<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
THERAPEUTIC DISCOVERY CORPORATION
- --------------------------------------------------------------------------------
(Name of the Issuer)
ALZA CORPORATION
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Statement)
CLASS A COMMON STOCK, PAR VALUE $0.01
- --------------------------------------------------------------------------------
(Title of Class of Securities)
883376105
- --------------------------------------------------------------------------------
(CUSIP Number of Class of Securities)
Bruce Cozadd, 950 Page Mill Road, Palo Alto, CA 94304, (650) 494-5000
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
(a) [ ] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under
the Securities Exchange Act of 1934.
(b) [ ] The filing of a registration statement under the Securities Act of
1933.
(c) [ ] A tender offer.
(d) [X] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies. [ ]
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation/1/: $100 million Amount of Filing Fee/2/: $20,000
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- -----------------------
/1/ For purposes of calculating the filing fee only. This calculation is
based upon the purchase price of $100 million for all issued and outstanding
shares of Class A Common Stock of the Issuer to be acquired pursuant to this
transaction.
/2/ The amount of the filing fee, calculated in accordance with Section
13 of the Securities Exchange Act of 1934, as amended, equals 1/50th of one
percent of the aggregate value of cash to be paid by ALZA Corporation for such
Class A Common Stock.
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[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form or
schedule and the date of its filing.
Amount previously paid:___________________ Filing party:__________________
Form or registration no.:_________________ Date filed:____________________
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Introduction.
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This Schedule 13E-3 Transaction Statement (the "Statement") relates to
the exercise by ALZA Corporation, a Delaware corporation ("ALZA"), of its
option to purchase all issued and outstanding shares of Class A Common Stock
of Therapeutic Discovery Corporation, a Delaware corporation ("TDC").
This Statement is being filed by ALZA. Notwithstanding this Statement, ALZA
disclaims application of Rule 13e-3 under the Securities Exchange Act of 1934,
as amended, to the transaction reported herein.
Item 1.
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(a) The issuer of the class of equity security which is the subject of
this filing and the address of its principal executive offices is:
Therapeutic Discovery Corporation
1454 Page Mill Road
Palo Alto, CA 94303-0806
(b) The exact title of the class of security which is the subject of this
filing is Class A Common Stock, par value $0.01, of TDC. The number
of shares of Class A Common Stock outstanding as of August 25, 1997,
the most recent practicable date, is 7,734,424. As of that date,
there were also options to purchase 395,000 shares of Class A Common
Stock immediately exercisable. The approximate number of holders of
record of such Class A Common Stock as of August 25, 1997, the most
recent practicable date, is 5,604.
(c) The principal market in which the Class A Common Stock is being traded
is the Nasdaq National Market. The range of high and low bid
quotations for the Class A Common Stock for each quarterly period
during the past two years is:
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
June 30, 1995 7.875 6.00
September 30, 1995 7.75 6.75
December 31, 1995 7.25 6.75
March 31, 1996 10.625 7.125
June 30, 1996 9.875 8.875
</TABLE>
3
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<TABLE>
<S> <C> <C>
September 30, 1996 10.00 8.00
December 31, 1996 11.375 9.375
March 31, 1997 11.375 10.50
June 30, 1997 11.375 10.625
</TABLE>
(d) To the best of ALZA's knowledge after making reasonable inquiry, TDC
has not paid any dividends on the Class A Common Stock in the past
two years.
TDC is restricted from paying any dividends on the Class A Common
Stock if, after payment of such dividend, the amount of TDC's cash,
cash equivalents and short-term and long-term investments would be
less than the Available Funds as such term is defined in the
Restated Certificate of Incorporation of TDC as filed with the
Secretary of State of the State of Delaware on April 1, 1993 (the
"Restated Certificate") and attached as Annex 17(c) hereto.
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(e) Not applicable.
(f) Not applicable.
Item 2.
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This filing is being made by ALZA. Its principal business is
pharmaceutical research and development and the commercialization of
pharmaceutical products. The address of its principal executive offices are
950 Page Mill Road, Palo Alto, CA 94304.
During the last five years, ALZA has not been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors). During the
last five years, ALZA has not been a party to a civil proceeding of a judicial
or administrative body of competent jurisdiction and as a result of such
proceeding was or is subject to a judgment, decree or final order enjoining
further violations of, or prohibiting activities, subject to, federal or state
securities laws or finding any violation of such laws.
4
<PAGE>
Item 3.
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(a) (1) The nature and approximate amount in dollars of any transaction
which has occurred since the commencement of TDC's second full fiscal
year preceding the date of this Statement between ALZA and TDC are as
follows:
(i) Since the commencement of TDC's second full fiscal year
preceding the date of this Statement, TDC paid
approximately $225,000,000 to ALZA pursuant to a
Development Agreement between ALZA and TDC dated March 10,
1993 whereby ALZA was retained by TDC to undertake
activities related to the selection and development of
pharmaceutical products.
(ii) Since the commencement of TDC's second full fiscal year
preceding the date of this Statement, TDC paid
approximately $500,000 to ALZA pursuant to a Services
Agreement between ALZA and TDC dated March 10, 1993 whereby
ALZA was retained by TDC to provide certain administrative
services to TDC (such as legal and accounting) in exchange
for payment of ALZA's costs in the provision of such
services.
(iii) There is also (a) a Technology License Agreement dated
March 10, 1993 between ALZA and TDC, whereby ALZA licensed
certain proprietary technology to TDC, and (b) a License
Option Agreement dated March 10, 1993 between ALZA and TDC,
whereby TDC granted ALZA an option to license certain
products from TDC. No amounts have been paid by either of
ALZA or TDC to the other pursuant to such agreements since
the commencement of TDC's second full fiscal year preceding
the date of this Statement except as set forth in section
(iv) below.
5
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(iv) In January of 1997, ALZA exercised its option to license
from TDC for 12 European countries a second-generation
transdermal testosterone product to follow ALZA's existing
Testoderm(R) product. ALZA entered into an agreement with
Ferring N.V. to market the TDC product in such countries.
As a result of ALZA's exercise of this license option and
the arrangement with Ferring, ALZA paid TDC $580,000, a
portion of the upfront payment ALZA received from Ferring,
and will receive payments from ALZA based on sales of the
product in the 12 European countries covered by ALZA's
agreement with Ferring.
(v) In February of 1997, ALZA exercised its option to license
from TDC a once-daily OROS(R) hydromorphone product on a
worldwide basis. ALZA entered into an agreement with Knoll
Pharmaceutical Company and Knoll A.G. (together "Knoll")
for the further clinical development and worldwide
commercialization of that product. As a result of ALZA's
exercise of the license for such product, TDC will receive
a portion of the amounts ALZA receives from Knoll based on
worldwide sales of the product, and a portion of future
milestone payments made by Knoll to ALZA.
(2) None.
(b) Not applicable.
Item 4.
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(a) ALZA exercised its option to purchase all of TDC's Class A Common
Stock (the "Purchase Option") on August 25, 1997 by delivering an
exercise notice to TDC. The terms of the Purchase Option are set
forth in TDC's Restated Certificate. Pursuant to the Restated
Certificate, the exercise price of the Purchase Option is $100
million. ALZA has determined that September 29, 1997 will be the
closing date for the purchase ("Closing Date"). ALZA will deposit
the exercise price with Boston EquiServe, L.P., as payment agent
("Payment Agent"), on or prior to that date. Promptly following the
Closing Date, and upon receipt of stock certificates for the Class A
Common Stock as instructed by the Payment Agent, the Payment Agent
will distribute the exercise price pro rata to each person or entity
who was a holder of Class A Common Stock at the close of business on
the Closing Date. In the case of any person or entity holding Class
A Common Stock in a brokerage account, the broker will credit the
relevant account with such amount.
6
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In accordance with the terms of the Restated Certificate, the
stockholders of the Class A Common Stock do not need to take any steps
to approve the purchase. Title to the Class A Common Stock will
automatically vest in ALZA on the Closing Date and the exercise price
will be paid to such stockholders, upon tender of their stock
certificates directly or through their brokers, in accordance with
their respective interests.
(b) Not applicable.
Item 5.
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Subsequent to the purchase of the Class A Common Stock by ALZA, TDC will be
a wholly-owned subsidiary of ALZA. ALZA anticipates de-listing TDC from the
Nasdaq National Market and suspending its reporting requirements with the
Securities and Exchange Commission (the "Commission") by filing a Form 15. ALZA
intends to replace TDC's officers and Board of Directors with ALZA employees.
Item 6.
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(a) The total consideration for the purchase by ALZA of the Class A Common
Stock is $100 million. The source of these funds is ALZA's cash, cash
equivalents and marketable securities.
(b) ALZA's reasonably itemized statement of expenses for the transaction
includes filing fees of $20,000, printer fees of approximately
$5,000, accounting fees of approximately $2,000 and legal fees of
approximately $50,000. TDC will not be responsible for paying any or
all of such expenses.
(c) Not applicable.
(d) Not applicable.
Item 7.
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(a) The purpose of this transaction is to acquire the rights to all
products and product candidates developed or under development by ALZA
and TDC pursuant to the Development Agreement dated March 10, 1993
between ALZA and TDC. ALZA believes that it is in the best interests
of ALZA and ALZA's stockholders to exercise the Purchase Option at
this time.
7
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(b) As ALZA is exercising certain previously granted rights, no other
options were considered.
(c) The transaction is structured pursuant to the terms of the previously
granted Purchase Option as set forth in TDC's Restated Certificate.
This transaction is being undertaken at this time because TDC has no
significant funds remaining to expend on product development and the
Purchase Option otherwise would have expired no later than January 15,
1998.
(d) The transaction reported herein will cause TDC to become a wholly-
owned subsidiary of ALZA. TDC will be de-listed from the Nasdaq
National Market and will have its public reporting obligations
suspended. The federal tax consequences to TDC are that utilization of
TDC's losses and other tax carryovers may be limited under Section 382
of the Internal Revenue Code of 1986, as amended (the "Code").
The transaction reported herein will cause ALZA to own 100% of TDC.
As a result, ALZA will indirectly own all of the assets of TDC.
Accordingly, ALZA will report 100% of the net book value and net
earnings of TDC. There will be no significant federal tax
consequences to ALZA as a result of the exercise of the Purchase
Option.
The transaction reported herein will cause each stockholder of Class A
Common Stock to dispose of his or her Class A Common Stock for
consideration equal to that stockholder's pro rata share of the
exercise price identified in Item 4(a) above. This consideration is
the amount specified in the Restated Certificate provided in 1993.
The federal income tax consequences to such stockholder, in general
terms, are set forth below.
The following discussion sets forth federal income tax considerations
under the Code for stockholders with respect to cash received by
stockholders of TDC for the Class A Common Stock. This discussion is
intended only to provide general information to stockholders that are
subject to United States federal income tax; it may not address all
relevant federal income tax consequences to such persons or to other
categories of stockholders, e.g., foreign persons, dealers in
securities, and stockholders that are exempt from federal income tax.
This discussion is based upon present federal income tax laws and does
not attempt to anticipate changes, including changes in tax rates,
that may be made under currently pending legislative proposals. This
discussion assumes that the Class A Common Stock was at all relevant
times capital assets of the stockholders. This discussion does not
address state, local or foreign tax considerations. ALL STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
Holders of Class A Common Stock will have a capital gain or loss due
to ALZA's exercise of the Purchase Option equal to the difference
between (a)
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<PAGE>
the amount of the cash received, and (b) their basis in the Class A
Common Stock surrendered. Gain or loss due to the exercise of the
Purchase Option should be long-term if the Class A Common Stock has
been held for more than one year at the time of exercise of the
Purchase Option. The Internal Revenue Service ("IRS") may assert,
however, that the holding period of the Class A Common Stock does not
begin until such date as the Purchase Option is exercised and that
capital gain or loss upon exercise of the Purchase Option is therefore
short-term. Limitations may apply to deduction of capital loss.
To the extent that holders of Class A Common Stock have not provided
appropriate taxpayer identification numbers on IRS Form W-9 or a
substitute therefor, such stockholders may be subject to backup
withholding by ALZA.
Item 8.
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(a) ALZA reasonably believes that the transaction reported herein is fair
to the holders of TDC Class A Common Stock. None of ALZA's directors
dissented to the transaction. Julian N. Stern and Dr. Alejandro
Zaffaroni abstained from voting on such transaction because they each
own shares of Class A Common Stock.
(b) The material factor upon which the belief stated in Item 8(a) is based
is set forth below.
(i) Stockholder Awareness of Purchase Option
The initial public holders of the Class A Common Stock received
such stock as a dividend from ALZA in 1993. The Purchase Option
was a feature of the Class A Common Stock at that time and was
described in the ALZA Information Statement, dated March 10,
1993, distributed in connection with this distribution. The
Purchase Option was also set forth in the Restated Certificate,
which was publicly filed both with the Delaware Secretary of
State and the Commission prior to the distribution. Pursuant to
the Restated Certificate, the stock certificates for the Class
A Common Stock were legended to put the holders thereof on
further notice about the Purchase Option. Stockholders were
also advised of the Purchase Option in each Form 10-K (since
the date of the distribution) and each recent Form 10-Q public
filing made by each of ALZA and TDC with the Commission.
Accordingly, the Purchase Option was present in the initial
public distribution of the Class A Common Stock, was
disseminated in TDC's charter documents, was discussed
9
<PAGE>
in ALZA's and TDC's periodic filings and was legended on each
stock certificate for the Class A Common Stock. As a result,
every TDC Class A Common stockholder received substantial
notice as to the terms of the Purchase Option prior to making
any investment decision with respect to the Class A Common
Stock. In addition, recent public filings by both ALZA and TDC
have indicated the status of funds available for product
development and therefore when the potential exercise of the
Purchase Option was likely to be triggered. During 1997, both
parties have indicated that these funds would likely be
exhausted during the third quarter of 1997.
(c) The Restated Certificate does not require any approval of the
stockholders of TDC for the exercise of the Purchase Option.
(d) After making reasonable inquiry of management of TDC, ALZA believes
that no directors of TDC have retained an unaffiliated representative
to act solely on behalf of any security holders of TDC as no action is
required by either TDC's directors or security holders to effect the
Purchase Option.
(e) See Item 8(d) above.
(f) Not applicable.
Item 9.
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(a) Neither ALZA nor, to the best of ALZA's knowledge after reasonable
inquiry of management of TDC, TDC, has received any report, opinion
(other than an opinion of counsel) or appraisal from an outside party
which is materially related to the transaction described herein.
(b) Not applicable.
(c) Not applicable.
Item 10.
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(a) As of August 25, 1997, no shares of Class A Common Stock of TDC are
beneficially owned by ALZA, by any pension, profit sharing or similar
plan of ALZA or, to ALZA's knowledge after reasonable inquiry of
management of TDC, by TDC, by each executive officer and director of
either ALZA, TDC, any person controlling either ALZA or TDC or any
executive officer of any corporation ultimately in control of either
ALZA or TDC, or by any associate or majority owned subsidiary of
either ALZA or TDC except as set out on the following table:
10
<PAGE>
<TABLE>
<CAPTION>
Immediately
Direct Indirect Exercisable
Name Position Ownership Ownership Options
- ---- -------- --------- --------- -------
<S> <C> <C> <C> <C>
Blaschke, Dr. Terrence F. Director of TDC 4,500 6,200 40,000
Cozadd, Bruce C. Senior Vice President and 15
Chief Financial Officer of ALZA
Fethe, Harold Vice President, Human 3,304
Resources of ALZA
Fulscher, Dr. Gary V. Senior Vice President, 4,489 4,693
Operations of ALZA
Hoffmann, David R. Vice President, Finance and 1,622 6,223
Secretary of TDC
Lairson, Dr. Paul D. Director of TDC 40,000
Martin, Suzanne G. Vice President, Research and 695
Development Administration of TDC
Neil, Gary L., Ph.D. Director, President and Chief 12,000 160,000
Executive Officer of TDC
Phipps, Allen M. Chairman of the Board of TDC 10,000 60,000
Sommers, William P, Ph.D. Director of TDC 2,919 40,000
Stern, Julian N. Director and Secretary of ALZA 9,393
Theeuwes, Dr. Felix President, New Ventures and 413 17,064
Chief Scientist of ALZA
Zaffaroni, Dr. Alejandro Co-Chairman of the Board and 95,594
Founder of ALZA
</TABLE>
As of December 31, 1996 ALZA's 401(k) tax deferral investment plan owned 18,902
shares of Class A Common Stock for the accounts of certain ALZA employees. The
employees direct the investment of these accounts. Some of the shares reported
as indirectly owned by ALZA employees in the table above are included in the
foregoing amount.
(b) None.
11
<PAGE>
Item 11.
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The arrangements between ALZA and TDC have been described in Items 1, 4,
and 6 herein. A summary of this information is set forth below.
Article FIFTH of the Restated Certificate provides ALZA with the Purchase
Option. The Purchase Option provides that ALZA may purchase all, but not less
than all, of the issued and outstanding Class A Common Stock at any time prior
to the earlier of: (i) 60 days after the later of (a) the date of filing with
the Commission or (b) the due date of TDC's Form 10-K or Form 10-Q containing a
balance sheet showing that TDC has less than an aggregate of $5 million in cash,
cash equivalents, and short-term and long-term investments, or (ii) June 30,
1999. ALZA may exercise the Purchase Option at any time prior to such expiration
date by mailing an exercise notice to TDC. This exercise notice must identify
certain information, including a Closing Date for the purchase and the exercise
price and form of consideration to be paid to TDC stockholders. The Closing Date
must be within 90 days of the exercise date but may be extended by ALZA in
certain circumstances outlined in the Restated Certificate, such as the need for
regulatory clearance. ALZA exercised the Purchase Option by providing the
foregoing exercise notice to TDC on August 25, 1997. The Closing Date has been
set for September 29, 1997.
From the date of exercise of the Purchase Option until the Closing Date,
TDC is prohibited by the terms of the Restated Certificate from engaging in any
extraordinary corporate activity without the prior written consent of ALZA.
Article FOURTH of the Restated Certificate provides that as soon as ALZA
exercises the Purchase Option, TDC's board shall cease to be classified, the
number of authorized TDC directors shall be increased in accordance with a
formula set forth in the Restated Certificate and the holders of TDC's Class B
Common Stock (currently ALZA) shall have the sole right to appoint the directors
thereafter.
Within 15 days after the mailing of the exercise notice to TDC, TDC must
provide ALZA with a status statement containing certain financial information.
This financial information includes all actual and contingent liabilities of
TDC. ALZA then may reduce the exercise price by the amount of such liabilities.
It is not anticipated that any reduction will occur in the current circumstances
of this transaction.
ALZA must designate a payment agent who will distribute the exercise price
to the TDC stockholders. ALZA must also deposit both the exercise price, and
irrevocable instructions to pay the exercise price to TDC stockholders of record
as of the close of business on the Closing Date, with the payment agent on or
prior to the Closing Date. ALZA has designated Boston EquiServe, L.P., as
payment agent.
12
<PAGE>
On the Closing Date, title to the Class A Common Stock will automatically
transfer to and vest in ALZA without further act of any person. The Payment
Agent will then disburse the exercise price to TDC stockholders upon tender of
stock certificates to the Payment Agent or, if the Class A Common Stock is held
in a brokerage account, that account will be credited with such amount.
Item 12.
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(a) Not applicable.
(b) Not applicable.
Item 13.
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(a) Appraisal rights are not afforded under either applicable law or the
Restated Certificate to TDC stockholders in respect of the exercise of
the Purchase Option and none will be afforded by either ALZA or
TDC. ALZA is not aware of any rights available to objecting holders
of Class A Common Stock under applicable law.
(b) ALZA is unaware, after making reasonable inquiry of management of TDC,
of any grant of access to unaffiliated security holders to the
corporate files of either TDC or ALZA or the appointment of counsel or
appraisal services for unaffiliated security holders at the expense of
either TDC or ALZA.
(c) Not applicable.
Item 14.
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(a) TDC financial data is attached to this Statement as Exhibits 99.1,
99.2 and 99.3. TDC had no material fixed charges for the two most
recent fiscal years and the appropriate interim period. Book value
per share of Class A Common Stock for December 31, 1996 was $8.94 and
for June 30, 1997 was $2.82.
(b) Not applicable.
Item 15.
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(a) Not applicable.
(b) None.
Item 16.
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Not applicable.
13
<PAGE>
Item 17.
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17(c) Restated Certificate of Incorporation of Therapeutic Discovery
Corporation as filed with the Secretary of State of the State of Delaware on
April 1, 1993.
17(d) Notice to Stockholders of Therapeutic Discovery Corporation (for
purposes of this Statement only, Annex A thereto being Item 17(c) above).
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99.1 Financial information extracted from TDC Form 10-Q for the
quarterly period ended June 30, 1997.
99.2 Financial information extracted from TDC Form 10-K for the year
ended December 31, 1996.
99.3 Financial information extracted from TDC Form 10-K for the year
ended December 31, 1995.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
August 27, 1997 ALZA CORPORATION
By: /s/ BRUCE C. COZADD
____________________________
Bruce C. Cozadd,
Senior Vice President and
Chief Financial Officer
The original statement shall be signed by each person on whose behalf the
statement is filed or his authorized representative. If the statement is signed
on behalf of a person by his authorized representative (other than an executive
officer or general partner of the person filing this statement), evidence of the
representative's authority to sign on behalf of such person shall be filed with
the statement. The name and any title of each person who signs the statement
shall be typed or printed beneath his signature.
<PAGE>
ANNEX 17(c)
State of Delaware
Office of the Secretary of State PAGE 1
________________________________
I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
RESTATED CERTIFICATE OF INCORPORATION OF "THERAPEUTIC DISCOVERY CORPORATION"
FILED IN THIS OFFICE ON THE FIRST DAY OF APRIL, A.D. 1993, AT 9 O'CLOCK A.M
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO NEW CASTLE
COUNTY RECORDER OF DEEDS ON THE FIRST DAY OF APRIL, A.D. 1993 FOR RECORDING.
* * * * * * * * * *
/s/ William T. Quillen
[SEAL OF STATE OF DELAWARE] ---------------------------------------------
William T. Quillen, Secretary of State
AUTHENTICATION: *3843907
DATE: 04/01/1993
930915252
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
THERAPEUTIC DISCOVERY CORPORATION
(Originally incorporated on November 12, 1992)
FIRST: Name. The name of this corporation is Therapeutic Discovery
----
Corporation (the "corporation").
SECOND: Registered Office; Registered Agent. The address of the
-----------------------------------
registered office of this corporation in the State of Delaware is 1013 Centre
Road, in the City of Wilmington, County of New Castle. The name of the
registered agent of this corporation at such address is Corporation Service
Company.
THIRD: Purpose. The purpose of this corporation is to engage in
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any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH: Authorized Capital Stock.
------------------------
(A) This corporation is authorized to issue two classes of shares,
which shall be known as Class A Common Stock and Class B Common Stock. The total
number of shares of stock of all classes that this corporation is authorized to
issue is 12,000,100. The total number of shares of Class A Common Stock which
this corporation is authorized to issue is 12,000,000. The total number of
shares of Class B Common Stock which this corporation is authorized to issue is
100. Each share of Class A Common Stock and Class B Common Stock shall have a
par value of $0.01.
Effective immediately upon the filing of this Restated Certificate of
Incorporation, each share of Common Stock, par value $1.00 per share, of this
corporation outstanding immediately prior to such filing shall be converted into
and reclassified as one share of Class B Common Stock.
(B) The powers, designations, preferences, and relative,
participating, optional or other special rights granted to, and the
qualifications, limitations and restrictions imposed upon, the Class A Common
Stock and Class B Common Stock and the respective holders thereof are as
follows:
(1) Redemption. The shares of Class A Common Stock are redeemable
----------
and may be redeemed as provided in (but only as provided in) ARTICLE FIFTH,
Section (F).
(2) Dividends. The holders of shares of Class A Common Stock and
---------
Class B Common Stock shall be entitled to receive per share and without
preference such dividends as may be declared by the Board of Directors from
time to time
<PAGE>
out of funds legally available therefor. No dividend may be declared on the
Class A Common Stock unless the same per share dividend is declared on the
Class B Common Stock, and no dividend may be declared on the Class B Common
Stock unless the same per share dividend is declared on the Class A Common
Stock. Dividends may not be declared, nor may shares of Class A Common
Stock or Class B Common Stock be repurchased or redeemed (other than
pursuant to Section (F) of Article FIFTH) if, after payment of such
dividend, or after effecting such repurchase or redemption, the amount of
this corporation's cash, cash equivalents, short and long term investments
would be less than the amount of Available Funds as of the date of such
dividend, repurchase or redemption.
(3) Liquidation. In the event of voluntary or involuntary liquidation
-----------
of this corporation, the holders of the Class A Common Stock and Class B
Common Stock of the corporation shall be entitled to receive, on a pro rata
per share basis and without preference, all of the remaining assets of this
corporation available for distribution to its stockholders.
(4) Voting Rights. Except as otherwise required by law or provided
-------------
herein, the holders of Class A Common Stock and Class B Common Stock shall
vote together as a single class. Each holder of Class A Common Stock and
Class B Common Stock shall have one vote for each share standing in his or
her name on all matters submitted to a vote of holders of the common
shares. At any meeting of the stockholders of this corporation, the
determination of a quorum shall be based upon the presence of shares of
Class A Common Stock and Class B Common Stock representing a majority of
the voting power of all of the shares of Class A Common Stock and Class B
Common Stock. This corporation shall not, without the affirmative vote of
the holders of a majority of the issued and outstanding shares of Class B
Common Stock, voting separately and as a class, (a) alter or change the
powers, designations, preferences and relative, participating, optional or
other special rights granted to, or the qualifications, limitations and
restrictions imposed upon, the Class A Common Stock or the Class B Common
Stock, (b) alter or change Articles FOURTH, FIFTH, SIXTH, SEVENTH or EIGHTH
of this Restated Certificate of Incorporation, (c) authorize the creation
or issuance of any additional class or series of stock, or otherwise make
any amendment to this Certificate of Incorporation that would alter the
rights of the holders of the Class B Common Stock, (d) undertake the
voluntary dissolution, liquidation or winding up of this corporation, (e)
merge or consolidate this corporation with or into any other corporation or
entity, (f) sell, lease, exchange, transfer or otherwise dispose of any
substantial asset of this corporation or (g) alter the bylaws of this
corporation in a manner
-2-
<PAGE>
described in the last sentence of ARTICLE EIGHTH. Furthermore, from and
after the Purchase Option Exercise Date, as defined in Article FIFTH, (i)
the board of directors of this corporation shall cease to be classified;
(ii) the number of directors of this corporation shall be increased to a
number equal to (a) two times the maximum number of authorized directors
(counting for this purpose both directors in office and vacant
directorships), plus (b) one; and (iii) the holders of the Class B
----
Common Stock shall have the sole right to elect the directors of this
corporation, including directors to fill the new directorships created
pursuant to clause (ii). No vacancy created as a result of the increase in
the size of the board of directors pursuant to the preceding sentence shall
be filled other than by the holders of the Class B Common Stock.
(5) Conversion. The Class B Common Stock shall automatically convert
----------
into fully paid and non-assessable shares of Class A Common Stock of this
corporation at 12:01 a.m. New York time on the day immediately following
the expiration of the Purchase Option granted in Article FIFTH. The Class B
Common Stock shall convert into Class A Common Stock at the rate of one
share of Class A Common Stock for each share of Class B Common Stock.
(6) Transfer of Class A Common Stock. Until the first to occur of (i)
--------------------------------
the third anniversary of the date (the "Distribution Date") upon which
certificates representing Units comprised in part of shares of Class A
Common Stock are distributed by ALZA Corporation (together with its
successors and assigns, "ALZA") to the holders of ALZA's Class A Common
Stock or (ii) the Purchase Option Exercise Date, the Class A Common Stock
may be transferred only as part of Units. Each "Unit" consists of one share
of Class A Common Stock and one warrant to acquire one-eighth of one share
of ALZA Common Stock.
FIFTH. Purchase Option.
---------------
(A) Definitions. For purpose of this Restated Certificate of
-----------
Incorporation, the following terms shall have the following definitions:
(1) ALZA Common Stock means the Class A Common Stock of ALZA or, if
-----------------
such Class A Common Stock is converted into or exchanged for another class or
series of stock of ALZA or any other corporation, such other class or series of
stock.
(2) Available Funds means, as of any date of determination, the sum
---------------
of (a) $250 million (contributed by ALZA in or about March 1993), plus (b)
----
interest and other income earned through investment of such funds until their
expenditure pursuant to the Development Contract through the date of
-3-
<PAGE>
determination, less (c) reasonable ongoing administrative expenses of this
----
corporation, including legal and accounting expenses, incurred through the date
of determination, less (d) the costs associated with the distribution to ALZA's
----
stockholders of the Units.
(3) Development Contract means the Development Agreement dated as of
--------------------
March 10, 1993 between ALZA and this corporation, as such contract may be
amended or modified from time to time by amendments approved by ALZA and the
board of directors of this corporation.
(4) Fair Market Value means, with reference to ALZA Common Stock, (a)
-----------------
if ALZA Common Stock is listed on the New York Stock Exchange or any other
securities reporting closing sales prices (including without limitation the
NASDAQ National Market System), the average of the closing sales price of ALZA
Common Stock on such exchange (which shall be the New York Stock Exchange or, if
ALZA Common Stock is not then traded on such exchange, on the principal exchange
on which ALZA Common Stock is then traded), for the five trading days ending
with the trading day that is two trading days prior to the date of
determination, (b) if ALZA Common Stock is not listed on any securities exchange
described in clause (a) but is quoted on NASDAQ or another quotation system
providing bid prices, the average (over the five day period described in clause
(a)) of the bid prices for each day in such period on NASDAQ (or, if ALZA Common
Stock is not then quoted on NASDAQ, the largest quotation system on which ALZA
Common Stock is then quoted), and (c) if ALZA Common Stock is not listed on any
exchange or quoted on any quotation system, the value thereof as determined in
good faith by ALZA's board of directors.
(5) Final Purchase Option Exercise Price means the Purchase Option
------------------------------------
Exercise Price minus (a) the amount by which this corporation's Liabilities
-----
existing at the Purchase Option Exercise Date (other than liabilities pursuant
to the Development Contract) exceed the aggregate of this corporation's then
existing cash, cash equivalents and short-term and long-term investments (but
excluding from such cash, cash equivalents and short-term and long-term
investments the amount of Available Funds determined as of the Purchase Option
Exercise Date which had not, as of such date, been paid by this corporation in
accordance with the Development Contract); and minus (b), if the Purchase Option
-----
Exercise Price was determined based upon the provisions of clause (c) of
Section (A)(10) of this Article FIFTH, any additional amounts paid by this
corporation pursuant to the Development Contract from the date of the last
report of such expenditures provided by this corporation to ALZA pursuant to the
Development Contract to the Purchase Option Exercise Date.
(6) Liabilities means, with respect to this corporation, (a) all
-----------
liabilities required to be reflected or
-4-
<PAGE>
reserved against in this corporation's financial statements under generally
accepted accounting principles consistently applied ("GAAP"), (b) any guaranty
of any indebtedness of another person and (c) any reimbursement or similar
obligation with respect to any letter of credit issued for the account of this
corporation or as to which this corporation is otherwise liable. Liabilities of
the type described in (b) and (c) shall be valued at the full amount of the
potential liability of the corporation thereon.
(7) License Agreement means any License Agreement between ALZA and
-----------------
this corporation entered into upon the exercise by ALZA of the license option
granted to it pursuant to the License Option Agreement.
(8) License Option Agreement means the License Option Agreement
------------------------
between ALZA and this corporation dated as of March 10, 1993, as such agreement
may be amended or modified from time to time by amendments approved by ALZA and
the board of directors of this corporation.
(9) Purchase Option Exercise Date means the date upon which ALZA
-----------------------------
notifies this corporation in writing of its exercise of the Purchase option as
provided in Section (C) of this Article FIFTH.
(10) Purchase Option Exercise Price means the greatest of the
------------------------------
following:
(a) the greater of (i) 25 times the Royalties paid by or due from
ALZA to this corporation, plus 25 times any Royalties that would have been
----
paid by or due from ALZA to this corporation if ALZA had not exercised its
right to buy out its obligation to pay any such Royalties as provided in
Section 7.5 of the Development contract or Section 3.4 of any License
Agreement, in each case determined with reference to the most recent four
complete calendar quarters preceding the Purchase Option Exercise Date for
which such Royalties were paid by or due from ALZA or would have been paid
by or due from ALZA, or (ii) 100 times such Royalties paid by or due from
ALZA to this corporation during the most recent complete calender quarter
for which such Royalties were paid or due; provided, that in the case of
--------
either (i) or (ii) the amount so determined shall be reduced by any amounts
previously paid by ALZA to this corporation to buy out any obligation to
pay Royalties as provided in the Development Contract or any License
Agreement;
(b) the Fair Market Value of one million shares of ALZA Common Stock
(which number of shares shall be proportionately adjusted for any stock
dividend, split-up, combination or reclassification of the ALZA Common
Stock) determined as of the Purchase Option Exercise Date;
-5-
<PAGE>
(c) $325 million less the total amount paid by this corporation under
----
the Development Contract as last reported by this corporation to ALZA
through the Purchase Option Exercise Date; and
(d) $100 million.
(11) Purchase Option Expiration Time means 11.59 p.m. New York time on
-------------------------------
December 31, 1999; provided that such date will be extended for successive one
year periods if, as of any June 30 beginning with June 30, 1999, this
corporation has not paid at least 90% of all Available Funds pursuant to the
Development Contract. Notwithstanding the foregoing sentence, the Purchase
Option Expiration Time will in no event occur later than 11.59 p.m. New York
time on the 60th day after the later of (a) the date of filing with the
Securities and Exchange Commission or (b) the due date of this corporation's
Annual Report on Form 10-K or Quarterly Report on Form 10-Q containing a balance
sheet showing that this corporation has less than an aggregate of $5 million in
cash, cash equivalents, and short-term and long-term investments.
(12) Royalties means (a) royalties paid or other payments made by
---------
ALZA to this corporation under a License Agreement in respect of any product
licensed by ALZA from this corporation pursuant to the License Option Agreement
and (b) payments made by ALZA under Section 7.4 of the Development Contract. In
determining the amount of Royalties for purposes of Article FIFTH, Section (A)
(10) (a), all Special Royalty Payments are to be amortized equally over a period
of 28 calendar quarters beginning with the calendar quarter in which such
Special Royalty Payment is made, regardless of the treatment of such Special
Royalty Payments in determining Royalties actually paid under any License
Agreement or the Development Contract.
(13) Special Royalty Payment means front-end distribution fees,
-----------------------
prepaid royalties and similar one-time, infrequent or special payments.
(14) Status Statement means, as of any date, a balance sheet dated as
----------------
of such date, together with (a) a statement and brief description of all other
liabilities of this corporation constituting Total Liabilities as of such date
not reflected on such balance sheet, (b) a statement of the amount of Available
Funds remaining as of such date, and (c) a statement of the total amounts paid
by this corporation pursuant to the Development Contract through such date.
(15) Total Liabilities means, with respect to this corporation, (a)
-----------------
all Liabilities and (b) any other debts, liabilities or obligations, absolute or
contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, including all costs and expenses
relating thereto, and including those debts, liabilities
-6-
<PAGE>
and obligations arising under law, rule or regulation, or under any pending or
threatened action, suit or proceeding, or any order or consent decree of any
governmental entity or any award or any arbitrator of any kind, and those
arising under any contract, commitment or undertaking.
(B) Grant of Option. ALZA is hereby granted an exclusive irrevocable
---------------
purchase option to purchase all issued and outstanding shares of Class A Common
Stock of this corporation for the Final Purchase Option Exercise Price (the
"Purchase Option"). The Purchase Option, if exercised, must be exercised as to
all, but not less then all, issued and outstanding shares of Class A Common
Stock and may be exercised at any time at or prior to the Purchase Option
Expiration Time. ALZA shall elect, at the time of exercise of the Purchase
Option, to pay all or any portion of the Final Purchase Option Exercise Price in
cash, ALZA Common Stock (valued at its Fair Market Value determined as of the
Purchase Option Exercise Date), or any combination thereof. The Purchase Option
may, at ALZA's option, be assigned or otherwise transferred to any person or
entity, including this corporation.
(C) Manner of Exercise. The Purchase Option shall be exercised at or
------------------
before the Purchase Option Expiration Time by written notice (the "Exercise
Notice") from ALZA to this corporation stating that the Purchase Option is
being exercised and setting forth (1) the Purchase Option Exercise Price; (2)
the portion, if any, of the Purchase Option Exercise Price to be paid in cash
and the portion, if any, of the Purchase Option Exercise Price to be paid in
ALZA Common Stock, and if any portion of the Purchase Option Exercise Price is
to be paid in ALZA Common Stock, stating the Fair Market Value of such ALZA
Common Stock determined as of the Purchase Option Exercise Date, and (3) a
closing date (the "Closing Date") on which all of the issued and outstanding
shares of Class A Common Stock will be purchased. The Purchase Option shall be
deemed to be exercised as of the date of mailing by first class mail of the
Exercise Notice to this corporation.
(D) Closing.
-------
(1) Closing Date; Corporation. Except as set forth below, the Closing
-------------------------
Date shall be the date specified as such in the Exercise Notice, which date
specified shall be no later than 90 days after the Purchase Option Exercise
Date. The Closing Date may be extended by ALZA if, the judgment of ALZA, an
extension of the Closing Date is necessary to obtain any governmental or third
party consent to the purchase of the Class A Common Stock, to permit any
necessary registration statement or similar filing to be declared effective, or
to permit the expiration prior to the Closing Date of any statutory or
regulatory waiting period. ALZA may extend the Closing Date for the reasons set
forth in the preceding sentence by delivering written notice of such extension
to this corporation on or prior
-7-
<PAGE>
to the previously scheduled Closing Date. This corporation shall cooperate with
ALZA to effect the closing of the Purchase Option, including without limitation
seeking any required third-party or governmental consents, and filing any
applications, notifications, registration statements or the like which may be
necessary to effect the closing.
(2) Certain Restrictions Following Purchase Option Exercise Date.
------------------------------------------------------------
From the Purchase Option Exercise Date until the Closing Date, this corporation
will not take any of the following actions (or permit any such actions to be
taken on its behalf) except with the prior written consent of ALZA:
(a) borrow money, or mortgage, remortgage, pledge, hypothecate or
otherwise encumber any of its assets;
(b) sell, lease, lend, exchange or otherwise dispose of any of its
assets, other than sales of inventory in the ordinary course of business;
(c) pay or declare any dividends or make any distributions on or in
respect of any shares of its capital stock;
(d) default in its obligations under any material contract,
agreement, commitment or undertaking of any kind or enter into any material
contract, agreement, purchase order or other commitment; or
(e) enter into any other transaction or agreement or arrangement, or
incur any liabilities, not in the ordinary course of this corporation's
business.
(3) Determination of Final Purchase Option Exercise Price. Not later
-----------------------------------------------------
than 15 business days following the Purchase Option Exercise Date, this
corporation shall deliver a final Status Statement to ALZA prepared as of the
Purchase Option Exercise Date. Following receipt of such Status Statement and
completion of any other investigation as ALZA shall deem necessary or
appropriate, and prior to the Closing Date, ALZA shall determine the Final
Purchase Option Exercise Price by making the adjustments to the Purchase Option
Exercise Price contemplated by Section (A)(5) of this Article FIFTH and shall
notify this corporation of such determination.
(4) Payment of Final Purchase Option Exercise Price. On or before the
-----------------------------------------------
Closing Date, ALZA shall deposit the full amount of the Final Purchase Option
Exercise Price with a bank or banks or similar entities designated by ALZA
(which may include ALZA's transfer agent if shares of ALZA Common Stock are
being delivered) to pay, on ALZA's behalf, the Final Purchase Option Exercise
Price (the "Payment Agent"). Funds, if any, and ALZA Common Stock, if any,
deposited with the Payment Agent shall be delivered in trust for the benefit of
the holders of Class A
-8-
<PAGE>
Common Stock, and ALZA shall provide the Payment Agent with irrevocable
instructions to pay, on or after the Closing Date, the Final Purchase Option
Exercise Price for the shares of Class A Common Stock to the holders of record
thereof determined as of the Closing Date. Payment for shares of Class A Common
Stock shall be mailed to each holder at the address set forth in this
corporation's records or at the address provided by each holder or, if no
address is set forth in this corporation's records for a holder or provided by
such holder, to such holder at the address of this corporation. At ALZA's
request, this corporation shall provide, or shall cause its transfer agent to
provide, to ALZA or to the Payment Agent, free of charge, a complete list of the
record holders of shares of Class A Common Stock, including the number of shares
of Class A Common Stock held of record and the address of each record holder.
(E) Transfer of Title. Transfer of title to all of the issued and
-----------------
outstanding shares of Class A Common Stock shall be deemed to occur
automatically on the Closing Date and thereafter this corporation shall be
entitled to treat ALZA as the sole holder of all of the issued and outstanding
shares of its Class A Common Stock, notwithstanding the failure of any holder of
Class A Common Stock to tender the certificates representing such shares to the
Payment Agent. This corporation shall instruct its transfer agent not to accept
any shares of Class A Common Stock for transfer on and after the Closing Date,
except for the shares of Class A Common Stock transferred to ALZA. This
corporation shall take all actions reasonably requested by ALZA to assist in
effectuating the transfer of shares of Class A Common Stock in accordance with
this Article FIFTH.
(F) Redemption of Class A Common Stock. At ALZA's election (which
----------------------------------
election may be made at any time, provided it is made, by delivery of written
notice thereof to this corporation, not less than five days prior to the Closing
Date), this corporation shall, subject to applicable restrictions in the
Delaware General Corporation Law, redeem on the Closing Date all issued and
outstanding shares of Class A Common Stock for an aggregate redemption price
equal to the Final Purchase Option Exercise Price.
SIXTH. Protective Provisions.
---------------------
(A) Legend. Certificates evidencing shares of Class A Common Stock
------
issued by or on behalf of this corporation shall bear a legend in substantially
the following form:
"The shares of Therapeutic Discovery Corporation evidenced hereby are
subject to an option in favor of ALZA Corporation, its successors and assigns,
as described in the Restated Certificate of Incorporation of Therapeutic
Discovery Corporation to purchase such shares at a purchase price determined in
accordance with Article FIFTH thereof exercisable
-9-
<PAGE>
by notice delivered to this Corporation at or prior to the Purchase Option
Expiration Time (as defined in the Restated Certificate of Incorporation of
Therapeutic Discovery Corporation). Copies of the Restated Certificate of
Incorporation of Therapeutic Discovery Corporation are available at the
principal place of business of Therapeutic Discovery Corporation at 1290 Page
Mill Road, P. O. Box 10950, Palo Alto, California 94303-0860 and will be
furnished to any stockholder on request and without cost."
(B) No Conflicting Action. This corporation shall not take, nor
---------------------
permit any other person or entity within its control to take, any action
inconsistent with ALZA's rights under Article FIFTH. This corporation shall not
enter into any arrangement, agreement or understanding, whether oral or in
writing, that is inconsistent with or limits or impairs the rights of ALZA and
the obligations of this corporation hereunder, including without limitation any
arrangement, agreement or understanding which imposes any obligation upon this
corporation, or deprives this corporation of any material rights, as a
consequence of the exercise of the Purchase Option or the acquisition of the
outstanding Class A Common Stock pursuant thereto.
(C) Inspection and Visitation Rights; Status Statements. ALZA shall
---------------------------------------------------
have the right to inspect and copy, on reasonable notice and during regular
business hours, the books and records of this corporation. ALZA shall also have
the right to request from time to time (but not more frequently than monthly) a
Status Statement as of such date as ALZA may request. Each Status Statement
shall be sent within seven days of request by ALZA. ALZA shall also have the
right to send a non-voting representative to attend all meetings of this
corporation's board of directors and any committees thereof. Such
representative shall receive notice of all meetings of this corporation's board
of directors and each committee thereof, as well as copies of all documents and
other materials provided to any directors of this corporation in connection
with any such meeting not later than the time such materials are provided to
other directors. Such representative shall also be provided with copies of all
resolutions adopted or proposed to be adopted by unanimous written consent not
later than the time such resolutions are provided to other directors.
SEVENTH: Board of Directors.
------------------
(A) The number of directors which shall constitute the whole Board of
Directors of this corporation shall initially be three, but may be increased or
decreased from time to time by a resolution duly adopted by the Board of
Directors.
(B) Nomination of candidates for election to the Board of Directors
shall be made as provided in the bylaws of this corporation. Election of
directors need not be by written ballot.
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<PAGE>
(C) 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 1994; each
initial director in Class II shall hold office until the annual meeting of
stockholders in 1995; and each initial director in Class III shall hold office
until the annual meeting of stockholders in 1996. Notwithstanding the foregoing
provisions of this Article, each director shall serve until his successor is
duly elected and qualified or until his death, resignation or removal.
(D) In the event of any increase or decrease in the authorized number
of directors, the 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 as
possible. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
(E) Except as otherwise provided in Article FOURTH, Section (B)(4),
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.
(F) The name and mailing address of each person who is to serve as a
director until the annual meeting of the stockholders entitled to vote for the
class or until a successor is elected and qualified are as follows:
NAME MAILING ADDRESS CLASS
Dr. Pieter P. Bonsen 950 Page Mill Road, I
Palo Alto, CA 94303
Adrian M. Gerber 950 Page Mill Road, II
Palo Alto, CA 94303
Dr. Felix Theeuwes 950 Page Mill Road, III
Palo Alto, Ca 94303
(G) The board of directors of this corporation shall cease to be
classified as provided in this Article SEVENTH from
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<PAGE>
and after the Purchase Option Exercise Date. From and after such date all
directors shall be elected to one year terms; provided the term of any director
then in office shall not be reduced.
EIGHTH: Bylaws. In furtherance and not in limitation of the
------
powers conferred by statute, and subject to the next sentence, the Board of
Directors and the stockholders of this corporation are each expressly authorized
to adopt, amend or repeal the bylaws of this corporation subject to any
particular provisions concerning amendments set forth in this Certificate of
Incorporation or the bylaws of this corporation. No amendment to the bylaws may
be adopted by the stockholders without the approval of holders of a majority of
the Class B Common Stock voting separately as a class if such amendment would
affect the classification of the Board of Directors, or would otherwise regulate
the conduct of the Board's affairs or the manner in which it may act.
NINTH: Stockholder Meetings.
--------------------
(A) Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes whatsoever may be called at any time only by the Board of
Directors, the Chairman of the Board or the President of this corporation.
(B) No Action Without Meeting. At any time when this 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 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. Notwithstanding the foregoing, the holder or holders of the
Class B Common Stock may take any action permitted to be taken by such holders
as a class by written consent without a meeting.
TENTH: Limitation of Liability and Indemnification of Directors.
--------------------------------------------------------
(A) Elimination of Certain Liability of Directors. No director or
---------------------------------------------
this corporation shall be personally liable to this corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
this corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper, personal benefit.
(B) Indemnification and Insurance.
-----------------------------
1. Right to Indemnification. Each person who was or is made a party
------------------------
or is threatened to be made a party to or is
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<PAGE>
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), because he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of this corporation or is or was serving at the request of this corporation as a
direction, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise (including service with
respect to employee benefit plans), whether the basis of the proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by this corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits this corporation to provide broader
indemnification rights than that law permitted this corporation to provide
before such amendment), against all expense, liability and loss (including
attorney's 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, however, that this 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 this corporation. Such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification conferred by this Section shall be
a contract right which may not be retroactively amended and shall include the
right to be paid by this corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires the payment of such expenses incurred
by a director or officer in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such person
while a director or officer, including, without limitation, service with respect
to an employee benefit plan) in advance of the final disposition of the
proceeding, such payment shall be made only upon delivery to this corporation of
an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if ultimately it shall be determined that such director or
officer is not entitled to be indemnified under this section or otherwise. This
corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of this corporation with the same scope and effect as the
indemnification of directors and officer
2. Nonexclusivity of Rights. The right to indemnification and the
------------------------
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any
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<PAGE>
person may have or hereafter acquire under any statute, provision of this
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
3. Insurance. This corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of this
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expenses, liability or loss, whether or not this
corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
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<PAGE>
IN WITNESS WHEREOF, the undersigned officers have executed this
Restated Certificate of Incorporation on March 30, 1993 and do hereby certify
--
that this Restated Certificate of Incorporation, which restates and integrates,
and also further amends, the provisions of this Corporation's Certificate of
Incorporation, was duly adopted by the stockholders of this Corporation in
accordance with Sections 242 and 245 of the Delaware General Corporation Law.
THERAPEUTIC DISCOVERY CORPORATION
BY: /s/ Pieter P. Bonsen
--------------------------------
Dr. Pieter P. Bonsen,
President, Therapeutic Discovery
Corporation
ATTEST:
/s/ Mary M. Roensch
- --------------------------
Mary M. Roensch, Secretary,
Therapeutic Discovery Corporation
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<PAGE>
ANNEX 17(d)
- --------------------------------------------------------------------------------
ALZA CORPORATION
EXERCISE OF OPTION TO PURCHASE ALL
CLASS A COMMON STOCK OF
THERAPEUTIC DISCOVERY CORPORATION
------------------------------------
NOTICE TO STOCKHOLDERS OF
THERAPEUTIC DISCOVERY CORPORATION
------------------------------------
This information is disseminated pursuant to Rule 13e-3 of the
Securities Exchange Act of 1934, as amended.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
<PAGE>
THE TRANSACTION
---------------
ALZA Corporation, a Delaware corporation ("ALZA"), wishes to advise holders
of the Class A Common Stock of Therapeutic Discovery Corporation, a Delaware
corporation ("TDC"), that, on August 25, 1997, ALZA exercised its option to
purchase all of the issued and outstanding shares of Class A Common Stock of TDC
(the "Purchase Option") as provided in TDC's Restated Certificate of
Incorporation filed with the Secretary of State of the State of Delaware on
April 1, 1993 (the "Restated Certificate"). The closing date for this purchase
will be September 29, 1997 (the "Closing Date"). A copy of the Restated
Certificate is appended hereto as Annex A.
-------
The purchase price for all issued and outstanding shares of Class A
Common Stock is $100 million. As of August 25, 1997, there are 7,734,424
shares of Class A Common Stock issued and outstanding and options to purchase
395,000 shares of Class A Common Stock currently exercisable. Accordingly,
assuming all outstanding options are exercised, you will receive approximately
$12.30 for each share of Class A Common Stock that you hold as of the close of
business on the Closing Date.
In accordance with the Restated Certificate, ALZA will deposit $100
million with Boston EquiServe, L.P. (the "Payment Agent") on or before
September 29, 1997 and will provide the Payment Agent with an irrevocable
direction to pay these funds to the holders as of the close of business on
September 29, 1997 of Class A Common Stock. AFTER COMPLYING WITH THESE
CONDITIONS, OWNERSHIP OF ALL TDC CLASS A COMMON STOCK WILL AUTOMATICALLY
TRANSFER TO ALZA ON SEPTEMBER 29, 1997. If you hold your Class A Common Stock
certificates, the Payment Agent will be instructing you on how to tender your
certificates for payment. You will receive your payment from the Payment Agent
after you tender the certificates. If you hold your Class A Common Stock in a
brokerage account, your broker will credit your account with the purchase
price.
<PAGE>
NATURE OF DISCLOSURE
--------------------
ALZA is providing this information to the security holders of TDC in
compliance with Rule 13e-3 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Notwithstanding the provision of this information, ALZA
disclaims any classification of ALZA as an "affiliate" of TDC as such term is
used in Rule 13e-3 of the Exchange Act .
SPECIAL FACTORS
---------------
Purpose
-------
The purpose of this transaction is to acquire the rights to all products
and product candidates developed or under development by ALZA and TDC pursuant
to the Development Agreement dated March 10, 1993 between ALZA and TDC. ALZA
believes that it is in the best interests of ALZA and ALZA's stockholders to
exercise the Purchase Option at this time.
As ALZA is exercising certain previously granted rights, no other options
were considered.
The transaction is structured pursuant to the terms of the previously
granted Purchase Option as set forth in TDC's Restated Certificate. This
transaction is being undertaken at this time because TDC has no significant
funds remaining to expend on product development and the Purchase Option
otherwise would have expired no later than January 15, 1998.
Consequences
------------
The transaction reported herein will cause TDC to become a wholly-owned
subsidiary of ALZA. ALZA anticipates that TDC will be de-listed from the
Nasdaq National Market and will have its public reporting obligations
suspended. The federal tax consequences to TDC are that utilization of TDC's
losses and other tax carryovers may be limited under Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code").
The transaction reported herein will cause ALZA to own 100% of TDC. As a
result, ALZA will indirectly own all of the assets of TDC. Accordingly, ALZA
will report 100% of the net book value and net earnings of TDC. There will be
no significant federal tax consequences to ALZA as a result of the exercise of
the Purchase Option.
3
<PAGE>
The transaction reported herein will cause each stockholder of Class A
Common Stock to dispose of his or her Class A Common Stock for consideration
equal to that stockholder's pro rata share of the exercise price identified
above. This consideration is the amount specified in the Restated Certificate
provided in 1993. The federal income tax consequences to such stockholder, in
general terms, are set forth below.
The following discussion sets forth federal income tax considerations under
the Code for stockholders with respect to cash received by stockholders for the
Class A Common Stock. This discussion is intended only to provide general
information to stockholders that are subject to United States federal income
tax; it may not address all relevant federal income tax consequences to such
persons or to other categories of stockholders, e.g., foreign persons, dealers
in securities, and stockholders that are exempt from federal income tax. This
discussion is based upon present federal income tax laws and does not attempt to
anticipate changes, including changes in tax rates, that may be made under
currently pending legislative proposals. This discussion assumes that the Class
A Common Stock was at all relevant times capital assets of the stockholders.
This discussion does not address state, local or foreign tax considerations. ALL
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
Holders of Class A Common Stock will have a capital gain or loss due to
ALZA's exercise of the Purchase Option equal to the difference between (a) the
amount of the cash received, and (b) their basis in the Class A Common Stock
surrendered. Gain or loss due to the exercise of the Purchase Option should be
long-term if the Class A Common Stock has been held for more than one year at
the time of exercise of the Purchase Option. The Internal Revenue Service
("IRS") may assert, however, that the holding period of the Class A Common
Stock does not begin until such date as the Purchase Option is exercised and
that capital gain or loss upon exercise of the Purchase Option is therefore
short-term. Limitations may apply to deduction of capital loss.
To the extent that holders of Class A Common Stock have not provided
appropriate taxpayer identification numbers on IRS Form W-9 or a substitute
therefor, such stockholders may be subject to backup withholding by ALZA.
Fairness
--------
ALZA reasonably believes that the transaction reported herein is fair to
the holders of TDC Class A Common Stock. None of ALZA's directors dissented to
the transaction.
4
<PAGE>
Julian N. Stern and Dr. Alejandro Zaffaroni abstained from voting on such
transaction because they each own shares of Class A Common Stock.
The material factor upon which this belief is based is set forth below.
Stockholder Awareness of Purchase Option
The initial public holders of the Class A Common Stock received such stock
as a dividend from ALZA in 1993. The Purchase Option was a feature of the
Class A Common Stock at that time and was described in the ALZA Information
Statement dated March 10, 1993 distributed in connection with this
distribution. The Purchase Option was also set forth in the Restated
Certificate, which was publicly filed both with the Delaware Secretary of
State and the Securities and Exchange Commission (the "Commission") prior
to the distribution. Pursuant to the Restated Certificate, the stock
certificates for the Class A Common Stock were legended to put the holders
thereof on further notice about the Purchase Option. Stockholders were also
advised of the Purchase Option in each Form 10-K (since the date of the
distribution) and each recent Form 10-Q public filing made by each of ALZA
and TDC with the Commission. Accordingly, the Purchase Option was present
in the initial public distribution of the Class A Common Stock, was
disseminated in TDC's charter documents, was discussed in ALZA's and TDC's
periodic filings and was legended on each stock certificate for the Class A
Common Stock. As a result, each TDC Class A Common stockholder received
substantial notice as to the terms of the Purchase Option prior to making
any investment decision with respect to the Class A Common Stock. In
addition, recent public filings by both ALZA and TDC have indicated the
status of funds available for product development and therefore when the
potential exercise of the Purchase Option was likely to be triggered.
During 1997, both parties have indicated that these funds would likely be
exhausted during the third quarter of 1997.
The Restated Certificate does not require any approval of the stockholders
of TDC for the exercise of the Purchase Option.
After making reasonable inquiry of management of TDC, ALZA believes that no
directors of TDC have retained an unaffiliated representative to act solely on
behalf of any security holders of TDC as no action is required by either
TDC's directors or security holders to effect the Purchase Option.
Reports
-------
Neither ALZA nor, to the best of ALZA's knowledge after reasonable inquiry
of management of TDC, TDC, has received any report, opinion (other than an
opinion of counsel) or
5
<PAGE>
appraisal from an outside party which is materially related to the transaction
described herein.
BACKGROUND AND SUMMARY OF TRANSACTION
-------------------------------------
Identification of ALZA:
This filing is being made by ALZA. Its principal business is
pharmaceutical research and development and the commercialization of
pharmaceutical products. The address of its principal executive offices are
950 Page Mill Road, Palo Alto, CA 94304.
During the last five years, ALZA has not been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors). During the
last five years, ALZA has not been a party to a civil proceeding of a judicial
or administrative body of competent jurisdiction and as a result of such
proceeding was or is subject to a judgment, decree or final order enjoining
further violations of, or prohibiting activities, subject to, federal or state
securities laws or finding any violation of such laws.
Identification and Securities of TDC:
The issuer of the Class A Common Stock and the address of its principal
executive offices is:
Therapeutic Discovery Corporation
1454 Page Mill Road
Palo Alto, CA 94303-0806
The exact title of the class of security which is the subject of this
filing is Class A Common Stock, par value $0.01, of TDC. The amount of Class A
Common Stock outstanding as of August 25, 1997, the most recent practicable
date, is 7,734,424. As of that date, there were also options to purchase 395,000
shares of Class A Common Stock immediately exercisable. The approximate number
of holders of record of such Class A Common Stock as of August 25, 1997, the
most recent practicable date, is 5,604.
The principal market in which the Class A Common Stock is being traded is
the Nasdaq National Market. The range of high and low bid quotations for the
Class A Common Stock for each quarterly period during the past two years is:
<TABLE>
<CAPTION>
Period High Low
- ----------------------- ---------- ---------
<S> <C> <C>
June 30, 1995 7.875 6.00
September 30, 1995 7.75 6.75
December 31, 1995 7.25 6.75
March 31, 1996 10.625 7.125
June 30, 1996 9.875 8.875
September 30, 1996 10.00 8.00
December 31, 1996 11.375 9.375
March 31, 1997 11.375 10.50
June 30, 1997 11.375 10.625
</TABLE>
6
<PAGE>
To the best of ALZA's knowledge, after making reasonable inquiry, TDC has
not paid any dividends on the Class A Common Stock in the past two years.
TDC is restricted from paying any dividends on the Class A Common Stock if,
after payment of such dividend, the amount of TDC's cash, cash equivalents and
short-term and long-term investments would be less than the Available Funds as
such term is defined in the Restated Certificate.
Past Contacts, Transactions or Negotiations:
The nature and approximate amount in dollars of any transaction which has
occurred since the commencement of TDC's second full fiscal year preceding the
date of this Statement between ALZA and TDC are as follows:
(i) Since the commencement of TDC's second full fiscal year
preceding the date of this Statement, TDC paid approximately
$225,000,000 to ALZA pursuant to a Development Agreement
between ALZA and TDC dated March 10, 1993 whereby ALZA was
retained by TDC to undertake activities related to the
selection and development of pharmaceutical products.
(ii) Since the commencement of TDC's second full fiscal year
preceding the date of this Statement, TDC paid approximately
$500,000 to ALZA pursuant to a Services Agreement
7
<PAGE>
between ALZA and TDC dated March 10, 1993 whereby ALZA was
retained by TDC to provide certain administrative services
to TDC (such as legal and accounting) in exchange for
payment of ALZA's costs in the provision of such services.
(iii) There is also (a) a Technology License Agreement dated March
10, 1993 between ALZA and TDC, whereby ALZA licensed certain
proprietary technology to TDC, and (b) a License Option
Agreement dated March 10, 1993 between ALZA and TDC, whereby
TDC granted ALZA an option to license certain products from
TDC. No amounts have been paid by either of ALZA or TDC to
the other pursuant to such agreements since the commencement
of TDC's second full fiscal year preceding the date of this
Statement except as set forth in section (iv) below.
(iv) In January of 1997, ALZA exercised its option to license
from TDC for 12 European countries a second-generation
transdermal testosterone product to follow ALZA's existing
Testoderm(R) product. ALZA entered into an agreement with
Ferring N.V. to market the TDC product in such countries. As
a result of ALZA's exercise of this license and the
arrangement with Ferring, ALZA paid TDC $580,000, a portion
of the upfront payment ALZA received from Ferring, and will
receive payments from ALZA based on sales of the product in
the 12 European countries covered by ALZA's agreement with
Ferring.
(v) In February of 1997, ALZA exercised its option to license
from TDC a once-daily OROS(R) hydromorphone product on a
worldwide basis. ALZA entered into an agreement with Knoll
Pharmaceutical Company and Knoll A.G. (together "Knoll") for
the further clinical development and worldwide
commercialization of that product. As a result of ALZA's
exercise of the license, TDC will receive a portion of the
amounts ALZA receives from Knoll based on worldwide sales of
the product, and a portion of certain milestone payments
made by Knoll to ALZA.
8
<PAGE>
Terms of the Transaction:
ALZA exercised its option to purchase all of TDC's Class A Common Stock on
August 25, 1997 by delivering an exercise notice to TDC. The terms of the
Purchase Option are set forth in TDC's Restated Certificate. Pursuant to the
Restated Certificate, the exercise price of the Purchase Option is $100 million.
ALZA has determined that September 29, 1997 will be the Closing Date. ALZA will
deposit the exercise price with Boston EquiServe, L.P., as Payment Agent, on or
prior to that date. Promptly following the Closing Date, and upon receipt of
stock certificates for the Class A Common Stock as instructed by the Payment
Agent, the Payment Agent will distribute the exercise price pro rata to each
person or entity who was a holder of Class A Common Stock at the close of
business on the Closing Date. In the case of any person or entity holding Class
A Common Stock in a brokerage account, the broker will credit the relevant
account with such amount.
In accordance with the terms of the Restated Certificate, the stockholders
of the Class A Common Stock do not need to take any steps to approve the
purchase. Title to the Class A Common Stock will automatically vest in ALZA on
the Closing Date and the exercise price will be paid to such stockholders, upon
tender of their stock certificates directly or through their brokers, in
accordance with their respective interests.
Plans or Proposals of ALZA:
Subsequent to the purchase of the Class A Common Stock by ALZA, TDC will be
a wholly-owned subsidiary of ALZA. ALZA anticipates de-listing TDC from the
Nasdaq National Market and suspending its reporting requirements with the
Securities and Exchange Commission by filing a Form 15. ALZA intends to replace
TDC's officers and Board of Directors with ALZA employees.
Interest in Securities of TDC:
As of August 25, 1997, no shares of Class A Common Stock of TDC are
beneficially owned by ALZA, by any pension, profit sharing or similar plan of
ALZA or, to ALZA's knowledge after reasonable inquiry of management of TDC, by
TDC, by each executive officer and director of either ALZA, TDC, any person
controlling either ALZA or TDC or any executive officer of any corporation
ultimately in control of either ALZA or TDC, or by any associate or majority
owned subsidiary of either ALZA or TDC except as set out on the following table:
9
<PAGE>
<TABLE>
<CAPTION>
Immediately
Direct Indirect Exercisable
Name Position Ownership Ownership Options
- ---- -------- --------- --------- -----------
<S> <C> <C> <C> <C>
Blaschke, Dr. Terrence F. Director of TDC 4,500 6,200 40,000
Cozadd, Bruce C. Senior Vice President and 15
Chief Financial Officer of ALZA
Fethe, Harold Vice President, Human 3,304
Resources of ALZA
Fulscher, Dr. Gary V. Senior Vice President, 4,489 4,693
Operations of ALZA
Hoffmann, David R. Vice President, Finance and 1,622 6,223
Secretary of TDC
Lairson, Dr. Paul D. Director of TDC 40,000
Martin, Suzanne G. Vice President, Research and 695
Development Administration of TDC
Neil, Gary L., Ph.D. Director, President and Chief 12,000 160,000
Executive Officer of TDC
Phipps, Allen M. Chairman of the Board of TDC 10,000 60,000
Sommers, William P, Ph.D. Director of TDC 2,919 40,000
Stern, Julian N. Director and Secretary of ALZA 9,393
Theeuwes, Dr. Felix President, New Ventures and 413 17,064
Chief Scientist of ALZA
Zaffaroni, Dr. Alejandro Co-Chairman of the Board and 95,594
Founder of ALZA
</TABLE>
As of December 31, 1996 ALZA's 401(k) tax deferral investment plan owned 18,902
shares of Class A Common Stock for the accounts of certain ALZA employees. The
employees direct the investment of these accounts. Some of the shares reported
as indirectly owned by ALZA employees in the table above are included in the
foregoing amount.
10
<PAGE>
CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO TDC'S CLASS A COMMON
STOCK:
Article FIFTH of the Restated Certificate provides ALZA with the Purchase
Option. The Purchase Option provides that ALZA may purchase all, but not less
than all, of the issued and outstanding Class A Common Stock at any time prior
to the earlier of: (i) 60 days after the later of (a) the date of filing with
the Commission or (b) the due date of TDC's Form 10-K or Form 10-Q containing a
balance sheet showing that TDC has less than an aggregate of $5 million in cash,
cash equivalents, and short-term and long-term investments, or (ii) June 30,
1999. ALZA may exercise the Purchase Option at any time prior to such expiration
date by mailing an exercise notice to TDC. This exercise notice must identify
certain information, including a Closing Date for the purchase and the exercise
price and form of consideration to be paid to TDC stockholders. The Closing Date
must be within 90 days of the exercise date but may be extended by ALZA in
certain circumstances outlined in the Restated Certificate, such as the need for
regulatory clearance. ALZA exercised the Purchase Option by providing the
foregoing exercise notice to TDC on August 25, 1997. The Closing Date has been
set for September 29, 1997.
From the date of exercise of the Purchase Option until the Closing Date,
TDC is prohibited by the terms of the Restated Certificate from engaging in any
extraordinary corporate activity without the prior written consent of ALZA.
Article FOURTH of the Restated Certificate provides that as soon as ALZA
exercises the Purchase Option, TDC's board shall cease to be classified, the
number of authorized TDC directors shall be increased in accordance with a
formula set forth in the Restated Certificate and the holders of TDC's Class B
Common Stock (currently ALZA) shall have the sole right to appoint the directors
thereafter.
Within 15 days after the mailing of the exercise notice to TDC, TDC must
provide ALZA with a status statement containing certain financial information.
This financial information includes all actual and contingent liabilities of
TDC. ALZA then may reduce the exercise price by the amount of such liabilities.
It is not anticipated that any reduction will occur in the current circumstances
of this transaction.
ALZA must designate a Payment Agent who will distribute the exercise price
to the TDC stockholders. ALZA must also deposit both the exercise price, and
irrevocable instructions to pay the exercise price to TDC stockholders of record
as of the close of business on the Closing Date, with the Payment Agent on or
prior to the Closing Date.
11
<PAGE>
On the Closing Date, title to the Class A Common Stock will automatically
transfer to and vest in ALZA without further act of any person. The Payment
Agent will then disburse the exercise price to TDC stockholders upon tender of
stock certificates to the Payment Agent as instructed thereby.
OTHER PROVISIONS OF THE TRANSACTION
-----------------------------------
Appraisal rights are not afforded under either applicable law or the
Restated Certificate to TDC stockholders in respect of the exercise of the
Purchase Option and none will be afforded by either ALZA or TDC. ALZA is not
aware of any rights available to objecting holders of Class A Common Stock under
applicable law.
ALZA is unaware, after making reasonable inquiry of TDC, of any grant of
access to unaffiliated security holders to the corporate files of either TDC or
ALZA or the appointment of counsel or appraisal services for unaffiliated
security holders at the expense of either TDC or ALZA.
SUMMARY OF FINANCIAL STATEMENTS
-------------------------------
Selected Consolidated Financial Data
Set forth below is a summary of TDC's selected consolidated financial data,
which has been excerpted or derived from the information contained in TDC's
Annual Reports on Form 10-K for the years ended December 31, 1996 and 1995, and
its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997.
More comprehensive information is included in such reports and other
documents filed by TDC with the Commission, and the following information should
be read in conjunction with such reports and other documents and the financial
information (including any related notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations) contained therein.
Statement of Income Data:
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31, Six Months ended June 30,
1996 1995 1997 1996
-------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 8.2 $ 11.5 $ 1.5 $ 4.7
Net loss $ 94.8 $ 59.4 $ 48.3 $ 46.5
Loss per share $ 12.25 $ 7.68 $ 6.24 $ 6.01
Ratio of earnings
to fixed changes N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
(in millions, except per share amounts)
December 31, 1996 June 30, 1997
----------------- -------------
<S> <C> <C>
Working capital $67.9 $20.9
Total assets 88.5 40.5
Total stockholders'
equity 69.1 21.8
Book value per share $8.94 $2.82
</TABLE>
Note to Selected Consolidated Financial Data:
(1) TDC had no material fixed charges for the periods presented.
CONCLUSION
----------
If you have any questions with respect to this transaction, please contact
ALZA Corporate and Investor Relations at (650) 494-5222.
ALZA and TDC wish to thank you for your investment and interest in TDC. We
sincerely hope that you are pleased with your return on this investment.
12
<PAGE>
EXHIBIT INDEX
EXHIBIT
- ---------
17(c) Restated Certificate of Incorporation of Therapeutic Discovery
Corporation as filed with the Secretary of State of the State of
Delaware on April 1, 1993.
17(d) Notice to Stockholders of Therapeutic Discovery Corporation (for
purposes of this Statement only, Annex A thereto being Item 17(c)
above).
99.1 Financial information extracted from TDC Form 10-Q for the
quarterly period ended June 30, 1997.
99.2 Financial information extracted from TDC Form 10-K for the year
ended December 31, 1996.
99.3 Financial information extracted from TDC Form 10-K for the year
ended December 31, 1995.
<PAGE>
EXHIBIT 99.1
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Statement of Operations (unaudited)
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Period From
Three Months Ended Six Months Ended Inception
June 30, June 30, (November 1992)
1997 1996 1997 1996 to June 30, 1997
---------- ---------- ---------- -------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net interest and investment income $ 838 $ 1,993 $ 1,505 $ 4,665 $ 35,841
EXPENSES:
Research and development
paid to ALZA Corporation 26,375 28,312 48,616 49,886 253,995
General and administrative 513 705 1,168 1,254 10,624
---------- ---------- ---------- ---------- ----------------
Total expenses 26,888 29,017 49,784 51,140 264,619
---------- ---------- ---------- ---------- ----------------
Loss before tax (26,050) (27,024) (48,279) (46,475) $(228,778)
Income tax - - - - 301
---------- ---------- ---------- ---------- ----------------
Net loss $ (26,050) $ (27,024) $ (48,279) $ (46,475) $(228,477)
---------- ---------- ---------- ---------- ----------------
Net loss per common share $ (3.37) $ (3.49) $ (6.24) $ (6.01)
---------- ---------- ---------- ----------
Weighted average common shares 7,734,524 7,734,524 7,734,524 7,734,524
========== ========== ========== ==========
</TABLE>
See accompanying notes.
-2-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Balance Sheet (unaudited)
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,913 $ 10,597
Short-term investments 36,643 74,707
Interest receivable 448 809
Prepaid expenses and other
current assets 395 1,033
--------- ---------
Total current assets 39,399 87,146
Long-term assets:
Employee loans, long-term 300 300
Prepaid expenses and other
long-term assets - -
Organization costs, (net of
accumulated amortization) 776 1,014
--------- ---------
Total assets $ 40,475 $ 88,460
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 18,445 $ 19,129
Accounts payable and other current liabilities 22 72
--------- ---------
Total current liabilities 18,467 19,201
Long-term liabilities:
Deferred compensation 229 115
Total liabilities
Stockholders' equity:
Class A Common Stock, $.01 par
value, 12,000,000
shares authorized, 7,734,424
issued and outstanding 77 77
Class B Common Stock, $.01 par
value, 100 shares authorized,
issued and outstanding - -
Additional paid-in capital 251,650 251,650
Net unrealized losses on
available-for-sale securities (493) (1,166)
Deficit accumulated during the
development stage (228,477) (180,198)
Deferred compensation (978) (1,219)
--------- ---------
Total stockholders' equity 21,779 69,144
--------- ---------
Total liabilities and stockholders' equity $ 40,475 $ 88,460
========= =========
</TABLE>
See accompanying notes.
-3-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Condensed Consolidated Statement of Cash Flows (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Period From
Six Months Ended Inception
June 30, (November 1992) to
1997 1996 June 30, 1997
---------- ---------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(48,279) $(46,475) $ (228,477)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Amortization of organization costs 238 358 2,804
Amortization of deferred compensation 241 82 969
(Increase) decrease in assets:
Interest receivable 361 (81) (448)
Other receivable - - (252)
Organization costs - - (3,581)
Prepaid expenses and other assets 638 52 (143)
Increase (decrease) in liabilities:
Payable to ALZA Corporation (684) 3,924 18,445
Accounts payable and other current liabilities (50) (52) 22
Long-term liabilities 114 12 229
-------- -------- -----------
Total adjustments 858 4,295 18,045
-------- -------- -----------
Net cash used in operating
activities (47,421) (42,180) (210,432)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in available-for-sale
securities - (25,667) (1,363,067)
Sale of available-for-sale securities 35,737 58,503 622,411
Maturities of available-for-sale
securities 3,000 8,070 703,523
Employee loans, long-term - - (300)
-------- -------- -----------
Net cash provided by
(used in) investing activities 38,737 40,906 (37,433)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock - - 2
Issuance of Class A Common Stock - - 249,998
Issuance costs - - (222)
-------- -------- -----------
Net cash provided by financing
activities - - 249,778
-------- -------- -----------
Net increase (decrease) in cash and
cash equivalents (8,684) (1,274) 1,913
Cash and cash equivalents at beginning of period 10,597 13,314 -
-------- -------- -----------
Cash and cash equivalents at end of period $ 1,913 $ 12,040 $ 1,913
======== ======== ===========
</TABLE>
See accompanying notes.
-4-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1997
Notes to Financial Statements (unaudited)
1. BASIS OF PRESENTATION
Therapeutic Discovery Corporation ("TDC") was incorporated in Delaware on
November 12, 1992 and commenced operations on June 11, 1993. TDC was formed to
select and develop new human pharmaceutical products (the "TDC Products")
combining the proprietary drug delivery systems of ALZA Corporation ("ALZA")
with various drug compounds. TDC has been engaged in these and related
activities since its formation. TDC's principal activities consist of research
and development activities under its agreements with ALZA.
Under generally accepted accounting principles, TDC is considered a
development stage company and, accordingly, must present financial information
for the three and six months ended June 30, 1997 and 1996 and for the period
from inception (November 1992) to June 30, 1997.
The information at June 30, 1997, for the three and six months ended June
30, 1997 and 1996, and the period from inception (November 1992) to June 30,
1997 is unaudited, but includes all adjustments (consisting only of normal
recurring adjustments) which the management of TDC believes necessary for fair
presentation of the results for such periods. Interim results are not
necessarily indicative of results for a full year. The financial statements
should be read in conjunction with the audited financial statements of TDC for
the year ended December 31, 1996 included in TDC's 1996 Annual Report on
Form 10-K.
2. SHORT-TERM INVESTMENTS
TDC has classified its entire investment portfolio as available-for-sale.
TDC's investment portfolio is available for current operations and, therefore,
has been classified as a current asset. Investments in the available-for-sale
category are carried at fair market value with unrealized losses recorded as a
separate component of stockholders' equity. At June 30, 1997, net unrealized
losses on available-for-sale securities were approximately $0.5 million. The
cost of securities when sold is based upon specific identification.
-5-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1997
The following is a summary of available-for-sale securities at June 30, 1997:
<TABLE>
<CAPTION>
Available-for-Sale Securities
-----------------------------
Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $23,159 $ 0 $(300) $22,859
Collateralized mortgage
obligations and asset
backed securities 3,997 0 (125) 3,872
Corporate securities 10,634 0 ( 68) 10,566
------- ------- ---------- ---------
$37,790 $ 0 $(493) $37,297
======= ======= ========== =========
</TABLE>
The amortized cost and estimated fair value of debt and marketable
securities at June 30, 1997, 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 obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Fair
(in thousands) Cost Value
--------- ----------
<S> <C> <C>
Due in one year or less $17,177 $17,085
Due after one year through
four years 13,676 13,438
Due after four years through
eight years 6,937 6,774
--------- ----------
$37,790 $37,297
========= ==========
</TABLE>
-6-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1997
3. ARRANGEMENTS WITH ALZA CORPORATION
TDC was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining ALZA's proprietary drug delivery
technologies with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. In connection with the distribution
to ALZA stockholders of a special dividend of units (each unit includes one
share of TDC Class A Common Stock and one warrant to purchase one-eighth of
one share of ALZA Common Stock at an exercise price of $65 per share), ALZA
made a $250 million cash contribution to TDC's capital. The cash is being
used primarily to fund activities under a development agreement (the
"Development Contract") between ALZA and TDC pursuant to which ALZA conducts
research and development activities on behalf of TDC. In accordance with
TDC's Restated Certificate of Incorporation, on June 11, 1996, the Units
separated into their component securities--TDC Class A Common Stock and ALZA
warrants. As a result of the separation, both securities are listed and
trade independently on the Nasdaq Stock Market. The trading symbol for the
TDC Class A Common Stock is "TDCA".
PRODUCT LICENSE OPTION. TDC has granted to ALZA an option to acquire, on a
product-by-product and country-by-country basis, a perpetual, exclusive,
royalty-bearing license to make, have made, use and sell any or all TDC
Products (the"License Option"). If ALZA exercises its License Option for any TDC
Product (a "Licensed TDC Product"), ALZA will pay the following royalties
("Product Royalties") to TDC:
(a) if the Licensed TDC Product is sold by ALZA, Product Royalties of up
to a maximum of 5% of ALZA's net sales of the Licensed TDC Product determined as
follows: (i) 1% of net sales, other than sales to distributors or sublicensees
who agree to pay royalties or make percentage of sales payments to ALZA or any
affiliate of ALZA and in respect of which the Product Royalties are determined
as provided in clause (b) below, plus (ii) an additional 0.1% of such net sales
for each full $1 million of the Development Costs (as defined in the Development
Contract) of the Licensed TDC Product paid by TDC; and
(b) if the Licensed TDC Product is sold by a third party, Product
Royalties of up to a maximum of 50% of third party payments to ALZA with respect
to such Licensed TDC Product determined as follows: (i) 10% of such third party
payments, plus (ii) an additional 1% of such third party payments for each full
$1 million of the Development Costs of the Licensed TDC Product paid by TDC.
In each case, net sales and other third party payments will be reduced by the
dollar amount of any license or similar payments due to third parties from
ALZA with respect to the Licensed TDC Product. In addition, ALZA has the
option to buy out TDC's right to receive Product Royalties with respect to
any Licensed TDC Product on either a country-by-country or worldwide basis.
-7-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1997
ALZA may exercise the License Option with respect to any TDC Product, on a
country-by-country basis, at any time until 90 days after the earliest of the
following: (a) approval to market the TDC Product in such country by the
appropriate regulatory agency; (b) approval to market the TDC Product in the
United States by the FDA; or (c) the expiration of the Purchase Option (as
defined below).
PURCHASE OPTION. ALZA has certain rights pursuant to the Restated
Certificate of Incorporation of TDC to purchase all (but not less than all)
of the TDC Class A Common Stock (the "Purchase Option"). Except as otherwise
set forth below, the Purchase Option may be exercised by written notice to
TDC at any time during the period ending on December 31, 1999; provided that
such date will be extended for successive one year periods if, as of any June
30 beginning with June 30, 1999, TDC has not used at least 90% of all funds
available for product development as set forth in the Development Contract.
Notwithstanding the foregoing, the Purchase Option will terminate on the 60th
day after the later of the filing or the due date of a Form 10-K or Form 10-Q
of TDC containing a balance sheet showing less than $5 million of cash, cash
equivalents and short-term and long-term investments. Based on TDC's current
rate of expenditures on TDC Products, TDC's balance sheet will reach this
threshold during the third quarter of 1997.
If the Purchase Option is exercised, the exercise price (the "Purchase
Option Exercise Price") will be the greatest of the following:
(a) $100 million;
(b) the greater (i) of 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 each case, less any amounts previously paid by
ALZA to exercise a buy-out option with respect to any product;
(c) the fair market value of one million shares of ALZA Common Stock; or
(d) $325 million less all amounts spent by TDC under the Development
Contract.
Based on information available at June 30, 1997, the Purchase Option Exercise
Price is expected to be $100 million.
At the time of exercise of the Purchase Option ALZA may decide, in its
discretion, to pay the Purchase Option Exercise Price in cash, in ALZA Common
Stock, or in any combination of cash and ALZA Common Stock.
-8-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1997
ALZA has not made a decision as to whether it will exercise the Purchase
Option. ALZA is under no obligation to exercise the Purchase Option and will
do so only if ALZA determines that it is in the best interests of ALZA and
its stockholders at the time the decision is made.
For a more detailed discussion of the License Option, the Purchase Option
and the arrangements between ALZA and TDC, see TDC's 1996 Annual Report on
Form 10-K.
-9-
<PAGE>
EXHIBIT 99.2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Therapeutic Discovery Corporation
We have audited the accompanying balance sheet of Therapeutic Discovery
Corporation (a development stage company) as of December 31, 1996 and 1995,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1996, 1995 and 1994 and for the period from
inception (November 1992) to December 31, 1996. 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 financial position of Therapeutic Discovery
Corporation (a development stage company) at December 31, 1996 and 1995 and
the results of its operations and its cash flows for the years ended December
31, 1996, 1995 and 1994 and for the period from inception (November 1992) to
December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 14, 1997
F-1
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,597 $ 13,314
Short-term investments 74,707 163,294
Interest receivable 809 1,427
Prepaid expenses and other current assets 1,033 278
--------- --------
Total current assets 87,146 178,313
Long-term assets:
Employee loans, long-term 300 300
Prepaid expenses and other long-term assets - 1,094
Organization costs, (net of accumulated
amortization) 1,014 1,730
--------- --------
Total assets $ 88,460 $181,437
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 19,129 $ 16,817
Accounts payable and other liabilities 72 148
--------- --------
Total current liabilities 19,201 16,965
Long-term liabilities:
Deferred compensation 115 -
Stockholders' equity:
Class A Common Stock, $.01 par value,
12,000,000 shares authorized, 7,734,424
issued and outstanding 77 77
Class B Common Stock, $.01 par value,
100 shares authorized, issued and
outstanding - -
Additional paid-in capital 251,650 251,650
Net unrealized losses on available-for-sale
securities (1,166) (262)
Deficit accumulated during development stage (180,198) (85,448)
Deferred compensation (1,219) (1,545)
--------- --------
Total stockholders' equity 69,144 164,472
--------- --------
Total liabilities and stockholders' equity $ 88,460 $181,437
========= ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended Year Ended Inception
December 31, December 31, December 31, (November 1992) to
1996 1995 1994 December 31, 1996
------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Net interest and investment income $ 8,215 $ 11,540 $ 8,673 $ 34,336
and license fees
EXPENSES:
Research and development
paid to ALZA Corporation 99,953 68,923 31,634 205,379
General and administrative 3,012 2,321 2,700 9,456
---------- ---------- ---------- ----------
Total expenses 102,965 71,244 34,334 214,835
---------- ---------- ---------- ----------
Loss before taxes (94,750) (59,704) (25,661) (180,499)
---------- ---------- ---------- ----------
Income tax - 301 - 301
---------- ---------- ---------- ----------
Net loss $ (94,750) $ (59,403) $ (25,661) $(180,198)
---------- ---------- ---------- ----------
Net loss per common share $ (12.25) $ (7.68) $ (3.32)
========== ========== ==========
Weighted average common shares 7,734,524 7,734,524 7,734,524
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
Unrealized Deficit
losses on Accumulated
Class A Class B Additional available- During the Total
Common Common Common Paid-in for-sale Development Deferred Stockholders'
Stock Stock Stock Capital securities Stage Compensation Equity
-------- --------- --------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 100 shares
of Common Stock for
$20 per share to ALZA
Corporation in
November 1992 $ - $ - $ - $ 2 $ - $ - $ - $ 2
Issuance of 7,734,424
shares of Class A
Common Stock for
approximately $32.32
per share to ALZA
Corporation in June
1993, net of issuance
costs of $222 - 77 - 249,699 - - - 249,776
Conversion by ALZA
Corporation of 100
shares of Common Stock
into 100 shares of
Class B Common Stock
in June 1993 - - - - - - - -
Deferred compensation
resulting from grant
of options through
December 31, 1993 - - - 1,686 - - (1,686) -
Amortization of
deferred
compensation - - - - - - 80 80
Net loss - - - - - (384) - (384)
------ ------- ------- -------- --------- -------- -------- ---------
BALANCE,
DECEMBER 31,
1993 - 77 - 251,387 - (384) (1,606) 249,474
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
Unrealized Deficit
losses on Accumulated
Class A Class B Additional available- During the Total
Common Common Common Paid-in for-sale Development Deferred Stockholders'
Stock Stock Stock Capital securities Stage Compensation Equity
-------- --------- --------- ------------ ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred compensation
resulting from grant
of options in the year
ended December 31, 1994 - - - 261 - - (261) -
Amortization of
deferred
compensation - - - - - - 158 158
Net change in unrealized
loss on available-for-sale
securities - - - - (11,393) - - (11,393)
Net loss - - - - - (25,661) - (25,661)
-------- --------- --------- ------------ ------------- ------------- -------------- -------------
BALANCE,
DECEMBER 31,
1994 - 77 - 251,648 (11,393) (26,045) (1,709) 212,578
Deferred compensation
resulting from grant
of options in the year
ended December 31, 1995 - - - 2 - - (2) -
Amortization of
deferred
compensation - - - - - - 166 166
Net change in unrealized
loss on available-for-sale
securities - - - - 11,131 - - 11,131
Net loss - - - - - - - (59,403)
-------- --------- --------- ------------ ------------- ------------- -------------- -------------
BALANCE,
DECEMBER 31,
1995 $ - $ 77 $ - $ 251,650 $ (262) $ (85,448) $ (1,545) $164,472
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
Unrealized Deficit
losses on Accumulated
Class A Class B Additional available- During the Total
Common Common Common Paid-in for-sale Development Deferred Stockholders'
Stock Stock Stock Capital securities Stage Compensation Equity
-------- --------- --------- ---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred compensation
resulting from grant
of options in the year
ended December 31, 1996 - - - - - - - -
Amortization of
deferred
compensation - - - - - 326 326
Net change in unrealized
loss on available-for-sale
securities - - - - (904) - - (904)
Net loss - - - - - (94,750) - (94,750)
-------- --------- --------- ---------- ----------- ----------- ------------ ------------
BALANCE,
DECEMBER 31,
1996 $ - $ 77 $ - $251,650 $(1,166) $(180,198) $(1,219) $ 69,144
======== ========= ========= ========== =========== =========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Period from
Year Ended Year Ended Year Ended Inception
December 31, December 31, December 31, (November 1992) to
1996 1995 1994 December 31, 1996
------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(94,750) $(59,403) $ (25,661) $ (180,198)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of organization costs 716 716 716 2,566
Amortization of deferred compensation 326 164 158 728
(Increase) decrease in assets:
Interest receivable 618 1,021 127 (809)
Other receivable - - (252) (252)
Organization costs - - - (3,581)
Prepaid expenses and other assets 339 123 130 (781)
Increase (decrease) in liabilities:
Payable to ALZA Corporation 2,312 9,122 5,390 19,129
Accounts payable 4 (2) (47) 5
Other current liabilities (80) (4) 52 67
Long-term liabilities 115 - - 115
-------- -------- --------- -----------
Total adjustments 4,350 11,140 6,274 17,187
-------- -------- --------- -----------
Net cash used in operating activities (90,400) (48,263) (19,387) (163,011)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in available-for-sale securities (25,667) (42,863) (294,121) (1,363,067)
Sale of available-for-sale securities 98,523 81,349 194,134 586,674
Maturities of available-for-sale securities 14,827 3,041 137,918 700,523
Employee loans, long-term - - - (300)
-------- -------- --------- -----------
Net cash provided by (used in) investing
activities 87,683 41,527 37,931 (76,170)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock - - - 2
Issuance of Class A Common Stock, net of
issuance costs - - - 249,776
-------- -------- --------- -----------
Net cash provided by financing
activities - - - 249,778
-------- -------- --------- -----------
Net increase (decrease) in cash and cash
equivalents (2,717) (6,736) 18,544 10,597
Cash and cash equivalents at beginning of period 13,314 20,050 1,506 -
-------- -------- --------- -----------
Cash and cash equivalents at end of period $10,597 $13,314 $20,050 $ 10,597
======== ======== ========= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Therapeutic Discovery Corporation ("TDC") was incorporated in Delaware on
November 12, 1992 and commenced operations on June 11, 1993. Since it
commenced operations, TDC has been engaged in selecting and developing new
human pharmaceutical products combining the proprietary drug delivery systems
of ALZA Corporation ("ALZA") with various drug compounds. TDC's principal
activities consist of research and development activities under its
agreements with ALZA. Accordingly, TDC is considered a development stage
company.
TDC incurred research and development expenses of approximately $100.0
million during 1996, $68.9 million during 1995, and $31.6 million during
1994. Research and development expenses have totaled approximately $205.4
million for the period from inception (November 1992) to December 31, 1996.
Based on TDC's current rate of expenditures on TDC products, it is expected
that funds for product development will be exhausted in the second half of
1997 and product development funding by TDC will cease. When cash available
for product development is exhausted, ALZA's purchase option with respect to
all of TDC's Class A Common Stock and option to license TDC products on a
product-by-product basis will be triggered, as described more fully in Note 2
below. The Board of Directors of TDC has initiated activities to establish a
contingency plan for the continued operations of TDC in the event that ALZA
chooses not to exercise the purchase option, and has the right, under its
agreements with ALZA, to take necessary steps to cease development funding
and maintain an adequate level of available funds to ensure TDC's ability to
meet its operating cash needs through at least December 31, 1997.
A summary of the significant accounting policies of TDC follows:
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
CASH AND CASH EQUIVALENTS:
TDC reports all highly liquid debt instruments purchased with a maturity of
three months or less as cash equivalents. The carrying amount reported on
the balance sheet for cash and cash equivalents approximates their fair value.
SHORT-TERM INVESTMENTS:
TDC has classified its entire investment portfolio, including cash
equivalents of approximately $85 million and $177 million at December 31,
1996 and 1995, respectively, as available-for-sale. TDC's investment
portfolio is available for current operations and, therefore, has been
classified as a current asset. Investments in the available-for-sale
category are carried at fair market value with unrealized losses recorded as
a separate component of stockholders' equity. At December 31, 1996, net
unrealized losses on available-for-sale securities were approximately $1.2
million. At December 31, 1995, net unrealized losses on available-for-sale
securities were approximately $0.3 million. Realized gains and losses for
the years ended December 31, 1996 and 1995 were not material. The cost of
securities when sold is based upon specific identification.
The following is a summary of available-for-sale securities at December 31,
1996:
<TABLE>
<CAPTION>
Available-for-Sale Securities
------------------------------------------------
Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $37,921 $ 8 $ (370) $37,559
Collateralized mortgage
obligations and asset
backed securities 22,340 4 (517) 21,827
Corporate securities 24,478 7 (298) 24,187
-------- ---------- ---------- ---------
$84,739 $19 $(1,185) $83,573
======== ========== ========== =========
</TABLE>
F-9
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
The following is a summary of available-for-sale securities at December 31,
1995:
<TABLE>
<CAPTION>
Available-for-Sale Securities
------------------------------------------------
Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $ 89,526 $288 $(167) $ 89,647
Collateralized mortgage
obligations and asset
backed securities 39,061 11 (363) 38,709
Corporate securities 47,858 47 (78) 47,827
--------- ---------- ---------- ---------
$176,445 $346 $(608) $176,183
========= ========== ========== =========
</TABLE>
The amortized cost and estimated fair value of debt and marketable
securities at December 31, 1996, 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 obligations without
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Fair
(in thousands) Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less $ 36,938 $ 36,611
Due after one year through
four years 40,814 40,118
Due after four years through
eight years 6,987 6,844
-------- --------
$ 84,739 $ 83,573
======== ========
</TABLE>
F-10
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
INVESTMENT RISK:
TDC invests excess cash in money market and fixed income securities of
companies with strong credit ratings, from a variety of industries, and in
U.S. government obligations. These securities typically bear minimal credit
risk and TDC has not experienced any losses on its investments to date due to
credit risk.
ORGANIZATION COSTS:
Organization costs totaling approximately $3.6 million were incurred in
developing TDC's organizational, financial and contractual structures and are
being amortized over 60 months using the straight line method.
STOCK BASED COMPENSATION:
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company grants certain
stock options for a fixed number of shares to employees, directors and
consultants with an exercise price below the fair value at the date of grant
and, accordingly, recognizes deferred compensation from the date of the grant.
PER SHARE INFORMATION:
Per share information is based on 7,734,524 shares (including Class A and
Class B Common Stock) outstanding for the entire period from inception
(November 1992) to December 31, 1996. Common equivalent shares are excluded
as their effect is antidilutive.
2. ARRANGEMENTS WITH ALZA CORPORATION
TDC was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining ALZA's proprietary drug delivery
technologies with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. In connection with the dividend
discussed below, ALZA made a $250 million cash contribution to TDC's capital,
which is being used primarily to fund activities under the development
contract described below.
F-11
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
In March 1993, ALZA announced a special dividend of units (each, a "Unit")
to ALZA stockholders, each Unit consisting of one share of TDC Class A Common
Stock and one warrant to purchase one-eighth of one share of ALZA Common
Stock at an exercise price of $65 per share. Holders of record of ALZA
Common Stock on May 28, 1993 received one Unit for every 10 shares of ALZA
Common Stock held, with cash distributed in lieu of fractional Units. A
total of 7,734,424 Units were distributed to ALZA stockholders on June 11,
1993. As a result of the distribution, all of the outstanding shares of TDC
Class A Common Stock were distributed to ALZA stockholders. ALZA continues
to hold all of the outstanding shares of TDC Class B Common Stock.
In accordance with TDC's Restated Certificate of Incorporation, on June 11,
1996, the Units separated into their component securities--TDC Class A Common
Stock and ALZA warrants. As a result of the separation, both securities are
listed and trade independently on the Nasdaq Stock Market. The trading symbol
for the TDC Class A Common Stock is "TDCA".
ALZA and TDC are parties to a development agreement (the "Development
Contract") pursuant to which ALZA conducts research and development
activities on behalf of TDC. Under the Development Contract, products have
been proposed by ALZA to TDC for development. For products approved for
development by TDC, ALZA (and/or other third parties) conducts research and
development activities under approved work plans and cost estimates. ALZA
has granted to TDC a royalty-free, exclusive, worldwide perpetual license to
use ALZA's proprietary drug delivery technology to develop and commercialize
TDC products.
For activities under the Development Contract, TDC incurred research and
development expenses of approximately $100.0 million during 1996, as compared
with $68.9 million during 1995, and $31.6 million during 1994. As
development activities continue during 1997, TDC's research and development
expenses are expected to continue until the funds contributed to TDC by ALZA
in 1993, plus any investment income earned thereon, less organization costs
and administrative expenses (including reasonable reserves for TDC
operations) are utilized.
ALZA has an option to license any products developed by TDC, on a
country-by-country product-by-product basis. If ALZA exercises its license
option for any product, ALZA will make the following payments to TDC with
respect to such product:
(a) if the product is sold by ALZA, royalties of up to a maximum of
5% of ALZA's net sales of the product determined as follows: (i) 1%
of net sales, plus (ii) an additional 0.1% of net sales for each full
$1 million of development costs of the
F-12
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
product paid by TDC; and (b) 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, determined as follows: (i) 10% of ALZA's
sublicensing revenues, plus (ii) an additional 1% of ALZA's
sublicensing revenues for each full $1 million of development costs of
the product paid by TDC.
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. Such option
may be exercised on a country-by-country or worldwide basis. Since the
beginning of 1997, ALZA has exercised its option to license TDC's
second-generation transdermal testosterone product to follow ALZA's existing
Testoderm-Registered Trademark- product from TDC for 12 European countries,
and TDC's OROS-Registered Trademark- hydromorphone product for the entire world.
ALZA also has an option, exercisable in 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; provided that such date may be extended for successive one year periods
if, as of any June 30 beginning with June 30, 1999, TDC has not used pursuant
to the Development Contract at least 90% of the cash initially contributed to
TDC by ALZA plus interest earned thereon less organization costs, TDC's
administrative expenses (including reasonable reserves for operations), and
the costs of the distribution to ALZA's stockholders. The Purchase Option
will expire, in any event, on the 60th day after TDC files with the
Securities and Exchange Commission a Form 10-K or Form 10-Q containing a
balance sheet showing less than an aggregate of $5 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 greater (i) of 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 each case, less any amounts previously paid by ALZA to exercise
a buy-out option with respect to any product;
(c) the fair-market value of one million shares of ALZA Common Stock, or
F-13
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
(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.
Until the expiration of the Purchase Option, ALZA, as the sole holder of
TDC's Class B Common Stock, will be entitled to vote separately as a class
with respect to, and therefore could prevent, any merger or liquidation of
TDC, the sale, lease, exchange, transfer or other disposition of any
substantial asset of TDC, and any amendments to the Restated Certificate of
Incorporation of TDC that would alter the Purchase Option, TDC's
capitalization, or the provisions of the Restated Certificate of
Incorporation concerning TDC's board of directors.
ALZA performs certain administrative services for TDC under an annually
renewable services agreement which is terminable at the option of TDC on 60
days' notice. Under this agreement, TDC reimburses ALZA for its
fully-burdened costs. Expenses incurred by TDC for administrative services
rendered under this agreement were approximately $152,000 in 1996, as
compared with $136,000 in 1995, and $206,000 in 1994. The expenses incurred
for the period from inception (November 1992) to December 31, 1996 were
approximately $614,000.
The arrangements between ALZA and TDC are complex and are incorporated in
various agreements between the parties and in TDC's Restated Certificate of
Incorporation.
3. STOCK OPTIONS
TDC has a stock option plan under which 500,000 shares of Class A Common
Stock have been reserved for issuance to employees, officers, directors
and consultants. During the period from inception (November 1992) to
December 31, 1993, options to purchase 341,500 shares were granted. In the
year ended December 31, 1994, options to purchase 55,000 shares were granted
to consultants. In the year ended December 31, 1995, options to purchase
2,000 shares were granted and options to purchase 1,500 shares were canceled.
In the year ended December 31, 1996, the options to purchase 2,000 shares
that were granted in 1995 were canceled. All outstanding options have an
exercise price of $1.00 per share, are exercisable in four equal annual
installments beginning on June 11, 1996, and expire ten years after the date
of grant. As of December 31, 1996, 395,000 options were outstanding, 98,750
of which were exercisable. The weighted average remaining contractual life
is 6.61 years for options outstanding at December 31, 1996.
F-14
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1996
STOCK COMPENSATION PLAN
TDC has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. The proforma compensation associated with the options granted
in 1995 (none in 1996) is negligible. TDC has, for financial statement
presentation purposes, recorded deferred compensation expense equal to the
difference, at the date of grant, between the exercise price and the market
value on the date of grant of the Class A Common Stock underlying options
granted during the relevant periods. This deferred compensation amount is
being amortized to expense over the vesting period of the options.
4. INCOME TAXES
Significant components of TDC's deferred tax assets for federal and state
income taxes for the two years ended December 31, 1996 and, 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
-------- --------
<S> <C> <C>
Net deferred tax assets:
Capitalized research expenses $ 64,696 $ 28,337
Capital loss carryover 1,434 1,454
SFAS 115 unrealized losses 479 108
Other (39) (39)
-------- --------
Total deferred tax assets 66,570 29,860
Less: valuation allowance (66,570) (29,860)
-------- --------
Net deferred tax assets $ - $ -
======== ========
</TABLE>
Because of the Company's lack of earnings history, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation
allowance increased by $36,710 in 1996 as compared with 1995 and by $14,719
in 1995 as compared with 1994, and by $14,695 in 1994 as compared with 1993.
F-15
<PAGE>
EXHIBIT 99.3
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Therapeutic Discovery Corporation
We have audited the accompanying balance sheet of Therapeutic Discovery
Corporation (a development stage company) as of December 31, 1995 and 1994, and
the related statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1995 and 1994 and for the periods from inception
(November 1992) to December 31, 1993 and 1995. 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 financial position of Therapeutic Discovery
Corporation (a development stage company) at December 31, 1995 and 1994 and the
results of its operations and its cash flows for the years ended December 31,
1995 and 1994 and for the periods from inception (November 1992) to December 31,
1993 and 1995 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 16, 1996
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Balance Sheet
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13,314 $ 20,050
Short-term investments 163,294 193,687
Interest receivable 1,427 2,448
Prepaid expenses and other current assets 278 401
-------- --------
Total current assets 178,313 216,586
Long-term assets:
Employee loans, long-term 300 300
Prepaid expenses and other long-term assets 1,094 1,094
Organization costs, (net of accumulated amortization) 1,730 2,447
-------- --------
Total assets $181,437 $220,427
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Payable to ALZA Corporation $ 16,817 $ 7,695
Accounts payable 1 3
Other current liabilities 147 151
-------- --------
Total current Liabilities 16,965 7,849
Stockholders' equity:
Class A Common Stock, $.01 par value, 12,000,000
shares authorized, 7,734,424 issued and outstanding 77 77
Class B Common Stock, $.01 par value, 100 shares
authorized, issued and outstanding - -
Additional paid-in capital 251,650 251,648
Net unrealized losses on available-for-sale securities (262) (11,393)
Deficit accumulated during development stage (85,448) (26,045)
Deferred compensation (1,545) (1,709)
-------- --------
Total stockholders' equity 164,472 212,578
-------- --------
Total liabilities and stockholders' equity $181,437 $220,427
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Statement of Operations
(in thousand, except number of shares and per share data)
<TABLE>
<CAPTION>
Period From Period From
Year Ended Year Ended Inception Inception
December 31, December 31, (November 1992) to (November 1992) to
1995 1994 December 31, 1993 December 31, 1995
------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Net interest and investment income $ 11,540 $ 8,673 $ 5,908 $ 26,121
Expenses:
Research and development 68,923 31,634 4,869 105,426
General and administrative 2,321 2,700 1,423 6,444
---------- ---------- ---------- -----------
Total expenses 71,244 34,334 6,292 111,870
---------- ---------- ---------- -----------
Loss before taxes (59,704) (25,661) (384) (85,749)
---------- ---------- ---------- -----------
Income tax 301 - - 301
---------- ---------- ---------- -----------
Net loss $ (59,403) $ (25,661) $ (384) $ (85,448)
========== ========== ========== ===========
Net loss per common share $ (7.68) $ (3.32) $ (.05)
========== ========== ==========
Weighted average common shares 7,734,524 7,734,524 7,734,524
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Statement of Stockholders' Equity
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Deficit Unrealized
Accumulated losses on
Class A Class B Additional During the available- Total
Common Common Common Paid-in Development Deferred for-sale Stockholders'
Stock Stock Stock Capital Stage Compensation securities Equity
------- ------- -------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 100 shares
of Common Stock for
$20 per share to ALZA
Corporation in November $ - $ - $ - $ 2 $ - $ - $ - $ 2
1992
Issuance of 7,734,424
shares of Class A
Common Stock for
approximately $32.32
per share to ALZA
Corporation in June
1993, net of issuance
costs of $222 - 77 - 249,699 - - - 249,776
Conversion by ALZA
Corporation of 100
shares of Common Stock
into 100 shares of
Class B Common Stock
in June 1993 - - - - - - - -
Deferred compensation
resulting from grant
of options through
December 31, 1993 - - - 1,686 - (1,686) - -
Amortization of
deferred
compensation - - - - - 80 - 80
Net loss - - - - (384) - - (384)
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31,
1993 - 77 - 251,387 (384) (1,606) - 249,474
</TABLE>
See accompanying notes
F-4
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
Statement of Stockholders' Equity
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Deficit Unrealized
Accumulated losses on
Class A Class B Additional During the available- Total
Common Common Common Paid-in Development Deferred for-sale Stockholders'
Stock Stock Stock Capital Stage Compensation securities Equity
------ ------- ------- ---------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred compensation
resulting from grant
of options in the year
ended December 31, 1994 - - - 261 - (261) -
Amortization of
deferred
compensation - - - - - 158 - 158
Net change in unrealized loss
on available-for-sale
securities - - - - - - (11,393) (11,393)
Net loss - - - - (25,661) - - (25,661)
------ ------- ------- ---------- ----------- ------------ ---------- -------------
Balance,
December 31,
1994 - 77 - 251,648 (26,045) (1,709) (11,393) 212,578
Deferred compensation
resulting from grant
of options in the year
ended December 31, 1995 - - - 2 - (2) - -
Amortization of
deferred
compensation - - - - - 166 - 166
Net change in unrealized
loss on available-for-sale
securities - - - - - - 11,131 11,131
Net loss - - - - (59,403) - - (59,403)
------ ------- ------- ---------- ----------- ------------ ---------- -------------
Balance,
December 31,
1995 $ - $ 77 $ - $ 251,650 $ (85,448) $ (1,545) $ (262) $ 164,472
====== ======= ======= ========== =========== ============ ========== =============
</TABLE>
See accompanying notes
F-5
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Period From Period from
Year Ended Year Ended Inception Inception
December 31, December 31, (November 1992) to (November 1992) to
1995 1994 December 31, 1993 December 30, 1995
------------ ------------ ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $ (59,403) $ (25,661) $ (384) $ (85,448)
Adjustments to reconcile net loss
to net cash used in operating activities;
Amortization of organization costs 716 716 418 1,850
Amortization of deferred compensation 164 158 80 402
(Increase) decrease in assets:
Interest receivable 1,021 127 (2,575) (1,427)
Other receivable - (252) - (252)
Organization costs - - (3,581) (3,581)
Prepaid expenses 123 130 (1,373) (1,120)
Increase (decrease) in liabilities;
Payable to ALZA Corporation 9,122 5,390 2,305 16,817
Accounts payable (2) (47) 50 1
Other current liabilities (4) 52 99 147
------------ ------------ ------------------ -----------------
Total adjustments 11,140 6,274 (4,577) 12,837
------------ ------------ ------------------ -----------------
Net cash used in operating activities (48,263) (19,387) (4,961) (72,611)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in available-for-sale securities (42,863) (294,121) (1,000,416) (1,337,400)
Sale of available-for-sale securities 81,349 194,134 212,668 488,151
Maturities of available-for-sale securities 3,041 137,918 544,737 685,696
Employee loans, long-term - - (300) (300)
------------ ------------ ------------------ -----------------
Net cash provided by (used in) investing
activities 41,527 37,931 (243,311) (163,853)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock - - 2 2
Issuance of Class A Common Stock, net of
issuance costs - - 249,776 249,776
------------ ------------ ------------------ -----------------
Net cash provided by financing activities - - 249,778 249,778
------------ ------------ ------------------ -----------------
Net increase (decrease) in cash and cash equivalents (6,736) 18,544 1,506 13,314
Cash and cash equivalents at beginning of period 20,050 1,506 - -
------------ ------------ ------------------ -----------------
Cash and cash equivalents at end of period $ 13,314 $ 20,050 $ 1,506 $ 13,314
============ ============ ================== =================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1995
Notes to Financial Statements
-----------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------
Therapeutic Discovery Corporation ("TDC") was incorporated in Delaware on
November 12, 1992 and commenced operations on June 11, 1993. Since it commenced
operations, TDC has been engaged in selecting and developing new human
pharmaceutical products combining the proprietary drug delivery systems of ALZA
Corporation ("ALZA") with various drug compounds. TDC's principal activities
consist of research and development activities under its agreement with ALZA.
Accordingly, TDC is considered a development stage company.
During the period from TDC's inception (November 1992) to December 31,
1992, TDC's operations were limited to capital formation and organization
activities. During that period, TDC earned no revenues and incurred immaterial
operating costs and expenses. Due to the insignificance of these amounts to the
financial statements taken as a whole, the results of operations for this period
are included in the results of operations for the period ended December 31,
1993.
A summary of the significant accounting policies of TDC follows:
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
TDC reports all highly liquid debt instruments purchased with a maturity of
three months or less as cash equivalents. The carrying amount reported on the
balance sheet for cash and cash equivalents approximates their fair value.
F-7
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31,1995
SHORT-TERM INVESTMENTS:
TDC has classified its entire investment portfolio, including cash
equivalents of $177 million and $214 million at December 31, 1995 and 1994,
respectively, as available-for-sale. Although TDC may not dispose of all of the
securities in its investment portfolio within one year, TDC's investment
portfolio is available for current operations and, therefore, has been
classified as a current asset. Investments in the available-for-sale category
are carried at fair market value with unrealized losses recorded as a separate
component of stockholders' equity. At December 31, 1995, net unrealized losses
on available-for-sale securities were approximately $.3 million. At December 31,
1994, net unrealized losses on available-for-sale securities were approximately
$11.4 million. Net interest and investment income for the year ended December
31, 1994 includes a loss of $3.9 million on securities that were sold in 1994 to
reposition TDC's portfolio to take advantage of higher interest rates. Realized
gains for the years ended December 31, 1995 and 1994 and realized losses for the
year ended December 31, 1995 were not material. The cost of securities when sold
is based upon specific identification.
The following is a summary of available-for-sale securities at December 31,
1995:
<TABLE>
<CAPTION>
Available-for-Sale Securities
-----------------------------------------------
Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $ 89,526 $ 288 $ (167) $ 89,647
Collateralized mortgage
obligations and asset
backed securities 39,061 11 (363) 38,709
Corporate securities 47,858 47 (78) 47,827
-------- --------- ---------- ---------
$176,445 $ 346 $ (608) $ 176,183
======== ========= ========== =========
</TABLE>
F-8
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1995
The following is a summary of available-for-sale securities at December 31,
1994:
<TABLE>
<CAPTION>
Available-for-Sale Securities
--------------------------------------------------
Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $109,864 $ 0 $ (6,586) $ 103,278
Collateralized mortgage
obligations and asset
backed securities 44,410 0 (2,552) 41,858
Corporate securities 70,602 0 (2,255) 68,347
-------- ---------- --------- ---------
$224,876 $ 0 $ (11,393) $ 213,483
======== ========== ========= =========
</TABLE>
The amortized cost and estimated fair value of debt and marketable
securities at December 31, 1995, 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 obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Fair
(in thousands) Cost Value
-------- ---------
<S> <C> <C>
Due in one year or less $ 75,570 $ 75,649
Due after one year through
four years 89,990 89,515
Due after four years through
eight years 10,885 11,019
-------- ---------
$176,445 $176,183
======== =========
</TABLE>
The difference between the total estimated fair value as given in the above
tables and the total of cash and cash equivalents and short-term investments on
the balance sheet is due to the inclusion of TDC's cash in bank of $0.4 million
in cash and cash equivalents on the balance sheet.
F-9
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1995
INVESTMENT RISK:
TDC invests excess cash in money market and fixed income securities of
companies with strong credit ratings, from a variety of industries, and in U.S.
government obligations. These securities typically bear minimal credit risk and
TDC has not experienced any losses on its investments to date due to credit
risk.
ORGANIZATION COSTS:
Organization costs totaling approximately $3.6 million were incurred in
developing TDC's organizational, financial and contractual structures and are
being amortized over 60 months using the straight line method.
STOCK BASED COMPENSATION:
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees. The Company grants certain
stock options for a fixed number of shares to employees, directors and
consultants with an exercise price below the fair value at the date of grant
and, accordingly, recognizes deferred compensation from the date of the grant.
PER SHARE INFORMATION:
Per share information is based on 7,734,524 shares (including Class A and
Class B Common Stock) outstanding for the entire period from inception (November
1992) to December 31, 1995. Common equivalent shares are excluded as their
effect is antidilutive.
2. ARRANGEMENTS WITH ALZA CORPORATION
----------------------------------
TDC was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining ALZA's proprietary drug delivery
technologies with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. In connection with the dividend
discussed below, ALZA made a $250 million cash contribution to TDC's capital,
which is being used primarily to fund activities under the development
contract described below.
F-10
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1995
In March 1993, ALZA announced a special dividend of units (each, a "Unit") to
ALZA stockholders, each Unit consisting of one share of TDC Class A Common Stock
and one warrant to purchase one-eighth of one share of ALZA Common Stock at an
exercise price of $65 per share. Holders of record of ALZA Common Stock on May
28, 1993 received one Unit for every 10 shares of ALZA Common Stock held, with
cash distributed in lieu of fractional Units. A total of 7,734,424 Units were
distributed to ALZA stockholders on June 11, 1993. As a result of the
distribution, all of the outstanding shares of TDC Class A Common Stock were
distributed to ALZA stockholders. ALZA continues to hold all of the outstanding
shares of TDC Class B Common Stock.
The Units trade on the Nasdaq Stock Market (under the 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").
On and after the Separation Date, the ALZA warrants and the TDC Class A Common
Stock will trade separately.
ALZA and TDC are parties to a development agreement (the "Development
Contract") pursuant to which ALZA conducts research and development activities
on behalf of TDC. Under the Development Contract, products are proposed by ALZA
to TDC for development. For products approved for development by TDC, ALZA
(and/or other third parties) will conduct research and development activities
under approved work plans and cost estimates. ALZA has granted to TDC a
royalty-free, exclusive worldwide perpetual license to use ALZA's proprietary
drug delivery technology to develop and commercialize TDC products.
For activities under the Development Contract, TDC incurred research and
development expenses of approximately $68.9 million during 1995 as compared with
$31.6 million during 1994 and $4.9 million for the period from inception
(November 1992) to December 31, 1993. As additional products are accepted by TDC
for development, and development activities increase, TDC's research and
development expenses are expected to continue at current levels or increase in
future years.
ALZA has an option to license any products developed by TDC, on a country-by-
country product-by-product basis. If ALZA exercises its license option for any
product, ALZA will make the following payments to TDC with respect to such
product;
(a) if the product is sold by ALZA, royalties of up to a maximum of 5%
of ALZA's net sales of the product determined as follows: (i) 1% of net
sales, plus (ii) an additional 0.1% of net sales for each full $1 million of
development costs of the product paid by TDC; and
F-11
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1995
(b) 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, determined as
follows: (i) 10% of ALZA's sublicensing revenues, plus (ii) an additional 1%
of ALZA's sublicensing revenues for each full $1 million of development costs
of the product paid by TDC.
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. Such option may be
exercised on a country-by-country or worldwide basis.
ALZA also has an option, exercisable in 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; provided
that such date may be extended for successive one year periods if, as of any
June 30 beginning with June 30, 1999, TDC has not paid pursuant to the
Development Contract at least 90% of the cash initially contributed to TDC by
ALZA plus interest earned thereon less organization costs, TDC's administrative
expenses, and the costs of the distribution to ALZA's stockholders. The Purchase
Option will expire, in any event, on the 60th day after TDC files with the
Securities and Exchange Commission a Form 10-K or Form 10-Q containing a balance
sheet showing less than an aggregate of $5 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) the greater (i) of 25 times the worldwide royalties and sublicensing fees
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 each case, less any amounts previously paid by
ALZA to exercise a buy-out option with respect to any product:
(b) the fair-market value of one million shares of ALZA Common Stock;
(c) $325 million less all amounts paid by TDC under the Development Contract:
or
(d) $100 million.
The purchase price may be paid in cash, in ALZA Common Stock, or any combination
of the two, at the option of ALZA.
F-12
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1995
Until the expiration of the Purchase Option, ALZA, as the sole holder of
TDC's Class B Common Stock, will be entitled to vote separately as a class with
respect to, and therefore could prevent, any merger or liquidation of TDC, the
sale, lease, exchange, transfer or other disposition of any substantial asset of
TDC, and any amendments to the Restated Certificate of Incorporation of TDC that
would alter the Purchase Option, TDC's capitalization, or the provisions of the
Restated Certificate of Incorporation concerning TDC's board of directors.
ALZA performs certain administrative services for TDC under an annually
renewable services agreement which is terminable at the option of TDC on 60
days' notice. Under this agreement, TDC reimburses ALZA for its fully-burdened
costs. Expenses incurred by TDC for administrative services rendered under this
agreement were approximately $136,000 in 1995, as compared with $206,000 in 1994
and $120,000 for the period from inception (November 1992) to December 31, 1993.
The expenses incurred for the period from inception (November 1992) to December,
1995 were approximately $462,000.
The arrangement between ALZA and TDC are complex and are incorporated in
various agreements between the parties and in TDC's Restated Certificate of
Incorporation.
3. STOCK OPTIONS
-------------
TDC has a stock option plan under which 500,000 shares of Class A Common
Stock have been reserved for issuance to employees, officers and directors and
consultants. During the period from inception (November 1992) to December 31,
1993, options to purchase 341,500 shares were granted. In the year ended
December 31, 1994, options to purchase 55,000 shares were granted to
consultants. In the year ended December 31, 1995, options to purchase 2,000
shares were granted and options to purchase 1,500 shares were cancelled. All
options granted on or prior to December 31, 1994 have an exercise price of $1.00
per share. Options granted in 1995 have an exercise price of not less than
eighty-five percent (85%) of the fair market value of the stock on the date of
grant. All options granted to date are exercisable in four equal annual
installments beginning on June 11, 1996 and expire ten years after the date of
grant.
TDC has, for financial statement presentation purposes, recorded deferred
compensation expense equal to the difference, at the date of grant, between the
exercise price and the market value on the date of grant of the Class A Common
Stock underlying options granted during the periods ended December 31, 1995 and
December 31, 1994. The TDC Class A Common Stock is currently traded as part of
F-13
<PAGE>
Therapeutic Discovery Corporation
(a development stage company)
December 31, 1995
Units, each Unit consisting of one share of TDC Class A Common Stock and one
warrant to purchase one-eighth of one share of ALZA Common Stock at an exercise
price of $65 per share. For purposes of determining the value of unexercised
options, the average of the high and low sales prices per Unit on the applicable
grant date was determined to be the value of TDC Class A Common Stock and no
value was attributed to the ALZA warrant. This deferred compensation amount is
being amortized to expense over the vesting period of the options. The value of
a Unit is not necessarily indicative of the future performance of the TDC Class
A Common Stock once such stock begins to trade separately from the ALZA
warrants.
4. INCOME TAXES
------------
Significant components of TDC's deferred tax assets for federal and state
income taxes for the two years ended December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands)
1995 1994
---- ----
<S> <C> <C>
Net deferred tax assets:
Capitalized research expenses $ 28,337 $ 8,840
Capital loss carryover 1,454 1,559
SFAS 115 unrealized losses 108 4,676
Other (39) 66
-------- -------
Total deferred tax assets 29,860 15,141
Less: Valuation allowance (29,860) (15,141)
-------- -------
Net deferred tax assets $ - $ -
-------- -------
</TABLE>
Because of the Company's lack of earnings history, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased by $14,719 in 1995 as compared with 1994 and by $14,695 in 1994 as
compared with 1993.
F-14
