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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
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Commission File Number 1-6247
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ALZA CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 77-0142070
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
950 Page Mill Road, P.O. Box 10950, Palo Alto, CA 94303-0802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 494-5000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock New York Stock Exchange
Liquid Yield Option-TM- Notes due 2014 New York Stock Exchange
(Zero Coupon-Subordinated)
Securities registered pursuant to Section 12(g) of the Act:
Units including ALZA Corporation Warrants (to purchase
Common Stock at $65 per share)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant, as of March 14, 1995: $1,752,627,122.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 14, 1995:
Title of Class Number of Shares
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Common Stock 82,087,188
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 5, 6, 7 and 8 are incorporated by reference to the
registrant's Annual Report to Stockholders for the year ended December 31, 1994;
Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive proxy statement for the registrant's Annual Meeting of Stockholders
to be held on May 11, 1995.
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ALZA CORPORATION FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
TABLE OF CONTENTS
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Page
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PART I
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Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . 16
EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . 17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . 19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . 19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . 19
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . 20
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . 20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . 20
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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PART I
ITEM 1. BUSINESS
ALZA Corporation ("ALZA") was incorporated under the laws of the state of
California on June 11, 1968, and changed its legal domicile from California to
Delaware in 1987. ALZA's mailing address is 950 Page Mill Road, P.O. Box 10950,
Palo Alto, CA 94303-0802.
ALZA develops, manufactures and markets pharmaceutical products that
incorporate drugs in advanced dosage forms called therapeutic systems, designed
to provide controlled, predetermined rates of drug release for extended time
periods. By administering drugs in preset patterns and by alternative routes,
ALZA's therapeutic systems can increase both the medical and the economic value
of drugs by minimizing their unpleasant or harmful side effects while optimizing
their beneficial actions. In addition, ALZA's therapeutic systems can simplify
drug therapy and increase patient compliance by decreasing the frequency with
which medication must be administered.
Historically, most of ALZA's product development activities were undertaken
pursuant to joint development and commercialization arrangements with other
pharmaceutical companies. These agreements normally provide for the
pharmaceutical company client to reimburse ALZA for costs incurred in product
development and clinical evaluation including a portion of general and
administrative expenses. The client receives marketing rights to the product,
and ALZA receives royalties based on the client's sales of the product. In some
cases ALZA manufactures all or a portion of the client's requirements of the
product; in other cases the client manufactures the product. Among the ALZA-
developed products commercialized to date by client companies are Procardia
XL[REGISTERED TRADEMARK] for the treatment of angina and hypertension,
Duragesic[REGISTERED TRADEMARK] for the management of severe chronic pain,
Transderm-Nitro[REGISTERED TRADEMARK] for the prevention and treatment of
angina and Nicoderm[REGISTERED TRADEMARK], an aid in smoking cessation.
In June 1993, ALZA distributed a special dividend of "Units" to ALZA
stockholders. Each Unit consisted of one share of Class A Common Stock of
Therapeutic Discovery Corporation ("TDC") and one warrant to purchase one-eighth
of one share of ALZA common stock. TDC was formed by ALZA for the purpose of
selecting and developing new human pharmaceutical products combining therapeutic
systems technologies with various drug compounds, and commercializing such
products, most likely through licensing to ALZA. TDC was funded with $250
million in cash contributed by ALZA. TDC and ALZA have entered into a research
and development contract for the selection and development of such products.
ALZA has the option to license each product developed by TDC, and to purchase
all of the outstanding shares of TDC Class A Common Stock, at a purchase price
based on a predetermined formula. The formation of TDC, and the development of
products with TDC, are intended to result in the establishment of a pipeline of
products for marketing by ALZA.
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During 1994, ALZA continued to apply its drug delivery technologies to the
development of new pharmaceutical products incorporating many of the important
drugs available today, as well as to new molecular entities. At the end of
1994, approximately 60 products based on ALZA's therapeutic systems were in
various stages of development and clinical evaluation, including more than 20
with TDC; a number of products are awaiting marketing clearance in the United
States and other countries.
ALZA is in the process of expanding its marketing activities. In April
1994, ALZA Pharmaceuticals, a division of ALZA, introduced in the United States
the Testoderm[REGISTERED TRADEMARK] testosterone transdermal system for hormone
replacement in testosterone-deficient men. Also during 1994, ALZA's sales
force began to co-promote the Duragesic[REGISTERED TRADEMARK] product
(developed by ALZA) with Janssen Pharmaceutica, Inc. ("Janssen") and the
Glucotrol XL[REGISTERED TRADEMARK] product (developed jointly by Pfizer,
Inc ("Pfizer") and ALZA) with Pfizer, both in the United States. ALZA's
marketing organization also supported Procter & Gamble in the launch in the
United States of the Actisite[REGISTEREDTRADEMARK] (tetracycline HCl)
periodontal fiber, which is distributed by a partnership between ALZA and
Procter & Gamble. ALZA is also establishing international commercialization
capabilities by developing distribution arrangements to market several
ALZA-developed products.
In 1994, ALZA established the ALZA Technology Institute ("ATI") to provide
the framework for extending and enhancing ALZA's drug delivery technologies.
ATI, which brings together ALZA's diverse research resources in one cohesive
group, is intended to focus on expanding ALZA's existing technologies and
adding new delivery technologies.
TECHNOLOGIES AND PRODUCTS
TRANSDERMAL SYSTEMS. ALZA's transdermal therapeutic systems provide for
the controlled delivery of drugs directly into the bloodstream through intact
skin. Transdermal systems are well-suited for the delivery of potent drugs that
are poorly absorbed and/or extensively metabolized when administered orally.
ALZA's transdermal products are thin multilayer systems, in the form of small
adhesive patches, that combine a drug reservoir with a polymer membrane or other
mechanism for the control of drug release to the surface of intact skin, and
hence into the bloodstream.
The transdermal products developed by ALZA and presently marketed in the
United States and/or other countries include:
- TRANSDERM SCOP[REGISTERED TRADEMARK] (scopolamine) - Applied once
every three days to prevent motion sickness.
- TRANSDERM-NITRO[REGISTERED TRADEMARK] (nitroglycerin) - Applied
once-a-day for the prevention and treatment of angina pectoris.
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- CATAPRES-TTS[REGISTERED TRADEMARK] (clonidine) - Applied once-a-week
for the treatment of high blood pressure.
- DURAGESIC[REGISTERED TRADEMARK] (fentanyl) - Applied once every three
days for the management of severe chronic pain in patients requiring
opioid analgesia.
- NICODERM[REGISTERED TRADEMARK] (nicotine) - Applied once-a-day to aid
in smoking cessation.
- TESTODERM[REGISTERED TRADEMARK] (testosterone) - Applied once a day
for testosterone replacement in testosterone-deficient men.
The Testoderm[REGISTERED TRADEMARK] product was launched in the United States by
ALZA Pharmaceuticals in April 1994. ALZA developed the product for ALZA TTS
Research Partners, Ltd., which receives royalties from ALZA based on sales of
the product. The product will be marketed outside the United States by
distributors. A number of additional transdermal products are in various stages
of development and clinical testing.
ORAL SYSTEMS. ALZA has developed several therapeutic systems for oral
administration. ALZA's OROS[REGISTERED TRADEMARK] products resemble
conventional tablets or capsules in appearance, but use an osmotic mechanism to
provide pre-programmed, controlled drug delivery to the gastrointestinal tract.
An OROS[REGISTERED TRADEMARK] product is comprised of a polymer membrane with
one or more laser-drilled holes surrounding a core containing the drug or drugs,
with or without osmotic or other agents. Water from the gastrointestinal tract
diffuses through the membrane at a controlled rate into the drug core, causing
the drug to be released in solution or suspension at a predetermined controlled
rate out of the laser-drilled hole(s). OROS[REGISTERED TRADEMARK] systems are
well suited for delivering drug compounds throughout the gastrointestinal tract
in programmed delivery for local treatment or systemic absorption.
The OROS[REGISTERED TRADEMARK] products developed by ALZA and presently
marketed in the United States and/or other countries include:
- PROCARDIA XL[REGISTERED TRADEMARK]/ADALAT CR[REGISTERED TRADEMARK]
(nifedipine) - A once-a-day formulation for the treatment of both
angina and hypertension.
- MINIPRESS XL[REGISTERED TRADEMARK]/ALPRESS LP[REGISTERED TRADEMARK]
(prazosin) - A once-a-day formulation for the treatment of
hypertension (marketed in France and approved for marketing in the
United States).
- VOLMAX[REGISTERED TRADEMARK] (albuterol) - A twice daily dosage form
for the treatment of asthma.
- EFIDAC 24[REGISTERED TRADEMARK] Pseudoephedrine - An over-the-
counter once-a-day nasal decongesant product.
- GLUCOTROL XL[REGISTERED TRADEMARK] (glipizide) - A once-a-day
treatment for Type II diabetes.
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Efidac 24[REGISTERED TRADEMARK] Chlorpheniramine, an over-the-counter,
once-a-day allergy product, which was recently cleared for marketing, is
expected to be introduced in the United States during the spring of 1995.
DynaCirc CR[REGISTERED TRADEMARK], a controlled-release version of the
anti-hypertensive medication isradipine, has also been cleared for
marketing in the United States by the FDA. In addition, a number of
OROS[REGISTERED TRADEMARK] products are in various stages of development
and testing or are awaiting regulatory clearance.
In addition to the OROS[REGISTERED TRADEMARK] systems described above,
ALZA is currently utilizing other osmotic technologies in the development of
products. These technologies include:
- CHRONSET[REGISTERED TRADEMARK] - ALZA's Chronset[REGISTERED TRADMARK]
therapeutic system, currently in development for oral delivery of
compounds including proteins and peptides, provides for a
predetermined delay in the release of active compounds from an
orally administered capsule, in order to target the location of
release.
- PUSH-PILL SYSTEMS - ALZA's push-pill systems are designed to deliver
large quantities of insoluble drugs on a once-a-day basis, either at a
constant rate, or in a programmed drug release profile for delayed,
patterned or pulsatile release.
ACTISITE[REGISTERED TRADEMARK] (TETRACYCLINE HCl) PERIODONTAL FIBER. The
Actisite[REGISTERED TRADEMARK] (tetracycline HCl) periodontal fiber was
developed jointly with On-Site Therapeutics, Inc. The thread-like
polymeric fibers are designed to treat periodontal disease by providing
rate-controlled delivery of tetracycline for ten days after placement
in the periodontal pocket by a dental practitioner. The product was
introduced in the United States in July 1994 by a partnership of ALZA
and Procter & Gamble. ALZA has the rights to market the
Actisite[REGISTERED TRADEMARK] product in most countries outside of the
United States, and the product has been cleared for marketing in Austria,
Belgium, Denmark, France, Germany, Italy, Luxembourg, Spain, Sweden,
Switzerland and the United Kingdom. ALZA is marketing the product in Italy
and the United Kingdom through distributors and is in the process of
arranging for distributors to market the product in other European
countries. The product is manufactured by ALZA.
BAXTER INFUSOR[REGISTERED TRADEMARK]. The Baxter
Infusor[REGISTERED TRADEMARK], a lightweight, disposable device for
intravenous therapy, resulted from a joint development arrangement
between ALZA and Baxter International Inc. ("Baxter"). The product
is manufactured by Baxter and marketed by Baxter in the United States,
Europe and Asia for the delivery of chemotherapeutic agents and analgesics.
Baxter also markets a light-weight, patient-controlled analgesic unit
in combination with the Baxter Infusor[REGISTERED TRADEMARK].
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OTHER ALZA PRODUCTS. Three product lines developed by ALZA in its earlier
years are marketed directly by ALZA Pharmaceuticals in the United States, and in
other countries under distribution agreements with third parties. Those
products are:
- OCUSERT[REGISTERED TRADEMARK] - ALZA's Ocusert[REGISTERED TRADEMARK]
(pilocarpine) Pilo-20 and Pilo-40 ocular therapeutic systems for the
treatment of glaucoma.
- PROGESTASERT[REGISTERED TRADEMARK] - The Progestasert[REGISTERED]
TRADEMARK] (progesterone) intrauterine contraceptive device provides a
contraceptive effect for one year by releasing the natural hormone
progesterone.
- ALZET[REGISTERED TRADEMARK] - ALZET[REGISTERED TRADEMARK] mini-osmotic
pumps are implantable, capsule-shaped units that can deliver solutions
containing a wide range of agents in laboratory animals at controlled
rates for up to four weeks.
ELECTROTRANSPORT. Electrotransport systems deliver drugs across intact
skin through the use of an electrical potential gradient. ALZA's
electrotransport therapeutic systems ("ETS") are small, easy to apply devices
consisting of an adhesive, a drug reservoir, electrodes and a power
source/controller. The systems are designed to deliver large molecules
(including proteins and peptides) and potent drugs that are poorly absorbed or
extensively metabolized in the gastrointestinal tract. ALZA has several
products utilizing this technology under development, including an ETS-fentanyl
product with Janssen.
HUMAN IMPLANTABLE THERAPEUTIC SYSTEMS. ALZA's Human Implantable
Therapeutic Systems (HITS) can be either diffusional or osmotic systems. The
diffusional systems are used to deliver low molecular weight compounds,
generally for long periods of time (months to years). The osmotic systems can
deliver substances of any size or configuration, generally for a period of weeks
or months. The osmotic systems are suitable for either systemic or site-
specific delivery.
VETERINARY PRODUCTS. ALZA has under development for client companies
veterinary products based on various technologies. These technologies include
ruminal bolus osmotic systems and implantable osmotic systems. Ivomec-
SR[REGISTERED TRADEMARK], a product combining Merck & Co., Inc.'s ("Merck")
antiparasitic agent ivermectin with ALZA's ruminal bolus technology, controls
internal and external parasites in cattle on pasture for an entire grazing
season following a single administration; the product has been introduced by
Merck in the United Kingdom. Regulatory applications for clearance to market
the product in the United States and other countries are on file. Other
veterinary products under development include a system for the administration of
growth hormones to cattle and other food-producing animals under an agreement
with Monsanto.
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THERAPEUTIC DISCOVERY CORPORATION
On June 11, 1993, ALZA completed the distribution of a special dividend of
"Units" to ALZA stockholders. Each Unit consists of one share of TDC Class A
Common Stock and one warrant to purchase one-eighth of one share of ALZA common
stock. Holders of record of ALZA common stock received one Unit for every 10
shares of ALZA common stock owned on May 28, 1993, with cash distributed in lieu
of fractional Units. The Units trade on the Nasdaq Stock Market (under the
trading symbol TDCAZ), and will trade only as Units until the earlier of
June 11, 1996 or the date on which ALZA exercises the Purchase Option (as
defined below) (the "Separation Date"), at which time the warrants and TDC Class
A Common Stock will trade separately. The warrants will be exercisable at a
per-share exercise price of $65 at any time after the Separation Date and will
expire, if not previously exercised, on December 31, 1999. In connection with
the special dividend, ALZA contributed $250 million in cash to TDC.
TDC was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining drug delivery technologies with various
drug compounds, and commercializing such products, most likely through licensing
to ALZA. ALZA and TDC have entered into a development agreement (the
"Development Contract") pursuant to which ALZA conducts research and development
activities on behalf of TDC. ALZA has granted to TDC a royalty-free, exclusive,
perpetual license to use ALZA's proprietary drug delivery technologies to
develop and commercialize specified TDC products.
In order to choose appropriate product candidates for development, ALZA and
TDC have established a product discovery process, a market-driven approach under
which they examine unmet medical needs in selected therapeutic areas and then
target for development cost-effective products. The therapeutic areas on which
ALZA and TDC are focusing are immunology/oncology, endocrine/metabolic disease,
central nervous system disorders, geriatric medicine (with an emphasis on
cardiovascular disease) and urology. Included in the review of appropriate
product candidates are compounds currently off-patent or soon to be off-patent,
proprietary compounds available for license, compounds in biotechnology and
pharmaceutical pipelines, and drugs that have been abandoned early in their
development due to side effects or poor efficacy in conventional dosage forms.
At the end of 1994, ALZA had more than 20 products under development with
TDC, a number of which are in early stages of clinical evaluation. These
products, which use several ALZA technologies and one technology of a third
party, are designed to provide improved safety, efficacy and/or patient
compliance compared with currently available therapies. Products under
development by ALZA and TDC include an OROS[REGISTERED TRADEMARK] dosage form
for the management of severe chronic pain, a transdermal product for the
treatment of urinary urge incontinence, and a pulmonary delivery product to
administer a polypeptide for the treatment of osteoporosis, under development
with Inhale Therapeutic Systems.
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ALZA's product development revenue from TDC during 1994 was $31.6 million.
ALZA has an option to license any products developed by TDC, on a product-
by-product basis, providing ALZA with access to a potential pipeline of products
for commercialization. If ALZA exercises its license option for any product,
ALZA will make royalty payments to TDC with respect to such product if the
product is sold by ALZA (up to a maximum of 5% of ALZA's net sales) or, if the
product is sold by a third party, sublicensing fees of up to 50% of ALZA's
sublicensing revenues with respect to the product. ALZA has an option,
exercisable on a product-by-product basis, to buy out its royalty obligation to
TDC by making a one-time payment that is a multiple of royalties and
sublicensing fees paid in specified periods.
ALZA also has an option to purchase, according to a predetermined formula,
all (but not less than all) of the outstanding shares of TDC Class A Common
Stock (the "Purchase Option"). The Purchase Option is exercisable at any time
until December 31, 1999 (or later under certain circumstances). However, the
Purchase Option will expire, in any event, on the 60th day after TDC files with
the Securities and Exchange Commission a report on Form 10-K or Form 10-Q
containing a balance sheet showing less than an aggregate of $5 million in cash,
cash equivalents, short-term investments and long-term investments. If ALZA
exercises the Purchase Option, the exercise price will be the greatest of: (a)
$100 million; (b) the fair market value of one million shares of ALZA common
stock; (c) the greater of (i) 25 times the worldwide royalties and sublicensing
fees paid by ALZA to TDC during four specified calendar quarters or (ii) 100
times such royalties and sublicensing fees during a specified calendar quarter;
in either case, less any amounts previously paid by ALZA to exercise a buy-out
option with respect to any product; or (d) $325 million less all amounts paid by
TDC under the Development Contract. The purchase price may be paid in cash, in
ALZA common stock, or any combination of the two, at the option of ALZA.
ALZA performs certain administrative services for TDC under an
administrative services agreement which is terminable at the option of TDC, and
for which ALZA is reimbursed its direct costs, plus certain overhead expenses.
For the year ended December 31, 1994, reimbursement to ALZA under this agreement
was approximately $0.2 million.
RESEARCH AND PRODUCT DEVELOPMENT
ALZA had product development revenue of $68.7 million during 1994, $46.8
million during 1993, and $39.1 million during 1992 from clients with which ALZA
has joint product development agreements (including $31.6 million in 1994 and
$4.9 million in 1993 from TDC). ALZA's product development revenue generally
represents clients' reimbursement of costs, including a portion of general and
administrative expenses. Therefore product development activities do not
contribute significantly to current
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net income. ALZA spent $58.0 million on client-sponsored product development
activities during 1994 ($36.4 million and $33.8 million in 1993 and 1992,
respectively), excluding reimbursable general and administrative costs, and
$18.1 million on ALZA-sponsored research and development activities during 1994
($16.8 million and $18.3 million in 1993 and 1992, respectively). Research and
product development costs are expensed as incurred.
MANUFACTURING
ALZA manufactures some or all of the product requirements for certain
client companies, including Duragesic[REGISTERED TRADEMARK] for Janssen,
Nicoderm[REGISTERED TRADEMARK] for Marion Merrell Dow, Inc. ("MMD") (and for
distribution by ALZA's distributor Nycomed Pharma in certain other countries),
Procardia XL[REGISTERED TRADEMARK] and Glucotrol XL[REGISTERED TRADEMARK] for
Pfizer, Catapres-TTS[REGISTERED TRADEMARK] for Boehringer Ingelheim, and
Transderm Scop[REGISTERED TRADEMARK], Efidac 24[REGISTERED TRADEMARK]
Pseudoephedrine and Efidac 24[REGISTERED TRADEMARK] Chlorpheniramine for
Ciba Self-Medication, Inc. (together with its affiliates, "Ciba"). ALZA also
manufactures the Progestasert[REGISTERED TRADEMARK], ALZET[REGISTERED]
TRADEMARK], Ocusert[REGISTERED TRADEMARK], Testoderm[REGISTERED TRADEMARK] and
Actisite[REGISTERED TRADEMARK] products. ALZA's 220,000 square foot commercial
manufacturing facility is in Vacaville, California.
Some of the materials used in manufacturing ALZA-developed products are
unique and may be available from only one or a limited number of suppliers.
ALZA attempts, where appropriate, to negotiate long-term supply arrangements for
some of these materials. With the increasing cost of product liability in the
pharmaceutical and medical device industries, particularly in the area of
implantable materials, it may become increasingly difficult or more expensive,
and in some cases impossible, for ALZA to obtain some of the materials it may
need for certain of its products. Scarcity or unavailability of materials could
make products more costly, could prevent the commercialization of some products,
or could cause delays in development due to the necessity to design products to
incorporate available or obtainable materials.
In December 1993, ALZA wrote off approximately $28.1 million related
primarily to ALZA's manufacturing activities. This write-off resulted from
both non-recurring expenses and allowances related to scale-up of the
production of certain products and to excess transdermal manufacturing
capacity and equipment resulting from ALZA's facilities expansion in
Vacaville, California. The facilities expansion was followed by lower than
anticipated Nicoderm[REGISTEREDTRADEMARK] production requirements
reflecting the decline in Nicoderm[REGISTEREDTRADEMARK] sales in 1993.
A portion of the write-off also related to the Duragesic[REGISTERED TRADEMARK]
product. In late 1993, ALZA learned that certain 25 microgram and 50
microgram Duragesic[REGISTERED TRADEMARK] systems manufactured by ALZA may
release fentanyl at a somewhat higher rate than the designated dose. For
a short period, only limited quantities of the product were available on
a "compassionate need" basis from Janssen. The $28.1 million write-off
included $10.1 million of inventory write-downs, $6.8 million of equipment
write-offs, $4.6 million of allowances reducing sales and receivables, and
$6.6 million of anticipated future cash outlays related to contractual
product supply issues.
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The effect of the write-off increased costs of products shipped by
approximately $22.0 million and reduced net sales by $6.1 million for the year
ended December 31, 1993. Charges relating to the write-off of assets and cash
expenditures for contractual product supply issues in 1994 approximated the
original estimate.
MARKETING
ALZA established its ALZA Pharmaceuticals division in 1993 to expand
ALZA's marketing capabilities in order to commercialize ALZA-developed
products, including those under development with TDC. ALZA Pharmaceuticals
now has a sales force of approximately 50 people located throughout the
United States. In April 1994, ALZA Pharmaceuticals introduced
Testoderm[REGISTERED TRADEMARK] in the United States. Also in 1994, the ALZA
sales force began to co-promote Duagesic[REGISTERED TRADEMARK] with Janssen
and Glucotrol XL[REGISTERED TRADEMARK] with Pfizer, both in the United
States. ALZA's marketing organization also supported Procter & Gamble in the
United States launch of Actisite[REGISTERED TRADEMARK], which was developled
by ALZA and On-Site Therapeutics, Inc. and is distributed by a partnership of
ALZA and Procter & Gamble.
ALZA Pharmaceuticals is also establishing international
commercialization capabilities by developing distribution arrangements to
market several ALZA-developled products. Actisite[REGISTERED TRADEMARK] is
distributed in Italy and the United Kingdom by European distributors. ALZA
has signed distribution agreements for fourteen Asian countries (excluding
Japan) for Testoderm[REGISTERED TRADEMARK], and a distribution agreement
for eight Scandinavian and European countries for the transdermal nicotine
product marketed as Nicoderm[REGISTERED TRADEMARK] in the United States by MMD.
ALZA's marketing group actively participates in ALZA's product discovery
activities with TDC. The marketing group prepares detailed market assessments
for each product considered by ALZA for proposal to TDC; these assessments
are an integral part of the product discovery process.
GOVERNMENTAL REGULATION
Under the United States Food, Drug, and Cosmetic Act, "new drugs" must
obtain clearance from the FDA before they lawfully can be marketed in the United
States. Applications for marketing clearance must be based on extensive
clinical and other testing, the cost of which is very substantial. The
packaging and labeling of all new drug products are also subject to FDA
regulation. Approvals (including pricing approvals) are required from health
regulatory authorities in foreign countries before marketing of pharmaceutical
products may commence in those countries. Requirements for approval may differ
from country to country, and can involve additional testing. There can be
substantial delays in obtaining required clearances from both the FDA and
foreign regulatory authorities after applications are filed. Even after
clearances are obtained, further delays may be encountered before the products
become commercially available. Veterinary products are subject to similar,
although in some cases less extensive, approval procedures.
ALZA's manufacturing activities, and the products sold by ALZA and its
client companies in the United States and/or exported to other countries, are
subject to extensive regulation by the United States Food and Drug
Administration ("FDA") and comparable agencies in other countries where the
products are distributed. FDA regulations govern a range of activities
including manufacturing, quality assurance, advertising and record keeping. The
continuing trend of stringent FDA oversight in product clearance and enforcement
has caused longer approval cycles, more uncertainty, greater risks and higher
costs of obtaining clearance to market a product. Failure to obtain, or delays
in obtaining, FDA and other regulatory clearance to market new products, as well
as other regulatory actions and recalls, could adversely affect ALZA's financial
results.
Good Manufacturing Practices ("GMP") regulations under the Food, Drug and
Cosmetic Act define processes for the manufacture of drug and device products.
ALZA has in place ongoing programs to upgrade its GMP compliance procedures. In
July 1994, ALZA received a "warning letter" from the FDA identifying certain GMP
compliance issues related to the manufacture of Duragesic[REGISTERED TRADEMARK].
A warning letter documents items the FDA identifies as deviations from GMP and
the actions required by the company to correct the deviations. Remedies
available to the FDA for failure to correct noted deficiencies could include
inventory seizure and/or an injunction prohibiting product shipments. As a
result of its discussions with the FDA, ALZA has intensified its program to
upgrade its GMP compliance procedures. ALZA intends that all of its operations
meet or exceed FDA enforcement standards. These
-11-
<PAGE>
standards change or evolve from time to time, and therefore require ongoing
upgrades by ALZA.
Environmental regulations may also affect the manufacturing process. As a
pharmaceutical company, ALZA uses in its business chemicals and materials which
may be classified as hazardous or toxic which require special handling and
disposal. In addition, ALZA undertakes to minimize releases to the environment
and exposure of its employees and the public to such materials. The costs of
these activities have increased substantially in recent years, and it is
possible that such costs may continue to increase significantly in the future.
See "Legal Proceedings" below.
PATENTS AND PATENT APPLICATIONS
As of December 31, 1994, ALZA owned approximately 500 United States patents
and had approximately 160 pending United States patent applications relating to
its products and other technologies. ALZA has in excess of 2,200 foreign
patents and pending patent applications covering its various technologies and
products. Patents have been issued, or are expected to be issued, covering
ALZA's current technologies and products, as well as products under development.
Patent protection generally has been important in the pharmaceutical
industry. ALZA believes that its current patents, and patents that may be
obtained in the future, are important to current and future operations. There
can be no assurance that ALZA's currently existing patents will cover future
products, that additional patents will be issued, or that any patents now or
hereafter issued will be of commercial benefit. In the United States, patents
generally are granted for specified periods of time. Some of ALZA's earlier
patents covering various aspects of certain OROS[REGISTERED TRADEMARK] and TTS
dosage forms have begun to expire, or will expire, over the next several years;
however, ALZA technologies and products are generally covered by multiple
patents.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to such validity or as to
the enforceable scope of the claims of the patent. There can be no assurance
that patents of ALZA will not be successfully challenged in the future. The
validity or enforceability of a patent after its issuance by the patent office
can be challenged in litigation. If the outcome of the litigation is adverse to
the owner of the patent, third parties may then be able to use the invention
covered by the patent, in some cases without payment. There can be no assurance
that ALZA patents will not be infringed or successfully avoided through design
innovation.
It is also possible that third parties may obtain patent or other
proprietary rights that may be necessary or useful to ALZA. With numerous other
companies engaged in developing drug delivery technologies, it can be expected
that other parties may in some circumstances file patent applications or obtain
patents that compete in priority with ALZA's patent applications. Such
-12-
<PAGE>
competition may result in adversarial proceedings such as patent interferences
and oppositions, which can increase the uncertainty of patent coverage. In
cases where third parties are first to invent a particular product or
technology, it is possible that those parties will obtain patents that will be
sufficiently broad so as to prevent ALZA from using certain technology or from
further developing or commercializing certain products. As ALZA expands its
direct marketing of products, ALZA may attempt to license-in products or
compounds or technologies for use in products. In each of these cases, if
licenses from third parties are necessary but cannot be obtained,
commercialization of the related products would be delayed or prevented.
In addition, ALZA utilizes significant unpatented proprietary technology,
and there can be no assurance that others will not develop similar technology.
For a description of certain legal proceedings relating to patents, see
"Legal Proceedings" below.
COMPETITION
All of ALZA's current and future products will face competition both from
more traditional forms of drug delivery and from advanced delivery systems being
developed by others. This competition potentially includes all of the
pharmaceutical companies in the world, including current ALZA clients. Many of
these other pharmaceutical companies have greater financial resources, technical
staff and manufacturing and marketing capabilities than ALZA. A number of
smaller companies also are developing drug delivery technologies.
As the pharmaceutical industry continues to consolidate, and as pressures
increase for cost-effective research and development, some pharmaceutical
companies may reduce their funding of research and development. Competition
for limited client dollars may therefore increase, and this competition could
include the clients' internal research and development programs, other
drug delivery programs and other technologies and products of third parties.
Competition in drug delivery systems is generally based on performance
characteristics and price. Acceptance by hospitals, physicians and patients is
crucial to the success of a product. Health care reimbursement policies of
managed care organizations, insurers and government agencies will continue to
exert pressure on pricing, and various federal and state agencies have enacted
regulations requiring rebates of a portion of the purchase price of many
pharmaceutical products.
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.
The growth of managed care organizations and the resulting pressures for cost-
containment in the United States health care system are expected to continue to
put pressures on the prices charged for
-13-
<PAGE>
pharmaceutical products. 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. While ALZA believes the changing
health care environment may increase the value of ALZA's drug delivery products
over the long term, it is impossible to predict the impact these changes may
have on ALZA.
REVENUES
In 1994, ALZA received royalty revenue from 13 products in the marketplace.
More than 50% of ALZA's 1994 royalty revenue (more than 60% in 1993 and more
than 50% in 1992) has been the result of royalties on sales of
Procardia XL[REGISTERED TRADEMARK] by Pfizer in the United States. Because the
basic patents covering the drug nifedipine itself expired several years ago,
other companies are attempting to develop products similar to Procardia
XL[REGISTERED TRADEMARK]. To date no product has been introduced which is bio-
equivalent to Procardia XL[REGISTERED TRADEMARK]. If such a product were to be
developed and introduced, its marketing could have a significant impact on
Procardia XL[REGISTERED TRADEMARK] pricing and sales, and therefore ALZA's
royalties.
Information as to ALZA's revenues is presented below:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Royalties and fees $ 123,748 $ 113,318 $ 114,684
Product development 68,715 46,783 39,081
Net sales 68,511 53,630 75,488
Other revenue 17,782 20,451 21,266
--------- --------- ---------
Total revenues $ 278,756 $ 234,182 $ 250,519
--------- --------- ---------
--------- --------- ---------
</TABLE>
Pfizer accounted for 30% of ALZA's total revenues in 1994, 35% in 1993 and
29% in 1992; Janssen accounted for 12% of ALZA's total revenues in 1994; TDC
accounted for 11% of ALZA's total revenues in 1994; Ciba accounted for 13% of
ALZA's total revenues in 1993 and 10% in 1992; and MMD accounted for 10% of
ALZA's total revenues in 1993 and 26% in 1992. The loss of revenues from one
or more of these clients would have a material adverse effect on ALZA's
profitability.
INDUSTRY SEGMENTS; EXPORTS
ALZA's business comprises one industry segment. Export sales were $16.9
million in 1994, $18.1 million during 1993 and $12.1 million during 1992,
principally to distributors and client companies in Europe.
-14-
<PAGE>
EMPLOYEES
On December 31, 1994, ALZA had 1,288 employees, of whom approximately 550
were engaged in research and product development activities, approximately 448
were engaged in manufacturing activities and the remainder were working in
general, administrative and marketing areas.
ITEM 2. PROPERTIES
ALZA's corporate offices are located in Palo Alto, California, and its two
research and development campuses are in Palo Alto and Mountain View,
California. ALZA also occupies a small research facility in Spring Lake Park,
Minnesota. ALZA's large-scale commercial manufacturing facility is located in
Vacaville, California. While ALZA believes that its facilities and equipment
are sufficient to meet its current operating requirements, ALZA will continue to
expand its facilities and equipment to support its long-term requirements.
ITEM 3. LEGAL PROCEEDINGS
A patent infringement suit was filed by Ciba in December 1991 against
Marion Merrell Dow, Inc. ("MMD") and ALZA in connection with the
commercialization of Nicoderm[REGISTERED TRADEMARK]. The suit, which was filed
in the United States District Court for the District of New Jersey, alleged that
a patent licensed to Ciba was infringed by AlZA and MMD. Ciba's motion for
preliminary injunction against the marketing of Nicoderm[REGISTERED TRADEMARK]
was denied in December 1991. ALZA and MMD filed counterclaims against Ciba,
including antitrust claims. In October 1994, the Court granted a motion for
summary judgment brought by ALZA and MMD, ruling invalid the patent licensed to
Ciba. Ciba appealed that ruling in November 1994. On January 25, 1995 ALZA and
MMD filed suit against Ciba and LTS Lohmann Therapy Systems Corporation in the
United States District Court for the Southern District of New York for
infringement of two United States patents issued to ALZA relating to the
transdermal administration of nicotine. The suit requests that the defendants
be enjoined from infringing the ALZA patents and requests damages.
In April 1993, two securities class action lawsuits (later consolidated)
were filed against ALZA and certain of its officers and directors in the United
States District Court for the Northern District of California. The consolidated
lawsuit claimed that ALZA issued and allowed to be issued various public
statements that were materially false and misleading, primarily with respect to
the Nicoderm[REGISTERED TRADEMARK] product. In July 1993, a derivative suit was
filed against certain officers and all of the
-15-
<PAGE>
directors of ALZA in the United States District Court for the Northern District
of California. The lawsuit claimed that some or all of the named persons
engaged in the mismanagement of the company and improperly obtained profits from
the sale of ALZA securities. In order to avoid the continuing drain of
resources required to defend these related suits, ALZA settled the suits for
$3.7 million on November 14, 1994, a significant portion of which was covered by
ALZA's directors and officers liability insurance.
During January 1994, a suit was filed against ALZA by Cygnus Therapeutics
Corporation in the United States District Court for the Northern District of
California, seeking a declaration of unenforceability and invalidity of an ALZA
patent relating to transdermal administration of fentanyl and alleging violation
of antitrust laws. In April 1994, the Court granted ALZA's motion to dismiss
the case, subject to the plaintiff's right to perform limited discovery and
amend its complaint. Subsequent to year end, the plaintiff amended its
complaint and ALZA has renewed its motion to dismiss the case.
During 1994, several product liability suits were filed against Janssen and
ALZA relating to the Duragesic[REGISTERED TRADEMARK] product. Janssen is
managing the defense of these suits in consultation with ALZA under an agreement
between the parties.
ALZA has been named as a potentially responsible party ("PRP") in
connection with the cleanup of certain waste disposal or "superfund" sites. One
of these actions is the cleanup of the Hillview Porter site near ALZA's Palo
Alto facilities. ALZA believes that it did not discharge any of the chemicals
of concern at this site. Other actions in which ALZA has been named as a PRP
involve the disposal of small quantities of waste at disposal sites which were
later named as cleanup sites. ALZA does not believe that its liability in these
matters, either individually or in the aggregate, will be material. However,
because the actions involve many parties and multiple regulatory authorities,
and the cleanup and allocation of financial responsibility can take many years,
it is impossible to predict the timing or amount of ALZA's potential liability.
Historically, the cost of resolution of ALZA's liability claims has not
been significant, and ALZA is not aware of any asserted or unasserted claims
pending against it, including the suits mentioned above, the resolution of which
would have a material adverse impact on the operations or financial position of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-16-
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Principal Occupations for
Name Age Past Five Years
----------------------- --- ------------------------------------
<S> <C> <C>
Dr. Alejandro Zaffaroni 72 Co-Chairman of the Board (since 1987)
and founder (in 1968) of ALZA;
Chairman of the Board and Chief
Executive Officer (1968-1987);
Chairman and Chief Executive Officer
of Affymax N.V., a drug discovery
company (1988-1995).
Dr. Ernest Mario 56 Co-Chairman of the Board and Chief
Executive Officer of ALZA (since
1993); Chief Executive of Glaxo
Holdings, plc (1989-1993); Chief
Executive Officer of Glaxo, Inc.
(1988-1989).
Dr. Felix Theeuwes 57 President, ALZA Technology Institute
(since 1994); Executive Vice
President, Research and Development
of ALZA (1991-1994) and Chief
Scientist of ALZA (since 1982);
Senior Vice President (1987-1990).
Dr. Pieter Bonsen 59 Senior Vice President, Development of
ALZA (since 1994); Senior Vice
President, Scientific and Technical
Services (1991-1994).
James Butler 54 Vice President, Sales and Marketing
of ALZA (since 1993); Vice President
and General Manager of Glaxo, Inc.'s
corporate division (1987-1993).
Bruce C. Cozadd 31 Vice President and Chief Financial
Officer of ALZA (since 1994); Vice
President, Corporate Planning and
Analysis (1993); Manager, Strategic
Projects (1991-1993).
Harold Fethe 50 Vice President, Human Resources of
ALZA (since 1991); Senior Director,
Human Resources (1987-1991).
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Dr. Gary V. Fulscher 51 Senior Vice President, Operations of
ALZA (since 1994); Vice President,
Administration (1987-1994).
Adrian M. Gerber 57 Executive Vice President, Commercial
Development of ALZA (since 1990);
Executive Director, Corporate
Licensing, of Merck & Co., Inc.,
(1985-1990).
Dr. Samuel R. Saks 40 Senior Vice President, Medical
Affairs of ALZA (since 1994); Vice
President, Medical Affairs (1992-
1994); Vice President, Clinical
Research, Oncology, Schering-Plough
Corporation (1991-1992); Vice
President, Clinical Research, XOMA
Corporation (1989-1991).
Peter D. Staple 43 Vice President and General Counsel of
ALZA (since 1994); Vice President and
Associate General Counsel of Chiron
Corporation (1992-1994); Vice
President and Associate General
Counsel of Cetus Corporation (1983-
1992).
</TABLE>
-18-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ALZA incorporates by reference the information concerning the market for
its common stock and related stockholder matters set forth at page 31 in the
Annual Report to Stockholders (the "Annual Report") attached as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
ALZA incorporates by reference the selected consolidated financial data set
forth at page 33 in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ALZA incorporates by reference Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth at pages 12 to 16 in the
Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALZA incorporates by reference the consolidated financial statements and
notes thereto set forth at pages 17 to 30 and the Report of Ernst and Young LLP,
Independent Auditors, at page 31 in the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-19-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ALZA incorporates by reference the information concerning its directors set
forth under the heading "Election of Directors" on pages 1 to 4 in ALZA's
definitive proxy statement dated March 21, 1995, for its Annual Meeting of
Stockholders to be held on May 11, 1995 (the "Proxy Statement"). Information
concerning ALZA's executive officers appears at the end of Part I of this report
on pages 17 and 18.
ITEM 11. EXECUTIVE COMPENSATION
ALZA incorporates by reference the information ("Summary Compensation
Table," "1994 Option Grants" and "1994 Aggregated Option Exercises and Fiscal
Year-End Option Values") set forth under the heading "Executive Compensation" on
pages 4 to 9 in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ALZA incorporates by reference the information set forth under the heading
"Beneficial Stock Ownership" on page 12 in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ALZA incorporates by reference the information set forth under the heading
"Certain Transactions" on page 13 in the Proxy Statement.
-20-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements: Incorporated by reference to the
Annual Report (see accompanying Index to Consolidated Financial
Statements).
2. Consolidated Financial Statement Schedule: See accompanying Index to
Consolidated Financial Statement Schedule.
3. Exhibits:
3.1 Restated Certificate of Incorporation of ALZA Corporation
filed with the Delaware Secretary of State on February 14,
1994 (1)
3.2 Composite By-laws of ALZA Corporation as restated on
February 10, 1994 and amended on August 11, 1994
4.1 Indenture dated July 7, 1994 between ALZA Corporation and
the Chase Manhattan Bank, N.A., as Trustee, relating to
ALZA's 5-1/4% Liquid Yield Option-TM- Notes (2)
4.2 Specimen LYONs-TM- Certificate (included in Exhibit 4.1)
4.3 Warrant Agreement dated January 31, 1990 between ALZA
Corporation and Medtronic, Inc. (3)
4.4 Form of Warrant Agreement between ALZA Corporation and the
Chase Manhattan Bank (with attached Warrant Certificate) (4)
4.5 Specimen Unit Certificate (4)
--------------------
(1) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1993.
(2) Incorporated by reference to ALZA's Form 10-Q Quarterly Report for the
period ended June 30, 1994.
(3) Incorporated by reference to ALZA's Form 10-Q Quarterly Report for the
period ended March 31, 1990.
(4) Incorporated by reference to ALZA's Form 8-A Registration Statement
(Commission File No. 0-11234) dated March 31, 1993, as amended.
-21-
<PAGE>
10.1 Technology License Agreement between ALZA and Therapeutic
Discovery Corporation (5)
10.2 Development Agreement between ALZA and Therapeutic Discovery
Corporation (5)
10.3 License Option Agreement between ALZA and Therapeutic
Discovery Corporation (5)
10.4 Restated Certificate of Incorporation of Therapeutic
Discovery Corporation (5)
10.5 Executive Deferral Plans II (6*)
10.6 Executive Deferral Plan Amendments (7*)
10.7 Amendment Number 2 to Executive Deferral Plans II*
10.8 1992 Stock Option Plan (7*)
11 Statement regarding weighted average common and common
equivalent shares used in computation of per share
earnings
13 Portions of Annual Report to Stockholders expressly
incorporated by reference herein
21 Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1994.
--------------------
(5) Incorporated by reference to the Form 10 of Therapeutic Discovery
Corporation (Commission File No. 0-21478) dated March 31, 1993, as amended.
(6) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1992 and ALZA's Form 10-Q Quarterly Report for the
period ended September 30, 1993.
(7) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1992.
(*) A management contract or compensatory plan or arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of Form 10-K.
-22-
<PAGE>
ALZA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORT OF
ERNST & YOUNG LLP, INDEPENDENT AUDITORS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
(Item 14(a))
<TABLE>
<CAPTION>
Page Number Reference
------------------------
Annual Report Form
To Stockholders 10-K
--------------- ----
<S> <C> <C>
Consolidated statement of income for the
years ended December 31, 1994, 1993 and 1992 17
Consolidated balance sheet at December 31,
1994 and 1993 18
Consolidated statement of stockholders'
equity for the years ended December 31, 1994,
1993 and 1992 19
Consolidated statement of cash flows for
the years ended December 31, 1994, 1993
and 1992 20
Notes to consolidated financial statements 21-30
Report of Ernst & Young LLP, Independent
Auditors 31
The following consolidated financial statement
schedule of ALZA Corporation is included:
II - Consolidated valuation and qualifying 24
accounts
</TABLE>
All other schedules have been omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
-23-
<PAGE>
SCHEDULE II
ALZA CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
Balance at Additions
Beginning Charged to Deductions Balance at
Of Year Income (write-offs) End of Year
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Allowance for
doubtful
receivables:
1994 $ 211,000 $ 53,000 $ (5,000) $ 259,000
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
1993 $ 181,000 $ 31,000 $ (1,000) $ 211,000
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
1992 $ 157,000 $ 31,000 $ (7,000) $ 181,000
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
</TABLE>
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALZA CORPORATION
By [Dr. Ernest Mario]
-------------------------------
Dr. Ernest Mario
Chief Executive Officer
Date: March 30, 1995
-25-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
[Dr. Alejandro Zaffaroni] [Rudolph A. Peterson]
-------------------------------- ------------------------------
Dr. Alejandro Zaffaroni Rudolph A. Peterson
Co-Chairman of the Board of Director
Directors and Director Date: March 30, 1995
Date: March 30, 1995
[Dr. Ernest Mario] [Dr. Jane E. Shaw]
-------------------------------- ------------------------------
Dr. Ernest Mario Dr. Jane E. Shaw
Co-Chairman of the Board of Director
Directors, Director and Chief Date: March 30, 1995
Executive Officer
Date: March 30, 1995
[William G. Davis] [Isaac Stein]
-------------------------------- ------------------------------
William G. Davis Isaac Stein
Director Director
Date: March 30, 1995 Date: March 30, 1995
[Martin S. Gerstel] [Julian N. Stern]
-------------------------------- ------------------------------
Martin S. Gerstel Julian N. Stern
Director Director
Date: March 30, 1995 Date: March 30, 1995
[Dr. Robert J. Glaser] [Bruce C. Cozadd]
-------------------------------- ------------------------------
Dr. Robert J. Glaser Bruce C. Cozadd
Director Vice President, Chief
Date: March 30, 1995 Financial Officer and
Principal Accounting Officer
Date: March 30, 1995
[Dean O. Morton]
--------------------------------
Dean O. Morton
Director
Date: March 30, 1995
-26-
<PAGE>
EXHIBIT INDEX
Exhibit
-------
3.2 Composite By-laws of ALZA Corporation
as restated on February 10, 1994 and
amended on August 11, 1994
10.7 Amendment Number 2 to Executive Deferral
Plans II
11 Statement regarding weighted average common
and common equivalent shares used in
computation of per share earnings
13 Portions of Annual Report to Stockholders
expressly incorporated by reference into
Annual Report on Form 10-K
21 Subsidiaries
23 Consent of Ernst & Young LLP, Independent
Auditors
27 Financial Data Schedule
-27-
<PAGE>
Exhibit 3.2
COMPOSITE BYLAWS
OF
ALZA CORPORATION
REGISTERED OFFICE AND REGISTERED AGENT
1. REGISTERED OFFICE. The registered office of the corporation shall be
in the City of Wilmington County of New Castle, State of Delaware.
2. OTHER OFFICES. The corporation may also have offices at such other
places, both within or without the State of Delaware, as the Board of Directors
may from time to time determine or the business of the corporation may require.
MEETINGS OF STOCKHOLDERS
3. TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall be
held at such time and place, either within or without the State of Delaware, as
shall be fixed by the Board of Directors and stated in the notice or waiver of
notice of the meeting.
4. ANNUAL MEETING. An annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on such date and at such time and
place as the Board of Directors shall each year designate.
5. SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes prescribed in the notice of meeting, may be called only by
the Board of Directors, the Chairman of the Board or the President of the
corporation.
1
<PAGE>
6. NO ACTION WITHOUT MEETING. At any time when the corporation has more
than one stockholder of any class of capital stock, no action required to be
taken or which may be taken at any annual or special meeting of the stockholders
of such class of capital stock of the corporation may be taken without a
meeting, and the power of stockholders to consent in writing without a meeting,
to the taking of any action is specifically denied.
7. NOTICE.
(a) Written notice of the place, date, and time of all meetings of the
stockholders shall be given not less than ten nor more than 60 days before the
date on which the meeting is to be held to each stockholder entitled to vote at
such meeting, except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation of the corporation).
(b) When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken and the
adjournment is for not more than thirty days; provided, however, that if the
date of any adjourned meeting is more than thirty days after the date for which
the meeting was originally noticed, or if a new record date is fixed for the
adjourned meeting, written notice of the place, date and time of the adjourned
meeting shall be given in conformity herewith. At any adjourned meeting, any
business may be transacted which might have been transacted at the original
2
<PAGE>
meeting.
8. NOMINATIONS AND PROPOSALS.
(a) The Board of Directors of the corporation may nominate candidates for
election as directors of the corporation and may propose such other matters for
approval of the stockholders as the board deems necessary or appropriate.
(b) Any stockholder entitled to vote for directors may nominate candidates
for election as directors of the corporation; provided, however, that so long as
the corporation has more than one stockholder, no nominations for director of
the corporation by any person other than the Board of Directors shall be
presented to any meeting of stockholders unless the person making the nomination
is a record stockholder and shall have delivered a written notice to the
Secretary of the corporation no later than the close of business 60 days in
advance of the stockholder meeting or ten days after the date on which notice of
the meeting is first given to the stockholders, whichever is later. Such notice
shall (i) set forth the name and address of the person advancing such nomination
and the nominee, together with such information concerning the person making the
nomination and the nominee as would be required by the appropriate Rules and
Regulations of the Securities and Exchange Commission to be included in a proxy
statement soliciting proxies for the election of such nominee, and (ii) shall
include the duly executed written consent of such nominee to serve as director
if elected.
(c) No proposal by any person other than the Board of Directors shall be
submitted for the approval of the stockholders at any regular or special meeting
of the stockholders of the
3
<PAGE>
corporation unless the person advancing such proposal shall have delivered a
written notice to the Secretary of the corporation no later than the close of
business 60 days in advance of the stockholder meeting or ten days after the
date on which notice of the meeting is first given to the stockholders,
whichever is later. Such notice shall set forth the name and address of the
person advancing the proposal, any material interest of such person in the
proposal, and such other information concerning the person making such proposal
and the proposal itself as would be required by the appropriate Rules and
Regulations of the Securities and Exchange Commission to be included in a proxy
statement soliciting proxies for the proposal.
9. QUORUM AND REQUIRED VOTE.
(a) At any meeting of the stockholders, the holders of a majority of all
of the shares of the stock entitled to vote on the subject matter at the
meeting, present in person or by proxy shall constitute a quorum, unless or
except to the extent that the presence of a larger number may be required by
law. Except as provided in Section 42 of these bylaws or as may be required by
law, the affirmative vote of a majority of shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the stockholders.
(b) If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.
(c) If a notice of any adjourned special meeting of stockholders is sent
to all stockholders entitled to vote
4
<PAGE>
thereat, stating that it will be held with those present constituting a quorum,
then, except as provided in Section 42 of these bylaws or as otherwise required
by law, those present at such adjourned meeting shall constitute a quorum, and
all matters shall be determined by a majority of the votes cast at such meeting.
10. VOTE REQUIRED FOR BUSINESS COMBINATION.
(a) In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as expressly provided in Subparagraph
(b) of this Section 10, any Business Combination (as hereinafter defined) with a
Related Person (as hereinafter defined) shall require the affirmative vote of
the holders of at least eighty percent of the voting power of all of the then
outstanding shares of all classes of stock of the corporation entitled to vote
for the election of directors (the "Voting Stock"), voting together as a single
class. Such affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage may be specified, by law or in
any agreement.
(b) The provisions of this Section 10 shall not apply to any Business
Combination if:
(i) A majority of the Continuing Directors (as hereinafter defined)
of the corporation then in office has by resolution approved the Business
Combination either in advance of or subsequent to such Related Person's having
become a Related Person;
(ii) The Business Combination is solely between the
5
<PAGE>
corporation and another corporation, one hundred percent of the Voting Stock of
which is owned directly or indirectly by the corporation; or
(iii) The Business Combination is a merger or consolidation and the
cash or fair market value (as determined by a majority of the Continuing
Directors) of the property, securities or other consideration to be received per
share by holders of stock of the corporation in the Business Combination is not
less than the Highest Per Share Price or the Highest Equivalent Price (as these
terms are hereinafter defined) paid by the Related Person in acquiring any of
the corporation's stock.
(c) For the purpose of this Section 10:
(i) The term "Business Combination" shall mean (A) any merger or
consolidation of the corporation with or into a Related Person, (B) any sale,
lease, exchange, transfer or other disposition, including, without limitation, a
mortgage or any other security device, of assets of the corporation or any
subsidiary of the corporation, to a Related Person if such assets constitute a
Substantial Part (as hereinafter defined), (C) any merger or consolidation of a
Related Person with or into the corporation or a subsidiary of the corporation,
(D) the issuance of any securities of the corporation or a subsidiary of the
corporation to a Related Person, (E) any recapitalization that would have the
effect of increasing the voting power in the corporation of a Related Person,
and (F) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Combination.
6
<PAGE>
(ii) The term "Related Person" shall mean any individual,
corporation or other entity which, alone or together with (A) its "Affiliates"
and "Associates" (as defined in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934 as in effect at the date of the
adoption of this Section 10 by the stockholders of the corporation
(collectively, and as so in effect, the "Exchange Act")) or (B) members of a
"group" (as defined with reference to Section 13(d)(3) of the Exchange Act) of
which such individual, corporation or other entity is a member, "beneficially
owns" (as defined in Rule 13d-3 of the Exchange Act) shares of the outstanding
common stock of the corporation which, in the aggregate, have (or, in the case
of convertible securities, would have, if such convertible securities were, at
the time the determination is being made, convertible and had been converted) 20
percent or more of the total combined power to elect directors of the
corporation.
(iii) For the purposes of subparagraph (b)(iii) of this Section 10,
the term "other consideration to be received" shall include, without limitation,
common stock of the corporation retained by its existing stockholders in the
event of a Business Combination in which the corporation is the surviving
corporation.
(iv) The term "Continuing Director" shall mean a director who is
unaffiliated with the Related Person and who was a member of the Board of
Directors of the corporation immediately prior to the time that the Related
Person involved in a Business Combination became a Related Person.
7
<PAGE>
(v) The term "Substantial Part" shall mean assets having a book
value in excess of 30 percent of the book value of the total consolidated assets
of the corporation and its subsidiaries taken as a whole as of the end of its
most recent fiscal year ended prior to the time the determination is made.
(vi) The terms "Highest Per Share Price" and "Highest Equivalent
Price" shall mean the following: If there is only one class of capital stock of
the corporation issued and outstanding, the Highest Per Share Price shall mean
the highest price that can be determined by a majority of the Continuing
Directors then in office to have been paid at any time by the Related Person for
any share or shares of that class of capital stock. If there is more than one
class of capital stock of the corporation issued and outstanding, the Highest
Equivalent Price shall mean, with respect to each class of capital stock of the
corporation, the amount determined by a majority of the Continuing Directors
then in office, on whatever basis they believe is appropriate, to be the highest
per share price equivalent to the highest per share price that can be determined
to have been paid at any time by the Related Person for any share or shares of
any class of capital stock of the corporation. In determining the Highest Per
Share Price and Highest Equivalent Price, all purchases by the Related Person
shall be taken into account regardless of whether the shares were purchased
before or after the Related Person became a Related Person. Also, the Highest
Per Share Price and the Highest Equivalent Price shall include any brokerage
commissions, transfer taxes and soliciting dealers' fees paid by the Related
Person with respect to the shares of capital stock of the
8
<PAGE>
corporation acquired by the Related Person.
(d) A majority of the Continuing Directors of the corporation then in
office (including directors purporting, in good faith, to be Continuing
Directors) shall have the power and duty to determine, for the purposes of this
Section 10, on the basis of information then known to them, whether any
individual, corporation or other entity is a Related Person. Any such
determination made in good faith shall be conclusive and binding for all
purposes of this Section 10.
(e) The provisions set forth in this Section 10 may not be repealed or
amended in any respect without:
(i) The affirmative vote of not less than 80 percent of the Board
of Directors and of a majority of the Continuing Directors then in office, and
(ii) The affirmative vote of the holders of 80 percent or more of
the Voting Stock, voting together as a single class;
PROVIDED, HOWEVER, that the provisions of this paragraph (e) shall not apply to
any amendment or repeal of any provision of this Section 10 that is recommended
to the stockholders by a resolution adopted by (A) a majority of the Board of
Directors, and (B) not less than 80 percent of the Continuing Directors then in
office, in which case any such amendment or repeal shall require only the
affirmative vote of a majority of the Voting Stock.
11. ORGANIZATIONS. The Chairman of the Board or, in his or
her absence, the President of the corporation or, in the absence
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<PAGE>
of both, such person as may be designated by the Board of Directors or, if there
is no such designation, such person as may be chosen by the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
shall call to order any meeting of the stockholders and act as chairman of the
meeting.
12. CONDUCT OF BUSINESS. The Chairman of any meeting of stockholders
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seem to him or her in order.
13. PROXIES AND VOTING. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing filed in accordance with the procedures established for
the meeting.
14. STOCK LIST. A complete list of stockholders entitled to vote at any
meeting of stockholders, arranged in alphabetical order and showing the address
of each such stockholder and the number of shares of each class registered in
his or her name, shall be open to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten days prior to the meeting, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the whole
time thereof and shall be open to the examination of any stockholder present.
10
<PAGE>
BOARD OF DIRECTORS
15. POWERS. The business and affairs of the corporation shall be managed
by or under the direction of its Board of Directors.
16. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number of directors of
the corporation who shall constitute the whole board shall be ten but may be
increased or decreased from time to time either by a resolution or bylaw duly
adopted by the Board of Directors. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III, which shall be as
nearly equal in number as possible. Each director shall serve for a term ending
on the date of the third annual meeting of stockholders following the annual
meeting at which the director was elected; provided, however, that each initial
director in Class I shall hold office until the annual meeting of stockholders
in 1988; each initial director in Class II shall hold office until the annual
meeting of stockholders in 1989; and each initial director in Class III shall
hold office until the annual meeting of stockholders in 1990. Notwithstanding
the foregoing, each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal.
17. REMOVAL. Any director may be removed from office, only with cause, by
the holders of a majority of the shares entitled to vote in an election of
directors.
18. RESIGNATIONS. A director may resign at any time by giving written
notice to the corporation. Such resignation shall be effective when given
unless the director specifies a later time. The resignation shall be effective
regardless of whether
11
<PAGE>
it is accepted by the corporation.
19. NEWLY-CREATED DIRECTORSHIPS AND VACANCIES. In the event of any
increase or decrease in the authorized number of directors, any newly-created or
eliminated directorships resulting from such increase or decrease shall be
apportioned by the Board of Directors among the three classes of directors so as
to maintain such classes as nearly equal in number as possible. No decrease in
the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director. Newly-created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled by the affirmative vote of a majority of the remaining directors
then in office (and not by stockholders), even though less than a quorum of the
Board of Directors. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified.
20. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held at such place or places, on such date or dates, and at such time or times
as shall have been established by the Board of Directors and publicized among
all directors. A notice of each regular meeting shall not be required.
21. SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President or any two directors.
12
<PAGE>
22. NOTICE OF MEETINGS.
(a) Special meetings, and regular meetings not fixed as provided in these
Bylaws, shall be held upon four days' notice by mail or two days' notice
delivered personally or by telephone or telegraph to each director who does not
waive such notice. The notice shall state the place, date and time of the
meeting. Unless otherwise indicated in the notice, any and all business may be
transacted at a special meeting.
(b) Notice of a reconvened meeting need not be given if the place, date
and time of the reconvened meeting are announced at the meeting at which the
adjournment is taken and the adjournment is not for more than 24 hours. If a
meeting is adjourned for more than 24 hours, notice of the reconvened meeting
shall be given prior to the time of that reconvened meeting to the directors who
were not present at the time of the adjournment.
23. ACTION WITHOUT MEETING. Except as required by law, any action
required or permitted to be taken at any meeting of the Board of Directors or
any committee thereof may be taken without a meeting if all members of the Board
of Directors or any committee thereof, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of the Board of
Directors or committee.
24. MEETING BY TELEPHONE. Except as required by law, members of the Board
of Directors or any committee thereof may participate in the meeting of the
Board of Directors or committee by means of conference telephone or similar
communications equipment if all persons who participate in the meeting can hear
13
<PAGE>
each other. Such participation in a meeting shall constitute presence in person
at such meeting.
25. QUORUM AND MANNER OF ACTING. At any meeting of the Board of
Directors, a majority of the directors then in office shall constitute a quorum
for all purposes. A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors. If a quorum
shall fail to attend any meeting, a majority of those present may adjourn the
meeting to another place, date or time, without further notice or waiver
thereof. Except as provided herein, the act of the majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors.
26. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors by a
vote of a majority of the whole Board, may from time to time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall for those
committees and any others provided for herein, elect a director or directors to
serve as the member or members, designating, if it desires, other directors as
alternate members who may replace any absent or disqualified member at any
meeting of the committee. Any committee so designated may exercise the power
and authority of the Board of Directors to declare a dividend or to authorize
the issuance of stock if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. The
principles set forth in Sections 15
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<PAGE>
through 25 of these Bylaws shall apply to committees of the Board of Directors
and to actions taken by such committees. All members of any Audit Committee of
this Company designated by the Board of Directors shall be directors who are not
also employees of the corporation.
27. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
or a committee thereof, and may receive fixed fees and other compensation for
their services as directors. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation for
such service.
OFFICERS
28. TITLES. The officers of the corporation shall be chosen by the Board
of Directors and shall include a Chairman of the Board or a President or both, a
Secretary and a Treasurer. The Board of Directors may also appoint one or more
Vice Presidents, Assistant Secretaries, Assistant Treasurers or other officers.
Any number of offices may be held by the same person. All officers shall perform
their duties and exercise their powers subject to the Board of Directors.
29. ELECTION, TERM OF OFFICE AND VACANCIES. The officers shall be elected
annually by the Board of Directors at its regular meeting following the annual
meeting of the stockholders,
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<PAGE>
and each officer shall hold office until the next annual election of officers
and until the officer's successor is elected and qualified, or until the
officer's death, resignation or removal. Any officer may be removed at any
time, with or without cause, by the Board of Directors. Any vacancy occurring
in any office may be filled by the Board of Directors.
30. RESIGNATION. Any officer may resign at any time upon notice to the
corporation without prejudice to the rights, if any, of the corporation under
any contract to which the officer is a party. The resignation of an officer
shall be effective when given unless the officer specifies a later time. The
resignation shall be effective regardless of whether it is accepted by the
corporation.
31. CHIEF EXECUTIVE OFFICER. The Board of Directors shall designate
either the Chairman of the Board or the President as the chief executive officer
and may prescribe the duties and powers of the chief executive officer. In the
absence of such a designation, the Chairman of the Board shall be the chief
executive officer. If there is no Chairman of the Board, the President shall be
the chief executive officer. Subject to the provisions of these Bylaws and to
the direction of the Board of Directors, the chief executive officer shall have
the responsibility for the general management and control of the business and
affairs of the corporation and shall perform all duties and have all powers
which are commonly incident to the office of chief executive or which are
delegated to him or her by the Board of Directors. Either the Chairman of the
Board or the
16
<PAGE>
President and such other officers as may, from time to time, be expressly
designated by the Board of Directors shall have power to sign all stock
certificates, contracts and other instruments of the corporation which are
authorized.
32. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall issue all
authorized notices for, and shall keep minutes of, all meetings of the
stockholders and the Board of Directors. He or she shall have charge of the
corporate books and shall perform such other duties as the Board of Directors
may from time to time prescribe. At the request of the Secretary, or in the
Secretary's absence or disability, any Assistant Secretary shall perform any of
the duties of the Secretary and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the Secretary.
33. TREASURER AND ASSISTANT TREASURERS. Unless the Board of Directors
designates another chief financial officer, the Treasurer shall be the chief
financial officer of the corporation. Unless otherwise determined by the Board
of Directors or the chief executive officer, the Treasurer shall have custody of
the corporate funds and securities, shall keep adequate and correct accounts of
the corporation's properties and business transactions, shall disburse such
funds of the corporation as may be ordered by the Board or the chief executive
officer (taking proper vouchers for such disbursements), and shall render to the
chief executive officer and the Board, at regular meetings of the Board or
whenever the Board may require, an account of all transactions and the financial
condition of the
17
<PAGE>
corporation. At the request of the Treasurer, or in the Treasurer's absence or
disability, any Assistant Treasurer may perform any of the duties of the
Treasurer and when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the Treasurer.
34. OTHER OFFICERS. The other officers of the corporation, if any, shall
exercise such powers and perform such duties as the Board of Directors or the
chief executive officer shall prescribe.
35. COMPENSATION. The Board of Directors shall fix the compensation of
the chief executive officer and may fix the compensation of other employees of
the corporation, including the other officers. If the Board does not fix the
compensation of the other officers, the chief executive officer shall fix such
compensation.
36. ACTIONS WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the Chairman of the Board, the
President or any officer of the corporation authorized by the Chairman of the
Board or the President, shall have power to vote and otherwise act on behalf of
the corporation, in person or by proxy, at any meeting of stockholders of, or
with respect to any action of stockholders of, any other corporation in which
the corporation may hold securities and otherwise shall have power to exercise
any and all rights and powers which the corporation may possess by reason of its
ownership of securities in such other corporation.
18
<PAGE>
STOCK AND DIVIDENDS
37. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a
certificate signed by, or in the name of, the corporation by the Chairman, the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Treasurer or an Assistant Treasurer, certifying the number of shares
owned by him or her. Any or all of the signatures on the certificates may be
facsimile.
38. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the
transfer books of the corporation kept at an office of the corporation or by
transfer agents designated to transfer shares of the stock of the corporation.
Except where a certificate is issued in accordance with the next sentence of
this Section, an outstanding certificate for the number of shares involved shall
be surrendered for cancellation before a new certificate is issued therefor. In
the event of the loss, theft or destruction of any certificate of stock, another
may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
39. REGULATIONS. The issue, transfer, conversion and registration of
certificates of stock shall be governed by such other regulations as the Board
of Directors may establish.
RECORD DATE
40. RECORD DATE. In order that the corporation may determine the
stockholders entitled to notice of or to vote at
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any meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Directors
may fix in advance, a record date, which shall not be more than 60 nor less than
ten days before the date of such meeting, nor more than 60 days prior to any
other action. If no record date is fixed, the record date (1) for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and (2) for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
reconvened meeting.
WAIVER OF NOTICE
41. WAIVER OF NOTICE. Whenever notice is required to be given by law or
these Bylaws, a written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting
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<PAGE>
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Unless so required by the Certificate of Incorporation or these
Bylaws, neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice.
AMENDMENTS
42. AMENDMENTS. These Bylaws may be amended or repealed or new bylaws may
be adopted by the stockholders or by the Board of Directors. Notwithstanding
the foregoing, no provision of Section 10 may be amended or repealed except in
accordance with Section 10(e) and no provision of Sections 16 or 19 may be
amended or repealed except by a resolution adopted by the affirmative vote of
not less than 75% of the members of the Board of Directors or by the affirmative
vote of the holders of at least 80% of the outstanding shares of capital stock
entitled to vote in an election of directors.
MISCELLANEOUS
43. FISCAL YEAR. The fiscal year of the corporation shall be as fixed by
the Board of Directors.
44. TIME PERIODS. In applying any provision of these Bylaws which
requires that an act be done or not done within a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event,
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calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
45. FACSIMILE SIGNATURES. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the corporation may be used
whenever and as authorized by the Board of Directors.
46. CORPORATE SEAL. The Board of Directors may provide a suitable seal,
containing the name of the corporation, which seal shall be in the charge of the
Secretary. Duplicates of the seal may be kept and used by the Treasurer or by
an Assistant Secretary or Assistant Treasurer.
47. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member
of any committee designated by the Board of Directors, and each officer of the
corporation shall, in the performance of his or her duties, be fully protected
in relying in good faith upon the books of account or other records of the
corporation, including reports made to the corporation by any of its officers,
by an independent certified public accountant or by an appraiser.
48. Indemnification of Employees. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative ("a
proceeding"), because he or she is or was an employee of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee, agent or trustee of another corporation, partnership, joint venture,
trust or other enterprise (including service with respect to employee benefit
plans from the date of plan adoption), shall be indemnified and held harmless by
the corporation against all expense, liability and loss (including attorneys'
fees, judgments, penalties, fines, Employee Retirement Income Security Act of
1974 excise taxes or penalties, and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith; provided
in any event that such person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation; and provided further that the corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if the proceeding (or part thereof) was authorized
by the Board of Directors of the corporation. Such indemnification shall
continue as to a person who has ceased to be an employee and shall inure to the
benefit of his or her heirs, executors or administrators.
[Section 48 adopted by the Board]
of Directors on August 11, 1994]
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EXHIBIT 10.7
ALZA Corporation
Executive Deferral Plans
AMENDMENT NUMBER TWO
ALZA Corporation and its subsidiaries that participate in the ALZA
Corporation Executive Deferral II (the "Plan"), pursuant to the power granted to
them by Section 10.2 of the Plan, hereby amend the Plan, effective as of
November 29, 1994, as follows:
1. Section 1.12 is eliminated in its entirety and is replaced by the following:
"1.12 Bonus Award" shall mean any cash bonus awarded to the Participant
under the provisions of any of the Company's bonus plans relating to the
calendar year prior to the Plan Year. Such Bonus Award shall be credited
to the Participant's EDPII account as of January 1 of the Plan Year."
2. All references in the Plan to the Executive Incentive Plan (or EIP) shall be
deemed references to the company's cash bonus plan or plans.
3. Section 3.1 of the Plan is hereby amended so that the last clause thereof
now reads "and up to one hundred percent (100%) (in full percentage points) of
his/her Bonus Award, subject to the limitations of Section 3.2 below."
ALZA Corporation, on behalf of itself and its subsidiaries participating in the
Plan have caused this Amendment to be executed by its duly authorized officer as
of November 29, 1994.
ALZA Corporation,
a Delaware Corporation
By: /s/ David R. Hoffmann
---------------------------------
David R. Hoffmann, Vice President
and Treasurer
<PAGE>
EXHIBIT 11
Statement Regarding Weighted Average Common and Common
Equivalent Shares Used in Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Primary:
Common stock 81,827,000 76,845,000 74,222,000
$15 warrants - 2,216,000 4,276,000
$25 warrants - 93,000 438,000
$65 warrants - - -
5-1/4% zero coupon convertible
subordinated debentures - - -
7-1/2% zero coupon convertible
subordinated debentures - - -
Other, principally stock
options 459,000 705,000 1,409,000
---------- ---------- ----------
Weighted average common and
common equivalent shares 82,286,000 79,859,000 80,345,000
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED:
Common stock 81,827,000 76,845,000 74,222,000
$15 warrants - 2,249,000 4,364,000
$25 warrants - 112,000 461,000
$65 warrants - - -
5-1/4% zero coupon convertible
subordinated debentures - - -
7-1/2% zero coupon convertible
subordinated debentures - - -
Other, principally stock
options 459,000 738,000 1,449,000
---------- ---------- ----------
Weighted average common and
common equivalent shares 82,286,000 79,944,000 80,496,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Primary and fully diluted earnings per share are based on weighted
average shares of common stock outstanding plus common equivalent shares. The
5-1/4% zero coupon convertible subordinated debentures (issued in July 1994) are
considered common stock equivalents; they were antidilutive for the year ended
1994. The 7-1/2% zero coupon convertible debentures (redeemed in 1993) are not
included in the calculation for 1992 and 1993 since in each case their inclusion
for the respective stated periods would have had an antidilutive effect. Fully
diluted earnings per share are not presented on the face of the Consolidated
Statement of Income since they are not materially different from primary
earnings per share.
-28-
<PAGE>
PAGE 12 OF PAPER FORMAT ANNUAL REPORT EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
ALZA reported net income of $58.1 million in 1994, compared to net income of
$45.6 million in 1993 and $72.2 million in 1992. Included in the 1993 results
were pre-tax charges and allowances of $28.1 million primarily related to
manufacturing activities, a $3.8 million extraordinary charge related to the
redemption of ALZA's 7 1/2% zero coupon convertible subordinated debentures and
$6.6 million of benefits related to the adoption of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Without
these unusual items, ALZA would have reported net income of $61.1 million for
1993.
TOTAL REVENUES (Presented graphically in paper format Annual Report)
(In thousands)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Royalties and fees $123,748 113,318 114,684 64,142 41,660
Product development 68,715 46,783 39,081 41,653 34,664
Net sales 68,511 53,630 75,488 33,953 22,929
Interest & other 17,782 20,451 21,266 22,601 10,172
-------- ------- ------- ------- -------
TOTAL REVENUES $278,756 234,182 250,519 162,349 109,425
</TABLE>
ROYALTIES AND FEES
Sales of many ALZA-developed products increased in 1994 and as a result, ALZA's
1994 royalties and fees reached a record level of $123.7 million. Royalties and
fees were $113.3 million and $114.7 million in 1993 and 1992, respectively.
Contributing to the 1994 growth in royalties and fees were initial royalties on
Adalat CR[REGISTERED TRADEMARK] and Glucotrol XL[REGISTERED TRADEMARK] and an
increase in Duragesic[REGISTERED TRADEMARK] royalties. While Pfizer Inc
("Pfizer") sales of Procardia XL[REGISTERED TRADEMARK] increased slightly in
1994 as compared with 1993, royalties were reduced by approximately $8 million
to provide for a potential adjustment in royalty revenue on U.S. sales of
Procardia XL[REGISTERED TRADEMARK] for the period from November 1993 through
December 1994. In July 1994, Pfizer informed ALZA that in November 1993 the
U.S. Patent Office had issued to Bayer AG a composition of matterpatent relating
to nifedipine crystals with various surface areas as
-1-
<PAGE>
PAGE 12-13 OF PAPER FORMAT ANNUAL REPORT
the active ingredient in sustained-release formulations of nifedipine. Assuming
the issued claims of the patent appropriately cover the nifedipine composition
in Procardia XL[REGISTERED TRADEMARK], royalties otherwise payable by Pfizer to
ALZA on U.S. sales of the product would be reduced. Until a final determination
is made regarding this matter, ALZA intends to maintain a reserve sufficient to
cover the maximum possible reduction in Procardia XL[REGISTERED TRADEMARK]
royalties.
Royalties and fees were slightly lower in 1993 than in 1992 due to lower
royalties from Nicoderm[REGISTERED TRADEMARK], offset in part by an increase in
royalties from Procardia XL[REGISTERED TRADEMARK] and by initial royalties from
Efidac 24[REGISTERED TRADEMARK] (pseudoephedrine hydrochloride) introduced by
Ciba Self-Medication, Inc. during the second half of 1993. Royalties from
Procardia XL[REGISTERED TRADEMARK] accounted for more than 50%, 60% and 50% of
ALZA's royalties in 1994, 1993 and 1992, respectively.
ALZA's net income currently results primarily from royalties and fees from
client companies. Royalties and fees are derived from sales by client companies
of products developed jointly with ALZA, and will vary from year to year as a
result of changing levels of product sales by client companies and,
occasionally, the receipt by ALZA of certain one-time fees. Because ALZA's
clients generally take responsibility for obtaining necessary regulatory
approvals and make all marketing and commercialization decisions regarding such
products, most of the variables that affect ALZA's royalties and fees are not
directly within ALZA's control.
With increasing pressures for cost containment in the U.S. health care system,
it can be expected that pharmaceutical product prices, including those of ALZA's
royalty-bearing products, will not increase as quickly as they have in the past,
and could decrease. Within the next several years, ALZA intends to become less
dependent on royalties and fees as ALZA's sales and marketing activities expand
and as ALZA markets more products (including products developed with Therapeutic
Discovery Corporation); however, there can be no assurance that these expanded
activities will be successful. In addition, health care cost containment
measures will affect products marketed by ALZA.
-2-
<PAGE>
PAGE 13 OF PAPER FORMAT ANNUAL REPORT
RESEARCH AND PRODUCT DEVELOPMENT
Product development revenue of $68.7 million in 1994 was a record for ALZA.
Product development revenue in 1993 and 1992 was $46.8 million and $39.1
million, respectively. ALZA's product development revenue generally represents
client reimbursement of costs, including a portion of general and administrative
expenses. Therefore, product development activities do not contribute
significantly to current net income. In general, ALZA's product development
arrangements with its client companies also provide for ALZA to receive, as
royalties and fees, payments based on future client sales of successfully
developed products.
The increase in product development revenue in 1994 was due primarily to product
development activities undertaken on behalf of Therapeutic Discovery Corporation
("TDC"). TDC was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining ALZA's proprietary drug delivery
technology with various drug compounds, and commercializing such products, most
likely through licensing to ALZA. ALZA and TDC have entered into a development
agreement pursuant to which ALZA conducts product development activities on
behalf of TDC and ALZA has granted to TDC a royalty-free, nonexclusive,
perpetual license to use ALZA's proprietary drug delivery technologies to
develop and commercialize specified TDC products. For the years ended 1994 and
1993, ALZA had product development revenue from TDC of $31.6 million and $4.9
million, respectively. Because products in early stages of development
generally require lower levels of expenditures, ALZA's product development
revenue from TDC can be expected to be lower during the early stages of
development. Product development revenue from TDC (and, correspondingly, ALZA's
product development expenses related to those TDC activities) are expected to
continue to increase. At the end or 1994 more than 20 TDC-funded projects were
under way, with additional product candidates under consideration.
-3-
<PAGE>
PAGE 13-14 OF PAPER FORMAT ANNUAL REPORT
INVESTMENT IN RESEARCH AND PRODUCT DEVELOPMENT (Presented graphically in paper
format Annual Report)
(In thousands)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Investment in Research
and Product Development $ 76,099 $53,153 $52,089 $41,163 $34,909
</TABLE>
Research and product development expenses increased 43.2% to $76.1 million in
1994 compared to 1993, primarily as a result of activities undertaken on behalf
of TDC. ALZA's total research and product development expenses were $53.2
million in 1993 and $52.1 million in 1992. As additional products are accepted
by TDC into its development pipeline, ALZA expects its total research and
product development expenses to increase in 1995 and beyond.
NET SALES AND COSTS OF PRODUCTS SHIPPED
ALZA's net sales increased $14.9 million to $68.5 million in 1994 compared to
1993. A portion of this increase was the result of a $6.1 million pre-tax
charge in 1993 related primarily to contract manufacturing activities (see note
2 of the notes to consolidated financial statements). ALZA's net sales of $53.6
million in 1993 were lower than 1992 net sales of $75.5 million as a result of
decreased shipments of transdermal products manufactured by ALZA for its client
companies, principally Nicoderm[REGISTERED TRADEMARK] for Marion Merrell Dow
and, to a lesser extent, the effect of the 1993 manufacturing write-off.
Included in net sales are sales generated from contract manufacturing activities
for ALZA's client companies and sales of ALZA-marketed products.
Net sales from ALZA contract manufacturing activities were $57.4 million in
1994. Because of the mix and volume of clients' product requirements, the level
of contract manufacturing sales fluctuates. Contract manufacturing sales
increased 8.5% in 1994 compared to 1993 due primarily to higher utilization of
the manufacturing capacity of ALZA's Vacaville, California manufacturing
facility, predominately for OROS[REGISTERED TRADEMARK] products. Contract
manufacturing sales decreased in 1993 as compared to 1992 due to the significant
decrease in Nicoderm[REGISTERED TRADEMARK] production, partially offset by
smaller increases in the production of other products.
-4-
<PAGE>
PAGE 14 OF PAPER FORMAT ANNUAL REPORT
ALZA manufactures and directly markets in the U.S. the Testoderm[REGISTERED]
TRADEMARK] testosterone transdermal system, the Progestasert[REGISTERED]
TRADEMARK] system, ALZET[REGISTERED TRADEMARK] osmotic pumps and the
Ocusert[REGISTERED TRADEMARK]system. In 1994, ALZA launched
Testoderm[REGISTERED TRADEMARK], the first transdermal testosterone replacement
therapy for testosterone deficient men. ALZA also manufactures the
Actisite[REGISTERED TRADEMARK] periodontal fiber, which is marketed in the U.S.
by a partnership between ALZA and Procter & Gamble for adjunctive treatment of
periodontitis. Progestasert[REGISTERED TRADEMARK], ALZET[REGISTERED]
TRADEMARK], Ocusert[REGISTERED TRADEMARK] and Actisite[REGISTERED TRADEMARK]
are sold internationally through other companies under distribution agreements.
ALZA has signed an agreement for the distribution of Testoderm[REGISTERED]
TRADEMARK] in 10 Asian countries and initial product launches are anticipated
within approximately two years upon receipt of the necessary regulatory
approvals. ALZA is also negotiating a distribution arrangement for
Testoderm[REGISTERED TRADEMARK] in Europe. Net sales of ALZA-marketed products
were $11.1 million in 1994, compared to $6.7 million in 1993 and $6.6 million in
1992. The increase in sales of ALZA-marketed products for 1994 was almost
entirely due to Testoderm[REGISTERED TRADEMARK] sales of $4.2 million.
Costs of products shipped of contract manufacturing and ALZA-marketed products
decreased to $56.6 million in 1994 compared to $74.5 million in 1993. Included
in the 1993 costs of products shipped was a $22.0 million pre-tax charge related
primarily to manufacturing activities. Without this manufacturing charge, costs
of products shipped for 1994 would have shown an increase of 8.0%. While costs
of products shipped increased in 1994, net sales rose at a proportionally higher
rate. Costs of products shipped increased 30.2% for 1993 from the 1992 level,
primarily from the effect of the manufacturing write-off mentioned above.
ALZA's Vacaville manufacturing facility provides substantial manufacturing
capacity for ALZA-developed products. Because of the nature of the
substantially fixed costs at this facility, costs of products shipped as a
percent of net sales may vary significantly due to the utilization of the
facility and the mix of products manufactured. ALZA expects costs of products
shipped, as a percent of net sales, to continue to decline over the longer
-5-
<PAGE>
PAGE 14-15 OF PAPER FORMAT ANNUAL REPORT
term through increased utilization of capacity and greater operating
efficiencies, although quarter-to-quarter fluctuations may occur.
As discussed in note 2 of the notes to consolidated financial statements, in
1993 ALZA wrote off $28.1 million related primarily to its manufacturing
activities. Charges relating to the write-off of assets and cash expenditures
for contractual product supply issues in 1994 approximated the original estimate
of $28.1 million.
ALZA's manufacturing activities, and the products sold by ALZA and its client
companies in the U.S. and/or exported to other countries, are subject to
extensive regulation by the United States Food and Drug Administration ("FDA")
and comparable agencies in other countries where the products are distributed.
ALZA intends that all of its operations meet or exceed FDA and other regulatory
standards. These standards change from time to time, and therefore compliance
requires ALZA to make significant expenditures on an ongoing basis.
GENERAL, ADMINISTRATIVE AND MARKETING
General, administrative and marketing expenses increased to $33.4 million in
1994 compared to $21.4 million in 1993 and $18.2 million in 1992. The increase
in 1994 from 1993 was due primarily to expenses related to the formation of ALZA
Pharmaceuticals (ALZA's sales and marketing division) and launch expenses
related to Testoderm[REGISTERED TRADEMARK]. ALZA Pharmaceuticals was created
in 1993 for the purpose of expanding ALZA's marketing capabilities in order to
commercialize ALZA-developed products, including those under development with
TDC, and potentially licensed-in products. In 1994, ALZA Pharmaceuticals
established a U.S. sales force of approximately 50 people and began actively
promoting Testoderm[REGISTERED TRADEMARK]. ALZA Pharmaceuticals also co-
promotes Glucotrol XL[REGISTERED TRADEMARK], the once-daily oral diabetes
product ALZA developed with Pfizer, and the Duragesic[REGISTERED TRADEMARK]
fentanyl transdermal system for the relief of severe chronic pain. The increase
in expenses from 1992 to 1993 was primarily attributable to initial activities
in the formation of ALZA Pharmaceuticals. ALZA expects general, administrative
and marketing expenses to increase slightly during
-6-
<PAGE>
PAGE 15-16 OF PAPER FORMAT ANNUAL REPORT
1995 as ALZA continues to expand its marketing activities.
OTHER REVENUE AND INTEREST EXPENSE
Other revenue, which consists primarily of interest income, was $17.8 million in
1994 compared to $20.5 million and $21.3 million in 1993 and 1992, respectively.
The decrease in 1994 from 1993 was due primarily to the realization during 1993
of approximately $5 million in gains related to long-term investments liquidated
to fund TDC. The decrease in interest income in 1993 from 1992 resulted from
lower invested cash balances following the contribution of $250 million to TDC
during 1993.
ALZA reported total interest expense of $19.4 million in 1994 compared to $19.2
million in 1993 and $17.5 million in 1992. In mid-1994, ALZA replaced its $250
million commercial paper program with approximately $337 million of 5 1/4% zero
coupon convertible subordinated debentures. In late 1993, ALZA began the
commercial paper program, the proceeds of which were used to redeem its 7 1/2%
zero coupon convertible subordinated debentures. While the average interest
rate on ALZA's outstanding debt was lower in 1994 compared to 1993, ALZA had
higher average outstanding debt. This resulted in a slight increase in total
interest expense in 1994 as compared to 1993. In 1993, interest expense
increased to $19.2 million from $17.5 million in 1992 due primarily to higher
accretion of the original issue discount on the 7 1/2% zero coupon convertible
subordinated debentures. Interest expense is expected to increase in 1995 as
compared to 1994 due to the higher amount of debt outstanding.
INCOME TAXES
ALZA's effective tax rate was 38% in 1994, compared to 35% in 1993 and 32% in
1992. The increase in 1994 is due primarily to an increase in pre-tax income
without proportionate increases in estimated available tax credits. Effective
January 1, 1993, ALZA adopted SFAS 109. As permitted by SFAS 109, prior year
financial statements were not restated to reflect the change in accounting
method. The cumulative effect of adopting SFAS 109 increased ALZA's net income
by $6.6 million or $.08 per share for the year ended December 31, 1993.
-7-
<PAGE>
PAGE 16 OF PAPER FORMAT ANNUAL REPORT
LIQUIDITY AND CAPITAL RESOURCES
During 1994, cash and cash equivalents increased from $53.7 million in 1993 to
$88.8 million at the end of 1994 and investments increased from $203.8 million
in 1993 to $256.1 million at the end of 1994. Unrealized losses on ALZA's
investments at December 31, 1994, which resulted from increases in prevailing
market interest rates, were $7.5 million, net of tax effect.
In July 1994, ALZA completed a public offering of 5 1/4% zero coupon convertible
subordinated debentures ("5 1/4% Debentures") due 2014, which resulted in $328.1
million of net proceeds to ALZA. ALZA used $249.5 million of the net proceeds
to retire its outstanding commercial paper. The remainder was invested in
ALZA's investment portfolio, to be used for corporate purposes. By refinancing
its short-term debt with fixed rate, long-term convertible debt, ALZA
significantly increased its working capital, reduced its interest rate risk in a
period of generally rising interest rates and eliminated the periodic interest
payments on its debt.
ALZA invested approximately $37.2 million in 1994 and $23.8 million in 1993 (net
of $6.8 million of equipment write-offs included in the manufacturing write-off;
see note 2 of the notes to consolidated financial statements) in additions to
property, plant and equipment to support its expanding research and product
development and manufacturing activities. While ALZA believes its current
facilities and equipment are sufficient to meet its current operating
requirements, ALZA will continue to expand its facilities and equipment to
support its long-term requirements. In addition, ALZA plans to add an
additional commercial manufacturing site in the near future. ALZA's investment
in 1995 for property, plant and equipment is expected to exceed 1994 levels.
ALZA believes that its existing cash and investment balances are adequate to
fund its current cash needs. In addition, should the need arise, ALZA believes
it would be able to borrow additional funds or otherwise raise additional
capital. ALZA may consider using its capital to make strategic
-8-
<PAGE>
PAGE 16 OF PAPER FORMAT ANNUAL REPORT
investments or to acquire or license technology or products. ALZA may also
enter into strategic alliances with third parties which could provide additional
funding for research and product development and support for product marketing
and sales.
-9-
<PAGE>
PAGE 17 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share amounts) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Royalties and fees $ 123,748 $ 113,318 $ 114,684
Product development, including amounts from
TDC(1994-$31,634; 1993-$4,869) 68,715 46,783 39,081
Net sales 68,511 53,630 75,488
Other revenue, primarily interest income 17,782 20,451 21,266
--------- --------- ----------
Total revenues 278,756 234,182 250,519
COSTS AND EXPENSES:
Research and product development 76,099 53,153 52,089
Costs of products shipped 56,638 74,450 57,196
General, administrative and marketing 33,350 21,422 18,241
Interest 19,379 19,204 17,538
--------- --------- ----------
Total costs and expenses 185,466 168,229 145,064
--------- --------- ----------
Income before income taxes, extraordinary item
and cumulative effect of accounting change 93,290 65,953 105,455
Provision for income taxes 35,170 23,084 33,285
--------- --------- ----------
Income before extraordinary item and
cumulative effect of accounting change 58,120 42,869 72,170
Extraordinary item-debt refinancing, net
of income taxes - (3,830) -
Cumulative effect of change in accounting
for income taxes - 6,573 -
--------- --------- ----------
Net income $ 58,120 $ 45,612 $ 72,170
--------- --------- ----------
--------- --------- ----------
PER COMMON AND COMMON EQUIVALENT SHARE:
Income before extraordinary item and
cumulative effect of accounting change $ .71 $ .54 $ .90
Extraordinary item-debt refinancing, net of
income taxes - (.05) -
Cumulative effect of change in accounting for
income taxes - .08 -
--------- --------- ----------
Net income $ .71 $ .57 $ .90
--------- --------- ----------
--------- --------- ----------
Weighted average common and dilutive common
equivalent shares 82,286 79,859 80,345
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
-10-
<PAGE>
PAGE 18 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(In thousands, except share and per share amounts) 1994 1993
---- ----
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 88,844 $ 53,683
Short-term investments 256,084 40,399
Receivables, net of allowance for doubtful
accounts (1994-$259; 1993-$211) 84,879 56,563
Inventories 33,415 25,163
Prepaid expenses and other current assets 29,211 22,603
-------- --------
Total current assets 492,433 198,411
Investments in long-term government and
corporate notes and bonds - 163,391
PROPERTY, PLANT AND EQUIPMENT:
Buildings and leasehold improvements 168,001 164,417
Equipment 103,876 90,662
Construction in progress 26,773 6,403
Land and prepaid land leases 17,038 17,001
-------- --------
315,688 278,483
Less accumulated depreciation and amortization (70,238) (56,886)
-------- --------
Net property, plant and equipment 245,450 221,597
Other assets 68,369 38,425
-------- --------
TOTAL ASSETS $806,252 $621,824
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Commercial paper $ - $249,520
Accounts payable 20,006 11,678
Accrued liabilities 18,773 17,415
Deferred revenue 16,340 6,698
Current portion of long-term debt 869 867
-------- --------
Total current liabilities 55,988 286,178
5 1/4% zero coupon convertible subordinated
debentures 344,593 -
Other long-term liabilities 41,192 28,969
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
300,000,000 shares authorized; 82,043,188 and
81,613,725 shares issued and outstanding at
December 31, 1994 and 1993, respectively 820 816
Additional paid-in capital 302,147 294,998
Unrealized loss on available-for-sale securities,
net of tax effect (7,471) -
Retained earnings 68,983 10,863
-------- --------
Total stockholders' equity 364,479 306,677
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $806,252 $621,824
-------- --------
-------- --------
</TABLE>
See accompanying notes.
-11-
<PAGE>
PAGE 19 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1994, 1993, and 1992
(in thousands)
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON RETAINED TOTAL
ADDITIONAL AVAILABLE- EARNINGS STOCK-
COMMON PAID-IN FOR-SALE (ACCUMULATED HOLDERS'
STOCK CAPITAL SECURITIES DEFICIT) EQUITY
----- ------- ---------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 $ 740 $ 392,437 $ - $ (70,323) $ 322,854
Common stock issued 9 12,510 - - 12,519
Net income - - - 72,170 72,170
-------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1992 749 404,947 - 1,847 407,543
Distribution of TDC Units - (213,404) - (36,596) (250,000)
Exercise of warrants 64 95,811 - - 95,875
Common stock issued 3 7,644 - - 7,647
Net income - - - 45,612 45,612
-------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1993 816 294,998 - 10,863 306,677
Common stock issued 4 7,149 - - 7,153
Unrealized loss on
available-for-sale
securities, net of
tax effect - - (7,471) - (7,471)
Net income - - - 58,120 58,120
-------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1994 $ 820 $ 302,147 $ (7,471) $ 68,983 $ 364,479
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
-12-
<PAGE>
PAGE 20 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,120 $ 45,612 $ 72,170
Non-cash adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 13,673 12,255 9,293
Interest on 5 1/4% zero coupon convertible
subordinated debentures 8,063 - -
Interest on 7 1/2% zero coupon convertible
subordinated debentures - 14,912 15,746
Extraordinary item-debt refinancing - 5,893 -
Cumulative effect of change in accounting
for income taxes - (6,573) -
Decrease (increase) in assets:
Receivables (28,316) (3,351) (6,693)
Inventories (8,252) 4,725 (10,473)
Prepaid expenses and other current assets (1,406) (1,859) (3,537)
Increase (decrease) in liabilities:
Accounts payable 8,328 140 4,978
Accrued liabilities 1,358 (1,530) 9,276
Deferred revenue 9,642 (1,102) 4,158
Other long-term liabilities 13,092 7,113 1,647
--------- --------- ---------
Total adjustments 16,182 30,623 24,395
--------- --------- ---------
Net cash provided by operating
activities 74,302 76,235 96,565
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (37,205) (23,784) (41,398)
Purchases of available-for-sale securities (328,944) - -
Sales of available-for-sale securities 147,892 - -
Maturities of available-for-sale securities 102,085 - -
Decrease (increase) in short-term
investments - 63,567 (16,457)
Decrease (increase) in long-term investments - 44,461 (83,456)
Decrease (increase) in cash surrender
value-life insurance and prepaid premiums (12,287) 4,285 (14,237)
Decrease (increase) in other assets 4,435 3,965 (8,959)
--------- --------- ---------
Net cash provided by (used in)
investing activities (124,024) 92,494 (164,507)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from 5 1/4% zero coupon convertible
subordinated debentures 328,117 - -
Redemption of 7 1/2% zero coupon convertible
subordinated debentures - (243,878) -
Issuances (maturities) of commercial paper, net (249,520) 249,520 -
Principal payments on long-term debt (867) (866) (2,603)
Contribution to TDC - (250,000) -
Other issuances of common stock 7,153 103,522 12,519
--------- --------- ---------
Net cash provided by (used in) financing
activities 84,883 (141,702) 9,916
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 35,161 27,027 (58,026)
Cash and cash equivalents at beginning
of year 53,683 26,656 84,682
--------- --------- ---------
Cash and cash equivalents at end
of year $ 88,844 $ 53,683 $ 26,656
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
-13-
<PAGE>
PAGE 21 OF PAPER FORMAT ANNUAL REPORT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1994, 1993 and 1992
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ALZA Corporation ("ALZA" or the "Company") develops, primarily under joint
development and commercialization agreements with pharmaceutical company clients
and another client, Therapeutic Discovery Corporation ("TDC"), a board range of
pharmaceutical products based on ALZA's proprietary therapeutic systems
technologies. ALZA's therapeutic systems can often improve the medical value as
well as the cost-effectiveness of drug compounds by increasing efficacy,
minimizing unpleasant or harmful side effects and/or providing greater patient
compliance. Revenues from these development activities with client companies
are reported as product development revenue. ALZA's product development revenue
represent clients' reimbursement to ALZA of costs incurred in product
development and clinical evaluation, including a portion of general and
administrative expenses, and therefore does not contribute significantly to
current net income. ALZA's policy is to expense all costs of research and
product development related both to costs incurred on its own behalf and on
behalf of its clients.
Royalty revenue and other payments based on sales by ALZA's client companies of
products developed under development and commercialization agreements, and
certain one-time or infrequent fees or similar payments under such agreements,
are reported as royalties and fees.
ALZA manufactures all or a portion of the product requirements for certain of
its client companies, including Duragesic[REGISTERED TRADEMARK] for Janssen
Pharmaceutica, Inc. ("Janssen"), Nicoderm[REGISTERED TRADEMARK] for Marion
Merrell Dow ("MMD"), Procardia XL[REGISTERED TRADEMARK] and Glucotrol
XL[REGISTERED TRADEMARK] for Pfizer Inc ("Pfizer"), Catapres-TTS[REGISTERED]
TRADEMARK] for Boehringer Ingelheim and Efidac 24[REGISTERED TRADEMARK]
(pseudoephedrine hydrochloride) for Ciba Self-Medication, Inc. ("Ciba"). In
addition, ALZA manufactures and markets directly
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PAGE 21 OF PAPER FORMAT ANNUAL REPORT
in the U.S., its Progestasert[REGISTERED TRADEMARK] system, ALZET[REGISTERED]
TRADEMARK] osmotic pumps, the Ocusert[REGISTERED TRADEMARK] system and the
Testoderm[REGISTERED TRADEMARK] testosterone transdermal system. ALZA also
manufactures the Actisite[REGISTERED TRADEMARK], periodontal fiber, which is
marketed in the U.S. by a partnership between ALZA and Procter & Gamble.
Internationally, Progestasert[REGISTERED TRADEMARK], ALZET[REGISTERED]
TRADEMARK], Ocusert[REGISTERED TRADEMARK] and Actisite[REGISTERED TRADEMARK]
are marketed through distributors. Revenues from all of these activities are
reported as net sales. ALZA recognizes sales revenues at the time of product
shipment; sales are net of discounts, rebates and allowances. Export sales,
principally to distributors and client companies in Europe, were $16.9 million,
$18.1 million and $12.1 million in 1994, 1993 and 1992, respectively.
Other revenue consists primarily of interest income. ALZA earned interest
income of $17.6 million, $19.6 million and $20.4 million in 1994, 1993 and 1992,
respectively.
Pfizer accounted for 30% of ALZA's total revenues in 1994, 35% in 1993 and 29%
in 1992; Janssen accounted for 12% of ALZA's total revenues in 1994; TDC
accounted for 11% of ALZA's total revenues in 1994; Ciba accounted for 13% of
ALZA's total revenues in 1993 and 10% in 1992; and MMD accounted for 10% of
ALZA's total revenues in 1993 and 26% in 1992.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ALZA and its
wholly owned subsidiaries, ALZA Development Corporation, ALZA International,
Inc. and ALZA Limited. All significant intercompany accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
ALZA reports all highly liquid debt instruments purchased with a maturity of
three months or less as cash equivalents. The carrying amount reported on the
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balance sheet for cash and cash equivalents approximates their fair value.
SHORT-TERM INVESTMENTS
Effective January 1, 1994, ALZA adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 requires certain investments to be
categorized as either trading, available-for-sale, or held-to-maturity. ALZA
has classified its entire investment portfolio, including cash equivalents of
$86.7 million at December 31,1994, as available-for-sale. Although ALZA may not
dispose of all of the securities in its investment portfolio within one year,
ALZA's investment portfolio is available for current operations and, therefore,
has been classified as a current asset beginning January 1, 1994. In prior
years, a portion of the investment portfolio was classified as a long-term
asset. In accordance with SFAS 115, prior period financial statements have not
been restated to reflect the change in accounting principle. Under SFAS 115,
investments in the available-for-sale category are carried at fair value with
unrealized gains and losses recorded as a separate component of stockholders'
equity.
As a result of adopting SFAS 115, stockholders' equity at January 1, 1994
increased by $1.2 million (net of tax effect) to reflect the net unrealized
gains on available-for-sale securities previously carried at amortized cost. At
December 31, 1994, net unrealized losses on available-for-sale securities were
$7.5 million, net of $5.2 million tax effect.
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The following is a summary of ALZA's investment portfolio at December 31, 1994.
Gross unrealized gains were immaterial at December 31, 1994 and as a result, are
not shown separately.
<TABLE>
<CAPTION>
Net Estimated
Unrealized Fair
(in thousands) Cost Losses Value
-------- -------- ----------
<S> <C> <C> <C>
U.S. Treasury securities
and obligations of
U.S. government
agencies $ 182,677 $ (8,737) $ 173,940
Collateralized mortgage
obligations and asset
backed securities 42,084 (1,612) 40,472
Corporate securities 130,670 (2,324) 128,346
-------- -------- ----------
$ 355,431 $ (12,673) $ 342,758
-------- -------- ----------
-------- -------- ----------
</TABLE>
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay certain of the obligations
without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Fair
(in thousands) Cost Value
-------- --------
<S> <C> <C>
Due in one year or less $ 115,372 $ 115,350
Due after one year through four years 107,319 103,768
Due after four years through eight years 132,740 123,640
-------- --------
$ 355,431 $ 342,758
-------- --------
-------- --------
</TABLE>
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PAGE 23 OF PAPER FORMAT ANNUAL REPORT
CREDIT AND INVESTMENT RISK
Most of ALZA's revenues, comprised primarily of royalties and fees, product
development revenue and net sales, are derived from agreements with major
pharmaceutical company clients and TDC, which have significant cash resources.
Therefore, ALZA considers its credit risk related to these transactions to be
minimal.
ALZA invests excess cash in securities of banks and companies from a variety of
industries, with strong credit ratings, and in U.S. government obligations.
These securities typically bear minimal risk and ALZA has not experienced any
losses on its investments due to institutional failure or bankruptcy. ALZA's
investment policy is designed to limit exposure with any one institution.
INVENTORIES
Raw materials, work in process and finished goods inventories are stated at the
lower of standard cost (which approximates actual costs on a first-in, first-out
cost method) or market value.
Inventories consist of the following:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Raw materials $18,264 $14,635
Work in process 10,175 9,241
Finished goods 4,976 1,287
------- -------
Total inventories $33,415 $25,163
------- -------
------- -------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including capitalized interest
additions of $0.3 million in 1994, $1.9 million in 1993 and $1.3 million in
1992. Additions and improvements are capitalized while maintenance and repairs
are expensed as incurred. Depreciation and amortization are computed on the
straight-line method, except for certain manufacturing
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PAGE 23 OF PAPER FORMAT ANNUAL REPORT
equipment that is depreciated on a per unit manufactured basis, over estimated
useful lives, as follows:
Buildings 30 to 40 years
Leasehold improvements Terms of the leases (1 to 5 years)
Equipment 3 to 9 years
Prepaid land leases Remaining terms of the leases (19 to 63
years)
Prepaid land leases represent ALZA's total cost, paid in advance, of leasehold
rights to land upon which certain of ALZA's buildings in Palo Alto, California
are situated. Included in construction in progress are payments made in
connection with the facilities being constructed or modified, and the
installation of related equipment in Mountain View, California (primarily
research and development) and Vacaville, California (primarily commercial
manufacturing).
ACCRUED LIABILITIES
The details of ALZA's accrued liabilities are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Accrued income taxes $ 1,418 $ 375
Accrued compensation 10,099 8,212
Manufacturing reserves and other 7,256 8,828
------- -------
Total accrued liabilities $18,773 $17,415
------- -------
------- -------
</TABLE>
PER SHARE INFORMATION
Per share information is based on weighted average common and dilutive common
equivalent shares, including ALZA common stock, warrants and options, for the
period each was outstanding. Fully diluted earnings per share are not presented
since dilution is less than 3% for each year presented.
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PAGE 24 OF PAPER FORMAT ANNUAL REPORT
NOTE 2: MANUFACTURING WRITE-OFF
In December 1993, ALZA wrote off $28.1 million related primarily to its
manufacturing activities. This write-off resulted from both non-recurring
expenses and allowances related to scale-up of the production of certain
products and to excess transdermal manufacturing capacity and equipment
resulting from ALZA's facility expansion in Vacaville, California. The facility
expansion was followed by lower than anticipated Nicoderm[REGISTERED TRADEMARK]
production requirements, reflecting the decline in Nicoderm[REGISTERED]
TRADEMARK] sales in 1993. The $28.1 million included $10.1 million of inventory
write-downs, $6.8 million of equipment write-offs, $4.6 million of allowances
reducing sales and receivables and $6.6 million of anticipated future cash
outlays related to contractual product supply issues. The effect of the write-
off in 1993 increased costs of products shipped by $22.0 million and reduced net
sales by $6.1 million. Charges relating to the write-off of assets and cash
expenditures for contractual product supply issues in 1994 approximated the
original estimate of $28.1 million.
NOTE 3: DEBT OBLIGATIONS AND OTHER LIABILITIES
In November 1993, ALZA redeemed all of its outstanding 7 1/2% zero coupon
convertible subordinated debentures ("7 1/2% Debentures") representing a total
redemption value of $243.9 million. In connection with this redemption, ALZA
incurred a one-time charge of $3.8 million, net of income taxes of $2.1 million,
related to the write-off of unamortized issuance costs. This charge was
reported in 1993 as an extraordinary item.
ALZA replaced the 7 1/2% Debentures with a $250 million U.S. commercial paper
program. The carrying amount reported on the December 31, 1993 balance sheet
for commercial paper approximated its fair value.
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PAGE 24-25 OF PAPER FORMAT ANNUAL REPORT
In July 1994, ALZA completed a public offering of 5 1/4% zero coupon convertible
subordinated debentures ("5 1/4% Debentures") The 5 1/4% Debentures were issued
at a price of $354.71 per $1,000 principal amount at maturity. The offering
resulted in $328.1 million of net proceeds to ALZA. Approximately $250 million
of the net proceeds were used to retire ALZA's outstanding commercial paper.
The remainder will be used for general corporate purposes. The 5 1/4%
Debentures, due July 2014, have a principal amount at maturity of $948.8
million. The 5 1/4% Debentures' yield to maturity is 5 1/4% per annum, computed
on a semiannual bond equivalent basis. There are no periodic interest payments.
At the option of the holder, each 5 1/4% Debenture is convertible into 12.987
shares of common stock, at any time. The 5 1/4% Debentures will be purchased by
ALZA on July 14, 1999, July 14, 2004 or July 14, 2009, at a purchase price equal
to the issue price plus accreted original issue discount to such purchase date,
at the option of the holder. ALZA, at its option, may elect to deliver either
common stock or cash in the event of conversion or purchase of the 5 1/4%
Debentures. ALZA, at its option, may redeem any or all of the 5 1/4% Debentures
for cash after July 14, 1999 at a redemption price equal to the issue price plus
accreted original issue discount. In connection with the offering, ALZA
incurred underwriting fees and other costs of $9.0 million, which are included
in other assets and are being amortized over the term of the 5 1/4% Debentures.
The 5 1/4% Debentures are listed for trading on the New York Stock Exchange. At
December 31,1994, the fair value of the 5 1/4% Debentures was $315.4 million.
ALZAs other long-term liabilities are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Long-term debt $ 928 $ 1,797
Deferred income taxes 18,513 9,906
Deferred compensation 21,751 17,266
------- -------
Total long-term liabilities $41,192 $28,969
------- -------
------- -------
</TABLE>
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Included in ALZA's long-term debt is a $850,000 note representing the required
future payments under a $5.0 million investment (included in other assets) in a
low income housing partnership. The aggregate annual maturities of long-term
debt at December 31, 1994, payable in each of the years 1996 through 1999, are
$870,000, $22,000, $24,000 and $12,000, respectively.
During 1987, ALZA implemented deferred compensation arrangements under which
selected employees may defer a portion of their salaries. ALZA has purchased
life insurance policies that it intends to use to partially finance amounts to
be paid in the future to participants, based on their deferred salary amounts
and interest.
NOTE 4: CAPITAL STOCK AND WARRANTS
In 1993, approximately 6.4 million warrants issued in connection with the 1988
Bio-Electro Systems ("BES") subscription offering were exercised. Net proceeds
to ALZA totaled approximately $96 million.
ALZA has outstanding privately held warrants to purchase 1.0 million shares of
common stock at an exercise price of $25 per share. The warrants will expire on
January 31, 1996. In connection with the formation of TDC, ALZA has out-
standing warrants to purchase approximately 1.0 million shares of common stock
at an exercise price of $65 per share. The warrants will expire on December 31,
1999.
ALZA is authorized to issue 100,000 shares of preferred stock, $.01 par value,
none of which was outstanding at December 31, 1994 or 1993. The Board of
Directors may determine the rights, preferences and privileges of any preferred
stock issued in the future.
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NOTE 5: ARRANGEMENTS WITH THERAPEUTIC DISCOVERY CORPORATION
In June 1993, ALZA completed the distribution of a special dividend of "Units"
to ALZA stockholders. Each Unit consisted of one share of TDC Class A common
stock and one warrant to purchase one-eighth of one share of ALZA common stock.
Holders of record on May 28, 1993 of ALZA common stock received one Unit for
every 10 shares of ALZA common stock owned, with cash distributed in lieu of
fractional Units. Approximately 7.7 million Units were distributed on June 11,
1993. The Units trade on the Nasdaq Stock Market (under the trading symbol
TDCAZ) and will trade only as Units until the earlier of June 11, 1996 or the
date on which ALZA exercises the Purchase Option (as defined below) (the
"Separation Date"), at which time the warrants and TDC Class A common stock will
trade separately. The warrants will be exercisable at a per-share exercise
price of $65 at any time after the Separation Date and will expire, if not
previously exercised, on December 31, 1999. In connection with the dividend,
ALZA contributed $250 million in cash to TDC. As a result of this contribution
and the dividend, ALZA's total assets and stockholders' equity were each reduced
by $250 million in 1993. Product development revenue from TDC during 1994 and
1993 was $31.6 million and $4.9 million, respectively.
TDC was formed by ALZA for the purpose of selecting and developing new human
pharmaceutical products combining ALZA's proprietary drug delivery technology
with various drug compounds, and commercializing such products, most likely
through licensing to ALZA. ALZA and TDC have entered into a development
agreement (the "Development Contract") pursuant to which ALZA conducts research
and development activities on behalf of TDC. ALZA has granted to TDC a royalty-
free, nonexclusive, perpetual license to use ALZA's proprietary drug delivery
technology to develop and commercialize specified TDC products.
ALZA has an option to license any product developed by TDC, on a product-by-
product basis, providing ALZA with access to a potential pipeline of products
-23-
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PAGE 26 OF PAPER FORMAT ANNUAL REPORT
for worldwide commercialization. If ALZA exercises its license option for any
product, ALZA will make royalty payments to TDC if the product is sold by ALZA
(up to a maximum of 5% of ALZA's net sales of such product) or, if the product
is sold by a third party, ALZA will pay TDC up to 50% of ALZA's sublicensing
revenues with respect to the product. The exact percentages, of net sales and
ALZA's sublicensing revenue payable to TDC, will depend on the amount of TDC's
funding of the product. ALZA has an option, exercisable on a product-by-product
basis, to buy out its royalty obligation to TDC by making a one-time payment
that is a multiple of royalties and sublicensing fees paid in specified periods.
ALZA also has an option, exercisable at ALZA's sole discretion, to purchase,
according to a predetermined formula, all (but not less than all) of the
outstanding shares of TDC Class A common stock (the "Purchase Option"). The
Purchase Option is exercisable at any time until December 31, 1999, or later
under certain circumstances. The Purchase Option will expire, in any event, on
the 60th day after TDC files a Form 10-K or Form 10-Q containing a balance sheet
showing less than an aggragate of $5.0 million in cash and cash equivalents,
short-term investments and long-term investments. If the Purchase Option is
exercised, the exercise price will be the greatest of: (a) $100 million; (b)
the fair market value of one million shares of ALZA common stock; (c) 25 times
the worldwide royalties and sublicensing fees paid by ALZA to TDC during four
specified calendar quarters or 100 times such royalties and sublicensing fees
during a specified calendar quarter; in each case, less any amounts previously
paid by ALZA to exercise a buy-out option with respect to any product; or (d)
$325 million less all amounts paid by TDC under the Development Contract. The
purchase price may be paid in cash, in ALZA common stock, or any combination of
the two, at the option of ALZA.
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PAGE 26-27 OF PAPER FORMAT ANNUAL REPORT
ALZA performs certain administrative services for TDC under an administrative
services agreement (terminable at the option of TDC), for which ALZA is
reimbursed its direct costs, plus certain overhead expenses. For the years
ended 1994 and 1993, administrative service revenue under this agreement was
$0.2 million and $0.1 million, respectively, and is included in other revenue.
NOTE 6: EMPLOYEE COMPENSATION AND BENEFIT PROGRAMS
In 1993, ALZA adopted a company-wide bonus program, the PACE program, under
which substantially all employees are eligible to receive a bonus. The annual
bonus, if any, is determined by ALZA's Board of Directors, at its discretion,
based on the Company's performance during the year. Under ALZA's Executive
Incentive Plan ("EIP"), for which 1993 was the last plan year, selected
employees received cash awards. Bonuses and awards under these programs for
1994, 1993 and 1992 were $2.6 million, $2.2 million and $1.0 million,
respectively.
ALZA has an employee stock purchase plan under which essentially all ALZA
employees may participate and purchase stock at 85% of its fair market value at
certain specified dates. Employee contributions are limited to 15% of
compensation and no more than 300,000 shares may be purchased by all
participants in any plan year. In 1994, 1993 and 1992, an aggregate of 157,075,
126,905 and 107,970 shares, respectively, of ALZA common stock were purchased by
the participants under the terms of this plan. Since adoption in 1984 of this
plan, 1,002,134 shares have been issued under this plan and 547,866 shares are
available for issuance.
In 1986, ALZA adopted a company-funded, defined contribution retirement plan for
its employees. This plan provides for an annual basic contribution and allows
for additional discretionary contributions on a year-by-year basis. Such
contributions are allocated to participants based on the participant's
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PAGE 27 OF PAPER FORMAT ANNUAL REPORT
salary and age. For 1994, 1993 and 1992, the total expense for such
contributions to this plan was $2.2 million, $1.9 million and $1.6 million,
respectively.
ALZA has a stock option plan, adopted in 1992, whereby incentive stock options
to purchase shares of ALZA common stock at not less than the fair market value
of the stock at the date of the grant, and nonstatutory stock options to
purchase shares of ALZA common stock at not less than 85% of the fair market
value of the stock at the date of grant, have been and may be granted to certain
present and potential employees, directors and consultants. To date, all
options granted have had exercise prices equal to the fair market value of
common stock on the date of grant. In addition, options granted under previous
plans remain outstanding, but no additional options may be granted under such
plans. Options generally expire ten years after the date of grant. During 1993,
the Company offered non-officer employees the right to amend the terms of their
outstanding options to (i) reset the vesting schedule, (ii) lower the exercise
price to the fair market value on the date of the amendment and (iii) reduce the
number of shares covered by the option under a formula related to the original
option exercise price. These amendments resulted in the cancellation of 81,095
previously outstanding options.
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Information as to ALZA's stock options is as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 3,637,210 $ 4.13-49.25 2,641,329 $ 2.50-49.25
Option activity during
the year:
Granted 1,099,870 $19.25-25.50 1,452,795 $19.75-42.25
Exercised (271,688) $ 4.13-25.88 (248,974) $ 2.50-31.88
Canceled (82,348) $12.00-49.25 (207,940) $11.50-49.25
--------- ---------
Options outstanding
at end of year 4,383,044 $ 5.25-49.25 3,637,210 $ 4.13-49.25
--------- ---------
--------- ---------
Options exercisable
at end of year 1,382,101 $ 5.25-49.25 1,075,305 $ 4.13-49.25
--------- ---------
--------- ---------
Options available for
grant at end of year 485,048 1,569,635
--------- ---------
--------- ---------
</TABLE>
NOTE 7: COMMITMENTS AND CONTINGENCIES
ALZA leases certain buildings and equipment under operating leases. Rent
expense under these leases during the years ended 1994, 1993 and 1992 was $1.6
million, $1.7 million and $1.6 million, respectively. Aggregate minimum rental
commitments under non-cancelable operating lease arrangements as of December 31,
1994 were $4.0 million and are payable as follows: $1.4 million in 1995, $0.7
million in 1996, $0.7 million in 1997, $0.8 million in 1998, $0.4 million in
1999 and $21,000 thereafter.
NOTE 8: INCOME TAXES
Effective January 1, 1993, ALZA changed its method of accounting for income
taxes to the liability method required by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). As permitted
under the new standard, prior years' financial statements have not been
restated. The cumulative effect of adopting SFAS 109 was a benefit of $6.6
million which consisted primarily of the remaining tax benefits resulting from
the BES acquisition in 1991. The information as disclosed for 1992 is computed
under the requirements of SFAS 96, the prior standard.
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The provision for income taxes is as follows for each of the three years ended
December 31:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $23,361 $15,270 $33,299
Deferred 4,110 2,782 (9,194)
------- ------- -------
27,471 18,052 24,105
State:
Current 6,246 4,644 9,046
Deferred 1,453 388 134
------- ------- -------
7,699 5,032 9,180
------- ------- -------
Provision for income taxes $35,170 $23,084 $33,285
------- ------- -------
------- ------- -------
</TABLE>
Tax benefits associated with employee stock option transactions reduced accrued
income taxes by $1.0 million and $2.3 million for 1994 and 1993, respectively.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes. The sources
and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Expected federal tax
at 35% (34% for 1992) $32,652 $23,084 $35,855
State income taxes, net of
federal benefit 5,004 3,271 6,059
In-process technology,
net of tax benefit - - (4,725)
Investment and research
tax credits (1,973) (2,172) (3,763)
Other (513) (1,099) (141)
------- ------- -------
Provision for income taxes $35,170 $23,084 $33,285
------- ------- -------
------- ------- -------
</TABLE>
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PAGE 29 OF PAPER FORMAT ANNUAL REPORT
Temporary differences which give rise to a significant portion of deferred tax
assets and liabilities for 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories $ 6,709 $ 7,018
Reserves 1,344 2,690
Deferred compensation 8,965 7,087
Capitalized research expenses 8,970 11,528
Deferred revenue 6,674 2,717
Unrealized losses on available-
for-sale securities 5,202 -
Other 6,519 6,642
------- -------
Total deferred tax assets 44,383 37,682
Deferred tax liabilities:
Property, plant and equipment 32,860 25,814
Other 2,002 1,793
------- -------
Total deferred tax liabilities 34,862 27,607
------- -------
Net deferred tax assets $ 9,521 $10,075
------- -------
------- -------
</TABLE>
During 1992, deferred income taxes were provided for differences in the timing
of recording certain revenue and expense items for tax and financial reporting
purposes. The sources and tax effects of these differences are as follows:
<TABLE>
<CAPTION>
(in thousands) 1992
----
<S> <C>
State income taxes $(1,904)
Tax over book depreciation 5,079
Deferred compensation and
other accrued liabilities (2,965)
Research and development
amortization (5,604)
Research tax credits (2,038)
Inventory valuation (1,573)
Other (55)
--------
Increase in prepaid
income taxes $(9,060)
--------
--------
</TABLE>
NOTE 9: LITIGATION
In December 1991, a patent infringement suit was filed by Ciba against MMD and
ALZA in connection with the commercialization of Nicoderm[REGISTERED]
TRADEMARK]. In October 1994, the Court granted a motion for summary judgment
brought by ALZA and MMD, ruling the patent invalid. That ruling cleared ALZA
and MMD of liability for infringement of
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PAGE 29-30 OF PAPER FORMAT ANNUAL REPORT
the patent. In November 1994 an appeal was filed by Ciba. Subsequent to year
end, ALZA and MMD filed a suit against Ciba and LTS Lohmann Therapy Systems
Corporation for infringement of two U.S. patents issued in 1994 to ALZA relating
to the transdermal administration of nicotine.
In April 1993, two securities class action lawsuits were filed against ALZA and
certain of its officers and directors. The lawsuits, which were consolidated
into one suit, claimed that ALZA issued and allowed to be issued various public
statements that were materially false and misleading, primarily with respect to
the Nicoderm[REGISTERED TRADEMARK] product. In July 1993, a derivative suit
was filed against certain officers and all of the directors of ALZA, which
claimed that some or all of the named persons engaged in mismanagement of the
Company and improperly obtained profits from the sale of ALZA securities. In
order to avoid the continuing cost of litigation, ALZA entered into an agreement
in 1994, which has been approved by the court, settling these related lawsuits
for $3.7 million. After taking into account the coverage by the Company's
directors' and officers' liability insurance, this settlement did not have a
material adverse impact on the operations or financial position of the Company.
During January 1994, ALZA was served with a suit seeking a declaration of
unenforceability and invalidity of an ALZA patent relating to transdermal
administration of fentanyl and alleging violation of antitrust laws. In April
1994, the Court granted ALZA's motion to dismiss this case, subject to the
plaintiff's right to perform limited discovery and amend its complaint.
Subsequent to year end, the plaintiff amended its complaint and ALZA renewed its
motion to dismiss the case.
During 1994, several product liability suits were filed against Janssen and ALZA
relating to the Duragesic[REGISTERED TRADEMARK] product. Janssen is managing
the defense of these suits in consultation with ALZA under an agreement between
the parties.
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Historically, the cost of resolution of ALZA's liability (including product
liability) claims has not been significant, and ALZA is not aware of any
asserted or unasserted claims pending against it, including the suits mentioned
above, the resolution of which would have a material adverse impact on the
operations or financial position of the Company.
NOTE 10: STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 25,655 $ 27,866 $ 23,115
Interest 6,321 48,756 1,402
</TABLE>
Cash paid for interest in 1993 includes $46.1 million of original issue discount
paid as part of the redemption price for the 7 1/2% Debentures.
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Conversion of the 7 1/2% Debentures $ - $ 267 $ 530
Distribution of TDC Units - 250,000 -
Net unrealized losses
on available-for-sale
securities ($12,673 less
$5,202 tax effect) 7,471 - -
Deferred issuance costs-
5 1/4% Debentures 8,413 - -
</TABLE>
-31-
<PAGE>
PAGE 31 OF PAPER FORMAT ANNUAL REPORT
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS ALZA CORPORATION
We have audited the accompanying consolidated balance sheet of ALZA Corporation
as of December 31, 1994 and 1993, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ALZA Corporation
at December 31, 1994 and 1993, and the consolidated results of its operations,
stockholders' equity and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the financial statements, in 1993 the Company changed
its method of accounting for income taxes.
Ernst & Young LLP
Palo Alto, California
February 17, 1995
-32-
<PAGE>
PAGE 31 OF PAPER FORMAT ANNUAL REPORT
ALZA COMMON STOCK
ALZA common stock is listed for trading (symbol AZA) on the New York Stock
Exchange. ALZA common stock prices are reported in the WALL STREET JOURNAL and
other newspapers. As of December 31, 1994, there were 10,023 holders of record.
ALZA has never paid cash dividends on its common stock and has no plan to do so
in the foreseeable future. The quarterly high and low sales prices for the
calendar years 1994 and 1993, as reported on the composite tape, are shown here:
ALZA COMMON STOCK
----------------------------------
1994 1993
-------------- --------------
HIGH LOW HIGH LOW
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
First Quarter $30 3/4 $21 $47 1/8 $25 1/4
Second Quarter 26 5/8 20 1/4 35 1/8 22 7/8
Third Quarter 24 1/8 20 1/8 26 3/4 19 1/4
Fourth Quarter 20 3/4 17 29 1/2 20 7/8
</TABLE>
-33-
<PAGE>
PAGE 32 OF PAPER FORMAT ANNUAL REPORT
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
---------------------------------------- -----------------------------------------------
(in thousands, except per share amounts) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $75,208 $66,234 $69,149 $68,165 $49,389 (1) $57,800 $57,057 $69,936
Operating income 24,889 20,270 23,654 26,074 (7,851)(2) 24,187 22,159 26,211
Income (loss) before extraordinary
item and cumulative effect of
accounting change 15,245 12,510 14,748 15,617 (6,117) 14,127 14,090 20,769
Net income (loss) 15,245 12,510 14,748 15,617 (9,947)(3) 14,127 14,090 27,342(4)
Income (loss) before extraordinary
item and cumulative effect of
accounting change per share .19 .15 .18 .19 (.08) .18 .18 .26
Net income (loss) per share .19 .15 .18 .19 (.13) .18 .18 .34
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes pre-tax charges and allowances of $6.1 million related primarily
to manufacturing activities.
(2) Includes pre-tax charges and allowances of $28.1 million ($.23 per share on
an after-tax basis) related primarily to manufacturing activities.
(3) Includes a $3.8 million ($.05 per share) extraordinary debt refinancing
charge related to the redemption of ALZA's 7 1/2% zero coupon convertible
subordinated debentures.
(4) Includes $6.6 million ($.08 per share) in one-time benefits resulting from
the adoption of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.
</TABLE>
-34-
<PAGE>
PAGE 33 OF PAPER FORMAT ANNUAL REPORT
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $278,756 $234,182 $250,519 $162,349 $109,425 $ 92,687 $ 84,189 $ 70,812 $ 57,799 $ 45,547
Income (loss) before
extraordinary item and
cumulative effect of
accounting change 58,120 42,869(1) 72,170 (62,076)(2) 24,654 18,774 17,003 13,984 9,005 5,055
Net income (loss) 58,120 45,612(3) 72,170 (62,076) 24,654 18,774 17,003 13,984 16,753(4) 9,707(4)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change per
share .71 .54 .90 (.88) .35 .27 .25 .21 .14 .09
Net income (loss) per
share .71 .57 .90 (.88) .35 .27 .25 .21 .26 .18
Cash, cash equivalents,
short-term investments
and long-term
investments 344,928 257,473 338,474 296,587 302,383 108,976 121,130 142,804 81,200 77,813
Total assets 806,252 621,824(5) 698,381 580,490 530,868 288,447 261,588 243,479 137,306 160,444
Convertible debentures 344,593 - 228,966 213,220 273,218 75,000 75,000 75,000 - 22,575
Total stockholders'
equity 364,479 306,677(5) 407,543 322,854 219,605 186,636 159,757 138,985 121,219 79,042
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes pre-tax charges and allowances of $28.1 million ($.23 per share on
an after-tax basis) related primarily to manufacturing activities.
(2) Includes the effects of a one-time charge of $101.3 million ($1.38 per
share) related to the purchase of in-process technology.
(3) Also includes $6.6 million ($.08 per share) in one-time benefits resulting
from the adoption of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, and a $3.8 million ($.05 per share)
extraordinary charge relating to the redemption of ALZA's 7 1/2% zero
coupon convertible subordinated debentures.
(4) Includes to the utilization of federal net operating loss carryforwards.
(5) Includes the effect of the $250 million contribution to Therapeutic
Discovery Corporation and the related special dividend to ALZA
stockholders.
</TABLE>
-35-
<PAGE>
Exhibit 21
SUBSIDIARIES
ALZA Development Corporation (incorporated in California)
ALZA International, Inc. (incorporated in Delaware)
ALZA Limited (incorporated in the United Kingdom)
-29-
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of ALZA Corporation of our report dated February 17, 1995, included in the 1994
Annual Report to Stockholders of ALZA Corporation.
Our audits also included the consolidated financial statement schedule of ALZA
Corporation listed in Item 14(a). This schedule is the responsibility of
ALZA's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3 No. 33-53671 and Forms S-8 No. 2-92629, No. 2-97422,
No. 33-21810, No. 2-83419, No. 2-77785, No. 2-97421, No. 33-36141, No. 33-49824
and No. 33-51890) and in the related Prospectuses, of our report dated
February 17, 1995 with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the consolidated financial statement schedule
included in this Annual Report (Form 10-K) of ALZA Corporation for the year
ended December 31, 1994.
Ernst & Young LLP
Palo Alto, California
March 30, 1995
-30-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-K DATED DECEMBER 31,
1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 89
<SECURITIES> 256
<RECEIVABLES> 85
<ALLOWANCES> 0
<INVENTORY> 33
<CURRENT-ASSETS> 492
<PP&E> 316
<DEPRECIATION> 70
<TOTAL-ASSETS> 806
<CURRENT-LIABILITIES> 56
<BONDS> 345
<COMMON> 1
0
0
<OTHER-SE> 363
<TOTAL-LIABILITY-AND-EQUITY> 806
<SALES> 69
<TOTAL-REVENUES> 279
<CGS> 57
<TOTAL-COSTS> 185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 93
<INCOME-TAX> 35
<INCOME-CONTINUING> 58
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
</TABLE>
