SHIRE PHARMACEUTICALS INC. 401(k) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
1. PLAN DESCRIPTION
Effective January 1, 2005, the 1997 Restated Shire 401(k) Savings Plan was renamed the Shire Pharmaceuticals Inc. 401(k) Savings Plan (hereafter the “Plan”). The following description of the Plan provides only general information. Participants should refer to the Plan Document for a more complete description of the Plan’s provisions.
General—The Plan is a defined contribution plan covering almost all part-time and full-time employees of certain U.S. subsidiaries of Shire Pharmaceuticals Group, plc. Subsidiaries covered by the Plan as of December 31, 2005, include Shire Pharmaceuticals Inc., Shire US Inc., Shire LLC, Shire Executive Services LLC, Shire US Manufacturing Inc., Shire Development Inc., Shire Regulatory, Inc., Trankaryotic Therapies, Inc. and Eminent Biopharmaceutical Services, Inc. (collectively, the “Company”). All eligible employees may begin participation in the Plan after attaining age 18.
Fidelity Management Trust Company is the recordkeeper, trustee and custodian of the Plan. The Plan adopted the Fidelity Advisor Retirement Connection Premium Service Retirement prototype nonstandardized profit sharing/401(k) plan. The Plan is administered by management of the Company.
The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
Contributions—Each year, participants may defer up to the lesser of 90% of eligible pretax compensation or $14,000 in a calendar year (in 2005), as defined by the Plan. If an employee has attained age 50 before the end of the calendar year, pretax contributions may be made at any time throughout the year up to an additional limit of $4,000 for 2005. Participants may also rollover amounts representing distributions from other qualified defined benefit or defined contribution plans. Participants direct the investment of their contributions into various investment options offered by the Plan, including mutual funds, a collective investment fund, and Company common stock fund. The Company contributes $2.33 for each $1.00 contributed by the participant up to the first 3% of compensation. Additional discretionary amounts may be contributed at the option of the Company. All Company contributions are invested in a portfolio of investments directed by the participant. Contributions are subject to certain limitations.
The Company elected to make safe harbor matching contributions in 2005 and 2004 in accordance with statutory requirements. Participants will be entitled to receive safe harbor matching contributions if they make pre-tax contributions to the Plan in 2005 and 2004. There is no change in the matching employer contribution formula.
Participant Accounts—Each participant’s account is credited with the participant’s contribution, the participant’s share of Company contributions and Plan earnings and losses net of mutual fund expenses. Allocations are based on participant earnings or account balances, as defined. The administrative expenses consist mainly of loan processing fees charged to the participant’s account in which the loan applies. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
- 4 -
Vesting—Participants are vested immediately in their contributions plus actual earnings thereon. Subject to safe harbor requirements, the vesting schedule has been eliminated for all employees in active employment status as of January 1, 2004. As a result, most employees are now 100% vested in matching employer contributions. A five-year vesting schedule applies to employees who have terminated prior to January 1, 2004, and are not former Roberts Pharmaceutical Corp. Savings Plan participants. Additionally, participants who previously participated in the Transkaryotic Therapies, Inc. Matched Retirement Savings Plan are subject to a five-year vesting schedule for employer matching contributions made to the Transkaryotic Therapies, Inc. Matched Retirement Savings Plan.
Participant Loans—Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum of $50,000 or 50% of their vested account balance, whichever is less. The loans are secured by the balance in the participant’s account and bear interest at rates that range from 5.00% to 11.50%, which are commensurate with local prevailing rates as determined at the inception of each loan. Principal and interest is paid ratably through payroll deductions.
Payment of Benefits—On termination of service for any reason, a participant may elect to receive either a lump-sum amount equal to the value of the participant’s vested interest in his or her account or substantially equal installments (monthly, quarterly, semi-annually or annually) over a period measured by reference to the life expectancy of the spouse or the joint and last survivor life expectancy of the participant or the participant’s spouse. Participants with accounts transferred from the Roberts Pharmaceutical Savings and Protection Plan also may receive a distribution in the form of a single life annuity and a Qualified Joint and Survivor Annuity. Distributions are made in cash.
Expenses of the Plan—The Company pays certain administrative expenses of the Plan. Any expenses not paid by the Company are the responsibility of the Plan. The Company also provides certain administrative services at no cost to the Plan.
Forfeitures—Upon participant termination, the non-vested portion of the participant’s account, as defined by the Plan, represents a forfeiture. After the earlier that such participant has received a distribution or incurred five consecutive one year breaks in service, forfeitures shall be used to offset Company matching contributions with respect to all remaining participants entitled to receive a matching contribution in the next plan year and each succeeding plan year, if necessary. At December 31, 2005, forfeited non-vested accounts totaled $663,145.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting—The financial statements of the Plan are prepared in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Plan management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
Investment Valuation—The Plan’s investments, except for participant loans, are stated at fair value. Quoted market prices are used to value the Company stock. Shares of mutual funds are valued at the net asset value of shares held by the Plan at year-end. Investments in collective funds are valued at fair values as estimated by Fidelity Management Trust Company (the “Trustee”). Participant loans are valued at the outstanding loan balances.
- 5 -
In accordance with Department of Labor regulations, realized and unrealized gains and losses are based on the value of investments as of the later of the beginning of the plan year or at the time of purchase, if purchased during the year, and are reflected currently in the statement of changes in net assets available for plan benefits.
Purchases and sales of securities are recorded on a trade date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Payment of Benefits—Benefits are recorded when paid.
Plan Transfers— Changes in net assets available for benefits as a result of plan mergers are reflected as Transfers in the accompanying 2005 Statement of Changes in Net Assets Available for Benefits.
Effective January 1, 2005, the Company merged the Shire Pharmaceutical Development 401(k) Profit-Sharing Plan (the “SPD Plan”) into the Plan. Participants in the SPD Plan began participating in the Plan on the effective date of the merger.
In July 2005, Shire Pharmaceuticals Group, plc acquired Transkaryotic Therapies, Inc. As a result of this acquisition, the Company merged the Transkaryotic Therapies, Inc. Matched Retirement Savings Plan (the “TKT Plan”) into the Plan effective September 1, 2005. Participants in the TKT Plan began participating in the Plan on the effective date of the merger.
3. INVESTMENTS
The Plan provides for investments in various investment securities and these investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and those changes could materially affect the amounts reported in the statements of net assets available for plan benefits.
The following table presents the fair value of investments as of December 31, 2005 and 2004, that represent 5% or more of the Plan’s net assets available for plan benefits:
| | | | | 2005 |
| | | | |
|
| | * | Trustee—Fidelity | | Shares | | Market Value |
| | | | | | | |
| | * | Shire Pharmaceuticals Group, plc | | 162,159 | | $6,290,148 |
| | * | Fidelity Advisor Diversified International Fund | | 441,143 | | 9,224,291 |
| | * | Fidelity Advisor Equity Income Fund | | 292,682 | | 8,294,598 |
| | * | Fidelity Advisor Small Cap Fund | | 336,571 | | 8,266,179 |
| | * | Fidelity Advisor Mid Cap Fund | | 337,560 | | 8,192,589 |
| | * | Fidelity Advisor Dividend Growth Fund | | 537,425 | | 6,486,726 |
| | * | Fidelity Advisor Equity Growth Fund | | 133,454 | | 6,416,465 |
| | * | Fidelity Advisor Intermediate Bond Fund | | 372,780 | | 4,040,937 |
| | * | Fidelity Advisor Stable Value Fund | | 6,191,179 | | 6,191,179 |
| | | | | | | |
| | * | Denotes a party-in-interest. | | | | |
- 6 -
| | | | | 2004 |
| | | | |
|
| | * | Trustee—Fidelity | | Shares | | Market Value |
| | | | | | | |
| | * | Shire Pharmaceuticals Group, plc | | 131,371 | | $4,197,303 |
| | * | Fidelity Advisor Small Cap Fund | | 191,812 | | 4,724,324 |
| | * | Fidelity Advisor Equity Growth Fund | | 85,714 | | 3,917,993 |
| | * | Fidelity Advisor Equity Income Fund | | 137,907 | | 3,906,906 |
| | * | Fidelity Advisor Diversified International Fund | | 230,956 | | 4,286,538 |
| | * | Fidelity Advisor Mid Cap Fund | | 158,993 | | 4,009,815 |
| | * | Fidelity Advisor Stable Value | | 2,692,223 | | 2,692,223 |
| | | | | | | |
| | * | Denotes a party-in-interest. | | | | |
During 2005 and 2004, the Plan’s investments (including gains and losses on investments bought and sold, as well as held during the year) appreciated in value as follows:
| | | | 2005 | | 2004 |
| | | |
| |
|
| | Mutual funds | | $3,911,556 | | $3,029,284 |
| | Common stock | | 1,088,302 | | 392,615 |
| | Collective investment funds | | 132,616 | | 81,945 |
| | |
| |
|
| | | | $5,132,474 | | $3,503,844 |
| | |
| |
|
4. RELATED-PARTY TRANSACTIONS
Certain plan investments are shares of mutual funds managed by the Trustee. Fidelity is the trustee as defined by the Plan and, therefore, these transactions qualify as party-in-interest transactions. In addition, the Plan invests in the Company’s common stock. The Company is the plan sponsor and therefore, these transactions qualify as party-in-interest transactions. The Plan held 162,159 shares of the Company common stock fund at a fair value of $6,290,148 at December 31, 2005. The Plan held 131,371 shares of the Company common stock fund at a fair value of $4,197,303 at December 31, 2004. The Plan also makes loans to participants.
5. PLAN TERMINATION
Although it has not expressed any intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions set forth in ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.
6. FEDERAL INCOME TAX STATUS
The Plan adopted the Fidelity Advisor Retirement Connection Premium Service Retirement prototype non-standardized profit sharing/401(k) plan. The Fidelity Prototype received a favorable opinion letter on December 10, 2001. The Plan has received a favorable determination letter from the IRS, dated June 17, 2004. The Plan has been amended since receiving the determination letter. However, the Plan administrator believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the Internal Revenue Code (“IRC”). As such, no provision for income taxes has been made in the accompanying financial statements.
On April 22, 2004, the Plan made a submission under the Voluntary Compliance Program (“VCP”) to the U.S. Internal Revenue Service (“IRS”) with respect to certain violations under Section 401(a)(17) of
- 7 -
the Internal Revenue Code. The Plan identified that it failed to limit compensation for purposes of calculating matching contributions during the years 1998 through 2003. The Company has corrected the payroll system issues that caused the violations. The Company and the Plan offset 2004 matching contributions with the prior year excess contributions. The Company received a compliance statement from the IRS dated April 29, 2005, which has been signed, returned and accepted by the IRS.
On April 22, 2004, the Plan received notice of pending review from the U.S. Department of Labor (“DOL”). This review was completed during the year ended December 31, 2005. As a result, the Company made certain contributions in 2005 to participant accounts for lost earnings related to late contributions to the Plan during the 2001, 2002, 2003, and 2004 Plan years. The Company has filed Form 5330 with the Internal Revenue Service and paid the required excise tax on the transactions. By letter dated August 11, 2005, the IRS has indicated approval of the corrective action taken.
Management believes, subsequent to the VCP submission and DOL review mentioned above, the Plan is being operated in accordance with all rules and regulations.
7. PLAN SPONSOR RELOCATION
In early 2005, the Company moved its U.S. headquarters to a location on the east coast of the U.S. The majority of employees at the previous headquarters in Newport, Kentucky, have either continued employment with the Company or have since terminated. Management of the Plan is reviewing the events of the move and related terminations to determine if such events resulted in a partial plan termination.
* * * * * *
- 8 -
SUPPLEMENTAL SCHEDULE
- 9 -
SHIRE PHARMACEUTICALS INC. 401(k) SAVINGS PLAN
FORM 5500, SCHEDULE H, PART IV, LINE 4i—
SCHEDULE OF ASSETS HELD (AT END OF YEAR)
December 31, 2005
| IDENTITY OF ISSUER | | DESCRIPTION | | | CURRENT
VALUE |
| | | | | | | |
| | CASH— | | | | | |
| * | | Fidelity Investments | | Interest and Non-Interest Bearing Cash | | $ | 320,839 |
| | | | | |
|
|
| | MUTUAL FUNDS: | | | | | |
| * | | Fidelity Investments | | Fidelity Advisor Diversified International Fund | | | 9,224,291 |
| * | | Fidelity Investments | | Fidelity Advisor Equity Income Fund | | | 8,294,598 |
| * | | Fidelity Investments | | Fidelity Advisor Small Cap Fund | | | 8,266,179 |
| * | | Fidelity Investments | | Fidelity Advisor Mid Cap Fund | | | 8,192,589 |
| * | | Fidelity Investments | | Fidelity Advisor Dividend Growth Fund | | | 6,486,726 |
| * | | Fidelity Investments | | Fidelity Advisor Equity Growth Fund | | | 6,416,465 |
| * | | Fidelity Investments | | Fidelity Advisor Intermediate Bond Fund | | | 4,040,937 |
| | | Credit Suisse Asset Management | | Credit Suisse Small Capital Value Fund | | | 3,791,556 |
| | | Janus Capital Corporation | | Janus Advisor Balanced Fund | | | 3,070,170 |
| | | AIM Investments | | AIM Basic Value Fund | | | 2,093,752 |
| | | BlackRock Funds | | BlackRock Mid Cap Value Equity Fund | | | 1,781,218 |
| * | | Fidelity Investments | | Fidelity Advisor Growth and Income Fund | | | 959,865 |
| * | | Fidelity Investments | | Fidelity Prime Fund | | | 683,055 |
| * | | Fidelity Investments | | Fidelity Advisor Government Investment Fund | | | 650,533 |
| * | | Fidelity Investments | | Fidelity Advisor Global Equity Fund | | | 423,086 |
| | | | | |
|
|
| | | Total mutual funds | | | | | 64,375,020 |
| | | | | | |
|
|
| | CORPORATE STOCK— | | | | | |
| * | | Shire Pharmaceuticals Group, plc | | Corporate Common Stock | | | 6,290,148 |
| | | | | |
|
|
| | COLLECTIVE INVESTMENT FUND— | | | | | |
| * | | Fidelity Investments | | Fidelity Advisor Stable Value Fund | | | 6,191,179 |
| | | | | |
|
|
| | | | | | | | |
| | | Total investments | | | | | 77,177,186 |
| | | | | | | | |
| * | PARTICIPANT LOANS | | Loans ranging from 1 to 10 years maturity with | | | |
| | | | | interest rates ranging from 5.00% to 11.50% | | | 1,025,829 |
| | | | | |
|
|
| | TOTAL | | $ | 78,203,015 |
| | | | | |
|
|
| | *Denotes party-in-interest. | | | | | |
- 10 -
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
| | Shire Pharmaceuticals Inc. 401(k) Savings Plan |
| |
|
| | (Name of Plan) |
| | |
Date June 28, 2006
| /s/ Gregory Flexter |
| |
|
| | Gregory Flexter/EVP and GM Sales and |
| | Marketing North America, |
| | Investment Advisory Committee |
| | |
| | /s/ Jeffrey V. Poulton |
| |
|
| | Jeffrey V. Poulton/VP, Therapeutic |
| | Area Finance/Member, Investment Advisory |
| | Committee |
