER, that if Lessee duly exercises the Building Addition Option and the Initial Lease Term is consequently extended as provided in Section 3.1 of the Lease, then notwithstanding anything to the contrary set forth in the preceding provisions of this Section 4.1(a), Basic Rent for the Initial Premises and the Expansion Premises for the portion of the Initial Lease Term commencing on August 15, 2008 shall be the Fair Market Rent of the Initial Premises and the Expansion Premises as of August 15, 2008, determined in the manner provided in Section 4.2 of the Lease. "(ii) With respect to the Building Addition and the Adjacent Land (as hereinafter defined), for the period commencing on the Building Addition Rent Commencement Date and continuing for the remainder of the Lease Term, the following amount per Lease Year: (x) if Lessor performs Lessor's Addition Work, an amount equal to twelve (12%) percent of the sum of (1) the aggregate amount of Lessor's actual out-of-pocket costs incurred in (a) demolishing the Adjacent Building, (b) preparing the Adjacent Land for construction of the Building Addition, (c) obtaining the permits, licenses, consents and approvals from governmental authorities for Lessor's Addition Work, (d) preparing Lessor's Working Drawings for Lessor's Addition Work, and (e) constructing Lessor's Addition Work (both "hard costs" and "soft costs"), and (2) Three Hundred Seventy Thousand Dollars ($370,000.00) (on account of the Adjacent Land); or (y) if Lessee performs Lessor's Addition Work at its sole cost and expense, an amount equal to twelve (12%) percent of the sum (1) the aggregate amount of Lessor's actual out-of pocket costs incurred in (a) demolishing the Adjacent Building, and (b) preparing the Adjacent Land for construction of the Building Addition, and (2) Three Hundred Seventy Thousand Dollars ($370,000.00) (on account of the Adjacent Land). "Basic Rent shall be due and payable in equal monthly installments, in advance, without offset or deduction, and without previous demand therefor, commencing (x) with respect to the Initial Premises, on the Commencement Date, (y) with respect to the Expansion Premises, on 5 6 the Expansion Premises Commencement Date, and (z) with respect to the Building Addition, on the Building Addition Rent Commencement Date, and in each case continuing on the first day of each calendar month or portion thereof during the Lease Term. If the Expansion Premises Commencement Date or the Building Addition Rent Commencement Date is other than the first day of a calendar month, Basic Rent for the Expansion Premises or the Building Addition (as the case may be) shall be PRO-RATED for such month. Basic Rent shall also be PRO-RATED for a partial month occurring at the end of the Lease Term." 5. FAIR MARKET RENT. (a) For purposes of determining "Fair Market Rent" pursuant to Section 4.2 of the Lease, all improvements to the Premises or the Building which are funded, in the first instance, by Lessor pursuant to this Amendment, regardless of whether Lessee makes payments to Lessor on account thereof pursuant to Paragraph 4 above, shall be deemed to be "improvements made by Lessor" and shall be included in determining Fair Market Rent. (b) The first three sentences of the second paragraph of Section 4.2 are hereby deleted in their entirety and the following are substituted therefor: "If Lessee duly exercises the Extension Option as provided in Section 3.2 of the Lease, then within twenty (20) days after Lessor receives Lessee's notice of exercise of the Extension Option, Lessor shall provide to Lessee Lessor's good faith determination of the Fair Market Rent of the Initial Premises and the Expansion Premises as of the first day of the Extension Term. If Lessee duly exercises the Building Addition Option as provided in Paragraph 15 of this Amendment and the Building Addition is constructed and the Initial Lease Term extended as provided in Section 3.1 of the Lease, then Lessor shall provide to Lessee not later than April 1, 2008 Lessor's good faith determination of the Fair Market Rent of the Initial Premises and the Expansion Premises as of August 15, 2008. The date on which Lessor provides such determination is hereinafter referred to as the "Notice Date". If Lessor and Lessee are unable to agree on such Fair Market Rent within thirty (30) days after the Notice Date, then Lessor and Lessee shall, not later than sixty (60) days after the Notice Date, each retain a real estate appraiser with at least ten (10) years' continuous experience in 6 7 the business of appraising or marketing commercial real estate in the Cambridge, Massachusetts vicinity, who shall, within sixty (60) days of his or her selection, prepare a written report summarizing his or her conclusion as to Fair Market Rent. Lessor and Lessee shall simultaneously exchange such reports; PROVIDED, HOWEVER, that if one party has not obtained such a report within one hundred thirty (130) days after the Notice Date, then the determination set forth in the other party's report shall be final and binding upon the parties." (c) All references to the "Expansion Premises" in Section 4.2 of the Lease shall be deemed to refer to the Initial Premises and the Expansion Premises together. 6. PRELIMINARY ENTRY. Section 4.3, PRELIMINARY ENTRY, is hereby amended as follows: (a) All references in such Section to the "Commencement Date" shall be deemed to mean and refer to the "Expansion Premises Commencement Date"; and (b) The third sentence thereof is deleted in its entirety. 7. DISCONTINUED OCCUPANCY. For purposes of calculating the Termination Payment as provided in Section 5.0 of the Original Lease, the costs incurred by Lessee in connection with the design and construction of the Expansion Work and Lessee's Addition Work shall be amortized on a straight-line basis over ten (10) years rather than the 5-year period stated in the Original Lease, with such amortization period commencing on the first day of the first calendar month commencing after the day on which such work is substantially completed (i.e., completed except for items of work which are not necessary to make the Building or the Building Addition (as the case may be) reasonably useable for the Permitted Uses and which, because of season or weather or nature of the item, cannot practicably be done at that time). 8. TAXES. (a) Section 6.1 of the Original Lease is hereby amended by adding the following sentence to the end thereof as it appears in the Original Lease: 7 8 "Notwithstanding anything to the contrary contained in this Lease, provided that Lessee makes all payments to Lessor on account of Taxes hereunder within the time specified in this Lease, "Taxes" shall not include any interest, penalties or other charges assessed against Lessor on account of Lessor's failure to pay Taxes on a timely basis to the taxing authority." (b) Effective on the Expansion Premises Commencement Date, "Lessee's Share" as defined in Section 6.2 of the Lease shall be one hundred percent (100%), and Lessee shall be responsible for the payment of all Taxes relating to the Premises, the Building or the Land, which payments shall be made to Lessor in the manner provided in Section 7 of the Lease. (c) Effective on the Expansion Premises Commencement Date, Lessee's pro-rata share of Taxes with respect to each of the Off-Site Lots in which are located any of the parking spaces leased by Lessee pursuant to Section 10 of the Lease shall be adjusted to reflect the number of parking spaces then leased by Lessee pursuant to said Section 10. (d) Effective on the Expansion Premises Commencement Date, Section 6.3, ABATEMENT OF TAXES, is hereby amended as follows: (i) The first paragraph shall be deleted in its entirety; and (ii) The first sentence of the second paragraph shall be deleted and the following substituted therefor: "Lessee shall have the right to file an application for the abatement of Taxes with respect to the Land and/or the Building provided that Lessee gives notice of such filing to Lessor (together with a copy of such abatement application) promptly after such application is filed." 9. UTILITIES AND SERVICES. Effective on the Expansion Premises Commencement Date, Section 7.0 of the Original Lease is hereby amended by deleting the second paragraph thereof in its entirety and substituting therefor the following: 8 9 "The only services which Lessor shall provide to the Premises, the Building or the Land during the Lease Term (collectively, "Lessor's Services") shall be: (i) maintaining the alarm and sprinkler systems, and (ii) snowplowing, paving, striping and general maintenance of the parking lots in which are located parking spaces leased by Lessee pursuant to Section 10.0 below. Lessee's obligation to make payments on account of such snowplowing, paving, striping and general maintenance of such parking lots shall be PRO-RATED in the manner provided in Section 10.0 of this Lease. Lessee shall continue to pay to Lessor as Additional Rent the property management fee paid by Lessor (if any) in connection with the Premises, which fee shall not exceed four (4%) percent of the gross rental revenue of the Premises." 10. INSURANCE. Section 8.2, CASUALTY INSURANCE, is hereby amended by inserting into the seventh line thereof after the phrase "as their respective interests may appear", the phrase "but naming Lessee as loss payee". 11. ASSIGNMENT AND SUBLETTING. Section 9.0(c) is hereby amended by deleting therefrom clause (iii) in its entirety, and substituting therefor the following: "(iii) Lessee shall pay to Lessor, as Additional Rent, immediately upon receipt thereof by Lessee, one-half (1/2) of the amount by which the aggregate rent and other amounts payable to Lessee under or in connection with such assignment or sublease, after deduction of (A) the costs reasonably incurred by Lessee in entering into such assignment or sublease (including, without limitation, reasonable attorneys' fees and expenses, brokerage commissions, alteration costs, and tenant concessions (such as free rent) granted by Lessee, all amortized on a straight-line basis over the term of such sublease or, in the case of an assignment, over the remaining Lease Term of this Lease), and (B) the monthly amount of the unamortized portion of the actual out-of-pocket costs reasonably incurred by Lessee in constructing those portions of the Expansion Work or Lessee's Addition Work which are permanently affixed to and 9 10 integrated into the structure of the Building or Building systems, for the term of such sublease (or in the case of an assignment, for the remainder of the Lease Term) determined on the basis of straight line amortization of such costs over a period of 10 years (and in the case of a sublease, then allocated on a PRO-RATA square footage basis to the portion of the Premises subject to such sublease), exceeds the Rent payable hereunder with respect to the portion of the Premises subject to such sublease (or, in the case of an assignment, the entire Premises). In the case of a sublease, unless otherwise agreed to in writing by Lessor at the time that it consents to such sublease, the calculation described in clause (iii) of the immediately preceding sentence shall be performed on a monthly basis and payment shall be made to Lessor on the basis of such monthly calculation. All separate charges reasonably imposed by Lessee upon such sublessee or assignee for the purchase of or use of equipment owned by Lessee which is not permanently affixed to and integrated into the structure of the Building or Building systems shall be excluded from the calculation described in clause (iii). Notwithstanding anything to the contrary herein contained, no assignee, sublessee or successor of or to Alkermes, Inc. shall have the right to exercise the Building Addition Option, which option is personal to and may only be exercised by Alkermes, Inc." 12. PARKING. Section 10.0, PARKING, is hereby amended by deleting therefrom the third paragraph in its entirety and substituting therefor the following: "Commencing on August 14, 1998, Lessee shall pay, as Additional Rent, on the same day on which Basic Rent is due and payable hereunder, rent on account of each parking space leased by Lessee at the then-fair market rent thereof, which amount may be adjusted by Lessor from year to year." 13. CONSTRUCTION; WORK LETTER. (a) Article 13.0, CONSTRUCTION, is hereby deleted in its entirety. (b) The Work Letter attached to the Original Lease as EXHIBIT C is hereby deleted in its entirety and the Supplementary Work Letter attached to this Amendment as EXHIBIT I is substituted therefor. All 10 11 references in the Lease to the "Work Letter" shall be deemed to refer to the Supplementary Work Letter. 14. EXPANSION WORK: Lessee may, at its sole cost and expense and in accordance with the provisions of the Supplementary Work Letter, make certain improvements to the Initial Premises and the Expansion Premises in connection with Lessee's initial occupancy of the Expansion Premises. All of the "Expansion Work" (as defined in the Supplementary Work Letter) shall be deemed to be part of "Lessee's Work" as that term is used in the Lease. Lessor shall have no obligation to (x) prepare any Working Drawings, (y) perform any work, or (z) make any contribution to Lessee, in connection with the design or construction by Lessee of the Expansion Work. All of the Expansion Work shall be finally completed by January 1, 1999, subject to the provisions of Section 24.0 (Force Majeure) of the Lease. 15. CONSTRUCTION OF BUILDING ADDITION. (a) Lessor owns the Adjacent Premises. The Adjacent Building is currently leased by Lessor to a third party, who, in turn, has subleased it to Cambridge Bottle and Can. Lessor hereby represents and warrants to Lessee that the term of the lease currently in effect with respect to the Adjacent Building expires on June 30, 1999. Lessor hereby agrees that it shall not extend nor renew the existing lease of the Adjacent Premises or enter into any other lease or tenancy agreement relating to the Adjacent Premises until the first to occur of (i) receipt by Lessor of a written waiver from Lessee of its right to exercise the Building Addition Option, or (ii) Lessee's failure to exercise the Building Addition Option in accordance with the requirements of this Paragraph 15. (b) Provided that: (i) as of the day on which Lessee gives "Lessee's Exercise Notice" (as hereinafter defined), (A) no Event of Default is then continuing and (B) Alkermes, Inc. is actually occupying at least twenty-five (25%) percent of the Premises; and (ii) (A) Lessee's net worth as set forth in the 10-Q report most recently prepared by Lessee immediately prior to the date on which Lessee gives Lessee's Exercise Notice to Lessor is not less than Lessee's net worth as set forth 11 12 in the 10-Q report most recently prepared by Lessee immediately prior to the date of this Amendment, and (B) the amount of unrestricted cash or cash equivalents then held by Lessee as of the date on which Lessee gives Lessee's Exercise Notice, together with the amount of financing then available to Lessee, exceeds the amount reasonably estimated by Lessor to be required by Lessee for (x) operation of Lessee's business for one (1) year as it is then being operated, plus (y) the costs to be incurred by Lessee in designing and constructing the Building Addition, then Lessee (which term shall mean, in connection with the Building Addition Option, only Alkermes, Inc., and not any sublessee, assignee or successor of or to Alkermes, Inc.) shall have the right to exercise the Building Addition Option by giving to Lessor not later than August 15, 2001 written notice of such exercise ("Lessee's Exercise Notice"). If Lessee duly exercises the Building Addition Option in accordance with the foregoing terms and conditions, then such exercise shall (i) be irrevocable except as expressly provided in Paragraph 7 of the Supplementary Work Letter, (ii) constitute the agreement of Lessee to perform at its sole cost and expense Lessee's Addition Work in accordance with the terms and conditions of this Amendment, and (iii) subject to the provisions of subparagraph 15(g) below and Paragraph 7 of the Supplementary Work Letter, require Lessor to perform at its sole cost and expense Lessor's Addition Work in accordance with the terms and conditions of this Amendment. (c) If Lessee duly exercises the Building Addition Option, then (i) from and after such exercise Lessor shall not enter into any further leases or tenancy agreements relating to the Adjacent Premises, (ii) promptly after receiving such notice of exercise, Lessor shall (x) terminate any tenancies or occupancies affecting the Adjacent Premises (if any) and make diligent efforts to obtain possession of the Adjacent Premises from the tenants and occupants thereof, and (y) at its sole cost and expense, subject to the terms and conditions of this Amendment, demolish and remove all structures on the Adjacent Land down to foundations, and level the surface of the Adjacent Land such that such demolition and removal is completed within six (6) months after Lessee's exercise of the Building Addition Option. Lessor shall 12 13 notify Lessee when such demolition and site levelling have been completed. From and after the date on which such work is completed: (1) Lessee shall be responsible for paying to Lessor, as Additional Rent, all Taxes (as defined in the Lease) assessed or imposed upon the Adjacent Land, which payments shall be made in the same manner and at the same times as Taxes are paid by Lessee pursuant to Section 6.0 of the Lease; and (2) Unless and until construction of the Building Addition commences on the Adjacent Land pursuant to the provisions of this Amendment, Lessor shall have the right to make any use of the surface of the Adjacent Land, including, without limitation, parking of automobiles (and Lessor may, at its sole cost and expense, pave the surface of all or portions of the Adjacent Land), but Lessor shall not construct any buildings or structures on the Adjacent Land. If Lessor does make use of the Adjacent Land as provided in this subparagraph (2), then for such time as Lessor continues to make such use of the Adjacent Land Lessor shall (A) be solely responsible for maintaining any pavement laid by Lessor on the Adjacent Land and (B) save Lessee harmless and indemnified from any loss, cost and expense (including, without limitation, reasonable attorney's fees) arising out of or relating to a claim of injury to any person or damage to any property while on the Adjacent Land unless occasioned by any omission, neglect or default of Lessee or any officer, agent, employee, servant, contractor or invitee of Lessee or anyone claiming by, through or under Lessee. (d) If at any time after Lessee duly exercises the Building Addition Option, an Event of Default occurs, then in addition to any other rights and remedies of Lessor hereunder, Lessor shall be entitled to cease the design or construction of Lessor's Addition Work. (e) In addition to the foregoing provisions of this Paragraph 15, the design and construction of the Building Addition shall be governed by the provisions of the Supplementary Work Letter. 13 14 (f) From and after the date on which Lessee exercises the Building Addition Option, (i) the Adjacent Land shall be deemed to be part of the Land for all purposes of the Lease (subject to the rights and obligations of Lessor as set forth in subparagraph 15(c)(2) above), and (ii) all obligations of Lessee under the Lease with respect to the Land, the Building or the Premises shall apply equally to the Land and the Building Addition (except that no Rent shall be due or payable hereunder in connection with the Building Addition until the Building Addition Rent Commencement Date except as otherwise specifically provided in Paragraph 15(c) above). From and after the Building Addition Rent Commencement Date, (i) the Building Addition shall be deemed to be part of the Building and the Premises for all purposes of the Lease, and (ii) Basic Rent shall be due and payable on account of the Building Addition and the Adjacent Land as provided in Section 4.1(a)(ii) of the Lease. (g) Notwithstanding anything to the contrary contained in this Paragraph 15, Lessee shall have the right, by written notice given to Lessor either (i) prior to the commencement of design work by Lessor on Lessor's Addition Work, or (ii) as provided in Paragraph 7 of the Supplementary Work Letter, to design and perform Lessor's Addition Work at Lessee's sole cost and expense, in which event (w) "Lessor's Addition Work" shall be deemed to be part of "Lessee's Addition Work" as that term is used in this Amendment, (x) "Lessor's Addition Work" shall be deemed to be part of "Lessee's Work" as that term is used in the Original Lease, (y) Lessor shall have no obligation to (1) prepare any Working Drawings, (2) perform any work, or (3) incur any costs in connection with the design or construction of the Building Addition (other than costs associated with Lessor's review of Lessee's Working Drawings), and (z) all references in the Supplementary Work Letter to "Lessee's Addition Work" shall be deemed to include and refer to "Lessor's Addition Work". (h) Notwithstanding anything to the contrary contained in this Amendment, Lessee shall have the right to rescind its exercise of the Building Addition Option in the circumstances described in Paragraph 7 of the Supplementary Work Letter. If Lessee so rescinds its exercise of the Building Addition Option, then effective upon the date of such rescission (i) the Adjacent Land shall no longer be deemed to be part of the Land subject to the Lease, and (ii) Lessee shall have no 14 15 obligation to pay Taxes assessed or imposed upon the Adjacent Land for any period beyond such effective date. 16. REAL ESTATE BROKER. Lessor and Lessee each represent to the other that they have dealt with no broker in connection with this First Amendment to Lease other than the Broker. Lessor shall pay the Broker as part of a separate agreement. Lessee agrees to indemnify and hold Lessor harmless from and against any claims for commissions or fees by any person other than the Broker arising from a breach by Lessee of the foregoing representation. Lessor agrees to indemnify and hold Lessee harmless from and against any claims for commissions or fees by the Broker or any other person by reason of a breach by Lessor of the foregoing representation. 17. SECURITY DEPOSIT. (a) Contemporaneously with the delivery by Lessee to Lessor of executed counterparts of this First Amendment to Lease, Lessee shall deliver the sum of $8,000.00 as an additional Security Deposit, which shall be deemed to be part of the "Security Deposit" for all purposes of the Lease. (b) Lessee shall deliver to Lessor, not later than the Building Addition Rent Commencement Date, an amount equal to one (1) months' Basic Rent on account of the Building Addition and the Adjacent Land (the "Additional Security Deposit"), which amount shall be deemed to be part of the "Security Deposit" for all purposes of the Lease; PROVIDED, HOWEVER, that if Lessor performs Lessor's Addition Work then (i) the amount of the Additional Security Deposit shall be increased to six (6) months' Basic Rent on account of the Building Addition and the Adjacent Land, and (ii) the Additional Security Deposit shall earn interest at the rate of five (5%) percent per annum. 18. ELECTRONIC COPIES OF LEASE, ETC. In connection with Lessee's public filings, upon request by Lessee, Lessor shall provide (or shall cause Lessor's counsel to provide) to Lessee a copy of the Lease, this Amendment, any other amendments to the Lease hereafter executed, or any other agreements between Lessee and lessor relating to the Lease, in a computer-readable electronic format (i.e., on a computer disk in the format in which such documents were prepared or maintained by Lessor or its counsel). 19. EFFECTIVE DATE. Except to the extent to which this Amendment specifically provides otherwise, all provisions of this Amendment shall 15 16 be effective immediately upon the execution of this Amendment by both Lessor and Lessee. 16 17 In all other respects, the terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect and unamended. EXECUTED UNDER SEAL as of the date set forth above. LESSOR: MASSACHUSETTS INSTITUTE OF TECHNOLOGY By: /s/ Philip A. Trussell -------------------------------------- Philip A. Trussell, /s/ JTM Director of Real Estate and Associate Treasurer Hereunto duly authorized LESSEE: ALKERMES, INC. By: /s/ Michael Landine -------------------------------------- Name: Michael Landine Title: Chief Financial Officer Hereunto duly authorized 17 18 EXHIBIT I --------- SUPPLEMENTARY WORK LETTER ------------------------- This Supplementary Work Letter is incorporated by reference into the First Amendment to Lease (the "Amendment") by and between Massachusetts Institute of Technology, as Lessor, and Alkermes, Inc., as Lessee. Terms defined in or by reference in the Amendment not otherwise defined herein shall have the same meaning herein as therein. 1. INTRODUCTION. This Supplementary Work Letter sets forth the terms and conditions for the construction of (i) improvements to the Building, and/or (ii) construction of the Building Addition. 2. ADDITIONAL DEFINITIONS. Each of the following terms shall have the meaning stated immediately after it: ADDITION WORK. Collectively, Lessee's Addition Work and Lessor's Addition Work. CONSTRUCTION AUTHORIZATIONS. All permits, licenses and other consents and approvals required from any governmental authority for the construction of (as the case may be): (i) the Expansion Work, (ii) Lessee's Addition Work, or (iii) Lessor's Addition Work. EXPANSION WORK. The work to be performed by Lessee in and to the existing Building, as shown on Lessee's Working Drawings as approved by Lessor pursuant to Paragraph 4 hereof. LESSEE'S ADDITION WORK. The work, as shown on Lessee's Working Drawings as approved by Lessor pursuant to Paragraph 5(b) hereof, to be performed by Lessee as part of the initial construction of the Building Addition for Lessee's use and occupancy. LESSEE'S DELAY. A delay of the type identified in Paragraph 11(b) of this Supplementary Work Letter. LESSEE'S GENERAL CONTRACTOR. A general contractor selected by Lessee and approved in writing by Lessor (which approval shall not be unreasonably withheld or delayed, but Lessor may withhold approval of any general contractor based on Lessor's past experience with such 18 19 general contractor), who will be engaged by Lessee to construct (as the case may be) the Expansion Work or Lessee's Addition Work. LESSEE'S WORKING DRAWINGS. The working drawings and specifications for, as the case may be, the Expansion Work or Lessee's Addition Work, to be prepared by Lessee and Lessee's architect in accordance with this Work Letter. Lessee's Working Drawings shall be prepared in compliance with all applicable Legal Requirements and stamped by registered Massachusetts professionals, and shall consist of all architectural and engineering plans and specifications which are required to construct the Expansion Work or Lessee's Addition Work (as the case may be) or to obtain any Construction Authorization required therefor. LESSOR'S ADDITION WORK. The work to be performed by Lessor in or on the Building Addition so as to provide the Building Addition as unfinished "shell" space to Lessee for the performance of Lessee's Addition Work, as shown on Lessor's Working Drawings as approved by Lessee pursuant to Paragraph 5(c) hereof, which work is anticipated to include the construction of (i) exterior walls and fenestration, including taped drywall on the inside surface of exterior walls, (ii) roof, (iii) foundation, (iv) subfloor, (v) electrical power feed, telephone cable, gas supply, water supply, and sanitary sewer service to the Building Addition from public utility lines, and (vi) heat (but not air-conditioning or make-up air), depending upon the actual operational requirements of Lessee. LESSOR'S DELAY. A delay of the type identified in Paragraph 11(a) of this Supplementary Work Letter. LESSOR'S WORKING DRAWINGS. The working drawings and specifications for Lessor's Addition Work, to be prepared by Lessor and Lessor's architect in accordance with this Work Letter. Lessor's Working Drawings shall be prepared in compliance with all applicable Legal Requirements and stamped by registered Massachusetts professionals, and shall consist of all architectural and engineering plans and specifications which are required to construct Lessor's Addition Work or to obtain any Construction Authorization required therefor. 3. INSURANCE AND BONDS. Prior to the commencement of any design work on the Expansion Work or Lessee's Addition Work (as the case may be), Lessee shall provide to Lessor an original certificate of insurance, in customary 19 20 form, for each architect and engineer retained by Lessee in connection with the design and/or construction of such work, which certificate shall evidence a current "errors and omissions" insurance policy as in effect, in an amount reasonably acceptable to Lessor. Prior to the commencement of any design work on Lessor's Addition Work, Lessor shall provide to Lessee an original certificate of insurance, in customary form, for each architect and engineer retained by Lessor in connection with the design and/or construction of Lessor's Addition Work, which certificate shall evidence a current "errors and omissions" insurance policy as in effect, in an amount reasonably acceptable to Lessee. Prior to the commencement of the construction of the Expansion Work or Lessee's Addition Work (as the case may be), Lessee shall provide to Lessor an original certificate of insurance for Lessee's General Contractor (or, if no general contractor is used, each trade contractor employed by Lessee in connection with the construction of such work), which certificate shall evidence a current general liability insurance policy as in effect, in an amount reasonably acceptable to Lessor, naming Lessor as an additional insured. Prior to the commencement of the construction of Lessor's Addition Work, Lessor shall provide to Lessee an original certificate of insurance for its general contractor (or, if no general contractor is used, each trade contractor employed by Lessor in connection with the construction of such work), which certificate shall evidence a current general liability insurance policy as in effect, in an amount reasonably acceptable to Lessee, naming Lessee as an additional insured. Lessee shall obtain from a surety reasonably satisfactory to Lessor payment and performance bonds for Lessee's General Contractor (in an amount not less than the full contract price), or if no general contractor is used, then for each trade contractor employed by Lessor in connection with the construction of such work whose bid price or contract price equals or exceeds $150,000 (in an amount not less than each such trade contractor's respective bid price or contract price), each of which bonds shall name Lessor as an additional obligee. 4. Working Drawings for the Expansion Work. --------------------------------------- Lessee shall be solely responsible for the preparation and completion of all preliminary and final Lessee's Working Drawings for all of the Expansion Work. Lessee shall retain its own architects and engineers to prepare Lessee's Working Drawings, provided that Lessor first approves such engineers and architects so selected by Lessee, which approval shall not be unreasonably withheld or delayed. Lessee shall provide copies of the preliminary Lessee's Working Drawings to Lessor, and Lessor shall provide to 20 21 Lessee within fifteen (15) business days after receipt of a complete set thereof a list of corrections and modifications which Lessor reasonably requires to be made to Lessee's Working Drawings. Lessor shall also provide to Lessee within such 15-business day period a list of those elements of the Expansion Work which Lessee must remove at the expiration or earlier termination of this Lease. Lessee shall revise the preliminary Lessee's Working Drawings to incorporate, to the extent reasonably practical, the corrections and modifications reasonably required by Lessor and shall submit final Lessee's Working Drawings to Lessor for its approval. Lessor shall review the final Lessee's Working Drawings and, within fifteen (15) business days after receipt of a complete set thereof, Lessor shall either (a) notify Lessee that Lessor has approved the final Lessee's Working Drawings, or (b) provide to Lessee a list of corrections and modifications which Lessor reasonably requires to be made to Lessee's Working Drawings. Lessor shall also provide to Lessee within such 15-business day period a supplementary list of those elements of the Expansion Work which Lessee must remove at the expiration or earlier termination of this Lease (if any). In the event Lessor returns Lessee's Working Drawings to Lessee for correction or modification, Lessee shall diligently correct the Working Drawings to incorporate, to the extent reasonably practical, the corrections and modifications reasonably required by Lessor and re-submit them to Lessor for approval pursuant to the preceding provisions of this paragraph. None of the Expansion Work shall commence until final Lessee's Working Drawings have been approved in writing by Lessor. Lessor's review of Lessee's Working Drawings shall be limited to the impact of the Expansion Work on the structural components of the Building, the roof of the Building and the Building systems, and the exterior appearance of the Building. 5. Working Drawings for the Addition Work. -------------------------------------- (a) CONCEPT OF BUILDING ADDITION. Lessor and Lessee hereby acknowledge and agree that it is their mutual intention that the Building Addition be a two-story building which can be constructed on the Adjacent Land in conformance with then-applicable Legal Requirements, as the same may be varied by zoning relief obtainable by Lessor at Lessee's expense, upon such conditions as are acceptable to Lessor in its reasonable discretion. Lessor shall provide reasonable cooperation to Lessee in connection with obtaining such zoning relief, and Lessee 21 22 shall reimburse Lessor upon request for all reasonable out-of-pocket expenses incurred by Lessor in connection therewith. Lessor and Lessee shall negotiate in good faith the location and size of the Building Addition, consistent with the understandings set forth in this subparagraph, in connection with the commencement of preparation of preliminary Lessor's Working Drawings and Lessee's Working Drawings for the Building Addition. (b) LESSEE'S WORKING DRAWINGS. Lessee shall be solely responsible for the preparation and completion of all preliminary and final Lessee's Working Drawings for Lessee's Addition Work. Lessee shall retain its own architects and engineers to prepare Lessee's Working Drawings, provided that Lessor first approves such engineers and architects so selected by Lessee, which approval shall not be unreasonably withheld or delayed. Lessee shall provide copies of the preliminary Lessee's Working Drawings to Lessor, and Lessor shall provide to Lessee within fifteen (15) business days after receipt of a complete set thereof a list of corrections and modifications which Lessor reasonably requires to be made to Lessee's Working Drawings. Lessor shall also provide to Lessee within such 15-business day period a list of those elements of Lessee's Addition Work which Lessee must remove at the expiration or earlier termination of this Lease. Lessee shall revise the preliminary Lessee's Working Drawings to incorporate, to the extent reasonably practical, the corrections and modifications reasonably required by Lessor and shall submit final Lessee's Working Drawings to Lessor for its approval. Lessor shall review the final Lessee's Working Drawings and, within fifteen (15) business days after receipt of a complete set thereof, Lessor shall either (a) notify Lessee that Lessor has approved the final Lessee's Working Drawings, or (b) provide to Lessee a list of corrections and modifications which Lessor reasonably requires to be made to Lessee's Working Drawings. Lessor shall also provide to Lessee within such 15-business day period a supplementary list of those elements of Lessee's Addition Work which Lessee must remove at the expiration or earlier termination of this Lease (if any). In the event Lessor returns Lessee's Working Drawings to Lessee for correction or modification, Lessee shall diligently correct the Working Drawings to incorporate, to the extent reasonably practical, the corrections and modifications reasonably required by Lessor and re-submit them to Lessor for approval pursuant to the preceding provisions of this paragraph. None of Lessee's Addition Work shall commence until 22 23 final Lessee's Working Drawings have been approved in writing by Lessor. (c) LESSOR'S WORKING DRAWINGS. Lessor shall be solely responsible for the preparation and completion of all preliminary and final Lessor's Working Drawings for Lessor's Addition Work. Lessor shall retain its own architects and engineers to prepare Lessor's Working Drawings. Within thirty (30) days after Lessor approves the preliminary Lessee's Working Drawings for Lessee's Addition Work, Lessor shall cause preliminary Lessor's Working Drawings to be prepared, and upon completion thereof Lessor shall provide copies of the same to Lessee. Lessee shall provide to Lessor within fifteen (15) business days thereafter a list of corrections and modifications which Lessee reasonably requires to be made to the preliminary Lessor's Working Drawings by reason of a conflict between such preliminary Working Drawings and the preliminary Lessee's Working Drawings as approved by Lessor. After Lessor has approved final versions of Lessee's Working Drawings for Lessee's Addition Work, Lessor shall revise the preliminary Lessor's Working Drawings or Lessor's Addition Work to incorporate, to the extent reasonably practical, the corrections and modifications reasonably required by Lessee and to make the same consistent with the approved final Lessee's Working Drawings. Lessor shall submit final Lessor's Working Drawings to Lessee for its approval. Lessee shall review the final Lessor's Working Drawings and, within fifteen (15) business days after receipt thereof, Lessee shall either (a) notify Lessor that Lessee has approved the final Lessor's Working Drawings, or (b) provide to Lessor a list of corrections and modifications which Lessee reasonably requires to be made to Lessor's Working Drawings by reason of a conflict between the final approved Lessee's Working Drawings and such revised Lessor's Working Drawings. In the event Lessee returns Lessor's Working Drawings to Lessor for such correction or modification, Lessor shall diligently correct Lessor's Working Drawings to incorporate, to the extent reasonably practical, the corrections and modifications reasonably required by Lessee and to make the same consistent with the approved final Lessee's Working Drawings, and resubmit them to Lessee for approval pursuant to the preceding provisions of this paragraph. 23 24 6. PROVISIONS APPLICABLE TO WORKING DRAWINGS GENERALLY. The review and/or approval by Lessor or its architect or engineers of any plans, sketches or Lessee's Working Drawings submitted by Lessee relating to the Expansion Work or Lessee's Addition Work, or the review and/or approval by Lessee or its architect or engineers of any plans, sketches or Lessor's Working Drawings submitted by Lessor relating to Lessor's Addition Work, shall not (i) constitute an opinion or representation by the reviewing/approving party that the same are in compliance with all applicable Legal Requirements and the provisions of all applicable insurance policies or as to the feasibility of constructing the work shown thereon, or (ii) impose on the reviewing/approving party any responsibility for a design defect, it being agreed that all such responsibility shall remain solely with the party which submitted such Working Drawings for review and approval. Each party submitting preliminary Working Drawings to the other for approval pursuant to this Work Letter shall include with such submittal a proposed schedule for the commencement and completion (both substantial completion and final completion) of the work shown thereon. Each party reviewing Working Drawings shall also, within the time period above provided for review of Working Drawings, review and approve or suggest modifications to such proposed schedule. No Expansion Work shall commence unless and until the parties have reached agreement upon the schedule for the Expansion Work; no Addition Work shall commence unless and until the parties have reached agreement upon the schedule for Lessor's Addition Work and Lessee's Addition Work. The parties shall make good faith efforts to reach agreement on each other's Working Drawings and on the schedule for the performance of the work shown thereon. In the event that Lessor or Lessee fails to respond to the other party within any of the 15-business day periods set forth in Paragraphs 4 or 5 above, the party submitting the Working Drawings and/or schedule for review (the "Submitting Party") shall provide written notice to the other party (the "Reviewing Party") of such Reviewing Party's failure to respond, which notice shall state that such Reviewing Party's continued failure to respond to such Working Drawings and/or schedule within ten (10) days of such Reviewing Party's receipt of such notice shall be deemed to be approval by the Reviewing Party of the Working Drawings and/or schedule as submitted by the Submitting Party. In the event that the Reviewing Party fails to respond in writing to the Working Drawings within such 10-day period, the Reviewing Party shall be deemed to have approved the Working Drawings and/or schedule as submitted to it. 24 25 7. COST OF LESSOR'S ADDITION WORK. Lessor shall also provide to Lessee, together with Lessor's preliminary Working Drawings for Lessor's Addition Work, an estimate of the cost to construct Lessor's Addition Work (supported by bids or take-offs from the preliminary Working Drawings), broken down into reasonable detail. Lessee shall have twenty (20) days from its receipt of such cost breakdown to notify Lessor in writing that either (i) Lessee approves such cost estimate, or (ii) Lessee does not approve such cost estimate and desires to complete the preparation of Lessor's Working Drawings and to construct Lessor's Work as provided in Paragraph 15(g) of the Amendment, or (iii) Lessee does not approve such cost estimate and thereby rescinds its exercise of the Building Addition Option. Lessee acknowledges that any such cost estimate is an estimate only, and that Basic Rent on account of the Building Addition shall be based upon the actual out-of-pocket cost to Lessor of performing Lessor's Addition Work. If Lessee does not approve such cost estimate and desires to complete the preparation of Lessor's Working Drawings and to construct Lessor's Work as provided in Paragraph 15(g) of the Amendment, then Lessee shall pay to Lessor, within thirty (30) days of demand therefor, as Additional Rent, all out-of-pocket costs incurred by Lessor (i) in connection with preparing the Working Drawings for Lessor's Addition Work prior to Lessor's receipt of such notice from Lessee, or (ii) in terminating any contracts theretofore entered into by Lessor in connection with the preparation of Lessor's Working Drawings for Lessor's Addition Work or for the construction thereof. If Lessee rescinds its exercise of the Building Addition Option, then the Lease shall continue in full force and effect as if Lessee had given Lessee's Notice of Exercise and not exercised the Building Addition Option, except that: (i) Lessee shall pay to Lessor, within thirty (30) days of demand therefor, as Additional Rent, all out-of-pocket costs incurred by Lessor (A) in demolishing the Adjacent Building and levelling the Adjacent Land, (B) in preparing the Working Drawings for Lessor's Addition Work, or (C) in terminating any contracts theretofore entered into by Lessor in connection with the preparation of Lessor's Working Drawings for Lessor's Addition Work or for the construction thereof; and (ii) Lessee shall have waived any further right to exercise the Building Addition Option. 25 26 If Lessee does not respond to such cost breakdown within such 20-day period, Lessor shall give Lessee written notice of its failure to respond, which notice shall state that Lessee's continued failure to respond to such cost breakdown within ten (10) days of Lessee's receipt of such notice shall be deemed to be approval of such cost breakdown by Lessee, and if Lessee thereafter fails to respond in writing to such cost breakdown within such 10- day period, Lessee shall be deemed to have approved such cost breakdown as submitted to it. In no event shall Lessor be required to prepare final Working Drawings for Lessor's Addition Work, or to perform any of Lessor's Addition Work, unless and until Lessee has approved the estimated cost of Lessor's Addition Work (or is deemed, pursuant to the provisions of this Paragraph 7, to have approved such estimated cost). 8. EXPANSION WORK AND LESSEE'S ADDITION WORK. Lessee shall be solely responsible for obtaining all Construction Authorizations required for the Expansion Work or Lessee's Addition Work. Lessor shall provide reasonable cooperation to Lessee in making and prosecuting applications for such Construction Authorizations, but Lessor shall not be required to incur any cost or expense in so doing. Lessee shall apply for and maintain in full force and effect (or cause Lessee's General Contractor to apply for and so maintain) all Construction Authorizations required for the construction of the Expansion Work or Lessee's Addition Work, and upon completion of the Expansion Work or Lessee's Addition Work (as the case may be), shall obtain a certificate of occupancy for the Premises or the Building Addition (as the case may be) from the appropriate governmental authority. Lessee shall deliver to Lessor a copy of said certificate of occupancy promptly after receiving the same. Lessee shall obtain from Lessee's General Contractor (or, if no general contractor is retained, from each trade contractor) a guaranty against construction defects for a period of not less than one (1) year. Promptly after receiving all Construction Authorizations required for the Expansion Work or Lessee's Addition Work (as the case may be), Lessee shall cause Lessee's General Contractor to commence construction and diligently to proceed to completion thereof. All construction shall be performed in a good and workmanlike manner, using new materials and in compliance with the approved Lessee's Working Drawings, the Construction Authorizations, all Legal Requirements, and the provisions of all applicable insurance policies. 26 27 Lessee shall be solely responsible for all costs and expenses of all architects, engineers and other consultants, and contractors, subcontractors and suppliers retained or employed (directly or indirectly) by Lessee in connection with the design or construction of the Expansion Work or Lessee's Addition Work. Lessee shall pay promptly for all labor and materials supplied to Lessee in connection with the Expansion Work or Lessee's Addition Work, shall not cause or permit any liens for such labor or materials to attach to the Land, the Building, the Adjacent Land or the Building Addition, and shall bond or discharge any such lien which may be filed or recorded within thirty (30) days after Lessee receives notice of such filing or recording. Lessor shall have no obligation to make any payment on account of the cost of preparing Lessee's Working Drawings or the construction of the Expansion Work or Lessee's Addition Work. The performance of the Expansion Work or Lessee's Addition Work (as the case may be) shall be subject to the requirements set forth in Section 12.0(f) of the Lease. Lessor may inspect such work at any time or times and shall promptly give written notice to Lessee of any observed defects. Lessee shall promptly correct all such defective work at its sole cost and expense. In the event that at any time during construction of the Expansion Work or Lessee's Addition Work Lessee fails so to correct promptly any defective work, Lessor shall give an additional written notice to Lessee which notice shall state that if Lessee does not correct such defective work within ten (10) days of its receipt of such notice (or, if such defective work cannot reasonably be corrected within such 10-day period, if Lessee does not commence the correction of such defective work within such 10-day period and continue such correction diligently to completion thereafter), then, in addition to any other remedies which Lessor may have under the Lease or at law or in equity for such default, Lessor may correct such work. If Lessor thereafter corrects such defective work in accordance with the provisions of this Paragraph, Lessor shall provide to Lessee reasonable supporting documentation of the actual out-of-pocket costs incurred by Lessor in correcting such defective work and the provisions of Paragraph 16(b) below shall apply. 9. LESSOR'S ADDITION WORK. Lessor shall be solely responsible for obtaining all Construction Authorizations required for Lessor's Addition Work. Promptly after receiving all Construction Authorizations required for Lessor's Addition Work, Lessor shall commence construction and diligently proceed to completion thereof. All construction shall be performed in a good and workmanlike manner, using new materials and in compliance with the 27 28 approved Lessor's Working Drawings, the Construction Authorizations, all Legal Requirements, and the provisions of all applicable insurance policies. Lessor shall use reasonable efforts to minimize the cost of Lessor's Addition Work. Lessor shall obtain from its general contractor (or, if no general contractor is retained, from each trade contractor) a guaranty against construction defects for a period of not less than one (1) year. Lessee may inspect such work at any time or times and shall promptly give written notice to Lessor of any observed defects. Lessor shall promptly correct all such defective work at its sole cost and expense. In the event that at any time during construction of Lessor's Addition Work Lessor fails so to correct promptly any defective work, Lessee shall give an additional written notice to Lessor which notice shall state that if Lessor does not correct such defective work within ten (10) days of its receipt of such notice (or, if such defective work cannot reasonably be corrected within such 10- day period, if Lessor does not commence the correction of such defective work within such 10-day period and continue such correction diligently to completion thereafter), Lessee may correct such work. If Lessee thereafter corrects such defective work in accordance with the provisions of this Paragraph, Lessee shall provide to Lessor reasonable supporting documentation of the actual out-of-pocket costs incurred by Lessee in correcting such defective work and the provisions of Paragraph 16(a) below shall apply. 10. Substantial Completion; Building Addition Rent Commencement Date. ---------------------------------------------------------------- (a) Lessor and Lessee acknowledge that portions of Lessor's Addition Work will be proceeding concurrently with Lessee's Addition Work. Each party shall make diligent efforts to complete in a timely manner those portions of its respective work which must be completed before the other party can perform its work in that area. (b) The Building Addition Rent Commencement Date shall be the first to occur of: (i) the day on which Lessor's and Lessee's architects jointly reasonably determine that the Building Addition has been "substantially completed", meaning that Lessor's Addition Work and Lessee's Addition Work have been completed, except for items of work which are not necessary to make the Building 28 29 Addition reasonably usable for the Permitted Uses and which, because of season or weather or nature of the item, cannot practicably be done at that time; (ii) the date on which Lessee first occupies the Building Addition or any portion thereof for the Permitted Uses; or (iii) the date on which Lessor's and Lessee's architects jointly reasonably determine that the Building Addition would have been substantially completed but for Lessee's Delay. 11. Delays. ------ (a) LESSOR'S DELAY. If the substantial completion of Lessee's Addition Work is delayed by: (i) the failure of Lessor to substantially complete those portions of Lessor's Addition Work which must be substantially completed in order for construction of Lessee's Addition Work to proceed in a timely manner, which failure is caused by the delay of Lessor, Lessor's employees or agents, or Lessor's architects or engineers, or Lessor's general contractor or any subcontractor or supplier thereof (but specifically excluding any delay caused by Lessee, Lessee's architects or engineers, Lessee's General Contractor, or any subcontractor or supplier thereof or any delay caused by an event of Force Majeure (as defined in Section 24.0 of the Lease)), then the Building Addition Rent Commencement Date shall be delayed beyond the date set forth in the schedule approved pursuant to Paragraph 5 above by the number of days of actual delay in the substantial completion of Lessee's Addition Work caused by such failure on the part of Lessor (as reasonably determined by Lessor's architect), PROVIDED, HOWEVER that in the event of the occurrence of any such act or omission which Lessee believes is delaying the performance by Lessee's General Contractor or any subcontractor thereof, Lessee shall give notice thereof to Lessor within ten (10) days of Lessee's acquiring actual knowledge of such act or omission, which notice shall be a condition precedent to such act or omission being deemed a basis for an extension of the Building Addition Rent Commencement Date under this clause (i); or 29 30 (ii) the failure of Lessor to respond to preliminary Working Drawings or final Working Drawings submitted by Lessee within the 15-business day period for such response as set forth in Paragraph 5 of this Work Letter, then the Building Addition Rent Commencement Date shall be delayed beyond the date set forth in the schedule approved pursuant to Paragraph 5 above by one day for each day such response is delayed beyond such 15-business day period. (b) LESSEE'S DELAY. If the substantial completion of Lessee's Addition Work is delayed by any cause other than (i) a Lessor's Delay as defined above, or (ii) an event of Force Majeure (as defined in Section 24.0 of the Lease) (a "Lessee's Delay"), such delay shall have no effect on the Building Addition Rent Commencement Date and the Building Addition Rent Commencement Date shall be the date on which Lessor's architect reasonably determines that the Building Addition would have been substantially completed but for such Lessee's Delay. (c) FORCE MAJEURE. In the event that either Lessee or Lessor is delayed in the performance of any of its obligations hereunder by the occurrence of an event of Force Majeure, then the Building Addition Rent Commencement Date shall be extended one day for each day such event of Force Majeure continues. 12. COSTS OF WORK. In connection with any Expansion Work, Lessor's Addition Work or Lessee's Addition Work performed pursuant to this Supplementary Work Letter: (a) the party performing such work shall provide reasonably detailed information to the other party on a periodic basis concerning the actual out-of-pocket costs and expenses being incurred in connection with the design and performance of such work, together with, upon request, reasonable supporting documentation, and (b) within a reasonable time after completion of such work, the party performing such work shall provide to the other party a final statement of the total actual out-of-pocket costs and expenses incurred in connection with the design and performance of such work, in reasonable detail, and shall further provide, upon request, reasonable supporting documentation therefor to the extent not previously provided to the requesting party pursuant to the preceding subparagraph (a). 30 31 13. LESSEE'S ACCESS TO THE PREMISES. Lessee and Lessee's architects, engineers, Lessee's General Contractor, its subcontractors and suppliers may, at Lessee's sole risk, enter upon the Expansion Premises (and in the case of Lessee's Addition Work, upon the Adjacent Land and the Building Addition) for the limited purpose of constructing the Expansion Work or Lessee's Addition Work (as the case may be) PROVIDED that such persons work in harmony with Lessor and Lessor's general contractor, its subcontractors and suppliers. If at any time such entry shall cause or threaten to cause disharmony or otherwise interfere with the orderly completion or operation of the Building or the Building Addition, Lessor shall have the right upon twenty-four (24) hours' written notice to Lessee to withdraw the consent to such entry given in this Paragraph. Any such entry onto the Land, the Building, the Premises, the Adjacent Land or the Building Addition shall be deemed to be under all of the terms, covenants, conditions and provisions of this Lease. Lessor shall not be liable in any way for any injury, loss or damage which may occur to any of Lessee's work and installations made in the Building or the Building Addition or to properties placed therein during construction of the Expansion Work or Lessee's Addition Work, the same being at Lessee's sole risk, EXCEPT that the foregoing shall not apply to any injury, loss or damage caused by the negligence or willful misconduct of Lessor or its officers, agents, employees, servants or contractors. 14. LESSOR'S AND LESSEE'S REPRESENTATIVES. Prior to the commencement of any design work for each of the Expansion Work or the Addition Work, each party hereto shall designate in writing to the other a person as "Lessor's Representative" and "Lessee's Representative" respectively, which person shall be available during ordinary business hours to review the progress of the work and to respond to issues which arise during construction. Each party may rely on the other's Representative with respect to all matters which pertain to this Work Letter, each party having authorized its Representative to make decisions binding upon such party with respect to such matters. 15. Completion of Lessor's Addition Work and Acceptance by Lessee. ------------------------------------------------------------- (a) A punchlist of incomplete or defective items of Lessor's Addition Work shall be developed by Lessee and Lessor within fifteen (15) days after Lessor's Addition Work is "substantially completed" (as defined in Paragraph 10(b) of this Work Letter) by means of a joint inspection of the Building Addition by Lessor and Lessee or their respective architects or designees. Lessor shall complete all punchlist work as soon as practicable. 31 32 (b) Lessor's Addition Work shall be deemed to be accepted by Lessee except for such items as are specified either (a) in the punchlist described in the preceding subparagraph or (b) in a written notice given by Lessee to Lessor not later than thirty (30) days after the earlier of (i) the date on which Lessor notifies Lessee that Lessor's Addition Work is complete or (ii) the date on which Lessee first occupies any portion of the Building Addition to conduct its business therein, except for defects which are not reasonably discoverable during such 30-day period. Lessor shall correct the items set forth in such notice as soon as practicable. (c) In the event that Lessor fails to correct any item specified in the punchlist or in such a written notice delivered by Lessee to Lessor within the time period specified in the preceding subparagraphs of this Paragraph 15, then Lessee may correct such work. If Lessee thereafter corrects such item in accordance with the provisions of this Paragraph, Lessee shall provide to Lessor reasonable supporting documentation of the actual out-of-pocket costs incurred by Lessee in correcting such defective work and the provisions of Paragraph 16(a) below shall apply. 16. Costs Incurred in Correcting or Completing Other Party's Work. ------------------------------------------------------------- (a) All actual out-of-pocket costs reasonably incurred by Lessee in correcting or completing any of Lessor's Addition Work as performed by Lessor shall be deducted from the cost of Lessor's Addition Work for purposes of calculating Basic Rent for the Building Addition pursuant to Section 4.1(a)(ii) of the Lease. (b) All actual out-of-pocket costs reasonably incurred by Lessor in correcting or completing any item of the Expansion Work or Lessee's Addition Work shall be paid by Lessee to Lessor, as Additional Rent, within thirty (30) days of written demand therefor by Lessor. 17. GENERAL. A breach by Lessee of any provision of this Work Letter shall constitute a default under the Lease, for which Lessor shall have all remedies therein provided. 32 EX-10.22(B) 5 2ND AMENDMENT TO DEVELOPMENT AGREEMENT 1 Exhibit 10.22(b) SECOND AMENDMENT to the Development Agreement by and between Janssen Pharmaceutica International, a division of Cilag International AG, having its place of business in CH-6300 Zug, Switzerland ("JANSSEN") and Medisorb Technologies International, a Delaware limited partnership ("Medisorb"), which agreement has in the meantime been duly assigned from Medisorb to Alkermes Controlled Therapeutics Inc. II, 64 Sidney Street, Cambridge, MA 02139-4136, U.S.A. ("ACT II") by a deed of assignment dated March 1, 1996. WHEREAS, JANSSEN and ACT II desire to amend certain terms of the Development Agreement with respect to the continuation, management and further funding of the Development Program. NOW, THEREFORE, the parties agree to amend the Development Agreement as follows: 1. In connection with Section 3 A., the Parties will undertake the development activities set forth in the Development Plan attached to this Amendment as Exhibit 1. Such activities will be undertaken in accordance with the time and event schedule specified in the Development Plan with a view to finalize the IRF within the timeframe provided for in Section 4 A. of the Development Agreement. The 2 Development Plan attached hereto cancels and supersedes the initial Development Program referred to in Section 3A of the Development Agreement. 2. Section 3 B. is hereby amended and replaced by the following: The development activities to be undertaken hereunder will be coordinated by a development team comprised of representatives of JANSSEN or JANSSEN's Affiliates and ACT II (hereinafter "The Development Team"). The Development Team will monitor and coordinate all scaling up efforts in the preparation of the commercial manufacturing process of the Product and all regulatory support efforts in the preparation of the IRF and the subsequent regulatory filings with national Health Authorities. In the event that the Parties would consider additional activities to be undertaken during the Development Program, such activities will be discussed at the level of the Development Team, and, if such activities are to be added to the Development Plan, a related budget will be agreed 2 3 by the Parties in accordance with the provisions of Section 3 D. The Development team will meet at regular intervals as agreed by both parties or upon the specific request of JANSSEN and at such locations as JANSSEN shall determine, or, at the option of either party, through video or telephone conferences. The Development Team shall endeavor to resolve all matters by consensus, each party having one vote. If the Development Team cannot reach an unanimous decision on any matter, such matter shall be resolved based on and consistent with JANSSEN's decision, it being understood that JANSSEN can not unilaterally change the terms of this Agreement or the Budget related to the Development Plan or decide that ACT II has to substantially increase its support in addition to the efforts already committed by ACT II in accordance with the current Development Plan. 3. Section 3 C. is hereby amended and replaced by the following: ACT II will use reasonable efforts to comply with its commitments under the Development Plan and 3 4 will dedicate sufficient staff with sufficient skills to support its efforts. ACT II will provide JANSSEN and JANSSEN's Affiliates represented in the Development Team with a monthly written report specifying the activities undertaken by it under the Development Plan. ACT II will also create detailed descriptions of any methodology, development formulation or processes related to development of Product in order to enable JANSSEN to prepare and file any regulatory approval and to assist in meetings with the regulatory authorities and to enable JANSSEN and/or ACT II as the case may be, to prepare and start up the commercial manufacturing process and the decision process related thereto. 4. Section 3 D. is hereby amended and replaced by the following: The parties have agreed on a budget in connection with the activities to be undertaken by ACT II hereunder and such budget forms part of the Development Plan (hereinafter "The Budget"). 4 5 The Budget includes all the estimated costs to be reimbursed by JANSSEN to ACT II under the Development Plan, including the clinical trial supplies up to and including Phase III clinical trials. In April of each calendar year the Budget will be adjusted to the FTE (Full Time Equivalent) rate for the next following Alkermes (being ACT II's parent) fiscal year. Such FTE rate will be calculated by dividing the total expenses of Alkermes (being ACT II's parent) by the number of direct personnel. This personnel excludes G&A, finance, legal and human resources. Prior to implementing such new FTE rate, JANSSEN and ACT II will discuss the impact on the Budget of such new FTE-rate. In the event that as a result of additional activities to be undertaken by ACT II, the Budget would have to be revised, the parties will agree on such revision prior to ACT II starting any such activities. The Budget provides for the purchase of the capital items specified in Exhibit 2 attached hereto dedicated to the development of the Product for a total amount 1,860,000 USD. Such capital 5 6 items will be paid for by JANSSEN or its designee and ownership will reside with JANSSEN or the designee who paid for such capital items. Such capital items will be used by ACT II in its premises solely in relation to the development and manufacture of Product as provided for in the Development Plan and shall only be acquired after consultation and approval of JANSSEN. ACT II will be responsible for the maintenance of such capital items. All other capital items required by ACT II to perform the activities provided for in the Development Plan will be ACT II's obligation and responsibility. Upon termination of the Development Agreement for any reason whatsoever, the capital items paid for by JANSSEN or its designee will be transferred to JANSSEN or its designee, at JANSSEN's cost. ACT II will invoice JANSSEN on a monthly basis for the activities undertaken by it during the previous month. Together with such invoice, ACT II will send the monthly report detailing the efforts expended under the Development Plan during such month. JANSSEN will pay ACT II within thirty 6 7 (30) days following receipt of the invoice and the related report. This Second Amendment is deemed to be effective as from March 8, 1996. Since both JANSSEN and Janssen Pharmaceutica Inc., 1125 Trenton-Harbourton Road, Titusville, NJ 08560, U.S.A., have exercised the option to enter into a License Agreement provided for in Section 6(A) of the Development Agreement, as duly amend by the First Amendment, Janssen Pharmaceutica Inc. will co-sign this Second Amendment, to indicate its agreement with the terms thereof. 7 8 WITNESS, the signature of all parties hereto by their duly authorized officers. JANSSEN PHARMACEUTICA INTERNATIONAL Date: April 28, 1997 /s/ Erik Rombouts /s/ Heinz Schmid - ------------------------------------- ------------------------------------- (title) Division Manager (title) General Manager International Trading ALKERMES CONTROLLED THERAPEUTICS INC. II Date: /s/ Michael Landine - ------------------------------------- ------------------------------------- (title) (title) Vice President JANSSEN PHARMACEUTICA INC. Date: /s/ Paulo F. Costa - ------------------------------------- ------------------------------------- (title) (title) President 8 EX-10.27(A) 6 LOAN SUPPLEMENT & MODIFICATION AGREEMENT 1 Exhibit 10.27(a) LOAN SUPPLEMENT AND MODIFICATION AGREEMENT This Loan Supplement and Modification Agreement ("this Agreement") is made as of June 2, 1997 by and among Alkermes, Inc., a Pennsylvania corporation ("Alkermes"), Alkermes Controlled Therapeutics, Inc., a Pennsylvania corporation ("ACT I"), Alkermes Controlled Therapeutics Inc. II, a Pennsylvania corporation ("ACT II") (Alkermes, ACT I and ACT II being hereinafter referred to collectively as the "Borrowers" and individually as a "Borrower") and Fleet National Bank (the "Bank"). The Bank is the successor by merger to Fleet Bank of Massachusetts, N.A. ("Fleet Mass"). For good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrowers and the Bank agree as follows: 1. REFERENCE TO DOCUMENTS. Reference is made to (i) that certain letter agreement dated September 27, 1996 (the "Letter Agreement") among the Borrowers and the Bank; (ii) that certain $3,187,496 original principal amount promissory note dated December 23, 1994 made by Alkermes and payable to the order of Fleet Mass, as amended by Allonge to Note dated September 27, 1996 among Alkermes, ACT I and the Bank (said December 23, 1994 promissory note, as so amended, being hereinafter referred to as the "1994 Note"); (iii) that certain $1,500,000 original principal amount promissory note dated December 19, 1995 made by Alkermes and payable to the order of Fleet Mass, as amended by Allonge to Note dated September 27, 1996 among Alkermes, ACT I and the Bank (said December 19, 1995 promissory note, as so amended, being hereinafter referred to as the "1995 Note"); (iv) that certain $5,000,000 original principal amount promissory note dated September 27, 1996 (the "Ohio Term Note") made by Alkermes and ACT II and payable to the order of the Bank; (v) that certain Security Agreement dated as of September 27, 1996 (the "Security Agreement") from the Borrowers to the Bank; (vi) that certain Pledge Agreement (the "Pledge") dated as of September 27, 1996 from Alkermes to the Bank; (vii) that certain Mortgage and Security Agreement dated as of September 27, 1996 (the "Ohio Mortgage") from ACT II to the Bank relating to premises of ACT II in Clinton County, Ohio; and (viii) that certain promissory note of even date herewith (the "1997 Term Note") in the face principal amount of the $2,500,000 made by the Borrowers and payable to the order of the Bank. The Letter Agreement, the 1994 Note, the 1995 Note, the Ohio Term Note, the Security Agreement, the Pledge, the Ohio Mortgage and the 1997 Term Note are hereinafter referred to collectively as the "Financing Documents". A copy of the form of the 1997 Term Note is attached hereto as Exhibit 1. 2. 1997 TERM LOAN. (a) MAKING OF 1997 TERM LOAN. At the date hereof, the Bank is making a loan (the "1997 Term Loan") to the Borrowers in the principal amount of $2,500,000. The 1997 2 Term Loan is being made in order to finance costs of Qualifying Equipment acquired by any Borrower after January 1, 1996 (excluding Ohio Loan Collateral, as defined in the Security Agreement). The 1997 Term Loan does not exceed 100% of the invoiced actual costs of the tangible property constituting the items of Qualifying Equipment with respect to which the 1997 Term Loan is made (excluding taxes, shipping, software, installation charges, training fees and other "soft costs"). In connection with the making of the 1997 Term Loan, and as a precondition thereto, the Borrowers are providing the Bank with: (i) invoices supporting the costs of the relevant Qualifying Equipment; (ii) such evidence as the Bank may reasonably request showing that each item of Qualifying Equipment has been delivered to and installed at Alkermes' or ACT I's premises in Cambridge, MA (in the case of Qualifying Equipment owned by Alkermes or ACT I) or ACT II's premises in Clinton County, Ohio and Hamilton County, Ohio (in the case of Qualifying Equipment owned by ACT II), has become fully operational, has been paid for by the relevant Borrower and is owned by the relevant Borrower free of all liens and interests of any other person or entity (other than the security interest of the Bank pursuant to the Security Agreement); (iii) executed Uniform Commercial Code financing statements reflecting the items of Qualifying Equipment with respect to which the 1997 Term Loan is being made and an appropriate supplement to the Security Agreement reflecting such items; and (iv) evidence satisfactory to the Bank that the Qualifying Equipment is fully insured against casualty loss, with insurance naming the Bank as secured party and first loss payee. As used herein, "Qualifying Equipment" means equipment purchased by the Borrowers after January 1, 1996 (excluding Ohio Loan Collateral, as defined in the Security Agreement) for use in the Borrowers' business which meets all of the following criteria: (i) such equipment consists of one of the items shown on the Equipment List heretofore delivered by the Borrowers to the Bank or has otherwise been approved by the Bank for use in supporting the 1997 Term Loan, (ii) each item of such equipment has been delivered to and installed at Alkermes' or ACT I's premises in Cambridge, MA (in the case of Qualifying Equipment owned by Alkermes or ACT I) or ACT II's premises in Clinton County, Ohio or Hamilton County, Ohio (in the case of Qualifying Equipment owned by ACT II) and has become fully operational, (iii) the relevant Borrower has paid in full for each item of such equipment and holds title to same, free of all interests and claims of any other person or entity (other than the security interest of the Bank), and (iv) the Bank has a fully perfected first security interest in such equipment. The 1997 Term Loan is evidenced by the 1997 Term Note. Interest on the 1997 Term Loan 2 3 shall be payable at the times and at the rate provided for in the 1997 Term Note. Overdue principal of the 1997 Term Loan and, to the extent permitted by law, overdue interest shall bear interest at a rate per annum which at all times shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under the 1997 Term Note (but in no event in excess of the maximum rate from time to time permitted by then applicable law), compounded monthly and payable on demand. Each Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to the 1997 Term Note or on the books of the Bank, at or following the time of receiving any payment of principal of the 1997 Term Loan, an appropriate notation reflecting such transaction and the then unpaid principal balance of the 1997 Term Loan. The amount so noted shall constitute presumptive evidence as to the amount owed jointly and severally by the Borrowers with respect to principal of the 1997 Term Loan. Failure of the Bank to make any such notation shall not, however, affect any obligation of any Borrower or any right of the Bank hereunder or under the 1997 Term Note. The 1997 Term Loan is made jointly to the Borrowers and repayment thereof is the joint and several obligation of the Borrowers. (b) REPAYMENT OF 1997 TERM LOAN. The Borrowers shall repay (and shall be jointly and severally obligated to repay) principal of the 1997 Term Loan in 60 equal consecutive monthly installments, commencing on July 1, 1997 and continuing on the first business day of each month thereafter. Each such monthly installment of principal paid with respect to the 1997 Term Loan shall be in an amount equal to 1/60th of the original principal amount of the 1997 Term Loan. In any event, the then outstanding principal balance of the 1997 Term Loan and all interest then accrued but unpaid thereon shall be due and payable in full on June 3, 2002. The Borrowers may prepay, at any time or from time to time, the whole or any portion of the 1997 Term Loan; provided that each such principal prepayment shall be accompanied by payment of all interest under the 1997 Term Note accrued but unpaid to the date of payment; and further provided that at the time of each such prepayment the Borrowers pay to the Bank the Make-Whole Amount, if any, required by the second paragraph of Section 1.6 of the Letter Agreement in respect of such prepayment. Any partial prepayment of principal of the 1997 Term Loan will be applied to installments of principal of the 1997 Term Loan thereafter coming due in inverse order of normal maturity. 3 4 (c) FACILITY FEES. With respect to the 1997 Term Loan, the Borrowers are paying to the Bank, at the date of execution and delivery of this Agreement, a non-refundable facility fee in the amount of $12,500. The fee described in this paragraph is in addition to any balances and fees required by the Bank or any of its affiliates in connection with any other services now or hereafter made available to Alkermes and/or any of its affiliates. 3. CONCERNING THE LETTER AGREEMENT. The parties agree as follows with respect to the Letter Agreement: a. That the 1997 Term Loan constitutes an "Additional Term Loan" as defined in Section 1.5 of the Letter Agreement and is thus included within the definitions of "Term Loan" and "Term Loans" for all purposes of the Letter Agreement. b. That the 1997 Term Note constitutes an "Additional Term Note" as defined in Section 1.5 of the Letter Agreement and is thus included within the definitions of "Note" and "Notes" for all purposes of the Letter Agreement. Without limitation of the foregoing provisions of this paragraph 3b and of paragraph 3a above, the Borrowers acknowledge that the provisions of the Letter Agreement as to payment and collection of amounts owed thereunder (including, without limitation, Sections 1.7, 5.2 and 5.3 of the Letter Agreement) and as to costs, expenses and charges (including, without limitation, Sections 6.1 and 6.2 of the Letter Agreement) apply to the 1997 Term Loan and to the 1997 Term Note. c. That the 1997 Term Loan is an "Additional Term Loan which bears interest at a fixed rate" for the purposes of the second paragraph of Section 1.6 of the Letter Agreement. d. That Section 6.6 of the Letter Agreement is hereby amended by deleting therefrom the words "Catherine M. Bruton, Vice President" and by substituting in their stead the following: "Irina Case, Assistant Vice President" 4. CONCERNING THE SECURITY AGREEMENT. The parties agree as follows with respect to the Security Agreement: a. That the 1997 Term Loan constitutes an "Additional Term Loan" for the purposes of the Security Agreement and is thus included for all purposes within the definition of "Obligations" appearing in Section 1 of the Security Agreement; and that references in Section 17 of the Security Agreement, as amended 4 5 hereby, to the "1997 Term Loan" will be deemed to refer to the 1997 Term Loan, as hereinabove defined. b. That the 1997 Term Note constitutes an "Additional Term Note" for the purposes of the Security Agreement and is thus included within the definition of "Loan Documents" appearing in Section 1 of the Security Agreement. c. That the items listed on Exhibit 2 attached hereto are deemed to be "Additional Loan Collateral" for the purposes of the Security Agreement and are thus included within the definitions of "Equipment" and "Collateral" appearing in Section 1 of the Security Agreement; and that the items listed on Exhibit 2 attached hereto shall also be deemed to be "1997 Loan Collateral" for the purposes of Section 17 of the Security Agreement. d. That the equipment lists set forth in Exhibit A to the Security Agreement are hereby amended by adding thereto (without releasing or deleting any item shown on such lists immediately prior to the date hereof) all of the items appearing on Exhibit 2 attached hereto. e. That Section 17 of the Security Agreement is hereby amended in its entirety to read as follows: "17. PARTIAL RELEASE. The Secured Party agrees that, upon the satisfaction of the Partial Release Conditions (hereinafter defined) in relation to the 1994 Term Loan, the 1995 Term Loan, the Ohio Term Loan or the 1997 Term Loan, the Secured Party will, at the Debtors' request, execute and deliver to the Debtors a release of the 1994 Loan Collateral or the 1995 Loan Collateral or the Ohio Loan Collateral or the 1997 Loan Collateral (as appropriate) from the lien of this Security Agreement (including appropriate releases on Form UCC- 3) and, upon execution and delivery of such release, the 1994 Loan Collateral, the 1995 Loan Collateral, the Ohio Loan Collateral or the 1997 Loan Collateral (as the case may be) will no longer be deemed 'Collateral' subject to this Security Agreement. As used herein, the 'Partial Release Conditions' will be deemed satisfied only if ALL of the following shall have occurred: (i) the 1994 Term Loan or the 1995 Term Loan or the Ohio Term Loan or the 1997 Term Loan (as the case may be) shall have been paid in full, (ii) the cash and/or readily-marketable Government Securities pledged to the Secured Party under Section 1.8 of the Letter Agreement shall have an aggregate fair market 5 6 value of not less than the 'Required Minimum Value' (as defined in the Letter Agreement) and Alkermes shall agree to maintain such pledged cash and/or readily-marketable Government Securities in such amount so that the fair market value thereof shall never be less than such 'Required Minimum Value' and (iii) there shall then exist no Event of Default nor any event or circumstance which, with the passage of time or the giving of notice or both, could become an Event of Default. At the time of the making of any Additional Term Loan, the Bank and the Debtors may, by written modification to this Security Agreement, set forth the circumstances, if any, under which a partial release may be obtained with respect to the Additional Loan Collateral pledged in connection with the relevant Additional Term Loan." 5. CONCERNING THE PLEDGE. The parties agree as follows with respect to the Pledge: a. That the 1997 Term Note constitutes an "Additional Term Note" as described in Section 2 of the Pledge, with the result that the 1997 Term Note is included within the "Loan Documents" as defined in Section 2 of the Pledge. b. That the 1997 Term Loan is included within the "Secured Obligations" as defined in Section 2 of the Pledge. 6. CONCERNING THE OHIO MORTGAGE. The parties agree that the 1997 Term Note constitutes one of the "Other Term Notes" described in the WITNESSETH clause of the Ohio Mortgage, with the result that the 1997 Term Loan is among the obligations secured by the Ohio Mortgage. 7. AMENDED DOCUMENTS. Wherever in any Financing Document, or in any certificate or opinion to be delivered in connection therewith, reference is made to the Letter Agreement, to the Security Agreement, to the Pledge and/or to the Ohio Mortgage, from and after the date hereof same will be deemed to refer to the relevant Financing Document as amended or otherwise affected hereby. 8. REPRESENTATIONS. In order to induce the Bank to enter into this Agreement, each Borrower represents and warrants as follows: a. The execution, delivery and performance of each of this Agreement and the 1997 Term Note have been duly authorized by 6 7 each Borrower by all necessary corporate and other action, will not require the consent of any third party and will not conflict with, violate the provisions of, or cause a default or constitute an event which, with the passage of time or the giving of notice or both, could cause a default on the part of any Borrower under its charter documents or by-laws or under any contract, agreement, law, rule, order, ordinance, franchise, instrument or other document, or result in the imposition of any lien or encumbrance (except in favor of the Bank) on any property or assets of any Borrower. b. Each Borrower has duly executed and delivered each of this Agreement and the 1997 Term Note. c. Each of this Agreement and the 1997 Term Note is the legal, valid and binding joint and several obligation of each Borrower, enforceable against each Borrower jointly and severally in accordance with its respective terms. d. The statements, representations and warranties made in the Letter Agreement, in the Security Agreement and/or in the other Financing Documents continue to be correct as of the date hereof; except as amended, updated and/or supplemented by the attached Supplemental Disclosure Schedule. e. The covenants and agreements of the Borrowers contained in the Letter Agreement, in the Security Agreement and/or in the other Financing Documents have been complied with on and as of the date hereof. f. No event which constitutes or which, with notice or lapse of time, or both, could constitute, an Event of Default (as defined in the Letter Agreement) has occurred and is continuing. g. No material adverse change has occurred in the financial condition of any Borrower from that disclosed in the financial statements of Alkermes dated December 31, 1996, heretofore furnished to the Bank. 9. FULL FORCE AND EFFECT. Except as expressly affected hereby, the Letter Agreement and each of the other Financing Documents remains in full force and effect as heretofore. 10. NO WAIVER. Nothing contained herein will be deemed to constitute a waiver or a release of any provision of any of the Financing Documents. Nothing contained herein will in any event be deemed to constitute an agreement to give a waiver or release 7 8 or to agree to any amendment or modification of any provision of any of the Financing Documents on any other or future occasion. Executed, as an instrument under seal, as of the day and year first above written. ALKERMES, INC. By: /s/ Michael J. Landine -------------------------------- Name: Michael J. Landine Title: Senior Vice President and CFO ALKERMES CONTROLLED THERAPEUTICS, INC. By: /s/ Michael J. Landine -------------------------------- Name: Michael J. Landine Title: Vice President ALKERMES CONTROLLED THERAPEUTICS INC. II By: /s/ Michael J. Landine -------------------------------- Name: Michael J. Landine Title: Vice President Accepted and agreed: FLEET NATIONAL BANK By: /s/ Matthew Moiauninger ---------------------------------- Name: Matthew Moiauninger Title: Vice President 8 9 EXHIBIT 2 Equipment List -------------- 10 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST
Date of Total Less Less Total Purchase Company Description Ref # Invoice Freight Sales Tax Invoice - ------------------------------------------------------------------------------------------------------------------------------------ ALKERMES EQUIPMENT FY1996 (APRIL 1995-MARCH 1996) 2/26/96 Amsco (PA) GMP washer 145389 95,239.00 0.00 0.00 95,239.00 2/26/96 Amsco (PA) Parts to GMP washer 145390 27,654.00 0.00 0.00 27,654.00 2/28/96 Amsco Sales (NY) Parts to GMP washer 145625 159.19 2.94 0.00 156.25 2/29/96 Amsco Sales (NY) Parts to GMP washer 145678 183.62 5.54 0.00 178.08 2/29/96 Amsco Sales (NY) Parts to GMP washer 145654 512.50 0.00 0.00 512.50 1/16/96 Beta Star Corporation Mdl 400 con & oq/iq prog 144682 6,925.00 0.00 0.00 6,925.00 1/9/96 Boston Ship Service Kitchen microwave 144031 197.40 0.00 9.40 188.00 2/9/96 Cargocaire Vacuum, 30565-01 145144 2,599.00 100.00 119.00 2,380.00 1/17/96 CDW Computer Centers Microtest discport etc. 144646 963.16 11.16 0.00 952.00 1/30/96 CDW Computer Centers Color Inkjet 144994 350.00 0.00 0.00 350.00 2/20/96 CDW Computer Centers HP printer & monitor 145737 1,230.35 23.35 0.00 1,207.00 3/14/96 CDW Computer Centers Hard drive etc. 146377 2,743.00 0.00 0.00 2,743.00 3/28/96 Danka Industries, Inc. Sharp fax machine 147040 2,369.85 0.00 112.85 2,257.00 2/21/96 Danka Industries, Inc. Sharp fax machine 145938 2,188.20 0.00 104.20 2,084.00 3/26/96 Data Care/Valcom HP vectra/color monitor 146801 3,458.70 42.00 162.70 3,254.00 3/5/96 Dell Direct Nanao flexscan F2-21 145909 2,104.00 75.00 0.00 2,029.00 3/7/96 Dell Direct Dell optiplex system 145945 1,787.10 0.00 85.10 1,702.00 2/13/96 Hank Finkel Associates Cart with ledges 145324 618.13 27.61 28.12 562.40 1/19/96 Imaging Research, Inc. Dual lamp desktop illumin. 144578 2,070.00 75.00 0.00 1,995.00 1/25/96 Imnet/Evergreen Tech. Console to mvv opt dsl dr 144648 4,035.00 0.00 0.00 4,035.00 1/26/96 InfoTech Apple laserwriter 144843 2,355.90 27.00 110.90 2,218.00 2/2/96 InfoTech lw 500 sheet feeder 144957 286.20 9.00 13.20 264.00 2/2/96 MacWarehouse HP laserjet 144995 1,080.00 0.00 30.00 1,050.00 1/31/96 MacWarehouse Powerbook etc. 145162 4,500.00 0.00 21.00 4,479.00 2/28/96 MacWarehouse Powermac, keyboard, etc. 145693 7,681.00 75.00 0.00 7,606.00 2/29/96 MacWarehouse Netpatrol pack pro 145794 1,282.00 3.00 0.00 1,279.00 1/4/96 Microcenter Apple laserwriter 144381 2,466.45 0.00 117.45 2,349.00 2/29/96 Microtech International 8mb simms 145694 2,252.27 20.27 0.00 2,232.00 3/15/96 Microtech International Mia 8000/72-06 etc. 146246 4,257.27 27.27 0.00 4,230.00 2/27/96 Microtech International 16&8mb simms 145612 1,114.07 16.07 0.00 1,098.00 2/28/96 Nortel Digital line card etc. 145955 4,023.00 0.00 189.00 3,834.00 1/23/96 PCs Compleat, Inc. Celebris gl short tower 144479 3,681.27 17.82 174.45 3,489.00 1/25/96 PCs Compleat, Inc. 16mb simms 144643 708.45 4.95 33.50 670.00 3/20/96 PCs Compleat, Inc. Hard drive 146343 6,327.80 29.90 299.90 5,998.00 3/11/96 Radiometer America, Inc. Conductivity meter etc. 146003 1,890.00 0.00 0.00 1,890.00 1/15/96 Shreve Systems Laserwriter etc, 144158 795.00 19.00 0.00 776.00 2/2/96 Shreve Systems SCSI hard disk etc. 145339 1,015.00 20.00 0.00 995.00 1/30/96 VWR Scientific Freezer chest 145293 5,657.00 0.00 0.00 5,657.00 3/5/96 Waters Corporation Bus sat/in module box 145805 2,155.00 5.00 0.00 2,150.00
Page 1 11 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST ALKERMES F&F FY1996 (APRIL 1995-MARCH 1996) 2/9/96 First Office Concepts Storage cabinet credenza 145120 730.40 29.00 33.40 668.00 1/25/96 Hank Finkel Tables, shelves, posts, etc. 144826 3,802.95 161.17 172.42 3,469.36 2/12/96 Hank Finkel Stainless steel bench 145114 1,032.90 69.00 45.90 918.00 ALKERMES EQUIPMENT FY1997 (APRIL 1996-MARCH 1997) 2/28/97 AMC Computers 2 orange PC & 2 orange window 95 155706 4,108.00 20.00 0.00 4,088.00 2/25/97 AMC Computers APMM Apple 20" display 155735 5,430.00 195.00 0.00 5,235.00 3/14/97 AMC Computers APCM4595LL/ Mac ext. keyboard/ carrycage/microsaver 155755 5,799.00 0.00 0.00 5,799.00 3/18/97 AMC Computers APCM4595LL/Mac extended Keyboard II 155876 10,670.00 70.00 0.00 10,600.00 3/18/97 AMC Computers APCM4595LL/Mac extended Keyboard II/ Mitsubishi 155880 7,585.00 175.00 0.00 7,410.00 9/25/96 AMC Computers 3CN3C1667100 3com lonkbuilder 151049 855.00 10.00 0.00 845.00 10/28/96 AMC Computers Apple display and keyboards 152163 6,280.00 40.00 0.00 6,240.00 10/31/96 AMC Computers Apple PC compatibility 152162 2,020.00 10.00 0.00 2,010.00 11/25/96 AMC Computers Apple computer, display, keyboard 152754 8,395.00 75.00 0.00 8,320.00 1/24/97 AMC Computers HP LASERJET MX PRINTER W/TONER 154175 7,800.00 50.00 0.00 7,750.00 1/17/97 AMC Computers APCM/APPLE20"/KEYBOARD 154269 12,620.00 140.00 0.00 12,480.00 1/10/97 AMC Computers APCM/APPLE20"/KEYBOARD 154147 4,200.00 40.00 0.00 4,160.00 1/18/97 AMC Computers APCM/APPLE20"/KEYBOARD 154122 4,210.00 50.00 0.00 4,160.00 2/21/97 AMSCO Interface board, touch panel 154946 2,206.55 43.15 0.00 2,163.40 2/13/97 AMSCO P117580014/Pump 154755 6,385.25 0.00 0.00 6,385.25 3/31/96 Bio-Rad Digilab Division Winir system 146717 13,360.00 0.00 0.00 13,360.00 4/2/96 Bio-Rad Digilab Division Credit ref #146717 152261 -4,870.00 0.00 0.00 -4,870.00 9/30/96 Biotest Purge Filter Assembly 151117 7,881.40 71.40 0.00 7,810.00 3/27/96 CDW Computer Centers Intel Pentium Overdrive 146731 382.46 11.46 0.00 371.00 3/28/96 CDW Computer Centers Intel Pentium Overdrive 146736 256.33 1.33 0.00 255.00 5/23/96 CDW Computer Centers Visionter 16mb dell 148275 356.66 6.66 0.00 350.00 7/10/96 CDW Computer Centers SEAGATE 1.00GB 11ms IDE 149330 201.00 0.00 0.00 201.00 7/31/96 CDW Computer Centers HP LJ 5 12PPm 600PI 149959 1,261.65 22.65 0.00 1,239.00 9/19/96 CDW Computer Centers SAMSUNG 17glt 151068 738.89 54.89 0.00 684.00 10/23/96 CDW Computer Centers NANAO FLEXSCAN 21IN 151864 1,855.26 60.26 0.00 1,795.00 10/24/96 CDW Computer Centers SAMSUNG 17 GLI 17IN 151870 746.92 54.92 0.00 692.00 10/24/96 CDW Computer Centers SAMSUNG 11GLI 17IN 151871 1,384.00 0.00 0.00 1,384.00 11/20/96 CDW Computer Centers TOS 200CDS/MHZ 28.8 PCMIA 152535 4,674.67 38.67 0.00 4,636.00 6/24/96 CDW Computer Centers SIMPLE 8MB DEC HINOTE 148908 157.35 5.35 0.00 152.00 6/19/96 CDW Computer Centers SIMPLE 16MB DEC PC LP 148895 253.43 8.43 0.00 245.00 6/20/96 CDW Computer Centers MHZ 28.8 PCMCIAV.34 FAX 148896 259.83 8.83 0.00 251.00 6/7/96 CDW Computer Centers SEAGATE HARD DRIVE 148668 299.00 0.00 0.00 299.00 6/11/96 CDW Computer Centers HP LASER 5P 148681 879.00 0.00 0.00 879.00 5/31/96 CDW Computer Centers NANAO MONITOR 148400 1,915.87 95.87 0.00 1,820.00 7/11/96 CDW Computer Centers 4MB Dell 147077 253.24 3.24 0.00 250.00 4/1/96 Computer Town Apple Mac 146718 1,727.50 10.75 81.75 1,635.00 4/2/96 Computer Town 4 Power macs 146763 4,195.80 0.00 199.80 3,996.00
Page 2 12 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST 6/24/96 Computer Town SONY 17"COLOR MONITOR 148818 853.95 15.00 39.95 799.00 6/24/96 Computer Town APPOI HDA 320 MB SCSI 149400 409.50 0.00 19.50 390.00 8/28/96 Cotter Corporation Modification to WFI 151081 3,123.80 0.00 0.00 3,123.80 2/27/97 Data Science Receiver system RPC-1/power supply/ start cable 155210 11,236.01 26.01 0.00 11,210.00 3/18/97 Dell Direct Sales Dell Dimension XPS Pentium Processor 155736 2,795.00 100.00 0.00 2,695.00 10/1/96 Dell Direct Sales DELLPCW/MONITOR,NETWORK 151216 3,330.00 100.00 0.00 3,230.00 11/25/96 Dell Direct Sales Pentium Pro3000mhz 152551 3,689.00 55.00 0.00 3,634.00 3/27/96 Dell Direct Sales Dell dimension Pentium 146818 2,323.65 55.00 110.65 2,158.00 11/26/96 Dell Direct Sales Dimension XPS/Microsoft system/Win95 152664 2,820.30 100.00 134.30 2,586.00 2/23/96 Dictronics Laser facsimile machine 148273 2,792.50 325.00 117.50 2,350.00 1/23/97 Entex HP-HEWLET/3COM/TOSHIBA 154155 11,021.25 186.93 498.78 10,335.54 1/23/97 Entex Proliant 2500, energy unit etc. 154531 14,827.31 208.01 693.30 13,926.00 2/25/97 Entex TT-TEKTRONIX (color printer)/lower tray assa. for phase II 155711 9,201.28 166.03 430.25 8,605.00 3/10/97 Entex HP-Hewlett Pack/fast ethlink/ 8x speed CD-Rom/ 155734 1,803.55 81.05 77.50 1,645.00 12/13/96 Geneva Group SollomIV 152743 45,046.09 0.00 0.00 45,046.09 4/9/96 Infotech Hp laserjet 5SI 147045 4,045.95 15.00 191.95 3,839.00 4/19/96 Infotech Laserjet Iv plus 147209 1,447.00 0.00 0.00 1,447.00 5/22/96 Infotech 16 mb simms 148159 515.15 8.00 24.15 483.00 6/17/96 Infotech HP DESKJET 1600CM 148610 2,135.95 16.00 100.95 2,019.00 6/7/96 Infotech HP LASERJET 148379 4,068.95 38.00 191.95 3,839.00 5/8/96 MacWarehouse Keyboard-compatibility cd 147934 1,232.90 118.90 0.00 1,114.00 5/29/96 MacWarehouse Power Mac w/scan display 148479 7,442.00 0.00 0.00 7,442.00 5/29/96 MacWarehouse Extended Keyboard, etc. 148480 1,654.50 135.00 0.00 1,519.50 5/30/96 MacWarehouse Powermac 148481 1,026.00 27.00 0.00 999.00 5/30/96 MacWarehouse APPLE MULTIPLE SCAN DSPLY 148518 947.39 0.00 49.39 898.00 5/8/96 MacWarehouse POWER MAC & DISPLAY 148403 9,889.00 0.00 0.00 9,889.00 7/1/96 MacWarehouse Extended Keyboard II 149032 194.00 39.00 0.00 155.00 7/1/96 MacWarehouse Power Mac 7200 149033 4,921.00 0.00 0.00 4,921.00 7/15/96 MacWarehouse Extended Keyboard + modem 149440 865.00 0.00 0.00 865.00 9/23/96 MacWarehouse Mitsubishi MCA640 optical drive 151069 602.00 3.00 0.00 599.00 10/16/96 MacWarehouse POWERPORT/MERCURY FOR POWER BOOK 151570 319.00 0.00 0.00 319.00 1/6/97 MacWarehouse APPLE POWERBOOK/LASERJET 154172 2,744.00 0.00 0.00 2,744.00 2/20/97 MacWarehouse Powermac 7300 155085 8,196.00 0.00 0.00 8,196.00 2/20/97 MacWarehouse Credit ref #155085 155733 -2,299.00 0.00 0.00 -2,299.00 2/12/97 MacWarehouse Fax, ethernet line 154929 1,297.95 8.00 0.00 1,289.95 4/1/96 McMaster-Carr Steel ladder 146721 494.08 42.00 0.00 452.08 9/15/96 Micro Center Academic network center 150623 5,109.31 0.00 243.30 4,866.01 9/10/96 Micro Center QVS cable, scanner keyboard 150542 4,931.51 0.00 234.83 4,696.68 11/22/96 Micro-Med Low pressure analyzer 152441 6,765.00 0.00 0.00 6,765.00 1/7/97 Microtech International MIA1600/168-06PPC 153485 1,015.91 15.91 0.00 1,000.00 4/4/96 Microtech International Mia8000/168-06 PPC 146781 1,808.71 18.71 0.00 1,790.00 5/8/96 Microtech International 8mb simms 147774 2,794.59 22.59 0.00 2,772.00 5/31/96 Microtech International MIA8000/168-06-PPC 148294 2,405.19 21.19 0.00 2,384.00 9/25/96 Microtech International DIMM 512k cache 151070 1,242.94 17.94 0.00 1,225.00
Page 3 13 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST 10/29/96 Microtech International MIA1600/168-06-PPC 151869 1,386.45 17.45 0.00 1,369.00 12/18/96 Nortel Communication Telephones 153230 1,742.10 20.00 82.00 1,640.10 12/9/96 Nortel Communication M2616 perf-plus tel basic 153325 608.50 10.00 28.50 570.00 2/21/97 Northern Business Machine Sharp fax machine 155068 5,394.00 0.00 0.00 5,394.00 12/31/96 Osmonics PUMP MOTOR ELECTRIC BOILER 153415 2,070.00 0.00 0.00 2,070.00 9/19/96 PC's Compleat Inc P133,16MBEDO win 95 150846 2,617.90 14.95 123.95 2,479.00 6/20/96 PC's Compleat Inc DIGITAL HINOTE ULTRA II 148736 3,198.90 49.95 149.95 2,999.00 10/24/96 PC's Compleat Inc P133,16MBEDO/MEMORY/VIDEO 151713 4,223.60 29.90 199.70 3,994.00 12/12/96 PC's Compleat Inc P133A, memory, modem 153096 4,296.85 14.95 203.90 4,078.00 12/16/96 PC's Compleat Inc Replicator, port, w/ethernet 152955 339.90 4.95 15.95 319.00 2/21/97 Orange Micro, Inc. Orange Pc 540 PCI 154887 6,579.10 39.70 311.40 6,228.00 12/12/96 South Hill Datacomm 4 PORT STATIONS & ADAPTERS 154313 3,756.00 0.00 0.00 3,756.00 1/14/97 Stoelting LAB STANDARD W/18 DEGREE EARBARS 153889 7,831.80 46.80 0.00 7,785.00 9/10/96 The Holt Company slide proj with film 150556 753.00 0.00 0.00 753.00 10/7/96 The Holt Company KODAK EKTAGRAPHIC IIIA SLIDE PROJECT 151212 781.50 15.00 36.50 730.00 2/10/97 Thomas Scientific Blender 4L 120V 154461 1,284.76 28.76 0.00 1,256.00 6/12/96 Triumph PCVD1012/PCACCALPRT 148600 1,789.80 6.90 84.90 1,698.00 12/4/96 VWR Corporation Ambi-hi low chambers 153086 3,810.00 0.00 0.00 3,810.00 5/10/96 Waters Corporation In-line degasser 4 channel 147809 2,905.00 5.00 0.00 2,900.00 7/29/96 Zsource Ricoh SCSI scanner + drive 149559 4,764.00 18.00 226.00 4,520.00 ALKERMES F&F FY1997 (APRIL 1996-MARCH 1997) 5/21/96 First Office Concepts Letter Size File Cabinets 148012 2,589.50 80.00 119.50 2,390.00 5/16/96 First Office Concepts Steel Display Cases 148156 2,638.80 39.00 123.80 2,476.00 1/9/97 First Office Concepts Cramer stoll 153988 556.18 17.00 25.68 513.50 4/1/96 Hank Finkel Shelf & Post 146976 166.95 6.95 21.00 139.00 1/21/97 Hank Finkel curt/post/caster 154149 2,403.24 199.97 104.92 2,098.35 3/14/97 Nortel Communications M2008HF stndrd bus tel/M2616 perf-plus tel 155991 4,932.50 50.00 232.50 4,650.00 3/12/97 Nortel Communications M2616 Perf-Plus Tel basic 155990 1,700.00 20.00 80.00 1,600.00 ALKERMES EQUIPMENT FY1998 (APRIL 1997-MARCH 1998) 4/3/97 AMC Computer Corp Powermac 156216 2,565.00 0.00 0.00 2,565.00 4/23/97 AMC Computer Corp Powerbook computer 156698 5,759.00 25.00 0.00 5,734.00 4/18/97 AMC Computer Corp HP laserjet 156865 3,895.00 0.00 0.00 3,895.00 4/7/97 AMC Computer Corp Powermac 157210 3,515.00 0.00 0.00 3,515.00 4/25/97 Carver, Inc. C/press model with c/base press stand 156728 2,809.94 64.94 0.00 2,745.00 4/10/97 Data Sciences, Inc. Blood pressure monitoring system 156739 17,973.95 13.95 0.00 17,960.00 3/31/97 Dell Direct Sales, L.P. Dell 6200 w/pentium 156086 3,800.00 55.00 0.00 3,745.00 3/28/97 Dell Direct Sales, L.P. Dell 6200 w/pentium 156087 3,800.00 55.00 0.00 3,745.00 4/11/97 Dell Direct Sales, L.P. Dell poweredge 2100 pentium pro base 156403 3,389.00 100.00 0.00 3,289.00 4/8/97 Entex Toshiba 156359 2,888.27 37.52 135.75 2,715.00 4/2/97 Entex HP computer 156361 2,529.15 122.05 110.10 2,297.00 3/31/97 Fisher Scientific Freezer storage flame material 156080 2,792.00 0.00 0.00 2,792.00 5/5/97 Genevea Group GB ultra wide swapable drive, PCI controller 156609 5,761.47 25.00 273.17 5,463.30
Page 4 14 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST 4/28/97 Harvard Apparatus Multi-syr pump 22 156720 4,204.38 14.38 0.00 4,190.00 4/23/97 Kinematic AG Dispersing and homogenizing unit 156262 5,941.65 0.00 0.00 5,941.65 3/31/97 La Calhene Replacement canopy for two half suit isolator 156040 7,994.15 59.15 0.00 7,935.00 4/24/97 McMaster-Carr Stainless steel scullery sink 156881 2,381.15 40.00 0.00 2,341.15 4/21/97 Micro Motion Sensor and transmitter 156401 6,835.20 20.00 0.00 6,815.20 4/10/97 Microtech International Memory for computers 156800 3,705.36 25.36 0.00 3,680.00 4/7/97 Shreve Systems 500 MB internal 3.5 harddrives 156471 4,650.00 70.00 0.00 4,580.00 4/7/97 Sonics & Materials, Inc. 100 watt system 156461 2,232.19 12.19 0.00 2,220.00 4/28/97 VWR Corporation Balances 157269 6,181.45 0.00 0.00 6,181.45 4/16/97 Waters Corporation In-line degasser 4-channel 156426 3,005.00 5.00 0.00 3,000.00 ------------------------------------------------ TOTAL ALKERMES 720,029.00 5,712.95 7,991.46 706,324.59 ------------------------------------------------ ACTI EQUIPMENT FY1996 (APRIL 1995-MARCH 1996) 2/13/96 Accutemp Engineering Watlow microprocessor, et 5250 2,722.15 45.68 0.00 2,676.47 1/30/96 Alloy Products Corp. 7 Gal Tank w/misc parts 5189 3,670.40 16.40 0.00 3,654.00 2/13/96 Alloy Products Corp. 14 gal vessel 5254 3,754.27 54.27 0.00 3,700.00 2/16/96 Amsco Sales (NY) Valve-part of Cooler 5244 323.48 3.62 0.00 319.86 1/8/96 AMSCO-PA H202 case 5078 788.00 0.00 0.00 788.00 1/8/96 Avestin, Inc. High pressure homo. mach 5051 13,030.00 160.00 0.00 12,870.00 3/18/96 Chisholm Corp. Palltronic filter tester 5454 15,750.00 0.00 0.00 15,750.00 2/15/96 Chisholm Corporation Water/moisture trap 5255 160.52 10.52 0.00 150.00 2/16/96 Cole-Parmer Humidity data processor 5245 976.70 6.70 0.00 970.00 3/7/97 Cole-Parmer Humidity data processor 5365 2,024.15 29.15 0.00 1,995.00 1/15/96 Cotter Corporation WFI tank upgrade project 5042 12,849.72 0.00 0.00 12,849.72 2/9/96 Cotter Corporation Add ferrule 40l vessel 5220 2,848.00 0.00 0.00 2,848.00 2/27/96 Harvard Apparatus Multi syringe pump 5310 2,631.37 6.37 0.00 2,625.00 3/6/96 IKA Works, Inc. Homogenizer motor 5368 2,399.58 11.58 0.00 2,388.00 3/1/96 ITT Sherotec Valves for tanks 5333 9,131.43 14.83 0.00 9,116.60 January La Calhene Platine for clean room 144898 33,447.00 0.00 0.00 33,447.00 4/11/96 La Calhene Isolator walls 5639 22,824.30 0.00 0.00 22,824.30 3/27/96 MKS Instruments Barratron pressure transducer 5500 4,931.48 11.48 0.00 4,920.00 2/29/96 Osmonics Steam generator 5621 60,278.50 0.00 0.00 60,278.50 1/1/96 Pacific Venture Lease 8142N 4984 2,897.00 0.00 0.00 2,897.00 2/8/96 Process Instrumentation Temp callibrator w/access 5356 3,555.00 5.00 0.00 3,550.00 2/22/96 Sonics & Materials Ultrasonic Processor etc. 5302 7,343.45 28.45 0.00 7,315.00 1/17/96 Superior Controls Prolease 50 data acq.system 5084 7,827.00 0.00 0.00 7,827.00 2/9/96 Superior Controls Prolease 50 data acq.system 5266 7,969.60 0.00 0.00 7,969.60 3/6/96 Superior Controls Prolease 50 data acq.system 5376 5,218.00 0.00 0.00 5,218.00 3/25/96 Superior Controls Prolease 50 data acq.system 5517 1,500.00 0.00 0.00 1,500.00 3/25/96 Superior Controls Prolease 50 data acq.system 5518 7,969.60 0.00 0.00 7,969.60 1/18/96 Telsonic, USA Ultrasonic generator, etc. 5089 2,910.00 35.00 0.00 2,875.00
Page 5 15 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST ACTI F&F FY1996 (APRIL 1995-MARCH 1996) 1/22/96 Hank Finkel Table 670 908.24 76.64 39.60 792.00 2/23/96 Hank Finkel Shelf & Post 5311 166.26 19.00 7.01 140.25 2/27/96 Hank Finkel Shelf & Post 5324 166.00 19.00 7.00 140.00 3/7/96 Hank Finkel Standard Utility Cart 5381 465.58 22.48 21.10 422.00 2/27/96 Terra Universal, Inc. Blue Upholstered Chair 5340 1,677.00 67.00 0.00 1,610.00 ACTI EQUIPMENT FY1997 (APRIL 1996-MARCH 1997) 1/8/97 Alleghency Bradford Corp Heat exchanger 8231 10,427.00 0.00 0.00 10,427.00 2/5/97 Alloy Products Corp Vessel 14 Gal ASME T-316 8560 8,865.72 85.72 0.00 8,780.00 4/9/96 Alloy Products Corp 14 gal vessel 5630 7,784.27 54.27 0.00 7,730.00 7/11/96 Amsco Sales Corp 1 316l SS TC PRESSURE REG 6318 1,966.59 10.03 0.00 1,956.56 3/31/96 Anatel Corporation Analyzer 5569 16,998.62 3.62 0.00 16,995.00 2/11/97 Apache Stainless Equipment 37.4 18" Vessel 8591 4,390.00 0.00 0.00 4,390.00 1/13/97 Avestin, Inc. EmulsiFlex-C50 high pressure 8315 23,040.00 290.00 0.00 22,750.00 4/4/96 Avestin, Inc. Homogenizer/Transducer 5597 25,980.00 320.00 0.00 25,660.00 6/25/96 Beta-Star Corp MODEL #400 CONTROL 6429 13,075.00 0.00 0.00 13,075.00 6/25/96 Beta-Star Corp ADDITIONAL PARTS MODEL #400 6428 6,326.44 0.00 0.00 6,326.44 5/16/96 Bio-Rad Digilab Div. Automatic temp controller 5827 4,870.00 0.00 0.00 4,870.00 6/13/96 Boston Ship Service 1810 Fridge 5980 525.00 0.00 0.00 525.00 1/10/97 Chemineer Inc CAT-10 static mixer 8321 3,978.18 18.18 0.00 3,960.00 6/11/96 Cole-Parmer Instrument PUMP MFLEX V-FLO 6050 2,650.00 0.00 0.00 2,650.00 7/25/96 Cole-Parmer Instrument VAC PUMP 6524 2,777.60 227.60 0.00 2,550.00 2/28/97 Cotter Corporation Modify Glove Box Isolator small 8787 1,475.00 0.00 0.00 1,475.00 3/20/96 Cotter Corporation Pressure control valve 5659 2,819.00 0.00 0.00 2,819.00 10/16/96 Cotter Corporation Modification to SS Isolator unit 7602 5,900.00 0.00 0.00 5,900.00 11/14/96 Cotter Corporation FAB. SC Middle per 10/23/96 skecth 7830 1,395.00 0.00 0.00 1,395.00 1/23/97 Cotter Corporation FAB. bottom collection tank 8402 4,650.00 0.00 0.00 4,650.00 1/23/97 Cotter Corporation 10".4" can red top insulated 8401 5,750.00 0.00 0.00 5,750.00 3/21/97 Cotter Corporation Modify glove box isolator small 9148 2,175.00 0.00 0.00 2,175.00 2/4/97 Edwards High Vacuum B Pump E2M18 8542 2,815.59 200.59 0.00 2,615.00 6/19/96 Edwards High Vacuum VACUUM PUMP W/RUBBER 6110 3,030.79 50.79 0.00 2,980.00 3/24/97 Exeter Analytical, Inc. CE440 element analyzer & start up kit 8954 30,450.00 125.00 0.00 30,325.00 9/23/96 Fisher Scientific Incubator MDL 815 220VAC 50HZ 7163 2,295.00 0.00 0.00 2,295.00 9/27/96 Fisher Scientific Digital Chart Recorder 115V 7398 2,235.00 0.00 0.00 2,235.00 10/8/96 Fisher Scientific Incubator MDL 815 220VAC 7407 4,590.00 0.00 0.00 4,590.00 11/20/96 Fisher Scientific Blood bk ref 12cu ft 115v 7851 2,815.00 0.00 0.00 2,815.00 11/4/96 FTS Systems, Inc pump circulating 7805 1,508.45 0.00 0.00 1,508.45 7/26/96 FTS Systems, Inc RC211,208V AIR COOLED 6526 13,200.00 0.00 0.00 13,200.00 4/8/96 FTS Systems, Inc Secondary Key temp 5615 13,685.00 0.00 0.00 13,685.00 6/18/96 Glen Mills Inc TURBULA SHAKER 6108 7,400.00 0.00 0.00 7,400.00 10/31/96 Glen Mills Inc Turbula Shaker-Mixer Model T2C 7582 7,600.00 0.00 0.00 7,600.00 9/18/96 Harvard Apparturs Inc Pump 22 Multi-SYR 6953 2,002.06 7.06 0.00 1,995.00
Page 6 16 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST 7/11/96 Hewlett Packard Flouresence detector & kits + installation 7210 12,624.00 0.00 0.00 12,624.00 12/13/96 IKA-Works, Inc. Dispersing Tool 8162 1,679.35 8.35 0.00 1,671.00 3/4/96 IKA-Works, Inc. Homogenizer 5553 3,355.76 13.76 0.00 3,342.00 4/9/96 Infotech HP laserjet 51 5603 964.45 52.00 43.45 869.00 4/9/96 Infotech HP laserjet 5L 5619 1,846.90 22.00 86.90 1,738.00 5/24/96 ITT Sherotec SC Chamber 5926 5,675.98 35.98 0.00 5,640.00 6/13/96 ITT Sherotec FD TOP-DRAWING 320EP 6082 26,053.45 55.45 0.00 25,998.00 6/17/96 ITT Sherotec DISPENSER TANK 2PCX 6109 9,302.05 73.25 0.00 9,228.80 6/18/96 ITT Sherotec DISPENSER TANK 2PCS 6129 18,570.60 113.00 0.00 18,457.60 5/24/96 ITT Sherotec TANK BOTTOM VALVE ADDITION 5942 22,359.02 24.02 0.00 22,335.00 10/11/96 Jouan Inc Bench top centerfuge & accessories 7377 6,686.36 86.36 0.00 6,600.00 5/17/96 La Calhene Alum autoclavable container 5794 8,992.00 0.00 0.00 8,992.00 5/21/96 La Calhene Containment isolator 5910 11,761.80 0.00 0.00 11,761.80 6/19/96 La Calhene ALUM. AUTOCLAV CONTAINER 6133 15,144.00 0.00 0.00 15,144.00 5/14/96 La Calhene Contamination isolatorw/four gloves 151251 23,523.60 0.00 0.00 23,523.60 10/17/96 La Calhene Replacement canopy 7401 15,667.00 0.00 0.00 15,667.00 10/17/96 La Calhene Replacement canopy 7402 15,667.00 0.00 0.00 15,667.00 11/25/96 La Calhene Glove leak tester 7914 15,000.00 0.00 0.00 15,000.00 3/18/97 La Calhene Replacement canopy work station 8965 4,452.00 0.00 0.00 4,452.00 3/11/97 La Calhene Rigid wall turbulent flow & accessories 9192 3,920.60 0.00 0.00 3,920.60 1/31/97 La Calhene Half suite, diameter, PVC, sleeve 8566 8,217.50 81.50 0.00 8,136.00 4/22/96 Lightnin Mixer w/various parts 5714 19,509.26 77.28 0.00 19,431.98 10/30/96 Lightnin Baldor Fear motor/ control 7600 707.75 34.75 0.00 673.00 11/25/96 McMaster-Carr voltagespike,surge and recorder 7866 1,106.94 3.28 0.00 1,103.66 1/8/97 Micro Diagnostics Stainless steel rotameter 8392 3,808.73 0.00 0.00 3,808.73 6/3/96 Millipore Corporation INTEGRAL 316 ISOLATOR 5939 7,000.00 0.00 0.00 7,000.00 6/25/96 Millipore Corporation Milliflex sensor II 115V 7261 3,005.00 5.00 0.00 3,000.00 2/26/97 Millipore Corporation Milliflex sensor II 115V 8810 3,000.00 0.00 0.00 3,000.00 7/11/96 Millipore Corporation Milliflex sensor II 115V 6324 3,000.00 0.00 0.00 3,000.00 9/4/96 MKS Instruments Baratron absolute pressure transducer 6984 1,680.90 10.90 0.00 1,670.00 10/19/96 MKS Instruments 628A11TAE/A070-92 7397 1,681.03 11.03 0.00 1,670.00 9/12/96 National Instrument Labview dev. for Macintosh 7049 3,316.75 26.75 0.00 3,290.00 2/24/97 Nettco Corporation Nettco model 18P, motor, ac drive, stirre 8832 25,883.00 113.00 0.00 25,770.00 5/2/96 Nettco Corporation 1BP mixer 5725 33,855.48 189.48 0.00 33,666.00 8/6/96 Novex Power ease 500 Pre-Ca 6683 1,531.00 46.00 0.00 1,485.00 3/31/97 Osmonics, Inc. Generator 10% due from 2/29/96 9204 4,139.00 0.00 0.00 4,139.00 11/21/96 OTT Process Equipment etra ac drive nema 4 7754 1,533.00 73.00 0.00 1,460.00 9/6/96 Pall Filtron Corporation 5k omega centrasette 7021 10,726.33 4.33 0.00 10,722.00 9/12/96 Pall Filtron Corporation Sanitart centrasette +mutiples 6905 55,250.00 0.00 0.00 55,250.00 9/18/96 Pall Filtron Corporation Integrity analyzer 7408 5,400.00 0.00 0.00 5,400.00 10/2/96 Pall Filtron Corporation 5K omega centresette 25SQ T-screen 7258 5,364.63 3.63 0.00 5,361.00 3/14/97 Pall Filtron Corporation Maximate ext SS cassette holder/ open channel 4ft 8995 13,991.26 141.26 0.00 13,850.00 12/4/96 Pharmacia Biotech Superdex 75 7964 5,896.00 56.00 0.00 5,840.00 8/22/96 Phenomenex CH-mult. column heater 6770 1,480.00 0.00 0.00 1,480.00
Page 7 17 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST 11/22/96 Precision Stainless, Inc. 50 liter portable mix tanks 8036 2,817.00 0.00 0.00 2,817.00 2/28/97 Precision Stainless, Inc. 100 liter portable mix tank & accessories 9191 17,459.00 0.00 0.00 17,459.00 1/24/97 Sigmil Ltd Meissner housing w/steam jacket 8417 2,311.90 29.90 0.00 2,282.00 6/21/96 Sonics & Materials, Inc 50W ultrasonic atomizer 6151 2,038.61 8.61 0.00 2,030.00 2/17/97 Sonics & Materials, Inc 40 KHZ atomizer & horn 8700 2,883.28 13.28 0.00 2,870.00 10/22/96 Sonics & Materials, Inc Ultrasonic processor/atomizing 7561 3,784.20 14.20 0.00 3,770.00 8/14/96 Spex CertiPrep Freezer mill/microvial set 6699 3,530.94 5.94 0.00 3,525.00 10/29/96 Steri Technologies Bottom valves 7756 12,737.68 53.68 0.00 12,684.00 11/26/96 Summit Machine Builders 4107 console & start up system 8269 2,110.90 0.00 0.00 2,110.90 2/12/97 Summit Machine Builders Precision netweight filler 8728 5,059.00 0.00 0.00 5,059.00 2/28/97 Summit Machine Builders 4107 console/power cord/ electricswitch etc 9138 5,059.00 0.00 0.00 5,059.00 9/11/96 Superior Controls, Inc Prolease 500 data acquisition system 150707 6,340.00 0.00 0.00 6,340.00 6/18/96 Superior Controls, Inc Prolease 500 data acquisition system 6215 2,720.00 0.00 0.00 2,720.00 6/18/96 Superior Controls, Inc Prolease 500 data acquisition system 6216 3,470.00 0.00 0.00 3,470.00 2/11/97 Superior Controls, Inc Prolease 500 data acquisition system 8762 13,812.00 0.00 0.00 13,812.00 4/15/96 Superior Controls, Inc. Prolease 500 data acquisition system 5622 1,080.00 0.00 0.00 1,080.00 4/15/96 Superior Controls, Inc. Prolease 500 data acquisition system 5623 2,609.00 0.00 0.00 2,609.00 4/15/96 Superior Controls, Inc. Prolease 500 data acquisition system 5772 3,984.80 0.00 0.00 3,984.80 3/13/97 Superior Controls, Inc. Prolease 500 data acquisition system 9037 670.00 0.00 0.00 670.00 3/19/97 Superior Controls, Inc. Prolease 500 data acquisition system 9188 6,906.00 0.00 0.00 6,906.00 3/13/97 Superior Controls, Inc. Prolease 500 data acquisition system 9190 10,359.00 0.00 0.00 10,359.00 9/30/96 Vorti-Siv Division Vorti-Sivmodel /Dome cover w/ lock band/FDA white rubber feet 7475 4,085.00 250.00 0.00 3,835.00 9/30/96 Vorti-Siv Division Vorti-Sivmodel RBF-10/ screens.shallow funnel 7485 3,825.00 0.00 0.00 3,825.00 8/28/96 Vorti-SixDivision 140 mexh s.s. screns + multiples 6889 1,371.98 10.98 0.00 1,361.00 4/29/96 VWR Scientific Freezer chest 5716 6,930.84 0.00 0.00 6,930.84 5/20/96 VWR Scientific Ambi-hi-low chamber 5841 1,905.00 0.00 0.00 1,905.00 11/25/96 VWR Scientific Vessel, bioprcess w/ DRN/ mixer/ shaft 7872 11,261.46 0.00 0.00 11,261.46 11/8/96 VWR Scientific Bioprocess vessel 7675 2,060.42 0.00 0.00 2,060.42 11/14/96 VWR Scientific Lab-line-HI-LO incubator 7834 1,905.00 0.00 0.00 1,905.00 1/14/97 VWR Scientific Bal semi-mcro balance 8336 2,996.25 0.00 0.00 2,996.25 2/11/97 VWR Scientific Bath large MOD 270 8663 1,773.08 0.00 0.00 1,773.08 10/28/96 Washburn-Garfield Corp. Butterfly valve & accessories 7503 1,375.24 24.94 0.00 1,350.30 7/24/96 Waters Corporation 486 TUNABLE UV/VIS 6527 7,287.17 7.17 0.00 7,280.00 8/12/96 Waters Corporation 2690 W/Vac degaas/heat cooler 6626 26,875.00 30.00 0.00 26,845.00 8/19/96 Waters Corporation 410 differential refractomer 6717 8,283.75 83.75 0.00 8,200.00 11/21/96 Waters Corporation 2020 Alpha/open VMS 7887 46,211.32 11.32 0.00 46,200.00 2/26/97 Waters Corporation W/Vac degas, tunable, scan, fluorometter etc. 8836 120,380.20 84.70 0.00 120,295.50 3/19/97 Waters Corporation 2 custom 2020 Alpha server hardware 9091 60,185.99 185.99 0.00 60,000.00 ACTI F&F FY1997 (APRIL 1996-MARCH 1997) 4/17/97 Hank Finkel Wire carts 5638 895.98 39.49 40.79 815.70 5/1/96 Hank Finkel Shelves 5739 1,594.26 71.86 72.50 1,449.90 9/27/96 Hank Finkel Shelves 7360 3,088.64 146.91 140.08 2,801.65 11/27/96 Hank Finkel Shelves 7877 1,016.41 76.76 44.75 894.90
Page 8 18 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST 12/17/96 Hank Finkel Shelves 8135 1,556.96 75.78 70.53 1,410.65 1/7/97 Hank Finkel Shelves 8393 1,806.70 193.06 76.84 1,536.80 1/31/97 Hank Finkel Shelves 8502 2,334.13 219.43 100.70 2,014.00 ------------------------------------------------ TOTAL ACTI 1,373,636.66 5,035.14 751.25 1,367,850.27 ------------------------------------------------ ACTII EQUIPMENT FY1997 (APRIL 1996-MARCH 1997) 9/25/96 Alloy Products Corp Vessel 4 liter ASME electro polish 2278 4,264.22 10.22 0.00 4,254.00 9/19/96 Alloy Products Corp Vessel 19 liter ASME electro polish 2277 1,434.43 5.43 0.00 1,429.00 2/14/97 AMC Computers HPCD422 multiples 4208 3,185.00 20.00 0.00 3,165.00 10/1/96 Applied Reactor 1-gallon reactor 2728 18,100.00 0.00 0.00 18,100.00 2/7/97 Applied Reactor Speciality polymer reactor 4238 18,245.00 145.00 0.00 18,100.00 2/26/97 Biotest Diagnostics Air sampler RCS plus/battery recharger 4398 3,584.68 33.68 201.00 3,350.00 2/11/97 Cintron Scale Scientific scale 4314 4,983.87 15.87 0.00 4,968.00 11/25/96 Coulter Optical bench 3100 49,160.00 160.00 0.00 49,000.00 12/10/96 Coulter Credit, apply to ref #3100 3441 -6,907.17 -407.17 0.00 -6,500.00 8/14/96 Data Comm Warehouse Micro transceiver w/RJ45 1905 2,230.84 4.95 125.99 2,099.90 2/21/97 DCI, Inc. Round vertical insulated tanks 4277 47,779.50 0.00 0.00 47,779.50 3/12/97 DCI, Inc. Round vertical insulated tanks 4731 11,133.00 0.00 0.00 11,133.00 11/9/96 Engineering Excellence Part F.S>G. crtl 4266 1,723.63 0.00 0.00 1,723.63 4/8/96 Exergy Heat exchanger 207 961.30 11.30 0.00 950.00 12/4/96 Fisher Scientific Viscosity bath 120V 3194 3,518.00 0.00 0.00 3,518.00 5/14/97 Fluke Data logger, etc. 512 3,403.17 11.34 176.83 3,215.00 6/5/96 Hewlett Packard AUTOSAMPLER/SIPPER 832 6,335.00 0.00 0.00 6,335.00 6/18/96 Infotech HP laserjet 1174 4,048.95 18.00 191.95 3,839.00 11/7/96 Infotech 2900 2,039.70 9.00 96.70 1,934.00 11/22/96 Infotech CMPQ 2.1GB F/W hot swap/COMPAQ 64MB 3161 2,053.70 23.00 96.70 1,934.00 12/12/96 Infotech KNGSTN 64 MB UPG 3472 721.95 9.00 33.95 679.00 10/23/96 Jay Instrument Honeywell pressure transmitter 2802 1,245.00 0.00 0.00 1,245.00 6/12/96 Koch Engineering Equipment static mixer 942 1,006.70 6.70 0.00 1,000.00 6/4/96 Lightnin Mixer final asy ts w/o comp intfc 110V 831 1,195.80 4.80 0.00 1,191.00 2/5/97 List Inc Engineering design of list DTB unit 4312 20,000.00 0.00 0.00 20,000.00 3/29/96 MacWarehouse Apple computer/keyboard 217 3,127.06 76.00 159.06 2,892.00 4/9/96 MacWarehouse Apple laserwriter printer 492 4,602.89 0.00 252.89 4,350.00 5/8/96 MacWarehouse Extended keyboard 673 1,606.44 148.94 82.50 1,375.00 5/8/96 MacWarehouse Apple laserwriter printer, multi-scan display 824 8,951.70 0.00 506.70 8,445.00 5/30/96 MacWarehouse Applevision 1710 & display 857 3,893.38 0.00 220.38 3,673.00 5/30/96 MacWarehouse KEYBOARD & TRANSCE 854 1,194.80 103.00 61.80 1,030.00 6/4/96 MacWarehouse INTERNET ROUTER 898 1,407.50 3.00 79.50 1,325.00 5/30/96 MacWarehouse Modem, keyboard 879 820.00 0.00 0.00 820.00 7/29/96 MacWarehouse IOMEGA 1GB JAZ DRIVE 3.5" 1546 475.00 0.00 0.00 475.00 7/16/96 MacWarehouse Power MAC 7200/75, multi-scan 15SF 1431 3,422.00 0.00 0.00 3,422.00 7/5/96 MacWarehouse Multiscan 15SF II 1357 1,586.82 0.00 89.82 1,497.00 7/1/96 MacWarehouse Extended keyboard II 1265 369.58 40.98 18.60 310.00
Page 9 19 EXHIBIT 2 1997 LOAN COLLATERAL ALKERMES/ACTI/ACTII FIXED ASSET LIST 2/27/97 MacWarehouse PowerMac 7300/200 4518 5,398.00 0.00 0.00 5,398.00 2/12/97 MacWarehouse On line fax/1 line exthernet 4564 1,253.50 8.00 70.50 1,175.00 2/20/97 MacWarehouse Powerbook 3400c/200 16MB 4565 10,550.00 0.00 0.00 10,550.00 6/17/96 McCormick Equipment WIRE MESH PARTITION 951 3,473.00 90.00 0.00 3,383.00 2/11/97 Met One Model A2408 2 channel 4311 5,773.12 23.12 0.00 5,750.00 3/4/97 MicroWarehouse MSFT Project F/Win95/JMP Statistical 4617 1,091.10 11.20 0.00 1,079.90 9/16/96 New Brunswick science Utility tray,repair INNOVA 400 2245 4,812.02 112.02 0.00 4,700.00 1/16/97 Sharp Electronics Copier 3921 1,154.34 0.00 65.34 1,089.00 1/16/97 Sharp Electronics Copier 3922 2,452.84 0.00 138.84 2,314.00 1/16/97 Sharp Electronics Copier 3923 3,888.08 0.00 220.08 3,668.00 1/16/97 Sharp Electronics Duplexer 3924 590.42 0.00 33.42 557.00 2/28/97 Sharp Electronics Laser fax 4525 2,912.54 225.00 190.54 2,497.00 2/28/97 Sharp Electronics Laser fax 4526 2,912.54 225.00 190.54 2,497.00 6/11/96 South Hills Datacomm Network access point w/antenna 1025 2,800.35 0.00 133.35 2,667.00 9/6/96 TA Instruments, Inc. Module 2010/thermal analyst/monitor 2928 20,005.37 55.37 0.00 19,950.00 3/27/97 TA Instruments, Inc. Refrigerated cooling system 4631 8,187.30 62.30 0.00 8,125.00 5/9/96 VWR Scientific Orbital shaker 885 1,207.50 0.00 0.00 1,207.50 10/30/96 VWR Scientific Centifuge centra-GP8 2856 3,611.40 0.00 0.00 3,611.40 10/8/96 VWR Scientific Orbit environ shaker 2971 3,263.19 0.00 0.00 3,263.19 11/14/96 VWR Scientific Rotor horizontal 3021 2,628.60 0.00 0.00 2,628.60 2/24/97 VWR Scientific Orbital shaker open air 4210 1,417.07 0.00 0.00 1,417.07 10/16/96 VWR Scientific Turbidimeter DRT-100B 2674 1,307.90 0.00 0.00 1,307.90 12/11/96 VWR Scientific Buchi rotap 3317 3,513.75 0.00 0.00 3,513.75 9/5/96 VWR Scientific Pump syringe sage mod m362 2063 1,743.30 0.00 0.00 1,743.30 2/4/97 Waters Corporation 410 differential refractomer 4300 8,212.28 12.28 0.00 8,200.00 12/31/96 Waters Corporation 410 differential refractomer 4512 8,269.40 12.00 467.40 7,790.00 ACTII F&F FY1997 (APRIL 1996-MARCH 1997) 11/15/96 First Office Concepts, Inc High back task seating 1844 3,215.00 25.00 0.00 3,190.00 8/13/96 First Office Concepts, Inc Guest chairs 1845 4,705.00 50.00 0.00 4,655.00 10/22/96 First Office Concepts, Inc Corner end table-freestanding 2659 308.45 39.00 0.00 269.45 8/12/96 First Office Concepts, Inc 4 drawe vertical filing 2546 330.00 50.00 0.00 280.00 10/1/96 First Office Concepts, Inc High back task seating 2432 4,689.25 40.00 0.00 4,649.25 8/13/96 First Office Concepts, Inc Lateral file cabinet w/locks 2968 1,500.50 65.50 0.00 1,435.00 2/6/97 Nortel Communications Telephone system installation 3844 16,197.00 0.00 0.00 16,197.00 3/21/97 Nortel Communications Telephone system installation 4847 6,479.00 0.00 0.00 6,479.00 3/21/97 Nortel Communications Telephone system installation Accrued 42,113.00 0.00 0.00 42,113.00 9/9/96 Superior Carpet Carpet installation 2224 3,387.65 0.00 191.75 3,195.90 ------------------------------------------------ TOTAL ACTII 432,257.20 1,558.83 4,096.13 426,602.24 ------------------------------------------------ ------------------------------------------------ GRAND TOTAL ALKERMES, ACTI AND ACTII 2,525,922.86 12,306.92 12,838.84 2,500,777.10 ================================================
Page 10 20 SUPPLEMENTAL DISCLOSURE SCHEDULE [To be provided by Borrowers.] 21 Item 2.1(m) ----------- Material Contracts and Long-Term Commitments 1. Form of 1992 Warrant to purchase 2,800 shares of Alkermes, Inc.'s Common Stock. 2. Form of 1995 Warrant to purchase 300 shares of Alkermes, Inc.'s Common Stock. 3. Form of Global Warrant Certificate for 1994 Class A Warrants to purchase 1,700 shares of Alkermes, Inc.'s Common Stock. 4. Form of Class B 1994 Warrant to purchase 3,400 shares of Alkermes, Inc.'s Common Stock. 5. Form of Fund Warrant to purchase 7,293 shares of Alkermes, Inc.'s Common Stock. 6. Form of Incentive Warrant to purchase 42,280 shares of Alkermes, Inc.'s Common Stock. 7. Warrant Agreement, dated as of November 18, 1994, by and between Alkermes, Inc. and The First National Bank of Boston. 8. Amended and Restated 1989 Non-Qualified Stock Option Plan, as amended. 9. Amended and Restated 1990 Omnibus Stock Option Plan, as amended. 10. 1991 Restricted Common Stock Award Plan. 11. 1992 Non-Qualified Stock Option Plan. 12. Stock Option Plan for Non-Employee Directors. 13. Lease, dated as of September 18, 1991, between Forest City 64 Sidney Street, Inc. and Alkermes, Inc., as amended by a First Amendment of Lease dated September 1, 1992. 14. Lease, dated as of March 16, 1990, between Forest City 64 Sidney Street, Inc. and Enzytech, Inc. 22 15. Product Development Agreement, dated as of March 6, 1992, between Alkermes Clinical Partners, L.P. and Alkermes, Inc. 16. Purchase Agreement, dated as of March 6, 1992, by and among Alkermes, Inc. and each of the Limited Partners, from time to time, of Alkermes Clinical Partners, L.P. 17. Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992, as amended by Amendment No. 1 to Agreement of Limited Partnership, dated as of September 29, 1992, as further amended by Amendment No. 2 to Agreement of Limited Partnership, dated as of March 30, 1993. 18. Class A Note of Alkermes Development Corporation II, dated April 10, 1992, to PaineWebber Development Corporation in the amount of $100.00. 19. License Agreement, dated February 5, 1990, between Enzytech, Inc. and Massachusetts Institute of Technology. 20. Development and License Agreement dated February 4, 1992, between Enzytech, Inc. and Schering Corporation, as amended by an Amendment to Development and License Agreement dated July 26, 1995 between Alkermes Controlled Therapeutics, Inc. and Schering Corporation. 21. Prepaid Royalty Agreement dated July 26, 1995 between Alkermes Controlled Therapeutics, Inc. and Schering Corporation. 22. Collaborative Development Agreement dated as of January 9, 1995 between Alkermes Controlled Therapeutics, Inc. and Genentech, Inc. 23. Note Purchase Agreement, dated as of January 9, 1995, by and between Alkermes, Inc. and Genentech, Inc. 24. License Agreement, dated as of November 13, 1996 by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. 25. Convertible Promissory Note of Alkermes, Inc. dated January 31, 1995. 26. Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International, as amended by the First Amendment to Development Agreement, dated as of December 23, 1993. 23 27. License Agreement, dated as of February 13, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (United States). 28. License Agreement, dated as of February 21, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (worldwide except United States). 29. Development Agreement, dated as of August 1, 1996, by and between The R.W. Johnson Pharmaceutical Research Institute, Alkermes, Inc. and Alkermes Controlled Therapeutics, Inc. 30. Supply and License Agreement, dated as of August 1, 1996, by and between The R.W. Johnson Pharmaceutical Research Institute, Alkermes, Inc. and Alkermes Controlled Therapeutics. 31. Letter Agreement, dated September 27, 1996, between Fleet National Bank and Alkermes, Inc. 32. Promissory Note of Alkermes, Inc., dated December 23, 1994, to Fleet Bank of Massachusetts, N.A., as amended by Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and Alkermes. 33. Promissory Note of Alkermes, Inc., dated December 19, 1995, to Fleet Bank of Massachusetts, N.A., as amended by Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and Alkermes. 34. Loan Agreement dated December 30, 1993, among The Daiwa Bank, Limited, Alkermes Investments, Inc. and Alkermes, Inc., as amended by Amendment No. 1 to Loan Agreement, dated as of December 31, 1994, and as further amended by Amendment to Loan Agreement, dated as of December 29, 1995, and as further amended by Omnibus Amendment to Loan Documents, dated as of July 26, 1996, among The Sumitomo Bank, Limited (as assignee of The Daiwa Bank, Limited), Alkermes, Inc. and Alkermes Investments, Inc. 35. Second Amended and Restated Note, dated July 26, 1996, by Alkermes, Inc. and Alkermes Investments, Inc. to The Sumitomo Bank, Limited. 36. Employment Agreement, entered into as of February 7, 1991, between Richard F. Pops and Alkermes, Inc. 24 37. Employment Agreement, entered into as of June 13, 1994, by and between Robert A. Breyer and Alkermes, Inc. 25 Item 4.2 -------- Existing Liens Liens with respect to the Collateral, (as such term is defined in the Security Agreement, dated as of September 27, 1996, by and among Alkermes, Inc., Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Bank), granted by Alkermes, Inc., Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II in favor of the Bank, which Liens were created by the Security Agreement. Pursuant to a Loan Agreement, dated December 30, 1993, as amended by the Amendment No. 1 to Loan Agreement, dated December 31, 1994, the Amendment to Loan Agreement, dated as of December 29, 1995, and the Omnibus Amendment to Loan Documents, dated as of July 26, 1996, among The Sumitomo Bank, Limited ("Sumitomo"), as assignee of The Daiwa Bank, Limited, Alkermes Investments, Inc. and Alkermes, Inc., Alkermes, Inc. has established for the benefit and on behalf of Sumitomo Bank of New York Trust Company a restricted custodial account (the "Restricted Account"). Pursuant to such Loan Agreement, as amended, and certain other agreements executed in connection therewith, upon the occurrence of certain specified events, Sumitomo has the right to require Morgan Stanley & Co. to deliver certain funds of Alkermes, Inc. for which Morgan Stanley serves as custodian to Sumitomo Bank of New York Trust Company for deposit into the Restricted Account. Alkermes, Inc. has granted Sumitomo a security interest in all of its right, title and interest in the Restricted Account and all deposits or investments held therein. EX-10.35 7 PROMISSORY NOTE DATED 6/2/97 1 Exhibit 10.35 PROMISSORY NOTE --------------- $2,500,000.00 Boston, Massachusetts June 2, 1997 FOR VALUE RECEIVED, the undersigned Alkermes, Inc., a Pennsylvania corporation ("Alkermes"), Alkermes Controlled Therapeutics, Inc., a Pennsylvania corporation ("ACT I") and Alkermes Controlled Therapeutics Inc. II, a Pennsylvania corporation ("ACT II") (Alkermes, ACT I and ACT II being referred to herein individually as a "Borrower" and collectively as the "Borrowers") hereby jointly and severally promise to pay to the order of FLEET NATIONAL BANK (the "Bank") the principal amount of Two Million Five Hundred Thousand and 00/100 ($2,500,000.00) Dollars or such portion thereof as may be advanced under Section 2 of the below-described Loan Supplement and Modification Agreement ("Principal"), with interest, at the rate hereinafter set forth, on the daily balance of all unpaid Principal, from the date hereof until payment in full of all Principal and interest hereunder. As used herein, (i) "Loan Supplement and Modification Agreement" means that certain Loan Supplement and Modification Agreement of even date herewith among the Borrowers and the Bank and (ii) "Letter Agreement" means that certain letter agreement dated September 27, 1996 among the Borrowers and the Bank, as amended. Interest on all unpaid Principal shall be due and payable monthly in arrears, on the first business day of each month commencing on the first such date after the date of this note and continuing on the first business day of each month thereafter and on the date of payment of this note in full, at the rate of 8.58% per annum (computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed). Overdue Principal shall bear interest at a rate per annum which at all times shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under this note (but in no event in excess of the maximum rate permitted by then applicable law), compounded monthly and payable on demand. If the entire amount of any required Principal and/or interest is not paid within ten (10) days after the same is due, the Borrowers shall pay (and shall be jointly and severally obligated to pay) to the Bank a late fee equal to five percent (5%) of the required payment. The Principal of this note represents the 1997 Term Loan (as defined in the Loan Supplement and Modification Agreement) made pursuant to Section 2 of the Loan Supplement and Modification Agreement. The Principal of this note shall be repaid by the Borrowers in fifty-nine (59) equal consecutive monthly installments (each in the amount of $41,666.67), commencing on July 1, 1997 and continuing on the first business day of each month thereafter through and including May 1, 2002, plus a sixtieth (60th) and final payment due on June 3, 2002 in an amount equal to all then unpaid Principal and all interest accrued but unpaid thereon. The Borrowers may at any time and from time to time prepay all or any portion of Principal; 2 provided that each such prepayment of Principal shall be accompanied by (i) payment of all interest under this note accrued but unpaid to the date of prepayment and (ii) the "Make-Whole Amount", if any, required by the provisions of Section 1.6 of the Letter Agreement. Any partial prepayment of Principal shall be applied against Principal installments (including the final installment of Principal) thereafter coming due, in inverse order of normal maturity. Payments of both Principal and interest shall be made, in immediately available funds, at the office of the Bank located at 75 State Street, Boston, Massachusetts 02109, or at such other address as the Bank may from time to time designate. Each of the undersigned Borrowers irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to this note or on the books of the Bank, at or following the time of receiving any payment of Principal, an appropriate notation reflecting such transaction and the then aggregate unpaid balance of Principal. Failure of the Bank to make any such notation shall not, however, affect any obligation of any Borrower hereunder or under the Letter Agreement. The Principal balance of this note, as recorded by the Bank from time to time on such schedule or on such books, shall constitute presumptive evidence of the unpaid principal amount of the 1997 Term Loan. Each Borrower hereby (a) waives notice of and consents to any and all advances, settlements, compromises, favors and indulgences (including, without limitation, any extension or postponement of the time for payment), any and all receipts, substitutions, additions, exchanges and releases of collateral, and any and all additions, substitutions and releases of any person primarily or secondarily liable, (b) waives presentment, demand, notice, protest and all other demands and notices generally in connection with the delivery, acceptance, performance, default or enforcement of or under this note, and (c) agrees to pay, to the extent permitted by law, all reasonable costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by the Bank in enforcing this note and any collateral or security therefor, all whether or not litigation is commenced. This note is secured, INTER ALIA, by a Security Agreement dated as of September 27, 1996, as amended (as so amended, the "Security Agreement") given by the Borrowers to the Bank. This note is the "1997 Term Note" referred to in the Loan Supplement and Modification Agreement and constitutes an "Additional Term Note" as defined in the Letter Agreement and the Security Agreement and is entitled to benefits thereof. This note is subject to prepayment under the conditions set forth in the Letter Agreement, with the Make-Whole Amount, if any, required by the Letter Agreement consequent upon such prepayment. The maturity of this note may be accelerated upon the occurrence of an Event of Default, as provided in the Letter Agreement. This note is the joint and several obligation of the Borrowers. 2 3 Executed, as an instrument under seal, as of the day and year first above written. CORPORATE SEAL ALKERMES, INC. ATTEST: By: /s/ Michael J. Landine ----------------------------------- /s/ Patricia L. Allen Name: Michael J. Landine - ------------------------------ Title: Senior Vice President Assistant Secretary and CFO CORPORATE SEAL ALKERMES CONTROLLED THERAPEUTICS, INC. ATTEST: By: /s/ Michael J. Landine ----------------------------------- /s/ Patricia L. Allen Name: Michael J. Landine - ------------------------------ Title: Senior Vice President Assistant Secretary and CFO CORPORATE SEAL ALKERMES CONTROLLED THERAPEUTICS INC. II ATTEST: By: /s/ Michael J. Landine ----------------------------------- /s/ Patricia L. Allen Name: Michael J. Landine - ------------------------------ Title: Senior Vice President Assistant Secretary and CFO 3 EX-11 8 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE LOSS
Year Year Year Ended Ended Ended March 31, 1997 March 31, 1996 March 31, 1995 -------------- -------------- -------------- Net loss $(18,797,818) $(13,747,084) $(11,904,153) ============ ============ ============ Calculation of shares outstanding: Weighted average common shares outstanding used in calculating net loss per share in accordance with generally accepted accounting principles 18,288,334 14,774,584 13,535,339 ------------ ------------ ------------ Total 18,288,334 14,774,584 13,535,339 ============ ============ ============ Net loss per share $(1.03) $(0.93) $(0.88) ====== ====== ======
EX-21 9 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 SUBSIDIARIES OF ALKERMES, INC. State or Percentage Country of Company Ownership Incorporation - ------- --------- ------------- Alkermes Controlled Therapeutics, Inc. 100 Pennsylvania Alkermes Controlled Therapeutics Inc. II 100 Pennsylvania Alkermes Development Corporation II 100 Delaware Alkermes Europe, Ltd. 100 United Kingdom Alkermes Investments, Inc. 100 Delaware EX-22 10 PROXY STATEMENT DATED JUNE 1997 1 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) FILED BY THE REGISTRANT /X/ FILED BY A PARTY OTHER THAN THE REGISTRANT / / - -------------------------------------------------------------------------------- Check the appropriate box: / / Preliminary Proxy Statement /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12 / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) ALKERMES, INC. (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX): /X/ No fee required. / / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: - -------------------------------------------------------------------------------- 2 ALKERMES, INC. CAMBRIDGE, MASSACHUSETTS 02139 -------------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JULY 25, 1997 -------------------- TO THE SHAREHOLDERS: The annual meeting of shareholders of Alkermes, Inc. (the "Company") will be held at the offices of the Company, 64 Sidney Street, Cambridge, Massachusetts 02139, on Friday, July 25, 1997, at 10:00 A.M. for the following purposes: 1. To elect eight members of the Board of Directors, each to serve until the next annual meeting of shareholders and until his successor is duly elected and qualified. 2. To approve the amendment to the Alkermes Amended and Restated 1990 Omnibus Stock Option Plan to increase to 2,500,000 the number of shares issuable upon the exercise of options granted thereunder, an increase of 750,000 shares. 3. To transact such other business as may properly come before the meeting. The Board of Directors has fixed June 6, 1997 as the record date for determining the holders of Common Stock entitled to notice of and to vote at the meeting. Consequently, only holders of Common Stock of record on the transfer books of the Company at the close of business on June 6, 1997 will be entitled to notice of and to vote at the meeting. Please complete, date and sign the enclosed proxy and return it promptly. If you attend the meeting, you may vote in person. Morris Cheston, Jr. Secretary June 27, 1997 3 ALKERMES, INC. PROXY STATEMENT INTRODUCTION The accompanying proxy is solicited by the Board of Directors of Alkermes, Inc. ("Alkermes" or the "Company") in connection with its 1997 annual meeting of shareholders to be held at the offices of the Company, 64 Sidney Street, Cambridge, Massachusetts 02139, at 10:00 a.m., on July 25, 1997 (the "Meeting"). Copies of this Proxy Statement and the accompanying proxy are being mailed on or after June 27, 1997 to the holders of record of Common Stock on June 6, 1997 (the "Record Date"). The proxy may be revoked by a shareholder at any time prior to its use by giving notice of such revocation to the Secretary of the Company, by appearing at the Meeting and voting in person or by returning a later dated proxy. The expense of this solicitation will be paid by the Company. Some of the officers and regular employees of the Company may solicit proxies personally and by telephone. Unless specific instructions are given to the contrary, the persons named in the accompanying proxy will vote FOR the election to the Company's Board of Directors of the nominees named herein and FOR approval of the amendment to increase the number of shares available under the 1990 Amended and Restated Omnibus Stock Option Plan. With respect to all other matters, the persons named in the accompanying proxy will vote as stated herein. See "Other Business." Holders of Common Stock of record at the close of business on the Record Date will be entitled to cast one vote per share so held of record on such date on all items of business properly presented at the Meeting, except that the holders have cumulative voting rights in the election of directors. Therefore, each shareholder is entitled to cast as many votes in the election of directors as shall be equal to the number of shares of Common Stock held by such shareholder on the Record Date, multiplied by the number of directors to be elected. A shareholder may cast all such votes for a single nominee or may distribute votes among nominees as the shareholder sees fit. The Company had 20,765,518 shares of Common Stock outstanding on the Record Date. The presence at the Meeting, in person or by proxy, of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter will constitute a quorum for the purposes of consideration and action on such matter. ELECTION OF DIRECTORS Eight directors are to be elected at the Meeting to serve one-year terms until the 1998 annual meeting of shareholders and until their respective successors are elected and shall qualify. The persons named in the accompanying proxy intend to vote for the election of Floyd E. Bloom, Robert A. Breyer, John K. Clarke, Robert S. Langer, Richard F. Pops, Alexander Rich, Paul Schimmel and Michael A. Wall, unless authority to vote for one or more of such nominees is specifically withheld in the proxy. All of the nominees are currently directors of the Company. The persons named in the proxy will have the right to vote cumulatively and to distribute their votes among such nominees as they consider 4 advisable. The Board of Directors is informed that all the nominees are willing to serve as directors, but if any of them should decline to serve or become unavailable for election at the Meeting, an event which the Board of Directors does not anticipate, the persons named in the proxy will vote for such nominee or nominees as may be designated by the Board of Directors, unless the Board of Directors reduces the number of directors accordingly. The eight nominees for director receiving the highest number of votes cast by shareholders entitled to vote thereon will be elected to serve on the Board of Directors. Votes that are withheld will be counted in determining the presence of a quorum, but will have no effect on the vote. Set forth below is information regarding the nominees, as of June 6, 1997, including their recent employment, positions with the Company, other directorships and age. Dr. Bloom, age 60, is a founder of Alkermes and has been a director of Alkermes since 1987. Dr. Bloom has been active in neuropharmacology for more than 30 years, holding positions at Yale University, the National Institute of Mental Health and The Salk Institute. Since 1983, he has been at The Scripps Research Institute where he is currently Chairman, Department of Neuropharmacology. Dr. Bloom serves as Editor in Chief of Science. He holds an A.B. (Phi Beta Kappa) from Southern Methodist University and an M.D. (Alpha Omega Alpha) from Washington University School of Medicine in St. Louis. He is a member of the National Academy of Science, the Institute of Medicine and the Royal Swedish Academy of Science. Mr. Breyer, age 53, has been a director and President and Chief Operating Officer of Alkermes since July 1994. From August 1991 to December 1993, Mr. Breyer was President and General Manager of Eli Lilly Italy, a subsidiary of Eli Lilly & Co. From September 1987 to August 1991, he was Senior Vice President, Marketing and Sales of IVAC Corporation, a medical device company and a subsidiary of Eli Lilly & Co. Mr. Clarke, age 43, has served as a director of Alkermes since 1987. He is a general partner of DSV Partners III and DSV Management, the general partner of DSV Partners IV. DSV Partners III and DSV Partners IV are venture capital investment partnerships. He is also the managing general partner of Cardinal Health Partners. Mr. Clarke has been associated with DSV since 1982. Mr. Clarke is also a director of DNX Corporation, Inc., a biopharmaceutical company, Chrysalis International Corporation and Cubist Pharmaceuticals, Inc. Professor Langer, age 48, has served as a director of the Company since 1993. He is the Kenneth J. Germeshausen Professor of Chemical and Biomedical Engineering at the Massachusetts Institute of Technology and has been a member of the Massachusetts Institute of Technology faculty since July 1977. In 1989, Professor Langer was elected to the Institute of Medicine of the National Academy of Sciences and in 1992 was elected to both the National Academy of Engineering and the National Academy of Sciences. Professor Langer received his bachelor's degree from Cornell University in 1970 and a Ph.D. from Massachusetts Institute of Technology in 1974, both in chemical engineering. Mr. Pops, age 35, has been a director and the Chief Executive Officer of Alkermes since February 1991. From February 1991 to June 1994, Mr. Pops was also President of Alkermes. Mr. Pops currently serves on the Board of Directors of Immulogic Pharmaceutical Corporation, the Biotechnology Industry Organization (BIO), and The Brain Tumor Society (a non-profit organization). 2 5 Dr. Rich, age 72, is a founder of Alkermes and has been a director of Alkermes since 1987. Dr. Rich has been a professor at the Massachusetts Institute of Technology since 1958, and is the William Thompson Sedgwick Professor of Biophysics and Biochemistry. Dr. Rich earned both an A.B. (magna cum laude) and an M.D. (cum laude) from Harvard University. Dr. Rich is Co-Chairman of the Board of Directors of Repligen Corporation, a biopharmaceutical company. Dr. Schimmel, age 56, is a founder of Alkermes and has been a director of Alkermes since 1987. Dr. Schimmel is the John D. and Catherine T. MacArthur Professor of Biophysics and Biochemistry at the Massachusetts Institute of Technology, where he has been employed since 1967. A member of the National Academy of Sciences and the American Academy of Arts and Sciences, Dr. Schimmel graduated from Ohio Wesleyan University and completed his doctorate at Cornell University and the Massachusetts Institute of Technology, and did post doctoral work at Stanford University. Dr. Schimmel is Co-Chairman of the Board of Directors of Repligen Corporation and is a director of Cubist Pharmaceuticals, Inc. Mr. Wall, age 68, is a founder of Alkermes and has been Chairman of the Board of Alkermes since 1987. From April 1992 until June 30, 1993, he was a director and Chairman of the Executive Committee of Centocor, Inc. ("Centocor"), a biopharmaceutical company. From November 1987 to June 30, 1993, he was Chairman Emeritus of Centocor. Mr. Wall is a director of Kopin Corporation, a manufacturer of high definition imaging products, and Sugen, Inc., a biopharmaceutical company. The Board of Directors held seven meetings during the last fiscal year. Each of the Company's directors attended at least 75% of the aggregate of all meetings of the Board and of all committees of which he was a member held during the year. The standing committees of the Board are the Audit Committee and the Compensation Committee. The Board does not have a standing nominating committee. The Audit Committee, consisting of John K. Clarke and Alexander Rich, met twice during the last fiscal year. The Audit Committee is responsible for determining the adequacy of the Company's internal accounting and financial controls. The Compensation Committee, consisting of John K. Clarke, Robert S. Langer, Paul Schimmel and Michael A. Wall, met once during the last fiscal year. The Compensation Committee is responsible for reviewing matters pertaining to the compensation of employees of, and consultants to, the Company, fixing the compensation of officers of the Company and administering, and making grants and awards under, the Company's stock option and restricted stock award plans. The Compensation Sub-Committee, formed in June 1997, is responsible for making grants and awards under the Company's stock option and restricted stock award plans to "officers" as defined under Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Compensation Sub-Committee, consisting of John K. Clarke and Paul Schimmel, ratified all actions taken by the Compensation Committee with regard to such officers since November 1996 and did not meet during the last fiscal year. 3 6 APPROVAL OF AMENDMENT TO AMENDED AND RESTATED 1990 OMNIBUS STOCK OPTION PLAN The Company's Amended and Restated 1990 Omnibus Stock Option Plan (the "Omnibus Plan") currently authorizes the issuance of options to purchase up to 1,750,000 shares of Common Stock. In June 1997, the Board amended the Omnibus Plan, subject to shareholder approval, to increase the aggregate number of shares authorized for issuance upon exercise of options granted under the Omnibus Plan to 2,500,000. This amendment was designed to enhance the flexibility of the Compensation Committee and the Compensation Sub-Committee of the Board in granting stock options and limited stock appreciation rights to the Company's employees, officers and consultants and to ensure that the Company can continue to grant stock options to such persons at levels determined to be appropriate by the Compensation Committee and the Compensation Sub-Committee. The affirmative vote of a majority of the votes cast by all shareholders entitled to vote will be required to approve the proposed amendment to the Omnibus Plan. Abstentions will be counted as present for purposes of determining the presence of a quorum for purposes of this proposal, but will not be counted as votes cast. Broker non-votes (shares held by a broker or nominee as to which the broker or nominee does not have the authority to vote on a particular matter) will not be counted as present for purposes of determining the presence of a quorum for purposes of this proposal and will not be voted. Accordingly, neither abstentions nor broker non-votes will have any effect on the outcome of the vote on this proposal. The Board of Directors recommends that you vote FOR the approval of the amendment to the Omnibus Plan. DESCRIPTION OF THE OMNIBUS PLAN The Omnibus Plan provides for the grant to employees, officers and directors of, and consultants to, the Company and its subsidiaries of options to purchase up to 1,750,000 shares of Common Stock. The proposed amendment, which has been adopted by the Board of Directors, increases the number of shares which may be issued upon exercise of options which may be granted under the Omnibus Plan to 2,500,000. Such options may either be "incentive stock options" as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or may be non-qualified options. The Omnibus Plan will terminate on September 19, 2000 unless sooner terminated by the Board of Directors. The Company estimates that there are currently 200 persons who are eligible to receive options under the Omnibus Plan. The Omnibus Plan is administered by the Board of Directors with respect to options granted to employees, officers and consultants who are not directors, executive officers or significant employees of the Company, unless the Board delegates administration of the Omnibus Plan to the Compensation Committee, which the Board has done. The Compensation Sub-Committee administers the Omnibus Plan with respect to options granted to directors, executive officers and significant employees of the Company ("Reporting Persons"). The total number of options to be granted in any year under the Omnibus Plan to participants, the number and selection of the participants to receive options, the type and number of options granted to each and the other terms and provisions of such options are wholly within the discretion of the Compensation Committee and the Compensation Sub-Committee, subject to the limitations set forth in the Omnibus Plan. 4 7 Under the terms of the Omnibus Plan, the option exercise price may not be less than 100% (or, with respect to incentive stock options, 110% if the optionee owns 10% of the total combined voting power of all classes of stock of the Company) of the fair market value of the underlying stock at the time the option is granted. Options granted under the Omnibus Plan are generally nontransferable and expire upon the earlier of an expiration date fixed by the Compensation Committee and set forth in each individual option award certificate, ten years (or with respect to incentive stock options, five years, if the optionee owns 10% of the total combined voting power of all classes of stock of the Company) from the date of grant, and either three months after the date the optionee ceases to be an employee, officer or director of, or consultant to, the Company or its subsidiaries or, if the optionee dies or becomes disabled, one year after the date of death or the date the optionee ceases to be an employee, officer, director or consultant because of disability. Options which have expired or which have been cancelled unexercised will be returned to the Omnibus Plan and may again be granted pursuant to the Omnibus Plan. Under the Omnibus Plan, the price payable upon exercise of options may be paid in cash, property, services rendered or, under certain circumstances, in shares of stock of the Company having a fair market value equal to the option price on the date of exercise or any combination thereof. The Compensation Committee and the Compensation Sub-Committee are authorized, under the Omnibus Plan, to grant limited stock appreciation rights ("LSARs") with respect to all or any portion of the shares covered by options granted to Reporting Persons simultaneously with the grant of the related options if the related options are incentive stock options, or simultaneously with the grant of, or at any time during the term of, the related options if the related options are non-qualified options. The grant of an LSAR will not be effective until six months after the date of its grant. Those options with respect to which LSARs have been granted and become effective shall become immediately exercisable upon the occurrence of any of the following events (each, a "Triggering Event"): (i) consummation by the Company of a reorganization, merger, or consolidation after approval of any such transaction by shareholders, other than Reporting Persons, holding at least the minimum number of shares necessary to approve such transaction under the Company's Amended and Restated Articles of Incorporation, as amended (the "Articles") and applicable law, (ii) consummation by the Company of a sale of substantially all its assets after approval of any such transaction by shareholders, other than Reporting Persons, holding at least the minimum number of shares necessary to approve such transaction under the Articles and applicable law, or (iii) acquisition by a single purchaser or group of related purchasers of in excess of 51% of the issued and outstanding shares of Common Stock from shareholders of the Company other than Reporting Persons, in any case other than in a transaction in which the surviving corporation or the purchaser is the Company or a subsidiary of the Company (unless in such transaction the capital stock of the Company or a subsidiary of the Company is converted into capital stock of an entity other than the Company or any such subsidiary) or an entity controlled by a Reporting Person. Each LSAR provides that upon the occurrence of a Triggering Event, the optionee will receive an amount in cash equal to the amount by which the fair market value per share of the Common Stock issuable upon exercise of the option on the date such Triggering Event occurs exceeds the exercise price per share of the option to which the LSAR relates. A Triggering Event shall be deemed to have occurred only when the fair market value of the shares subject to the underlying option exceeds the exercise price of such option. When a Triggering Event occurs, the related option will cease to be exercisable. LSARs have been granted with respect to options to purchase 295,000 shares granted under the Omnibus Plan to Mr. Pops, options to purchase 74,500 shares granted to Mr. Landine and options to purchase 56,250 shares granted to Dr. Bartus. 5 8 OPTIONS OUTSTANDING, EXERCISABLE AND AVAILABLE FOR FUTURE GRANT As of June 6, 1997, options to purchase 1,466,228 shares were outstanding under the Omnibus Plan, of which options to purchase 669,785 shares were exercisable. The exercise prices for the outstanding options ranged from $0.56 to $28.75 per share. On June 6, 1997, the last sale price of the Company's Common Stock on the Nasdaq National Market was $17.125 per share. At June 6, 1997, options to purchase 62,699 shares (plus any options that expire or are cancelled in the future) were available for future grant, exclusive of the additional shares covered by the proposed amendment. FEDERAL INCOME TAX CONSEQUENCES The Federal income tax discussion set forth below is intended for general information only. State and local income tax consequences are not discussed and may vary from locality to locality. Under present Treasury regulations, a participant who is granted a non-qualified option will not realize taxable income at the time the option is granted. In general, a participant will be subject to tax for the year of exercise on an amount of ordinary income equal to the excess of the fair market value of the shares on the date of exercise over the option price, and the Company will receive a corresponding deduction. The participant's basis in the shares so acquired will be equal to the option price plus the amount of ordinary income upon which he is taxed. Upon subsequent disposition of the shares, the participant will realize capital gain or loss, long-term or short-term, depending upon the length of time the shares are held after the option is exercised. A participant is not taxed at the time an incentive option is granted. The tax consequences upon exercise and later disposition depend upon whether the participant was an employee of the Company or a subsidiary at all times from the date of grant until three months preceding exercise (one year in the case of permanent and total disability) and on whether the participant holds the shares for more than one year after exercising the option and two years after the date of grant of the option. If the participant satisfies both the employment rule and the holding rule, for regular tax purposes the participant will not realize income upon exercise of the option and the Company will not be allowed an income tax deduction at any time. The difference between the option price and the amount realized upon disposition of the shares by the participant will generally constitute a long-term capital gain or a long-term capital loss, as the case may be. If the participant meets the employment rule but fails to observe the holding rule (a "disqualifying disposition"), the participant generally recognizes as ordinary income, in the year of the disqualifying disposition (whether by sale or gift), the excess of the fair market value of the shares at the date of exercise over the option price. In the case of a sale, any excess of the sales price over the fair market value at the date of exercise will be recognized by the participant as capital gain (long-term or short-term depending on the length of time the stock was held after the option was exercised). If, however, the sales price is less than the fair market value at the date of exercise, then the ordinary income recognized by the participant is limited to the excess of the sales price over the option price. In the case of any disqualifying disposition, the Company's tax deduction is limited to the amount of ordinary income recognized by the participant. Different consequences will apply for a participant subject to the alternative minimum tax. 6 9 EXECUTIVE COMPENSATION AND OTHER INFORMATION SUMMARY COMPENSATION TABLE The following table sets forth a summary of the compensation paid by the Company during its last three fiscal years to its Chief Executive Officer and to each of the four other most highly compensated executive officers of the Company whose total annual salary and bonus exceeded $100,000 during the fiscal year ended March 31, 1997 (collectively, the "Named Executive Officers").
ANNUAL COMPENSATION LONG-TERM COMPENSATION Securities Name and Restricted Underlying Principal Stock Options/ All Other Position Year Salary ($) Bonus ($) Awards ($)(1) LSARs (#) Compensation ($) ---------- ---- ---------- --------- ------------- ----------- ---------------- Richard F. Pops 1997 291,116 50,000 0 40,000 0 Chief Executive 1996 266,346 15,000 0 87,500 0 Officer 1995 249,423 0 35,000 127,500(2) 0 Robert A. Breyer 1997 223,058 25,000 0 25,000 1,500(3) President and Chief 1996 204,231 10,000 0 50,000 1,500(3) Operating Officer 1995 143,077(4) 30,000(5) 0 207,500 16,735(6) Raymond T. Bartus 1997 199,039 5,000 0 10,000 0 Senior Vice 1996 190,692 0 0 17,500 0 President, 1995 189,000 0 10,500 75,000(7) 0 Preclinical Research and Development Michael J. Landine 1997 197,752 30,000 0 25,000 0 Senior Vice 1996 179,231 0 0 51,500 0 President and 1995 175,000 0 21,000 57,000(8) 0 Chief Financial Officer Scott D. Putney 1997 177,538 5,000 0 10,000 0 Vice President, 1996 169,192 0 0 17,500 0 Protein and 1995 167,500 0 10,500 75,000 0 Molecular Biology
- -------------- (1) All restricted stock awards have been made pursuant to the Company's 1991 Restricted Common Stock Award Plan (the "Award Plan"). All awards cease to be subject to forfeiture on an annual basis in 20% increments beginning on the first anniversary of the date of award, provided the grantee has remained an employee of the Company since the date of grant and the employee has not deferred the date on which forfeiture will lapse. Stock certificates are issued to the grantees 7 10 on the date each portion of their award ceases to be subject to forfeiture. For purposes of the above table, the value of an award was determined by multiplying the total shares subject to the award by the closing price for the Company's Common Stock as reported on the Nasdaq National Market on the date of the award. To the extent the Company declares any dividends on its Common Stock, dividends shall be payable on awards only to the extent forfeiture restrictions with respect to such awards have lapsed and shares have been issued. The aggregate number and value (based on the closing price of the Company's Common Stock on the Nasdaq National Market on March 31, 1997) of the restricted stock awards as of June 6, 1997 of each Named Executive Officer who has awards are as follows: Mr. Pops, 16,000 shares, $224,000; Dr. Bartus, 4,200 shares, $58,800; Mr. Landine, 9,600 shares, $134,400; Dr. Putney, 3,600 shares, $50,400. (2) Includes options to purchase 120,000 shares of the Company's Common Stock granted, in tandem with Limited Stock Appreciation Rights ("LSARs"), in exchange for certain outstanding options previously granted to Mr. Pops. See "Ten Year Option/SAR Repricings." For a discussion of the LSARs held by Mr. Pops, see "Employment Contracts and Termination of Employment and Change-in-Control Arrangements." (3) Consists of payment to Mr. Breyer for opting out of the Company's health insurance plan. (4) Represents cash compensation paid to Mr. Breyer for 39 weeks of employment in the fiscal year ended March 31, 1995. (5) Consists of a signing bonus paid to Mr. Breyer upon commencement of his employment in July 1994. (6) Consists of temporary living and moving expenses reimbursed to Mr. Breyer in connection with his relocation to Cambridge, Massachusetts upon commencement of his employment and a $1,154 payment to Mr. Breyer for opting out of the Company's health insurance plan. (7) Includes options to purchase 67,500 shares of the Company's Common Stock granted in exchange for all outstanding options previously granted to Dr. Bartus. See "Ten Year Option/SAR Repricings." Of such options, options to purchase 56,250 shares were granted in tandem with LSARs. For a discussion of the LSARs held by Dr. Bartus, see "Employment Contracts and Termination of Employment and Change in Control Arrangements." (8) Includes options to purchase 49,500 shares of the Company's Common Stock granted, in tandem with LSARs, in exchange for certain outstanding options previously granted to Mr. Landine. See "Ten Year Option/SAR Repricings." For a discussion of the LSARs held by Mr. Landine, see "Employment Contracts and Termination of Employment and Change-in-Control Arrangements." 8 11 OPTIONS/LSAR GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning stock options and LSARs granted during the fiscal year ended March 31, 1997 to each of the Named Executive Officers.
Potential Realizable Shares % of Total Value at Assumed Underlying Options/LSARs Annual Rates of Options/ Granted to Exercise Stock Price LSARs Employees in or Base Expiration Appreciation for Name Granted (#) Fiscal Year Price ($/Sh) Date Option Term - ---- ----------- ---------------- ------------ ---------- ------------------------ 5% ($) 10% ($) Richard F. Pops 40,000 9.26 14.31 11/21/06 359,979 912,258 Robert A. Breyer 25,000 5.79 14.31 11/21/06 224,987 570,161 Raymond T. Bartus 10,000 2.31 14.31 11/21/06 89,995 228,065 Michael J. Landine 25,000 5.79 14.31 11/21/06 224,987 570,161 Scott D. Putney 10,000 2.31 14.31 11/21/06 89,995 228,065
9 12 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth the number of shares acquired upon exercise of options exercised by the Named Executive Officers during the fiscal year ended March 31, 1997, the value realized upon exercise of such options, the number of shares issuable on exercise of options held by such persons at the end of the last fiscal year and the value of such unexercised options as of such date.
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SAR at Options/SAR at FY-End (#) FY-End ($)(1) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized ($) Unexercisable Unexercisable - -------------------------------------------------------------------------------------------------------- Richard F. Pops 0 0 280,625 / 149,375 3,414,000 / 1,055,975 Robert A. Breyer 2,000 43,760 114,250 / 166,250 1,139,763 / 1,393,263 Raymond T. Bartus 0 0 53,125 / 49,375 548,775 / 397,425 Michael J. Landine 0 0 74,625 / 83,875 843,555 / 583,065 Scott D. Putney 0 0 53,125 / 49,375 548,775 / 397,425
- -------------------- (1) Value is measured by the difference between the closing price for the Company's Common Stock on the Nasdaq National Market on March 31, 1997 and the exercise price of the option. 10 13 TEN YEAR OPTION/SAR REPRICINGS The following table sets forth certain information with respect to the stock options held by the Company's current executive officers that have been repriced since the formation of the Company in 1987.
Length of Number of Original Securities Term Underlying Market Price of Exercise Price Remaining Options/SARS Stock at Time at Time of New at Date of Repriced or of Repricing or Repricing or Exercise Repricing or Name Date Amended Amendment($) Amendment($) Price($) Amendment ---- ---- ------------- ------------- ------------- -------- ---------- Richard F. Pops 7/21/94 50,000(1) $ 3.69 $11.375 $ 3.69 7 years 125 days Chief Executive 7/21/94 75,000(1) 3.69 9.00 3.69 8 years 153 days Officer 7/21/94 35,000(1) 3.69 7.94 3.69 9 years 182 days 11/25/91 50,000 11.375 15.875 11.375 9 years 324 days Raymond T. Bartus 7/21/94 75,000(1) 3.69 9.00 3.69 8 years 102 days Senior Vice President, 7/21/94 15,000(1) 3.69 9.00 3.69 8 years 153 days Preclinical Research and Development Michael J. Landine 7/21/94 25,000(1) 3.69 11.375 3.69 7 years 125 days Senior Vice President 7/21/94 20,000(1) 3.69 9.00 3.69 8 years 153 days and Chief Financial 7/21/94 21,000(1) 3.69 7.94 3.69 9 years 182 days Officer 11/25/91 25,000 11.375 15.875 11.375 9 years 324 days Don G. Burstyn 7/21/94 30,000(1) 3.69 7.875 3.69 9 years 151 days Vice President, Regulatory Affairs Scott D. Putney 7/21/94 75,000(1) 3.69 9.56 3.69 7 years 9 days Vice President, 7/21/94 15,000(1) 3.69 9.00 3.69 8 years 153 days Protein and Molecular Biology
- -------------------- (1) All options indicated were exchanged for options to purchase 25% fewer shares. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Under an agreement between Mr. Pops and the Company, dated February 7, 1991, in the event Mr. Pops' employment with the Company is terminated for any reason other than as a result of his taking certain actions against or that have a significant deleterious effect on the Company, Mr. Pops shall be entitled to receive a payment equal to two-thirds of his then current annual base salary. Under an agreement between Mr. Breyer and the Company, dated June 13, 1994, in the event Mr. Breyer's employment with the Company is terminated by Alkermes for any reason other than as a result of his taking certain actions against or that have a significant deleterious effect on the Company, Mr. Breyer 11 14 shall be entitled to receive payments at the monthly rate of his then current annual base salary for up to nine months. The Company and Mr. Landine have agreed that, in the event Mr. Landine's employment with the Company is terminated for any reason other than as a result of his taking certain actions against or that have a significant deleterious effect on the Company, Mr. Landine shall be entitled to receive payments for the following six months aggregating 50% of his then current annual salary. Messrs. Pops and Landine and Dr. Bartus have been granted LSARs in connection with a portion of the stock options previously granted to them. Each LSAR provides that after the occurrence of one of several triggering events, including a reorganization or merger of the Company, a sale of the assets of the Company or the acquisition by a person or group of more than 51% of the Common Stock of the Company, the optionee will receive an amount in cash equal to the amount by which the fair market value per share of the Company's Common Stock issuable upon exercise of the option on the date such a triggering event occurs exceeds the exercise price per share of the option to which the LSAR relates. A triggering event shall be deemed to have occurred only when the fair market value of the shares subject to the underlying option exceeds the exercise price of such option. When a triggering event occurs, the related option will cease to be exercisable. COMPENSATION OF DIRECTORS Except for stock options automatically granted under the Stock Option Plan For Non-Employee Directors, directors do not receive compensation for services on the Board of Directors or any committee thereof. All of the directors, however, are reimbursed for their expenses for each Board and committee meeting attended. In addition, Floyd E. Bloom, Alexander Rich, Paul Schimmel and Michael A. Wall receive consulting fees from Alkermes and Robert S. Langer receives consulting fees from Alkermes Controlled Therapeutics, Inc. ("ACTI"), a wholly owned subsidiary of the Company. During the fiscal year ended March 31, 1997, Alkermes paid consulting fees to Drs. Bloom, Rich and Schimmel and Mr. Wall aggregating $30,000, $30,000, $48,000 and $80,000, respectively, and ACTI paid consulting fees to Professor Langer aggregating $86,572. Consulting fees are currently being paid to each of Drs. Bloom and Rich at the rate of $2,500 per month, to Dr. Schimmel at the rate of $4,000 per month, to Mr. Wall at the rate of $6,667 per month and to Professor Langer at the rate of $7,214 per month. Alkermes believes that the terms of such consulting arrangements are no less favorable to Alkermes and ACTI than those they could have received from an independent third party. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the last fiscal year, the Compensation Committee consisted of John K. Clarke, Robert S. Langer, Paul Schimmel and Michael A. Wall. The Compensation Sub-Committee consists of John K. Clarke and Paul Schimmel. Mr. Wall and Dr. Schimmel are consultants to Alkermes and Professor Langer is a consultant to ACTI. See "Compensation of Directors." 12 15 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee (the "Committee") is responsible for reviewing and establishing the compensation, and the Compensation Sub-Committee is responsible for reviewing and establishing compensation in the form of stock options or restricted stock awards, of the Company's executive officers. EXECUTIVE COMPENSATION POLICIES The Company's executive compensation program is designed to attract, retain and motivate experienced and well qualified executive officers who will promote the Company's research and product development efforts. In establishing executive compensation levels, the Committee is guided by a number of considerations. Because the Company is still in the process of developing its portfolio of product candidates, and because of the volatile nature of biotechnology stocks, the Committee believes that traditional performance criteria, such as revenue growth, profit margins and stock price are inappropriate for evaluating and rewarding the efforts of the Company's executive officers. Rather, the Committee bases executive compensation on the achievement of certain product development, corporate partnering, financial, strategic planning and other goals of the Company and the executive officer. In establishing compensation levels, the Committee also evaluates each officer's individual performance using certain subjective criteria, including an evaluation of each officer's initiative, contribution to overall corporate performance and managerial ability. No specific numerical weight is given to any of the above-noted subjective or objective performance criteria. In making its evaluations, the Committee consults on an informal basis with other members of the Board and, with respect to officers other than the Chief Executive Officer, reviews the recommendations of the Chief Executive Officer. Another consideration which affects the Committee's decisions regarding executive compensation is the high demand for well-qualified personnel in the biotechnology industry. Given such demand, the Committee strives to maintain compensation levels which are competitive with the compensation of other executives in the industry. To that end, the Committee reviews data obtained from a generally available outside survey of compensation and benefits in the biotechnology industry and from proxy statements or personal knowledge regarding executive compensation at a limited number of comparable companies, some of which are included in the Nasdaq Pharmaceutical Index shown in the Performance Graph on page 17. A third factor which affects compensation levels is the Committee's belief that stock ownership by management is beneficial in aligning management's and shareholders' interests in the enhancement of shareholder value. In accordance with such belief, the Committee and the Compensation Sub-Committee seek to provide a significant portion of executive compensation in the form of stock options or restricted stock awards. The Committee and the Compensation Sub-Committee have not, however, targeted a range or specific number of options or awards for each executive position, but makes its decisions based on the above-mentioned survey and the general experience of the Committee and the Compensation Sub-Committee members. 13 16 COMPENSATION MIX The Company's executive compensation packages generally include three components: base salary; a discretionary annual cash bonus; and stock options and restricted stock awards. The Committee generally reviews, and makes any changes to, the base salary and bonus of each executive officer as of the beginning of each calendar year. Base Salary The Committee seeks to establish base salaries which are competitive for each position and level of responsibility with those of executive officers at various other biotechnology companies of comparable size and stage of development. Discretionary Cash Bonus The Committee believes that discretionary cash bonuses are useful on a case by case basis to motivate and reward executive officers. However, cash bonuses have not been a significant element of the Company's executive compensation program, as the Committee believes long-term incentives are more appropriate and help to conserve cash. Bonuses for executive officers are not guaranteed, but are awarded from time to time only in the discretion of the Committee. Criteria for bonuses for executive officers range from success in attracting equity capital to success in conducting clinical trials to success in entering into new and expanded collaborations. Stock Options and Restricted Stock Awards Grants of stock options and awards of restricted stock under the Company's stock option and restricted stock award plans are designed to promote the identity of the long-term interests between the Company's executives and its shareholders and to assist in the retention of executives. Since stock options granted by the Company generally become exercisable over either a three-year or four-year period and restricted stock awards made by the Company cease to be subject to forfeiture on an annual basis over a five-year period, their ultimate value is dependent upon the long-term appreciation of the Company's stock price and the executive's continued employment with the Company. In addition, grants of stock options and awards of restricted stock may result in an increase in executive officers' equity interests in the Company, thereby providing such persons with the opportunity to share in the future value they are responsible for creating. When granting stock options or making restricted stock awards, the Committee and the Compensation Sub-Committee consider the relative performance and contributions of each officer compared to that of other officers within the Company with similar levels of responsibility. The number of options granted or shares awarded to each executive officer are generally determined by the Committee and the Compensation Sub-Committee on the basis of the general experience and subjective judgment of its members. 14 17 Section 162(m) of the Code limits the deductibility of annual compensation over $1 million to the Chief Executive Officer and the other Named Executive Officers unless certain conditions are met. The Company's Chief Executive Officer and the other Named Executive Officers have not received annual compensation over $1 million, and the Company has not yet determined what measures, if any, it should take to comply with Section 162. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER In establishing Mr. Pops' compensation package, the Committee seeks to maintain a level of total current compensation that is competitive with that of chief executives of certain other companies in the biotechnology industry at comparable stages of development. In addition, in order to align Mr. Pops' interests with the long-term interests of the Company's shareholders, the Committee and the Compensation Sub-Committee attempt to make a substantial portion of the value of his total compensation dependent on the long-term appreciation of the Company's stock price. At the Company's current stage of development, the Committee believes that Mr. Pops' performance as Chief Executive Officer of the Company must be evaluated almost exclusively using subjective criteria, including the Committee's evaluation of the Company's progress in attracting and retaining senior management, identifying new product candidates, identifying and securing corporate collaborators for the development of product candidates, identifying and acquiring new product development and technology opportunities, advancing the Company's existing product candidates through the complex drug development and regulatory approval process and raising the necessary capital to fund its research and development efforts. In evaluating and establishing Mr. Pops' current compensation package, the Committee considered the following accomplishments of the Company during calendar 1996. In March 1996, the Company acquired certain assets and technology owned or used by Medisorb Technologies International L.P. In May 1996, the Company successfully completed a public offering of 2,300,000 shares of its Common Stock resulting in net proceeds to the Company of approximately $22.9 million. In addition, a $5 million mortgage financing loan was completed in September 1996. The Company expanded its collaboration for Medisorb(R) with Janssen Pharmaceutica and its collaboration for ProLease(R) with Genentech, Inc. At the time the Committee established Mr. Pops' compensation, the Company had substantially negotiated and subsequently entered into a new collaboration for ProLease with Johnson & Johnson. In addition, the Company progressed in clinical trials of product candidates based on its proprietary RMP-7(TM), ProLease and Medisorb drug delivery systems. The Company completed a Phase I/II clinical trial of intra-arterial RMP-7 and completed enrollment of one multi-center Phase II clinical trial of intra-arterial RMP-7. In July 1996, Alkermes initiated a non-controlled, open label Phase I/II clinical trial of intravenous RMP-7. In August 1996, the Company completed a Phase I clinical trial of ProLease hGH in growth hormone deficient adults and in November 1996 commenced a multi-center Phase I/II clinical trial of ProLease hGH in growth hormone deficient children. The Company successfully manufactured a Medisorb formulation of a Janssen proprietary product and initial Phase I clinical trials of this Medisorb formulation were completed in 1996. 15 18 Given the significant role played by Mr. Pops in each of the above-noted accomplishments, the Committee increased Mr. Pops' annual base salary effective January 1, 1997 from $290,000 to $320,000 and granted Mr. Pops cash bonuses during the fiscal year totaling $50,000. As additional recognition of Mr. Pops' efforts in 1996, and in furtherance of the Committee's belief that a substantial portion of Mr. Pops' total compensation should be dependent on the long-term appreciation of the Company's stock price, in November 1996 the Committee granted Mr. Pops options to purchase 40,000 shares of Common Stock, which was subsequently ratified by the Compensation Sub-Committee. The Committee believes that each of these actions was particularly appropriate given Mr. Pops' performance during calendar 1996 and in order to maintain his compensation at a competitive level compared to that of the chief executive officers of other similarly sized and positioned biotechnology companies. Compensation Committee John K. Clarke Paul Schimmel Robert S. Langer Michael A. Wall Compensation Sub-Committee John K. Clarke Paul Schimmel 16 19 PERFORMANCE GRAPH The following graph compares the yearly percentage change in the cumulative total shareholder return on the Company's Common Stock for the last five fiscal years, with the cumulative total return on the Nasdaq Stock Market (U.S.) Index and the Nasdaq Pharmaceutical Index, which includes biotechnology companies. The comparison assumes $100 was invested on March 31, 1993 in the Company's Common Stock and in each of the foregoing indices and further assumes reinvestment of any dividends. The Company did not declare or pay any dividends during the comparison period.
3/31/93 3/31/94 3/31/95 3/31/96 3/31/97 ------- ------- ------- ------- ------- Alkermes, Inc. 100.00 87.50 34.38 114.06 175.00 Nasdaq Stock Market 100.00 107.94 120.08 163.04 181.21 (U.S. Index) Nasdaq Pharmaceutical 100.00 100.99 100.61 177.41 162.36 Index
17 20 MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the ownership of the Company's Common Stock as of June 6, 1997 by (i) each person who is known by the Company to be the owner of 5% or more of the Company's outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers, and (iv) all the directors and executive officers of the Company as a group.
Number of Shares Percentage Beneficially Beneficially Names or Group Owned(1) Owned - -------------- ---------------- ------------ Amerindo Investment Advisors Inc....... 3,167,500(2) 15.25% One Embarcadero, Ste. 2300 San Francisco, CA 94111 FMR Corporation........................ 2,100,100(3) 10.11% 82 Devonshire Street Boston, MA 02109 ALZA Corporation....................... 2,000,000 9.63% 950 Page Mill Road Palo Alto, CA 94303 Floyd E. Bloom......................... 166,000(4) * Robert A. Breyer....................... 173,750(5) * John K. Clarke......................... 26,968(6) * Robert S. Langer....................... 171,189(7) * Richard F. Pops........................ 345,091(8) 1.64% Alexander Rich......................... 184,200(9) * Paul Schimmel.......................... 302,200(9) 1.46% Michael A. Wall........................ 489,850(10) 2.36% Raymond T. Bartus...................... 84,125(11) * Michael J. Landine..................... 154,775(12) * Scott D. Putney........................ 84,725(13) *
18 21
Number of Shares Percentage Beneficially Beneficially Names or Group Owned(1) Owned - -------------- ---------------- ------------ All directors and executive officers as a group (16 persons)............ 2,275,673(14) 10.52%
- -------------------- * Represents less than 1% of the outstanding shares of the Company's Common Stock. (1) Except as indicated in footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of Common Stock owned. (2) Information is as of December 31, 1996. Amerindo Investment Advisors Inc. holds these shares in its capacity as investment advisor for various fiduciary accounts. (3) Information is as of May 8, 1997. FMR Corporation holds 1,983,000 of these shares in its capacity as investment advisor for various fiduciary accounts. (4) Includes 163,500 shares of Common Stock held by the Corey-Bloom Family Trust. Also includes 2,500 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 6, 1997. (5) Includes 166,750 shares of Common Stock subject to options which are exercisable or will become exercisable within 60 days of June 6, 1997. (6) Includes 850 shares of Common Stock issuable upon exercise of warrants which are exercisable. Also includes 12,500 shares of Common Stock subject to options which are exercisable. (7) Includes 167,857 shares of Common Stock held by The Wetmann Trust. Professor Langer is a beneficiary of The Wetmann Trust, but has no voting or investment power with respect to the shares held by The Wetmann Trust. Also includes 832 shares held by a trust, of which Professor Langer's wife is trustee, for the benefit of his children. Also includes 2,500 shares of Common Stock subject to options held by Professor Langer which are exercisable. (8) Includes 332,500 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 6, 1997. (9) Includes 1,700 shares of Common Stock issuable upon exercise of warrants which are exercisable. Also includes 2,500 shares of Common Stock subject to options which are exercisable. (10) Includes 2,500 shares of Common Stock subject to options which are exercisable. (11) Includes 78,125 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 6, 1997. 19 22 (12) Includes 99,875 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 6, 1997. (13) Includes 78,125 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 6, 1997. Also includes 1,200 shares of Common Stock awarded under the Award Plan which will cease to be subject to forfeiture within 60 days of June 6, 1997. (14) Includes 874,625 shares of Common Stock subject to options or issuable upon exercise of warrants which are exercisable or which will become exercisable within 60 days of June 6, 1997. Also includes 1,800 shares of Common Stock awarded under the Award Plan which will cease to be subject to forfeiture within 60 days of June 6, 1997. Also includes 167,857 shares of Common Stock held by The Wetmann Trust and 163,500 Shares of Common Stock held by the Corey-Bloom Family Trust. CERTAIN TRANSACTIONS STOCK OPTIONS AND AWARDS During the last fiscal year, various executive officers and a director were granted options to purchase shares of Common Stock pursuant to the Omnibus Plan, the Amended and Restated 1989 Non-Qualified Stock Option Plan or the Stock Option Plan for Non-Employee Directors. PRODUCT DEVELOPMENT AGREEMENT WITH ALKERMES CLINICAL PARTNERS, L.P. Pursuant to a Product Development Agreement dated March 6, 1992 between the Company and Alkermes Clinical Partners, L.P. (the "Partnership"), the Company conducts certain research and development on behalf of the Partnership. Alkermes Development Corporation II ("ADC II"), a wholly owned subsidiary of the Company, is the general partner of the Partnership. Richard F. Pops, a director and the Chief Executive Officer of the Company, is a director and the President and Chief Executive Officer of ADC II. Until funding was completed in the quarter ended June 30, 1996, the Company was reimbursed by the Partnership for its actual costs incurred in conducting such research and development, and also received a management fee of 10% of such costs. For the fiscal year ended March 31, 1997, the Company recorded revenue of $1,415,313 from the Partnership pursuant to the Product Development Agreement. Since the completion of funding from the Partnership, Alkermes has used its own resources, and intends to continue to use its own resources, to develop RMP-7, but may be forced to seek alternative sources of funding, including additional collaborators. OTHER BUSINESS The Board of Directors does not intend to present to the Meeting any business other than the election of directors and the approval of the amendment to the Omnibus Plan. If any other matter is presented to the Meeting which under applicable proxy regulations need not be included in this Proxy Statement or which the Board of Directors did not know a reasonable time before this solicitation would 20 23 be presented, the persons named in the accompanying proxy will have discretionary authority to vote proxies with respect to such matter in accordance with their best judgment. INDEPENDENT AUDITORS Deloitte & Touche LLP, independent auditors, audited the consolidated financial statements of the Company for the fiscal year ended March 31, 1997. Representatives of Deloitte & Touche LLP are expected to attend the Meeting, will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions. The Board of Directors has selected Deloitte & Touche LLP as the independent auditors to audit the Company's consolidated financial statements for the fiscal year ending March 31, 1998. DEADLINE FOR SHAREHOLDERS PROPOSALS The Company must receive any proposal which a shareholder wishes to submit at the 1998 annual meeting of shareholders before February 27, 1998 if the proposal is to be considered by the Board of Directors for inclusion in the proxy material for that meeting. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who beneficially own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of Common Stock. Executive officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Professor Langer is a beneficiary of The Wetmann Trust but, has no voting or investment power with respect to the shares held by The Wetmann Trust, which sold 20,000 shares of Common Stock in May, 1996. The Wetmann Trust timely filed a Form 4 reporting the sale of only 10,000 shares of Common Stock. The error was discovered in July, and an amended Form 4 was filed to reflect the sale of all 20,000 shares. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, for the fiscal year ended March 31, 1997, all Section 16(a) filing requirements applicable to its executive officers, directors, officers and greater than ten percent shareholders were complied with. By Order of the Board of Directors Morris Cheston, Jr. Secretary June 27, 1997 21 24 DETACH HERE PROXY ALKERMES, INC. CAMBRIDGE, MASSACHUSETTS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JULY 25, 1997 The undersigned shareholder of Alkermes, Inc. hereby appoints Michael J. Landine and Diane Fucci, and each of them, attorneys and proxies, with power of substitution in each of them, to vote and act for and on behalf of the undersigned at the annual meeting of shareholders of the Company to be held at the offices of the Company, 64 Sidney Street, Cambridge, Massachusetts 02139, at 10:00 a.m., July 25, 1997, and at all adjournments thereof, according to the number of shares which the undersigned would be entitled to vote if then personally present, as indicated hereon and in their discretion upon such other business as may come before the meeting, all as set forth in the notice of the meeting and in the proxy statement furnished herewith, copies of which have been received by the undersigned; hereby ratifying and confirming all that said attorneys and proxies may do or cause to be done by virtue hereof. It is agreed that unless otherwise marked on the other side, said attorneys and proxies are appointed with authority to vote FOR the directors and the proposal listed on the other side hereof. (PLEASE FILL IN, SIGN AND DATE ON THE OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE) 25 DETACH HERE [X] PLEASE MARK VOTES AS IN THIS EXAMPLE. THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" PROPOSALS 1 AND 2. 1. ELECTION OF DIRECTORS Nominees: Floyd E. Bloom, Robert A. Breyer, John K. Clarke, Robert S. Langer, Richard F. Pops, Alexander Rich, Paul Schimmel and Michael A. Wall. FOR ALL WITHHOLD NOMINEES [ ] [ ] AUTHORITY (except as FOR ALL indicated in NOMINEES space below) - ----------------------------------------------------------------- (To Withhold Authority to vote for any individual nominee, print the nominee's name above.) FOR AGAINST ABSTAIN 2. Proposal to approve the amend- ment to the Alkermes Amended and [ ] [ ] [ ] Restated 1990 Omnibus Stock Option Plan to increase to 2,500,000 the number of shares issuable upon the exercise of options granted thereunder, an increase of 750,000 shares. MARK HERE MARK HERE FOR ADDRESS [ ] IF YOU PLAN [ ] CHANGE AND TO ATTEND NOTE AT LEFT THE MEETING JULY 25, 1997 Signature should be the same as the name printed at the left. Executors, administrators, trustees, guardians, attorneys, and officers of corporations should add their title when signing. Signature: Date: Signature: Date: ----------------- ------- ----------------- --------- EX-23 11 CONSENT OF DELOITTE & TOUCHE 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements of Alkermes, Inc. on Form S-8 (File Nos. 33-44752, 33-58330, 33-97468, and 333-13283) of our report dated May 23, 1997, appearing in and incorporated by reference in the Annual Report on Form 10-K of Alkermes, Inc. for the year ended March 31, 1997. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Boston, Massachusetts June 27, 1997 EX-27 12 FINNACIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K FOR THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 2,799 82,498 0 0 0 89,868 15,737 (7,289) 104,697 8,201 10,914 0 0 207 78,944 104,697 0 19,827 0 29,554 0 0 1,381 (18,798) 0 (18,798) 0 0 0 (18,798) (1.03) (1.03)
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