SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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Alkermes Clinical Partners, L.P.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
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ALKERMES CLINICAL PARTNERS, L.P.
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD NOVEMBER 18, 2003
To the Limited Partners:
A special meeting of Limited Partners of Alkermes Clinical Partners,
L.P. will be held at the offices of Alkermes, Inc., 88 Sidney Street, Cambridge,
Massachusetts 02139, at 10:00 am, local time, on November 18, 2003 for the
following purpose:
1. To consider and vote upon a proposal to terminate
Alkermes Clinical Partners pursuant to Section 9.1 of
the Alkermes Clinical Partners, L.P. Agreement of
Limited Partnership, dated February 7, 1992, as
amended, among Alkermes Development Corporation, II,
a Delaware corporation, the Initial Limited Partner
and Additional Limited Partners.
2. To transact such other business as may properly come
before the meeting.
Only holders of record of Alkermes Clinical Partners, L.P. limited
partnership interests at the close of business on October 2, 2003 are entitled
to vote at the special meeting or any adjournments or postponements thereof.
Approval of the termination proposal at the special meeting requires the
favorable vote of the holders of at least two-thirds in interest of the Limited
Partners in person or by proxy at the special meeting. BECAUSE EACH LIMITED
PARTNER TYPICALLY HOLDS ONLY ONE-HALF TO ONE UNIT, IT IS EXTREMELY IMPORTANT
THAT EACH LIMITED PARTNER VOTE ON THE PROPOSAL.
Please mark, sign, date and return your proxy promptly in the enclosed
self-addressed envelope requiring no postage, whether or not you plan to attend
the special meeting. If you do plan to attend the special meeting, please call
Cindy Sragg at (617) 250-1600. For information required to obtain entry to the
special meeting.
If you have any questions about the enclosed material, please call our
agent Robin Stanley at 617-583-6620.
ALKERMES DEVELOPMENT CORPORATION, II
General Partner
/s/ Richard F. Pops
Richard F. Pops
Chief Executive Officer
October 7, 2003
THE GENERAL PARTNER HAS DETERMINED THE PROPOSED TERMINATION
TO BE IN THE BEST INTERESTS OF THE PARTNERSHIP AND ITS LIMITED PARTNERS,
HAS APPROVED AND DECLARED ADVISABLE THE TERMINATION AND RECOMMENDS THAT THE
LIMITED PARTNERS VOTE FOR APPROVAL OF THE TERMINATION.
ALKERMES CLINICAL PARTNERS, L.P.
PROXY STATEMENT
FOR THE SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD ON NOVEMBER 18, 2003
This proxy statement and the enclosed proxy are being mailed to the
limited partners (the "Limited Partners") of Alkermes Clinical Partners, L.P., a
Delaware limited partnership (the "Partnership"), on or about October __, 2003
by its general partner Alkermes Development Corporation, II (the "General
Partner"), a Delaware corporation and a wholly-owned subsidiary of Alkermes,
Inc. ("Alkermes"), on behalf of the Partnership to solicit proxies for use at a
special meeting to be held on November 18, 2003 at 10:00 am, local time, at the
offices of Alkermes, 88 Sidney Street, Cambridge, Massachusetts.
The purpose of the special meeting is to consider and vote upon the
proposal to terminate the Partnership following: (i) the clinical trial results
and difficulties encountered in developing Cereport(R), the Partnership's only
product candidate; (ii) the exhaustion of all cash assets of the Partnership in
September 1997; (iii) Alkermes' recent decision to stop funding the development
of Cereport, (iv) the unsuccessful efforts in 1997 and 2003 to identify a
collaborator, buyer or licensor for the receptor-mediated permeabilizer ("RMP")
technology licensed to and owned by the Partnership for exploitation in the U.S.
and Canada, including Cereport (the "Technology"), and (v) the resulting
determination that continued development of Cereport is believed to be
infeasible and uneconomic and the assets of the Partnership have no commercial
value. The General Partner has determined the proposed termination to be in the
best interests of the Partnership and the Limited Partners, has approved and
declared advisable the termination and recommends that the Limited Partners vote
FOR approval of the termination. See "The Proposed Termination - Recommendation
of the General Partner; Reasons for the Proposed Termination."
If the termination is approved, the Partnership will be terminated,
liquidated and dissolved. The Partnership has no cash and the non-cash assets of
the Partnership, consisting of rights under certain patents, know-how, data and
information relating to Cereport and the Technology, have been determined by the
General Partner, which determination was approved by its board of directors, to
have no commercial value and such rights will be abandoned prior to termination.
Therefore, there will be no liquidating distribution to the Limited Partners.
Upon dissolution approved by Limited Partners, final Schedule K-1s will
be issued to the Limited Partners. Without certain approvals from the Limited
Partners, it is not anticipated that final Schedule K-1s can be issued. If
approved and upon dissolution, each Limited Partner will receive a final
Schedule K-1 which is expected to report each Limited Partner's allocated share
of the ordinary loss of approximately $43,000 for a full unit and $21,500 for a
half unit. Limited Partners are encouraged to consult their own tax advisors to
determine the tax consequences, if any, upon issuance of final Schedule K-1s to
the Limited Partners. For a detailed description of the proposed termination,
including the subsequent liquidation and dissolution, see "Termination,
Liquidation and Dissolution of the Partnership."
Alkermes intends to pay the costs incurred by and on behalf of the
Partnership through the effective time of the termination in connection with the
proxy solicitation and the winding up of the Partnership, including preparation
of the final tax return and Schedule K-1s. The General Partner, UBS Financial
Services Inc. and its affiliates ("UBS")
and Alkermes will not receive any fees or reimbursement from the Partnership in
connection with the termination, liquidation and dissolution of the Partnership.
Alkermes and UBS are not making any recommendation or expressing any opinion as
to how the Limited Partners should vote their limited partnership interest
regarding the termination of the Partnership.
Under the limited partnership agreement dated as of February 7, 1992
among the General Partner, the purchasers of Class A units and the purchaser of
the Class B unit, approval of the termination requires the affirmative vote of
the holders of at least 66-2/3% of the outstanding limited partnership interests
(based on adjusted capital contributions). Accordingly, the termination will not
be approved unless the holders of 66-2/3% of the outstanding limited partnership
interests vote in its favor. Thus, failure to submit a proxy or to vote in
person at the special meeting or abstention by you will have the same effect as
a vote against the termination. Alkermes and PaineWebber Development Corporation
(the "PWDC"), the general partner of PaineWebber R&D Partners III, L.P. (the
"R&D III Fund"), who control approximately 8.0% and 14.5% of the limited
partnership interests, respectively, have indicated that they each intend to
vote such interests for termination of the Partnership, although none of
Alkermes, PWDC nor the R&D III Fund is making any recommendation or expressing
any opinion as to how the other Limited Partners should vote their limited
partnership interests regarding the termination of the Partnership and no
Limited Partner should rely on the indication as to how Alkermes, PWDC or the
R&D III Fund will vote in making its decision regarding the proposal.
IT IS EXTREMELY IMPORTANT THAT EACH LIMITED PARTNER VOTE ON THE
PROPOSAL.
In reviewing this proxy statement, you should carefully consider the
matters described under "Risk Factors" on page 4.
No person has been authorized to give any information or to make any
representation not contained in this proxy statement, and, if given or made,
such information or representation should not be relied upon as having been
authorized. The delivery of this proxy statement shall not under any
circumstances create any implication that there has been no change in the
affairs of the Partnership since the date as of which information is furnished
or the date hereof.
The date of this proxy statement is October 7, 2003.
TABLE OF CONTENTS
PAGE
SUMMARY AND SPECIAL FACTORS...................................................................................... 1
The Parties............................................................................................. 1
The Proposed Termination................................................................................ 1
Termination, Liquidation and Dissolution of the Partnership............................................. 1
Recommendation of the General Partner; Reasons for the Proposed Termination............................. 2
Vote Required to Approve the Termination................................................................ 2
Certain Federal Income Tax Considerations............................................................... 2
RISK FACTORS..................................................................................................... 4
The possibility that there may be a buyer for the Technology............................................ 4
Loss of opportunity to benefit from future events....................................................... 4
Conflict of Interest.................................................................................... 4
GENERAL INFORMATION ABOUT THE MEETING AND THE VOTE............................................................... 6
Purpose of Special Meeting.............................................................................. 6
Record Date; Voting; Quorum............................................................................. 6
Solicitation of Proxies................................................................................. 7
No Appraisal Rights..................................................................................... 7
Submission of Matters to a Vote of Security Holders..................................................... 7
THE PROPOSED TERMINATION......................................................................................... 8
The Partnership......................................................................................... 8
Recommendation of the General Partner; Reasons for the Proposed Termination............................. 10
Certain Federal Income Tax Consequences................................................................. 11
Description of the Technology........................................................................... 12
History of Clinical Development......................................................................... 12
Collaboration with ALZA Corporation..................................................................... 15
Efforts to Seek a Collaborator and to Sell the Technology............................................... 15
Termination of Research and Marketing Programs.......................................................... 16
Information About the Business of the Partnership....................................................... 17
TERMINATION, LIQUIDATION AND DISSOLUTION OF THE PARTNERSHIP...................................................... 22
General ............................................................................................... 22
PARTNERSHIP MANAGEMENT AND MARKET FOR AND OWNERSHIP OF THE LIMITED PARTNERSHIP INTERESTS AND RELATED MATTERS..... 23
SELECTED HISTORICAL FINANCIAL INFORMATION........................................................................ 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 27
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................................................. 31
OTHER BUSINESS................................................................................................... 32
ANNEX A - FINANCIAL STATEMENTS OF THE PARTNERSHIP............................................................... F-1
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SUMMARY AND SPECIAL FACTORS
The following is a summary of some of the information contained
elsewhere in this proxy statement. This summary is not intended to be complete
and is qualified in its entirety by the more detailed information contained in
this proxy statement. You are urged to read this proxy statement in its entirety
and to consider it with care.
This proxy statement contains forward-looking statements. Such
statements are subject to a number of risks and uncertainties. Actual results in
the future could differ materially from those described in the forward-looking
statements as a result of the factors in this proxy statement generally. The
Partnership further cautions you that the discussion of these factors may not be
exhaustive. The Partnership undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
THE PARTIES
Alkermes Clinical Partners, L.P. (the "Partnership"), 88 Sidney Street,
Cambridge, MA 02139. Telephone: (617) 494-0171.
Alkermes Development Corporation, II (the "General Partner"), 88 Sidney
Street, Cambridge, MA 02139. Telephone: (617) 494-0171.
THE PARTNERSHIP
The Partnership was formed in 1992 under the laws of the State of
Delaware for the principal objective of developing and deriving income from the
sale or license of a family of molecules designated as Receptor-Mediated
Permeabilizers(TM) ("RMPs(TM)") for human therapeutic use in the U.S. and
Canada. Also in 1992, the Partnership completed a private placement of limited
partnership interests that resulted in net proceeds of approximately $42
million. At the same time, the Partnership entered into a product development
agreement with Alkermes, Inc., pursuant to which Alkermes agreed to, among other
things, develop RMP products and the Partnership agreed to fund such
development. After the substantial depletion of the Partnership's funds in 1996,
Alkermes used its own funds to continue the development of Cereport, the
Partnership's only RMP product candidate. After Alkermes' recent decision to
discontinue funding of the continued development of Cereport, and after
unsuccessful efforts to find a third party interested in developing, buying or
licensing the RMP technology, the General Partner resolved to seek the
termination of the Partnership.
THE PROPOSED TERMINATION
Pursuant to the terms of the limited partnership agreement, the
Partnership proposes to terminate, liquidate and dissolve the Partnership.
TERMINATION, LIQUIDATION AND DISSOLUTION OF THE PARTNERSHIP
If the termination is approved and consummated, the Partnership will be
terminated pursuant to the terms of the limited partnership agreement, and will
be liquidated and dissolved. The Partnership has no remaining cash. Its non-cash
assets, consisting of rights under certain patents, know-how, data and
information relating to Cereport and the Technology for exploitation in the U.S.
and Canada, have been determined by the board of directors of the General
Partner to have no commercial value and such rights will be abandoned prior to
termination. See "Termination, Liquidation and Dissolution of the Partnership."
The General Partner, UBS and Alkermes will not receive any fees or reimbursement
from the Partnership in connection with the termination.
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RECOMMENDATION OF THE GENERAL PARTNER; REASONS FOR THE PROPOSED TERMINATION
The General Partner recommends that the Limited Partners vote FOR
approval of the termination. After considering the Partnership's financial
condition and prospects, Alkermes' decision to stop funding the development of
Cereport, the unsuccessful efforts (as described below) to identify a company
interested in developing, buying or licensing Cereport or the Technology, the
potential tax benefit that may be available to individual Limited Partners
associated with the issuance of final Schedule K-1s, and the other factors
discussed below, the board of directors of the General Partner has unanimously:
- determined the proposed termination and resulting
liquidation to be in the best interests of the
Partnership and its Limited Partners;
- approved and declared advisable the termination,
subject to approval by the Limited Partners, followed
by the liquidation; and
- recommends that the Limited Partners vote FOR
approval of the termination.
VOTE REQUIRED TO APPROVE THE TERMINATION
Under the limited partnership agreement, approval of the termination
requires the affirmative vote of the holders of at least 66-2/3% of the
outstanding limited partnership interests (based on adjusted capital
contributions). Accordingly, the termination will not be approved unless the
holders of 66-2/3% of the outstanding limited partnership interests vote in its
favor. Thus, the failure to submit a proxy card (or to vote in person at the
special meeting) or the abstention from voting by a Limited Partner will have
the same effect as a vote against the termination.
PWDC has informed the board of directors of the General Partner that it
intends to vote the limited partnership interest held by it as well as the
limited partnership interests held by the R&D III Fund for approval of the
termination of the Partnership, although none of Alkermes, PWDC nor the R&D III
Fund is making any recommendation or expressing any opinion as to how the other
Limited Partners should vote their limited partnership interests regarding the
termination of the Partnership and no Limited Partner should rely on the
indication as to how Alkermes, PWDC or the R&D III Fund will vote in making its
decision regarding the proposal. In addition, Alkermes has informed the board of
directors of the General Partner that it intends to vote its limited partnership
interests for approval of the termination of the Partnership. Because the
Limited Partners other than the R&D III Fund, PWDC and Alkermes typically each
hold only one-half to one unit, it is extremely important that each Limited
Partner vote on the proposal.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This summary outlines certain federal income tax principles applicable
to Limited Partners in connection with the liquidation. This summary deals only
with the treatment of a Limited Partner who acquired his interest pursuant to
the private offering in April 1992. There are numerous other federal income tax
principles not discussed herein that may be important to a Limited Partner in
connection with the partner's investment in the Partnership. Each Limited
Partner is urged to consult his/her own tax advisor concerning his investment in
the Partnership and the possible federal and state tax consequences of the
liquidation.
If there is an affirmative vote to terminate, the Partnership intends
to take the position that it has incurred an ordinary loss from trade or
business activities in connection with the abandonment of the
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Technology, including the related patents, know-how, data and information (the
"Intellectual Property"), a distributive share of which will be allocated to the
General Partner and each Limited Partner. The allocated share to the Limited
Partners of this ordinary loss is expected to approximate $43,000 for a full
unit and $21,500 for a half unit. In order to abandon successfully the
Intellectual Property for U.S. federal income tax purposes and claim a deduction
for such loss associated with the abandonment of the Intellectual Property, the
Partnership must adhere to several objective and subjective requirements
associated with the abandonment of property. Although the Partnership has
endeavored to ensure that these requirements have been satisfied, the IRS may
seek to disallow the deduction on the grounds that these requirements have not
been satisfied.
In addition, there is a risk that the IRS could argue that the
Intellectual Property was worthless on a date prior to the Partnership's
abandonment of such property. Although the chain of events leading up to the
Partnership's abandonment of the Intellectual Property support a deduction at
the time of the Partnership's abandonment, to the extent that the worthlessness
of the Intellectual Property is determined to be attributable to a year for
which the statute of limitations for which the Partnership could file a claim
for the deduction has expired, the deduction will be disallowed.
In general, the Partnership's abandonment of the Intellectual Property
and subsequent liquidation may affect the amount of each partner's loss subject
to the "at-risk" and "passive activity" limitations set forth in sections 465
and 469, respectively of the Internal Revenue Code of 1986, as amended (the
"Code"). With respect to each of these limitations, each partner should consult
his/her own income tax advisor concerning his/her investment in the Partnership
and the potential U.S. federal income tax consequences associated with the
liquidation of the Partnership.
The Partnership has not made and nor does the Partnership intend to
make an election under section 754 of the Code. Therefore, each Limited Partner
is urged to consult his/her own tax advisor concerning the amount and character
of any loss resulting from the abandonment of the Intellectual Property or
liquidation of the Partnership.
Treas. Reg. Section 1.6011-4 generally requires that each taxpayer that
"participates" in a "reportable transaction" must attach a disclosure statement
regarding the transaction to its U.S. federal income tax return. One type of
reportable transaction described within Treas. Reg. Section 1.6011-4 is a
transaction that gives rise to a loss under section 165 of the Code. As a result
of the Partnership's abandonment of the Intellectual Property, the rules set
forth in Treas. Reg. Section 1.6011-4 may require that the Partnership and/or
some or all of the Limited Partners of the Partnership to disclose the
abandonment transaction. The disclosure requirements of Treas. Reg. Section
1.6011-4 may differ for each partner. Therefore, each partner is urged to
consult with his/her own income tax advisor concerning these disclosure
requirements.
The Partnership is subject to the consolidated audit procedures set
forth in sections 6221 through 6233 of the Code. Consequently, a Limited Partner
is required to disclose any position taken on his/her individual U.S. federal
income tax return with respect to a partnership item that is inconsistent with
the treatment of such item by the Partnership. Therefore, each partner is urged
to consult with his/her own income tax advisor concerning these disclosure
requirements.
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RISK FACTORS
You should consider the following matters in considering whether to
vote in favor of the termination of the Partnership. These matters should be
considered in conjunction with the other information included in this proxy
statement.
THE POSSIBILITY THAT THERE MAY BE A BUYER FOR THE TECHNOLOGY
Although the General Partner considers the efforts in 1997 and 2003 to
market the Partnership's assets to have been thorough, and while the General
Partner believes it to be unlikely, it is possible that additional marketing
efforts may have resulted in a purchaser or licensor for the Partnership's
assets being identified. The marketing activities undertaken by Alkermes and the
General Partner are described below under "The Proposed Termination - Efforts to
Seek a Collaborator and to Sell the Technology."
LOSS OF OPPORTUNITY TO BENEFIT FROM FUTURE EVENTS
It is possible that the outlook for the development and
commercialization of product candidates based on the Technology, such as
Cereport, will improve. Although Alkermes has informed the General Partner that
it has abandoned all patents related to Cereport and the Technology outside the
U.S. and Canada and that it is not developing or planning to develop any RMP
product or products competitive to RMP products, it is possible although
extremely unlikely that Alkermes may do so in the future. Under the Product
Development Agreement, Alkermes is obligated to pay to the Partnership a royalty
on sales of RMP products in the U.S., Canada and, in some circumstances, Europe
and a royalty on sales of certain competitive products in the U.S. and Canada
for five years after termination of the interim license from the Partnership to
Alkermes. If the Partnership terminates, the Limited Partners will not receive
any payment related to such royalties. Alkermes is not developing, and has no
current plans to develop, any such RMP or competitive product. Nevertheless, if
the outlook were to improve or Alkermes were to develop and sell an RMP product
or a competitive product and the Partnership is no longer in existence, the
Limited Partners would not receive any royalty revenue on such RMP product or
competitive products during the defined period during which such royalties would
otherwise have been due to the Limited Partners.
CONFLICT OF INTEREST
The recommendation of the General Partner could be deemed to involve
certain conflicts of interest between the General Partner and the Limited
Partners, as the General Partner is a wholly-owned subsidiary of Alkermes.
Alkermes also owns 74 limited partnership interests in the Partnership
(representing approximately 8% of the limited partnership interests). In
addition, as a result of the termination, Alkermes will no longer be required to
pay royalties to the Partnership on any sales of competitive products and sales
of RMP products in Europe during defined periods in the future. Richard F. Pops,
the current Chief Executive Officer and a director of the General Partner, is a
director, the Chief Executive Officer and an employee of Alkermes. James M.
Frates, the current Vice President and a director of the General Partner, is the
Chief Financial Officer, Vice President and an employee of Alkermes. Alkermes
has been the only party to seek a collaborator for the Partnership or a
purchaser of the Technology and no independent third party has been engaged to
seek a collaborator or purchaser on the Partnership's behalf. See "Efforts to
Seek a Collaborator and to Sell the Technology" below.
PaineWebber Incorporated, a predecessor entity to UBS, marketed the
private placement of limited partnership interests in the Partnership and has
been involved in the marketing of similar financing vehicles. In addition to
having affiliates that are Limited Partners in the Partnership, UBS
representatives currently constitute two out of the four directors on the
General Partner's board of directors. Certain affiliates of UBS, including UBS
Securities LLC, have in the past and may in the
4
future provide investment banking and other services to Alkermes and may receive
compensation for such services. In addition, in the ordinary course of business,
UBS Securities LLC and its affiliates may trade securities of Alkermes for their
own accounts and the accounts of their customers and, accordingly may at any
time hold a long or short position in such securities.
5
GENERAL INFORMATION ABOUT THE MEETING AND THE VOTE
This proxy statement and enclosed proxy are being mailed to the Limited
Partners in connection with the solicitation of proxies by and on behalf of the
General Partner for use at the special meeting to be held on November 18, 2003
at 10:00 am, local time, at the offices of Alkermes, 88 Sidney Street,
Cambridge, Massachusetts, and any adjournment or postponement thereof. This
proxy statement is being mailed to the Limited Partners on or about October __,
2003.
PURPOSE OF SPECIAL MEETING
The purpose of the special meeting will be to consider and vote upon
the proposal to approve the proposed termination of the Partnership and to
transact such other business as may properly come before the special meeting.
Pursuant to the limited partnership agreement dated as of February 7, 1992 among
the General Partner, the purchasers of Class A units and the purchaser of the
Class B unit, approval and consummation of the termination would result in the
termination, liquidation and dissolution of the Partnership.
RECORD DATE; VOTING; QUORUM
The board of directors of the General Partner has fixed the close of
business on October 2, 2003 as the record date for the special meeting. Only the
Limited Partners of record on the record date will be entitled to notice of, and
to vote at, the special meeting. As of the record date, 921 units of limited
partnership interest were issued and outstanding and held by 1,106 holders of
record. A complete list of such Limited Partners will be available at the
General Partner's office located at 88 Sidney Street, Cambridge, Massachusetts,
for 30 days before the special meeting.
At the special meeting, each Limited Partner of record on the record
date is entitled to a weighted vote on the termination of the Partnership, based
on the amount of limited partnership interests (based on adjusted capital
contributions) held by such Limited Partner as of the record date. Pursuant to
the limited partnership agreement, the "adjusted capital contribution" with
respect to any Limited Partner means the aggregate capital contribution of such
Limited Partner, already made or to be made to the Partnership pursuant to the
limited partnership agreement, less any selling commissions, financial advisory
and marketing fees, warrant valuation fees and other fees paid by the
Partnership in any fiscal year in respect of such Limited Partner, or any
portion of any capital contribution which was distributed to the partners pro
rata by the Partnership.
Limited partnership interests represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. If no instructions are
indicated, these limited partnership interests will be voted for approval of the
termination of the Partnership and in the discretion of the proxy holder as to
other matters, if any, incidental to the conduct of the special meeting. A
Limited Partner who has given a proxy may revoke it at any time prior to its
exercise by giving written notice thereof to the Secretary of the General
Partner, by signing and returning a later dated proxy or by voting in person at
the special meeting; however, mere attendance at the special meeting will not
itself have the effect of revoking the proxy.
The affirmative vote of the holders of at least 66-2/3% of limited
partnership interests outstanding (based on adjusted capital contributions) as
of the record date is required for approval of the termination of the
Partnership. Accordingly, the termination will not be approved unless the
holders of 66-2/3% of limited partnership interests outstanding as of the record
date vote in favor of the termination. Thus, failure to submit a proxy (or vote
in person at the special meeting) or the abstention from voting by a Limited
Partner and broker non-votes will have the same effect as a vote against the
termination. PWDC has informed the board of directors of the General Partner
that it intends to vote the Class B limited
6
partnership interest held by it as well as the 133 Class A limited partnership
interests held by the R&D III Fund (approximately 14.5% of the limited
partnership interests outstanding) for approval of the termination of the
Partnership, although none of Alkermes, PWDC nor the R&D III Fund is making any
recommendation or expressing any opinion as to how the other Limited Partners
should vote their limited partnership interests regarding the termination of the
Partnership and no Limited Partner should rely on the indication as to how
Alkermes, PWDC or the R&D III Fund will vote in making its decision regarding
the proposal. In addition, Alkermes has informed the board of directors of the
General Partner that it intends to vote its 74 Class A limited partnership
interests (approximately 8.0% of the limited partnership interests outstanding)
for approval of the termination of the Partnership.
There are no quorum requirements with respect to the special meeting,
however, if the Limited Partners holding 66-2/3% of the limited partnership
interests outstanding do not submit a proxy or vote in person at the special
meeting, the termination of the Partnership cannot be approved. BECAUSE THE
LIMITED PARTNERS, OTHER THAN THE R&D III FUND, PWDC AND ALKERMES, TYPICALLY EACH
HOLD ONLY ONE-HALF TO ONE UNIT, IT IS EXTREMELY IMPORTANT THAT EACH LIMITED
PARTNER VOTE ON THE PROPOSAL.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Partnership. All
expenses in connection with the solicitation of the proxies of the Limited
Partners, including the cost of preparing and mailing this proxy statement will
be borne by Alkermes on behalf of the Partnership because the General Partner
and the Partnership have no assets with which to pay such expenses. In addition
to solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of the General Partner, Alkermes or UBS in person or by
telephone, telegram or other means of communication. Alkermes and UBS are not
making any recommendation or expressing any opinion as to how the Limited
Partners should vote their limited partnership interest regarding the
termination of the Partnership. Such directors, officers and employees will not
be additionally compensated. The Partnership has retained Robin Stanley to aid
in the solicitation of proxies. It is estimated that the fee for Robin Stanley
will not exceed $7,500, plus her out-of-pocket costs and expenses. Ms. Stanley
owns 1/2 Class A Limited Partnership Interest and was a director of the General
Partner from March 2000 to October 2002. She is a former PaineWebber employee
but is not acting on behalf of UBS, PaineWebber or any of their affiliates,
including R&D III Fund or PWDC. The Partnership has also retained the Altman
Group to mail the proxy soliciting materials and to collect and count proxies.
It is estimated that the fee for the Altman Group will not exceed $3,000, plus
out-of-pocket costs and expenses. Arrangements will be made with custodians,
nominees and fiduciaries for forwarding of proxy solicitation materials to
Limited Partners, and such custodians, nominees and fiduciaries may be
reimbursed for reasonable expenses incurred in connection therewith.
NO APPRAISAL RIGHTS
There are no appraisal or dissenters' rights applicable in connection
with the proposed termination of the Partnership. Accordingly, any Limited
Partners who do not vote in favor of the termination will not be entitled to
exercise any appraisal or dissenters' rights in connection with the termination.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Except for the matters to which this proxy statement relates, no
matters were submitted to a vote of security holders of the Partnership through
solicitation of proxies or otherwise, from the date of organization of the
Partnership in February 1992 through the date of this proxy statement.
7
THE PROPOSED TERMINATION
THE PARTNERSHIP
Organization of the Partnership
The Partnership was formed in February 1992 under the laws of the State
of Delaware. The limited partnership agreement was entered into by and among the
General Partner, the purchasers of Class A units and the purchaser of the Class
B unit. On April 10, 1992, the Partnership completed a private offering of (i)
920 Class A units, each unit consisting of one Class A limited partnership
interest in the Partnership and warrants to purchase shares of Alkermes, Inc.'s
$0.01 par value per share common stock and (ii) one Class B unit consisting of
one Class B limited partnership interest in the Partnership and warrants to
purchase shares of Alkermes' common stock. In addition, Alkermes issued a
warrant to purchase shares of Alkermes' common stock to R&D III Fund and a
warrant to purchase shares of Alkermes' common stock to PaineWebber
Incorporated. The private placement resulted in net proceeds of approximately
$42 million in cash and non-interest bearing notes receivable from the Limited
Partners, which were payable in annual installments through April 15, 1995.
The principal executive offices of the Partnership are located at the
offices of Alkermes, 88 Sidney Street, Cambridge, Massachusetts 02139, telephone
number (617) 494-0171.
The limited partnership agreement provides that the Partnership shall
continue in effect until December 31, 2020, unless sooner terminated pursuant to
the terms of such agreement.
Purpose of the Partnership
The principal objective of the Partnership was to develop and derive
income from the sale or license of a family of molecules designated by Alkermes
as Receptor-Mediated Permeabilizers for human therapeutic use in the U.S. and
Canada. Cereport, formerly known as RMP-7, is designed to facilitate drug
delivery to the central nervous system and has been the Partnership's principal
product candidate.
Brief History and Current Status of the Partnership
To further the Partnership's objective, it provided funding to Alkermes
for research and development expenses for Cereport from the capital
contributions received from the Limited Partners. Funding by the Partnership to
Alkermes ended during the quarter ended June 30, 1996 when capital contributions
were substantially depleted and none of the partners of the Partnership were
obligated to make any further capital contributions. Since the Partnership
funding was not sufficient to complete clinical trials and seek regulatory
approval of Cereport, Alkermes used in excess of $30 million of its own and its
collaborator's resources to continue the development of Cereport. In 1997,
Alkermes actively sought a collaborative partner to provide funding for the
development of Cereport and to participate in the commercialization of Cereport
if it were successfully developed. Alkermes ultimately entered into an agreement
for the development and commercialization of Cereport with ALZA Corporation
("ALZA"), the only company that expressed interest in the Technology. In 1999
and 2000, Alkermes submitted to ALZA information regarding the results of
further clinical trials and other data to seek ALZA's decision to move ahead
with its involvement in the development of Cereport. In June 2001, ALZA was
acquired by Johnson & Johnson ("J&J"), becoming a wholly owned subsidiary of
J&J. In December 2002, ALZA decided it had no interest in continuing development
of Cereport and mutually terminated the agreement with Alkermes.
Alkermes completed Phase I, Phase I/II and Phase II clinical trials and
began Phase III clinical trials for Cereport which have been discontinued except
for one clinical trial conducted by the Children's Oncology Group, in which the
final patient was dosed in August 2003. To date, although analysis of
8
clinical data showed some clinical activity, there has been no clinical
demonstration of efficacy sufficient for registration with any regulatory
authority.
As a result of the difficulties encountered in the development of
Cereport, including the clinical trial results and the termination of the
agreement with ALZA, Alkermes determined that continued development of Cereport
is not economically feasible and, therefore, it would not commit additional
funds to the development of Cereport. Alkermes abandoned all related patents
outside the U.S. and Canada. Alkermes notified the Limited Partners of this
decision in a March 2003 letter. At a meeting of the board of directors of the
General Partner held in April 2003, the board examined the various options
available to the Partnership given this decision by Alkermes, including
attempting to find a new collaborator to develop Cereport and the Technology and
market any resulting products in the U.S. and Canada, selling the Technology or
terminating the Partnership. The General Partner requested that Alkermes, on
behalf of the Partnership, attempt to find a company interested in developing,
licensing or purchasing the Technology. Alkermes assembled a package of
non-confidential information regarding the development of Cereport and sent that
package to eighteen pharmaceutical or biotechnology companies identified by the
Alkermes business development department to be most likely interested in the RMP
Technology, and Cereport in particular, given their activities in the field of
cancer treatment. After follow up with each of the target companies, no target
company had any interest in acquiring or developing the Technology. See "Efforts
to Seek a Collaborator and to Sell the Technology."
At two additional meetings held in May and June 2003, the board of
directors of the General Partner were informed by legal counsel that under the
product development agreement, Alkermes' decision not to fund future development
of Cereport would ultimately result in the termination of the Research Program,
as well as the obligations of Alkermes to manufacture and market any resulting
products. Alkermes informed the board that it was unsuccessful in identifying
any company interested in Cereport or the Technology. Based on the board's
discussions, the board of directors of the General Partner concluded in October
2003 that the Partnership does not have the resources or capability required to
develop the Technology or market any resulting products on its own, that
continued development of Cereport and the Technology is not economically
feasible and that the assets of the Partnership have no commercial value.
A series of consequences flowed from the conclusions reached by the
board of directors of the General Partner. First, the board of directors of the
General Partner terminated the Research Program and the Marketing Program.
Second, as a result of the termination of the Research program and the Marketing
Program, Alkermes' Purchase Option under the purchase agreement between Alkermes
and each of the Limited Partners terminated. Third, rights to the Technology
that had been licensed to Alkermes reverted to the Partnership. Fourth,
Alkermes' obligation to develop the Technology ceased. Fifth, Alkermes'
obligation to market any resulting Products ceased. Sixth, Alkermes' obligation
to manufacture any resulting Products will cease upon the earlier of (i) April
2, 2005 (eighteen months after termination of the Purchase Option) and (ii) the
sale or license of the Technology. Seventh, the board of directors determined
that termination of the Partnership was in the best interest of the Partnership
and the Limited Partners. See "The Development and Purchase Agreements" for
definitions of capitalized terms and further discussion of Alkermes' rights and
obligations.
9
RECOMMENDATION OF THE GENERAL PARTNER; REASONS FOR THE PROPOSED TERMINATION
Following three meetings of the board of directors of the General
Partner held in April, May and June 2003, the board of directors met on October
2, 2003 and unanimously adopted resolutions (i) expressing the board's belief
that the termination of the Partnership is in the best interests of the
Partnership and its Limited Partners, (ii) approving and declaring advisable the
proposed termination, subject to approval by the Limited Partners and (iii)
recommending that the Limited Partners vote FOR approval of the termination. The
General Partner has made this determination based on its assessment of (i) the
Partnership's financial condition and prospects, (ii) the availability,
feasibility and effect on the Limited Partners of alternatives to the
termination and (iii) the potential tax benefit of issuing a final Schedule K-1
to Limited Partners. In assessing the Partnership's financial condition,
prospects and remaining assets, the General Partner considered the following
factors:
- clinical trial results and difficulties encountered in
development of Cereport;
- regulatory environment and evolving standard of care for
treatment of brain tumors;
- termination of the development and commercialization agreement
between Alkermes and ALZA Corporation;
- unsuccessful efforts to identify a third party to develop,
license or buy the technology (despite marketing efforts in
1997 and 2003);
- resulting lack of commercial value of the assets of the
Partnership;
- absence of cash assets of the Partnership to pay for the
further development of Cereport, for the ongoing expenses of
maintaining the Partnership or for the defense of its patents
from infringement;
- the Partnership received a going concern qualification in its
latest audit;
- potential tax benefit to Limited Partners upon issuance of the
final Schedule K-1s as described in more detail below;
- if the Partnership is not terminated, there is a possibility
that a collaborator, buyer or licensor will surface, although
the General Partner believes it to be unlikely; and
- if the Partnership is not terminated, there is a possibility
that Alkermes would develop, at some future date, a product or
competing product which could generate royalty payments to the
Limited Partners, although the General Partner believes it to
be unlikely.
After considering these and other factors and lengthy discussions, the
General Partner concluded that termination is in the best interests of the
Partnership and the Limited Partners and recommends that the Limited Partners
vote FOR approval of the termination. Alkermes, PWDC and the R&D III Fund have
informed the board of directors of the General Partner that they each intend to
vote their respective limited partnership interests for approval of the
termination of the Partnership, although none of Alkermes, PWDC nor the R&D III
Fund is making any recommendation or expressing any opinion as to how the other
Limited Partners should vote their limited partnership interests regarding the
termination of the Partnership and no Limited Partner should rely on the
indication as to how Alkermes, PWDC or the R&D III Fund will vote in making its
decision regarding the proposal.
10
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
This summary outlines certain federal income tax principles applicable
to Limited Partners in connection with the liquidation. This summary deals only
with the treatment of a Limited Partner who acquired his interest pursuant to
the private offering in April 1992. There are numerous other federal income tax
principles not discussed herein that may be important to a Limited Partner in
connection with the partner's investment in the Partnership. Each Limited
Partner is urged to consult his/her own tax advisor concerning his investment in
the Partnership and the possible federal and state tax consequences of the
liquidation.
If there is an affirmative vote to terminate, the Partnership intends
to take the position that it has incurred an ordinary loss from trade or
business activities in connection with the abandonment of the Intellectual
Property, a distributive share of which will be allocated to the General Partner
and each Limited Partner. The allocated share to the Limited Partners of this
ordinary loss is expected to approximate $43,000 for a full unit and $21,500 for
a half unit. In order to abandon successfully the Intellectual Property for U.S.
federal income tax purposes and claim a deduction for such loss associated with
the abandonment of the Intellectual Property, the Partnership must adhere to
several objective and subjective requirements associated with the abandonment of
property. Although the Partnership has endeavored to ensure that these
requirements have been satisfied, the IRS may seek to disallow the deduction on
the grounds that these requirements have not been satisfied.
In addition, there is a risk that the IRS could argue that the
Intellectual Property was worthless on a date prior to the Partnership's
abandonment of such property. Although the chain of events leading up to the
Partnership's abandonment of the Intellectual Property support a deduction at
the time of the Partnership's abandonment, to the extent that the worthlessness
of the Intellectual Property is determined to be attributable to a year for
which the statute of limitations for which the Partnership could file a claim
for the deduction has expired, the deduction will be disallowed.
In general, the Partnership's abandonment of the Intellectual Property
and subsequent liquidation may affect the amount of each partner's loss subject
to the "at-risk" and "passive activity" limitations set forth in sections 465
and 469, respectively of the Code. With respect to each of these limitations,
each partner should consult his/her own income tax advisor concerning his/her
investment in the Partnership and the potential U.S. federal income tax
consequences associated with the liquidation of the Partnership.
The Partnership has not made and nor does the Partnership intend to
make an election under section 754 of the Code. Therefore, each Limited Partner
is urged to consult his/her own tax advisor concerning the amount and character
of any loss resulting from the abandonment of the Intellectual Property or
liquidation of the Partnership.
Treas. Reg. Section 1.6011-4 generally requires that each taxpayer that
"participates" in a "reportable transaction" must attach a disclosure statement
regarding the transaction to its U.S. federal income tax return. One type of
reportable transaction described within Treas. Reg. Section 1.6011-4 is a
transaction that gives rise to a loss under section 165 of the Code. As a result
of the Partnership's abandonment of the Intellectual Property, the rules set
forth in Treas. Reg. Section 1.6011-4 may require that the Partnership and/or
some or all of the Limited Partners of the Partnership to disclose the
abandonment transaction. The disclosure requirements of Treas. Reg. Section
1.6011-4 may differ for each partner. Therefore, each partner is urged to
consult with his/her own income tax advisor concerning these disclosure
requirements.
The Partnership is subject to the consolidated audit procedures set
forth in sections 6221 through 6233 of the Code. Consequently, a Limited Partner
is required to disclose any position taken on his/her individual U.S. federal
income tax return with respect to a partnership item that is inconsistent with
the
11
treatment of such item by the Partnership. Therefore, each partner is urged to
consult with his/her own income tax advisor concerning these disclosure
requirements.
DESCRIPTION OF THE TECHNOLOGY
Cereport, a member of the family of RMPs, is a nine amino acid peptide
based on bradykinin, a compound occurring naturally in the body and known to
affect vascular permeability. Cereport is a proprietary, synthetic analog of
bradykinin developed to increase transiently the permeability of the blood-brain
barrier. Following injection, Cereport increases permeability by triggering a
brief relaxation of the tight cellular junctions of the blood-brain barrier.
During the time the tight junctions are relaxed, permeability is increased and
drug molecules in the bloodstream can diffuse into the brain in concentrations
greater than can usually be achieved without Cereport. Preclinical and clinical
data also suggested that Cereport could be administered at doses that
selectively increase permeability in the region of brain tumors and other
pathology.
Cereport exerts a pharmacologic effect on the vasculature of the brain
and does not itself bind to or serve as a carrier for the drug of which it is
facilitating delivery. Cereport was designed to be marketed as an independent
agent to increase the utility of other therapeutic and diagnostic compounds
given with it. In the clinical setting, Cereport was administered in conjunction
with a therapeutic or diagnostic agent. Timing of Cereport administration
relative to that of the therapeutic or diagnostic agent has to be determined on
a drug by drug basis to attempt to optimize barrier permeability during the time
of peak drug plasma concentrations.
Brain Tumor
Current treatment for brain tumor is limited and inadequate. Standard
treatment typically involves surgery to remove cancerous tissue, followed by
radiation therapy. After initial treatment with surgery and/or radiotherapy,
brain tumors often recur. Upon recurrence, tumors typically progress rapidly,
neurological function and quality of life deteriorate and patients die within
months. Chemotherapy has played only a limited role in treatment, in part due to
the limited access of many chemotherapeutic agents to the brain because of the
normally restrictive blood-brain barrier. Carboplatin is a chemotherapeutic
approved for use by the FDA and other regulatory authorities worldwide for use
in the treatment of various tumor types outside of the brain, but is limited in
its ability to penetrate into the brain. The goal of the Cereport development
program was to enable more effective use of chemotherapeutic agents like
carboplatin in the treatment of brain tumors by transiently increasing the
permeability of the blood-brain barrier.
HISTORY OF CLINICAL DEVELOPMENT
In 2002, there were two remaining Cereport Phase II clinical trials
being conducted, one by the Pediatric Branch of the National Cancer Institute
("NCI"), which has been discontinued, and one by the Children's Oncology Group,
which dosed the final patient in August 2003. A number of other clinical trials
were conducted that are described in more detail below, all of which have been
completed or discontinued. As discussed above, Alkermes has discontinued all
funding for the further development of Cereport and the Research Program has
terminated. Without Alkermes or some other collaborator, the Partnership has no
resources or capability to conduct any clinical trials.
The General Partner's clinical strategy for Cereport had been to
establish a foundation of safety and pharmacologic effect of increasing
blood-brain barrier permeability prior to entering Phase III clinical trials of
Cereport administered in combination with carboplatin. Through the Phase I,
Phase I/II, Phase II and Phase III clinical trials, Cereport was shown to have a
good safety profile in volunteers and patients. Transient flushing was the most
consistent adverse event noted and nausea and vomiting were determined
12
to be the dose limiting toxicity. There was no evidence of increased toxicity
associated with the combination of Cereport and carboplatin, and the drug
combination was generally well tolerated by patients. To date, although analysis
of clinical data showed some clinical activity, in the opinion of the General
Partner, there has been no clinical demonstration of efficacy sufficient for
registration with any regulatory authority.
Recurrent Malignant Glioma
Based on the successful completion of Phase I and Phase I/II clinical
trials, Alkermes initiated multiple Phase II clinical trials both of intravenous
and intra-arterial Cereport and carboplatin in patients with recurrent malignant
glioma.
European Intravenous Phase II Clinical Trials: ALK01-013 and ALK01-019
In Europe, two separate non-controlled, open label Phase II clinical
trials of intravenous RMP-7 and carboplatin in patients with recurrent malignant
glioma commenced in the first quarter of 1995. Patient enrollment was completed
in May 1996, and preliminary results from the two clinical trials were announced
in December 1996.
The two clinical trials enrolled differing patient populations.
ALK01-013 ("Study-013") enrolled patients whose brain tumors had recurred
following previous treatment with surgery and radiotherapy. Such patients had
not previously been treated with chemotherapy. ALK01-019 ("Study-019") enrolled
patients whose brain tumors had recurred following previous treatment with
surgery, radiotherapy, and chemotherapy.
In both clinical trials, patients received treatment cycles of RMP-7
and carboplatin approximately once every four weeks. Each cycle consisted of a
15-minute intravenous infusion of carboplatin and a concurrent 10-minute
intravenous infusion of RMP-7. The prospectively defined endpoints of the
clinical trials included response rates over the first four cycles of treatment
as determined by stabilization or improvement for a minimum of two cycles of
treatment as measured by three standardized tests of neurological impairment and
patient performance status, and stabilization or reduction in tumor volume for a
minimum of two cycles as measured with contrast enhanced MRI.
In Study-013, 45 patients were treated at nine medical centers in the
United Kingdom. The combination of RMP-7 and carboplatin was generally well
tolerated. Of the patients treated, 61% to 91% responded to treatment as
measured by three tests of neurological impairment and performance status. In
addition, 79% of patients responded to the treatment as measured by the size of
their tumor as measured with contrast-enhanced MRI.
An independent analysis conducted by a statistician from the Medical
Research Council ("MRC"), Cambridge, England, compared the effect on survival of
treatment with RMP-7 and carboplatin versus a group of historical control
patients matched on important prognostic factors. All comparisons favored the
group treated with RMP-7 and carboplatin versus the control group. This finding
was statistically significant (hazard ratio 1.9-2.2, p(less than)=0.02), after
accounting for the effects of prognostic factors.
In Study-019, 42 patients were treated at 11 medical centers in the
United Kingdom, France and Sweden. Treatment with the combination of RMP-7 and
carboplatin was generally well tolerated. Of the patients treated, 40% to 59%
responded to treatment as measured by three tests of neurological impairment and
performance status. In addition, 24% of patients responded to the treatment as
measured by the size of their tumor with contrast-enhanced MRI. The MRC did not
perform a comparison of
13
patients in Study-019 to historical controls due to the lack of a database of
comparable patients who had failed surgery, radiotherapy and chemotherapy.
U.S. Intravenous Phase II Clinical Trial: ALK01-017
In the U.S., a Phase II clinical trial of intravenous RMP-7 and
carboplatin commenced in March 1995. Patient enrollment was completed in May
1996, and preliminary results from the clinical trial were announced in March
1997.
The clinical trial was designed as a double-blind, placebo-controlled
study comparing treatment with intravenous RMP-7 and carboplatin to treatment
with carboplatin alone in patients with recurrent malignant glioma. Patients
received treatment cycles of RMP-7 and carboplatin once approximately every four
weeks. Each cycle consisted of an approximately 45-minute intravenous infusion
of carboplatin and a 10-minute intravenous infusion of RMP-7. The prospectively
defined endpoints included time to tumor progression as measured by an increase
of tumor volume measured with contrast-enhanced MRI of greater than 50%, and
three separate measurements of patients' functional capacity, neurological
impairment, and quality of life. The study did not meet its primary endpoint of
time to tumor progression as measured by changes in tumor volume on magnetic
resonance imaging (MRI).
Newly Diagnosed Brain Tumor
The results of the three Phase II intravenous Cereport clinical trials,
while equivocal, provided the basis for the decision to proceed in the United
States and Europe into study ALK01-040, a Phase III clinical trial of
intravenous Cereport and carboplatin in patients with newly diagnosed brain
tumors. Study ALK01-040 began enrollment in March 1998. It was designed to
enroll patients with high grade primary brain tumors following surgical
resection of the tumor and prior to the initiation of radiotherapy. In April
1999, Alkermes announced its plans to discontinue study ALK01-040. The
discontinuation of the study was based on the determination that elements of the
study design were inappropriate and that the probability of successful
completion was low.
Metastatic Brain Tumor
Alkermes conducted a Phase I/II clinical trial of Cereport and
carboplatin in patients with metastatic brain tumors, or tumors that have spread
to the brain from other sites in the body. The study also included a dose
escalation component, in which progressively larger doses of Cereport were being
investigated in this patient population. The clinical trial phase of this study
was completed in 1999. In 2000, the results of this trial were presented to ALZA
pursuant to the development and commercialization agreement with ALZA, which
agreement was mutually terminated in December 2002. See "Collaboration with ALZA
Corporation" below.
Pediatric Brain Tumor
In August 1999, the NCI completed one study of Cereport and carboplatin
in pediatric patients with primary brain tumors. This study began in August 1996
and enrolled 25 patients. The study was a non-controlled, open label Phase I/II
clinical trial of intravenous Cereport and carboplatin in pediatric brain tumor
patients who had failed other therapies. The NCI began a second study in June
1998 that was discontinued in late 2002 after Alkermes discontinued funding.
This second study was a Phase II multi-center study in pediatric brain tumor
patients.
An investigator sponsored investigational new drug application to study
the radiosensitization effect of Cereport and carboplatin given with radiation
therapy in pediatric brain stem gliomas began in
14
2001. This study was being managed by the Children's Oncology Group in
coordination with the NCI. This study is in the process of winding down and the
final patient was dosed in August 2003. Alkermes has agreed to provide some
additional amounts of Cereport for use in the study which amounts are already
manufactured and held by Alkermes. The discontinuation and winding down of these
pediatric studies was based on Alkermes' determination that the continued
clinical development of Cereport is not economically feasible.
COLLABORATION WITH ALZA CORPORATION
As a result of the efforts of Alkermes to seek a collaborative partner
in 1997 (see "Efforts to Seek a Collaborator and Sell the Technology" below),
after mixed results of three Phase II clinical trials, in late 1996 and early
1997, Alkermes and ALZA entered into an agreement relating to the development
and commercialization of Cereport. Under the terms of the agreement, ALZA made a
$10.0 million upfront payment to Alkermes to fund clinical development; in
return, ALZA had the option to acquire exclusive worldwide commercialization
rights to Cereport, subject to the rights and obligations of the Partnership. In
1999 and 2000, Alkermes presented final reports to ALZA of additional Phase II
clinical trials and other data regarding the use of Cereport in combination with
carboplatin for the treatment of brain tumors. During 2001, ALZA was acquired by
J&J and is now a wholly owned subsidiary of J&J. In December 2002, ALZA decided
it had no interest in continuing development of Cereport and agreed to a mutual
termination of the agreement with Alkermes.
EFFORTS TO SEEK A COLLABORATOR AND TO SELL THE TECHNOLOGY
In 1997, Alkermes actively sought a strategic partner to provide
funding for the development of Cereport and to participate in the
commercialization of Cereport if it were successfully developed and approved.
The effort included targeted solicitations of interest by the head of Alkermes'
business development department to several biotechnology and pharmaceutical
companies active in the treatment of brain tumors or in the drug delivery
business. Of those contacts, only ALZA Corporation expressed interest in future
discussions and ultimately an agreement was entered into with ALZA in the fall
of 1997 relating to the development and commercialization of Cereport. See
"Collaboration with ALZA Corporation" above.
After termination of the agreement with ALZA and Alkermes'
determination that it would not commit additional funds to the development of
Cereport, the board of directors of the General Partner in April 2003 requested
that Alkermes, on behalf of the Partnership, attempt to find a company
interested in developing, licensing or purchasing the Technology. Alkermes
assembled a package of non-confidential information regarding the development of
Cereport and sent that package to eighteen companies identified by the Alkermes
business development department to be most likely interested in the Technology,
and Cereport in particular, given their activities in the field of cancer
treatment, including Amgen, Astra Zeneca, Aventis, Bristol Meyers Squibb, Eli
Lilly and Company, GlaxoSmithKline and Novartis. The Alkermes business
development department followed up by telephone with each of the target
companies to determine their interest in the Technology over an approximately
ten-week period. Of these eighteen companies, seven responded with no interest
at all, eight asked for more non-confidential information, one never responded
at all despite repeated efforts to contact it and two companies requested
additional time to consider the information provided. However, ultimately, no
target company asked for confidential information, had any interest or sought to
initiate any discussions regarding developing or obtaining rights to the
Technology.
In September 2003, Alkermes was contacted by Horizon Biomedical
Ventures, LLC, a firm that considers acquiring shelved or languishing products
and technologies to extract value, sometimes through further development of the
product or technology. After general discussion with an Alkermes
15
representative and review of the same non-confidential information sent to the
selected companies in the active marketing effort, Horizon Biomedical determined
that it has no interest in the Technology.
TERMINATION OF RESEARCH AND MARKETING PROGRAMS
As a result of the difficulties encountered in the development of
Cereport including the clinical trial results and the termination of the
agreement with ALZA, Alkermes determined that continued development of Cereport
is not economically feasible and, therefore, it would not commit additional
funds to the development of Cereport. Alkermes notified the General Partner and
then, on behalf of the General Partner, notified the Limited Partners of this
decision in a March 2003 letter.
At a meeting of the board of directors of the General Partner held in
April 2003, the board of directors reviewed the then-current status of the
research and development program being conducted by Alkermes pursuant to the
product development agreement, the prospects for the successful development and
commercialization of Cereport and any other product of the Technology and the
financial resources necessary to support such commercialization, as well as the
financial resources available to the Partnership. The board of directors of the
General Partner was informed by representatives of Alkermes present at the
meeting that, in such representatives' opinion, at least $12 to $20 million in
additional funds would be required to conduct a Phase III clinical trial before
a New Drug Application ("NDA") seeking regulatory approval for Cereport could
even be filed. The board of directors noted that the Partnership had no
remaining cash after September 1997 and none of the partners are obligated to
provide further funding or capital contributions to the Partnership. The
Alkermes representatives stated that Alkermes is unwilling to contribute
additional funds toward the development of Cereport. The Alkermes
representatives reviewed the efforts in 1997 to seek a collaborator to fund the
further development of Cereport in exchange for commercialization rights. See
"Efforts to Seek a Collaborator and to Sell the Technology" above. The board of
directors of the General Partner determined that given the immediate lack of
funds to conduct any future development activities, that it was in the best
interests of the Partnership to seek a collaborator, purchaser or licensor of
the Technology. It was decided that Alkermes would undertake that marketing
effort on behalf of the Partnership.
Subsequent to the April 2003 meeting of the board of directors of the
General Partner, Alkermes attempted to sell or license the Technology to a third
party or locate a strategic partner to otherwise fund further development of
Cereport and the Technology. At the May 2003 meeting of the board of directors
of the General Partner, representatives of Alkermes described the efforts being
undertaken to identify such a partner. See "Efforts to Seek a Collaborator and
Sell the Technology" above. The board of directors of the General Partner, at
its June 2003 meeting, again discussed the clinical development of Cereport,
steps and funding needed to continue development of Cereport, the lack of
Partnership financial resources and Alkermes' decision to stop funding the
development of Cereport. The board's discussion turned to the two potential
paths moving forward - securing a third party to buy, license or develop the
Technology or termination of the Partnership. Alkermes provided a description
and status report on its efforts to find a collaborative partner, purchaser or
licensor of the Technology. The board authorized Alkermes to negotiate with any
third party interested in buying, licensing or developing the Technology.
Finally, the board of directors discussed the possible termination of the
Partnership and determined to wait for the results of Alkermes' marketing
efforts before making any final decisions. At a meeting of the board of
directors of the General Partner on October 2, 2003, it was reported that no
third party had expressed any interest in the Technology and that an additional
third party, Horizon Biomedical, sought information regarding Cereport and the
Technology but determined that it too had no interest. The board of directors
concluded that the continued development of Cereport and the Technology was not
economically feasible, that the assets of the Partnership had no commercial
value and voted unanimously to terminate the research and marketing programs.
16
Results of Termination
Under the terms of the Product Development Agreement (described below),
upon the termination of the research and marketing programs by the board of
directors of the General Partner, Alkermes relinquished its rights to manage the
clinical development of the Technology as well as any rights to exploit or use
the Technology in the United States and Canada and to receive management fees
and the reimbursement of certain expenses relating to the research program and
the Technology. Alkermes retained responsibility for indefinitely maintaining,
at its own expense, all records, including a library of biological, chemical and
other physical materials, relating to the Technology. In addition, under the
terms of the Purchase Agreement (described below), the termination of the
research and marketing programs caused Alkermes' option to purchase the limited
partnership interests of the Limited Partners to likewise terminate, and set an
interim license termination date to occur eighteen months thereafter, on April
2, 2005.
INFORMATION ABOUT THE BUSINESS OF THE PARTNERSHIP
The Development and Purchase Agreements
The Partnership entered into a product development agreement, dated as
of March 6, 1992, with Alkermes (the "Product Development Agreement") pursuant
to which Alkermes granted certain licenses to the Partnership and Alkermes
agreed to perform certain development and marketing obligations. Alkermes
entered into a purchase agreement, dated as of March 6, 1992 (the "Purchase
Agreement"), with each investor in the private placement in 1992 and the Class B
Limited Partner, pursuant to which Alkermes could exercise a right to purchase
all the outstanding partnership interests of all the partners.
Pursuant to the Product Development Agreement, Alkermes irrevocably
granted to the Partnership an exclusive, royalty-free license to certain patent
rights and other technology owned or controlled by Alkermes related to RMPs (the
"Background Technology"). The license granted to the Partnership is limited to
Background Technology necessary or materially useful for the development and
commercialization of products based on RMPs (each a "Product") for human
pharmaceutical use in the U.S. and Canada (the "Field of Activity"). The
Partnership granted to Alkermes an exclusive, royalty-free license to all patent
rights and other technology arising from research and development conducted
under the Product Development Agreement (the "Program Technology") for
exploitation outside the Field of Activity. Finally, the Partnership granted to
Alkermes a royalty-bearing right and license to make, use, modify and improve
the Program and Background Technology within the Field of Activity (the "Interim
License"). Until the termination of the Interim License, Alkermes is obligated
to pay the Partnership within sixty days after the end of each calendar quarter
a payment equal to 12% of revenues on sales of RMPs in the U.S. and Canada.
Alkermes must also pay the Partnership, to the extent sales of RMPs in the U.S.
and Canada are insufficient to allow the Partnership to pay projected
distributions in any calendar year, quarterly payments equal to 10% of sales of
RMPs in Europe. Such payments based on sales of RMPs in Europe may be reduced if
such sales are made through sublicensees or other third parties. Alkermes is
obligated, in certain circumstances, to make payments to the Partnership equal
to 6% of revenues of Alkermes from the sale of certain products which are
competitive with any Product. The Interim License will terminate on April 2,
2005. After the Interim License Termination Date, Alkermes is obligated to pay a
6% royalty on sales of certain competitive products in the U.S. and Canada until
the fifth anniversary of the Interim License Termination Date. In addition,
Alkermes is obligated to pay the Partnership, to the extent sales of RMPs in the
U.S. and Canada are insufficient to pay projected distributions in any calendar
year, payments on a scale ranging from 10% down to 4% of Alkermes' revenues on
sales of RMPs in Europe and a scale ranging from 5% down to 2% of revenues from
sales of competitive products in Europe. Any payments based on sales of RMPs or
competitive products in Europe will terminate on the eleventh anniversary of the
Interim License Termination Date. If the Partnership terminates, the Limited
Partners will not receive any payment related to such royalties.
17
Alkermes agreed, pursuant to the Product Development Agreement, to the
extent permitted by Partnership funds (including the funds which Alkermes
elected to contribute to the development of Cereport), to use its best efforts
to perform the research and development necessary to engage in the Field of
Activity (the "Research Program"). Through June 30, 1996, the Partnership
reimbursed Alkermes for its research and development expenses on behalf of the
Partnership and paid a management fee equal to ten percent (10%) of such
expenses.
The Partnership's funds were expended and no United States Food and
Drug Administration ("FDA") marketing approval was received for the sale by or
on behalf of the Partnership of any Product in the Field of Activity. In this
circumstance, the Product Development Agreement provided that the General
Partner was to determine the amount of additional funds required by the
Partnership in the upcoming year, and Alkermes would have the right, in its sole
discretion, to contribute such funds to the Partnership or to pay such funds in
any manner to which Alkermes and the General Partner agreed (including the
direct payment of research and development expenses). Alkermes paid the research
and development expenses of the Partnership directly. However, in early 2003,
Alkermes decided not to commit any additional funds to the development of
Cereport. See "Termination of Research and Marketing Programs" above.
Pursuant to the Product Development Agreement, Alkermes agreed to use
its best efforts to manufacture and market the Products in the Field of Activity
directly or through third parties in the United States and Canada in accordance
with the marketing program approved by the board of directors of the General
Partner (the "Marketing Program"). Pursuant to the Purchase Agreement, as
defined below, Alkermes agreed to use its best efforts to manufacture Products
and to sell the Products for use in the Field of Activity directly. If Alkermes
determined that such manufacture and sale is not commercially practicable, it
has agreed to use its best efforts to license or sell the Program and Background
Technology to a third party for the highest consideration that, in Alkermes'
reasonable business judgment, is obtainable.
The Product Development Agreement provided that Alkermes' obligations
to develop Cereport or any other Product would cease and the Purchase Option (as
defined below) would terminate if (i) at any time at least 75% of the directors
of the General Partner determine that the Research Program is infeasible or
uneconomic and should be discontinued with respect to all Products or (ii) if
Alkermes decided not to contribute the additional funds to the Partnership which
are determined by the General Partner to be required when all Partnership funds
have been expended and no FDA marketing approval has been received for the sale
of any Product in the Field of Activity. Furthermore, Alkermes' obligations to
manufacture and market Cereport or any other Product would cease and the
Purchase Option would terminate if at least 75% of the directors of the General
Partner determined to discontinue the Marketing Program with respect to all
Products or upon the earlier of (i) eighteen months after termination of the
Purchase Option and (ii) the sale or license of the Program and Background
Technology. For a description of the actions of the board of directors of the
General Partner and Alkermes pursuant to these provisions, see "Termination of
the Research and Marketing Programs" above.
Under the terms of the Purchase Agreement, each Limited Partner granted
to Alkermes an irrevocable option (the "Purchase Option") to purchase his, her
or its interest in the Partnership. The Purchase Option is exercisable only if
all partnership interests are to be purchased and such option is exercised
pursuant to certain conditions set forth in the Purchase Agreement generally
related to the first commercial sale of a Product. If the Purchase Option were
exercised, Alkermes would be obligated to make a certain lump sum payment to
each Limited Partner (which could be paid in Alkermes common stock) as well as
royalties based on sales of Products.
18
Pursuant to the agreement, the Purchase Option would terminate upon the
occurrence of any of the following termination events: (i) the bankruptcy of
Alkermes or the Partnership, (ii) the cessation of operations by Alkermes, (iii)
the seizure or attachment of all or a substantial part of Alkermes' assets, (iv)
the termination of the Research Program or the Marketing Program, (v) Alkermes'
notice to the Partnership and the Limited Partners that it does not intend to
exercise the Purchase Option, or (vi) the expiration unexercised of the Purchase
Option. Upon any such termination, the Partnership would be free to license,
assign or otherwise transfer the Program and Background Technology in the Field
of Activity.
Patents, Licenses and Proprietary Rights
Pursuant to the Product Development Agreement, Alkermes has agreed to
file patent and similar applications that it believes in its reasonable business
judgment are necessary or useful to protect the Partnership's interest in the
Program and Background Technology and has agreed to use reasonable diligence to
prosecute and maintain in force such applications and any resultant patents or
similar rights at the Partnership's expense to the extent such applications
relate to Program and Background Technology in the Field of Activity. This
obligation will cease upon the earlier of (i) the sale or license of the
technology licensed to the Partnership and (ii) April 2, 2005 (eighteen months
after termination of the Purchase Option). Since the Partnership's funds were
fully expended in mid-1996, Alkermes has paid all patent expenses without
reimbursement from the Partnership. Pursuant to the Product Development
Agreement, Alkermes has abandoned the patents and patent applications relating
to the RMP technology in countries outside the U.S. and Canada, based on its
reasonable business judgment that any commercial value in such patents and
patent applications is outweighed by the expense of maintaining and pursuing
such patents and patent applications.
The Partnership has rights under five U.S. patents directed to
composition of matter as well as processes of preparation and methods of use,
including patents relating to permeabilizers, of which one U.S. patent was
issued in each of May 1992, December 1993, April 1996, December 1996 and
November 1997. None of the U.S. patents is expected to expire prior to 2010. The
Partnership has rights under four Canadian patent cases, one issued patent
expiring in 2012 and three pending applications.
Alkermes has the right, in certain circumstances, but not the
obligation, to bring patent infringement actions against third parties that
infringe any of the Partnership's rights with respect to the Program and
Background Technology. However, because Alkermes has determined that continued
development of Cereport is not economically feasible and the Research Program
and the Purchase Option have terminated, Alkermes does not intend to bring any
such actions. Therefore, the enforcement of patents against third party
infringers is an obligation of the Partnership. The Partnership does not have
the substantial resources necessary to bring a patent infringement action or
otherwise bring an action to protect its proprietary rights against third
parties.
Two U.S. patents have issued to a third party in the U.S. and in Europe
that contain claims covering certain analogs and uses thereof of the same
naturally occurring molecule on which Cereport is based. There can be no
assurance that the claims of the issued U.S. patents will not be infringed by
the Partnership's or any collaborator's proposed manufacture, use or sale of
Cereport. There can be no assurance that the Partnership would prevail in any
legal action seeking damages or injunctive relief for infringement of the
patents or that any license required under such patents would be made available
or, if available, would be available on acceptable terms. Alkermes is obligated
to defend any such suit or action until April 2, 2005 (eighteen months after
termination of the Purchase Option) at its expense. The Partnership does not
have the substantial resources necessary to defend any such action on its own
should a third party collaborator not be obligated to incur such expense on its
behalf. Furthermore, there can be no assurance that any licenses under any
patents would be made available on commercially viable terms,
19
if at all. Failure to obtain a required license could result in the inability to
proceed with RMP-based products.
The patent positions of holders of technology similar to the Technology
such as pharmaceutical, biopharmaceutical and biotechnology firms, are generally
uncertain and involve complex legal and factual questions. In addition, there
can be no assurance that the claims of the patents issued in connection with the
Partnership's Technology will be sufficiently broad to cover the Products
developed by the Partnership or its future collaborators, if any, or to provide
the Partnership with any competitive advantages. Moreover, no assurance can be
given that patents issued in connection with the Partnership's product candidate
will not be contested, narrowed, invalidated or circumvented.
Pharmaceutical, biopharmaceutical and biotechnology companies also rely
upon unpatented trade secrets and improvements, unpatented know-how and
continuing technological innovation to develop and maintain their competitive
position which they seek to protect, in part, by confidentiality agreements with
their corporate partners, collaborators, employees and consultants. There can be
no assurance that these agreements will not be breached, that the Partnership
would have adequate remedies for any breach, or that the Partnership's trade
secrets will not otherwise become known or be independently discovered by
competitors.
Such companies' practice is to require their employees, consultants and
advisors to execute a confidentiality agreement upon the commencement of an
employment or consulting relationship with the employer. The agreements provide
that all confidential information developed or made known to an individual
during the course of the employment or consulting relationship shall be kept
confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the individual while employed by the employer shall be
the exclusive property of such employer. There can be no assurance, however,
that these agreements will provide meaningful protection for the Partnership's
trade secrets in the event of unauthorized use or disclosure of such
information.
Competition
The biotechnology and pharmaceutical industries are subject to rapid
and substantial technological change. The Partnership and any collaborator face,
and will continue to face, intense competition in the development,
manufacturing, marketing and commercialization of RMP product candidates from
academic institutions, government agencies, research institutions, biotechnology
and pharmaceutical companies, including its collaborators, and drug delivery
companies. The General Partner believes that there are currently no products
approved by the FDA for increasing the permeability of the blood-brain barrier.
There are, however, many novel experimental therapies for the treatment of brain
tumors and central nervous system infections being tested in the U.S. and
Europe. There can be no assurance that developments by others will not render
RMP product candidates or technologies obsolete or noncompetitive.
The Partnership does not have any resources, capability or experience
necessary to manufacture or market Cereport or any RMP products. The competitors
and potential competitors of the Partnership have substantially greater capital
resources, manufacturing and marketing experience, research and development
resources and production facilities. These competitors also have significantly
greater experience than the Partnership in undertaking preclinical testing and
clinical trials of new pharmaceutical products and obtaining FDA and other
regulatory approvals. There can be no assurance that the Partnership would be
able to compete successfully with such companies. The existence of products
developed by the Partnership's competitors, or other products or treatments of
which the General Partner is not aware, or products or treatments that may be
developed in the future, may adversely affect the marketability of products
developed by the Partnership.
20
Manufacturing and Marketing
Cereport is a small peptide manufactured using standard synthetic
techniques. Historically, Alkermes has relied on an independent European
pharmaceutical company for the manufacture and supply of Cereport. However, due
to the termination of Alkermes' obligation to manufacture Cereport on behalf of
the Partnership, the Partnership or a future collaborator will have to either
enter into an agreement with a third party manufacturer for the manufacture of
Cereport or manufacture Cereport itself. The General Partner believes that, if
necessary, there are companies with which the Partnership could contract to
manufacture and supply the requirements for Cereport. Nevertheless, there can be
no assurance that any manufacturer of Cereport will meet demands for quality,
quantity, cost and timeliness of delivery.
Because of the termination of the Research and Marketing Programs in
addition to the termination of the agreement with ALZA, the Partnership would
have to either market Cereport on its own or find another collaborator. Because
the Partnership does not have the resources, capability or experience necessary
to market on its own, the Partnership must enter into arrangements with third
parties to market and sell its products in order to achieve commercial success
for any product candidate approved by the FDA.
Government Regulation
The manufacture and marketing of pharmaceutical products in the U.S.
require the approval of the FDA under the Federal Food, Drug and Cosmetic Act.
Similar approvals by comparable agencies are required in Canada. The FDA has
established mandatory procedures and safety standards which apply to the
preclinical testing and clinical trials, manufacture and marketing of
pharmaceutical products. Pharmaceutical manufacturing facilities are also
regulated by state, local and other authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess the drug's efficacy
and to identify potential safety problems. The results of these studies must be
submitted to the FDA as part of an Investigational New Drug application ("IND"),
which must be reviewed by the FDA before proposed clinical testing can begin.
Typically, clinical testing involves a three-phase process. Phase I trials are
conducted with a small number of subjects and are designed to provide
information about both product safety and the expected dose of the drug. Phase
II trials are designed to provide additional information on dosing and
preliminary evidence of product efficacy. Phase III trials are large scale
studies designed to provide statistical evidence of efficacy and safety in
humans. The results of the preclinical testing and clinical trials of a
pharmaceutical product are then submitted to the FDA in the form of an NDA, or
for a biological product in the form of a Product License Application ("PLA"),
for approval to commence commercial sales. Preparing such applications involves
considerable data collection, verification, analysis and expense. In responding
to an NDA or PLA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the application does
not satisfy its regulatory approval criteria.
Prior to marketing, any product developed by the Partnership must
undergo an extensive regulatory approval process, which includes preclinical
testing and clinical trials of such product candidate to demonstrate safety and
efficacy. This regulatory process can require many years and the expenditure of
substantial resources. Data obtained from preclinical testing and clinical
trials are subject to varying interpretations, which can delay, limit or prevent
FDA approval. In addition, changes in FDA approval policies or requirements may
occur or new regulations may be promulgated which may result in delay or failure
to receive FDA approval. Delays and costs in obtaining regulatory approvals
would have a material adverse effect on the Partnership's business, financial
condition and results of operations.
21
Among the conditions for NDA or PLA approval is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform on an ongoing basis with Good Manufacturing Process ("GMP"). Before
approval of an NDA or PLA, the FDA will perform a prelicensing inspection of the
facility to determine its compliance with GMP and other rules and regulations.
In complying with GMP, manufacturers must continue to expend time, money and
effort in the area of production and quality control to ensure full technical
compliance. After the establishment is licensed, it is subject to periodic
inspections by the FDA.
The requirements which the Partnership must satisfy to obtain
regulatory approval by governmental agencies in Canada prior to
commercialization of its products in Canada can be as rigorous and costly as
those described above. Because the Partnership does not have the resources,
capability or experience necessary to obtain regulatory approval on its own, the
Partnership must enter into arrangements with third parties in order to obtain
such regulatory approvals. There can be no assurance that the Partnership will
be able to enter into such arrangements.
The Partnership and any collaborator is also subject to various laws
and regulations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the
Partnership's research.
Employees
The Partnership and the General Partner do not have any employees.
Historically, employees of Alkermes have performed services on behalf of the
Partnership and the General Partner. As previously discussed, Alkermes has
informed the General Partner that it will not further support the Research
Program.
Description of Property
The Partnership and the General Partner do not own or lease any
property. Historically, the General Partner and the Partnership have utilized
the properties leased by Alkermes. As previously discussed, Alkermes has
informed the General Partner that it will not further support the Research
Program.
Under the product development agreement, Alkermes has an indefinite
obligation to store, preserve and maintain all materials, documents and other
records (including certain physical, chemical and biological specimens) relating
to the RMP-related technology and make same reasonably available to the
Partnership, its representatives and any third-party licensees or successors in
interest thereto.
Legal Proceedings
The Partnership is not aware of any material pending legal proceedings
to which the Partnership is a party or of which any of its property is the
subject.
TERMINATION, LIQUIDATION AND DISSOLUTION OF THE PARTNERSHIP
GENERAL
Approval and consummation of the termination by holders of at least
66-2/3% of the limited partnership interests outstanding as of the record date
will trigger a dissolution and liquidation of the Partnership under the terms of
the limited partnership agreement. Upon termination of the Partnership, the
affairs of the Partnership will be wound up and all of its debts and liabilities
will be discharged in the order of priority as provided by law.
22
The winding up of the affairs of the Partnership will be conducted
exclusively by the General Partner. The General Partner, in carrying out such
winding up and distribution, will have full power and authority to sell all or
any of the Partnership's assets or to distribute the same in kind to the Limited
Partners. Any assets distributed in kind would be subject to all operating
agreements or other agreements relating thereto which survive the termination of
the Partnership. However, the Partnership has no cash assets and the board of
directors of the General Partner has determined that the non-cash assets of the
Partnership, consisting of rights under certain patents, know-how, data and
information relating to Cereport and the Technology for exploitation in the U.S.
and Canada, and any remaining Cereport drug product, have no commercial value
and such rights will be abandoned prior to termination. There will be no amount
of cash or property available for distribution to Limited Partners on
termination and liquidation.
Upon the consummation of the liquidation, the Partnership will file a
certificate of cancellation with the Secretary of State of the State of Delaware
in accordance with Section 17-203 of the Delaware Revised Uniform Limited
Partnership Act. After the filing of the certificate of cancellation, the
Partnership will no longer be authorized to undertake partnership actions other
than those necessary for winding-up its affairs.
Various laws for the protection of creditors may apply to the
liquidation. These laws apply to activities such as liquidating distributions to
Limited Partners and payment of liabilities to creditors of the Partnership.
There will be no liquidating distributions to the Limited Partners and the
Partnership has no liabilities, as historically Alkermes has paid all
liabilities of the Partnership.
PARTNERSHIP MANAGEMENT AND MARKET FOR AND OWNERSHIP OF THE LIMITED
PARTNERSHIP INTERESTS AND RELATED MATTERS
Management of Partnership
Directors of the General Partner
Richard F. Pops, age 41, has been a director of the General Partner
since its inception in 1992. Mr. Pops has also been Chief Executive Officer and
a director of Alkermes since February 1991. Mr. Pops currently serves on the
Board of Directors of Neurocrine Biosciences, Inc., a biotechnology company, the
Biotechnology Industry Organization (BIO), serving as Chairman of the Board, and
the Massachusetts Biotechnology Council (MBC). He serves as Chair for the
Harvard Medical School Advisory Council for Biological Chemistry & Molecular
Pharmacology (BCMP) and is a member of the Harvard Medical School Board of
Fellows. Prior to joining Alkermes in 1991, Mr. Pops was employed by PaineWebber
Incorporated, most recently as Vice President of PaineWebber Development
Corporation, a subsidiary of PaineWebber Incorporated providing product
development financing for technology companies.
James M. Frates, age 36, has been a director of the General Partner
since June 1998. Mr. Frates has also been the Chief Financial Officer, Vice
President, Treasurer and Assistant Secretary of Alkermes since June 1998. From
June 1996 to July 1998, he was employed by Robertson Stephens & Company, most
recently as a Vice President. He received his M.B.A. from Harvard Business
School.
Stephen R. Dyer, age 43, has been a director of the General Partner
since December 2002. Mr. Dyer is a Senior Vice President of UBS Financial
Services Inc., having joined the firm in June 1988 as a Divisional Vice
President. He received his B.S. in Accounting from Boston College and his M.B.A.
from Indiana University. Mr. Dyer is a Certified Public Accountant.
23
Clifford B. Wattley, age 53, has been a director of the General Partner
since December 2002. Mr. Wattley is a Corporate Vice President of UBS Financial
Services Inc., having joined the firm in 1986. From 1986 to 1992, Mr. Wattley
participated in PaineWebber's Principal Transactions Group. Since 1992, Mr.
Wattley has been a member of the Private Investment Department. He holds a B.S.
degree in engineering from Columbia University and his M.B.A. from Harvard
Business School.
Executive Officers of the General Partner
Mr. Pops has been the President of the General Partner since its
inception and the Chief Executive Officer of the General Partner since 1993 when
the office of Chief Executive Officer was created.
Mr. Frates has been the Chief Financial Officer, Vice President,
Treasurer and Assistant Secretary of the General Partner since June 1998.
Compensation
The General Partner receives no compensation for performing its duties
under the Partnership Agreement. It is only entitled to receive its pro rata
share of Partnership distributions, distributions upon liquidation of the
Partnership and reimbursement for its expenditures for the payment of properly
incurred obligations of the Partnership. Furthermore, the officers and directors
of the General Partner receive no compensation other than the right to receive
reimbursement for appropriate expenses incurred while conducting the business of
the General Partner. Because the Partnership has no cash assets and its non-cash
assets will be abandoned upon termination, the General Partner and its officers
and directors will not receive any distributions or reimbursement upon
termination of the Partnership.
Certain affiliates of UBS, including UBS Securities LLC, have in the
past and may in the future provide investment banking and other services to
Alkermes and have and may receive compensation for such services. In addition,
in the ordinary course of business, UBS Securities LLC and its affiliates may
trade securities of Alkermes for their own accounts and the accounts of their
customers and, accordingly, may at any time hold a long or short position in
such securities.
Market Price and Distributions
There is no trading market for the limited partnership interests,
public or otherwise. Any transfer of a limited partnership interest is severely
restricted by certain conditions outlined in the Partnership Agreement, and
requires the consent of the General Partner which can be withheld in its sole
discretion.
As of October 2, 2003, there was one holder of a General Partnership
Interest, one holder of a Class B Partnership Interest and 1,106 holders of
Class A Partnership Interests.
There have been no cash distributions to the partners to date and none
are expected because the Partnership has no cash assets or viable products. The
capital account of each partner was increased by such partner's cash
contributions (net of selling commissions, investment banking fees, warrant
valuation fees and financial advisory fees allocated to the Partner) to the
Partnership, and increased or decreased by such partner's allocation of the net
gain or loss of the Partnership ("Profits" and "Losses," respectively). All
research expenditures of the Partnership have been capitalized and not treated
as a current expense. Partnership profits and losses are allocated 99% to the
Limited Partners (pro rata to their capital accounts) and 1% to the General
Partner.
24
Security ownership of certain beneficial owners and management
Information regarding security ownership of all directors who own any
class of the Partnership's securities and all persons known to the Partnership
to be the beneficial owners of more than 5% of any class of the Partnership's
securities as of October 2, 2003 is as follows:
Name and Address of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
-------------- ---------------- -------------------- -----
General Partner Alkermes Development One General Partner 100.0%
Interest Corporation II Interest
88 Sidney Street
Cambridge, MA 02139
Class A Limited PaineWebber R&D Partners 133 Class A Limited 14.5%
Partnership Interests III, L.P. Partnership Interests
1285 Avenue of the
Americas
New York, NY 10019
Alkermes, Inc. 74 Class A Limited 8.0%
88 Sidney Street Partnership Interests
Cambridge, MA 02139
Class B Limited PaineWebber Development One Class B Limited 100.0%
Partnership Interest Corporation Partnership Interest
1285 Avenue of the Americas
New York, NY 10019
Exclusive management and control of the Partnership's business is
vested in the General Partner. As of October 2, 2003 none of the directors or
officers of the General Partner have any security ownership in the Partnership.
25
SELECTED HISTORICAL FINANCIAL INFORMATION
Year Ended December 31,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statement of Operations
Data (1):
Total Revenues $ - $ - $ - $ - $ -
Total Expenses 40,693 23,953 37,870 44,112 29,348
---------- ----------- ------------ ----------- ------------
Net Loss $ (40,693) $ (23,953) $ (37,870) $ (44,112) $ (29,348)
========== =========== ============ =========== ============
Net Loss Per Class A
and B Unit $ (-) $ (-) $ (-) $ (-) $ (-)
========== =========== ============ =========== ============
Average Class A and B Units
Outstanding 921 921 921 921 921
========== =========== ============ =========== ============
December 31,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheets Data:
Total Assets $ - $ - $ - $ - $ -
Long-term Obligations - - - - -
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Statement of Operations
Data (1):
Total Revenues $ - $ - $ - $ -
Total Expenses 36,750 2,947 57,966 7,740
---------- -------- ------------- ---------
Net Loss $ (36,750) $ (2,947) $ (57,966) $ (7,740)
========== ======== ============= ========
Net Loss Per Class A
and B Unit $ (-) $ (-) $ (-) $ (-)
========== ======== ============= ========
Average Class A and B Units
Outstanding 921 921 921 921
========== ======== ============= ========
June 30, December 31,
2003 2002
---------- ------------
Balance Sheets Data:
Total Assets $ - $ -
Long-term Obligations - -
(1) The Partnership did not make any cash distributions to its partners during
any of the periods presented.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Partnership was formed on February 7, 1992, and is managed by its
general partner, Alkermes Development Corporation II (the "General Partner"), a
wholly owned subsidiary of Alkermes, Inc. The Partnership was organized to fund
the further development and clinical testing of a family of molecules,
designated by Alkermes as RMPs, for human pharmaceutical use in the U.S. and
Canada.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Any statements set forth below or otherwise made in writing or orally
by the Partnership or the General Partner with regard to its expectations as to
financial results and other aspects of its business may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements can be identified by
forward-looking words such as "may," "will," "expects," "anticipates,"
"believes," "estimates," "continues" or similar words. Although the General
Partner believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results of the Partnership's development activities and
its results of operations will not differ materially from its expectations.
Factors which could cause actual results to differ from expectations depend on
the direction taken by the Partnership at the direction of the General Partner.
The General Partner must examine and act upon its options given Alkermes'
decision that it will not commit additional funds to the development of
Cereport. Risk factors related to the options available include, among others:
(i) the General Partner and the Partnership have no resources to
pay any expenses of the General Partner or the Partnership and without financial
support from Alkermes or a new collaborator there is substantial doubt about the
Partnership's ability to continue as a going concern.
(ii) a new collaborator, licensor or buyer of the Technology may be
difficult to find, due to the mutual termination of the agreement between ALZA
Corporation and Alkermes, the difficulties encountered in developing Cereport,
the failure of similar efforts by Alkermes in 2003 and the general economic
conditions at this time;
(iii) even if a third party were interested in acting as a new
collaborator, the economic and other terms may not be commercially acceptable;
(iv) even if a buyer of the Technology licensed to the Partnership
were to be found, the purchase price paid may be sufficiently low that after
reimbursement of expenses of the Partnership paid by the General Partner and
Alkermes and payment of expenses of the transaction, there may be little or no
remaining funds to distribute to the partners;
(v) any license or sale of the Technology requires the approval of
the General Partner and 66-2/3% of the Limited Partners, which approval may be
difficult to obtain;
(vi) in the event that no collaborator or buyer is found for the
Technology, or no agreement can be reached on commercial terms, a termination of
the Partnership requires approval of 66-2/3% of the partners, which approval may
be difficult to obtain; and
27
(vii) whether or not the Partnership terminates and in what manner
it terminates may have tax implications for the Limited Partners. Limited
Partners should consult their own tax advisors regarding any tax implications.
If the General Partner were to find a new collaborator, there would be
significant risks related to the further development of Cereport, including,
among others:
(i) clinical trials for Cereport may not proceed as planned, the
trials may require more time to enroll patients and cost more than anticipated,
and even if they are completed Cereport could prove to be ineffective or unsafe;
(ii) the collaborator could reduce or discontinue funding of
Cereport;
(iii) the Partnership and the collaborator could not be permitted by
regulatory authorities to undertake additional clinical trials for Cereport or
clinical trials could be delayed or regulatory authorities could require
additional clinical trials before approving Cereport;
(iv) the collaborator could incur difficulties or set-backs in
obtaining the substantial additional funding required to continue research and
development programs and clinical trials;
(v) even if Cereport appears promising at an early stage of
development, it could fail to receive necessary regulatory approvals, be
difficult to manufacture on a large scale, be uneconomical, fail to achieve
market acceptance, be precluded from commercialization by proprietary rights of
third parties or experience substantial competition in the marketplace; and
(vi) technological change in the biotechnology or pharmaceutical
industries and the approval of other drugs or therapies to treat brain tumors
could render Cereport obsolete or noncompetitive.
RESULTS OF OPERATIONS
Years ended December 31, 2002 and 2001
Revenue
The Partnership had no revenue for the years ended December 31, 2002
and 2001. The Partnership anticipates that it will have no revenues in the
foreseeable future.
Expenses
The Partnership had no research and development expenses for the years
ended December 31, 2002 and 2001. There were no research and development
expenses because of the completion of the development funding to Alkermes
pursuant to the product development agreement between Alkermes and the
Partnership (the "Product Development Agreement").
General and administrative expenses for the year ended December 31,
2002 were $40,693 as compared to $23,953 for the year ended December 31, 2001.
The increase was mainly a result of increased professional service fees. The
General Partner is obligated to perform general and administrative services for
the Partnership. Historically, Alkermes has performed these general and
administrative services for the Partnership on the General Partner's behalf at
Alkermes' expense. There can be no assurance that Alkermes will continue to
perform these services.
28
Years ended December 31, 2001 and 2000
Revenue
The Partnership had no revenue for the years ended December 31, 2001
and 2000. The Partnership anticipates that it will have no revenues in the
foreseeable future.
Expenses
The Partnership had no research and development expenses for the years
ended December 31, 2001 and 2000. There were no research and development
expenses because of the completion of the development funding to Alkermes
pursuant to the Product Development Agreement.
General and administrative expenses for the year ended December 31,
2001 were $23,953 as compared to $37,870 for the year ended December 31, 2000.
The decrease was mainly a result of decreased professional service fees. The
General Partner is obligated to perform general and administrative services for
the Partnership. Historically, Alkermes has performed these general and
administrative services for the Partnership on the General Partner's behalf at
Alkermes' expense. There can be no assurance that Alkermes will continue to
perform these services.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain unaudited quarterly data of the
Partnership for each of the quarters during calendar years 2002 and 2001. This
information has been prepared on the same basis as the annual financial
statements and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the selected quarterly information when read in conjunction with the annual
financial statements and the notes thereto included elsewhere in this document.
The quarterly operating results of the Partnership's operations are not
necessarily indicative of the results of the Partnership's operations for any
other interim period or for a full year.
Quarters Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
----------------------------------------------------------
Revenue: $ - $ - $ - $ -
---------- ---------- ---------- ----------
Expenses:
General and administrative 4,793 2,947 4,130 28,823
---------- ---------- ---------- ----------
4,793 2,947 4,130 28,823
---------- ---------- ---------- ----------
Net Loss $ (4,793) $ (2,947) $ (4,130) $ (28,823)
========== ========== ========== ==========
Net Loss Per Class A and B Unit $ - $ - $ - $ -
========== ========== ========== ==========
Average Class A and B Units Outstanding 921 921 921 921
========== ========== ========== ==========
29
Quarters Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
----------------------------------------------------------
Revenue: $ - $ - $ - $ -
---------- ---------- ---------- ----------
Expenses:
General and administrative 2,043 1,916 4,887 15,107
---------- ---------- ---------- ----------
2,043 1,916 4,887 15,107
---------- ---------- ---------- ----------
Net Loss $ (2,043) $ (1,916) $ (4,887) $ (15,107)
========== ========== ========== ==========
Net Loss Per Class A and B Unit $ - $ - $ - $ -
========== ========== ========== ==========
Average Class A and B Units Outstanding 921 921 921 921
========== ========== ========== ==========
Quarters ended June 30, 2003 and 2002
Revenue
The Partnership had no revenue for the three and six months ended June
30, 2003 and 2002. The Partnership anticipates that it will have no revenue in
the foreseeable future.
Expenses
The Partnership had no research and development expenses for the three
and six months ended June 30, 2003 and 2002. There were no research and
development expenses because of the completion of the development funding to
Alkermes pursuant to the Product Development Agreement.
General and administrative expenses for the three and six months ended
June 30, 2003 were $36,750 and $57,966 as compared to $2,947 and $7,740 for the
three and six months ended June 30, 2002. The increase for the three and six
months ended June 30, 2003 as compared to June 30, 2002 was mainly a result of
increased professional service fees as the General Partner considers its options
given Alkermes' decision that it will not commit additional funds to the
development of Cereport. Historically, Alkermes has performed these general and
administrative services for the Partnership on the General Partner's behalf at
Alkermes' expense. There can be no assurance that Alkermes will continue to
perform these services.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Partnership had no remaining assets or
liabilities.
The Partnership's primary source of funding and capital resources was
the annual capital contributions by the Limited Partners and the General
Partner. The Limited Partners' capital contributions were remitted to the
Partnership in four annual installments, the fourth and final payment of which
was due on April 15, 1995. No additional capital contributions from any of the
Partners are required.
The Partnership funded research and development expenses for Cereport
from capital contributions received from Partners. Such development was
conducted for the Partnership by Alkermes pursuant to the Product Development
Agreement. The research and development funding to Alkermes ended during the
quarter ended June 30, 1996 when such capital contributions were substantially
30
depleted. Because the funding was not sufficient for Alkermes to complete
clinical trials and seek regulatory approval of Cereport, Alkermes had been
using its own resources until its recent decision not to commit any additional
funds to the development of Cereport. In late 1997, Alkermes entered into an
agreement with ALZA Corporation related to the development and commercialization
of Cereport that was mutually terminated in December 2002.
The Partnership used its remaining cash and cash equivalents during the
quarter ended September 30, 1997 to pay for administrative services for the
Partnership. The General Partner is obligated to perform certain administrative
services for the Partnership, such as preparing financial statements, tax
returns and reports to the Limited Partners. Historically, Alkermes has
performed such services on behalf of the General Partner at its expense. There
can be no assurance that Alkermes will continue to perform these services. The
activities performed by Alkermes and the General Partner constitute all of the
activities undertaken by or on behalf of the Partnership.
After June 30, 2003, the Partnership is expected to have no future
liquidity or capital resources requirements other than those funded by Alkermes,
if any.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 2002 and
the Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 filed with
the SEC by the Partnership pursuant to the Exchange Act is incorporated by
reference in this proxy statement.
All documents and reports filed by the Partnership pursuant to Section
13(a) or 15(d) of the Exchange Act subsequent to the date of this proxy
statement and prior to the special meeting shall be deemed to be incorporated by
reference in this proxy statement and to be a part hereof from the date of
filing of such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this proxy statement to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
proxy statement.
This proxy statement incorporates documents by reference which are not
presented herein or delivered herewith. Alkermes Clinical Partners, L.P. is a
reporting company and files annual, quarterly and current reports and other
information with the Securities and Exchange Commission. You may read and copy
the documents incorporated by reference, any other reports and other information
at the Securities and Exchange Commission's public reference room located at 450
Fifth Street, N.W., Washington, DC 20549. You can request copies of these
documents by writing to the Securities and Exchange Commission and paying a fee
for the copying cost. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for more information about the operation of the public reference
rooms. These Securities and Exchange Commission filings are also available at
the Securities and Exchange Commission's web site at "http://www.sec.gov".
Upon written or oral request, the General Partner will provide without
charge to each person, including any beneficial owner, to whom this prospectus
is delivered a copy of any or all of such documents which are filed with the
Securities and Exchange Commission (other than exhibits to such documents).
Written or oral requests for copies should be directed to Rebecca Peterson,
Director of Corporate Communications of Alkermes, 88 Sidney Street, Cambridge,
Massachusetts 02139 or (617) 494-0171.
31
OTHER BUSINESS
The General Partner does not intend to bring before the special meeting
any business other than as set forth in this proxy statement, and has not been
informed that any other business is to be presented at the special meeting.
However, if any matters other than those referred to above should properly come
before the meeting, it is the intention of the person(s) named in the enclosed
proxy to vote such proxy in accordance with his/their best judgment.
YOUR VOTE IS VERY IMPORTANT. Please sign and return promptly the
enclosed proxy in the envelope provided. The signing of a proxy will not prevent
your attending the special meeting and voting in person.
ALKERMES DEVELOPMENT CORPORATION, II
By: /s/ Richard F. Pops
Richard F. Pops
Chief Executive Officer
October 7, 2003
32
ANNEX A
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
Financial Statements as of December 31, 2002 and 2001 and for
Each of the Three Years in the Period
Ended December 31, 2002 and Independent Auditors' Report
and
Financial Statements as of June 30, 2003 and
December 31, 2002 and for
Each of the Three and Six Months Ended
June 30, 2003 and 2002
F-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Alkermes Clinical Partners, L.P.
Cambridge, Massachusetts
We have audited the accompanying balance sheets of Alkermes Clinical
Partners, L.P. (a Limited Partnership) as of December 31, 2002 and 2001, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Partnership as of December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Partnership will continue as a going concern. As discussed in Note 6 to the
financial statements, the Partnership completed its development funding to
Alkermes, Inc. (an affiliate) and none of the partners are obligated to make any
further capital contributions to the Partnership. As a result, the Partnership
has no assets with which to fund operations and has been reliant on funding
received from the General Partner, who in turn has been reliant on voluntary
contributions from Alkermes, Inc. In addition, as discussed in Note 3, Alkermes,
Inc. has indicated that it will not commit additional funds to the development
of the Partnership's products; as a result, the General Partner has begun
discussions regarding strategic alternatives for the Partnership. These factors
raise substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans concerning these matters are also described in Notes
3 and 6. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 21, 2003
F-2
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
ASSETS
TOTAL ASSETS $ - $ -
===== =====
LIABILITIES AND PARTNERS' CAPITAL
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ - $ -
===== =====
See notes to financial statements.
F-3
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
REVENUE:
$ - $ - $ -
------------- ------------- -------------
EXPENSES:
General and administrative 40,693 23,953 37,870
------------- ------------- -------------
40,693 23,953 37,870
------------- ------------- -------------
NET LOSS $ (40,693) $ (23,953) $ (37,870)
============= ============= =============
NET LOSS PER CLASS A AND B UNIT
$ - $ - $ -
============= ============= =============
AVERAGE CLASS A AND B UNITS OUTSTANDING 921 921 921
============= ============= =============
See notes to financial statements.
F-4
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
GENERAL
PARTNER TOTAL
BALANCE, JANUARY 1, 2000 $ - $ -
General Partner's capital contributions 37,870 37,870
Net loss for year (37,870) (37,870)
--------------- ---------------
BALANCE, DECEMBER 31, 2000 - -
General Partner's capital contributions 23,953 23,953
Net loss for year (23,953) (23,953)
--------------- ---------------
BALANCE, DECEMBER 31, 2001 - -
General Partner's capital contributions 40,693 40,693
Net loss for year (40,693) (40,693)
--------------- ---------------
BALANCE, DECEMBER 31, 2002 $ - $ -
=============== ===============
See notes to financial statements.
F-5
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (40,693) $(23,953) $(37,870)
--------- -------- --------
Net cash used by operating activities (40,693) (23,953) (37,870)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
General Partner's capital contributions 40,693 23,953 37,870
--------- -------- --------
Net cash provided by financing activities 40,693 23,953 37,870
--------- -------- --------
NET CHANGE IN CASH - - -
CASH, BEGINNING OF YEAR - - -
--------- -------- --------
CASH, END OF YEAR $ - $ - $ -
========= ======== ========
See notes to financial statements.
F-6
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. ORGANIZATION AND BUSINESS OPERATIONS
Alkermes Clinical Partners, L.P. (the "Partnership") was formed on February 7,
1992 and is managed by its general partner, Alkermes Development Corporation II
(the "General Partner"), a wholly owned subsidiary of Alkermes, Inc.
("Alkermes"). The Partnership was organized to fund the further development and
clinical testing of a family of molecules, designated by Alkermes as
Receptor-Mediated Permeabilizers ("RMPs"), for human pharmaceutical use in the
United States and Canada.
On April 10, 1992, the Partnership and Alkermes sold in a private placement (i)
920 Class A units, each unit (a "Class A Unit") consisting of one Class A
Limited Partnership interest in the Partnership and warrants to purchase shares
of Alkermes common stock, and (ii) one Class B unit (the "Class B Unit")
consisting of one Class B Limited Partnership interest (the "Class B Interest")
in the Partnership and warrants to purchase shares of Alkermes common stock. The
purchase price was $50,000 for each Class A Unit, $10,718 of which was paid at
the time of subscription, and the balance of which was evidenced by an investor
note (each, an "Investor Note" and collectively, the "Investor Notes"), $12,372
of which was paid during 1993, $14,166 of which was paid during 1994 and the
remainder of which was paid in April 1995. The purchase price for the Class B
Unit was $100,000, $21,000 of which was paid at the time of subscription, and
the balance of which was evidenced by a promissory note, $24,744 of which was
paid during 1993, $28,332 of which was paid during 1994 and the remainder of
which was paid in April 1995. All warrants issued in the private placement have
been exercised or expired.
The net proceeds from the sale of the units were used primarily to fund the
further development and clinical testing of RMPs (the "Research Program"), which
development and testing has been conducted for the Partnership by Alkermes
pursuant to a product development agreement by and between Alkermes and the
Partnership (the "Product Development Agreement") (see Note 3). Cereport(R),
formerly known as RMP-7(TM), is a product candidate designed to facilitate drug
delivery to the central nervous system and is the Partnership's principal
product candidate.
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The Partnership prepares its financial statements on the
accrual basis of accounting.
USE OF ESTIMATES - The preparation of the Partnership's financial statements in
conformity with accounting principles generally accepted in the United States of
America necessarily requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during each of the reporting
periods. Actual results could differ from those estimates.
NET LOSS PER CLASS A AND B LIMITED PARTNERSHIP INTEREST - Net loss per Class A
and B Limited Partnership interest is calculated with the net loss attributable
only to the limited partners of the Partnership (each, a "Limited Partner" and
collectively, the "Limited Partners") and excludes the loss attributable to the
General Partner. There were no losses attributable to the Limited Partners for
the years ended December 31, 2002, 2001 and 2000.
INCOME TAXES - Federal and state income taxes are the responsibility of the
General Partner and each of the Limited Partners of the Partnership.
Accordingly, no provision for income taxes has been recorded.
COMPREHENSIVE INCOME - There are no elements of other comprehensive income in
the financial statements.
3. PRODUCT DEVELOPMENT AGREEMENT
In March 1992, the Partnership entered into the Product Development Agreement
with Alkermes, pursuant to which Alkermes licensed to the Partnership certain
technologies of Alkermes relating to RMPs. The Partnership paid Alkermes a
nonrefundable fee of $1,750,000 under the Product Development Agreement for
prior research and costs incurred by Alkermes relating to RMPs and recorded such
fee as research and development expense in the period ended December 31, 1992.
The Partnership granted to Alkermes an exclusive interim license to manufacture
and market RMPs for human pharmaceutical use in the United States and Canada
(the "Interim License"). Pursuant to this Interim License, upon the first
marketing approval of an RMP product by the United States Food and Drug
Administration, the Partnership is to receive a payment from Alkermes equal to
20% of the aggregate capital contributions of all partners (the "Milestone
Payment"). Additionally, the Partnership is to receive royalty payments from
Alkermes equal to 12% of United States and Canadian revenues and 10% of European
revenues, in certain circumstances, from any sales of RMPs by Alkermes.
The Interim License and Alkermes' obligation to develop an RMP product will
terminate if the Research Program or Marketing Program terminate, which will
occur if at least 75% of the directors of the General Partner determine that the
Research Program is infeasible or uneconomic and should be discontinued or 75%
of the directors of the General Partner determine to discontinue the Marketing
Program or if Alkermes decides not to contribute the additional funds to the
Partnership which are determined by the General Partner to be required when all
Partnership funds have been expended and no FDA marketing approval has been
received for the sale of any RMP product. The directors of the General Partner
intend to convene a meeting in the near future to discuss the feasibility of the
Research Program and the Marketing Program. However, Alkermes has determined
that the development of Cereport is not
F-8
economically feasible and, therefore, it will not commit additional funds to its
development. This decision will cause a termination of the Research Program, the
Purchase Option and, in turn, the Marketing Program.
The General Partner is in the process of examining the various options available
to the Partnership given these events, which include attempting to find a new
collaborator to develop the technology licensed to the Partnership, selling such
technology or terminating the Partnership. The General Partner may not be able
to find a collaborator or a buyer. License or sale of the technology or a
termination of the Partnership (absent a license or sale of the technology),
would require approval of 66 2/3% of the partners.
The Partnership has rights under five issued patents: U.S. Patent No. 5,112,596
in May 1992, U.S. Patent No. 5,268,164 in December 1993, U.S. Patent No.
5,506,206 in April 1996, U.S. Patent No. 5,585,355 in December 1996 and U.S.
Patent No. 5,686,416 in November 1997.
4. PARTNERSHIP PURCHASE OPTION
In consideration for the warrants to purchase Alkermes common stock, each
Limited Partner has granted to Alkermes an option to purchase (the "Purchase
Option"), under certain circumstances, the Limited Partnership interest in the
Partnership held by such Limited Partner. Upon the exercise of the Purchase
Option, each owner of a Class A Limited Partnership interest (a "Class A Limited
Partner") will be entitled to receive an initial payment of, at the option of
Alkermes, $40,000 in cash or approximately $42,100 in Alkermes' common stock, as
well as certain additional payments (which are subject to certain limitations)
based on Alkermes' net revenues from sales of RMPs in the United States, Canada
and Europe (the "royalty stream") as follows:
- 12% of net revenues to Alkermes on sales of RMPs in the United
States and Canada and 10% of net revenues to Alkermes on sales of RMPs in
Europe, until each Class A Limited Partner has received an aggregate of $400,000
per interest from the initial payment and the royalty stream; and thereafter,
- 9% of net revenues to Alkermes on sales of RMPs in the United
States, Canada and Europe, until each Class A Limited Partner has received an
aggregate of $500,000 per interest from the initial payment and the royalty
stream; and thereafter,
- 4% of net revenues to Alkermes on sales of RMPs in the United
States, Canada and Europe.
If Alkermes exercises the Purchase Option, the holder of the Class B Interest
(the "Class B Limited Partner") will receive, in addition to an advance payment
of $80,000, payable in cash or stock in the same manner as described above for
the Class A Limited Partners, quarterly payments equal to (i) prior to the date
on which the Class B Threshold (as described below) occurs, the Class B Limited
Partner's pro rata portion (based upon the ratio that the Class B Limited
Partner's capital contribution bears to the aggregate capital contributions of
all Limited Partners) of the royalties described in the previous paragraph, and
(ii) beginning on the date on which the Class B Threshold occurs, the Class A
Limited Partners will receive only 95% of the above royalties. The Class B
Threshold will occur on the first day of the calendar quarter that follows the
calendar quarter in which each Class A Limited Partner will have received
distributions in an aggregate amount equal to its capital contribution.
F-9
Royalties on sales of RMPs in Europe will be payable only in certain
circumstances. The royalties described above will terminate on the last day of
the calendar quarter eleven years after Alkermes exercises the Purchase Option.
Alkermes may exercise the Purchase Option upon the earlier of: (i) the date that
is the later of the last day of the first month in which the Partnership shall
have received payments under the Interim License (excluding the Milestone
Payment) equal to 15% of the Limited Partners' capital contributions or the
expiration of 24 months after the first commercial sale of an RMP product under
the Interim License and (ii) the expiration of 48 months after the first
commercial sale of an RMP product under the Interim License.
The Purchase Option will terminate upon the occurrence of any of the following
termination events: (i) the bankruptcy of Alkermes or the Partnership, (ii) the
cessation of operations by Alkermes, (iii) the seizure or attachment of all or a
substantial part of Alkermes' assets, (iv) the termination of the Research
Program or the Marketing Program, (v) Alkermes' notice to the Partnership and
the Limited Partners that it does not intend to exercise the Purchase Option or
(vi) the expiration unexercised of the Purchase Option. As described in Note 3,
the Research Program has not yet terminated but Alkermes has indicated its
decision not to commit additional funds to the development of Cereport and
therefore its intention to cause a termination of the Research Program and the
Purchase Option.
5. PARTNERS' CAPITAL
The Partnership allocates its profits or losses for each fiscal year 1% to the
General Partner and 99% to the Limited Partners. The Partnership then allocates
the profits and losses allocated to the Limited Partners pro rata in accordance
with the Limited Partners' capital contributions, as adjusted for certain
allocations and returns to each Limited Partner. The capital contributions made
by each Class A Limited Partner and the Class B Limited Partner are discussed in
Note 1. Losses in excess of the Limited Partners' capital contributions are
allocated to the General Partner. If and when the Class B Threshold occurs (see
Note 4), the Partnership will allocate to the Class B Limited Partner 5% of
profits and losses allocated to the Limited Partners and will allocate to the
Class A Limited Partners 95% of profits and losses allocated to the Limited
Partners. Such allocation to the Class A Limited Partners will be made pro rata
based on such Limited Partners' capital contributions, as adjusted for certain
allocations and returns to such Limited Partners.
6. COMPLETION OF SCHEDULED FUNDING
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. For the years ended December 31,
2002, 2001 and 2000, the Partnership incurred no research and development
expenses related to the RMP program, notwithstanding the continued development
of the RMP product candidate. The Partnership was providing funding to Alkermes
for research and development expenses for Cereport from capital contributions
received from Partners. Funding to Alkermes ended during the quarter ended June
30, 1996 when such capital contributions were substantially depleted. None of
the Partners of the Partnership is obligated to make any further capital
contributions. Since the funding was not sufficient for Alkermes to complete
clinical trials and seek regulatory approval of Cereport, Alkermes has used its
own resources to develop Cereport. However, as discussed in Note 3, Alkermes has
decided not to commit additional funds to the development of Cereport.
The General Partner is obligated to perform certain administrative services for
the Partnership, such as preparing financial statements, tax returns and reports
to Partners. During 2002, 2001 and 2000, Alkermes performed such services for
the Partnership on behalf of the General Partner. There can be no
F-10
assurance that Alkermes will continue to perform these services. The services
performed by Alkermes and the General Partner constitute all of the activities
undertaken by or on behalf of the Partnership.
The financial statements do not include any adjustments relating to the amounts
and classification of liabilities that might be necessary should the Partnership
be unable to continue as a going concern. The Partnership's continuation as a
going concern is dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to obtain additional financing or
refinancing as may be required, and ultimately to attain successful operations.
After December 31, 2002, the Partnership is expected to have no future
liquidity or capital resource requirements other than those funded by Alkermes,
if any.
F-11
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
-------------- ---------------
ASSETS
Total Assets $ -- $ --
============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Total Liabilities and Partners' Capital $ -- $ --
============== ===============
F-12
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
-------------- --------------- ------------- --------------
Revenue: $ -- $ -- $ -- $ --
-------------- --------------- ------------- --------------
Expenses:
General and administrative 36,750 2,947 57,966 7,740
-------------- --------------- ------------- --------------
36,750 2,947 57,966 7,740
-------------- --------------- ------------- --------------
Net loss (36,750) (2,947) (57,966) (7,740)
============== =============== ============= ==============
Net Loss Per Class A and B Unit $ -- $ -- $ -- $ --
============== =============== ============= ==============
Average Class A and B Units Outstanding 921 921 921 921
============== =============== ============= ==============
See notes to financial statements
F-13
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2003 2002
------------------------
Cash flows from operating activities:
Net loss $ (57,966) $ (7,740)
--------- ---------
Net cash used by operating activities (57,966) (7,740)
--------- ---------
Cash flows from financing activities:
General Partner's capital contributions 57,966 7,740
--------- ---------
Net cash provided by financing activities 57,966 7,740
--------- ---------
Net decrease in cash -- --
Cash, beginning of period -- --
--------- ---------
Cash, end of period $ -- $ --
========= =========
See notes to financial statements.
F-14
ALKERMES CLINICAL PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements for Alkermes Clinical Partners, L.P. (the
"Partnership") for the three and six month periods ended June 30, 2003 and 2002,
are unaudited and include all adjustments which, in the opinion of management,
are necessary to present fairly the results of operations for the periods then
ended. All such adjustments are of a normal recurring nature. These financial
statements should be read in conjunction with the Partnership's Annual Report on
Form 10-K for the year ended December 31, 2002, which includes financial
statements and notes thereto for the years ended December 31, 2002, 2001 and
2000.
The results of the Partnership's operations for any interim period are not
necessarily indicative of the results of the Partnership's operations for any
other interim period or for a full year.
2. NET LOSS PER CLASS A AND B LIMITED PARTNERSHIP INTEREST
Net loss per Class A and B limited partnership interest is calculated with the
net loss attributable only to the limited partners of the Partnership (each, a
"Limited Partner" and collectively, the "Limited Partners") and excludes the
loss attributable to Alkermes Development Corporation II (the "General
Partner"). There were no losses attributable to the Limited Partners for the
three and six months ended June 30, 2003 and 2002.
3. COMPLETION OF SCHEDULED FUNDING
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. For the three and six months ended
June 30, 2003 and 2002, the Partnership incurred no research and development
expenses related to the RMP(TM) program. The Partnership was providing funding
to Alkermes, Inc. ("Alkermes") for research and development expenses for
Cereport(R) from capital contributions received from Partners. Funding to
Alkermes ended during the quarter ended June 30, 1996 when such capital
contributions were substantially depleted. None of the Partners of the
Partnership is obligated to make any further capital contributions. Since the
funding was not sufficient for Alkermes to complete clinical trials and seek
regulatory approval of Cereport, Alkermes had been using its own resources to
develop Cereport. However, as discussed in Note 3 to the audited financial
statements included in the Annual Report on Form 10-K for the year ended
December 31, 2002, Alkermes has decided not to commit additional funds to the
development of Cereport.
The General Partner is obligated to perform certain administrative services for
the Partnership, such as preparing financial statements, tax returns and reports
to Partners. During the three and six months ended June 30, 2003, Alkermes
performed such services for the Partnership on behalf of the General Partner.
There can be no assurance that Alkermes will continue to perform these services.
The services performed by Alkermes and the General Partner constitute all of the
activities undertaken by or on behalf of the Partnership.
F-15
The financial statements do not include any adjustments relating to the amounts
and classification of liabilities that might be necessary should the Partnership
be unable to continue as a going concern. The Partnership's continuation as a
going concern is dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to obtain additional financing or
refinancing as may be required, and ultimately to attain successful operations.
After June 30, 2003, the Partnership is expected to continue to have no future
liquidity or capital resources requirements other than those funded by Alkermes,
if any.
F-16
PROXY PROXY
ALKERMES CLINICAL PARTNERS, L.P.
SPECIAL MEETING OF LIMITED PARTNERS
THIS PROXY IS SOLICITED ON BEHALF OF
ALKERMES CLINICAL PARTNERS, L.P. BY
ALKERMES DEVELOPMENT CORPORATION, II
THE GENERAL PARTNER
The undersigned hereby appoints James M. Frates and Kathryn Biberstein
or their designee with full power of substitution, the attorneys and the proxies
of the undersigned, to represent and to vote, as designated below, all units of
limited partnership interest ("Limited Partnership Interest") of Alkermes
Clinical Partners, L.P., a Delaware limited partnership (the "Partnership"),
that the undersigned is entitled to vote if personally present at the Special
Meeting of Limited Partners of the Partnership to be held on November 18, 2003
at 10:00 am, local time, at the offices of Alkermes, Inc., 88 Sidney Street,
Cambridge, Massachusetts, 02139 and at any adjournment(s) or postponement(s)
thereof. This proxy revokes all prior proxies given by the undersigned. `
The proposals to authorize are:
1. Approval of the termination of the Partnership.
[ ] For [ ] Against [ ] Abstain
2. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the Special Meeting or any
adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED LIMITED PARTNER. THE GENERAL PARTNER RECOMMENDS A VOTE FOR
PROPOSALS 1 & 2. IF NO DIRECTION IS MADE ON THIS CARD, THE PROXY WILL BE VOTED
"FOR" PROPOSALS 1 & 2.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROPERLY USING THE ENCLOSED PRE-
PAID ENVELOPE OR DELIVER TO: The Altman Group, 1275 Valley Brook Avenue,
Lyndhurst, New Jersey 07071. IF YOU HAVE ANY QUESTIONS, PLEASE CALL OUR AGENT
ROBIN STANLEY AT (617) 583-6620. Facsimile copies of the front and reverse sides
of this Proxy, properly completed and duly executed, will be accepted at (201)
460-0050.
Dated:
___________________________
Signature
___________________________
Signature (if held jointly)
___________________________
Title
Please sign exactly as name appears hereon. When Limited Partnership Interests
are held by joint tenants, both should sign. When signing as an attorney, as
executor, administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in name by President or other authorized officer. If
a partnership, please sign in partnership name by authorized person.
SPECIAL MEETING - NOVEMBER 18, 2003
YOUR VOTE IS EXTREMELY IMPORTANT
Regardless of the number of Limited Partnership Interests of Alkermes
Clinical Partners, L.P. you own, please vote by taking these simple steps:
1. Please SIGN, MARK, DATE, and MAIL the enclosed proxy card in
the enclosed, postage-paid envelope (or by facsimile) as soon
as possible before the special meeting on November 18, 2003.
2. You may also transmit your proxy to The Altman Group by
facsimile to (201) 460-0050 When voting your proxy by
facsimile, both sides of the proxy card must be transmitted.
3. If you wish to vote "FOR" the Termination, you must submit the
enclosed proxy card.
4. Failure to return a proxy card and abstention from voting are
the equivalent of a vote "AGAINST" the Termination.
5. If you have any questions or require any additional
information concerning this Proxy Statement please contact:
ROBIN STANLEY AT (617) 583-6620
PLEASE SIGN, MARK, DATE AND RETURN YOUR PROXY CARD TODAY.