<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 33-53671
P R O S P E C T U S
$825,000,000
[LOGO]
LIQUID YIELD OPTION-TM- NOTES DUE 2014
(ZERO COUPON--SUBORDINATED)
------------------
The issue price of each Liquid Yield Option-TM- Note ("LYON"-TM-) to be
issued by ALZA Corporation, a Delaware corporation ("ALZA"), will be $354.71
(35.471% of principal amount at maturity) (the "Issue Price"), and there will be
no periodic payments of interest. The LYONs will mature on July 14, 2014. The
Issue Price of each LYON represents a yield to maturity of 5.25% per annum
(computed on a semi-annual bond equivalent basis) calculated from July 14, 1994.
The LYONs will be subordinated to all existing and future Senior Indebtedness of
ALZA, the principal amount of which as of May 31, 1994 was $1.7 million,
excluding ALZA's $249.3 million principal amount of outstanding commercial
paper, which will be retired with a portion of the proceeds from the sale of the
LYONs. See "Capitalization" and "Description of LYONs -- Subordination of
LYONs."
Each LYON will be convertible at the option of the Holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by ALZA.
Upon conversion, ALZA may elect to deliver Common Stock, par value $.01 per
share (the "Common Stock"), of ALZA at a conversion rate of 12.987 shares per
LYON (the "Conversion Rate") or cash equal to the market value of the shares of
Common Stock into which the LYONs are convertible. The Conversion Rate will not
be adjusted for accrued Original Issue Discount, but will be subject to
adjustment upon the occurrence of certain events affecting the Common Stock.
Upon conversion, the Holder will not receive any cash payment representing
accrued Original Issue Discount; such accrued Original Issue Discount will be
deemed paid by the Common Stock or cash received on conversion. See "Description
of LYONs -- Conversion Rights." On July 6, 1994, the last reported sale price of
the Common Stock on the New York Stock Exchange was $23 3/4 per share.
LYONs will be purchased by ALZA, at the option of the Holder, as of July 14,
1999, July 14, 2004 and July 14, 2009 (each, a "Purchase Date") for a Purchase
Price per LYON of $459.63, $595.58 and $771.74 (Issue Price plus accrued
Original Issue Discount to such Purchase Date), respectively, representing a
yield per annum to the Holder on each such Purchase Date of 5.25% (computed on a
semi-annual bond equivalent basis). Subject to certain conditions, ALZA, at its
option, may elect to pay the Purchase Price as of any particular Purchase Date
in cash or shares of Common Stock, or in any combination thereof. See
"Description of LYONs -- Purchase of LYONs at the Option of the Holder." In
addition, as of 35 business days after the occurrence of any Change in Control
of ALZA occurring on or prior to July 14, 1999, ALZA will also purchase for cash
any LYON, at the option of the Holder, for a Change in Control Purchase Price
equal to the Issue Price plus accrued Original Issue Discount to the date set
for such purchase. See "Description of LYONs -- Change in Control Permits
Purchase of LYONs at the Option of the Holder."
The LYONs will not be redeemable by ALZA prior to July 14, 1999. Thereafter,
the LYONs are redeemable for cash at any time at the option of ALZA, in whole or
in part, at Redemption Prices equal to the Issue Price plus accrued Original
Issue Discount to the date of redemption. See "Description of LYONs --
Redemption of LYONs at the Option of ALZA."
For a discussion of certain United States federal income tax considerations
for Holders of LYONs, see "Certain United States Federal Income Tax
Considerations."
The LYONs have been approved for listing on the New York Stock Exchange upon
official notice of issuance.
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH
SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE LYONS OFFERED
HEREBY.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRICE TO UNDERWRITING PROCEEDS TO
AT MATURITY PUBLIC DISCOUNT (1) ALZA (2)
<S> <C> <C> <C> <C>
Per LYON.................................. 100% 35.471% .887% 34.584%
Total (3)................................. $825,000,000 $292,635,750 $7,315,894 $285,319,856
<FN>
(1) ALZA has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by ALZA estimated at $400,000.
(3) ALZA has granted the Underwriter an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to an additional
$123,750,000 aggregate principal amount at maturity of LYONs on the same
terms as set forth above to cover over-allotments, if any. If the option is
exercised in full, the total Principal Amount at Maturity, Price to Public,
Underwriting Discount and Proceeds to ALZA will be $948,750,000,
$336,531,113, $8,413,278 and $328,117,835, respectively. See
"Underwriting."
</TABLE>
--------------------------
The LYONs are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, subject to approval of
certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the LYONs will be made in New York, New York, on or about July 14,
1994.
- -TM- Trademark of Merrill Lynch & Co., Inc.
--------------------------
MERRILL LYNCH & CO.
---------------
The date of this Prospectus is July 7, 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE LYONS OFFERED
HEREBY OR THE COMMON STOCK OF ALZA, OR BOTH OF THEM, AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
AVAILABLE INFORMATION
ALZA is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected at the public reference facilities of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material can be obtained at prescribed rates from the Commission
at such address. Such reports, proxy statements and other information can also
be inspected at the Commission's regional offices at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, such reports, proxy statements and other
information concerning ALZA may be inspected at the offices of the New York
Stock Exchange at 20 Broad Street, New York, New York 10005.
ALZA has filed with the Commission a Registration Statement on Form S-3
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered by this Prospectus. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to ALZA and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto, which may be examined without charge at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of which may be obtained from
the Commission upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by ALZA with the Commission,
are hereby incorporated by reference in this Prospectus:
(a) ALZA's Annual Report on Form 10-K for the fiscal year ended December
31, 1993;
(b) ALZA's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994; and
(c) The description of the Common Stock contained in ALZA's registration
statement on Form 8-A filed May 14, 1992 under the Exchange Act, including
any amendment or reports filed for the purpose of updating such description.
All documents filed by ALZA pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the securities offered hereby shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the respective dates of filing of such documents. 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 Prospectus to the
extent that a statement contained herein, or in any other subsequently filed
document that 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 Prospectus.
Upon written or oral request directed to Corporate and Investor Relations,
ALZA Corporation, 950 Page Mill Road, P.O. Box 10950, Palo Alto, California
94303-0802, telephone (415) 494-5222, ALZA will provide, without charge, to any
person to whom this Prospectus is delivered, a copy of any document incorporated
by reference in this Prospectus (not including exhibits to any such document
except to the extent any such exhibits are specifically incorporated by
reference in the information incorporated in this Prospectus).
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE DETAILED INFORMATION AND FINANCIAL
STATEMENTS INCLUDED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITER'S OVER-ALLOTMENT OPTION IS NOT EXERCISED.
ALZA
ALZA is the recognized leader in the development of pharmaceutical products
based on controlled drug delivery technologies. Since the company's founding in
1968, ALZA's research and development efforts have resulted in a broad range of
proprietary therapeutic systems designed to improve the medical value and cost
effectiveness of drug compounds by improving efficacy, minimizing side effects
and/or providing greater patient compliance. Among the ALZA-developed products
commercialized to date by client companies are Procardia XL-R-, for the
treatment of both angina and hypertension, Volmax-R- (albuterol), an
anti-asthmatic product, and Efidac/24-R-, an over-the-counter nasal decongestant
product, all utilizing ALZA's OROS-R- oral therapeutic systems; and
Transderm-Nitro-R- for the prevention and treatment of angina, Nicoderm-R-, an
aid in smoking cessation, and Duragesic-R- for the management of chronic pain
(such as cancer pain), utilizing various transdermal therapeutic systems.
Approximately 60 additional products utilizing ALZA therapeutic systems are in
various stages of development or clinical evaluation, a number of which are
awaiting marketing clearance in the United States and/or other countries. ALZA
recently announced United States Food and Drug Administration ("FDA") marketing
clearance of two products -- Glucotrol XL-R- and Actisite-R- (tetracycline HCl)
periodontal fiber. Glucotrol XL-R-, developed jointly with Pfizer, Inc., is a
product for the treatment of diabetes taken orally once a day. Actisite-R-,
developed jointly with On-Site Therapeutics, Inc., is the first
sustained-release, site-specific drug therapy cleared for marketing in the
United States for the treatment of patients with adult periodontitis.
Most of ALZA's product development activities have been undertaken pursuant
to joint development and commercialization agreements, including agreements with
many of the world's largest pharmaceutical companies. These agreements normally
provide for the pharmaceutical company client to reimburse ALZA for ALZA's costs
incurred in product development and clinical evaluation. The client receives
marketing rights to the products and ALZA receives royalties on product sales.
In some cases, ALZA has rights to co-promote the products developed. In many
cases, ALZA manufactures all or a portion of the client's requirements of the
product. ALZA's clients often take responsibility for obtaining necessary
regulatory approvals and make all marketing and other commercialization
decisions regarding the products. Therefore, most of the variables that affect
ALZA's royalties and fees are not within ALZA's control. For the year ended
December 31, 1993, royalties from sales of Procardia XL accounted for
approximately 60% of ALZA's royalties and fees.
As part of ALZA's Target 2000 strategic plan, ALZA intends to increase
significantly the development, manufacturing and marketing of its own products
in addition to continuing its client-based business. In furtherance of this
goal, ALZA formed Therapeutic Discovery Corporation ("TDC") and distributed
"units," consisting of TDC shares and ALZA warrants, as a special dividend to
ALZA stockholders in June 1993. TDC was formed to develop and commercialize,
most likely through licensing to ALZA, products incorporating ALZA's drug
delivery systems with various drug compounds. ALZA contributed $250 million in
cash to TDC and will develop products on behalf of TDC under a development
contract. ALZA has an option to license each product developed by TDC, and also
has an option to purchase all of the TDC shares. The formation of TDC, and the
development of products with TDC, are intended to result in a potential pipeline
of products for marketing by ALZA.
With the approval and launch of the Testoderm-R- transdermal therapeutic
system for the treatment of testosterone deficiencies in hypogonadal males, ALZA
has begun to accelerate its marketing activities. ALZA introduced the Testoderm
product in the United States in April 1994 through ALZA Pharmaceuticals, ALZA's
sales and marketing group. ALZA Pharmaceuticals also has begun to co-promote the
Duragesic transdermal fentanyl system with Janssen Pharmaceutica. With the
Testoderm product, the
3
<PAGE>
Duragesic co-promotion activities, other co-promotion arrangements and the
opportunity to market the products developed by TDC, ALZA intends to increase
its commercialization activities through ALZA Pharmaceuticals while continuing
its business of developing products for third party clients.
ALZA's principal executive offices are located at 950 Page Mill Road, P.O.
Box 10950, Palo Alto, California 94303-0802 and its telephone number is (415)
494-5000.
THE OFFERING
<TABLE>
<S> <C>
LYONs.................................. $825,000,000 aggregate principal amount at maturity
(excluding $123,750,000 aggregate principal amount
at maturity subject to the Underwriter's
over-allotment option) of LYONs due July 14, 2014.
There will be no periodic interest payments on the
LYONs. Each LYON will have an Issue Price of
$354.71 and a principal amount due at maturity of
$1,000.
Yield to Maturity of LYONs............. 5.25% per annum (computed on a semi-annual bond
equivalent basis) calculated from July 14, 1994.
Conversion Rights...................... Each LYON will be convertible at the option of the
Holder at any time on or prior to maturity, unless
previously redeemed or otherwise purchased by
ALZA. Upon conversion of a LYON, ALZA may elect to
deliver shares of Common Stock, at a Conversion
Rate of 12.987 shares per LYON, or cash equal to
the market value of the shares of Common Stock
into which the LYONs are convertible. The
Conversion Rate will not be adjusted for accrued
Original Issue Discount, but will be subject to
adjustment upon the occurrence of certain events
affecting the Common Stock. Upon conversion, the
Holder will not receive any cash payment
representing accrued Original Issue Discount; such
accrued Original Issue Discount will be deemed
paid by the Common Stock or cash received by the
Holder on conversion. See "Description of LYONs --
Conversion Rights."
Subordination.......................... The LYONs will be subordinated in right of payment
to the prior payment in full of all existing and
future Senior Indebtedness of ALZA, the principal
amount of which as of May 31, 1994 was $1.7
million, excluding ALZA's $249.3 million principal
amount of outstanding commercial paper, which will
be retired with a portion of the proceeds from the
sale of the LYONs. See "Capitalization" and
"Description of LYONs -- Subordination of LYONs."
Original Issue Discount................ Each LYON is being offered at an Original Issue
Discount for United States federal income tax
purposes equal to the excess of the principal
amount at maturity over the amount of the Issue
Price. Prospective purchasers of LYONs should be
aware that, although there will be no periodic
payments of interest on the LYONs, accrued
Original Issue Discount will be includable,
periodically, in a Holder's gross income for
United States federal income tax purposes prior to
conversion, redemption, other disposition or
maturity of such Holder's LYONs, whether
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
or not such LYONs are ultimately converted,
redeemed, sold (to ALZA or otherwise) or paid at
maturity. See "Certain United States Federal
Income Tax Considerations -- Original Issue
Discount."
Sinking Fund........................... None.
Optional Redemption.................... The LYONs will not be redeemable by ALZA prior to
July 14, 1999. Thereafter, the LYONs are
redeemable for cash at any time at the option of
ALZA, in whole or in part, at Redemption Prices
equal to the Issue Price plus accrued Original
Issue Discount to the date of redemption. See
"Description of LYONs -- Redemption of LYONs at
the Option of ALZA."
Purchase at the Option of the Holder... ALZA will purchase any LYON, at the option of the
Holder, as of July 14, 1999, July 14, 2004 and
July 14, 2009, for a Purchase Price of $459.63,
$595.58 and $771.74 (Issue Price plus accrued
Original Issue Discount to such Purchase Date),
respectively, representing a 5.25% yield per annum
to the Holder on such date, computed on a
semi-annual bond equivalent basis. Subject to
certain exceptions, ALZA, at its option, may elect
to pay the Purchase Price as of any such Purchase
Date in cash or Common Stock, or any combination
thereof. Because the Market Price of any Common
Stock to be delivered in payment, in whole or in
part, of the Purchase Price is determined prior to
the applicable Purchase Date, Holders of LYONs
bear the market risk with respect to the value of
the Common Stock to be received from the date such
Market Price is determined to such Purchase Date.
In addition, as of 35 business days after the
occurrence of any Change in Control of ALZA
occurring on or prior to July 14, 1999, ALZA will
also purchase for cash any LYON, at the option of
the Holder, for a Change in Control Purchase Price
equal to the Issue Price plus accrued Original
Issue Discount to the Change in Control Purchase
Date. The Change of Control purchase feature of
the LYONs may in certain circumstances have an
anti-takeover effect. See "Description of LYONs --
Purchase of LYONs at the Option of the Holder" and
"-- Change in Control Permits Purchase of LYONs at
the Option of the Holder."
Use of Proceeds........................ ALZA will use the net proceeds of this offering for
the retirement at maturity of all of ALZA's
outstanding commercial paper, which had an
aggregate principal amount of $249.3 million as of
May 31, 1994, and for general corporate purposes.
See "Use of Proceeds."
Listing................................ The LYONs have been approved for listing on the New
York Stock Exchange upon official notice of
issuance. The Common Stock is currently traded on
the New York Stock Exchange under the symbol
"AZA."
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
Set forth below are summary consolidated financial data for ALZA as of the
dates and for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
------------------------------ -----------------------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
------------- ---------------- -------------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
STATEMENT OF OPERATIONS
DATA:
Total revenues....... $ 68,165 $ 69,936(1) $ 234,182(1) $ 250,519 $ 162,349 $ 109,425 $ 92,687
Income (loss) before
extraordinary item
and cumulative
effect of accounting
change . 15,617 20,769 42,869(2) 72,170 (62,076)(3) 24,654 18,774
Net income (loss).... 15,617 27,342(4) 45,612(4)(5) 72,170 (62,076)(3) 24,654 18,774
Income (loss) per
share before
extraordinary item
and cumulative
effect of accounting
change . 0.19 0.26 0.54(2) 0.90 (0.88)(3) 0.35(6) 0.27(6)
Net income (loss) per
share............... 0.19 0.34(4) 0.57(4)(5) 0.90 (0.88)(3) 0.35(6) 0.27(6)
BALANCE SHEET DATA:
Working capital...... $ 76,959(7) $ 118,235 $ (87,767)(5) $ 188,744 $ 227,950 $ 335,385 $ 130,329
Total assets......... 642,384 737,741 621,824 698,381 580,490 530,868 288,447
Commercial paper..... 249,370 -- 249,520 -- -- -- --
7 1/2% zero coupon
convertible
subordinated
debentures (5)...... -- 233,244 -- 228,966 213,220 198,218 --
5 1/2% convertible
subordinated
debentures.......... -- -- -- -- -- 75,000 75,000
Other long-term
liabilities......... 32,437 25,141 28,969 22,723 23,607 19,474 10,357
Stockholders'
equity.............. 320,822(7)(8) 438,311 306,677(8) 407,543 322,854 219,605 186,636
OTHER DATA:
Ratio of earnings to
fixed charges (9)... 7.6x 6.6x 3.9x 6.3x --(10) 6.3x 5.4x
Pro forma ratio of
earnings to fixed
charges............. 5.9x(11) -- 4.7x(11) -- -- -- --
<FN>
- ------------------------------
(1) Includes approximately $5.0 million ($0.04 per share on an after-tax basis)
of one-time investment gains realized on long-term investments liquidated
in connection with ALZA's contribution to TDC.
(2) Includes pre-tax charges and allowances of $28.1 million ($0.23 per share
on an after-tax basis) related primarily to manufacturing activities.
(3) In 1991 ALZA incurred a one-time charge of $101.3 million relating to the
purchase of in-process technology in connection with the acquisition of
Bio-Electro Systems, Inc., a company acquired by ALZA in early 1992.
(4) In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). ALZA adopted the provisions of SFAS 109 in its financial
statements for the quarter ended March 31, 1993, increasing net income by
$6.6 million ($0.08 per share). As permitted by SFAS 109, prior year
financial statements have not been restated to reflect the change in
accounting method.
(5) On November 15, 1993 ALZA redeemed all of its outstanding 7 1/2% zero
coupon convertible subordinated debentures. In connection with this
redemption, ALZA incurred a $3.8 million (net of income taxes)
extraordinary refinancing charge. The 7 1/2% zero coupon convertible
subordinated debentures were replaced with commercial paper which was
classified as short term debt, thereby reducing working capital.
(6) Per share data for 1989 and 1990 have been restated to give retroactive
effect to a two-for-one stock split effective November 1991.
(7) In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). ALZA adopted the provisions of
the new standard for investments held as of or acquired after January 1,
1994. In accordance with SFAS 115, prior period financial statements have
not been restated to reflect the change in accounting principle. Under SFAS
115, all available-for-sale securities were classified as current assets
and a $2.3 million valuation allowance was established at March 31, 1994
for the difference between their cost and fair market value.
(8) Stockholders' equity decreased from December 31, 1992 to December 31, 1993
and from March 31, 1993 to March 31, 1994 due primarily to the TDC
distribution in the second quarter of 1993.
(9) The ratios of earnings to fixed charges were calculated by dividing the sum
of (i) income (loss) before income taxes, extraordinary item and the
cumulative effect of the accounting change and (ii) fixed charges (reduced
by capitalized interest costs), by fixed charges. Fixed charges consist of
interest (expensed and capitalized), amortization of debt issue expense and
the estimated interest portion of rent expense.
(10) Earnings for the year ended December 31, 1991 were insufficient to cover
fixed charges by approximately $43 million.
(11) The pro forma ratio of earnings to fixed charges assumes the 7 1/2% zero
coupon convertible subordinated debentures and the commercial paper
outstanding during the periods presented had been refinanced on a
retroactive basis by the LYONs offered hereby.
</TABLE>
6
<PAGE>
INVESTMENT CONSIDERATIONS
DEPENDENCE ON RELATIONSHIPS WITH CLIENT COMPANIES. ALZA's net income
currently results primarily from royalties and fees paid by client companies.
Royalties and fees are derived from sales by the clients of products
incorporating ALZA technologies, and therefore vary from quarter to quarter as a
result of changing levels of product sales by client companies. Because ALZA's
clients make all marketing and other commercialization decisions with respect to
such products (including, in many cases, taking responsibility for obtaining
necessary regulatory approvals), most of the variables that affect ALZA's
royalties and fees are not directly within ALZA's control. In addition, ALZA's
royalties and fees could be adversely affected if the pressures for cost
containment in the United States health care system were to result in lower
selling prices for royalty-bearing products. For the year ended December 31,
1993, Procardia XL, marketed by Pfizer, Inc., accounted for approximately 60% of
ALZA's royalties and fees.
UNCERTAINTIES RELATING TO RECENT AND PLANNED EXPANSION OF MARKETING AND
MANUFACTURING ACTIVITIES. ALZA recently began marketing the Testoderm
transdermal therapeutic system, and intends to expand its sales and marketing
activities in the future, under co-promotion arrangements, under its
arrangements with TDC, and under other arrangements with third parties (which
could include the acquisition or license of products and/or technologies). While
the activities with TDC and other third parties are intended to result in a
valuable pipeline of products for marketing by ALZA, there can be no assurance
that this will be the case. ALZA also has expanded and is continuing to expand
its manufacturing facilities in anticipation of future manufacturing needs.
Utilization of these facilities in any quarter depends on many factors,
including client orders, product approvals, and product launches and sales, many
of which are outside of ALZA's control. There can be no assurance that ALZA's
expanded sales, marketing and manufacturing activities will be successful.
VOLATILITY OF SECURITIES PRICES. The market prices of ALZA's securities are
subject to significant fluctuations in response to variations in quarterly
operating results, announcements of new commercial products by ALZA or its
competitors, developments or disputes concerning patent or proprietary rights,
regulatory developments in both the United States and foreign countries, health
care reform and regulation, and economic and other external factors. In
addition, the pharmaceutical sector of the stock market has in recent years
experienced significant price fluctuations. Such fluctuations, as well as
economic conditions generally, may adversely affect the market price of ALZA's
securities.
UNCERTAINTIES CONCERNING EFFECTS OF HEALTH CARE REFORM. The health care
industry has continued to change rapidly as the public, government, medical
practitioners and the pharmaceutical industry focus on ways to expand medical
coverage while controlling the growth in health care costs. Congress and the
Clinton Administration are working on comprehensive legislative changes which,
if enacted, could put significant pressures on the prices charged for
pharmaceutical products. Similarly, prescription drug reimbursement practices
and the growth of large managed care organizations, as well as generic and
therapeutic substitution (substitution of a different product for the same
indication), could significantly affect ALZA's business.
ARRANGEMENTS POTENTIALLY INHIBITING A CHANGE IN CONTROL OF ALZA. Certain
provisions of ALZA's Certificate of Incorporation and of the LYONs may inhibit a
change in control of ALZA. The provisions of ALZA's Certificate of Incorporation
granting the Board of Directors the authority to issue shares of Preferred Stock
with such terms as the Board may determine, classifying ALZA's board, preventing
stockholders from calling special meetings of ALZA's stockholders and requiring
supermajority votes in the event of certain proposed business combinations may
inhibit any change in control of ALZA. The provision in the LYONs granting the
holders of the LYONs the right to require ALZA to purchase all or any part of
the LYONs in the event of a Change in Control may also inhibit any change in
control of ALZA. See "Description of LYONs -- Change in Control Permits Purchase
of LYONs at the Option of the Holder" and "Description of Capital Stock."
7
<PAGE>
USE OF PROCEEDS
The aggregate net proceeds to ALZA from the sale of the LYONs offered hereby
are estimated to be approximately $285 million (or approximately $328 million if
the Underwriter's over-allotment option is exercised in full). ALZA will use a
portion of the net proceeds to retire at maturity all of ALZA's outstanding
commercial paper, which had an aggregate principal amount of $249.3 million as
of May 31, 1994, and had maturities of less than 120 days and bore interest as
of such date at rates ranging from 3.97% to 4.98% per annum. The remainder of
the net proceeds will be used for general corporate purposes, which include
working capital, acquisition of additional facilities and equipment, expansion
of ALZA's pharmaceutical business (including its sales and marketing
activities), possible expenditures under joint ventures, partnerships or other
similar agreements, and the possible acquisition of assets, technologies,
products and businesses to expand ALZA's existing operations. Pending such uses,
ALZA will invest the net proceeds of the offering in marketable securities.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
ALZA's Common Stock is traded on the New York Stock Exchange under the
symbol AZA. Prior to June 1, 1992, the Common Stock was traded on the American
Stock Exchange under the same symbol. The following table sets forth the high
and low per share sales price for the Common Stock as reported on the composite
tape for the applicable exchange for the quarters indicated. The last reported
sale price for the Common Stock on the New York Stock Exchange on July 6, 1994
was $23 3/4. These prices do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1992
First Quarter......................... $55 3/4 $40 5/8
Second Quarter........................ $48 5/8 $38 7/8
Third Quarter......................... $50 3/8 $40 3/8
Fourth Quarter........................ $47 3/8 $33 1/2
1993
First Quarter......................... $47 1/8 $25 1/4
Second Quarter........................ $35 1/8 $22 7/8
Third Quarter......................... $26 3/4 $19 1/4
Fourth Quarter........................ $29 1/2 $20 7/8
1994
First Quarter......................... $30 3/4 $21
Second Quarter........................ $26 5/8 $20 1/4
Third Quarter (through July 6)........ $24 1/8 $23 1/2
</TABLE>
ALZA has never paid a cash dividend on its Common Stock and does not
anticipate doing so in the foreseeable future.
8
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and short-term debt of
ALZA and its consolidated subsidiaries at March 31, 1994, and as adjusted to
give effect to the sale of the LYONs offered by this Prospectus (assuming no
exercise of the Underwriter's over-allotment option) and assuming the retirement
at maturity of $249,370,000 aggregate principal amount of outstanding commercial
paper from the net proceeds of the sale of the LYONs, in each case as if such
events had occurred on March 31, 1994.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1994
-----------------------
AS
ACTUAL ADJUSTED(1)
---------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Commercial paper............................................................. $ 249,370 $ --
Other short-term debt (2).................................................... 868 868
---------- -----------
Total short-term debt...................................................... $ 250,238 $ 868
---------- -----------
---------- -----------
Long-term liabilities:
LYONs offered hereby......................................................... $ -- $ 292,636
Other long-term liabilities.................................................. 32,437 32,437
---------- -----------
Total long-term liabilities................................................ 32,437 325,073
Stockholders' equity:
Preferred Stock, $.01 par value; 100,000 shares authorized; none issued and
outstanding................................................................. -- --
Common Stock, $.01 par value, 300,000,000 shares authorized; 81,674,400
shares issued and outstanding (3)........................................... 817 817
Additional paid-in capital................................................... 295,818 295,818
Unrealized losses on available-for-sale securities (unrealized loss of $3,891
less $1,598 tax effects) (4)................................................ (2,293) (2,293)
Retained earnings............................................................ 26,480 26,480
---------- -----------
Total stockholders' equity................................................. 320,822 320,822
---------- -----------
Total capitalization..................................................... $ 353,259 $ 645,895
---------- -----------
---------- -----------
<FN>
- ------------------------
(1) Adjusted to reflect: (i) the issuance of the LYONs assuming no exercise of
the Underwriter's over-allotment option and (ii) the retirement at
maturity of $249,370,000 of outstanding commercial paper from the net
proceeds of the sale of the LYONs, in each case as if such events had
occurred on March 31, 1994.
(2) Other short-term debt consists entirely of the current portion of
long-term debt.
(3) Excludes 5,832,501 shares reserved for issuance pursuant to ALZA's stock
option, stock purchase and other employee benefit plans, 1,000,000 shares
reserved for issuance upon the exercise of outstanding warrants
exercisable at $25 per share on or before January 31, 1996 and 966,697
shares reserved for issuance upon the exercise of outstanding warrants
exercisable at $65 per share on or before December 31, 1999.
(4) In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). ALZA adopted the
provisions of the new standard for investments held as of or acquired
after January 1, 1994. In accordance with SFAS 115, prior period financial
statements have not been restated to reflect the change in accounting
principle. Under SFAS 115, all available-for-sale securities were
classified as current assets and a $2.3 million valuation allowance was
established at March 31, 1994 for the difference between their cost and
fair market value.
</TABLE>
9
<PAGE>
DESCRIPTION OF LYONS
The LYONs are to be issued under an indenture to be dated as of July 1, 1994
(the "Indenture") between ALZA and The Chase Manhattan Bank, N.A., as trustee
(the "Trustee"). A copy of the form of Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the LYONs and the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the LYONs and the Indenture, including the definitions
therein of certain terms which are not otherwise defined in this Prospectus.
Wherever particular provisions or defined terms of the Indenture (or of the Form
of LYON which is a part thereof) are referred to, such provisions or defined
terms are incorporated herein by reference. References herein are to sections in
the Indenture and paragraphs in the Form of LYON.
GENERAL
The LYONs will be unsecured obligations of ALZA limited to $825,000,000
aggregate principal amount at maturity ($948,750,000 aggregate principal amount
at maturity if the Underwriter's over-allotment option is exercised in full) and
will mature on July 14, 2014. The principal amount at maturity of each LYON is
$1,000 and will be payable at the office of the Paying Agent, which initially
will be the Trustee, in The City of New York, and payment will be made at its
office in New York, or any other office of the Paying Agent maintained for such
purpose. (Sections 2.2, 2.3 and 4.5 and Form of LYON, paragraph 3.)
The LYONs are being offered at a substantial discount from their principal
amount at maturity. There will be no periodic payments of interest. The
calculation of the accrual of Original Issue Discount (the difference between
the Issue Price and the principal amount at maturity of a LYON) in the period
during which a LYON remains outstanding will be on a semi-annual bond equivalent
basis using a 360-day year composed of twelve 30-day months; such accrual will
commence on the issue date of the LYONs. (Form of LYON, paragraph 1.) Maturity,
conversion, purchase by ALZA at the option of the Holder, or redemption of a
LYON will cause Original Issue Discount and interest, if any, to cease to accrue
on such LYON, under the terms and subject to the conditions of the Indenture.
(Section 2.8.) ALZA may not reissue a LYON that has matured or been converted,
purchased by ALZA at the option of a Holder, redeemed or otherwise canceled
(except for registration of transfer, exchange or replacement thereof). (Section
2.10.) See "Certain United States Federal Income Tax Considerations -- Original
Issue Discount."
The LYONs will be issued only in fully registered form, without coupons, in
denominations of $1,000 principal amount at maturity or an integral multiple
thereof. (Form of LYON, paragraph 11.) LYONs may be presented for conversion at
the office of the Conversion Agent and for exchange or registration of transfer
at the office of the Registrar, each of which initially will be the Trustee.
(Section 2.3.) No service charge will be made for any registration of transfer
or exchange of LYONs; however, ALZA may require payment by a Holder of a sum
sufficient to cover any tax, assessment or other governmental charge payable in
connection therewith. (Section 2.6.)
SUBORDINATION OF LYONS
Indebtedness evidenced by the LYONs will be subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full of all
existing and future Senior Indebtedness. (Section 10.1 and Form of LYON,
paragraph 8.) "Senior Indebtedness" means the principal of (and premium, if any)
and unpaid interest on all present and future (i) indebtedness of ALZA for
borrowed money, (ii) obligations of ALZA evidenced by bonds, debentures, notes
or similar instruments, (iii) indebtedness incurred, assumed or guaranteed by
ALZA in connection with the acquisition by it or a subsidiary of any business,
properties or assets (except purchase money indebtedness classified as accounts
payable under generally accepted accounting principles), (iv) obligations of
ALZA as lessee under leases required to be capitalized on the balance sheet of
the lessee under generally accepted accounting principles and leases of property
or assets made as part of any sale and lease-back transaction to which ALZA is a
party, (v) reimbursement obligations of ALZA in respect of letters of credit
relating to indebtedness or other obligations of ALZA that qualify as
indebtedness or obligations of the kind referred to in clauses (i) through (iv)
above and (vi) obligations of ALZA under direct or indirect guaranties in
respect of, and obligations (contingent or otherwise) to purchase or otherwise
acquire, or otherwise to assure a creditor against loss in respect of,
indebtedness or
10
<PAGE>
obligations of others of the kinds referred to in clauses (i) through (v) above,
in each case unless, in the instrument creating or evidencing the indebtedness
or obligation or pursuant to which the same is outstanding, it is provided that
such indebtedness or obligation is not superior in right of payment to the
LYONs. (Section 1.1.)
By reason of such subordination, in the event of dissolution, insolvency,
bankruptcy or other similar proceedings, upon any distribution of assets, (i)
the holders of Senior Indebtedness will be entitled to be paid in full before
payment may be made on the LYONs and the Holders of LYONs will be required to
pay over their share of such distribution in respect of the LYONs to the holders
of Senior Indebtedness until such Senior Indebtedness is paid in full and (ii)
unsecured creditors of ALZA who are not Holders of LYONs or holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the Holders of LYONs. (Section 10.2.)
No payment of the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Change in Control Purchase Price or
interest, if any, with respect to any LYONs may be made, nor may ALZA pay cash
with respect to the Purchase Price or upon conversion of any LYON (other than
cash in lieu of fractional shares) or acquire any LYONs except as set forth in
the Indenture, if there shall have occurred and be continuing (i) a default in
any payment with respect to any Senior Indebtedness of ALZA or (ii) an event of
default with respect to any Senior Indebtedness of ALZA permitting the holders
thereof to accelerate the maturity thereof. (Section 10.4.)
The LYONs will be effectively subordinated to all liabilities, including
trade payables and capitalized lease obligations, if any, of ALZA's
subsidiaries. Any right of ALZA to receive assets of any of its subsidiaries
upon liquidation or reorganization of the subsidiary (and the consequent right
of the Holders of the LYONs to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that ALZA is itself recognized as a creditor of
such subsidiary, in which case the claims of ALZA would still be subordinate to
any security interests in the assets of such subsidiary and any indebtedness of
such subsidiary senior to that held by ALZA.
As of May 31, 1994, the principal amount of Senior Indebtedness was $1.7
million, excluding ALZA's $249.3 million principal amount of outstanding
commercial paper, which will be retired with a portion of the proceeds from the
sale of the LYONs. There are no restrictions in the Indenture on the creation of
additional indebtedness, including Senior Indebtedness.
CONVERSION RIGHTS
A Holder of a LYON may convert it at any time before the close of business
on July 14, 2014; PROVIDED, HOWEVER, that if a LYON is called for redemption,
the Holder may convert it at any time before the close of business on the
Redemption Date. On conversion of a LYON, ALZA may elect to deliver shares of
Common Stock or an amount of cash determined as described below. A LYON in
respect of which a Holder has delivered a Purchase Notice or a Change in Control
Purchase Notice exercising the option of such Holder to require ALZA to purchase
such LYON may be converted only if such notice is withdrawn by a written notice
of withdrawal delivered to the Paying Agent prior to the close of business on
the Purchase Date or the Change in Control Purchase Date, as the case may be, in
accordance with the terms of the Indenture. (Form of LYON, paragraph 9.)
The initial Conversion Rate is 12.987 shares of Common Stock per LYON,
subject to adjustment upon the occurrence of certain events described below. A
Holder otherwise entitled to a fractional share of Common Stock will receive
cash in lieu of such fractional share equal to the market value of such
fractional share based on the Sale Price on the Trading Day immediately prior to
the Conversion Date. A Holder may convert a portion of such Holder's LYON
provided that the portion is $1,000 principal amount at maturity or an integral
multiple thereof. (Sections 11.1 and 11.3 and Form of LYON, paragraph 9.)
On conversion of a LYON, a Holder must (i) complete and manually sign the
conversion notice on the back of the LYON (or complete and manually sign a
facsimile thereof) and deliver such notice to the Conversion Agent or any other
office or agency maintained for such purpose, (ii) surrender the LYON to the
Conversion Agent or such other office or agency by physical or book entry
delivery, (iii) if required, furnish
11
<PAGE>
appropriate endorsements and transfer documents and (iv) if required, pay all
transfer or similar taxes. The date on which all of the foregoing requirements
have been satisfied is the Conversion Date. (Section 11.2 and Form of LYON,
paragraph 9.)
On conversion of a LYON, a Holder will not receive any cash payment
representing accrued Original Issue Discount. ALZA's delivery to the Holder of
the fixed number of shares of Common Stock (or cash in the applicable amount as
provided below) into which the LYON is convertible (together with the cash
payment, if any, in lieu of fractional shares) will satisfy ALZA's obligation to
pay the principal amount at maturity of the LYON including the accrued Original
Issue Discount attributable to the period from the Issue Date to the Conversion
Date. Thus, the accrued Original Issue Discount is deemed to be paid in full
rather than canceled, extinguished or forfeited. (Section 11.2.) The Conversion
Rate will not be adjusted at any time during the term of the LYONs for such
accrued Original Issue Discount.
In lieu of delivering shares of Common Stock upon notice of conversion of
any LYON, ALZA may elect to pay the Holder surrendering a LYON an amount in cash
equal to the Sale Price of a share of Common Stock on the Trading Day
immediately prior to the Conversion Date multiplied by the Conversion Rate in
effect on such Trading Day, subject to adjustment upon the occurrence of certain
events described below; PROVIDED, that if such payment of cash is not permitted
pursuant to the provisions of the Indenture or otherwise, ALZA will deliver
shares of Common Stock (and cash in lieu of fractional shares) as set forth
below. Upon conversion of any LYON, ALZA shall inform the Holder through the
Conversion Agent of its election to deliver shares of Common Stock or to pay
cash in lieu of delivery of such shares no later than two business days
following the Conversion Date. If ALZA elects to deliver shares of Common Stock,
such shares will be delivered through the Conversion Agent no later than the
seventh business day following the Conversion Date. If ALZA elects to pay cash,
such cash payment will be made to the Holder surrendering such LYON no later
than the fifth business day following such Conversion Date. (Sections 11.1 and
11.2.) For a discussion of the tax treatment of a Holder receiving cash or
Common Stock, see "Certain United States Federal Income Tax Considerations --
Disposition or Conversion."
ALZA may not pay cash upon conversion of any LYON (other than cash in lieu
of fractional shares) if there has occurred and is continuing an Event of
Default described under "Events of Default; Notice and Waiver" below (other than
a default in such payment on such LYON). (Section 11.1.)
The "Sale Price" on any Trading Day means the closing sale price per share
for the Common Stock (or, if no closing price is reported, the average of the
bid and ask prices or, if more than one in either case, the average of the
average bid and the average ask prices) on such date as reported in the
composite transactions for the principal United States securities exchange on
which the Common Stock is traded or, if the Common Stock is not listed on a
United States national or regional securities exchange, as reported by the
National Association of Securities Dealers Automated Quotation System. A
"Trading Day" means each day on which the securities exchange or quotation
system which is used to determine the Sale Price is open for trading or
quotation.
The Conversion Rate will be adjusted for dividends or distributions on
Common Stock payable in Common Stock or other capital stock of ALZA;
subdivisions, combinations or certain reclassifications of Common Stock;
distributions to all holders of Common Stock of certain rights, warrants or
options to purchase Common Stock expiring within 60 days after the record date
for such distribution at a price per share less than the Sale Price at the time
specified in the Indenture; and distributions to such holders of assets or debt
securities of ALZA or certain rights, warrants or options to purchase securities
of ALZA (excluding cash dividends or other cash distributions from current or
retained earnings other than any Extraordinary Cash Dividend). However, no
adjustment need be made if Holders may participate in the transactions on a
basis and with notice that the Board of Directors of ALZA determines to be fair
and appropriate or in certain other cases. In cases where the fair market value
of the assets, debt securities or certain rights, warrants or options to
purchase securities of ALZA distributed to stockholders exceeds the Average Sale
Price of the Common Stock or such Average Sale Price exceeds the fair market
value of the assets, debt securities or rights, warrants or options so
distributed, by less than $1.00, rather than being entitled to an adjustment in
the Conversion Rate, the Holder of a LYON upon conversion thereof will be
12
<PAGE>
entitled to receive, in addition to the shares of Common Stock into which the
LYON is convertible, the kind and amount of assets, debt securities or rights,
warrants or options comprising the distribution that such Holder would have
received if such Holder had converted such LYON immediately prior to the record
date for determining the stockholders entitled to receive the distribution. The
Indenture permits ALZA to increase the Conversion Rate from time to time for a
period of time not less than 20 business days. (Sections 11.6, 11.7, 11.8, 11.9,
11.10, 11.12 and 11.14 and Form of LYON, paragraph 9.)
If ALZA is a party to a consolidation, merger or binding share exchange, or
transfers all or substantially all of its assets, the right to convert a LYON
into Common Stock may be changed into a right to convert into securities, cash
or other assets of ALZA or another person. (Section 11.14.)
In the event of a taxable distribution to holders of Common Stock that
results in an adjustment of the Conversion Rate or in the event the Conversion
Rate is increased at the discretion of ALZA, the Holders of the LYONs may, in
certain circumstances, be deemed to have received a distribution subject to
United States federal income tax as a dividend. See "Certain United States
Federal Income Tax Considerations -- Constructive Dividend."
REDEMPTION OF LYONS AT THE OPTION OF ALZA
No sinking fund is provided for the LYONs. The LYONs will not be redeemable
by ALZA prior to July 14, 1999. Thereafter, ALZA may redeem the LYONs for cash
as a whole at any time, or from time to time in part, upon not less than 30
days' nor more than 60 days' notice of redemption given by mail to the Holders
of LYONs. (Sections 3.1 and 3.3 and Form of LYON, paragraphs 5 and 7.)
The following table shows Redemption Prices of a LYON on July 14, 1999, at
each July 14 thereafter prior to maturity, and at maturity on July 14, 2014,
which prices reflect the accrued Original Issue Discount calculated to each such
date. The Redemption Price of a LYON redeemed between such dates would include
an additional amount reflecting the additional Original Issue Discount accrued
since the next preceding date in the table to, but excluding, the Redemption
Date. (Form of LYON, paragraph 5.)
<TABLE>
<CAPTION>
(2) (3)
ACCRUED ORIGINAL REDEMPTION
(1) ISSUE DISCOUNT AT PRICE
REDEMPTION DATE LYON ISSUE PRICE 5.25% (1)+(2)
- ------------------------------------ ---------------- --------------------- --------------
<S> <C> <C> <C>
July 14, 1999....................... $ 354.71 $ 104.92 $ 459.63
July 14, 2000....................... 354.71 129.36 484.07
July 14, 2001....................... 354.71 155.11 509.82
July 14, 2002....................... 354.71 182.23 536.94
July 14, 2003....................... 354.71 210.79 565.50
July 14, 2004....................... 354.71 240.87 595.58
July 14, 2005....................... 354.71 272.54 627.25
July 14, 2006....................... 354.71 305.91 660.62
July 14, 2007....................... 354.71 341.04 695.75
July 14, 2008....................... 354.71 378.05 732.76
July 14, 2009....................... 354.71 417.03 771.74
July 14, 2010....................... 354.71 458.07 812.78
July 14, 2011....................... 354.71 501.30 856.01
July 14, 2012....................... 354.71 546.83 901.54
July 14, 2013....................... 354.71 594.79 949.50
At maturity......................... 354.71 645.29 $ 1,000.00
</TABLE>
If less than all of the outstanding LYONs are to be redeemed, the Trustee
shall select the LYONs to be redeemed in principal amounts at maturity of $1,000
or integral multiples thereof by lot, PRO RATA or by another method the Trustee
considers fair and appropriate. If a portion of a Holder's LYONs is selected for
partial redemption and such Holder converts a portion of such LYONs, such
converted portion shall be deemed to be of the portion selected for redemption.
(Section 3.2.)
13
<PAGE>
PURCHASE OF LYONS AT THE OPTION OF THE HOLDER
On July 14, 1999, July 14, 2004 and July 14, 2009 (each, a "Purchase Date")
ALZA will become obligated to purchase, at the option of the Holder thereof, any
outstanding LYON for which a written Purchase Notice has been delivered by the
Holder to the Paying Agent or to any other office or agency maintained for such
purpose at any time from the opening of business on the date that is 20 business
days prior to such Purchase Date until the close of business on such Purchase
Date and for which such Purchase Notice has not been withdrawn, subject to
certain additional conditions. The Purchase Price payable in respect of a LYON
shall be equal to the Issue Price plus accrued Original Issue Discount to the
Purchase Date, with respect to each Purchase Date, as set forth in the table
below. ALZA, at its option, may elect to pay the Purchase Price with respect to
any particular Purchase Date in cash or Common Stock, or any combination
thereof. (Section 3.8 and Form of LYON, paragraph 6.) For a discussion of the
tax treatment of a Holder receiving cash, Common Stock, or any combination
thereof, see "Certain United States Federal Income Tax Considerations --
Disposition or Conversion."
ALZA will be required to give notice (the "ALZA Notice") on a date not less
than 20 business days prior to any Purchase Date to all Holders at their
addresses shown in the register of the Registrar (and to beneficial owners if
required by applicable law) stating, among other things, (i) whether ALZA will
pay the Purchase Price of LYONs in cash or Common Stock, or any combination
thereof (and, if a combination, specifying the percentage of the Purchase Price
to be paid in each of cash and Common Stock), and (ii) the procedures that
Holders must follow to require ALZA to purchase LYONs from such Holder. (Section
3.8.)
The Purchase Notice given by each Holder electing to require ALZA to
purchase LYONs shall state (i) the certificate numbers of the LYONs to be
delivered by such Holder for purchase by ALZA, (ii) the portion of the principal
amount at maturity of LYONs to be purchased, which portion must be $1,000 or an
integral multiple thereof, (iii) that such LYONs are to be purchased by ALZA
pursuant to the applicable provisions of the LYONs and (iv) in the event ALZA
elects, pursuant to the ALZA Notice, to pay the Purchase Price with respect to
the applicable Purchase Date in Common Stock (in whole or in part) but such
Purchase Price is ultimately to be paid in cash because any of the other
conditions to payment of the Purchase Price in Common Stock is not satisfied by
such Purchase Date, as described below, whether such Holder elects (a) to
withdraw such Purchase Notice as to some or all of the LYONs to which it relates
(stating the principal amount at maturity and certificate numbers of the LYONs
as to which such withdrawal shall relate) or (b) to receive cash in respect of
the Purchase Price for all LYONs subject to such Purchase Notice. If the Holder
fails to indicate such Holder's choice with respect to the election described in
clause (iv) above in the Purchase Notice, such Holder shall be deemed to have
elected to receive cash in respect of the Purchase Price for all LYONs subject
to such Purchase Notice in such circumstances. (Section 3.8.)
Any Purchase Notice may be withdrawn by the Holder by a written notice of
withdrawal delivered to the Paying Agent or to any other office or agency
maintained for such purpose prior to the close of business on the Purchase Date.
The notice of withdrawal shall state the principal amount at maturity and the
certificate numbers of the LYONs as to which the withdrawal notice relates and
the principal amount at maturity, if any, which remains subject to the Purchase
Notice. (Section 3.10.)
The table below shows the Purchase Prices of a LYON as of the specified
Purchase Dates:
<TABLE>
<CAPTION>
PURCHASE DATE PURCHASE PRICE
----------------- --------------
<S> <C>
July 14, 1999....................................................... $ 459.63
July 14, 2004....................................................... $ 595.58
July 14, 2009....................................................... $ 771.74
</TABLE>
If ALZA elects to pay the Purchase Price, in whole or in part, in shares of
Common Stock, the number of shares of Common Stock to be delivered in respect of
the portion of the Purchase Price to be paid in Common Stock shall be equal to
such portion of the Purchase Price divided by the Market Price of a share of
Common Stock. However, no fractional shares of Common Stock will be delivered
upon any purchase by ALZA of LYONs through the delivery of such Common Stock in
payment, in whole or in part, of the
14
<PAGE>
Purchase Price. Instead, ALZA will pay cash based on the Market Price for all
fractional shares of Common Stock. (Section 3.8.) See "Certain United States
Federal Income Tax Considerations -- Disposition or Conversion."
The "Market Price" means the average of the Sale Prices of the Common Stock
for the five Trading Day period ending on the third Trading Day prior to the
applicable Purchase Date, appropriately adjusted to take into account the
occurrence during the seven Trading Days preceding such Purchase Date of certain
events that would result in an adjustment of the Conversion Rate with respect to
the Common Stock. Because the Market Price of the Common Stock is determined
prior to the applicable Purchase Date, Holders of LYONs bear the market risk
with respect to the value of the Common Stock to be received from the date such
Market Price is determined to such Purchase Date. ALZA may elect to pay in
Common Stock only if the information necessary to calculate the Market Price is
reported in THE WALL STREET JOURNAL or another daily newspaper of national
circulation. (Section 3.8.)
Upon determination of the actual number of shares of Common Stock issuable
in accordance with the foregoing provisions, ALZA will publish such
determination in THE WALL STREET JOURNAL or another daily newspaper of national
circulation. (Section 3.8.)
ALZA's right to purchase LYONs, in whole or in part, with Common Stock is
subject to ALZA satisfying various conditions, including (i) the registration of
the Common Stock under the Securities Act and the Exchange Act, if applicable,
and (ii) any necessary qualification or registration under applicable state laws
or the availability of an exemption from such qualification and registration and
compliance with other applicable federal securities laws. If such conditions are
not satisfied with respect to a Holder or Holders by the Purchase Date, ALZA
will pay the Purchase Price of the LYONs of such Holder or Holders in cash.
(Section 3.8.) See "Certain United States Federal Income Tax Considerations --
Disposition or Conversion." ALZA may not change the form of consideration (or
components thereof) to be paid once ALZA has given the ALZA Notice to Holders of
LYONs, except as described in the second sentence of this paragraph. (Section
3.8.)
ALZA will comply with the provisions of Rule 13e-4, Rule 14e-1 and any other
tender offer rules under the Exchange Act which may then be applicable and will
file Schedule 13E-4 or any other schedule required thereunder in connection with
any offer by ALZA to purchase LYONs at the option of Holders. (Section 3.13.)
Payment of the Purchase Price for a LYON for which a Purchase Notice has
been delivered and not validly withdrawn is conditioned upon delivery of such
LYON (together with necessary endorsements) to the Paying Agent or to any other
office or agency maintained for such purpose at any time (whether prior to, on
or after the Purchase Date) after delivery of such Purchase Notice. (Section
3.8.) Payment of the Purchase Price for a LYON will be made promptly following
the later of the Purchase Date or the time of delivery of such LYON. (Section
3.10.) If the Paying Agent holds, in accordance with the terms of the Indenture,
money or securities sufficient to pay the Purchase Price of such LYON on the
business day following the Purchase Date, then, on and after the Purchase Date,
such LYON will cease to be outstanding and Original Issue Discount on such LYON
will cease to accrue and will be deemed paid, whether or not such LYON is
delivered to the Paying Agent or to any other office or agency maintained for
such purpose, and all other rights of the Holder will terminate (other than the
right to receive the Purchase Price upon delivery of the LYON). (Section 2.8.)
ALZA's ability to purchase LYONs with cash may be limited by the terms of
its then-existing borrowing agreements. No LYONs may be purchased for cash
pursuant to the provisions described above if there has occurred and is
continuing an Event of Default described under "Events of Default; Notice and
Waiver" below (other than a default in the payment of the Purchase Price with
respect to such LYONs). (Section 3.10.)
CHANGE IN CONTROL PERMITS PURCHASE OF LYONS AT THE OPTION OF THE HOLDER
In the event of any Change in Control of ALZA occurring on or prior to July
14, 1999, each Holder of LYONs will have the right, at the Holder's option,
subject to the terms and conditions of the Indenture, to
15
<PAGE>
require ALZA to become obligated to purchase all or any part (provided that the
principal amount at maturity must be $1,000 or an integral multiple thereof) of
the Holder's LYONs on the date that is 35 business days after the occurrence of
such Change in Control (the "Change in Control Purchase Date") at a cash price
equal to the Issue Price plus accrued Original Issue Discount to the Change in
Control Purchase Date (the "Change in Control Purchase Price"). (Section 3.9 and
Form of LYON, paragraph 6.) See "Certain United States Federal Income Tax
Considerations -- Disposition or Conversion."
Within 15 business days after the Change in Control, ALZA is obligated to
give notice regarding the Change in Control to the Trustee and to all Holders of
LYONs at their addresses shown in the register of the Registrar (and to
beneficial owners if required by applicable law), which notice shall state,
among other things, (i) the date of such Change in Control and, briefly, the
events causing such Change in Control, (ii) the last date by which the Change in
Control Purchase Notice must be given, (iii) the Change in Control Purchase
Date, (iv) the Change in Control Purchase Price, (v) briefly, the conversion
rights of the LYONs, (vi) the name and address of the Paying Agent and the
Conversion Agent, (vii) the Conversion Rate and any adjustments thereto, (viii)
that LYONs as to which a Change in Control Purchase Notice has been given may be
converted into Common Stock only if the Change in Control Purchase Notice has
been withdrawn in accordance with the terms of the Indenture, (ix) a brief
description of these rights and the procedures the Holder must follow to
exercise these rights, and (x) the procedures for withdrawing a Change in
Control Purchase Notice. ALZA will cause a copy of such notice to be published
in THE WALL STREET JOURNAL or another daily newspaper of national circulation.
(Section 3.9.)
To exercise this right, the Holder must deliver written notice (a "Change in
Control Purchase Notice") to the Paying Agent or to any other office or agency
maintained for such purpose of the exercise of such right prior to the close of
business on the Change in Control Purchase Date. The Change in Control Purchase
Notice shall state (i) the certificate numbers of the LYONs to be delivered by
the Holder thereof for purchase by ALZA, (ii) the portion of the principal
amount at maturity of LYONs to be purchased, which portion must be $1,000 or an
integral multiple thereof, and (iii) that such LYONs are to be purchased by ALZA
pursuant to the applicable provisions of the LYONs. (Section 3.9.)
Any Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the Paying Agent or to any other
office or agency maintained for such purpose prior to the close of business on
the Change in Control Purchase Date. The notice of withdrawal shall state the
principal amount at maturity and the certificate numbers of the LYONs as to
which the withdrawal notice relates and the principal amount at maturity, if
any, that remains subject to a Change in Control Purchase Notice. (Section
3.10.)
Payment of the Change in Control Purchase Price for a LYON for which a
Change in Control Purchase Notice has been delivered and not validly withdrawn
is conditioned upon delivery of such LYON (together with necessary endorsements)
to the Paying Agent or to any other office or agency maintained for such
purpose, at any time (whether prior to, on or after the Change in Control
Purchase Date) after the delivery of such Change in Control Purchase Notice.
(Section 3.9.) Payment of the Change in Control Purchase Price for such LYON
will be made promptly following the later of the Change in Control Purchase Date
or the time of delivery of such LYON. (Section 3.10.) If the Paying Agent holds,
in accordance with the terms of the Indenture, money sufficient to pay the
Change in Control Purchase Price of such LYON on the business day following the
Change in Control Purchase Date, then, on and after such date, such LYON shall
cease to be outstanding and Original Issue Discount on such LYON will cease to
accrue and will be deemed paid, whether or not such LYON is delivered to the
Paying Agent or to any other office or agency maintained for such purpose, and
all other rights of the Holder shall terminate (other than the right to receive
the Change in Control Purchase Price upon delivery of the LYON). (Section 2.8.)
16
<PAGE>
Under the Indenture, a "Change in Control" of ALZA is deemed to have
occurred at such time as (i) there shall be consummated any consolidation or
merger of ALZA in which ALZA is not the continuing or surviving corporation or
pursuant to which the Voting Stock of ALZA would be converted into cash,
securities or other property, in each case other than a consolidation or merger
of ALZA in which the holders of the Voting Stock of ALZA immediately prior to
the consolidation or merger have, directly or indirectly, at least a majority of
the Voting Stock of the surviving corporation immediately after the
consolidation or merger, or (ii) any person (including its Affiliates and
Associates) other than ALZA, its subsidiaries or their employee benefit plans,
files a Schedule 13D or 14D-1 (or any successor schedule, form or report under
the Exchange Act) disclosing that such person has become the Beneficial Owner of
50% or more of ALZA's Voting Stock. (Section 3.9.)
"Voting Stock" means, with respect to any person, capital stock of such
person having general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such person
(irrespective of whether or not at the time capital stock of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency). (Section 3.9.)
ALZA will comply with the provisions of Rule 13e-4, Rule 14e-1 and any other
tender offer rules under the Exchange Act which may then be applicable and will
file Schedule 13E-4 or any other schedule required thereunder in connection with
any offer by ALZA to purchase LYONs at the option of Holders upon a Change in
Control. (Section 3.13.) The Change in Control purchase feature of the LYONs may
in certain circumstances make more difficult or discourage a takeover of ALZA
and, thus, the removal of incumbent management. The Change in Control purchase
feature, however, is not the result of management's knowledge of any specific
effort to accumulate shares of Common Stock or to obtain control of ALZA by
means of a merger, tender offer, solicitation or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the Change in
Control purchase feature is a standard term contained in other LYONs offerings
that have been marketed by the Underwriter and the terms of such feature result
from negotiations between ALZA and the Underwriter.
If a Change in Control were to occur, there can be no assurance that ALZA
would have sufficient funds to pay the Change in Control Purchase Price for all
LYONs tendered by the Holders thereof. In addition, ALZA's ability to purchase
LYONs with cash may be limited by the terms of its then-existing borrowing
agreements. Payment of the Change in Control Purchase Price will be subordinated
to the repayment of Senior Indebtedness. See "Subordination of LYONs." A default
by ALZA on its obligation to pay the Change in Control Purchase Price would
result in an Event of Default and could result in acceleration of the maturity
of other indebtedness of ALZA at the time outstanding pursuant to cross-default
provisions. See "Events of Default; Notice and Waiver." No LYONs may be
purchased if there has occurred and is continuing an Event of Default described
under "Events of Default; Notice and Waiver" below (other than a default in the
payment of the Change in Control Purchase Price with respect to such LYONs).
(Section 3.10.)
MERGERS AND SALES OF ASSETS BY ALZA
The Indenture provides that ALZA may not consolidate with or merge into any
other person or sell, lease or otherwise transfer all or substantially all of
its assets to any other person, unless, among other things, (i) the resulting,
surviving or transferee person (if other than ALZA) is organized and existing
under the laws of the United States, any state thereof or the District of
Columbia and such person expressly assumes all obligations of ALZA under the
LYONs and the Indenture and (ii) ALZA or such successor person shall not
immediately thereafter be in default under the Indenture. Upon the assumption of
ALZA's obligations by such a person in such circumstances, subject to certain
exceptions, ALZA shall be discharged from all obligations under the LYONs and
the Indenture. (Section 5.1.) Certain of the foregoing transactions occurring on
or prior to July 14, 1999 could result in a Change in Control of ALZA permitting
each Holder to require ALZA to purchase the LYONs of such Holder as described
above. (Section 3.9.)
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that if an Event of Default specified therein shall
have occurred and be continuing, either the Trustee or the Holders of not less
than 25% in aggregate principal amount at maturity of the LYONs then outstanding
may declare the Issue Price of the LYONs plus the Original Issue Discount
17
<PAGE>
on the LYONs accrued to the date of such declaration to be immediately due and
payable. In the case of certain events of bankruptcy or insolvency, the Issue
Price of the LYONs plus the Original Issue Discount accrued thereon to the
occurrence of such event shall automatically become and be immediately due and
payable. See "Subordination of LYONs." If any LYONs are declared due and payable
before their stated maturity, the holders of Senior Indebtedness then
outstanding shall be entitled to receive payment in full of all amounts due or
to become due on or with respect to all Senior Indebtedness, or provision shall
be made for payment of such amounts, before the Holders of LYONs are entitled to
receive any payment on account of the LYONs. (Section 10.3.) Under certain
circumstances, the Holders of a majority in aggregate principal amount at
maturity of the outstanding LYONs may rescind any such acceleration with respect
to the LYONs and its consequences. (Section 6.2.) Interest shall accrue and be
payable on demand upon a default in the payment of principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption Price, Purchase Price,
Change in Control Purchase Price or cash or shares of Common Stock to be
delivered on conversion of LYONs, in each case to the extent that payment of
such interest shall be legally enforceable. (Form of LYON, paragraph 1.)
Under the Indenture, an Event of Default is defined as any of the following:
(i) default in payment of the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Purchase Price or Change in Control
Purchase Price with respect to any LYON when such becomes due and payable
(whether or not payment is prohibited by the provisions of the Indenture), (ii)
failure by ALZA to deliver shares of Common Stock or pay cash in lieu thereof
when such Common Stock or cash is required to be delivered or paid, as the case
may be, following conversion of a LYON, (iii) failure by ALZA to comply with any
of its other agreements in the LYONs or the Indenture upon the receipt by ALZA
of notice of such default by the Trustee or by Holders of not less than 25% in
aggregate principal amount at maturity of the LYONs then outstanding and ALZA's
failure to cure such default within 60 days after receipt by ALZA of such
notice, (iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed of ALZA or any Consolidated Subsidiary, which
default shall have resulted in such indebtedness, in an aggregate principal
amount exceeding $25,000,000, becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable without such
indebtedness being discharged or such acceleration having been rescinded or
annulled, or there having been deposited in trust a sum of money sufficient to
discharge such indebtedness within a period of 30 days after the giving of a
Notice of Default by the Trustee or by Holders of not less than 25% in aggregate
principal amount at maturity of the LYONs then outstanding, or (v) certain
events of bankruptcy or insolvency. (Section 6.1.)
The Trustee shall give notice to Holders of the LYONs of any continuing
default known to the Trustee within 90 days after the occurrence thereof;
provided, that the Trustee may withhold such notice if it determines in good
faith that withholding the notice is in the interests of the Holders. (Section
7.5.)
The Holders of a majority in aggregate principal amount at maturity of the
outstanding LYONs may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that such direction shall not be in
conflict with any law or the Indenture and subject to certain other limitations.
(Section 6.5.) Before proceeding to exercise any right or power under the
Indenture at the direction of such Holders, the Trustee shall be entitled to
receive from such Holders reasonable security or indemnity satisfactory to it
against any cost, liability or expense which might be incurred by it in
complying with any such direction. No Holder of any LYON will have any right to
pursue any remedy with respect to the Indenture or the LYONs, unless (i) such
Holder shall have previously given the Trustee written notice of a continuing
Event of Default, (ii) the Holders of at least 25% in aggregate principal amount
at maturity of the outstanding LYONs shall have made a written request to the
Trustee to pursue such remedy, (iii) such Holder or Holders have offered to the
Trustee reasonable security or indemnity satisfactory to the Trustee, (iv) the
Holders of a majority in aggregate principal amount at maturity of the
outstanding LYONs have not given the Trustee a direction inconsistent with such
request within 60 days after receipt of such request and (v) the Trustee shall
have failed to comply with the request within such 60-day period. (Section 6.6.)
18
<PAGE>
Notwithstanding the foregoing, the right of any Holder (i) to receive
payment of the principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Purchase Price or Change in Control Purchase Price
with respect to any LYON and any interest in respect of a default in the payment
of any such amounts on such LYON, on or after the due date expressed in such
LYON or (ii) to institute suit for the enforcement of any such payments or
conversion or (iii) to convert LYONs (including, without limitation, the right
to receive cash in lieu of Common Stock upon conversion if ALZA has elected to
pay cash with respect thereto) shall not be impaired or adversely affected
without such Holder's consent. (Section 6.7.) The Holders of at least a majority
in aggregate principal amount at maturity of the outstanding LYONs may waive an
existing default and its consequences, other than (i) any default in any payment
on the LYONs, (ii) any default with respect to the conversion rights of LYONs or
(iii) any default in respect of certain covenants or provisions in the Indenture
which may not be modified without the consent of the Holder of each LYON as
described in "Modification" below. (Section 6.4.)
ALZA will be required to furnish to the Trustee annually a statement as to
any default by ALZA in the performance and observance of its obligations under
the Indenture. (Section 4.3.)
MODIFICATION
Modification and amendment of the Indenture or the LYONs may be effected by
ALZA and the Trustee with the consent of the Holders of not less than a majority
in aggregate principal amount at maturity of the LYONs then outstanding. Without
the consent of each Holder affected thereby, however, no amendment may, among
other things, (i) reduce the principal amount at maturity, Issue Price, Purchase
Price, Change in Control Purchase Price, Redemption Price or the amount of cash
payable in respect of conversion upon ALZA's election to pay cash with respect
thereto, or extend the stated maturity of any LYON or alter the manner or rate
of accrual of Original Issue Discount or interest, or make any LYON payable in
money or securities other than that stated in the LYON, (ii) reduce the
principal amount at maturity of LYONs whose Holders must consent to an amendment
or any waiver under the Indenture, (iii) modify the Indenture provisions
relating to such amendments or waivers, (iv) make any change that adversely
affects the right to convert any LYON or the right to require ALZA to purchase a
LYON (including, without limitation, the right to receive cash in lieu of Common
Stock upon conversion or purchase other than elimination of ALZA's option to pay
cash in lieu of delivering shares of Common Stock upon conversion as described
below), (v) modify the provisions of the Indenture relating to the subordination
of the LYONs in a manner that adversely affects the rights of any Holder of the
LYONs, or (vi) impair the right to institute suit for the enforcement of any
payment with respect to, or conversion of, the LYONs. (Section 9.2.) In
addition, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding, unless the holders of such Senior Indebtedness (as required
pursuant to the terms of such Senior Indebtedness) consent to such change.
(Section 9.2.)
Without the consent of any Holder of LYONs, ALZA and the Trustee may amend
the Indenture to (i) cure any ambiguity, omission, defect or inconsistency,
provided that such amendment does not materially adversely affect the rights of
any Holder, (ii) provide for the assumption by a successor corporation of the
obligations of ALZA under the Indenture, (iii) provide for uncertificated LYONs
in addition to certificated LYONs so long as such uncertificated LYONs are in
registered form for United States federal income tax purposes, (iv) eliminate
ALZA's option to pay cash in lieu of delivering shares of Common Stock upon
conversion of LYONs (other than cash in lieu of fractional shares and except
with respect to elections already made), (v) make any change that does not
adversely affect the rights of any Holder of LYONs or (vi) make any change to
comply with the Trust Indenture Act of 1939, as amended, or any requirement of
the Commission in connection with the qualification of the Indenture under such
act. (Section 9.1.)
DISCHARGE OF THE INDENTURE
ALZA may satisfy and discharge its obligations under the Indenture by
delivering to the Trustee for cancellation all outstanding LYONs or by
depositing with the Trustee, after the LYONs have become due and payable, cash
(or, if permitted by the terms of the Indenture, other securities) sufficient to
pay at stated maturity all of the outstanding LYONs and paying all other sums
payable under the Indenture by ALZA.
19
<PAGE>
INFORMATION CONCERNING THE TRUSTEE
The Chase Manhattan Bank, N.A. is the Trustee under the Indenture. ALZA and
its subsidiaries may maintain deposit accounts and conduct other banking
transactions with the Trustee in the ordinary course of business.
CLAIMS IN BANKRUPTCY
If ALZA becomes the subject of a voluntary or involuntary case under the
United States Bankruptcy Code, the claim of any Holder of a LYON may, under the
Bankruptcy Code, be limited to the Issue Price of the LYON plus that portion of
the Original Issue Discount that is deemed to have accrued from the date of
issue to the date of the commencement of the bankruptcy case. In addition, the
Holders of the LYONs will be subordinated in right of payment to Senior
Indebtedness and effectively subordinated to indebtedness and other obligations
of ALZA's subsidiaries. See "Subordination of LYONs."
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF CAPITAL STOCK. ALZA's authorized capital stock consists of
300,000,000 shares of Common Stock, par value $.01 per share, and 100,000 shares
of Preferred Stock, par value $.01 per share (the "Preferred Stock"). No
Preferred Stock is outstanding as of the date of this Prospectus. For recent
prices of Common Stock, see "Price Range of Common Stock and Dividend Policy."
On March 31, 1994, there were 81,674,400 shares of Common Stock outstanding.
In addition there were 1,966,697 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants and 5,832,501 shares of Common Stock
reserved for issuance under option and other incentive plans. 12,321,416 shares
have been reserved for issuance upon conversion of the LYONs.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. Subject to any superior rights of
Preferred Stock, holders of Common Stock are entitled to share, on a pro rata
basis, in all assets remaining after payment of or provision for liabilities.
The shares of Common Stock are not subject to redemption. ALZA has the corporate
power to repurchase Common Stock.
ALZA's Board of Directors has authority to fix or alter the rights,
preferences, privileges, restrictions and other terms of any series of Preferred
Stock, the number of shares constituting any such series and the designation
thereof. ALZA has no present plans to issue any shares of Preferred Stock.
ALZA has a classified Board of Directors with directors serving staggered
terms of three years each. Directors may not be removed by the stockholders
without cause. Special meetings of the stockholders may be called only by the
Board of Directors, the Chairman of the Board or the President. Nominations for
election of directors may be made by the Board of Directors or by any
stockholder of record entitled to vote for directors, provided that any
stockholder nominating a candidate for director must deliver written notice to
the Secretary of ALZA not later than the close of business 60 days in advance of
the stockholders' meeting or 10 days after the date on which the notice of
meeting is first given to stockholders, whichever is later. The stockholder's
notice must set forth certain information concerning the stockholder and the
stockholder's nominee. No nominations for director shall be presented to any
stockholders' meeting if not made in compliance with such procedures. ALZA's
bylaws also require that advance notice be given and certain other procedures be
followed with regard to any other business to be brought by a stockholder before
a meeting of stockholders. Such procedures include the delivery of notice of
such proposal to the Secretary of ALZA not later than the close of business 60
days in advance of the meeting or 10 days after the date on which the notice of
meeting is first given to stockholders, whichever is later. The notice must set
forth certain information concerning the stockholder and the proposed business,
including any material interest of the stockholder in that business. The
provisions of ALZA's Certificate of Incorporation and bylaws governing the
number and classification of the Board of Directors and certain related matters
cannot be amended without the approval of at least 75% of the Board of Directors
or the affirmative vote of not less than 80% of the voting power of the
outstanding shares of voting capital stock. The affirmative vote of at least 80%
of the voting power of the outstanding shares of voting capital stock is
required to approve certain business combinations.
20
<PAGE>
The provisions of ALZA's Certificate of Incorporation granting the Board of
Directors the authority to issue Preferred Stock with such terms as the Board
may determine, classifying ALZA's Board, preventing stockholders from calling
special meetings of ALZA's stockholders, and requiring supermajority votes in
the event of certain business combinations may inhibit any change in control of
ALZA.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material United States federal income tax
considerations is for general information only. The summary is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative history,
existing and proposed regulations thereunder, published rulings and court
decisions, all as in effect and existing on the date hereof and all of which are
subject to change at any time. The tax treatment of a Holder of the LYONs may
vary depending upon the Holder's particular situation. Certain Holders
(including insurance companies, tax-exempt organizations, individual retirement
and other tax-deferred accounts, financial institutions, broker-dealers, foreign
corporations, and individuals who are not citizens or residents of the United
States) may be subject to special rules not discussed below. This summary does
not discuss the tax considerations of subsequent purchasers of LYONs and is
limited to investors who hold LYONs as capital assets. Accordingly, purchasers
of LYONs should consult their own tax advisors as to the particular tax
consequences to them of acquiring, holding, converting or otherwise disposing of
the LYONs, including the applicability and the effect of any state, local or
foreign tax laws and recent changes in applicable tax laws.
ALZA has been advised by Mayer, Brown & Platt, special federal income tax
counsel to ALZA, that in the opinion of such counsel the LYONs will be treated
as indebtedness for United States federal income tax purposes. The following
discussion of tax considerations assumes that the LYONs will be treated as
indebtedness.
ORIGINAL ISSUE DISCOUNT
The LYONs are being issued at a substantial discount from their principal
amount at maturity. For federal income tax purposes, the difference between the
issue price (the first price at which a substantial amount of the LYONs are sold
for money) and the principal amount at maturity of each LYON constitutes
Original Issue Discount. Holders of the LYONs will be required to include
Original Issue Discount in income periodically over the term of the LYONs before
the receipt of the cash, Common Stock or other payments attributable to such
income.
A Holder of a LYON must include in gross income for federal income tax
purposes the sum of the daily portions of Original Issue Discount with respect
to the LYON for each day during the taxable year or portion of a taxable year on
which such Holder holds the LYON ("Accrued Original Issue Discount"). The daily
portion is determined by allocating to each day of the accrual period a PRO RATA
portion of an amount equal to the adjusted issue price of the LYON at the
beginning of the accrual period multiplied by the yield to maturity of the LYON
(determined by compounding at the close of each accrual period and adjusted for
the length of the accrual period). Under the Code, the accrual period will be
each six month period which ends on the day in each calendar year corresponding
to the maturity date of the LYON or the date six months before such maturity
date. The information returns provided to holders and the Internal Revenue
Service (the "Service") by the Company regarding the accrual of Original Issue
Discount will be based on these six month accrual periods. Treasury regulations,
however, permit a Holder to select an accrual period of any length and to vary
the length of the accrual period over the term of the debt instrument, provided
that each accrual period is no longer than one year and each scheduled payment
of principal or interest occurs on the final day of an accrual period or on the
first day of an accrual period. The adjusted issue price of the LYON at the
start of any accrual period is the issue price of the LYON increased by the
Accrued Original Issue Discount for each prior accrual period. Under these
rules, Holders will have to include in gross income increasingly greater amounts
of Original Issue Discount in each successive accrual period. ALZA will be
required to furnish annually to the Service and to certain noncorporate Holders
information regarding the amount of Original Issue Discount attributable to that
year.
DISPOSITION OR CONVERSION
A Holder's basis for determining gain or loss on the sale or other
disposition of a LYON will be increased by any Accrued Original Issue Discount
includable in such Holder's gross income. Gain or loss
21
<PAGE>
upon a sale or other disposition (including a sale to ALZA or receipt of cash
from ALZA on conversion) of a LYON, except as described below, will generally be
capital gain or loss, which will be long term if the LYON has been held for more
than one year.
A Holder's conversion of a LYON for Common Stock is generally not a taxable
event (except with respect to cash received in lieu of a fractional share). A
Holder's obligation to include in gross income the daily portions of Original
Issue Discount with respect to a LYON will prospectively terminate on the date
of conversion. The Holder's basis in the Common Stock received on conversion of
a LYON will be the same as the Holder's basis in the LYON at the time of
conversion (exclusive of any tax basis allocable to a fractional share).
If the Holder elects to exercise the option to tender the LYONs to ALZA on a
Purchase Date and ALZA issues Common Stock in satisfaction of the Purchase
Price, such exchange is generally not a taxable event for federal income tax
purposes, and therefore, neither gain nor loss would be recognized, except as
described below with regard to fractional shares. In such event, a Holder's tax
basis in the Common Stock received in the exchange will be the same as the
Holder's tax basis in the LYON tendered to ALZA in exchange therefor (exclusive
of any tax basis allocable to a fractional share). If the original Holder elects
to exercise his or her option to tender the LYONs to ALZA on a Purchase Date and
ALZA delivers cash and Common Stock in satisfaction of the Purchase Price, the
Holder would recognize neither gain nor loss. In such event, the Holder's tax
basis in the Common Stock received in the exchange will be the same as the
Holder's tax basis in the LYON tendered to ALZA in exchange therefor, exclusive
of any basis allocable to fractional shares as described below, decreased by the
amount of cash received in the exchange.
The holding period for the Common Stock received in the conversion or
exchange will include the holding period for the LYON tendered to ALZA in
exchange therefor, except that the holding period of Common Stock allocable to
Accrued Original Issue Discount may commence on the day following the date of
conversion. Gain or loss upon a sale or other disposition of the Common Stock
received on conversion or exchange of a LYON will be capital gain or loss if the
Common Stock is a capital asset in the hands of the Holder.
If the Holder elects to exercise his or her option to tender the LYONs to
ALZA on a Purchase Date and ALZA delivers cash in satisfaction of the Purchase
Price or if a Holder elects to exercise his or her option to tender the LYON to
ALZA for cash on a Change in Control Purchase Date, such an exchange would be a
taxable sale. Also, if the holder elects to exercise the conversion option and
ALZA delivers cash equal to the value of the shares of the Common Stock, such an
exchange would be a taxable sale. The Holder would recognize capital gain or
loss upon the sale, measured by the difference between the amount of cash
transferred by ALZA to the Holder and the Holder's basis in the LYON.
Under the current advance ruling policy of the IRS, cash received in lieu of
a fractional share of Common Stock upon conversion or purchase of a LYON should
be treated as a payment in exchange for the fractional share interest in such
Common Stock. Accordingly, if the Common Stock is a capital asset in the hands
of the Holder, the receipt of cash in lieu of a fractional share of Common Stock
should generally result in capital gain or loss, if any (measured by the
difference between the cash received for the fractional share and the Holder's
tax basis in a fractional share).
CONSTRUCTIVE DIVIDEND
If at any time ALZA makes a distribution of property to stockholders that
would be taxable to such stockholders as a dividend for United States federal
income tax purposes (for example, distributions of evidences of indebtedness or
assets of ALZA, but generally not stock dividends or rights to subscribe for
Common Stock) and, pursuant to the antidilution provisions of the LYONs, the
Conversion Rate of the LYONs is increased, such increase may be deemed to be the
payment of a taxable dividend to Holders of the LYONs.
22
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of the Purchase Agreement, to
purchase $825,000,000 aggregate principal amount at maturity of the LYONs from
ALZA. The Underwriter has advised ALZA that it proposes to offer the LYONs
directly to the public at the offering price set forth on the cover page of this
Prospectus. After the initial public offering, the offering price may be
changed. The LYONs are offered subject to receipt and acceptance by the
Underwriter and to certain other conditions, including the right to reject
orders in whole or in part.
ALZA has granted the Underwriter an option for 30 days after the date of
this Prospectus to purchase up to an additional $123,750,000 aggregate principal
amount at maturity of LYONs to cover over-allotments, if any, at the initial
public offering price less the underwriting discount as set forth on the cover
page of this Prospectus, plus accrued Original Issue Discount, if any, accrued
from the Issue Date, computed on a semi-annual bond equivalent basis.
ALZA has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriter may be required to make in respect thereof.
ALZA has agreed with the Underwriter not to sell, offer to sell, grant any
option for the sale of, or otherwise dispose of or transfer any securities
similar to the LYONs or any Common Stock or any securities convertible into or
exercisable or exchangeable for such securities or Common Stock for a period of
90 days after the date of this Prospectus without the prior written consent of
the Underwriter other than Common Stock issuable upon the exchange of LYONs
offered hereby, Common Stock issued or sold pursuant to employee benefit plans
and dividend reinvestment plans, Common Stock issued upon exercise of currently
outstanding options or warrants, or certain privately issued restricted
securities.
The LYONs have been approved for listing on the New York Stock Exchange upon
official notice of issuance.
The Underwriter has previously marketed (and anticipates continuing to
market) securities of other issuers under the trademark "LYONs." The LYONs
offered by ALZA hereby contain certain terms and provisions which are different
from such other previously marketed LYONs, the terms and provisions of which
also vary. See "Description of LYONs."
From time to time the Underwriter and certain of its affiliates have
performed, and may in the future perform, investment banking or financial
advisory services for ALZA.
LEGAL MATTERS
The validity of the issuance of the LYONs offered hereby will be passed upon
for ALZA by Heller, Ehrman, White & McAuliffe, Palo Alto, California, ALZA's
counsel. Shearman & Sterling, San Francisco, California, will act as counsel to
the Underwriter. Mayer, Brown & Platt, Chicago, Illinois, will act as special
counsel to the Underwriter and as special United States federal income tax
counsel to ALZA. At May 31, 1994, Julian N. Stern, a member of Heller, Ehrman,
White & McAuliffe who is also a director and the Secretary of ALZA, owned
beneficially 158,645 shares of Common Stock (including options and warrants) and
other attorneys in that firm owned, in the aggregate, 700 shares of Common Stock
(including warrants).
EXPERTS
The consolidated financial statements and financial statement schedules of
ALZA Corporation and subsidiaries, appearing or incorporated by reference in
ALZA's Annual Report (Form 10-K) for the year ended December 31, 1993, have been
audited by Ernst & Young, independent auditors, as set forth in their reports
thereon incorporated herein by reference. Such consolidated financial statements
and financial statement schedules are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
23
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY ALZA OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF ALZA SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
Prospectus Summary............................. 3
Investment Considerations...................... 7
Use of Proceeds................................ 8
Price Range of Common Stock and Dividend
Policy........................................ 8
Capitalization................................. 9
Description of LYONs........................... 10
Description of Capital Stock................... 20
Certain United States Federal Income Tax
Considerations................................ 21
Underwriting................................... 23
Legal Matters.................................. 23
Experts........................................ 23
</TABLE>
$825,000,000
[LOGO]
LIQUID YIELD OPTION-TM- NOTES
DUE 2014
(ZERO COUPON--SUBORDINATED)
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
JULY 7, 1994
-TM- Trademark of Merrill Lynch & Co., Inc.
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
