-----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, QZ0fQc2Cp1xxxHVZ5nN7zDDhpMAZcCZfgorjRglmdkoQ5w0gaJ8HDhkAJl246qjo jD40nz/neU3HQufwIXTEPw== 0000950135-01-502520.txt : 20010815 0000950135-01-502520.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950135-01-502520 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOGEN INC CENTRAL INDEX KEY: 0000714655 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 043002117 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12042 FILM NUMBER: 1711797 BUSINESS ADDRESS: STREET 1: 14 CAMBRIDGE CTR CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6176792000 MAIL ADDRESS: STREET 1: 14 CAMBRIDGE CTR CITY: CAMBRIDGE STATE: MA ZIP: 02142 FORMER COMPANY: FORMER CONFORMED NAME: BIOGEN NV DATE OF NAME CHANGE: 19880622 10-Q 1 b40015bie10-q.txt BIOGEN INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 COMMISSION FILE NUMBER 0-12042 BIOGEN, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3002117 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 CAMBRIDGE CENTER, CAMBRIDGE, MA 02142 (617) 679-2000 (Address,including zip code, and telephone number, including area code, of registrant's principal executive offices) 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 [ ] The number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of July 31, 2001 was 148,537,614 shares. 1 2 BIOGEN, INC. INDEX PART I - FINANCIAL INFORMATION PAGE NUMBER Condensed Consolidated Statements of Income - Three and six months ended June 30, 2001 and 2000 3 Condensed Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 4 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II - OTHER INFORMATION 16 Note concerning trademarks: AVONEX(R) is a registered trademark of Biogen, Inc. 2 3 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- REVENUES: Product $243,217 $190,009 $463,214 $364,605 Royalties 17,445 40,505 34,495 82,757 -------- -------- -------- -------- Total revenues 260,662 230,514 497,709 447,362 -------- -------- -------- -------- COSTS AND EXPENSES: Cost of revenues 35,202 30,795 64,348 59,418 Research and development 79,118 71,701 151,888 134,707 Selling, general and administrative 55,266 40,921 103,826 82,104 -------- -------- -------- -------- Total costs and expenses 169,586 143,417 320,062 276,229 -------- -------- -------- -------- Income from operations 91,076 87,097 177,647 171,133 Other income, net 11,533 16,737 27,996 115,761 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 102,609 103,834 205,643 286,894 Income taxes 30,757 31,774 61,668 93,468 -------- -------- -------- -------- NET INCOME $ 71,852 $ 72,060 $143,975 $193,426 ======== ======== ======== ======== BASIC EARNINGS PER SHARE $ 0.48 $ 0.48 $ 0.97 $ 1.29 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE $ 0.47 $ 0.47 $ 0.94 $ 1.24 ======== ======== ======== ======== SHARES USED IN COMPUTING: Basic earnings per share 148,602 148,643 148,395 149,501 ======== ======== ======== ======== Diluted earnings per share 153,337 154,150 153,414 155,931 ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 3 4 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, December 31, 2001 2000 ----------- ----------- (unaudited) ASSETS Current assets Cash and cash equivalents $ 75,972 $ 48,737 Marketable securities 684,024 633,675 Accounts receivable, net 166,457 143,178 Deferred tax assets 43,997 40,047 Other current assets 56,683 62,634 ----------- ----------- Total current assets 1,027,133 928,271 ----------- ----------- Property, plant and equipment Cost 627,969 537,072 Less accumulated depreciation 153,865 136,643 ----------- ----------- Property, plant and equipment, net 474,104 400,429 ----------- ----------- Patents, net 15,086 13,510 Marketable securities 57,241 71,982 Other assets 20,332 17,664 ----------- ----------- $ 1,593,896 $ 1,431,856 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 49,239 $ 37,869 Current portion of long-term debt 4,888 4,888 Accrued expenses and other 180,855 178,264 ----------- ----------- Total current liabilities 234,982 221,021 ----------- ----------- Long-term debt, less current portion 44,741 47,185 Other long-term liabilities 53,430 57,248 Commitments and contingencies -- -- Shareholders' equity Common stock 1,517 1,517 Additional paid-in capital 795,444 772,172 Retained earnings 610,900 543,913 Accumulated other comprehensive income 13,721 22,376 Treasury stock, at cost (160,839) (233,576) ----------- ----------- Total shareholders' equity 1,260,743 1,106,402 ----------- ----------- $ 1,593,896 $ 1,431,856 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 4 5 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Six Months Ended June 30, 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 143,975 $ 193,426 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 18,070 16,321 Deferred income taxes 86 268 Tax benefit of stock options 22,622 67,377 Other 417 2,697 Gain on sale of non-current marketable securities (3,321) (101,129) Changes in: Accounts receivable (23,279) (16,938) Other current and other assets 3,962 (2,781) Accounts payable, accrued expense and other current and long-term liabilities 9,687 22,263 --------- --------- Net cash from operating activities 172,219 181,504 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities (624,483) (360,510) Proceeds from sales and maturities of marketable securities 575,863 374,940 Proceeds from sales of non-current marketable securities 3,652 120,199 Acquisitions of property and equipment (90,897) (80,468) Additions to patents (2,424) (2,182) --------- --------- Net cash from investing activities (138,289) 51,979 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (2,444) (2,443) Purchases of treasury stock (21,443) (250,727) Issuance of common and treasury stock related to stock option exercises 17,192 30,229 --------- --------- Net cash from investing activities (6,695) (222,941) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 27,235 10,542 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 48,737 56,920 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 75,972 $ 67,462 ========= =========
See Notes to Condensed Consolidated Financial Statements. 5 6 BIOGEN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows of Biogen, Inc. and its subsidiaries (the "Company"). The Company's accounting policies are described in the Notes to the Consolidated Financial Statements in the Company's 2000 Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts for the three and six months ended June 30, 2000 have been reclassified to conform to the current period presentation. INVENTORIES Inventories are stated at the lower of cost or market with cost determined under the first-in/first-out ("FIFO") method and are included in other current assets. Included in inventory are raw materials used in the production of pre-clinical and clinical products which are expensed as research and development costs when consumed. The components of inventories are as follows:
June 30, December 31, (in thousands) 2001 2000 -------- ------------ Raw materials $ 11,484 $ 7,775 Work in process 13,245 17,582 Finished goods 14,075 14,172 -------- -------- $ 38,804 $ 39,529 ======== ========
2. FINANCIAL INSTRUMENTS On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133"). The Company elected to adopt SFAS 133 in the fourth quarter of 1998. All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company assesses, both at its inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows of hedged items. The Company assesses hedge ineffectiveness on a quarterly basis and records the gain or loss related to the ineffective portion to current earnings to the extent significant. If the Company determines that a hedged forecasted transaction is no longer probable of occurring, the Company discontinues hedge accounting for the affected portion of the transaction, and any unrealized gain or loss on the contract is recognized in current earnings. As of June 30, 2001, the Company had $15.0 million outstanding under a floating rate loan secured by one of the Company's laboratory and office buildings in Cambridge, Massachusetts and $34.6 million outstanding under a floating rate loan agreement for financing the construction of its biological manufacturing facility in North Carolina. The Company uses interest rate swap agreements to mitigate the risk associated with its floating rate debt. The fair value of the interest rate swap agreements at June 30, 2001, representing the cash requirements of the Company to settle the agreements, was approximately $2.2 6 7 million. The fair value of the interest rate swap agreements at June 30, 2000, representing the cash the Company would receive to settle the agreements, was approximately $561,000. The Company has designated the interest rate swaps as cash flow hedges. There were no amounts of hedge ineffectiveness related to the Company's interest rate swaps during the three and six months ended June 30, 2001 or in the comparable period of 2000, and no gains or losses were excluded from the assessment of hedge effectiveness. The Company records the differential to be paid or received on the interest rate swaps as incremental interest expense. The Company has foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies. All foreign currency forward contracts have durations of ninety days to 6 months. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in other comprehensive income. Realized gains and losses for the effective portion are recognized with the underlying hedge transaction. The notional amount of the foreign currency forward contracts outstanding at June 30, 2001 was approximately $49.2 million. These contracts had a fair value of approximately $2.8 million, representing an unrealized gain, and were included in other current assets at June 30, 2001. For the three and six months ended June 30, 2001 and 2000, there were no significant amounts recognized in earnings due to hedge ineffectiveness. For the three and six months ended June 30, 2001, there were no significant amounts recognized as a result of the discontinuance of cash flow hedge accounting because it was no longer probable that the hedge forecasted transaction would occur. For the three and six months ended June 30, 2000, approximately $388,000 and $392,000, respectively, in gains were recognized as a result of the discontinuance of cash flow hedge accounting because it was no longer probable that the hedge forecasted transaction would occur. The Company recognized $3.7 million and $6.7 million of gains in product revenue for the settlement of certain effective cash flow hedge instruments for the three and six months period ended June 30, 2001, respectively. The Company recognized $974,000 and $1.8 million of gains in royalty revenue for the settlement of certain effective cash flow hedge instruments for the three and six months period ended June 30, 2001, respectively. The Company recognized $2.3 million and $4.8 million of gains in product revenue for the settlement of certain effective cash flow hedge instruments for the three and six months period ended June 30, 2000, respectively. The Company recognized $426,000 and $1.1 million of gains in royalty revenue for the settlement of certain effective cash flow hedge instruments for the three and six months period ended June 30, 2000, respectively. These settlements were recorded in the same period as the related forecasted transactions affecting earnings. 3. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net income, such as translation adjustments and unrealized holding gains and losses on available-for-sale marketable securities, net of tax and certain derivative instruments, net of tax. Comprehensive income for the three months ended June 30, 2001 and 2000 was $79.1 million and $77.1 million, respectively. Comprehensive income for the six months ended June 30, 2001 and 2000 was $135.3 million and $177.4 million, respectively. 4. EARNINGS PER SHARE The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and warrants. Options to purchase approximately 2.1 million and 1.7 million shares were outstanding at June 30, 2001 and 2000, respectively, but not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price during the period. The put warrants sold in 7 8 connection with the Company's stock repurchase program did not have a significant additional dilutive effect. Shares used in calculating basic and diluted earnings per share for the three and six month periods ending June 30, are as follows:
Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2001 2000 2001 2000 ------- ------- ------- ------- Weighted average number of shares of common stock outstanding 148,602 148,643 148,395 149,501 Dilutive stock options 4,735 5,507 5,019 6,430 ------- ------- ------- ------- Shares used in calculating diluted earnings per share 153,337 154,150 153,414 155,931 ======= ======= ======= =======
5. SHARE REPURCHASE PROGRAM On December 18, 2000, the Company announced that its Board of Directors had authorized the repurchase of up to 4 million shares of the Company's common stock. The repurchased stock will provide the Company with treasury shares for general corporate purposes, such as stock to be issued under employee stock option and stock purchase plans. Stock purchases are expected to occur from time to time through out 2001. To enhance the 2000 stock repurchase program, the Company entered into agreements with independent third parties under which the Company committed to purchase up to 1,500,000 shares of the Company's stock subject to the terms of the agreements at strike prices ranging from $57.82 to $63.06. The Company purchased 328,000 shares through June 30, 2001 at a cost of $21.4 million. The agreements permit a net share settlement at the Company's option. In November of 2000, the Company completed a previous stock repurchase program. During 2000, the Company repurchased approximately 4.6 million shares of its common stock under this program at a cost of $300.2 million. 6. OTHER INCOME, NET Other income, net consists of the following (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Interest income $ 10,694 $ 10,370 $ 22,479 $ 21,107 Interest expense (1,051) (1,080) (2,089) (2,185) Other income 1,890 7,447 7,606 96,839 --------- --------- --------- --------- Total other income, net $ 11,533 $ 16,737 $ 27,996 $ 115,761 ========= ========= ========= =========
Other income for the three and six months ended June 30, 2001 includes gains on the sale of certain non-current marketable securities totaling approximately $781,000 and $3.3 million, respectively. Other income for the three and six months ended June 30, 2000 includes gains on the sale of certain non-current marketable securities totaling approximately $8.7 million and $101.1 million, respectively. 7. INCOME TAX EXPENSE Income tax expense as a percentage of pre-tax income for the three months ended June 30, 2001 and 2000 was approximately 30% and 31%, respectively. Income tax expense as a percentage of pre-tax income for the six months ended June 30, 2001 and 2000 was approximately 30% and 33%, respectively. The effective tax rate varied from the U.S. statutory rates for the first six months of 2001 and 2000 primarily due to higher sales in European jurisdictions with lower tax rates and the utilization of research and development credits. The Company's effective tax rate outside the U.S. is lower than the U.S. tax rate, and 8 9 the Company expects that the U.S. tax rate will decline as a percentage of its total tax rate as international sales increase. 8. LITIGATION On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent (U.S. Patent No. 5,376,567) in the United States in the production of Biogen's AVONEX(R) (Interferon beta-1a) product. In November 1996, Berlex's New Jersey action was transferred to the United States District Court in Massachusetts and consolidated for pre-trial purposes with a related declaratory judgment action previously filed by Biogen. On August 18, 1998, Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent (U.S. Patent No. 5,795,779). On September 23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex sought a judgment granting it damages, trebling of any damages awarded and a permanent injunction restraining Biogen from the alleged infringement. A hearing on the parties' summary judgment motions in the case was completed in March 2000. In September 2000, the District Court rendered final judgment in favor of Biogen and against Berlex determining that Biogen's production of AVONEX(R) did not infringe any of the claims of the Berlex patents. Berlex has appealed this decision to the Court of Appeals for the Federal Circuit and the parties have briefed the appeal for oral argument. The Company filed a contingent cross-appeal asserting that the Berlex patents are invalid because they fail to meet one of the statutory requirements of patentability. An unfavorable ruling on the appeal filed by Berlex could result in the case being remanded to the District Court for trial. If Berlex were to be successful in its appeal and the case were to be remanded, an unfavorable ruling in the remanded case could have a material adverse effect on the Company's results of operations and financial position. The Company believes that the decision of the District Court that Biogen does not infringe the Berlex patents is sound, but the ultimate outcome of the appeal is not currently determinable. As a result, an estimate of any potential loss or range of loss cannot be made at this time. In 1995, the Company filed an opposition with the Opposition Division of the European Patent Office to oppose a European patent (the "Rentschler I Patent") issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler") relating to compositions of matter of beta interferon. In 1997, the European Patent Office issued a decision to revoke the Rentschler I Patent. Rentschler appealed that decision and an oral hearing on the appeal took place in December 2000. At the oral hearing in order to gain reinstatement of the patent, Rentschler narrowed the patent claims so as to claim only a specific cell line. Biogen does not use the specific cell line now claimed. On October 13, 1998, the Company filed another opposition with the Opposition Division of the European Patent Office to oppose a second European patent issued to Rentschler (the "Rentschler II Patent") with certain claims regarding compositions of matter of beta interferon with specific regard to the structure of the glycosylated molecule. A hearing on the Company's opposition may be held in 2001. While Biogen believes that the Rentschler II Patent will be revoked, if the Rentschler II Patent were to be upheld and if Rentschler were to obtain, through legal proceedings, a determination that the Company's sale of AVONEX(R) in the European countries giving effect to the patent infringes a valid claim of the patent, such result could have a material adverse effect on the Company's results of operation and financial position. 9. SEGMENT INFORMATION The chief operating decision makers review the profit and loss of the Company on an aggregate basis and manage the operations of the Company as a single operating segment. Accordingly, the Company operates in one segment, which is the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives product revenues from sales of its AVONEX(R) (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis. The Company also derives revenue from royalties on worldwide sales by the Company's licensees of a number of products covered under patents controlled by the Company, including alpha interferon and hepatitis B vaccines and diagnostic products. 10. NEW ACCOUNTING PRONOUNCEMENT In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's financial statements is not expected to be material. 9 10 BIOGEN, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Biogen, Inc. (the "Company" or "Biogen") is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives revenues from sales of its AVONEX(R) (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis ("MS"). The Company also derives revenue from royalties on worldwide sales by the Company's licensees of a number of products covered under patents controlled by the Company, including alpha interferon and hepatitis B vaccines and diagnostic products. RESULTS OF OPERATIONS For the quarter ended June 30, 2001, the Company reported net income of $71.9 million or $0.47 per diluted share as compared to $72.1 million or $0.47 per diluted share for the comparable period of 2000. For the six months ended June 30, 2001, the Company reported net income of $144 million or $0.94 per diluted share as compared to $193.4 million or $1.24 per diluted share for the comparable period of 2000. Total revenues for the quarter ended June 30, 2001 were $260.7 million, as compared to $230.5 million in the same period of 2000, an increase of $30.2 million or approximately 13%. Total revenues for the six months ended June 30, 2001 were $497.7 million, as compared to $447.4 million in the same period of 2000, an increase of $50.3 million or approximately 11%. Product revenues in the current quarter were $243.2 million as compared to $190 million for the same period of 2000, an increase of $53.2 million or approximately 28%. Product revenues in the six months ended June 30, 2001 were $463.2 million as compared to $364.6 million for the same period of 2000, an increase of $98.6 million or approximately 27%. Product revenues from AVONEX(R) represent approximately 93% of the Company's total revenues in the current quarter and six months ended June 30, 2001 as compared to 82% for the three and six month periods of 2000. The growth in the three and six month periods ended June 30, 2001 over the comparable periods in 2000 was primarily attributable to increases in the sales volume of AVONEX(R) in the United States and in the fifteen member countries of the European Union ("EU"). AVONEX(R) sales outside of the United States were approximately $70 million and $128.2 million in the three and six months ended June 30, 2001 as compared to $51.2 million and $99.5 million in the same periods of 2000, respectively. Revenues from royalties in the three months ended June 30, 2001 were $17.4 million, a decrease of $23.1 million or approximately 57% as compared to $40.5 million of royalty revenue for the same period in 2000. Revenues from royalties in the six months ended June 30, 2001 were $34.5 million, a decrease of approximately 58% as compared to $82.8 million of royalty revenue for the same period in 2000. Revenues from royalties represented approximately 7% of total revenues for the three and six months ended June 30, 2001 as compared to 18% for the same periods in 2000. COSTS AND EXPENSES Total costs and expenses for the three months ended June 30, 2001 were $169.6 million as compared to $143.4 million in the same period of 2000, an increase of approximately 18%. Total costs and expenses for the six months ended June 30, 2001 were $320.1 million as compared to $276.2 million in the same period of 2000, an increase of approximately 16%. Cost of revenues in the three months ended June 30, 2001 totaled $35.2 million compared to $30.8 million in the same period of 2000, an increase of $4.4 million or 14%. Cost of revenues in the six months ended June 30, 2001 totaled $64.3 million compared to $59.4 million in the same period of 2000, an increase of $4.9 million or 8%. The increase in cost of revenues was attributable to the higher sales volume of 10 11 AVONEX(R). Included in cost of revenues for the three months ended June 30, 2001 and 2000 is $33.9 million and $27.5 million, respectively, of costs related to product revenues and $1.3 million and $3.3 million, respectively, of costs related to royalty revenue. Included in cost of revenues for the six months ended June 30, 2001 and 2000 is $62.2 million and $53.5 million, respectively, of costs related to product revenues and $2.1 million and $5.9 million, respectively, of costs related to royalty revenue. Gross margins on product revenues remained constant at approximately 86% for the three months ended June 30, 2001 compared to the same period in 2000. Gross margins on product revenues increased to approximately 87% for the six months ended June 30, 2001 compared to 85% in the same period in 2000. Gross margins on royalty revenue increased to approximately 93% for the three months ended June 30, 2001 compared to 92% for the same period in 2000. Gross margins on royalty revenue increased to approximately 94% for the six months ended June 30, 2001 compared to 93% in the same period in 2000. The Company expects that gross margins on royalty revenue will fluctuate in the future based on changes in sales volumes for specific products. Research and development expenses in the current quarter were $79.1 million, an increase of $7.4 million or 10% as compared to $71.7 million in the same period of 2000. Research and development expenses in the six months ended June 30, 2001 were $151.9 million, an increase of $17.2 million or 13% as compared to $134.7 million in the same period of 2000. The increase was primarily due to an increase in clinical trial costs and the costs associated with an increase in the Company's other development efforts related to its ongoing research and development programs. The Company expects that, in the near and long-term, research and development expenses will increase as the Company continues to expand its development efforts with respect to new products, conducts clinical trials of these products and continues work on new formulations and delivery methods for AVONEX(R). Selling, general and administrative expenses in the second quarter of 2001 were $55.3 million, an increase of $14.4 million or 35% as compared to the same period of 2000. Selling, general and administrative expenses in the six months ended June 30, 2001 were $103.8 million, an increase of $21.7 million or 26% compared to the same period of 2000. This increase was primarily due to an increase in selling and marketing expenses related to the sale of AVONEX(R). The Company expects that selling, general and administrative expenses will continue to increase in the near term as the Company continues to expand its sales and marketing organizations and efforts necessary to sell AVONEX(R) worldwide. OTHER INCOME, NET Other income, net consists primarily of interest income, partially offset by interest expenses and other non-operating income and expenses. Other income, net in the current quarter of 2001 was $11.5 million as compared to $16.7 million in 2000, a decrease of $5.2 million. Other income, net in the six months ended June 30, 2001 was $28 million as compared to $115.8 million in 2000, a decrease of $87.8 million. Interest income for the three months ended June 30, 2001 was $10.7 million compared to $10.4 million in the same period of 2000, an increase of $0.3 million or 3%. Interest income for the first six months of 2001 was $22.5 million compared to $21.1 million in the same period of 2000, an increase of $1.4 million or 7% due primarily to higher average yields and an increase in funds invested. The Company expects interest income to vary based on changes in the amount of funds invested and fluctuations in interest rates. In the three months ended June 30, 2001 interest expense was $1.1 million, comparable to the same period in 2000. In the six months ended June 30, 2001 interest expense decreased to $2.1 million from $2.2 million compared to the same period in 2000. Other income for the three and six months ended June 30, 2001 includes gains on the sale of certain non-current marketable securities totaling approximately $781,000 and $3.3 million, respectively. Other income decreased by $5.6 million in the first three months of 2001 from the same period in 2000. Other income decreased by $89.2 million in the six months ended June 30, 2001 from the same period in 2000. The decrease in other income is due primarily to the sale of certain non-current marketable securities generating gains of approximately $8.7 million and $101.1 million in the three and six months ended June 30, 2000. 11 12 Other income, net consists of the following (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Interest income $ 10,694 $ 10,370 $ 22,479 $ 21,107 Interest expense (1,051) (1,080) (2,089) (2,185) Other income (expense) 1,890 7,447 7,606 96,839 --------- --------- --------- --------- Total other income, net $ 11,533 $ 16,737 $ 27,996 $ 115,761 ========= ========= ========= =========
INCOME TAXES Income tax expense as a percentage of pre-tax income for the three months ended June 30, 2001 and 2000 was approximately 30% and 31%, respectively. Income tax expense as a percentage of pre-tax income for the six months ended June 30, 2001 and 2000 was approximately 30% and 33%, respectively. During the three and six months ended June 30, 2001 and 2000, the Company recognized gains on the sale of certain non-current marketable securities. Excluding the tax effect on these gains the Company's effective tax rate for the three and six months ended June 30, 2001 and 2000 was approximately 30%. The effective tax rate varied from the U.S. statutory rates for the first six months of 2001 and 2000 primarily due to higher sales in European jurisdictions with lower tax rates and the utilization of research and development credits. The Company's effective tax rate outside the U.S. is lower than the U.S. tax rate, and the Company expects that the U.S. tax rate will decline as a percentage of its total tax rate as international sales increase. FINANCIAL CONDITION At June 30, 2001, cash, cash equivalents and short-term marketable securities were $760 million compared with $682.4 million at December 31, 2000, an increase of $77.6 million. Working capital increased $84.9 million to $792.2 million. Net cash from operating activities for the period ended June 30, 2001 was $172.2 million compared with $181.5 million for the same period in 2000. Cash outflows from investing activities during the first six months of 2001 included investments in property and equipment and patents of $93.3 million. Net cash outflows from investing activities related to marketable securities was $45 million. Significant cash outflows from financing activities included $21.4 million for purchases of the Company's common stock under its stock repurchase program and $2.4 million for repayments on loan agreements with banks. Cash inflows included $17.2 million from common stock option exercises and employee stock purchase plan activity. On December 18, 2000, the Company announced that its Board of Directors had authorized the repurchase of up to 4 million shares of the Company's common stock. The repurchased stock will provide the Company with treasury shares for general corporate purposes, such as stock to be issued under employee stock option and stock purchase plans. Stock purchases are expected to occur from time to time through out 2001. To enhance the 2000 stock repurchase program, the Company entered into agreements with independent third parties under which the Company committed to purchase up to 1,500,000 shares of the Company's stock subject to the terms of the agreements at strike prices ranging from $57.82 to $63.06. The Company purchased 328,000 shares through June 30, 2001 at a cost of $ 21.4 million. The agreements permit a net share settlement at the Company's option. In November of 2000, the Company completed a previous stock repurchase program. During 2000, the Company repurchased approximately 4.6 million shares of its common stock under this program at a cost of $300.2 million. On October 4, 1999, the Company began construction of its new research and development center in Cambridge, Massachusetts. The new 224,000 square foot building was completed in the spring of 2001 at a total cost of approximately $95 million, of which $87.7 million had been committed at June 30, 2001. Additionally, the Company is building a large scale manufacturing plant in Research Triangle Park, North Carolina. The Company expects that construction will be completed at the end of 2001 at a total cost of approximately $175 million, of which $164 million had been committed at June 30, 2001. 12 13 Several legal proceedings were pending during the current quarter, which involve the Company. See Note 8 of the Notes to the Condensed Consolidated Financial Statements. See also Item 1 - Business, "Patents and Other Proprietary Rights" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for discussions of these legal proceedings. The Company believes that existing funds and cash generated from operations are adequate to satisfy its working capital and capital expenditure requirements in the foreseeable future. However, the Company may raise additional capital to take advantage of favorable conditions in the market or in connection with the Company's development activities. NEW ACCOUNTING PRONOUNCEMENT In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's financial statements is not expected to be material. OUTLOOK SAFE HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Reference is made in particular to forward-looking statements regarding the anticipated level of future product sales, royalty revenues, expenses and profits and predictions as to the anticipated outcome of pending litigation and patent-related proceedings. These and all other forward-looking statements are made based on the Company's current belief as to the outcome and timing of such future events. Factors which could cause actual results to differ from the Company's expectations and which could negatively impact the Company's financial condition and results of operations are discussed below and elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations. DEPENDENCE ON AVONEX(R) SALES The Company's ability to sustain increases in revenues and profitability in the near term will be primarily dependent on the level of revenues and profitability from AVONEX(R) sales. The Company's ability to sustain profitability from sales of AVONEX(R) will depend on a number of factors, including: continued market acceptance of AVONEX(R) worldwide; the Company's ability to maintain a high level of patient satisfaction with AVONEX(R); the nature of regulatory and pricing decisions related to AVONEX(R) worldwide; the extent to which AVONEX(R) receives and maintains reimbursement coverage; successful resolution of the lawsuit with Berlex related to the "McCormick" patents, which if ultimately decided in Berlex's favor could have a material adverse effect on the Company's financial position and results of operations; success in revoking the Rentschler patent since if the patent were to be upheld and if Rentschler were to obtain, through legal proceedings, a determination that the Company's sale of AVONEX(R) in Europe infringes a valid Rentschler patent, such result could have a material adverse effect on the Company's results of operation and financial condition; the success of ongoing development work related to AVONEX(R) in expanded MS indications; the continued accessibility of third parties to vial, label, and distribute AVONEX(R) on acceptable terms; and the Company's ability to sustain market share of AVONEX(R) in light of the impact of competitive products for the treatment of MS. In the United States, one of the Company's competitors, Serono Laboratories, Inc. ("Serono"), is conducting a 12-month head-to-head study of Rebif(R), a recombinant interferon beta-1a product and AVONEX(R) to determine if Rebif(R) is clinically superior to AVONEX(R). Preliminary results of the study were released by Serono in the second quarter of 2001. At that time Serono stated that it will use the results of this study in its attempts to overcome the orphan drug status of AVONEX(R) and to get Rebif(R) approved before expiration of AVONEX's(R) orphan drug status. If Serono is successful, competition in the United States multiple sclerosis marketplace will increase. ROYALTY REVENUE The Company receives royalty revenues which contribute a significant amount to its overall profitability. The Company expects to continue to experience a decline in royalty revenues as a result of patent expirations and other patent-related events in the range of up to approximately $10 million per quarter for 2001 (not including amounts that are subject to a royalty dispute with Schering-Plough Corporation ("Schering-Plough") as discussed below). See "Outlook - Patents and Other Proprietary Rights" in the Company's Annual Report on Form 10-K for the 13 14 period ended December 31, 2000. The Company expects the most significant decline to be in the amount of royalties received from Schering-Plough on sales of INTRON(R) A as the result of patent expirations in the EU and Japan and the royalty dispute with Schering-Plough in the United States. The extent of the decline in royalties related to United States sales of INTRON(R) A will depend on the outcome of a dispute with Schering-Plough. Schering-Plough has taken the position that a Court of Appeals' decision narrowing the scope of the claims of Biogen's United States alpha interferon patent (the "901 Patent") permits it to discontinue payment of royalties on U.S. sales of its alpha interferon products. Biogen has filed for arbitration to compel payment of unpaid past royalties and to ensure payment of royalties due in the future under a license agreement. Given Schering-Plough's history of taking aggressive positions in contract interpretation, Biogen has included claims which would resolve issues related to future royalty payments to pre-empt any potential challenges by Schering-Plough. These claims include Schering-Plough's obligation to commence royalty payments in July 2002 (the expiration date of the 901 Patent) based on a patent application owned by F. Hoffman-LaRoche ("Roche") and Genentech, Inc. ("Genentech"). The agreement between Biogen and Schering-Plough extending Schering-Plough's royalty obligation beyond the expiration date of the 901 Patent was part of the settlement of a lawsuit between Biogen and Roche/Genentech. In return for Schering-Plough's agreement to extend its royalty obligation, Biogen settled the lawsuit with Roche/Genentech and Roche granted Schering Plough an exclusive license for Schering-Plough to sell its products under the Roche/Genentech patent right that was the subject of the dispute. Biogen intends to vigorously oppose Schering-Plough's attempts to discontinue payment of royalties. If Schering-Plough were to prevail in arbitration, the resulting decline in royalties on United States sales of alpha interferon products will range up to approximately an additional $10 million per quarter until July 2002. There are a number of other factors which could also cause the actual level of royalty revenue to differ from the Company's expectations. For example, pricing reforms, health care reform initiatives, other legal and regulatory developments and the introduction of competitive products may have an impact on product sales by the Company's licensees. In addition, sales levels of products sold by the Company's licensees may fluctuate from quarter to quarter due to the timing and extent of major events such as new indication approvals or government sponsored programs. Since the Company is not involved in the development or sale of products by its licensees, the Company can not be certain of the timing or potential impact of factors which may affect sales by the Company's licensees. In the long term, the Company expects its royalty revenue to be affected most significantly by patent expirations and a potential decrease in sales by licensees of licensed products. See "Outlook - Patents and Other Proprietary Rights." There can be no assurance that the Company will achieve a positive outcome with respect to any of the factors discussed in this Section or that the timing and extent of the Company's success with respect to any combination of these factors will be sufficient to result in sustained increases in revenues or profitability or the sustained profitability of the Company. For a further discussion of risks regarding drug development, patent matters, including the Berlex lawsuit on the "McCormick" patents and the Amgen appeal, competition in the MS market and regulatory matters, see the Company's Annual Report on Form 10-K for the period ended December 31, 2000 under the headings "Business - Risks Associated with Drug Development", "Business - Patents and Other Proprietary Rights", "Business - - Competition and Marketing - AVONEX(R) (interferon beta-1a)", "Business - Regulation", "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook." PRODUCTS AVONEX(R) is currently the only product sold by the Company. The Company's long-term viability and growth will depend on the successful development and commercialization of other products from its research activities and collaborations. The Company continues to expand its development efforts related to other potential products in its pipeline. The expansion of the pipeline may include increases in spending on internal projects, the acquisition of third-party technologies or products or other types of investments. Product development involves a high degree of risk. Only a small number of research and development programs result in the commercialization of a product. Success in preclinical and early clinical trials does not ensure that later stage or large scale clinical trials will be successful. Many important factors affect the Company's ability to successfully develop and commercialize drugs, including the ability to obtain and maintain necessary patents and licenses, to demonstrate safety and efficacy of drug candidates at each stage 14 15 of the clinical trial process, to overcome technical hurdles that may arise, to meet applicable regulatory standards, to receive required regulatory approvals, to be capable of producing drug candidates in commercial quantities at reasonable costs, to obtain reimbursement coverage for the products, to compete successfully against other products and to market products successfully. There can be no assurance that the Company will be successful in its efforts to develop and commercialize new products. Patents and Other Proprietary Rights The Company has numerous issued patents and patent applications pending on a number of its processes and products. The Company has also obtained rights to certain patents under licenses with third parties which provide for the payment of royalties. There can be no assurance that the Company's existing patents or others, if obtained, will provide substantial protection or commercial benefit to the Company. In addition, the Company does not know to what extent its pending patent applications or patent applications licensed from third parties will be granted or whether any of its patents will prevail if they are challenged in litigation. Also, there can be no assurance that third parties will not be granted patents claiming subject matter necessary to the Company's business. The Company is aware of certain patents held by Genentech relating to immunoadhesion technology that may cover the Company's AMEVIVE(TM) product. The Company has had discussions with Genentech regarding licensing and is evaluating these patents to determine if a license should be taken. The Company has granted an exclusive worldwide license to Schering-Plough under its alpha interferon patents. Schering-Plough's royalty obligation to the Company under these patents is discussed above in "Royalty Revenue". The Company has licensed its recombinant hepatitis B antigen patent rights to manufacturers and marketers of hepatitis B vaccines and diagnostic test kits, and receive royalties on sales of the vaccines and test kits by the Company's licensees. The obligation of SmithKline Beecham Biological S.A. and Merck & Co., Inc. to pay royalties on sales of hepatitis B vaccines and the obligation of the Company's other licensees under the Company's hepatitis B patents to pay royalties on sales of diagnostic products will terminate upon expiration of the Company's hepatitis B patents. In August 2001 a United States patent was issued to the Company covering a pharmaceutical composition for stimulating production of antibodies in humans against a hepatitis B virus, a method of using the pharmaceutical composition, a diagnostic kit for detecting antibodies against a hepatitis B virus, and an in vitro method for detecting antibodies against a hepatitis B virus. This patent will expire in 2018. The Company's European hepatitis B patents expired at the end of 1999, except in those countries in which the Company obtained supplemental protection certificates. The Company has received supplemental protection certificates in Australia, Belgium, France, Great Britain, Ireland, Italy, Luxembourg, The Netherlands, Sweden and Switzerland, and has a number of granted or pending registrations of the Great Britain supplementary protection certificates in various British territories. The additional coverage afforded by supplemental protection certificates, or related registrations, ranges from two to eight years. There can be no assurance as to the extent of coverage available under the supplemental protection certificates, or that protection will be available in additional countries. 15 16 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders (a) The information set forth in this Item 4 relates to matters submitted to a vote at the Annual Meeting of Stockholders of Biogen, Inc. on June 15, 2001. (b) Not applicable. (c) A proposal to elect Alan Belzer, Mary L. Good, Sir Kenneth Murray and James W. Stevens as directors to serve for a three year term ending in 2004 and until their successors are duly elected and qualified was approved with the following vote:
Nominee For Abstains ------- --- -------- Alan Belzer 119,822,165 956,941 Mary L. Good 119,787,484 991,622 Sir Kenneth Murray 119,796,502 982,604 James W. Stevens 119,816,288 962,818
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending December 31, 2001 was approved with 119,668,561 affirmative votes, 632,723 negative votes, and 477,822 abstentions. (d) Not applicable. Item 5 - Other Information None. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits No. 10 1985 Non-Qualified Stock Option Plan (as amended and restated through April 27, 2001). (b) None. 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. BIOGEN, INC. Dated: August 14, 2001 /s/ Peter N. Kellogg ----------------------------------------- Vice President - Finance and Chief Financial Officer 17 EX-10 3 b40015biex10.txt 1985 NON-QUALIFIED STOCK OPTION PLAN 1 Exhibit 10 BIOGEN, INC. 1985 NON-QUALIFIED STOCK OPTION PLAN (AS AMENDED AND RESTATED THROUGH APRIL 27, 2001) I. PURPOSE OF THE PLAN The Plan is intended to encourage ownership of shares of Common Stock of the Company by certain employees and Directors of the Company and its Affiliates and to provide an additional incentive to those employees and Directors to promote the success of the Company and its Affiliates. II. DEFINITIONS 1. "Affiliate" means (a) a corporation in respect of which the Company owns directly or indirectly fifty percent (50%) or more of the voting securities thereof or which is otherwise controlled by the Company; or (b) to the extent not inconsistent with Section 423(a) of the Internal Revenue Code of 1986, as amended, an unincorporated trade or business controlled by the Company which has elected, for federal income tax purposes, to be either (i) classified as an association taxable as a corporation or (ii) disregarded as an entity separate from its owner (as provided in Section 301.7701-3 of the federal income tax regulations). For purposes of this definition, the Company shall be deemed to control another entity if the Company possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities, by contract or otherwise. 2. "Committee" means the Stock and Option Plan Administration Committee of the Board of Directors of the Company. 3. "Company" means Biogen, Inc., a Massachusetts corporation. 4. "Corporate Change in Control" shall be deemed to have occurred upon: (i) the acquisition of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the Exchange Act) of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities by a person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (excluding for this purpose, the Company or its Affiliates, or any employee benefit plan of the Company), pursuant to a transaction or series of related transactions which the Board of Directors does not approve; or (ii) at such time as individuals who as of April 27, 2001 constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute a majority of the Board of Directors of the Company, provided that any person becoming a director subsequent to April 27, 2001 whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board, shall, for purposes of the Plan, be considered as though such person were a member of the Incumbent Board (other than an individual 2 whose initial assumption of office is in connection with an actual or threatened election contest related to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) the occurrence of any other event which the Incumbent Board in its sole discretion determines should be considered a Corporate Change of Control; 5. "Corporate Transaction" shall mean the following unless and until the transaction becomes a Corporate Change of Control: (i) a reorganization, recapitalization, merger or consolidation unless more than fifty percent (50%) of the Company's outstanding voting stock or the voting stock of the corporation resulting from the transaction (or the parent of such corporation) is held subsequent to the transaction by the persons who held the stock of the Company immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company to a successor in interest to the business of the Company. 6. "Designated Employee" shall mean an employee or Director of the Company designated by the Committee, in its sole discretion, as a "Designated Employee" for purposes of this Plan at any time prior to the effective date of a Corporate Transaction. 7. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 8. "For Cause" shall have the meaning set forth in Section VI (F). 9. "Incumbent Board" shall have the meaning set forth in the definition of "Corporate Change of Control." 10. "Involuntary Employment Action" shall have the meaning set forth in Section VI(Q). 11. "ISO Plan" shall have the meaning set forth in Article III. 12. "Option" means a stock option granted under this Plan. 13. "Plan" shall mean this 1985 Non-Qualified Stock Option Plan. 14. "Retirement" shall have the meaning set forth in Section VI(I). III. SHARES SUBJECT TO THE PLAN The aggregate number of shares as to which Options may be granted from time to time shall be 49,208,000 of the shares of Common Stock of the Company (par value $.01); provided, 2 3 however that such aggregate number shall be reduced by the number of shares which has been sold under, or may be sold pursuant to options granted from time to time under, the Company's 1982 Incentive Stock Option Plan (the "ISO Plan"), to the same extent as if such sales had been made or options granted pursuant to this Plan. If any option granted under this Plan or the ISO Plan ceases to be "outstanding", in whole or in part, other than by reason of the exercise of such option, the shares which were subject to such option shall be available for the granting of other Options. Any option shall be treated as "outstanding" until such option is exercised in full, terminates under the provisions of this Plan or the ISO Plan, as the case may be, or expires by reason of lapse of time. The aggregate number of shares as to which Options may be granted shall be subject to change only by means of an amendment adopted in accordance with Article XI below, subject to the provisions of Article VIII. IV. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Committee. The membership of the Committee shall be determined, and shall be subject to change without cause and without notice from time to time, by the Board of Directors of the Company. The Committee is authorized to interpret the provisions of the Plan or of any Option and to make all rules and determinations necessary or advisable for the administration of the Plan. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted under it shall be final, unless otherwise determined by the Incumbent Board. The Committee's determinations under the Plan do not need to be uniform and may be made by it selectively among persons who receive, or are eligible to receive Options under the Plan (whether or not such persons are similarly situated). Subject to the provisions of the Plan, Options may be granted upon such terms and conditions as the Committee may prescribe. This Plan is intended to comply in all respects with Rule 16b-3 or its successors promulgated under the Securities Exchange Act of 1934 ("1934 Act") with respect to participants who are subject to Section 16 of the 1934 Act, and any provision in this Plan with respect to such persons contrary to Rule 16b-3 shall be deemed null and void to the extent permissible by law and deemed appropriate by the Committee. V. ELIGIBILITY FOR PARTICIPATION The Committee shall determine which employees and Directors shall be eligible to participate in the Plan. Without limiting the generality of the foregoing, Options may be awarded for reasons of performance, merit, promotion, bonus or upon new employees joining the Company or any Affiliate. The Committee may grant to one or more such employees or Directors one or more Options, and shall designate the number of shares to be optioned under each Option so granted; 3 4 provided, however, that no Options shall be granted after December 31, 2002. In no event shall any employee be granted in any calendar year options to purchase or receive more than 2,400,000 shares of the Company's Common Stock pursuant to this Plan. VI. TERMS AND CONDITIONS OF OPTIONS No Option issued pursuant to this Plan shall be an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. Each Option shall be set forth in writing in an Option agreement, duly executed on behalf of the Company and by the person to whom such Option is granted. No Option shall be deemed to have been granted and no purported grant of any Option shall be effective until such Option shall have been approved by the Committee. The Committee may provide that Options be granted subject to such conditions as the Committee may deem appropriate, including without limitation, subsequent approval by the shareholders of the Company of this Plan or any amendments thereto. Each such Option agreement shall be subject to at least the following terms and conditions: A. Option Price: Except as otherwise determined by the Committee, the Option price per share for Options granted under the Plan shall be equal to the fair market value per share of Common Stock on the date of grant of the Option; provided, however, that in no event shall the Option price be less than the par value per share of Common Stock. Fair market value shall be the average of the "high" and "low" sale prices as reported in the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for the date of grant of the Option or, if none, for the most recent trading date thirty (30) days or less prior to the date of grant of the Option on which the Common Stock was traded. B. Term of Option: Each Option shall terminate not more than ten (10) years from the date of the grant thereof, or at such earlier or later time as the Committee shall expressly resolve. C. Date of Exercise: The Committee may prescribe the date or dates on which the Option becomes exercisable, and may provide that the Option rights accrue or become exercisable in installments over a period of months or years, or upon the attainment of stated goals. The Committee shall have the right to accelerate the date of exercise of any installment of any Option. D. Cancellation and Repurchase Rights: The Committee may stipulate that any Option which becomes exercisable shall be subject to cancellation or that shares purchased upon the exercise of such Option shall be subject to repurchase rights in favor of the Company. In such event the Committee shall determine the date or dates, or event or events, upon which such cancellation or repurchase rights shall become effective or shall lapse, as the case may be. E. Medium of Payment: The Option price shall be payable upon the exercise of the Option. It shall be payable in cash, or, if permitted by the Committee, in shares held by the Option holder for at least six months or other consideration. 4 5 F. Termination of Employment: An Option holder who ceases (for any reason other than death, total and permanent disability, Retirement or termination of employment for cause) to be an employee or Director of the Company or of an Affiliate may exercise any Option granted to the extent that the right to purchase shares thereunder has accrued on the date of such termination. Such Option shall be exercisable only within three (3) months after such date of termination, or, if earlier, within the originally prescribed term of the Option, unless the Committee shall authorize a different period. Employment shall not be deemed terminated by reason of a transfer to another employer which is the Company or an Affiliate. If any Option is not exercised following the Option Holder's termination within the time specified, the Option shall terminate and the shares covered by such Option shall revert to the Plan. An Option holder whose employment with the Company or an Affiliate is terminated by his/her employer for cause or a Director who is removed from the Board of Directors for cause shall forthwith upon such termination cease to have any right to exercise any Option, and the Option shall terminate and the shares covered by such option shall revert to the Plan. For purposes of this Plan, termination "for cause" shall be deemed to include dishonesty with respect to the employer, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Committee as to the existence of cause shall be conclusive. An Option holder to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability, or who is on a permitted leave of absence for any purpose, shall not, during the period of any such absence, be deemed by virtue of such absence alone, to have terminated his employment with the Company or with an Affiliate except as the Committee may otherwise expressly provide. G. Total and Permanent Disability: If an Option holder ceases to be an employee or Director of the Company or of an Affiliate by reason of total and permanent disability, as determined by the Committee, any Option held by him or her on the date of disability shall be exercisable as to all or any part of the shares subject to the Option, all of which shares shall be fully vested as of the date of such disability. A disabled Option holder may exercise such Option only within a period of one (1) year after the date as of which the Committee determines that he or she became disabled or within such different period as may be determined by the Committee, or, if earlier, within the originally prescribed term of the Option. If any Option is not exercised following the Option Holder's total and permanent disability within the time specified, the Option shall terminate and the shares covered by such Option shall revert to the Plan. H. Death: If an Option holder dies while the Option holder is an employee or Director of the Company or of an Affiliate, any Option held by him or her at the date of death shall be exercisable as to all or any part of the shares subject to the Option, all of which shares shall be fully vested as of the date of the Option holder's death. A deceased Option holder's legal representatives or one who acquires the Option by will or by the laws of descent and distribution may exercise such Option only within a period of one (1) year after the date of death or within such different period as may be determined by the Committee, or, if earlier, within the originally 5 6 prescribed term of the Option. If any Option is not exercised following the Option Holder's death within the time specified, the Option shall terminate and the shares covered by such Option shall revert to the Plan. I. Retirement: Unless otherwise provided by the Committee, immediately upon an Option holder's Retirement, such individual's then unvested Options, including those held by a permitted transferee of such individual, shall automatically accelerate and become fully vested for fifty percent (50%) of the number of shares covered by such unvested Options and for an additional ten percent (10%) of the number of shares covered by such unvested Options for every year of employment by the Company or any of its Affiliates beyond ten (10) years, up to the remaining number of unvested Options. Upon Retirement, a retired Option holder (or permitted transferee of such individual) may exercise any then outstanding Options solely to the extent the right to purchase shares has accrued or has been accelerated only within a period of one (1) year after the date of Retirement or within such different period as may be determined by the Committee, or, if earlier, within the originally prescribed term of the Option. If any Option is not exercised following the Option Holder's Retirement within the time specified, the Option shall terminate and the shares covered by such Option shall revert to the Plan. For purposes of the Plan, the term "Retirement" as to any employee or Director of the Company or any of its Affiliates shall mean such person's leaving the employment of the Company and its Affiliates after reaching age 55 with ten (10) years of service with the Company or its Affiliates, but not including pursuant to any termination for cause or pursuant to any termination for insufficient performance, as determined by the Company. The provisions of this Section I shall be retroactive and shall apply to all outstanding Options granted under the Plan, regardless of the date of grant. J. Exercise of Option and Issue of Shares: Options shall be exercised by giving written notice to the Company, addressed to the Company at the address specified by the Company, with which the Option holder shall tender the Option price. Such written notice shall be signed by the person exercising the Option, shall state the number of shares with respect to which the Option is being exercised, and shall contain any warranty required by Article VII of the Plan. The issuance of the Option shares may be delayed by the Company if any law or regulation requires the Company to take any action with respect to the Option shares prior to the issuance thereof. Without limiting the generality of the foregoing, nothing contained herein shall be deemed to require the Company to issue any Option shares if prohibited by law or applicable regulation. The shares shall, upon issuance, be evidenced by an appropriate certificate or certificates in respect of paid-up, non-assessable shares. K. Assignability and Transferability of Option: By its terms, an Option granted to an Option holder shall not be transferable by such Option holder other than (i) by will or by the laws of descent and distribution or (ii) pursuant to a qualified domestic relations order, as defined by the Code or Title 1 of the Employee Retirement Income Security Act or the rules thereunder, or (iii) as otherwise determined by the Committee. The designation of a beneficiary of an Option 6 7 by an Option holder shall not be deemed a transfer prohibited by this paragraph. Except as provided in the preceding sentence, an Option shall be exercisable, during an Option holder's lifetime, only by the Option holder (or by his or her legal representative) and shall not be assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation, or other disposition of any Option or of any rights granted thereunder contrary to the provisions of this Paragraph, or the levy of any attachment or similar process upon an Option or other such rights, shall be null and void. L. Other Provisions: The Option agreements authorized under the Plan shall be subject to such other terms and conditions, including, without limitation, restrictions upon the exercise of the Option, as the Committee shall deem advisable. M. Non-Employee, Non-Scientific Board Directors' Options: Each Director who is not (i) an employee of the Company or any of its Affiliates, or (ii) a member of the Scientific Board of the Company, or (iii) elected pursuant to an agreement or arrangement between shareholders of the Company or between the Company and its shareholders, upon first being appointed or elected to the Board of Directors, and upon every third anniversary thereof, shall be granted an Option to purchase 30,000 shares of Common Stock. Each such Option shall have an exercise price equal to the fair market value per share of Common Stock on the date of grant, as determined under Section VI.A. above, and a term of ten (10) years, and shall be exercisable as to one-third (1/3) of the shares subject thereto upon completion of one full year of service on the Board of Directors after the date of grant, and as to an additional one-third (1/3) upon completion of each full year of service thereafter. For any such Director serving in office on December 6, 1991, the first such Option shall be granted on the date on which the most recent Option previously granted to him, the vesting of which is contingent upon continued service on the Board of Directors, becomes fully vested, and subsequent Options under this Paragraph shall be granted on every third anniversary of such date. Notwithstanding the provision of Section XI concerning amendment of the Plan, the provisions of this Section VI.M. shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act, or the rules thereunder. The grants of options under this Paragraph M are intended to be non-discretionary formula awards within the meaning of Rule 16b-3(c)(2)(ii). Paragraph F of Article VI, which cancels the Options of any Participant determined by the Committee to have been terminated for cause, shall not apply to the awards under this Paragraph M. N. Tax Withholding: In the event that any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act ("F.I.C.A.") withholdings or other amounts are required by applicable law or governmental regulation to be withheld from the Option holder's salary in connection with the exercise of an Option, the Option holder shall advance in cash to the Company, or to any Affiliate of the Company which employs or employed the Option holder, the amount of such withholdings unless a different withholding arrangement, including the use of shares of the Company's Common Stock, is authorized by the Committee (and permitted by law), provided, however, that with respect to persons subject to Section 16 of the 1934 Act, any such withholding arrangement involving use of shares shall be in compliance 7 8 with any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934 Act. If the Committee allows withholding through use of shares, it shall be only to the statutory minimum amount. For purposes hereof, the fair market value of the shares withheld for purposes of payroll withholding shall be determined in the manner provided in Section VI.A. above, as of the date of exercise. If the fair market value of the shares withheld is less than the amount of payroll withholdings required, the Option holder may be required to advance the difference in cash to the Company or the Affiliate employer. O. Reload Options: The Committee may authorize reload options ("Reload Options") to purchase for cash or shares a number of shares of Common Stock. The number of Reload Options shall equal (i) the number of shares of Common Stock used to exercise the underlying Options and (ii) to the extent authorized by the Committee, the number of shares of Common Stock used to satisfy any tax withholding requirement incident to the exercise of the underlying Options. The grant of a Reload Option will become effective upon the exercise of underlying Options through the use of shares of Common Stock held by the optionee for at least 6 months. Reload Options must be evidenced in Option agreements or amendments to those agreements. The Option price per share of Common Stock deliverable upon the exercise of a Reload Option shall be the fair market value of a share of Common Stock on the date the grant of the Reload Option becomes effective. The term of each Reload Option shall be equal to the remaining option term of the underlying Option. No additional Reload Options shall be granted to Option holders when Options and/or Reload Options are exercised pursuant to the terms of this Plan following termination of the Option holder's employment or on account of death or total and permanent disability. All other provisions of this Plan with respect to Options shall apply equally to Reload Options. P. Rights as a Shareholder: No Option holder shall have rights as a shareholder with respect to any shares covered by such Option except as to such shares as have been registered in the Company's share register in the name of such person upon the due exercise of the Option. Q.Effect of Corporate Transaction: In the event of a Corporate Transaction, the Committee shall, prior to the effective date of the Corporate Transaction, as to each outstanding Option under the Plan either (i) make appropriate provisions for the Options to be assumed by the successor corporation or its parent or be replaced with a comparable options to purchase shares of the capital stock of the successor corporation or its parent; or (ii) upon written notice to the Option holders provide that all Options must be exercised and the Plan will terminate (all Options having been made fully exercisable as set forth below in this Section Q); or (iii) terminate all Options in exchange for a cash payment equal to the excess of the then fair market value of the shares subject to such Options (all Options having been made fully exercisable as set forth below in this Section Q) over the Option price thereof. The determination of comparability under this Section shall be made by the Committee and its determination shall be final, binding and conclusive. Each outstanding Option under the Plan which is assumed in connection with a Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities 8 9 which would have been issued, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock as are subject to such Option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the Option price payable per share, provided the aggregate Option price payable for such securities shall remain the same. In addition, the class and number of securities available for issuance under the Plan on both an aggregate and per participant basis shall be appropriately adjusted to reflect the effect of the Corporate Transaction upon the Company's capital structure. If at any time within two (2) years of the effective date of a Corporate Transaction there is an Involuntary Employment Action with respect to any Designated Employee, each then outstanding Option assumed or replaced under this Section and held by such Designated Employee (or a permitted transferee of such person) shall, upon the occurrence of such Involuntary Employment Action, automatically accelerate so that each such Option shall immediately become exercisable for the total number of shares of Common Stock at the time subject to such Option, as assumed or replaced, and may be exercised for all or any portion of those shares to the extent not previously exercised. Upon the occurrence of an Involuntary Employment Action with respect to a Designated Employee, any outstanding Options held by such Designated Employee (and his or her permitted transferees) shall be exercisable only within one (1) year of the Involuntary Employment Action or, if earlier, within the originally prescribed term of the Option. An "Involuntary Employment Action" as to any Designated Employee shall mean the involuntary termination of the Designated Employee's employment with the Company or an Affiliate other than "for cause", as defined in Article II, or the termination by the Designated Employee of his or her employment with the Company and its Affiliates upon the occurrence, without the Option holder's express written consent, of any of the following circumstances unless such circumstances are corrected (provided such circumstances are capable of correction): (i) any adverse and material alteration and diminution in the Option holder's position, title or responsibilities (other than a mere change in title or reporting relationship) as they existed immediately prior to the Corporate Transaction or as the same may be increased from time to time thereafter, (ii) a reduction of the Option holder's annual base salary or targeted bonus opportunity, in each case as in effect on the date prior to the Corporate Transaction or as the same may be increased from time to time thereafter, or (iii) relocation of the offices at which the Option holder is employed which increases the Option holder's daily commute by more than 100 miles on a round trip basis. In the event the Company terminates this Plan or elects to cash out the Options in accordance with clauses (ii) and (iii) of the first paragraph of this Section Q, then the exercisability of each Option outstanding under this Plan shall be automatically accelerated so that each such Option shall immediately prior to such Corporate Transaction, become exercisable for the full number of shares purchasable under such Option to the extent not previously exercised and may be exercised prior to such Corporate Transaction for all or any portion of such shares. The Committee shall, in its discretion, determine the timing and mechanics required to implement the foregoing sentence. R. Acceleration Upon Corporate Change in Control: In the event of any of a Corporate Change in Control then the exercisability of each Option outstanding under this Plan 9 10 shall be automatically accelerated so that each such Option shall immediately prior to such Corporate Change in Control, become exercisable for the full number of shares purchasable under such Option to the extent not previously exercised and may be exercised for all or any portion of such shares consistent with Section VIII within the originally prescribed term of the Option . The Committee shall, in its discretion, determine the timing and mechanics required to implement the foregoing sentence. However, an outstanding Option under this Plan shall not be accelerated under this Section if and to the extent one or more limitations imposed by the Committee at the time of grant preclude such acceleration upon a Corporate Change in Control. S. The provisions of Sections Q and R shall be retroactive and shall apply to all Options granted under the Plan, regardless of the date of grant. T. The grant of Options under this Plan shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. VII. PURCHASE FOR INVESTMENT If and to the extent that the issuance of shares pursuant to the exercise of Options is deemed by the Company to be subject to the United States Securities Act of 1933, as now in force or hereafter amended ("1933 Act"), or to the securities law of any other jurisdiction, the Company shall be under no obligation to issue shares covered by such exercise unless the person or persons who exercises or who exercise such Option shall make such warranty or take such action as may be required by any applicable securities law of any applicable jurisdiction and shall, in the case of the applicability of the 1933 Act, in the absence of an effective registration under such Act with respect to such shares, warrant to the Company, at the time of such exercise, that such person is or that they are acquiring the shares to be issued to such person or to them, pursuant to such exercise of the Option, for investment and not with a view to, or for sale in connection with, the distribution of any such shares; and in such events the person or persons acquiring such shares shall be bound by the provisions of a legend endorsed upon any share certificates expressing the requirements of any applicable non-United States securities law, or, in cases deemed governed by the 1933 Act, substantially the following legend, which shall be endorsed upon the certificate or certificates evidencing the shares issued by the Company pursuant to such exercise: "The shares have not been registered under the securities laws of any country, including the United States Securities Act of 1933, as amended, and the Company may refuse to permit the sale or transfer of all or any of the shares until (1) the Company has received an opinion of Counsel satisfactory to the Company that any such transfer is exempt from registration under all applicable securities laws or (2) in the case of sales or transfers to which the United States Securities Act of 1933 is applicable, unless a registration statement with respect to such shares shall be effective under such Act, as amended." 10 11 Without limiting the generality of the foregoing, the Company may delay issuance of the shares until completion of any action or obtaining of any consent which the Company deems necessary under any applicable law (including without limitation state securities or "blue sky" laws). VIII. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION In the event that the outstanding Common Stock, $.01 par value, of the Company is changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, change in par value, stock split-up, combination of shares or dividend payable in capital stock, or the like except in a Corporate Transaction for which such adjustments are set forth in Article VI Q, appropriate adjustment shall be made in the number and kind of shares for the purchase of which Options may be granted under the Plan, including Options to be granted pursuant to Article VI M hereof, and, in addition, appropriate adjustment shall be made in the number and kind of shares and in the Option price per share subject to outstanding Options so that each Option holder shall be in a position equivalent to the position the Option holder would have been in had the Option holder exercised the Options immediately prior to the applicable event. IX. DISSOLUTION OR LIQUIDATION OF THE COMPANY Upon the dissolution or liquidation of the Company other than in connection with transactions to which the preceding Article VIII is applicable, all Options granted hereunder shall terminate and become null and void; provided, however, that if the rights hereunder of an Option holder or one who acquired an Option by will or by the laws of descent and distribution have not otherwise terminated and expired, the Option holder or such person shall have the right immediately prior to such dissolution or liquidation to exercise any Option granted hereunder to the extent that the right to purchase shares thereunder has accrued as of the date of exercise immediately prior to such dissolution or liquidation. X. TERMINATION OF THE PLAN Unless the Committee shall decide to reduce or, subject to shareholder approval, if required under Article XI, to extend the duration of the Plan, the Plan shall terminate on December 31, 2002. Termination of the Plan shall not affect any Options granted or any Option agreements executed prior to the effective date of termination. XI. AMENDMENT OF THE PLAN The Plan may be amended by the Committee or the Board of Directors of the Company provided, however, that if the scope of any amendment is such as to require shareholder approval in order to comply with Rule 16b-3 under the 1934 Act such amendment shall require approval by the shareholders. Any amendment shall not affect any Options theretofore granted and any 11 12 Option agreements theretofore executed by the Company and any Option holder unless such amendment shall expressly so provide. No amendment shall adversely affect any Option holder with respect to an outstanding Option without the written consent of such Option holder. With the consent of the Option holder affected, the Committee may amend any outstanding Option agreement in a manner not inconsistent with the Plan, including, without limitation, to accelerate the date of exercise of any installment of any Option. XII. EMPLOYMENT RELATIONSHIP Nothing herein contained shall be deemed to prevent the Company or an Affiliate from terminating the employment of any employee, nor to prevent any employee from terminating his/her employment with the Company or an Affiliate. XIII. EFFECTIVE DATE This Plan first became effective on January 2, 1985. 12 -----END PRIVACY-ENHANCED MESSAGE-----