10-Q 1 b37988ake10-q.txt ALKERMES, INC. 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 [ ] 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 incorporation or organization) Identification No.) 64 Sidney Street, Cambridge, MA 02139-4136 ---------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (617) 494-0171 ---------------------- Not Applicable -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares Outstanding as of February 8, 2001 --------------------------------------- ------------------------------------------ Common Stock, par value $.01 57,097,456 Non-Voting Common Stock, par value $.01 382,632 2 ALKERMES, INC. AND SUBSIDIARIES INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets 3 - December 31, 2000 and March 31, 2000 Consolidated Statements of Operations 4 - Three months ended December 31, 2000 and 1999 - Nine months ended December 31, 2000 and 1999 Consolidated Statement of Shareholders' Equity 5 - Nine months ended December 31, 2000 Consolidated Statements of Cash Flows 6 - Nine months ended December 31, 2000 and 1999 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of 10 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 17 EXHIBIT INDEX 18 (2) 3 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS: ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)

December 31, March 31, 2000 2000 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 4,273,883 $ 6,100,643 Short-term investments 298,562,816 331,266,720 Receivables from collaborative arrangements 32,223,259 3,182,382 Prepaid expenses and other current assets 8,117,790 5,291,701 ------------- ------------- Total current assets 343,177,748 345,841,446 ------------- ------------- Property, Plant and Equipment: Land 235,000 235,000 Building 4,727,700 3,538,935 Furniture, fixtures and equipment 40,372,134 35,845,461 Leasehold improvements 14,137,760 13,804,269 Construction in progress 36,587 - ------------- ------------- 59,509,181 53,423,665 Less accumulated depreciation and amortization (25,485,385) (20,554,182) ------------- ------------- 34,023,796 32,869,483 ------------- ------------- Investments 15,633,529 20,094,438 ------------- ------------- Other Assets 10,784,940 15,155,738 ------------- ------------- Total Assets $ 403,620,013 $ 413,961,105 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 6,351,850 $ 7,227,897 Accrued interest 2,846,492 979,497 Deferred revenue 7,854,098 8,655,062 Long-term obligations - current portion 5,233,333 5,625,000 ------------- ------------- Total current liabilities 22,285,773 22,487,456 ------------- ------------- Long-Term Obligations 18,908,292 22,791,625 ------------- ------------- Convertible Subordinated Notes 200,000,000 200,000,000 ------------- ------------- Other Long-Term Liabilities 1,057,206 715,029 ------------- ------------- Shareholders' Equity: Capital stock, par value $.01 per share: authorized, 2,250,000 shares; none issued Convertible exchangeable preferred stock, par value $.01 per share: initially authorized and issued, 2,300,000 shares; outstanding, 1,768,200 and 2,299,000 shares at December 31, 2000 and March 31, 2000, respectively (liquidation preference of $88,410,000 at December 31, 2000) 17,682 22,990 Common stock, par value $.01 per share: authorized, 160,000,000 shares; issued, 56,874,017 and 53,953,996 shares at December 31, 2000 and March 31, 2000, respectively 568,741 539,540 Non-voting common stock, par value $.01 per share: authorized, 450,000 shares; issued, 382,632 at December 31, 2000 and March 31, 2000, 3,826 3,826 Additional paid-in capital 429,099,985 427,577,936 Deferred compensation (2,122,275) (8,545,926) Accumulated other comprehensive income 3,883,628 6,742,064 Accumulated deficit (270,082,845) (258,373,435) ------------- ------------- Total shareholders' equity 161,368,742 167,966,995 ------------- ------------- Total Liabilities and Shareholders' Equity $ 403,620,013 $ 413,961,105 ============= =============

See notes to consolidated financial statements. (3) 4 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended December 31, December 31, December 31, December 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues: Research and development and other revenue under collaborative arrangements $ 9,689,267 $ 7,013,356 $ 46,170,537 $ 17,136,864 ------------ ------------ ------------ ------------ Expenses: Research and development 16,863,152 13,483,815 47,800,735 39,322,552 General and administrative 4,968,541 3,464,840 14,730,013 10,247,970 Noncash compensation (income) expense (1,643,961) 9,025,371 (784,814) 12,722,945 ------------ ------------ ------------ ------------ Total expenses 20,187,732 25,974,026 61,745,934 62,293,467 ------------ ------------ ------------ ------------ Net operating loss (10,498,465) (18,960,670) (15,575,397) (45,156,603) ------------ ------------ ------------ ------------ Other income (expense): Interest income 5,506,031 2,482,351 16,765,426 7,423,836 Interest expense (2,365,148) (724,772) (7,068,804) (2,187,566) ------------ ------------ ------------ ------------ 3,140,883 1,757,579 9,696,622 5,236,270 ------------ ------------ ------------ ------------ Net loss (7,357,582) (17,203,091) (5,878,775) (39,920,333) Preferred stock dividends 2,095,044 2,409,982 5,830,635 6,845,890 ------------ ------------ ------------ ------------ Net loss attributable to common shareholders $ (9,452,626) $(19,613,073) $(11,709,410) $(46,766,223) ============ ============ ============ ============ Basic and diluted loss per common share $(0.17) $(0.39) $(0.21) $(0.93) ============ ============ ============ ============ Weighted average number of common shares outstanding 55,670,025 50,808,528 54,762,414 50,441,416 ============ ============ ============ ============

See notes to consolidated financial statements. (4) 5 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

$3.25 Convertible Exchangeable Non-voting Additional Preferred Stock Common Stock Common Stock Paid-in Shares Amount Shares Amount Shares Amount Capital ---------------------------------------------------------------------------------------------------------------------------------- Balance, April 1, 2000 2,299,000 $ 22,990 53,953,996 $539,540 382,632 $ 3,826 $ 427,577,936 Issuance of common stock - - 22,091 221 - - 107,232 Conversion of $3.25 convertible exchangeable preferred stock (75) (1) 252 3 - - (2) Noncash compensation - - - - - - 689,353 Amortization of noncash compensation - - - - - - - Unrealized gain on marketable securities - - - - - - - Cumulative foreign currency translation adjustments - - - - - - - Net income for period - - - - - - - Preferred stock dividends - - - - - - - --------------------------------------------------------------------------------------- Balance, June 30, 2000 2,298,925 22,989 53,976,339 539,764 382,632 3,826 428,374,519 Issuance of common stock - - 765,838 7,658 - - 2,324,758 Issuance of common stock to collaborative partner - - 160,030 1,600 - - 4,998,378 Conversion of $3.25 convertible exchangeable preferred stock (315) (3) 1,062 11 - - (8) Compensation relating to options canceled - - - - - - (60,821) Noncash compensation - - - - - - (4,854,616) Amortization of noncash compensation - - - - - - - Unrealized loss on marketable securities - - - - - - - Cumulative foreign currency translation adjustments - - - - - - - Net loss for period - - - - - - - Preferred stock dividends - - - - - - - --------------------------------------------------------------------------------------- Balance, September 30, 2000 2,298,610 22,986 54,903,269 549,033 382,632 3,826 430,782,210 Issuance of common stock - - 180,296 1,803 - - 1,312,757 Conversion of $3.25 convertible exchangeable preferred stock (530,410) (5,304) 1,790,452 17,905 - - (12,601) Noncash compensation - - - - - - (2,982,381) Amortization of noncash compensation - - - - - - - Unrealized loss on marketable securities - - - - - - - Cumulative foreign currency translation adjustments - - - - - - - Net loss for period - - - - - - - Preferred stock dividends - - - - - - - --------------------------------------------------------------------------------------- Balance, December 31, 2000 1,768,200 $ 17,682 56,874,017 $568,741 382,632 $ 3,826 $ 429,099,985 ======================================================================================= Other Comprehensive Income (Loss) --------------------------------------- Foreign Currency Unrealized Gain Deferred Translation (Loss) on Marketable Accumulated Compensation Adjustments Securities Deficit Total ---------------------------------------------------------------------------------------------------------------------------------- Balance, April 1, 2000 $(8,545,926) $ (64,686) $ 6,806,750 $(258,373,435) $ 167,966,995 Issuance of common stock - - - - 107,453 Conversion of $3.25 convertible exchangeable preferred stock - - - - - Noncash compensation (689,353) - - - - Amortization of noncash compensation 3,149,334 - - - 3,149,334 Unrealized gain on marketable securities - - 145,250 - 145,250 Cumulative foreign currency translation adjustments - (27,108) - - (27,108) Net income for period - - - 9,764,547 9,764,547 Preferred stock dividends - - - (1,867,877) (1,867,877) --------------------------------------------------------------------------------------- Balance, June 30, 2000 (6,085,945) (91,794) 6,952,000 (250,476,765) 179,238,594 Issuance of common stock - - - - 2,332,416 Issuance of common stock to collaborative partner - - - - 4,999,978 Conversion of $3.25 convertible exchangeable preferred stock - - - - - Compensation relating to options canceled 60,821 - - - - Noncash compensation 4,854,616 - - - - Amortization of noncash compensation (2,290,187) - - - (2,290,187) Unrealized loss on marketable securities - - (1,389,000) - (1,389,000) Cumulative foreign currency translation adjustments - (12,089) - - (12,089) Net loss for period - - - (8,285,740) (8,285,740) Preferred stock dividends - - - (1,867,714) (1,867,714) --------------------------------------------------------------------------------------- Balance, September 30, 2000 (3,460,695) (103,883) 5,563,000 (260,630,219) 172,726,258 Issuance of common stock - - - - 1,314,560 Conversion of $3.25 convertible exchangeable preferred stock - - - - - Noncash compensation 2,982,381 - - - - Amortization of noncash compensation (1,643,961) - - - (1,643,961) Unrealized loss on marketable securities - - (1,585,374) - (1,585,374) Cumulative foreign currency translation adjustments - 9,885 - - 9,885 Net loss for period - - - (7,357,582) (7,357,582) Preferred stock dividends - - - (2,095,044) (2,095,044) --------------------------------------------------------------------------------------- Balance, December 31, 2000 $(2,122,275) $ (93,998) $ 3,977,626 $(270,082,845) $ 161,368,742 =======================================================================================

See notes to consolidated financial statements. (5) 6 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Nine Months Nine Months Ended Ended December 31, December 31, 2000 1999 ------------ ------------ Cash flows from operating activities: Net loss $ (5,878,775) $(39,920,333) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 5,730,190 5,101,011 Noncash interest expense 372,023 651,972 Compensation relating to issuance of common stock and grant of stock options and awards made (784,814) 12,722,945 Adjustments to other assets 365,686 779,315 Changes in assets and liabilities: Receivables from collaborative arrangements (29,040,877) (4,527,219) Prepaid expenses and other current assets (3,527,606) (1,048,522) Accounts payable and accrued expenses 988,179 (363,438) Deferred revenue (800,964) (1,872,573) Other long-term liabilities (29,846) (34,719) ------------ ------------ Net cash used by operating activities (32,606,804) (28,511,561) ------------ ------------ Cash flows from investing activities: Additions to property, plant and equipment (6,039,695) (4,847,598) Purchases of available-for-sale short-term investments (90,025,111) -- Sales of available-for-sale short-term investments 37,146,104 -- Maturities of short-term investments, net 86,849,107 6,532,422 Maturities (purchases) of long-term investments, net 4,460,909 (5,729,473) Increase in other assets (221,456) (131,823) ------------ ------------ Net cash provided by (used by) investing activities 32,169,858 (4,176,472) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock 3,754,429 5,606,599 Proceeds from issuance of common stock to collaborative partner 4,999,978 - Payment of preferred stock dividends (5,830,635) (6,845,890) Payment of long-term obligations (4,275,000) (5,400,000) Proceeds from issuance of 1999 convertible exchangeable preferred stock - 35,000,000 ------------ ------------ Net cash (used by) provided by financing activities (1,351,228) 28,360,709 ------------ ------------ Effect of exchange rate changes on cash (38,586) (9,175) ------------ ------------ Net decrease in cash and cash equivalents (1,826,760) (4,336,499) Cash and cash equivalents, beginning of period 6,100,643 9,115,432 ------------ ------------ Cash and cash equivalents, end of period $ 4,273,883 $ 4,778,933 ============ ============ Supplementary information: Cash paid for interest $ 4,829,786 $ 1,586,774 ============ ============

See notes to consolidated financial statements. (6) 7 ALKERMES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements of Alkermes, Inc. (the "Company") for the three and nine month periods ended December 31, 2000 and 1999 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. All such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 2000, which includes consolidated financial statements and notes thereto for the years ended March 31, 2000, 1999 and 1998. In addition, the financial statements include the accounts of Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II, Advanced Inhalation Research, Inc. ("AIR"), Alkermes Investments, Inc., Alkermes Europe, Ltd. and Alkermes Development Corporation II ("ADC II"), wholly owned subsidiaries of the Company. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for any other interim period or for a full fiscal year. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. COMPREHENSIVE INCOME (LOSS) Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in the equity of the Company that are excluded from net income (loss). Specifically, other comprehensive income includes unrealized holding gains and losses on the Company's "available-for-sale" securities and changes in cumulative foreign currency translation adjustments. In order to provide more flexibility with our investment portfolio, we are now treating a portion of our Short-term Investments as available-for-sale. All of our Short-term Investments had previously been accounted for as held-to-maturity. During the quarter ended December 31, 2000, Short-term Investments with an amortized cost of $119.4 million (which approximated fair market value) became available-for-sale securities. (7) 8 Comprehensive income (loss) for the three months ended December 31, 2000 and 1999 is as follows:

Three Months Three Months Ended Ended December 31, 2000 December 31, 1999 ----------------- ----------------- Net loss $(7,357,582) $(17,203,091) Cumulative foreign currency translation adjustments 9,885 (15,666) Unrealized (loss) gain on marketable securities (1,585,374) 1,500 ----------- ------------ Comprehensive loss $(8,933,071) $(17,217,257) =========== ============ Nine Months Nine Months Ended Ended December 31, 2000 December 31, 1999 ----------------- ----------------- Net loss $(5,878,775) $(39,920,333) Cumulative foreign currency translation adjustments (29,312) (4,533) Unrealized (loss) gain on marketable securities (2,829,124) 58,500 ----------- ------------ Comprehensive loss $(8,737,211) $(39,866,366) =========== ============

The accumulated other comprehensive income is as follows: Balance, March 31, 2000 $ 6,742,064 Change for the three months ended June 30, 2000 118,142 ----------- Balance, June 30, 2000 6,860,206 Change for the three months ended September 30, 2000 (1,401,089) ----------- Balance, September 30, 2000 5,459,117 Change for the three months ended December 31, 2000 (1,575,489) ----------- Balance, December 31, 2000 $ 3,883,628 =========== 3. NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133," which we are required to adopt in fiscal year 2002. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133". SFAS No. 133 and 138 provide a comprehensive and consistent standard for the measurement of derivatives and hedging activities. We do not believe that the adoption of SFAS No. 133 will have a material impact on our financial position and results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101B was issued in June 2000 and delays the implementation date of SAB 101 until the quarter ended March 31, 2001. SAB 101 requires companies to report any changes in (8) 9 revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes." We do not believe that the implementation of SAB 101 will have a material impact on our financial position and results of operations. 4. COMMITMENTS On October 26, 2000, the Company entered into an operating lease agreement for a new facility to be constructed adjacent to its current headquarters for laboratory, clinical manufacturing and office space (the "New Building"). The lease is scheduled to commence in May 2002. The initial lease term for which rent is to be paid is ten years with two ten-year extensions. The Company is responsible for a portion of the tenant improvements to the building which are currently being estimated. The annual future minimum lease payments are $6.7 million for years 1-5 and $7.0 million for years 6-10. Alkermes can terminate the lease for failure by the landlord to meet certain conditions or construction target dates. In conjunction with the New Building, Alkermes entered into a new lease on October 26, 2000 that replaces several current leases for space it currently occupies and uses for laboratory, clinical manufacturing and offices. The new lease has the same lease term and extension options as the lease for the New Building. The annual future minimum lease payments are $2.0 million for years 1-5 and $2.2 million for years 6-10. This lease can also be terminated if the New Building lease is terminated. (9) 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Alkermes (together with our subsidiaries, "we" or "us") is a leader in the development of products based on sophisticated drug delivery technologies. We have several areas of focus, including: (i) controlled, sustained release of injectable drugs lasting several days to several weeks, utilizing our ProLease(R) and Medisorb(R) technologies and (ii) the development of pharmaceutical products based on our proprietary Advanced Inhalation Research, Inc. ("AIR(TM)") pulmonary technology. Our first product, Nutropin Depot(TM), was launched in the United States by our partner, Genentech, Inc. ("Genentech"), in June 2000. Nutropin Depot is a long-acting form of Genentech's recombinant human growth hormone using our ProLease technology. In addition to our Cambridge, Massachusetts headquarters, research and manufacturing facilities, we operate research and manufacturing facilities in Ohio and a medical affairs office in Cambridge, England. Since our inception in 1987, we have devoted substantially all of our resources to research and development programs. At December 31, 2000, we had an accumulated deficit of approximately $270.1 million. We have funded our operations primarily through public offerings and private placements of debt and equity securities, bank loans and payments under research and development agreements with collaborators, including Alkermes Clinical Partners, L.P. ("Clinical Partners"), a research and development limited partnership whose operations commenced in April 1992 and whose funding ended during June 1996. We often develop our product candidates in collaboration with others on whom we rely for funding, development, manufacturing and/or marketing. FORWARD-LOOKING STATEMENTS Any statements set forth below or otherwise made in writing or orally by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words like "believe," "expect," "may," "will," "should," "seek," or "anticipate," and similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, our business is subject to significant risks and there can be no assurance that actual results of our development and manufacturing activities and our results of operations will not differ materially from our expectations. Factors which could cause actual results to differ from expectations include, among others: (i) we may be unable to continue to manufacture our first product, Nutropin Depot, or to manufacture future products on a commercial scale or economically; (ii) Nutropin Depot may not produce significant revenues and, in commercial use, may have unintended side effects, adverse reactions or incidents of misuse; (iii) our collaborators could elect to terminate or delay programs at any time; (iv) we and our collaborators may not be permitted by regulatory authorities to undertake new or additional clinical trials for product candidates incorporating our technologies, or clinical trials could be delayed; (v) our product candidates could be ineffective or unsafe during clinical trials; (vi) even if clinical trials are completed and the data is submitted to the U.S. Food and Drug Administration ("FDA") as a New Drug (10) 11 Application ("NDA") for marketing approval and to other health authorities as a marketing authorization application, the NDA or marketing authorization application could fail to be accepted, or could fail to receive approval on a timely basis, if at all; (vii) disputes with collaborators, termination of collaborations or failure to negotiate acceptable new collaborative arrangements for our technologies could occur; (viii) even if our product candidates appear promising at an early stage of development, product candidates could fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance, be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; (ix) technological change in the biotechnology or pharmaceutical industries could render our product candidates obsolete or noncompetitive; (x) difficulties or set-backs in obtaining and enforcing our patents and difficulties with the patent rights of others could occur; (xi) we could incur difficulties or set-backs in obtaining the substantial additional funding required to continue research and development programs and clinical trials; and (xii) disputes with Clinical Partners over rights to Cereport(R) and related technology could occur. RESULTS OF OPERATIONS After taking into account preferred stock dividends, net loss attributable to common shareholders for the three months ended December 31, 2000 and 1999 was $9.5 and $19.6 million or $0.17 and $0.39 basic and diluted loss per common share. After taking into account preferred stock dividends, net loss attributable to common shareholders for the nine months ended December 31, 2000 and 1999 was $11.7 and $46.8 million or $0.21 and $0.93 basic and diluted loss per common share. Research and development and other revenue under collaborative arrangements were $9.7 and $46.2 million for the three and nine months ended December 31, 2000 compared with $7.0 and $17.1 million for the same periods last year. The increase for the nine months ended December 31, 2000 was substantially the result of non-recurring milestone revenues earned as a result of the launch of Nutropin Depot by our collaborative partner, Genentech. Nutropin Depot is an injectable long-acting formulation of Genentech's recombinant human growth hormone based on our Prolease drug delivery system. In addition, there was an increase in funding earned under collaborative agreements for the three and nine months ended December 31, 2000. Total operating expenses were $20.2 and $61.7 million for the three and nine months ended December 31, 2000 as compared to $26.0 and $62.3 million for the three and nine months ended December 31, 1999. The decrease for the three months ended December 31, 2000 as compared to the three months ended December 31, 1999 was primarily related to a decrease in noncash compensation charges partially offset by an increase in research and development expenses and an increase in general and administrative expenses, which are discussed below. The decrease for (11) 12 the nine months ended December 31, 2000 as compared to the nine months ended December 31, 1999 was primarily related to a decrease in noncash compensation charges offset by an increase in research and development expenses and an increase in general and administrative expenses, which are discussed below. Research and development expenses for the three and nine months ended December 31, 2000 were $16.9 and $47.8 million as compared to $13.5 and $39.3 million for the corresponding periods of the prior year. The increase in research and development expenses for the three and nine months ended December 31, 2000 as compared to the three and nine months ended December 31, 1999 was mainly the result of an increase in salary and related benefits and other costs associated with an increase in personnel as we advance our own and our collaborators' product candidates through development, clinical trials and commercialization. As we expand the development of our proprietary products we expect to incur an increase in research and development expenses. In addition, we had an increase in depreciation expense as a result of the acquisition of fixed assets. General and administrative expenses for the three and nine months ended December 31, 2000 were $5.0 and $14.7 million compared to $3.5 and $10.2 million for the corresponding periods of the prior year. The increase in the three and nine months ended December 31, 2000 as compared to the three and nine months ended December 31, 1999 was primarily the result of increased consulting costs and professional fees. In addition, there was an increase in amortization expense related to offering costs in connection with the sale of $200 million principal amount of our 3 3/4% Convertible Subordinated Notes due 2007 (the "3 3/4% Notes") in February 2000. Noncash compensation (income) expense for the three and nine months ended December 31, 2000 was ($1.6) and ($0.8) million as compared to $9.0 and $12.7 million for the corresponding periods of the prior year. Noncash compensation charges primarily relate to common stock issued and stock options granted to certain employees, consultants and other individuals associated with our subsidiary, AIR. Fluctuations in these charges are primarily a result of changes in the market value of our common stock, partially offset by a reduction in the number of shares of common stock subject to future vesting. As a result of fluctuations in our common stock price from September 30, 2000 to December 31, 2000, we recognized non-cash compensation income for the three months ended December 31, 2000 based on the calculation of noncash compensation for consultants, as prescribed under the fair value method of accounting. Interest income for the three and nine months ended December 31, 2000 was $5.5 and $16.8 million compared to $2.5 and $7.4 million for the corresponding periods of the prior year. The increase in such income for the three and nine months ended December 31, 2000 as compared to the corresponding periods of the prior year was primarily the result of the interest income earned on the increase in average cash and investment balances mainly resulting from the investment of the net proceeds from the sale of the 3 3/4% Notes. Interest income also increased as a result of an increase in interest rates as compared to the prior year periods. (12) 13 Interest expense for the three and nine months ended December 31, 2000 was $2.4 and $7.1 million as compared to $0.7 and $2.2 million for the corresponding periods of the prior year. The increase in the three and nine months ended December 31, 2000 as compared to the corresponding periods of the prior year was primarily the result of interest costs related to the 3 3/4% Notes. We do not believe that inflation and changing prices have had a material impact on our results of operations. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments were approximately $302.8 million at December 31, 2000 as compared to $337.4 million at March 31, 2000. During the nine months ended December 31, 2000, the decrease in cash and cash equivalents and short-term investments was primarily the result of cash used to fund our operations, to acquire fixed assets, to pay preferred stock dividends and to make interest and principal payments on our indebtedness. The decrease was partially offset by the increase in interest income earned on the net proceeds from the sale of the 3 3/4% Notes. The decrease was also partially offset by the net proceeds received from issuances of our common stock as a result of the exercise of stock options and $5.0 million received from the sale of our common stock to our collaborative partner, GlaxoSmithKline, in August 2000. Receivables from collaborative arrangements include the non-recurring milestone earned as a result of the June 28, 2000 launch of Nutropin Depot by Genentech. In order to provide more flexibility with our investment portfolio, we are now treating a portion of our Short-term Investments as available-for-sale. All of our Short-term Investments had previously been accounted for as held-to-maturity. During the quarter ended December 31, 2000, Short-term Investments with an amortized cost of $119.4 million (which approximated fair market value) became available-for-sale securities. We invest in cash equivalents, U.S. Government obligations, high-grade corporate notes and commercial paper. Our investment objectives for all of our investments taken as a whole are, first, to assure conservation of capital and liquidity, and second, to obtain investment income. Investments classified as held-to-maturity, include $14.0 million principal amount of high-grade corporate notes and U.S. Government obligations with maturities ranging from 13 to 15 months. Our research and development costs to date have been financed primarily by sales of debt and equity securities and payments under research and development collaborative arrangements. We expect to incur significant additional research and development and other costs in connection with collaborative arrangements and as we expand the development of our proprietary product candidates, including costs related to preclinical studies, clinical trials and facilities expansion. Therefore, we expect that our costs, including research and development costs for all product candidates, will exceed revenues through at least fiscal 2002, which will result in losses from operations. Capital expenditures were approximately $6.0 million for the nine months ended December 31, 2000, principally reflecting equipment purchases and building improvements. Our capital expenditures for equipment, facilities and building improvements have been financed to date primarily with proceeds from bank loans and the sales of debt and equity securities. Under the (13) 14 provisions of our loan agreements, Fleet National Bank has a security interest in certain of our assets. We will continue to pursue opportunities to obtain additional financing in the future. Such financing may be sought through various sources, including debt and equity offerings, corporate collaborations, bank borrowings, lease arrangements relating to fixed assets and other financing methods. The source, timing and availability of any financings will depend on market conditions, interest rates and other factors. Our future capital requirements will also depend on many factors, including continued scientific progress in our research and development programs (including our proprietary product candidates), the magnitude of these programs, progress with preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the establishment of additional collaborative arrangements, the cost of manufacturing facilities and of commercialization activities and arrangements and the cost of product in-licensing and any possible acquisitions. We may need to raise substantial additional funds for longer-term product development, including development of our proprietary product candidates, regulatory approvals and manufacturing or marketing activities that we might undertake in the future. There can be no assurance that additional funds will be available on favorable terms, if at all. If adequate funds are not available, we may be required to curtail significantly one or more of our research and development programs and/or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or future products. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We own financial instruments that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. Our Short-term Investments and Investments consist of U.S. Government obligations, high-grade corporate notes and commercial paper. In order to provide more flexibility with our investment portfolio, we are now treating a portion of our Short-term Investments as available-for-sale. All of our Short-term Investments had previously been accounted for as held-to-maturity. During the quarter ended December 31, 2000, Short-term Investments with an amortized cost of $119.4 million (which approximated fair market value) became available-for-sale securities. The amount of the portfolio that is held-to-maturity is comprised of investments that mature within one year, are not callable by the issuer and have fixed interest rates. Our investments are subject to interest rate risk, and could decline in value if interest rates increase. Due to the conservative nature of our Short-term Investments and Investments, we do not believe that we have a material exposure to interest rate risk. Our available-for-sale marketable equity securities and the 3 3/4% Notes are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these financial instruments due to the difference between the market interest rate and the rate at the date of purchase of the financial instrument. A 10% decrease in market interest rates would result in no material impact on the net fair value of such interest-sensitive financial instruments. Our 3 3/4% Notes are sensitive to fluctuations in the price of our common stock into which the 3 3/4% Notes are convertible. Changes in our common stock price would result in changes in the fair value of the 3 3/4% Notes. Due to the difference between the current market price and the market price at the date of issuance of the 3 3/4% Notes, a 10% increase in the December 31, 2000 quarter-end market price of the 3 3/4% Notes would result in an increase of approximately $9.9 million in the net fair value of the 3 3/4% Notes. (14) 15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: NUMBER EXHIBIT ------ ------- 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 Company'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 Company's Report on Form 10-Q for the quarter ended June 30, 1991). 3.1(c) Amendment to the 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 Company'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 Company's Report on Form 10-Q for the quarter ended December 31, 1992). 3.1(e) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on February 26, 1998. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-3, as amended (File No. 333-50157)). 3.1(f) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 12, 1999 (Non-Voting Common Stock Terms). (Incorporated by reference to Exhibit 3.1(g) to the Company's Report on Form 10-K for the fiscal year ended March 31, 1999). 3.1(g) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 28, 2000 (effecting a 2-for-1 stock split and increase in authorized shares). (Incorporated by reference to Exhibit 3.1(g) to the Company's Report on Form 10-K for the year ended March 31, 2000). (15) 16 3.1(h) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on June 27, 2000. (Incorporated by reference to Exhibit 3.1(h) to the Company's Report on Form 10-K for the year ended March 31, 2000). 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of June 2, 1999. (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-K for the year ended March 31, 1999). 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1, as amended (File No. 33-40250)). 4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, as amended (File No. 333-50157)). 4.3 Specimen of Non-Voting Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.4 to the Company's Report on Form 10-K for the fiscal year ended March 31, 1999). 4.4 Indenture, dated as of March 1, 1998, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-3, as amended (File No. 333-50157)). 4.5 Indenture, dated as of February 18, 2000, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-3, as amended (File No. 333-31354)). 10.1 Change in Control Employment Agreement, dated as of December 19, 2000, between Alkermes, Inc. and Richard F. Pops. 10.2 Form of Change in Control Employment Agreement, dated as of December 19, 2000, between Alkermes, Inc. and each of Robert A. Breyer, Raymond T. Bartus, James M. Frates and Michael J. Landine. 10.3 Lease, dated as of October 26, 2000, between FC 88 Sidney, Inc. and Alkermes, Inc. 10.4 Lease, dated as of October 26, 2000, between Forest City 64 Sidney Street, Inc. and Alkermes, Inc. (b) During the quarter ended December 31, 2000, the Company filed no Reports on Form 8-K. (16) 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALKERMES, INC. (Registrant) Date: February 14, 2001 By: /s/ Richard F. Pops --------------------------------- Richard F. Pops Chief Executive Officer and Director (Principal Executive Officer) Date: February 14, 2001 By: /s/ James M. Frates --------------------------------- James M. Frates Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) (17) 18 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 Company'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 Company's Report on Form 10-Q for the quarter ended June 30, 1991). 3.1(c) Amendment to the 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 Company'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 Company's Report on Form 10-Q for the quarter ended December 31, 1992). 3.1(e) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on February 26, 1998. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-3, as amended (File No. 333-50157)). 3.1(f) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 12, 1999 (Non-Voting Common Stock Terms). (Incorporated by reference to Exhibit 3.1(g) to the Company's Report on Form 10-K for the fiscal year ended March 31, 1999). 3.1(g) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 28, 2000 (effecting a 2-for-1 stock split and increase in authorized shares). (Incorporated by reference to Exhibit 3.1(g) to the Company's Report on Form 10-K for the year ended March 31, 2000). 3.1(h) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on (18) 19 June 27, 2000. (Incorporated by reference to Exhibit 3.1(h) to the Company's Report on Form 10-K for the year ended March 31, 2000). 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of June 2, 1999. (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-K for the year ended March 31, 1999). 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1, as amended (File No. 33-40250)). 4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, as amended (File No. 333-50157)). 4.3 Specimen of Non-Voting Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.4 to the Company's Report on Form 10-K for the fiscal year ended March 31, 1999). 4.4 Indenture, dated as of March 1, 1998, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-3, as amended (File No. 333-50157)). 4.5 Indenture, dated as of February 18, 2000, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-3, as amended (File No. 333-31354)). 10.1 Change in Control Employment Agreement, dated as of December 19, 2000, between Alkermes, Inc. and Richard F. Pops. 10.2 Form of Change in Control Employment Agreement, dated as of December 19, 2000, between Alkermes, Inc. and each of Robert A. Breyer, Raymond T. Bartus, James M. Frates and Michael J. Landine. 10.3 Lease, dated as of October 26, 2000, between FC 88 Sidney, Inc. and Alkermes, Inc. 10.4 Lease, dated as of October 26, 2000, between Forest City 64 Sidney Street, Inc. and Alkermes, Inc. (19)