UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from __________ to __________
Commission File Number 1-6247
ALZA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0142070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Page Mill Road
P.O. Box 10950
Palo Alto, California 94303-0802
(Address of principal executive offices)
Registrant's telephone number, including area code (650) 494-5000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Number of shares outstanding of each of the registrant's classes
of common stock as of July 30, 1999:
Common Stock, $.01 par value - 101,596,932 shares
<PAGE>
ALZA CORPORATION
FORM 10-Q for the Quarter Ended
June 30, 1999
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Income 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-27
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Part II. Other Information
Item 1. Legal Proceedings 28
Item 4. Submission of matters to vote of security holders 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Exhibits
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALZA CORPORATION
Condensed Consolidated Statement of Operations (unaudited)
(In millions, except per share amounts)
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------------------------------------
Revenues:
Net sales $103.2 $ 72.3 $199.4 $139.1
Royalties, fees and other 54.8 53.4 113.7 103.8
Research and development 37.2 32.6 67.6 58.9
----------------------------------------
Total revenues 195.2 158.3 380.7 301.8
Costs and expenses:
Costs of products shipped 40.3 35.2 74.6 66.5
Research and development 47.8 42.7 91.9 82.9
Selling, general and
administrative 60.4 27.3 115.6 51.7
SEQUUS merger-related
costs - - 32.6 -
----------------------------------------
Total costs and expenses 148.5 105.2 314.7 201.1
Operating income 46.7 53.1 66.0 100.7
Interest expense 14.8 14.3 29.7 28.5
Interest and other income (18.4) (6.5) (23.4) (13.4)
----------------------------------------
Net interest and other
(income) expense (3.6) 7.8 6.3 15.1
----------------------------------------
Income before income taxes 50.3 45.3 59.7 85.6
Provision for income taxes 16.1 15.9 21.8 29.7
----------------------------------------
Net income $ 34.2 $ 29.4 $ 37.9 $ 55.9
======================================
Earnings per share
Basic $ 0.34 $ 0.30 $ 0.38 $ 0.57
======================================
Diluted $ 0.33 $ 0.29 $ 0.37 $ 0.56
======================================
Shares used in per share computation
Basic 100.7 99.0 100.5 98.6
Diluted 114.9 113.8 102.9 100.7
See accompanying notes.
<PAGE>
ALZA Corporation
Condensed Consolidated Balance Sheet (unaudited)
(In millions)
June 30, December 31,
1999 1998
________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 92.2 $ 110.1
Short-term investments 58.1 86.1
Receivables, net 166.7 148.6
Inventories, at cost:
Raw materials 19.9 18.2
Work in process 10.4 10.6
Finished goods 29.0 25.8
________________________________________________________________
Total inventories 59.3 54.6
Prepaid expenses and other
current assets 69.5 26.3
________________________________________________________________
Total current assets 445.8 425.7
Property, plant and equipment 511.2 504.7
Less accumulated depreciation
and amortization (131.0) (132.3)
________________________________________________________________
Net property, plant and equipment 380.2 372.4
Investments in long-term securities 336.6 317.9
Deferred product acquisition payments 281.9 279.1
Other assets 285.4 271.5
________________________________________________________________
TOTAL ASSETS $ 1,729.9 $ 1,666.6
================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53.0 $ 59.7
Accrued liabilities 57.3 61.5
Other current liabilities 7.5 7.4
________________________________________________________________
Total current liabilities 117.8 128.6
5% convertible subordinated debentures 499.9 500.0
5 1/4% zero coupon convertible
subordinated debentures 433.7 422.6
Other long-term liabilities 81.4 83.5
Stockholders' equity:
Common stock and additional
paid-in capital 671.7 645.5
Accumulated other comprehensive loss (9.5) (10.6)
Accumulated deficit (65.1) (103.0)
________________________________________________________________
Total stockholders' equity 597.1 531.9
________________________________________________________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,729.9 $ 1,666.6
================================================================
See accompanying notes.
<PAGE>
ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In millions)
Six Months Ended
June 30,
1999 1998
__________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37.9 $ 55.9
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 20.0 18.7
Amortization of product acquisition payments 12.2 5.3
Interest on 5 1/4% zero coupon convertible
subordinated debentures 11.2 10.5
Changes in current assets:
Receivables (18.1) (9.3)
Inventories (4.6) 6.7
Prepaid expenses and other current assets (43.8) 0.4
Changes in liabilities:
Accounts payable (1.8) (34.8)
Accrued liabilities 0.4 (15.3)
Other long-term liabilities 1.9 1.2
Gain on sale of real estate and
other assets, net (12.5) -
Asset write-down 10.7 -
___________________
Total adjustments (24.4) (16.6)
___________________
Net cash provided by operating activities 13.5 39.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40.8) (25.1)
Proceeds from sale of real estate assets 20.3 -
Product acquisition payments (20.0) (6.2)
Purchases of available-for-sale securities (102.5) (176.4)
Sales and maturities of available-for-sale
securities 113.2 167.0
Other investing activities (18.0) (14.0)
______________________________________________________________________
Net cash used in investing activities (47.8) (54.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 20.0 38.1
Principal repayments of long-term debt, net (3.6) (4.2)
______________________________________________________________________
Net cash provided by financing activities 16.4 33.9
______________________________________________________________________
Net (decrease) increase in
cash and cash equivalents (17.9) 18.5
Cash and cash equivalents at
beginning of period 110.1 71.7
_____________________________________________________________________
Cash and cash equivalents at end of period $ 92.2 $ 90.2
=======================
See accompanying notes.
<PAGE>
ALZA CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
The information at June 30, 1999 and for the three and six months
ended June 30, 1999 and 1998 includes all adjustments (consisting
only of normal recurring adjustments) that the management of ALZA
Corporation ("ALZA") believes necessary for fair presentation of
the results for the periods presented.
Results for any interim period are not necessarily indicative of
results for any future interim period or for the entire year.
The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto
included in ALZA's Annual Report on Form 10-K for the year ended
December 31, 1998 and on ALZA's Report on Form 8-K filed May 13,
1999, which restates financial information for prior periods to
reflect the combined results of ALZA and SEQUUS Pharmaceuticals,
Inc. ("SEQUUS"). In March 1999, all of the outstanding shares of
SEQUUS were acquired by ALZA in a business combination accounted
for as a pooling of interests. Accordingly, the financial data
for prior periods has been restated to represent the combined
financial results of ALZA and SEQUUS (Note 5).
Comprehensive Income
Total comprehensive income includes net income plus other
comprehensive income, which, for ALZA, primarily comprises net
unrealized gains or losses on available-for-sale securities.
Other comprehensive income (loss) was $(6.8) million and $(9.8)
million for the quarters ended June 30, 1999 and 1998,
respectively, and $1.1 million and $(9.9) million for the six
months ended June 30, 1999 and 1998. Total comprehensive income
was $27.4 million and $19.6 million for the quarters ended June
30, 1999 and 1998, respectively, and $39.0 million and $46.0
million for the six months ended June 30, 1999 and 1998,
respectively.
Supplemental Disclosures of Cash Flow Information
Noncash Investing and Financing Activities (In millions)
Six months
ended June 30,
1999 1998
_________________________________________________________________
Investment in low-income housing
in exchange for long-term debt $ - $ 10.1
Acquisition of building in lieu of
repayment of note receivable - 17.5
Accrued purchase option exercise price
for limited partners' interests in
ALZA TTS Research Partners, Ltd. - 91.2
Conversion of 5% and 5 1/4% Debentures
into ALZA common stock 0.2 1.2
Reclassification
Certain amounts in the prior year's financial statements
have been reclassified to conform to the 1999 presentation.
NOTE 2. MERGER AGREEMENT WITH ABBOTT LABORATORIES
On June 21, 1999, ALZA entered into an Agreement and Plan of
Merger ("Merger Agreement") with Abbott Laboratories ("Abbott"),
an Illinois corporation. Under the terms of the Merger
Agreement, Abbott would acquire all of ALZA's outstanding stock
in a tax free, stock-for-stock transaction. ALZA's stockholders
would receive 1.2 shares of Abbott common stock for each share of
ALZA common stock held on the record date. The transaction is
expected to be completed by the end of 1999, subject to approval
by ALZA's stockholders, clearance by regulatory agencies and
customary closing conditions.
NOTE 3. EARNINGS PER SHARE INFORMATION
Basic earnings per share is calculated by dividing net
income by the weighted average common shares outstanding for the
period. Diluted earnings per share is calculated by dividing net
income, as adjusted, by the weighted average common shares
outstanding for the period plus the dilutive effect of stock
options, warrants and convertible securities.
The following table sets forth the computation of ALZA's
basic and diluted earnings per share:
Quarter Ended Six Months Ended
(In millions except June 30, June 30,
per share amounts) 1999 1998 1999 1998
_________________________________________________________________
NUMERATOR:
Basic
Net income $ 34.2 $ 29.4 $37.9 $ 55.9
_________________________________________________________________
Diluted
Net income $ 34.2 $ 29.4 $37.9 $ 55.9
Adjustments, net of tax:
Interest on 5 1/4%
Debentures 33.8 3.5 - -
___________________________________________________________________
Adjusted net income $ 38.0 $ 32.9 $37.9 $ 55.9
=================================================================
DENOMINATOR:
Basic
Weighted average shares 100.7 99.0 100.5 98.6
=================================================================
Diluted
Weighted average shares 101.0 99.1 100.8 98.6
Effect of dilutive
securities:
Employee stock options 1.6 2.3 2.1 2.0
Warrants - 0.1 - 0.1
5 1/4% Debentures 12.3 12.3 - -
___________________________________________________________________
Weighted average shares
and assumed conversions 114.9 113.8 102.9 100.7
=================================================================
Basic earnings per share $ 0.34 $ 0.30 $0.38 $ 0.57
===================================================================
Diluted earnings per share $ 0.33 $ 0.29 $0.37 $ 0.56
=================================================================
Stock options and warrants to purchase 3.5 million and 3.0
million shares of common stock were excluded from the diluted
earnings per share calculation for the quarter and six months ended
June 30, 1999, respectively, compared to 2.5 million shares for the
same periods in 1998 because the exercise price of the options and
warrants was greater than the average market price of the common
shares during the quarter, and therefore the effect of including
those options and warrants would have been anti-dilutive. Assumed
conversions of ALZA's outstanding 5% convertible subordinated
debentures due 2006 ("5% Debentures") were not included in the
diluted earnings per share calculation for the periods presented as
their inclusion would have been anti-dilutive. The 5 1/4% zero
coupon convertible subordinated debentures due 2014 ("5 1/4%
Debentures") were not included in the diluted earnings per share
calculation for the six months ended June 30, 1999 and 1998 as
their inclusion would have been anti-dilutive.
NOTE 4. CRESCENDO PHARMACEUTICALS CORPORATION (RELATED PARTY)
Under the Development Agreement between ALZA and Crescendo
Pharmaceuticals Corporation ("Crescendo"), ALZA recorded product
development revenues of $28.5 million for the quarter ended June
30, 1999 and $51.8 million for the six months ended June 30, 1999
compared with $24.9 million for the quarter ended June 30, 1998
and $44.9 million for the six months ended June 30, 1998. ALZA
expects that Crescendo will have expended all of its available
funds during 2000.
Under the Technology License Agreement between ALZA and
Crescendo, ALZA recorded technology fee revenue from Crescendo of
$2.0 million for the quarter ended June 30, 1999 and $4.0 million
for the six months ended June 30, 1999, compared with $3.0
million for the quarter ended June 30, 1998 and $6.0 million for
the six months ended June 30, 1998, all in accordance with the
terms of the agreement.
ALZA has an option to acquire an exclusive, royalty-bearing
license to each product developed by Crescendo under the
Development Agreement. The option is exercisable on a product-by-
product, country-by-country, basis. In December 1998, ALZA
exercised its option to obtain a worldwide license to OROSr-
registered trademark- oxybutynin (marketed by ALZA in the United
States as Ditropanr-registered trademark- XL). Under the license
agreement for this product, ALZA must pay Crescendo 2.5% of net
sales of the licensed product in the first year of sales, and 3%
in the second and third years. Thereafter, until 15 years after
the date of the first commercial sale of the product, the
percentage owed to Crescendo would be based upon development
costs paid by Crescendo; based upon current information this rate
is expected to be between 5% and 6%.
NOTE 5. ACQUISITION OF SEQUUS PHARMACEUTICALS, INC.
On March 16, 1999, ALZA completed a merger with SEQUUS by
acquiring all of SEQUUS' outstanding stock in a tax-free, stock-
for-stock transaction. SEQUUS stockholders received 0.4 shares
of ALZA common stock for each share of SEQUUS common stock. ALZA
issued 13.2 million shares in the merger. ALZA accounted for the
transaction as a pooling of interests. Accordingly, ALZA's
consolidated financial statements have been retroactively
restated for prior periods to include the combined financial
results of ALZA and SEQUUS. For the quarter and six months ended
June 30, 1999, the consolidated results of operations of the
combined companies have been presented and no adjustments were
necessary to conform the accounting practices of the two
companies.
The table below presents the separate results of operations
for ALZA and SEQUUS for the periods prior to the merger and
combined results after the merger:
Merger-
related
(In millions) ALZA SEQUUS adjustments Total
_________________________________________________________________
Six months ended June 30, 1999
Revenues (a)$ 368.3 $ 12.4 $ - $ 380.7
Net income (a) 76.2 (5.7) (b)(32.6) 37.9
___________________________________________________________
Six months ended June 30, 1998
Revenues $ 273.0 $ 28.8 $ - $ 301.8
Net income (loss) 59.0 (5.2) (c) 2.1 55.9
________________________________________________________________
(a) SEQUUS' results are included in ALZA's combined results
subsequent to March 16, 1999.
(b) Represents expenses incurred by ALZA related to the merger.
(c) Represents a 40% tax benefit derived from SEQUUS' net loss.
As a result of the SEQUUS acquisition, ALZA incurred merger-
related costs that consisted of merger transaction costs, exit
costs and employee severance costs. Merger transaction costs
consisted primarily of fees for investment bankers, attorneys and
accountants, filing fees, financial printing costs and other
related charges. Exit costs include costs such as cancellation of
lease agreements and the write-down of SEQUUS assets that will
not be used in continuing operations. The following table shows
the details of the accrual for merger-related costs for the six
months ended June 30, 1999:
Merger- Balance
related at June 30,
(In millions) costs Utilized 1999
____________________________________________________________________
Merger transaction costs $ 13.2 $ 13.2 $ -
Exit costs 14.3 10.3 4.0
Employee severance 5.1 5.1 -
_______________________________
Total $ 32.6 $ 28.6 $ 4.0
===============================
NOTE 6. SEGMENT REPORTING
ALZA has two operating segments: ALZA Pharmaceuticals and
ALZA Technologies. The ALZA Pharmaceuticals segment includes
sales of products directly to the pharmaceutical marketplace,
research and development of potential products to be marketed by
ALZA (including revenues and expenses relating to products under
development with Crescendo) and co-promotion revenues for
products co-promoted by ALZA. The ALZA Technologies segment
includes research, development and manufacturing for client
companies and ALZA Pharmaceuticals, and royalties and fees
(including milestone payments) from ALZA's client companies under
joint product development and commercialization agreements. The
"Other" category primarily comprises corporate general and
administrative expenses, including finance, legal, human
resources, commercial development, executive and other functions
not directly attributable or allocated to the activities of the
operating segments, as well as rental and service fee revenues.
SEQUUS' net sales, costs of products shipped, research and
development for potential products to be marketed by ALZA and
sales and marketing expenses are included in ALZA
Pharmaceuticals; SEQUUS royalties and fee revenues and research
and development expenses are included in ALZA Technologies; and
SEQUUS general and administrative expenses are included in Other.
ALZA evaluates performance and allocates resources based on
operating income or loss from operations (before allocation of
certain general and administrative expenses, net interest
expense, investment gains and losses and income taxes). ALZA
does not assess segment performance or allocate resources based
on a segment's total assets, and therefore ALZA's assets are not
reported by segment. ALZA allocates certain long-lived assets to
operating segments for purposes of allocating depreciation and
amortization expense. The accounting policies of the reportable
segments are the same as those described in the summary of
significant accounting policies in ALZA's Annual Report on Form
10-K for the year ended December 31, 1998. ALZA accounts for
intersegment revenues based on prices negotiated between the
segments, which generally approximate the prices charged to third
parties.
ALZA's reported segments are strategic operating units that
distribute products to different types of customers and provide
different types of services. They are managed differently
because ALZA Pharmaceuticals' sales and marketing efforts are
extensive and disparate from the revenue generation process
resulting from ALZA Technologies' arrangements with client
companies.
The following tables contain information about segment
operating income (loss) for the quarter ended June 30, 1999 and
1998, and six months ended June 30, 1999 and 1998.
Quarter ended Six months ended
June 30, June 30,
(In millions) 1999 1998 1999 1998
________________________________________________________________
Revenues from external customers
Net sales
ALZA Pharmaceuticals $ 68.8 $ 41.8 $ 136.7 $ 83.7
ALZA Technologies 34.4 30.5 62.7 55.4
Royalties, fees and other
ALZA Pharmaceuticals 3.2 6.3 6.3 10.1
ALZA Technologies 51.2 46.2 106.6 92.5
Other 0.4 0.9 0.8 1.2
Research and development
ALZA Pharmaceuticals 28.5 24.3 51.8 43.8
ALZA Technologies 8.7 8.3 15.8 15.1
__________________________________________
Total $ 195.2 $ 158.3 $ 380.7 $301.8
=========================================
Intersegment revenues
Net sales
ALZA Pharmaceuticals $ - $ - $ - $ -
ALZA Technologies 3.8 2.0 8.0 3.6
Research and development
ALZA Pharmaceuticals - - - -
ALZA Technologies 28.6 24.3 51.9 43.9
__________________________________________
Total $ 32.4 $ 26.3 $ 59.9 $ 47.5
=========================================
Segment operating income (loss)
ALZA Pharmaceuticals $ 2.5 $ 10.7 $ 6.3 $ 21.8
ALZA Technologies 52.3 47.7 106.5 90.2
Other (8.1) (5.3) (46.8) (11.3)
__________________________________________
Total $ 46.7 $ 53.1 $ 66.0 $100.7
=========================================
The following table contains a reconciliation of ALZA's
income before taxes to that reported by segment in the tables
above:
Quarter ended Six months ended
June 30, June 30,
(In millions) 1999 1998 1999 1998
________________________________________________________________
Income (loss) before taxes
Total operating income for
reportable segments $ 54.8 $ 58.4 $ 112.8 $112.0
Other loss (8.1) (5.3) (46.8) (11.3)
Unallocated amounts:
Interest and other income 18.4 6.5 23.4 13.4
Interest expense (14.8) (14.3) (29.7) (28.5)
___________________________________________
Income before income
taxes $ 50.3 $ 45.3 $ 59.7 $ 85.6
=========================================
NOTE 7. SALE OF REAL ESTATE ASSETS
During the second quarter of 1999, ALZA sold five buildings
located in Palo Alto, California, resulting in a total pretax
gain of $12.6 million. ALZA will lease back these buildings
through December 31, 1999, when it expects to complete occupancy
of new buildings in Mountain View. In the near term, ALZA
expects to lease out certain other Palo Alto, Menlo Park and
Mountain View properties, currently occupied by ALZA, which could
result in additional rental income in 2000 and beyond.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Notice Concerning Forward-Looking Statements
Some of the statements made in this Form 10-Q are forward-
looking in nature, including, without limitation, plans
concerning the commercialization of products, statements
concerning potential product sales, future costs of products
shipped (and gross margins), associated sales and marketing
expenses, plans concerning development of products and other
statements that are not historical facts. The occurrence of the
events described, and the achievement of the intended results,
are subject to various risk factors that could cause ALZA's
actual results to be materially different than those presented,
some or all of which risks are not predictable or within ALZA's
control. Many risks and uncertainties are inherent in the
pharmaceutical industry; others are more specific to ALZA's
business. Many of the significant risks related to ALZA's
business are described in ALZA's Annual Report on Form 10-K for
the year ended December 31, 1998.
RESULTS OF OPERATIONS
SUMMARY
Quarter Ended Six Months Ended
(In millions June 30, June 30,
except per share amounts) 1999 1998 1999 1998
_________________________________________________________________
Revenues $ 195.2 $ 158.3 $ 380.7 $ 301.8
_________________________________________________________________
Operating income 46.7 53.1 66.0 100.7
_________________________________________________________________
Net income 34.2 29.4 37.9 55.9
_________________________________________________________________
Diluted earnings per share 0.33 0.29 0.37 0.56
_________________________________________________________________
ALZA's net income for the quarter ended June 30, 1999 was
$34.2 million or $0.33 per diluted share compared with a net
income of $29.4 million or $0.29 per diluted share for the
quarter ended June 30, 1998. ALZA's net income for the six
months ended June 30, 1999 was $37.9 million or $0.37 per diluted
share compared with a net income of $55.9 million or $0.56 per
diluted share for the six months ended June 30, 1998. Net income
for the six months ended June 30, 1999 included merger-related
charges of $24.8 million (net of tax effect of $7.8 million), or
$0.24 per diluted share, which should be excluded in order to
analyze comparable operating results for the six month periods of
1999 and 1998.
Net income increased 16% for the quarter ended June 30,
1999, compared with the quarter ended June 30, 1998. On a
comparable basis for the six months ended June 30, 1999, ALZA's
net income increased 12% to $62.7 million, or $0.61 per diluted
share, excluding the merger related charges discussed above,
compared with $55.9 million or $0.56 per share for the six months
ended June 30, 1998. The increase in net income for the quarter
and six months ended June 30, 1999 compared to the same periods
in 1998 resulted primarily from the following:
-Net sales increased 43% to $103.2 million and $199.4 million
for the quarter and six months ended June 30, 1999, respectively,
from $72.3 million and $139.1 million for the quarter and six
months ended June 30, 1998, respectively. The increase in net
sales resulted primarily from a 64% increase in sales of products
by ALZA Pharmaceuticals to $68.8 million and $136.7 million for
the quarter and six months ended June 30, 1999, respectively,
from $41.8 million and $83.7 million for the same three and six
month periods in 1998. This increase in ALZA Pharmaceuticals'
sales can be primarily attributed to $14.4 million and $36.4
million sales of Ditropan-registered trademark- XL (oxybutynin
chloride), which was launched on February 1, 1999, for the
quarter and six months ended June 30, 1999, respectively, as well
as an increase of 19% and 26% in sales of Doxil-registered
trademark-/Caelyx-registered trademark- (doxorubicin HCl
liposome injection) for the quarter and six months ended June 30,
1999, respectively, all as compared to the same periods in 1998.
In addition, revenues from contract manufacturing increased 13%
to $34.4 million and $62.7 million for the quarter and six months
ended June 30, 1999, respectively, from $30.5 million and $55.4
million for the same periods in 1998, due to higher shipments of
Glucotrol XL-registered trademark- (glipizide) to Pfizer Inc.
("Pfizer"), Duragesic-registered trademark- (fentanyl) shipments
to Janssen Pharmaceutica, Inc.(together with its affiliates,
("Janssen"), and NicoDerm-registered trademark- and Nicoderm-
registered trademark- CQ-trademark- (nicotine) to Hoechst Marion
Roussel, Inc. and SmithKline Beecham p.l.c.("SB"), respectively.
- Gross margin increased to 61% for the quarter ended June 30,
1999 from 51% for the quarter ended June 30, 1998, and increased
to 63% for the six months ended June 30, 1999 from 52% for the
six months ended June 30, 1998. The increase in gross margin was
largely due to the increase in sales of ALZA-marketed products as
a percentage of total net sales and, to a lesser extent, an
improvement in margins on certain contract manufactured products.
- Royalties, fees and other revenues increased 3% to $54.8
million for the quarter ended June 30, 1999 from $53.4 million
for the quarter ended June 30, 1998, and increased 10% to $113.7
million for the six months ended June 30, 1999 from $103.8
million for the six months ended June 30, 1998. The increase in
royalties is primarily due to an increase in royalties on sales
of Catapres-TTS-registered trademark-(clonidine) by Boehringer
Ingelheim Pharmaceuticals Inc. ("Boehringer"), NicoDerm CQ by SB
and Glucotrol XL by Pfizer, partially offset by a decrease in
royalties from sales of Procardia XL-registered trademark-
(nifedipine) by Pfizer. Fee revenue decreased to $5.0 million
for the quarter ended June 30, 1999 from $7.6 million for the
quarter ended June 30, 1998, and to $10.0 million for the six
months ended June 30, 1999 from $15.8 million for the six months
ended June 30, 1998. Fee revenues consists of upfront, milestone
and other one-time, special, or infrequent payments made under
joint development agreements or by distributors who acquire
rights to market ALZA products outside the United States and
Canada, or co-promotion fees.
- Research and development revenues increased 14% to $37.2
million for the quarter ended June 30, 1999 from $32.6 million
for the quarter ended June 30, 1998, and increased 15% to $67.6
million for the six months ended June 30, 1999 from $58.9 million
for the six months ended June 30, 1998. The increase is
primarily due to an increase in research and development revenue
from Crescendo to $28.5 million and $51.8 million for the quarter
and six months ended June 30, 1999, respectively, compared with
$24.9 million and $44.9 million for the same periods in 1998.
- Interest and other income increased substantially to $18.4
million for the quarter ended June 30, 1999 from $6.5 million for
the quarter ended June 30, 1998, and increased to $23.4 million
for the six months ended June 30, 1999 compared with $13.4
million for the six months ended June 30, 1998. This increase
was primarily due to a pretax gain of $12.6 million on sales of
real estate assets that were completed during the quarter ended
June 30, 1999.
- ALZA's effective tax rate declined to 32% for the quarter
and six months ended June 30, 1999, excluding the tax effect of
$7.8 million on merger-related costs of $32.6 million, compared
to 35% for the quarter and six months ended June 30, 1998.
Substantially offsetting these contributions to net income
in 1999 were the following:
- Research and development expenses increased 12% to $47.8
million for the quarter ended June 30, 1999 from $42.7 million
for the quarter ended in June 30, 1998, and increased 11% to
$91.9 million for the six months ended June 30, 1999 from $82.9
million for the six months ended June 30, 1998.
- Selling, general and administrative expenses increased to
$60.4 million for the quarter ended June 30, 1999 from $27.3
million for the quarter ended June 30, 1998, and increased to
$115.6 million for the six months ended June 30, 1999 from $51.7
million for the six months ended June 30, 1998. This increase
was due to the expansion of the sales organization in the second
half of 1998, the increase in marketing expenditures related to
the launch of Ditropan XL in the first half of 1999 and increased
marketing expenses for ALZA's expanded product portfolio.
OPERATING SEGMENT SUMMARY
ALZA has two operating segments: ALZA Pharmaceuticals and
ALZA Technologies.
ALZA Pharmaceuticals markets and sells products developed by
ALZA Technologies or others directly to the pharmaceutical
marketplace in the United States and Canada and to distributors
who sell such products outside the United States and Canada.
ALZA Pharmaceuticals also conducts product development, co-
promotes products with third parties, and engages ALZA
Technologies and others to conduct product development and
manufacture products for ALZA Pharmaceuticals.
ALZA Technologies conducts research and development of
ALZA's drug delivery technologies and products for ALZA
Pharmaceuticals and Crescendo and other pharmaceutical company
clients, and manufactures products for sale by ALZA
Pharmaceuticals and client companies.
The "Other" category primarily comprises corporate general
and administrative activities and the associated costs related to
finance, legal, human resources, commercial development,
executive and other functions not directly attributable (or
allocated) to the activities of the operating segments, as well
as rental and service fee revenues.
SEQUUS' net sales, costs of products shipped, research and
development for potential products to be marketed by ALZA and
sales and marketing expenses are included in ALZA
Pharmaceuticals; SEQUUS royalties and fee revenues and research
and development expenses are included in ALZA Technologies; and
SEQUUS general and administrative expenses are included in Other.
OPERATING SEGEMENT SUMMARY
Quarter ended Six months ended
June 30, June 30,
(In millions) 1999 1998 1999 1998
_________________________________________________________________
Revenues
ALZA PHARMACEUTICALS $ 100.5 $ 72.4 $ 194.8 $137.6
ALZA TECHNOLOGIES 126.7 111.3 245.0 210.5
OTHER 0.4 0.9 0.8 1.2
_________________________________________________________________
Total segment revenues 227.6 184.6 440.6 349.3
Intersegment elimination (32.4) (26.3) (59.9) (47.5)
_________________________________________________________________
Total revenues $ 195.2 $ 158.3 $ 380.7 $301.8
Operating income (loss)
ALZA PHARMACEUTICALS $ 2.5 $ 10.7 $ 6.3 $ 21.8
ALZA TECHNOLOGIES 52.3 47.7 106.5 90.2
OTHER (8.1) (5.3) (46.8) (11.3)
_________________________________________________________________
Total operating income $ 46.7 $ 53.1 $ 66.0 $100.7
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals' revenues increased 39% and 42% for the
quarter and six months ended June 30, 1999 compared to the same
periods in 1998 due to a 64% increase in net sales of ALZA-
marketed products for both the quarter and six months ended June
30, 1999 compared to the same periods in 1998. The decrease in
ALZA Pharmaceuticals' operating income for the quarter and six
months ended June 30, 1999 compared to the quarter and six months
ended June 30, 1998, was due to substantial increases in sales
and marketing, reflecting the substantial expansion of ALZA's
sales organization and increased marketing expenses related to
the launch of Ditropan-registered trademark-XL and ALZA's
expanded product portfolio.
ALZA TECHNOLOGIES
Operating income for ALZA Technologies increased 10% for the
quarter ended June 30, 1999 and 18% for the six months ended June
30, 1999 compared to the same periods in 1998. This increase was
primarily due to an 11% and 15% increase in royalties, fees and
other revenues for the quarter and six months ended June 30,
1999, respectively, and a 13% increase in contract manufacturing
sales for the quarter and six months ended June 30, 1999.
OTHER
Operating loss for the "Other" segment increased to $8.1
million and $46.8 million for the quarter and six months ended
June 30, 1999, respectively, from $5.3 million and $11.3 million
for the quarter and six months ended June 30, 1998, respectively.
The increase in the operating loss for the six months ended June
30, 1999 was due primarily to $32.6 million of merger-related
charges recorded in the quarter ended March 31, 1999 related to
the SEQUUS acquisition.
NET SALES
Net Sales Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1999 1998 1999 1998
_________________________________________________________________
ALZA PHARMACEUTICALS
Ditropan-registered trademark-
XL $ 14.4 $ - $36.4 $ -
Doxil-registered trademark-/
Caelyx-registered trademark-14.0 11.8 28.3 22.5
Ethyol-registered trademark- 8.5 5.8 17.1 13.9
Mycelex-registered trademark-
Troche 7.7 9.8 12.7 15.7
Elmiron-registered trademark- 7.7 3.7 12.6 10.7
Testoderm-registered trademark-
TTS line 5.2 2.2 9.7 4.3
Other 11.3 8.5 19.9 16.6
___________________________________________________________________
Total 68.8 41.8 136.7 83.7
___________________________________________________________________
ALZA TECHNOLOGIES
Contract manufacturing 34.4 30.5 62.7 55.4
Intersegment 3.8 2.0 8.0 3.6
___________________________________________________________________
Total 38.2 32.5 70.7 59.0
___________________________________________________________________
Intersegment eliminations (3.8) (2.0) (8.0) (3.6)
___________________________________________________________________
Total net sales $103.2 $ 72.3 $199.4 $139.1
___________________________________________________________________
Total net sales as a percentage
of total revenues 53% 46% 52% 46%
___________________________________________________________________
ALZA PHARMACEUTICALS
Included in net sales of ALZA-marketed products are sales of
the products marketed directly by ALZA in the United States and
Canada, and sales of those products in other countries through
distributors. Net sales of ALZA-marketed products increased 64%
for both the quarter and six months ended June 30, 1999 compared to
the same periods for 1998. The increase resulted primarily from
sales of Ditropan XL, which was launched in February 1999. Sales
of Doxil/Caelyx increased 19% and 26% for the quarter and six
months ended June 30, 1999, respectively, compared to the same
periods in 1998. Sales of Ethyol-registered trademark-
(amifostine) increased 48% and 23% for the quarter and six months
ended June 30, 1999, respectively, compared to the same periods for
1998. Partially offsetting these increases was a 22% and 19%
decline in sales of Mycelex-registered trademark-(clotrimazole)
Troche for the quarter and six months ended June 30, 1999,
respectively, compared to the same periods in 1998.
Net sales of ALZA-marketed products can be expected to vary
from quarter to quarter, particularly in the first years after
launch of a new product. Ditropan XL was launched in the first
quarter of 1999, and Doxil, Ethyol, Elmiron-registered trademark-
(pentosan polysulfate sodium) and Testoderm-registered trademark-
TTS (Testosterone Transdermal System) were cleared for marketing
during the past few years. Additionally in June, 1999 the United
States Food and Drug Administration ("FDA") approved new
indications for Ethyol and Doxil. All of these products have not
yet achieved their steady-state sales levels. Wholesaler stocking
patterns, managed care and formulary acceptance, the introduction
of competitive products, and acceptance by patients and physicians
will affect future sales of these products.
ALZA TECHNOLOGIES
Net sales from contract manufacturing include sales generated
from contract manufacturing activities for ALZA's client companies
and for ALZA Pharmaceuticals. Net sales from contract
manufacturing increased 13% for both the quarter and six months
ended June 30, 1999, compared to the same periods in 1998,
primarily due to an increase in ALZA shipments of Glucotrol XL to
Pfizer, Duragesic to Janssen and NicoDerm CQ to SB. These
increases were partially offset by a decline in ALZA shipments of
Covera-HST-trademark-(verapamil) to Searle.
The timing and quantities of orders for products marketed by
client companies are not within ALZA's control. Net sales to
client companies can be expected to fluctuate from period to
period, sometimes significantly, depending on the volume, mix and
timing of orders of products shipped to client companies, and in
some quarters, due to the shipment of launch quantities of products
to clients.
GROSS MARGIN
Gross Margin
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
_________________________________________________________________
ALZA PHARMACEUTICALS(1) 80% 76% 81% 76%
ALZA TECHNOLOGIES(1) 21% 16% 20% 15%
_________________________________________________________________
Gross margin(2) 61% 51% 63% 52%
___________________________________________________________________
(1) Includes intersegment revenues or expenses.
(2) After intersegment eliminations.
The increase in total gross margin for the quarter and six
months ended June 30, 1999 compared to the same periods for 1998
was due to increased sales of higher-margin products by ALZA
Pharmaceuticals and, to a lesser extent, an increase in margins
on products shipped by ALZA Technologies to client companies.
ALZA expects its gross margin on net sales to increase from
historical rates over the longer term, although quarter-to-
quarter fluctuations, even significant ones, can be expected to
continue to occur. A trend of higher gross margins may be
achieved through a proportionate increase in direct sales by ALZA
Pharmaceuticals in relation to sales from contract manufacturing
and, to a lesser extent, increased utilization of capacity and
greater operating efficiencies by ALZA Technologies.
ALZA PHARMACEUTICALS
The gross margin on net sales of ALZA-marketed products
increased in the quarter and six months ended June 30, 1999
compared to the same periods for 1998 due to a shift in product
mix towards sales of higher-margin products, including Ditropan XL,
which was launched in February 1, 1999.
ALZA TECHNOLOGIES
The gross margin on net sales of products manufactured by
ALZA Technologies for sale by client companies and ALZA
Pharmaceuticals increased marginally in the quarter and six
months ended June 30, 1999 compared with the same periods in 1998
as a result of an increase in shipments of higher-margin products
to client companies. ALZA Technologies' gross margin on its
contract manufacturing sales is usually considerably lower than
ALZA Pharmaceuticals' gross margin on its sales of ALZA-marketed
products. ALZA's client-funded product development agreements
generally provide for a supply price that is intended to cover
ALZA's costs to manufacture the product plus a small margin.
ALZA also receives royalties on the clients' sales of the
products, which are included in royalties, fees and other
revenues. Sales to ALZA Pharmaceuticals are based upon
negotiated prices, which generally approximate the prices charged
to third parties.
ROYALTIES, FEES AND OTHER REVENUES
Royalties, Fees and Other Revenues
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1999 1998 1999 1998
________________________________________________________________
ALZA PHARMACEUTICALS $ 3.2 $ 6.3 $ 6.3 $ 10.1
ALZA TECHNOLOGIES 51.2 46.2 106.6 92.5
OTHER 0.4 0.9 0.8 1.2
_________________________________________________________________
Total royalties, fees and
other revenues $ 54.8 $ 53.4 $113.7 $103.8
_________________________________________________________________
Percentage of total revenues 28% 34% 30% 34%
_________________________________________________________________
ALZA PHARMACEUTICALS
For the quarter and six months ended June 30, 1999, fee
revenue for AlZA Pharmaceuticals included technology fees from
Crescendo of $2.0 million and $4.0 million, respectively,
compared to $3.0 million and $6.0 million for the same periods in
1998, as provided in the agreements between ALZA and Crescendo.
ALZA TECHNOLOGIES
Royalties, fees and other revenues increased 11% and 15% for
the quarter and six months ended June 30, 1999, respectively,
compared to the same periods in 1998. The increase in royalties,
fees and other revenues was largely due to an increase in
royalties for the three and six months ended June 30, 1999,
resulting primarily from higher royalties on product sales of
NicoDerm CQ, Catapres-TTS and Glucotrol XL, partially offset by a
decrease in royalties from sales of Procardia XL.
Sales of Procardia XL, as reported by Pfizer, decreased 28%
and 27% for the quarter and six months ended June 30, 1999,
respectively, compared to the same periods in 1998. Several
companies have filed Abbreviated New Drug Applications ("ANDAs")
with the FDA requesting clearance to market generic equivalents
to Procardia XL, and one company has received tentative FDA
approval of its ANDA. Pfizer has filed suit against these
companies for infringement of patent rights relating to the
nifedipine active drug substance in Procardia XL, and is also
involved in litigation with the FDA and one of the ANDA
applicants concerning the regulatory status of the applicant's
product. It is not possible to predict the timing and amount of
the negative impact on sales of Procardia XL that will result
from competition from these or other potential generic sustained-
release nifedipine products.
RESEARCH AND DEVELOPMENT
Research and Development Revenue
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1999 1998 1999 1998
_________________________________________________________________
ALZA PHARMACEUTICALS
Crescendo $ 28.5 $ 24.3 $51.8 $ 43.8
_________________________________________________________________
ALZA TECHNOLOGIES
Other clients 8.7 8.3 15.8 15.1
Intersegment 28.6 24.3 51.9 43.9
_________________________________________________________________
Total 37.3 32.6 67.7 59.0
Intersegment elimination (28.6) (24.3) (51.9) (43.9)
_________________________________________________________________
Total research and development
revenues $ 37.2 $ 32.6 $67.6 $ 58.9
_________________________________________________________________
Percentage of total revenues 19% 21% 18% 20%
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals derives research and development
revenues from Crescendo. Revenues from Crescendo are offset by
intersegment charges from ALZA Technologies for research and
development expenses incurred on behalf of ALZA Pharmaceuticals
related to products under development for marketing by ALZA
Pharmaceuticals. ALZA expects that Crescendo will have expended
all its available funds during 2000.
ALZA has an option to acquire an exclusive, royalty-bearing
license to each product developed by Crescendo under the
Development Agreement. The option is exercisable on a product-by-
product, country-by-country, basis. In December 1998, ALZA
exercised its option to obtain a worldwide license to OROS
oxybutynin (Ditropan XL). Under the license agreement, ALZA must
pay Crescendo 2.5% of net sales of the licensed product for the
first year of sales and 3% for the second and third years.
Thereafter, until 15 years after the date of the first commercial
sale of the product, the percentage owed to Crescendo would be
based upon development costs paid by Crescendo; based upon
current information this rate is expected to be between 5% and 6%.
ALZA TECHNOLOGIES
Research and development revenues increased 14% and 15% for
the quarter and six months ended June 30, 1999, respectively,
compared to the same periods in 1998, primarily due to an 18%
increase in intersegment research and development revenues from
ALZA Pharmaceuticals related to Crescendo projects. Research and
development revenues from client companies increased 5% for the
quarter and six months ended June 30, 1999.
Research and Development Expenses
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1999 1998 1999 1998
_________________________________________________________________
ALZA PHARMACEUTICALS
Intersegment $ 28.6 $ 24.3 $51.9 $ 43.9
Product development
expense 5.9 6.5 14.1 12.9
___________________________________________________________________
Total 34.5 30.8 66.0 56.8
_________________________________________________________________
ALZA TECHNOLOGIES 41.9 36.2 77.8 70.0
_________________________________________________________________
Intersegment elimination (28.6) (24.3) (51.9) (43.9)
_________________________________________________________________
Total research and development
expenses $ 47.8 $ 42.7 $91.9 $ 82.9
_________________________________________________________________
Percentage of total revenues 25% 27% 24% 27%
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals engages ALZA Technologies to provide
research and development services, which are charged under the
same formula ALZA charges client companies. Intersegment
expenses related to these services increased for the quarter and
six months ended June 30, 1999 as compared to the same periods in
1998 due to additional expenses incurred in the preparation of
New Drug Application ("NDA") submissions for DUROS-registered
trademark- leuprolide (leuprolide acetate implant) which ALZA has
named ViadurT-trademark-, and OROS-registered trademark-
methylphenidate, which were submitted in May 1999 and July 1999,
respectively. Product development expense remained relatively
constant for the quarter ended June 30, 1999 compared to the
quarter ended June 30, 1998. For the six months ended June 30,
1999 compared to the six months ended June 30, 1998, product
development expense increased by 9% primarily due to an increase
in development costs related to products marketed by ALZA
Pharmaceuticals.
ALZA TECHNOLOGIES
Research and development expenses increased 16% and 11% for
the quarter and six months ended June 30, 1999, respectively,
compared to the same periods for 1998, reflecting an increase in
product development activities for ALZA Pharmaceuticals and under
agreements with client companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1999 1998 1999 1998
_________________________________________________________________
ALZA PHARMACEUTICALS
Sales and marketing
expenses $ 45.9 $ 18.4 $88.4 $ 33.9
___________________________________________________________________
ALZA PHARMACEUTICALS
Amortization of product
acquisition payments 3.7 2.7 7.6 5.3
ALZA TECHNOLOGIES
Amortization of product
acquisition payments 2.3 - 4.6 -
___________________________________________________________________
Total 6.0 2.7 12.2 5.3
_________________________________________________________________
OTHER
General and administrative
expenses 8.5 6.2 15.0 12.5
_________________________________________________________________
Total selling, general
administrative expenses $ 60.4 $ 27.3 $115.6 $ 51.7
===================================================================
Total selling, general and
administrative expenses as a
percentage of total revenues 31% 17% 30% 17%
_________________________________________________________________
ALZA PHARMACEUTICALS
Sales and marketing expense increased substantially for the
quarter and six months ended June 30, 1999 compared to the same
periods in 1998 as a result of the significant increase in the
size of ALZA's sales organization, the increased sales and
marketing activities due to the launch of Ditropan XL and the
increased marketing expenses for ALZA's expanded product
portfolio. During the second half of 1998, ALZA expanded its
sales organization by approximately 260 sales professionals. In
1998, ALZA entered into an agreement with UCB Pharma, Inc.("UCB
Pharma") under which approximately 350 sales professionals of UCB
Pharma are co-promoting Ditropan XL in the United States with
ALZA. UCB Pharma receives payments based on sales of Ditropan XL
above certain levels, as well as payments for sales calls made.
The term of the co-promotion arrangement continues through March
2002. In July 1999 ALZA expanded the agreement with UCB Pharma
to increase the number of calls to primary care physicians during
a three-month period.
In July 1999 ALZA entered into an agreement with Abbott to
co-promote Ditropan XL in the United States, adding 300 more
sales professionals to the sales force currently promoting
Ditropan XL.
Amortization of product acquisition payments for the ALZA
Pharmaceuticals segment increased 38% and 45% for the quarter and
six months ended June 30, 1999 compared to the same periods in
1998 due to the amortization of payments for products that were
acquired in the second half of 1998 and the amortization of
additional payments made since the second quarter of 1998 related
to previous product acquisitions.
ALZA TECHNOLOGIES
Amortization of product acquisition payments for ALZA
Technologies relates to three and six months amortization of the
$91.2 million exercise price paid in August 1998 to acquire all
of the outstanding limited partnership interests in the TTS
Partnership.
NET INTEREST
Quarter Ended Six Months Ended
Net Interest June 30, June 30,
(In millions) 1999 1998 1999 1998
_________________________________________________________________
Interest and other income $(18.4) $ (6.5) $(23.4) $ (13.4)
Interest expense 14.8 14.3 29.7 28.5
________________________________________________________________
Net interest and
other (income) expense (3.6) 7.8 6.3 15.1
________________________________________________________________
Interest and other income increased to $18.4 million for the
quarter ended June 30, 1999 from $6.5 million for the quarter
ended June 30, 1998, and increased to $23.4 million for the six
months ended June 30, 1999 compared with $13.4 million for the
six months ended June 30, 1998. This increase was primarily due
to a pretax gain of $12.6 million on sales of real estate assets
that were completed during the quarter ended June 30, 1999.
Interest expense was slightly higher for the quarter and six
months ended June 30, 1999 compared to the same periods for 1998,
primarily due to accreted interest on ALZA's outstanding 5 1/4%
Debentures.
Effective Tax Rate
For the quarter and six months ended June 30, 1999, ALZA's
effective income tax rate was 32%, excluding the tax effect of
$7.8 million on merger-related costs of $32.6 million, compared
to 35% for the quarter and six months ended June 30, 1998.
ALZA's annual effective combined federal and state income tax
rate for 1999 is estimated to be 31% to 32%, assuming utilization
of SEQUUS' net operating losses. The actual effective income tax
rate will depend upon the actual level of earnings, potential
changes in the tax laws, the amount of investment and research
credits available and ALZA's ability to utilize such credits.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
June 30, December 31,
(In millions) 1999 1998
_________________________________________________________________
Working capital $ 328.0 $ 297.1
Cash and investments 486.9 514.1
Total assets 1,729.9 1,666.6
Long-term debt 973.4 966.1
_________________________________________________________________
Six months ended June 30,
(In millions) 1999 1998
_________________________________________________________________
Net cash provided by
operating activities $ 13.5 $ 39.3
Capital expenditures 40.8 25.1
Product acquisition payments 20.0 6.2
_________________________________________________________________
Cash flow generated by operating activities for the six
months ended June 30, 1999 was $13.5 million (or $32.6 million
excluding payments for merger-related expenses) compared to $39.3
million for the six months ended June 30, 1998. The decrease in
cash flow provided by operating activities was a result of lower
net income of $37.9 million, due to merger-related charges, an
increase in prepaid and other current assets of $43.8 million and
an increase in accounts receivable of $18.1 million.
ALZA's capital spending for the six months ended June 30,
1999 was $40.8 million for additions to facilities and equipment
to support its research, development and manufacturing
activities, compared to capital spending of $25.1 million in the
same period in 1998. While ALZA believes its current facilities
and equipment (including the facilities currently under
construction) are sufficient to meet its current operating
requirements, ALZA is expanding its facilities and equipment to
support its medium-term and long-term requirements. Capital
expenditures during the remainder of 1999 are expected to
continue to increase over 1998 levels as a result of the spending
on the new Mountain View facilities being built, which ALZA plans
to begin occupying during the third quarter of 1999.
As a result of ALZA's investment in a real estate joint
venture and construction of buildings in Mountain View,
California, which are scheduled to be completed in late 1999,
ALZA has been evaluating its real estate holdings and future
facilities needs. During the second quarter of 1999, ALZA sold
five buildings located in Palo Alto, California for a total of
$20.3 million. ALZA will lease back these buildings through
December 31, 1999, when it expects to complete occupancy of its
new buildings in Mountain View. In the near term ALZA expects to
lease out certain other Palo Alto, Menlo Park and Mountain View
properties currently occupied by ALZA, which could result in
lease income in 2000 and beyond.
ALZA believes that its existing cash and investment balances
are adequate to fund its cash needs for 1999 and beyond. In
addition, should the need arise, ALZA believes it would be able
to borrow additional funds or otherwise raise additional capital.
ALZA may consider using its capital to make strategic investments
or to acquire or license technology or products.
Merger Agreement with Abbott Laboratories
On June 21, 1999, Abbott Laboratories and ALZA announced
that the companies have entered into a merger agreement. Under
the terms of the agreement, Abbott would acquire all of ALZA's
outstanding stock in a tax free, stock-for-stock transaction.
ALZA's stockholders would receive 1.2 shares of Abbott common
stock for each share of ALZA common stock. The transaction is
expected to be completed by the end of 1999 subject to approval
by ALZA's stockholders, clearance by regulatory agencies and
customary closing conditions.
Year 2000
ALZA is reliant upon its computer systems and applications,
including scientific and manufacturing equipment containing
computer-related components, to conduct its business. Key
internal systems and applications include manufacturing
production management, raw materials supply, inventory control,
research and development activities and project management,
documentation, marketing and financial systems. The majority of
ALZA's significant operating and accounting systems are currently
Year 2000 compliant. The financial and accounting systems that
are not currently Year 2000 compliant have been identified and
are in the process of being upgraded or replaced. Other internal
systems have been inventoried and evaluated for Year 2000
compliance. Internal systems will be upgraded or replaced or
contingency plans will be developed, as necessary. Year 2000
issues are expected to be resolved with respect to all systems
critical to ALZA's business by the end of 1999.
In addition to its internal systems, ALZA is also reliant
upon the capabilities of the computer systems of its
distributors, customers, vendors, banks, and government agencies.
ALZA has initiated communications with third parties with whom it
has material direct business relationships in order to determine
their level of Year 2000 compliance.
Year 2000 costs incurred to date have not been material.
Total costs to modify ALZA's systems for Year 2000 compliance are
expected to be less than $2.0 million. Such costs do not include
normal system upgrades and replacements and the actual financial
impact could exceed this estimate.
If ALZA is unable to bring its systems into compliance in
the expected timeframe, any noncompliance could have a material
impact on ALZA's operations, and could result in delays or
failures in manufacturing, research and development and similar
activities. The extent of such impact cannot presently be
determined. ALZA may also experience delays or failures in
manufacturing, distribution, order entry, order processing,
product shipping and distribution, invoicing, payment, or similar
normal business activities, if certain third party distributors,
customers, vendors and banks are not Year 2000 compliant. In
addition, ALZA may experience some delay in obtaining approvals
to market ALZA products from government agencies if government
computer systems are not Year 2000 compliant. There can be no
assurances that third parties' failure to ensure Year 2000
compliance would not have an adverse impact on ALZA's financial
condition or results of operations.
ALZA continues to develop specific contingency plans
intended to mitigate the effects of any potential Year 2000
disruption, including the effects of operational problems and
costs that may result from a failure of ALZA and certain third
parties to complete efforts necessary to achieve Year 2000
compliance on a timely basis or from abnormal buying patterns in
anticipation of Year 2000. ALZA expects to have contingency
plans in place by the end of the third quarter of 1999.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Financial market risks related to changes in interest rates
and foreign currency exchange rates are described in Part II,
Item 7A, Quantitative and Qualitative Disclosure About Market
Risk, in ALZA's Annual Report on Form 10-K for the year ended
December 31, 1998 and the Form 8-K filed May 13, 1999, which
restates financial information for prior periods to reflect the
combined results of ALZA and SEQUUS.
ALZA is exposed to equity price risks on the marketable
portion of equity securities included in its portfolio of
investments entered into to further its business and strategic
objectives. These investments are generally in small
capitalization stocks in the pharmaceutical and biotechnology
industry sector, in companies with which ALZA has research and
development or product agreements. ALZA typically does not
attempt to reduce or eliminate its market exposure on these
securities. A 20% adverse change in equity prices would result
in an approximate $10 million decrease in ALZA'S available-for-
sale securities, based upon a sensitivity analysis performed on
ALZA's financial position at June 30, 1999. However, actual
results may differ materially.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Product liability suits have been filed against Janssen and
ALZA from time to time relating to the Duragesic product.
Janssen is managing the defense of these suits in consultation
with ALZA under an agreement between the parties.
Historically, the cost of resolution of liability claims
against ALZA (including product liability claims) has not been
significant, and ALZA is not aware of any asserted or unasserted claims
pending against it, including the suits mentioned above, the
resolution of which would have a material adverse impact on the
operations or financial position of ALZA.
Pursuant to a Remedial Action Order No. HSA 88/89-016 issued
by the California Department of Toxic Substances Control
("DTSC"), ALZA has been named as one of a number of potentially
responsible parties in connection with the cleanup and
environmental remediation of the Hillview-Porter Regional Site
Project near ALZA's Palo Alto facilities. The purpose of the
DTSC action is, in part, to apportion responsibility for cleanup
costs among the parties involved. Cleanup costs for the entire
region have been estimated at approximately $16 million. ALZA
believes that it did not discharge any of the chemicals of
concern at the site in question. ALZA does not believe that its
liability in this matter, if any, will be material.
On June 22, 1999, a purported class action lawsuit was filed
in the Superior Court of the State of California, County of Santa
Clara, against ALZA and all of the current members of its Board
of Directors. The action is captioned Lisa Fruchter v. ALZA
Corporation, et al., No. CV 782725 (Santa Clara County,
California, Superior Court). The complaint alleges that ALZA and
its directors breached fiduciary duties owed to ALZA's
stockholders when they permitted ALZA to enter into the Merger
Agreement with Abbott. In general, the complaint alleges that
the exchange ratio under the Merger Agreement is inadequate and
further alleges that ALZA's board of directors had an obligation
to place ALZA up for auction when it entered into the Merger
Agreement. The allegations purport to be based on California
law. The action seeks both an injunction to prevent the merger
and damages in event that the merger is completed. ALZA believes
the complaint to be without merit and intends to defend the
action vigorously.
Item 4. Submission of Matters to a Vote of Security Holders:
(a) The annual meeting of the stockholders of ALZA was held on
May 6, 1999.
(b) A total of 77,455,501 shares were represented at the annual
meeting. Stockholders approved the following proposals:
(i) Election of Class III Directors:
Votes For Votes Withheld
Dr. I. Craig Henderson 76,153,248 1,302,253
Dr. Ernest Mario 75,338,033 2,117,468
Isaac Stein 76,684,550 770,951
(ii) To increase by 5,000,000 shares the number of shares of ALZA
common stock reserved for issuance under ALZA's Amended and
Restated Stock Plan. There were 51,888,737 votes in favor,
25,143,667 votes against and 423,097 abstentions.
(iii)The ratification of the appointment of Ernst & Young
LLP as ALZA's independent auditors for the fiscal year ended
December 31, 1999. There were 77,077,043 votes in favor,
85,269 votes against and 293,189 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amended and Restated Stock Plan
10.2 Form of Amendment to Executive
Agreement between ALZA Corporation and Certain
Executive Officers dated as of June 11, 1999.
10.3 Executive Agreement between
ALZA Corporation and Dr. Ernest Mario, dated as of
June 21, 1999.
27 Financial Data Schedule
(b) On May 13, 1999, ALZA filed a current report on Form 8-K to
file as Exhibit 99.1 the selected consolidated financial data,
management's discussion and analysis of financial condition and
results of operations, and audited consolidated financial
statements as of and for the periods listed therein, as restated
to reflect the combined results of ALZA and SEQUUS.
On June 25, 1999 ALZA filed a current report on Form 8-K
to report the signing of the merger agreement between
ALZA and Abbott on June 21, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ALZA CORPORATION
Date: August 13, 1999 By: /s/ E. Mario
Dr. Ernest Mario
Chairman and Chief
Executive Officer
Date: August 13, 1999 By: /s/ Bruce C. Cozadd
Bruce C. Cozadd
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
10.1 Amended and Restated Stock Plan
10.2 Form of Amendment to Executive Agreement between ALZA
Corporation and Certain Executive Officers dated as of
June 11, 1999.
10.3 Executive Agreement between ALZA Corporation and
Dr. Ernest Mario, dated as of June 21, 1999.
27 Financial Data Schedule
Exhibit 10.1
ALZA CORPORATION
Amended and Restated Stock Plan
(as amended through May 6, 1999)
1. PURPOSE. The purpose of this ALZA Corporation Amended
and Restated Stock Plan (the "Plan") is to attract, retain and
motivate key employees (including employees who are also
directors), directors and consultants of ALZA Corporation (the
"Company") and its subsidiaries by giving them the opportunity to
acquire stock ownership in the Company. Grants under this Plan
may consist of incentive stock options, intended to satisfy the
requirements of Section 422 of the Internal Revenue Code of 1986,
as it may be amended from time to time (the "Code"), or non-
statutory stock options (in either case, where unspecified,
"options"). This Plan also provides for the award of restricted
stock.
2. EFFECTIVE DATE AND TERM OF PLAN. The effective date of
this Plan is May 4, 1992, the date of the approval of the 1992
Stock Option Plan by the Company's stockholders. This Plan shall
terminate automatically ten (10) years after its effective date
unless terminated earlier by the Board of Directors (the "Board")
under Section 13 hereof. No grant of options or restricted stock
shall be made after termination of this Plan, but all grants made
prior to termination shall remain in effect in accordance with
their terms.
3. SHARES SUBJECT TO THE PLAN.
(a) NUMBER AND SOURCE OF SHARES. Subject to the
provisions of Section 9, the total number of shares of stock
reserved for grants under this Plan is 14,000,000 shares of
Common Stock, $. 01 par value, of the Company (the "Stock"). If
any option terminates or expires without being exercised in full,
or if any shares of Stock issued as restricted stock are
forfeited prior to conferring on their holder benefits of
ownership other than voting rights or accumulated dividends that
are not realized, the shares issuable under such option or so
forfeited shall become available again for grant under this Plan.
The shares to be issued hereunder may consist of authorized and
unissued shares or treasury shares.
(b) INDIVIDUAL LIMITATION. The Company may not grant
options covering in the aggregate more than 200,000 shares of
Stock (subject to adjustments and substitutions as required under
Section 9 below) to any one participant in any one-year period,
except that, at the time of an offer of employment, the Company
may grant options covering in the aggregate up to 750,000 shares
of Stock (subject to adjustments and substitutions as required
under Section 9 below).
4. ADMINISTRATION OF THE PLAN. This Plan shall be
administered by the Board or by a committee that meets the
requirements of Rule 16b-3 under the Securities Exchange Act of
1934 (the "Exchange Act") as in effect from time to time (in
either case, the "Administrator"). The Administrator (i) may
authorize any one or more of its members or any officer of the
Company to execute and deliver documents on behalf of the
Administrator and (ii) so long as not otherwise required for the
Plan to comply with Rule 16b-3, may delegate to one or more
officers or directors of the Company authority to grant options
to persons who are not subject to Section 16 of the Exchange Act
with respect to Stock. The Administrator may delegate non-
discretionary administrative duties to such employees of the
Company or a subsidiary as it deems proper. The Administrator
may also make rules and regulations which it deems useful to
administer this Plan. Any decision or action of the
Administrator in connection with this Plan or any options or
restricted stock granted or shares of Stock purchased under this
Plan shall be final and binding. No member of the Board shall be
liable for any decision, action or omission respecting this Plan,
or any options or restricted stock granted or shares of Stock
issued under this Plan.
5. ELIGIBILITY.
(a) Incentive stock options may be granted under this
Plan only to employees of the Company or a subsidiary, including
employees who may also be officers or directors of the Company or
any subsidiary of the Company. Non-statutory options and
restricted stock may be granted to employees (including employees
who are also directors), directors, consultants and potential
employees (in contemplation of and subject to employment) of the
Company or any subsidiary of the Company; provided, however, that
grants to directors who are not also employees of the Company may
be made only in accordance with Section 5(b) below. Participants
in this Plan shall be recommended for grants hereunder by the
Chief Executive Officer or Chief Operating Officer of the Company
and approved by the Administrator. Determination by the
Administrator as to eligibility shall be conclusive.
(b) Notwithstanding any other provision of this Plan,
directors who are not also employees of the Company may receive
grants under this Plan only in accordance with this Section 5(b).
Automatically and in connection with the offer of directorship to
a person who is not an employee of the Company, and subject to
that person becoming a director of the Company within the time
period set forth in the offer, the person shall be granted a non-
statutory option to purchase 20,000 shares of Stock at the fair
market value of the Stock on the date of the offer. Such option
shall vest in five equal annual increments of 4,000 shares for
each increment, beginning on the first anniversary of the date on
which the person first attends a meeting of the Board following
his or her election as a director (the "Service Date"), and shall
be exercisable until the date that is ten (10) years after the
date of grant. Assuming that the director is a non employee
director on the fifth anniversary of his or her Service Date,
such director automatically shall be granted on such fifth
anniversary of his or her Service Date a further non-statutory
option to purchase 10,000 shares of Stock at the fair market
value of the Stock on the date of the grant. Such additional
option shall vest in five equal annual increments of 2,000 shares
each, beginning one year after the date of grant and shall be
exercisable until the date that is ten (10) years after the date
of grant. Thereafter, on each subsequent fifth anniversary of
his or her Service Date, assuming the director is then a non
employee director, a further option to purchase an additional
10,000 shares of Stock automatically shall be granted to such
director on the same basis as set forth in the preceding
sentence. The Service Date for a director who is also an
employee of the Company but who terminates employment with the
Company while remaining a director shall, for purposes of this
Section 5(b), be deemed to be the date on which such director
first attends a meeting of the Board following the termination of
his or her employment with the Company. If such director has not
been granted options to purchase Stock within five years prior to
his or her Service Date, he or she automatically shall be granted
a non-statutory option to purchase 20,000 shares of Stock on the
same basis as set forth above for a grant to a person becoming a
director of the Company; and, thereafter, on each subsequent
fifth anniversary of his or her Service Date, assuming the
director is then a non-employee director, a further option to
purchase an additional 10,000 shares of Stock automatically shall
be granted to such director on the same basis as set forth above
for further options. However, if such director has been granted
options to purchase Stock within five years prior to his or her
Service Date, he or she shall automatically be granted a non-
statutory option to purchase 10,000 shares of Stock on the same
basis as set forth above for further options on the fifth
anniversary of the date of the last grant of options by the
Company to such person prior to the termination of his or her
employment with the Company (the "Initial Grant Date"); and,
thereafter, on each subsequent fifth anniversary of his or her
Initial Grant Date, assuming the director is then a non-employee
director, a further option to purchase an additional 10,000
shares of Stock automatically shall be granted to such director
on the same basis as set forth above for further options.
6. OPTIONS.
(a) GRANT. The Administrator may, in its discretion,
grant options under this Plan at any time and from time to time
before the expiration of this Plan. The Administrator shall
specify the date of grant or, if it fails to, the date of grant
shall be the date of the action taken by the Administrator to
grant the option (in either case, the "Grant Date"). If an
incentive stock option is approved in anticipation of employment,
the Grant Date shall in any event not be prior to the date the
intended optionee is first treated as an employee of the Company
or any subsidiary for payroll purposes.
(b) OPTION AGREEMENTS. As soon as practicable after
the Grant Date, the Company will provide the optionee a written
stock option agreement (the "Option Agreement"), which designates
the option as an incentive stock option or non-statutory option
and which identifies the Grant Date, the number of shares of
Stock covered by the option, the option price and the terms and
conditions for exercise of the option.
(c) TERMS AND CONDITIONS OF OPTIONS. Options granted
under this Plan shall be subject to the following additional
terms and conditions and such other terms and conditions not
inconsistent with this Plan as the Administrator may impose:
(i) EXERCISE OF OPTION. In order to exercise all
or any portion of an incentive stock option granted under this
Plan (or any other option which, by its terms, so requires), an
optionee must remain in the employ of the Company or a subsidiary
of the Company until the date on which the option (or portion
thereof) becomes exercisable (the "Vesting Date"). An option
shall be partially exercisable on or after each Vesting Date with
respect to the percentage of total shares of Stock covered by the
option set out in the Option Agreement.
If an option (or portion thereof) is not exercised on
the earliest Vesting Date on which it becomes exercisable, it may
be exercised thereafter at any time prior to its expiration date;
provided, however, that in no event may an incentive stock option
granted under this Plan be exercised more than ten (10) years
from the Grant Date. If the Company grants an incentive stock
option to an optionee who owns, on the Grant Date, directly or by
attribution, stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the
company or any subsidiary, the option shall not be exercisable
more than five (5) years after the Grant Date.
Notwithstanding any other provision of this Plan, to
the extent required by Section 422(d) of the Code, the aggregate
value of all shares first becoming exercisable by an optionee
during any year, under all incentive stock options granted to
such optionee covering stock of the Company (or any company
which, at the time of grant, was a parent or subsidiary of the
Company), shall not exceed $100,000 or such other amount as may
be in effect from time to time. If by their terms such incentive
stock options, when taken together, would first become
exercisable at a faster rate then, except as otherwise
specifically provided by the Administrator in its discretion, the
portion thereof which exceeds such amount shall be non-statutory
options. For this purpose, value shall be the fair market value
of the option stock when the options were granted and options
shall be taken into account in the order in which they were
granted. In no event may the operation of this Section 6(c)(i)
cause an option to vest before its terms or, having vested, cease
to be vested.
Options granted to employees under this Plan shall be
exercisable until ten (10) years after the Grant Date, unless the
Administrator shall determine otherwise.
(ii) OPTION PRICE. The option price of incentive
stock options shall be at least one-hundred percent (100%) of the
fair market value of the shares covered by the option on the
Grant Date, as determined in good faith by the Administrator and,
in the case of non-statutory options, shall be at least one
hundred percent (100%) of the fair market value of the shares
covered by the option on the Grant Date unless the Administrator
specifically determines otherwise, in which event the option
price of such non-statutory options shall not be less than eighty-
five percent (85%) of the fair market value of the shares covered
thereby on the Grant Date, determined in the same manner. If the
Company grants an incentive stock option to an optionee owning on
the Grant Date, directly or by attribution, shares possessing
more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any subsidiary, the option
price shall be at least one-hundred ten percent (110%) of the
fair market value of the shares covered by the option on the
Grant Date determined in the same manner.
(iii) METHOD OF EXERCISE. To the extent the
right to purchase shares has accrued, an option (or portion
thereof) may be exercised from time to time in accordance with
its terms by written notice from the optionee to the Company
stating the number of shares with respect to which the option is
being exercised and accompanied by payment in full of the
exercise price of the shares. Payment may be made in cash, by
check, or by delivery of shares of Stock (duly endorsed in favor
of the Company or accompanied by a duly endorsed stock power), by
a combination of the above, or any other form of consideration
approved by the Administrator (including payment in accordance
with a cash-less exercise program as permitted under Regulation T
promulgated by the Federal Reserve Board, as amended from time to
time). Any shares delivered to the Company as payment upon
exercise of an option shall be valued at their fair market value
as of the date of exercise of the option determined in good faith
by the Administrator. Options may not be exercised by any
optionee by the delivery of shares of stock more frequently than
once every six months.
(iv) RESTRICTIONS ON OPTION SHARES. At the time
it grants options under this Plan, the Company may retain for
itself (or others) rights to purchase the shares acquired under
the option or impose other restrictions on the shares. The terms
and conditions of any such rights or other restrictions shall be
set forth in the Option Agreement evidencing the option.
(v) NON-ASSIGNABILITY OF OPTION RIGHTS. Except
as otherwise determined by the Administrator, no option shall be
transferable other than by will or by the laws of descent and
distribution or a qualified domestic relations order and,
otherwise during the lifetime of an optionee, only the optionee
may exercise an option.
(vi) EXERCISE AFTER TERMINATION OF SERVICE OR DEATH.
If for any reason other than permanent and total disability or
death, an optionee ceases to be employed by, or a consultant or
director to (if such relationship forms the sole basis for the
grant), the Company or a subsidiary, options held at the date
of such termination (to the extent then exercisable) may be
exercised at any time within three months after the date of
such termination (but in no event after the expiration date of
the option as set forth in the Option Agreement). If an optionee
becomes permanently and totally disabled (within the meaning of
Section 22(e)(3) of the Code) or dies while employed by, or a
consultant or director to, the Company or a subsidiary, (or, if
the optionee dies within the period that the option remains
exercisable after termination of employment, consultancy or
directorship), options then held (to the extent then exercisable)
may be exercised by the optionee, the optionee's personal
representative, or by the person to whom the option is
transferred by will or the laws of descent and distribution, at
any time within one year after the disability or death or any
lesser period specified in the Option Agreement (but in no event
after the expiration date of the option as set forth in the
Option Agreement).
7. RESTRICTED STOCK.
(a) GRANT. The Administrator may grant restricted
stock under this Plan at any time and from time to time before
the expiration of this Plan.
(b) RESTRICTED STOCK AGREEMENT. As soon as
practicable after the grant of restricted stock, which in no
event shall be later than thirty (30) days after the grant date
of the restricted stock, the Company will provide the participant
with a written restricted stock agreement setting forth the terms
and conditions of the grant (the "Restricted Stock Agreement").
(c) PRICE. Participants awarded restricted stock,
within fifteen (15) days of receipt of the Restricted Stock
Agreement, shall pay to the Company the purchase price of the
restricted stock set forth in the Restricted Stock Agreement,
which shall not be less than the par value of the Stock subject
to the grant. If such payment is not made and received by the
Company by such date, the grant of restricted stock shall lapse.
(d) RESTRICTIONS. Subject to the provisions of the
Plan and the Restricted Stock Agreement, during a period set by
the Administrator, commencing with, and not exceeding ten (10)
years from, the grant date of the restricted stock (the
"Restriction Period"), the participant shall not be permitted to
sell, assign, transfer, pledge or otherwise encumber shares of
restricted stock. Within these limits, the Administrator may
provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions, in whole or in part,
based on service, performance or such other factors or criteria
as the Administrator may determine.
(e) DIVIDENDS. Unless otherwise determined by the
Administrator, cash dividends with respect to shares of
restricted stock shall be automatically reinvested in additional
restricted stock, and dividends payable in Stock shall be paid in
the form of restricted stock.
(f) TERMINATION. Except to the extent otherwise
provided in the Restricted Stock Agreement and pursuant to
Section 7(d), upon termination of a participant's employment for
any reason during the Restriction Period, all shares still
subject to restriction shall be forfeited by the participant.
8. PAYMENT OF TAXES.
(a) The exercise of an option (regardless of the form
of payment for exercise of the option) or the transfer or other
disposition of restricted stock shall be conditioned upon payment
in cash, or provision satisfactory to the Administrator for
payment to the Company, of any federal and state withholding
taxes which, in the Administrator's judgment, are payable in
connection therewith.
(b) If and to the extent consented to by the
Administrator in its sole discretion, a person who exercises an
option may (i) tender to the Company previously-owned shares of
Stock, or (iii) have shares of Stock to be obtained upon exercise
of the option withheld by the Company on behalf of the optionee,
in either case to pay the amount of tax that the Administrator,
in its discretion, determines to be required to be withheld by
the Company.
9. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The
existence of outstanding options shall not affect the Company's
right to effect adjustments, re-capitalization, reorganizations,
or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance
of bonds, debentures, preferred or prior preference stock ahead
of or affecting the Stock, the dissolution or liquidation of the
Company's, or any other corporation's, assets or business, or any
other corporate act whether similar to the events described above
or otherwise. Subject to Section 10, if the number of
outstanding shares of Stock is increased or decreased in number
or changed into or exchanged for a different number or kind of
securities of the Company or any other corporation by reason of a
re-capitalization, reclassification, stock split, combination of
shares, stock dividend or other event, the number and kind of
securities with respect to which options or restricted stock may
be granted under this Plan, the individual limitations under
Section 3(b) above, the number and kind of securities as to which
outstanding options may be exercised, the option price at which
outstanding options may be exercised hereunder shall be
proportionately adjusted.
10. DISSOLUTION, LIQUIDATION, MERGER. In the event of a
dissolution or liquidation of the Company, a merger or
consolidation in which the Company is not the surviving
corporation, a reverse merger in which the Company is the
surviving corporation but in which more than fifty percent (50%)
of the shares of its Stock outstanding before the merger are
held, after the merger, by holders different from those
immediately prior to the merger, or a sale of more than eighty
percent (80%) of the assets of the Company, (a) except as
otherwise provided in the Option Agreement, the time at which
each outstanding option may be exercised (subject, in the case of
incentive stock options, to the limitations on exercisability set
forth in Section 6(c)(i) of this Plan) shall be accelerated at a
time such that the optionee (upon exercise of the option) would
be eligible to receive the consideration payable to holders of
Stock in connection with such liquidation, dissolution, merger,
consolidation, reverse merger or sale, and (b) except as
otherwise provided in the Restricted Stock Agreement, the
restrictions applicable to any restricted stock shall lapse.
11. RIGHTS AS STOCKHOLDER. Unless the Plan or the
Administrator expressly specify otherwise, a participant shall
have no rights as a stockholder with respect to any shares of
Stock covered by a grant hereunder until the date of issuance (as
evidenced by the appropriate entry on the books of the Company or
a duly authorized transfer agent) of a certificate representing
the shares of Stock. Subject to Sections 9 and 10, no adjustment
shall be made for dividends or other rights for which the record
date is prior to the date the certificate is issued.
12. DISQUALIFYING DISPOSITIONS. If shares of Stock
acquired upon exercise of an incentive stock option are disposed
of in a "disqualifying disposition" (within the meaning of
Section 422 of the Code), the holder of the shares shall notify
the Company in writing, within five days after the disposition,
of the date and the terms of such disposition. In the event of
any such disposition, the holder will comply with any other
requirements imposed by the Company in order to enable the
Company to secure the related income tax deduction to which it is
entitled.
13. TERMINATION OR AMENDMENT.
(a) The Board may amend, alter or discontinue this
Plan, but no amendment, alteration or discontinuance shall be
made which would impair the rights of a participant under an
outstanding grant without the participant's consent. In
addition, the Board may not amend or alter the Plan without the
approval of stockholders of the Company entitled to vote at a
duly held stockholders' meeting or by an action by written
consent and, if at a meeting, a quorum of the voting power of the
Company is represented in person or by proxy, where such
amendment or alteration would, except as expressly provided in
the Plan, increase the total number of shares reserved for
issuance pursuant to grants under the Plan or in such other
circumstances as the Board deems appropriate to comply with Rule
16b-3 or with Section 422 of the Code or otherwise.
14. PARENT AND SUBSIDIARY. As used in this Plan, "parent"
and "subsidiary" mean any corporation in an unbroken chain of
corporations which includes the Company if, at the relevant time,
each of the corporations other than the last corporation in the
chain owns stock possessing more than fifty percent (50%) of the
total combined voting power of all classes of stock of one of the
other corporations in the chain.
15. EMPLOYMENT OR CONSULTING RELATIONSHIP. Nothing in this
Plan or any option granted hereunder shall interfere with or
limit in any way the right of the Company or of any its
subsidiaries to terminate any optionee's employment or consulting
at any time, nor confer upon any optionee any right to continue
in the employ of, or consult with, the Company or any its
subsidiaries.
16. GOVERNING LAW. This Plan and the rights of all persons
under this Plan shall be construed in accordance with and under
applicable provisions of the Code and the laws of the State of
California.
* * * * * * * * *
The Board adopted the ALZA Corporation 1992 Stock Option
Plan on January 30, 1992 and the stockholders approved it on May
4, 1992. The Board amended the ALZA Corporation 1992 Stock
Option Plan on February 16, 1995, renaming it the ALZA
Corporation Amended and Restated Stock Plan (the "Amended and
Restated Plan") and the stockholders approved the amendments on
May 11, 1995.
The Board amended the Amended and Restated Plan on February
12, 1997 to increase the number of shares from 6,000,000 to
9,000,000 and to provide for the transferability of option
rights. The stockholders approved the amendment to increase the
number of shares on May 8, 1997.
The Board further amended the Amended and Restated Plan on
August 13, 1997. These amendments did not require stockholder
approval.
The Board further amended the Amended and Restated Plan on
February 9, 1999 to increase the number of shares from 9,000,000
to 14,000,000, subject to stockholder approval. The stockholders
approved this amendment on May 6, 1999. The Compensation and
Benefits Committee of the Board made certain non-material
amendments to Section 8 of the Amended and Restated Plan on May
6, 1999.
EXHIBIT 10.2
FORM OF AMENDMENT TO EXECUTIVE AGREEMENT
AMENDMENT (the "Amendment") to Executive Agreement (the
"Executive Agreement"), between _______________ (the "Executive") and
ALZA Corporation, a Delaware corporation (the "Company").
WHEREAS, Compensation and Benefits Committee (the
"Committee") of the Board of Directors (the "Board") of the
Company previously authorized the Company to enter into
agreements with certain executive officers of the Company
(the "Executive Agreements") providing for the payment of
severance and other benefits upon termination of such
executives following a change in control of the Company;
WHEREAS, the Committee has determined that it is in the
best interests of the Company and its stockholders to modify such
benefits in the manner set forth below.
NOW, THEREFORE, in consideration of the mutual
agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the Executive and the Company have agreed and do
hereby agree to amend the Executive Agreement as follows,
effective as of the 11th day of June, 1999:
1. Section 6 of the Executive Agreement is hereby
renamed "Severance Payments."
2. Section 6.1(A) of the Executive Agreement is hereby
amended in its entirety to read as follows:
"In lieu of any further salary and bonus payments to
the Executive for periods subsequent to the Date of
Termination and in lieu of any severance benefit
otherwise payable to the Executive, the Company shall
pay to the Executive a lump sum severance payment,
in cash, equal to the product of (x) the sum of
(i) the Executive's annual base salary in effect
immediately prior to the occurrence of the event
or circumstance upon which the Notice of Termination
is based or in effect immediately prior to the Change
in Control, if higher, and (ii) the amount paid to or
accrued by the Executive pursuant to the Company's
regular bonus, incentive cash compensation or income
deferral arrangements (and not including any special
one-time awards not made as part of a regular program)
in the one-year period immediately preceding that in
which the Date of Termination occurs or, if higher,
the amount paid or accrued in the one-year period
immediately preceding that in which the Change in
Control occurs and (y) 2.5."
3. Section 6.1(C) of the Executive Agreement is hereby
amended in its entirety to read as follows:
"All outstanding Options, to the extent not then vested
on the Date of Termination shall be exercisable in
accordance with the terms and conditions of the Amended
and Restated Stock Plan and 1985 Stock Option Plan, as
applicable, and Executive's option agreement(s)."
4. Section 6.2 of the Executive Agreement is hereby
amended in its entirety to read as follows:
"(A) In the event that the Executive becomes entitled
to the Severance Payments, if any of the payments or
benefits received or to be received by the Executive
in connection with a Change in Control or the Executive's
termination of employment (whether pursuant to the terms
of this Agreement or any other plan, arrangement or
agreement with the Company, any Person whose actions
result in a Change in Control or any Person affiliated
with the Company or such Person) (all such payments and
benefits, excluding the Gross-Up Payment, being hereinafter
referred to as the "Total Payments") will be subject
to the Excise Tax, the Company shall pay to the Executive
an additional amount (the "Gross-Up Payment") such that
the net amount retained by the Executive, after deduction
of any Excise Tax on the Total Payments and any Federal,
state and local income and employment taxes and Excise
Tax upon the Gross-Up Payment, shall be equal to
the Total Payments.
(B) For purposes of determining whether any of the
Total Payments will be subject to the Excise Tax and the
amount of such Excise Tax, (i) all of the Total Payments
shall be treated as "parachute payments" (within the meaning
of section 280G(b)(2) of the Code) unless, in the opinion
of tax counsel ("Tax Counsel")reasonably acceptable to the
Executive and selected by the accounting firm which was,
immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such payments or
benefits (in whole or in part) do not constitute
parachute payments, including by reason of section
280G(b)(4)(A)of the Code, (ii) all "excess parachute
payments" within the meaning of section 280G(b)(l) of
the Code shall be treated as subject to the Excise Tax
unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part)represent
reasonable compensation for services actually rendered
(within the meaning of section 280G(b)(4)(B) of the Code)
in excess of the Base Amount allocable to such reasonable
compensation, or are otherwise not subject to the Excise
Tax, and (iii) the value of any noncash benefits or any
deferred payment or benefit shall be determined by the
Auditor in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining
the amount of the Gross-Up Payment, the Executive shall be
deemed to pay federal income tax at the highest marginal
rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation
in the state and locality of the Executive's residence
on the Date of Termination (or if there is no Date of
Termination, then the date on which the Gross-Up Payment
is calculated for purposes of this Section 6.2), net of
the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes.
(C) In the event that the Excise Tax is finally determined
to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Executive shall repay
to the Company, within five (5) business days following the
time that the amount of such reduction in the Excise Tax is
finally determined, the portion of the Gross-Up Payment
attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal,
state and local income and employment taxes imposed on the
Gross-Up Payment being repaid by the Executive, to the extent
that such repayment results in a reduction in the Excise Tax
and a dollar-for-dollar reduction in the Executive's taxable
income and wages for purposes of federal, state and local
income and employment taxes, plus interest on the amount of
such repayment at 120% of the rate provided in Section 1274(b)(2)(B)
of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in calculating
the Gross-Up Payment (including by reason of any payment the
existence or amount of which cannot be determined at the time
of the Gross-Up Payment), the Company shall make an additional
Gross-Up Payment in respect of such excess (plus any interest,
penalties or additions payable by the Executive with respect
to such excess) within five (5) business days following the
time that the amount of such excess is finally determined.
The Executive and the Company shall each reasonably cooperate
with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Total Payments."
5. Except as otherwise provided herein, the remaining
terms of the Executive Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused the Amendment to
be executed by its duly authorized officer, and the Executive has
hereunto signed the Amendment, as of the date first above written.
ALZA Corporation
By: _____________________________
Its: ______________________________
SCHEDULE OF SIGNATORIES TO
FORM OF AMENDMENT TO EXECUTIVE AGREEMENT
James Butler
Bruce Cozadd
Harold Fethe
Ron Haak
Robert M. Myers
Samuel R. Saks
Peter Staple
Jane Wissel
James Young
EXHIBIT 10.3
EXECUTIVE AGREEMENT
THIS AGREEMENT dated June 21, 1999, is made by and
between ALZA Corporation, a Delaware corporation (the "Company"),
and Dr. Ernest Mario, Ph.D. (the "Executive").
WHEREAS, the Company considers it essential to the best
interests of its shareholders to foster the continuous employment
of key management
personnel; and
WHEREAS, the Board of Directors of the Company (the
"Board") recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control (as defined in
the last Section hereof) exists and that such possibility, and the
uncertainty and questions which it may raise among management, may
result in the departure or distraction of management personnel to
the detriment of the Company and its shareholders; and
WHEREAS, the Board has determined that appropriate
steps should be taken to reinforce and encourage the continued
attention and dedication of members of the Company's management,
including the Executive, to their assigned duties without distraction
in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control.
NOW, THEREFORE, in consideration of the premises and
the mutual covenants herein contained, the Company and the Executive
hereby agree as follows:
1. DEFINED TERMS. The definition of capitalized terms
used in this Agreement is provided in the last Section hereof.
2. TERM OF AGREEMENT. This Agreement shall commence on
the date hereof and shall continue in effect through December 31,
2000; provided that, commencing on January 1, 2001 and each
January 1 thereafter, the term of this Agreement shall automatically
be extended for one additional year
unless, not later than October 30 of the preceding year, the Company or the
Executive shall have given notice not to extend this Agreement or
a Change in Control shall have occurred prior to such January 1;
provided, however, that if a Change in Control shall have
occurred during the term of this Agreement, this Agreement shall
continue in effect for a period of not less than twenty-four (24)
months from the date on which such Change in Control occurred.
3. COMPANY'S COVENANTS SUMMARIZED. In order to induce
the Executive to remain in the employ of the Company and in
consideration of the Executive's covenants set forth in Section 4
hereof, the Company agrees, under the conditions described herein,
to pay the Executive the "Severance Payments" described in Section 6.1
hereof and the other payments and benefits described herein in
the event the Executive's employment with the Company is
terminated following a Change in Control and during the term of
this Agreement. No amount or benefit shall be payable under this
Agreement unless there shall have been (or, under the terms
hereof, there shall be deemed to have been) a termination of the
Executive's employment with the Company following a Change in
Control. This Agreement shall not be construed as creating an
express or implied contract of employment and, except as
otherwise agreed in writing between the Executive and the
Company, the Executive shall not have any right to be retained in
the employ of the Company.
4. THE EXECUTIVE'S COVENANTS. The Executive agrees
that, subject to the terms and conditions of this Agreement,
in the event of a Potential Change in Control during the term
of this Agreement, the Executive will remain in the employ of
the Company until the earliest of (A) a date which is twelve (12)
months after the date of such Potential Change of Control, (B)
the date of a Change in Control, (C) the date of termination by
the Executive of the Executive's employment for Good Reason
(determined by creating the Potential Change in Control as a
Change in Control in applying the definition of Good Reason),
or by reason of the Executive's death, Disability or
Retirement, or (D) the termination by the Company of the
Executive's employment for any reason.
5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.
5.1 Following a Change in Control and during the term
of this Agreement, during any period that the Executive fails to
perform the Executive's full-time duties with the Company as a result of
incapacity due to physical or mental illness, the Company shall pay the
Executive's full salary to the Executive at the rate in effect at the
commencement of any such period, together with all compensation and
benefits payable to the Executive under the terms of any compensation
or benefit plan, program or arrangement maintained by the Company
during such period, until the Executive's employment is terminated
by the Company for Disability.
5.2 If the Executive's employment shall be terminated
for any reason following a Change in Control and during the term of
this Agreement, the Company shall pay the Executive's full salary to
the Executive through the Date of Termination at the rate in effect
at the time the Notice of Termination is given, together with all
compensation and benefits payable to the Executive through the Date
of Termination under the terms of any compensation or benefit plan,
program or arrangement maintained by the Company during such period.
5.3 If the Executive's employment shall be terminated
for any reason following a Change in Control and during the term of
this Agreement, the Company shall pay the Executive's normal
post-termination compensation and benefits under the circumstances
(other than any regular severance benefits) to the Executive as
such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with,
the Company's retirement, insurance and other compensation or
benefit plans, programs and arrangements.
6. SEVERANCE PAYMENTS/CONSULTING AGREEMENT.
6.1 Subject to Section 6.2 hereof, the Company shall
pay the Executive the payments described in this Section 6.1 (the
"Severance Payments") upon the termination of the Executive's
employment following a Change in Control and during the term of
this Agreement, in addition to the payments and benefits described
in Section 5 hereof, unless such termination is (a) by the Company
for Cause, (b) by reason of death, Disability or Retirement, or
(c) by the Executive without Good Reason. The Executive's employment
shall be deemed to have been terminated following a Change in
Control by the Company without Cause or by the Executive with
Good Reason if the Executive's employment is terminated prior to
a Change in Control without Cause at the direction of a Person
who has entered into an agreement with the Company the consummation
of which will constitute a Change in Control or if the Executive
terminates his employment with Good Reason prior to a Change in
Control (determined by treating a Potential Change in Control as
a Change in Control in applying the definition of Good Reason) if
the circumstance or event which constitutes Good Reason occurs at
the direction of such Person.
(A) In lieu of any further salary and bonus payments to
the Executive for periods subsequent to the Date of Termination and
in lieu of any severance benefit otherwise payable to the Executive,
the Company shall pay to the Executive a lump sum severance payment,
in cash, equal to the product of (x) the sum of (i) the Executive's
annual base salary in effect immediately prior to the occurrence of
the event or circumstance upon which the Notice of Termination is
based or in effect immediately prior to the Change in Control, if
higher, and (ii) the amount paid to or accrued by the Executive
pursuant to the Company's regular bonus, incentive cash compensation
or income deferral arrangements (including any special one-time awards
not made as part of a regular program) in the one-year period immediately
preceding that in which the Date of Termination occurs or, if higher,
the amount paid or accrued in the one-year period immediately preceding
that in which the Change in Control occurs and (y) three (3); provided,
however, that in no event shall such amount be less than $4.5 million.
(B) Notwithstanding any provision of the Company's
bonus, incentive cash compensation or income deferral arrangements,
the Company shall pay to the Executive a lump sum amount, in cash,
equal to the sum of (i) any bonus, incentive or deferred cash
compensation that has been allocated or awarded to the Executive
for a completed year or other measuring period preceding the
Date of Termination but has not yet been paid (pursuant to Section
5.2 hereof or otherwise), and (ii) a pro rata portion of the
aggregate value of all contingent bonus, incentive or deferred cash
compensation awards to the Executive for all uncompleted periods
(based on the number of days from the commencement of the applicable
period through the Date of Termination) calculated as to each such
award by a good faith proration of performance toward applicable
objectives prior to the Date of Termination; provided, however,
that in the event a Change in Control occurs prior to December
31, 1999, the Executive shall be entitled to participate in the
Company's annual performance bonus plan applicable to the Company's
senior executive officers pursuant to which the Company shall pay
to the Executive, no later than February 28, 2000, the full amount
of the performance bonus the Executive is entitled to receive
thereunder for fiscal year 1999, which amount shall not be
less than $750,000.
(C) All outstanding Options, to the extent not then
vested on the Date of Termination shall be exercisable in accordance
with the terms and conditions of the Amended and Restated Stock Plan
and 1985 Stock Option Plan, as applicable, and Executive's option
agreements.
(D) The Company shall pay the Executive a lump sum
amount, in cash, equal to the excess of (x) the benefits under any
retirement, pension or deferred compensation arrangements that the
Executive would have accrued under the terms of such plan without
regard to any amendments made subsequent to a Change in Control
and on or prior to the Date of Termination, which amendment adversely
affects in any manner the computation of the benefits thereunder,
determined as if the Executive were fully vested thereunder, over
(y) the benefits that the Executive is otherwise entitled to receive
under such plan.
(E) For a twenty-four (24) month period after the Date
of Termination, provided that such period shall be reduced by one
month for each full month that the Date of Termination is later
than the first anniversary of the Change in Control, the Company
shall arrange to provide the Executive with life, disability,
accident and health insurance benefits substantially similar to
those which the Executive is receiving immediately prior to the
Notice of Termination (without giving effect to any reduction
in such benefits subsequent to a Change in Control which reduction
constitutes Good Reason). Benefits otherwise receivable by the
Executive pursuant to this Section 6.1(E) shall be reduced to
the extent comparable benefits are actually received by or made
available to the Executive without cost during the above-referenced
period following the Executive's termination of employment (and
any such benefits actually received by the Executive shall be
reported to the Company by the Executive).
6.2 (A) In the event the Executive becomes entitled to
the Severance Payments, if any of the payments or benefits
received or to be received by the Executive in connection with a
Change in Control or the Executive's termination of employment
(whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, any Person whose
actions result in a Change in Control or any Person affiliated
with the Company or such Person) (all such payments and benefits,
excluding the Gross-Up Payment (as defined below), being
hereinafter referred to as the "Total Payments") will be subject
to the Excise Tax, the Excise Tax shall be allocated pro rata to
the portion of the Total Payments that are not attributable to
the acceleration of equity-based awards to the Executive (the
"Non-Equity Payments") and the portion of the Total Payments that
are attributable to the acceleration of equity-based awards to
the Executive (the "Equity Payments") and the Company shall pay to
the Executive an additional amount (the "Gross-Up Payment") such
that the net amount retained by the Executive, after deduction of
any Excise Tax allocated to the Non-Equity Payments and any
Federal, state and local income and employment taxes and Excise
Tax upon the Gross-Up Payment, shall be equal to the Non-Equity
Payments. By way of example, if the Excise Tax equals $100,000
and each of the Non-Equity Payments and the Equity Payments are
$200,000, the Gross-Up would be based on 50% of the Excise Tax.
(B) For purposes of determining whether any of the
Total Payments will be subject to the Excise Tax and the amount
of such Excise Tax, (i) all of the sum of the Total Payments shall
be treated as "parachute payments" (within the meaning of section
280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the
accounting firm which was, immediately prior to the Change in
Control, the Company's independent auditor (the "Auditor"), such
payments or benefits (in whole or in part) do not constitute
parachute payments, including by reason of section 280G(b)(4)(A)
of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as
subject to the Excise Tax unless, in the opinion of Tax Counsel,
such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered (within
the meaning of section 280G(b)(4)(B) of the Code) in excess of
the Base Amount allocable to such reasonable compensation, or are
otherwise not subject to the Excise Tax, and (iii) the value of
any noncash benefits or any deferred payment or benefit shall be
determined by the Auditor in accordance with the principles of
sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive
shall be deemed to pay federal income tax at the highest marginal
rate of federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes
at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the date of termination
(or if there is no date of termination, then the date on which
the Gross-Up Payment is calculated for purposes of this section),
net of the maximum reduction in federal income taxes which could
be obtained from deduction of such state and local taxes.
(C) In the event that the Excise Tax is finally
determined to be less than the amount taken into account
hereunder in calculating the Gross-Up Payment, the Executive shall
repay to the Company, within five (5) business days following the
time that the amount of such reduction in the Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable
to the Excise Tax and federal, state and local income and employment
taxes imposed on the Gross-Up Payment being repaid by the Executive,
to the extent that such repayment results in a reduction in the Excise
Tax and a dollar-for-dollar reduction in the Executive's taxable
income and wages for purposes of federal, state and local income
and employment taxes, plus interest on the amount of such
repayment at 120% of the rate provided in section 1274(b)(2)(B)
of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in calculating the
Gross-Up Payment (including by reason of any payment the
existence or amount of which cannot be determined at the time of
the Gross-Up Payment), the Company shall make an additional Gross-
Up Payment in respect of such excess (plus any interest,
penalties or additions payable by the Executive with respect to
such excess) within five (5) business days following the time
that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate with
the other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Total Payments."
(D) The Executive and the Company shall enter into an
agreement, which shall (i) have a term of four (4) years, (ii)
contain appropriate provisions restricting competition by the
Executive from working in a Listed Drug Delivery Company during
the term, and (iii) provide the Executive with a quarterly fee
in an amount equal to $31,250, which amount shall be paid on
the first business day of each calendar quarter occurring during
the term.
6.3 The payments provided for in Section 6.1 (other
than Section 6.1(E)) shall be made not later than the fifteenth
(15th) day following the Date of Termination; provided that, if
the amounts of such payments cannot be finally determined on or
before such day, the Company shall pay to the Executive on such
day an estimate, as determined in good faith by the Company, of the
minimum amount of such payments to which the Executive is clearly
entitled and shall pay the remainder of such payments (together
with interest at the rate provided in section 1274(b)(2)(B) of
the Code) as soon as the amount thereof can be determined but in
no event later than the thirtieth (30th) day after the Date of
Termination. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been
due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) business day after demand
by the Company (together with interest at the rate provided in
section 1274(b)(2)(B) of the Code). At the time that payments are
made under this Section, the Company shall provide the Executive
with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations
including, without limitation, any opinions or other advice the
Company has received from outside counsel, auditors or
consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
7. TERMINATION PROCEDURES.
7.1 NOTICE OF TERMINATION. After a Change in Control
and during the term of this Agreement, any purported termination
of the Executive's employment (other than by reason of death) shall
be communicated by written Notice of Termination from one party
hereto to the other party hereto in accordance with Section 10
hereof. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide
a basis for termination of the Executive's employment under the
provision so indicated.
7.2 DATE OF TERMINATION. "Date of Termination," with
respect to any purported termination of the Executive's employment
after a Change in Control and during the term of this Agreement,
shall mean (i) if the Executive's employment is terminated for
Disability, thirty (30) days after Notice of Termination is given
(provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such thirty
(30) day period), and (ii) if the Executive's employment is
terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the
Executive, shall not be less than fifteen (15) days nor more than
sixty (60) days, respectively, from the date such Notice of
Termination is given).
8. NO MITIGATION. The Company agrees that, if the
Executive's employment by the Company is terminated during the
term of this Agreement, the Executive is not required to seek
other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Section 6.
Further, the amount of any payment or benefit provided for in
Section 6 (other than Section 6.1(E)) shall not be reduced by
any compensation earned by the Executive as the result of employment
by another employer, by retirement benefits, by offset against
any amount claimed to be owed by the Executive to the Company,
or otherwise.
9. SUCCESSORS; BINDING AGREEMENT.
9.1 In addition to any obligations imposed by law upon
any successor to the Company, the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure
of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the
Company in the same amount and on the same terms as the Executive
would be entitled to hereunder if the Executive were to terminate
the Executive's employment for Good Reason after a Change in Control,
except that, for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date
of Termination.
9.2 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees. If the Executive shall die while any amount would still
be payable to the Executive hereunder (other than amounts which,
by their terms, terminate upon the death of the Executive) if the
Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators
of the Executive's estate.
10. NOTICES. For the purpose of this Agreement, notices
and all other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt requested, postage
prepaid, addressed to the respective addresses set forth below,
or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice
of change of address shall be effective only upon actual receipt:
To the Company:
ALZA Corporation
950 Page Mill Road
P.O. Box 10950
Palo Alto, CA 94303
Attention: General Counsel
To the Executive:
Dr. Ernest Mario
Squire House
900 University Avenue
Palo Alto, California 94301
11. MISCELLANEOUS. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by the Executive and
on behalf of the Company by a duly authorized officer. No waiver
by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision
of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of
California. All references to sections of the Exchange Act or the
Code shall be deemed also to refer to any successor provisions to
such sections. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state
or local law and any additional withholding to which the
Executive has agreed. The obligations of the Company and the
Executive under Sections 5, 6 and 7 shall survive the expiration
of the term of this Agreement.
12. VALIDITY. The invalidity or unenforceability or any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
13. COUNTERPARTS. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same
instrument.
14. SETTLEMENT OF DISPUTES; ARBITRATION. All claims by
the Executive for benefits under this Agreement shall be directed
to and determined by the Board or a designated committee of the
Board and shall be in writing. Any denial by the Board of a claim
for benefits under this Agreement shall be delivered to the
Executive in writing and shall set forth the specific reasons for
the denial and the specific provisions of this Agreement relied
upon. Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by
arbitration in Palo Alto, California in accordance with the rules
of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that the Executive shall be
entitled to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in
connection with this Agreement.
15. DEFINITIONS. For purposes of this Agreement, the
following terms shall have the meanings indicated below:
(A) "Base Amount" shall have the meaning defined in
section 280G(b)(3) of the Code.
(B) "Beneficial Owner" shall have the meaning defined
in Rule 13d-3 under the Exchange Act.
(C) "Board" shall mean the Board of Directors of the
Company.
(D) "Cause" for termination by the Company of the
Executive's employment, after any Change in Control, shall mean
(i) the willful and continued failure by the Executive to substantially
perform the Executive's duties with the Company (other than any such
failure resulting from the Executive's incapacity due to physical
or mental illness or any such actual or anticipated failure after
the issuance of a Notice of Termination for Good Reason by the
Executive pursuant to Section 7.1) after a written demand for
substantial performance is delivered to the Executive by the
Company, which demand specifically identifies the manner in which
the Company believes that the Executive has not substantially
performed the Executive's duties, (ii) the willful engaging by
the Executive in conduct which is demonstrably and materially
injurious to the Company or its subsidiaries, monetarily or
otherwise, (iii) the conviction of the Executive of a felony
involving moral turpitude or (iv) the Executive becoming eligible
for Retirement.
(E) A "Change in Control" shall be deemed to have
occurred if the conditions set forth in any one of the following
paragraphs shall have been satisfied:
(i) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power
of the Company's then outstanding securities; or
(ii) during any period of two consecutive years
(not including any period prior to the execution of this
Agreement), a majority of the Board ceases to be comprised
of (a) individuals who at the beginning of such period
constitute the Board and (b) any new directors (other
than a director designated by a Person who has entered
into an agreement with the Company to effect a transaction
described in clause (i), (iii) or (iv) of this paragraph)
whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose
election or nomination for election was previously so
approved; or
(iii) the shareholders of the Company approve a
merger or consolidation of the Company with any other
corporation, other than (a) a merger or consolidation which
would result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity),
in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit
plan of the Company, more than 50% of the combined voting
power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger
or consolidation, or (b) a merger or consolidation effected
to implement a recapitalization of the Company (or similar
transaction) in which no Person acquires more than 50% of
the combined voting power of the Company's then outstanding
securities; or
(iv) the shareholders of the Company approve a
plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or
substantially all the Company's assets.
Notwithstanding the foregoing, a Change in Control shall not
include any event, circumstance or transaction occurring during
the six-month period following a Potential Change in Control
which results from the action of any entity or group which
includes, is affiliated with or is wholly or partly controlled by
one or more executive officers of the Company (a "Management
Group"); provided that, such action shall not be taken into
account for this purpose if it occurs within a six-month period
following a Potential Change in Control resulting from the action
of any Person which is not a Management Group.
(F) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(G) "Company" shall mean ALZA Corporation and any
successor to its business and/or assets (except in determining,
under Section 15(E) hereof, whether or not any Change in Control
of the Company has occurred in connection with such succession).
(H) "Company Shares" shall mean shares of common stock
of the Company or any equity securities into which such shares
have been converted.
(I) "Date of Termination" shall have the meaning stated
in Section 7.2 hereof.
(J) "Disability" shall be deemed the reason for the
termination by the Company of the Executive's employment, if, as a
result of the Executive's incapacity due to physical or mental
illness, the Executive shall have been absent from the full-time
performance of the Executive's duties with the Company for a period
of six (6) consecutive months, or for any period of eight (8) months
in any twelve-month period, the Company shall have given the Executive
a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have
returned to the full-time performance of the Executive's duties.
(K) "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended from time to time.
(L) "Excise Tax" shall mean any excise tax imposed
under section 4999 of the Code.
(M) "Executive" shall mean the individual named in the
first paragraph of this Agreement.
(N) "Good Reason" for termination by the Executive of
the Executive's employment shall mean the occurrence (without the
Executive's express written consent) of any one of the following
acts by the Company, or failures by the Company to act, unless,
in the case of any act or failure to act described in paragraph
(i), (v) or (vi) below, such act or failure to act is corrected
prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(i) the assignment to the Executive of any duties
materially inconsistent with the Executive's status as an
executive officer of the Company or a substantial adverse
alteration in the nature or status of the Executive's
responsibilities from those in effect immediately prior
to the Change in Control; provided, however, that the
Executive shall be deemed to have Good Reason to terminate
employment if, after the Change in Control (and without
otherwise terminating the Executive's employment) the
Executive ceases to be the chief executive officer of a
company whose securities are publicly traded on a national
securities exchange or quotation system, but any termination
for Good Reason that is solely pursuant to this proviso
shall not be effective until the expiration of 180 days
after the Change in Control;
(ii) a reduction by the Company in the Executive's
annual base salary as in effect on the date hereof or as the
same may be increased from time to time;
(iii) the relocation of the Executive's principal
place of employment by the Company to a location outside the
Palo Alto/San Jose metropolitan area (or, if different, the
metropolitan area in which the Executive's employment was
located immediately prior to the Change in Control) or the
Company's requiring the Executive to travel on the Company's
business to an extent substantially inconsistent with the
Executive's business travel obligations as of the date of
the Change in Control;
(iv) the failure by the Company, without the
Executive's consent, to pay to the Executive any portion of
the Executive's current compensation, or to pay to the
Executive any portion of an installment of deferred
compensation under any deferred compensation program of
the Company, within seven (7) days of the date such
compensation is due;
(v) the failure by the Company to continue in
effect any compensation plan in which the Executive
participates immediately prior to the Change in Control
which is material to the Executive's total compensation,
including but not limited to the Company's stock option,
incentive compensation, bonus and other plans or any
substitute plans adopted prior to the Change in Control,
unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect
to such plan, or the failure by the Company to continue
the Executive's participation therein (or in such substitute
or alternative plan) on a basis that is not less favorable
than that which existed at the time of the Change in Control;
provided that, in each case under this clause (v), such
failure causes a material adverse change in the annual
compensation of the Executive, taken as a whole and
including amounts or awards that are reasonably expected
to be made, compared to the compensation package that
existed at the time of the Change in Control; and provided,
further, that any such determination which is based on
participation in a stock option plan shall take into account,
among other factors, the overall practices and policies of a
parent company with respect to its option plans; or
(vi) the failure by the Company to continue to
provide the Executive with benefits substantially similar
to those enjoyed by The Executive under any of the Company's
pension, life insurance, medical, health and accident, or
disability plans in which the Executive was participating
at the time of the Change in Control, the taking of any
action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive the
Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure
by the Company to provide the Executive with the number of paid
vacation days to which the Executive is entitled on the basis
of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the
Change in Control unless any such failure is the result of a
change in policy applicable generally to senior employees
of the Company and of any corporation of which the Company is
a subsidiary.
The Executive's right to terminate the Executive's
employment for Good Reason shall not be affected by the
Executive's incapacity due to physical or mental illness. The
Executive's continued employment shall not constitute consent to,
or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(O) "ISOs" shall mean options qualifying as incentive
stock options under section 422 of the Code.
(P) "Listed Drug Delivery Company" shall mean any one
of the following companies, or a business entity controlled by any one
of such companies: Advanced Polymer Systems, Biovail Corp. International,
Cygnus Therapeutic Systems, Elan Corporation Plc., Ethical Holdings
Plc., Gensia Corp., Genta Inc., KV Pharmaceutical Co., Noven
Pharmaceuticals Inc., R.P. Scherer Corp. or TheraTech Inc.
(Q) "Notice of Termination" shall have the meaning
stated in Section 7.1 hereof.
(R) "Options" shall mean options for Company Shares
granted to the Executive under the Company's Amended and Restated
Stock Plan and 1985 Stock Option Plan.
(S) "Pension Plan" shall mean the ALZA Retirement Plan.
(T) "Person" shall have the meaning given in Section
3(a)(9) of the Exchange Act, as modified and used in Sections 13(d)
and 14(d) thereof; however, a Person shall not include (i) the
Company or any of its subsidiaries, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company or any of its subsidiaries, (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company.
(U) "Potential Change in Control" shall be deemed to
have occurred if the conditions set forth in any one of the
following paragraphs shall have been satisfied:
(i) the Company enters into an agreement, the
consummation of which would result in the occurrence of a
Change in Control;
(ii) the Company or any Person publicly announces
an intention to take actions which, if consummated,
would constitute a Change in Control;
(iii) any Person who is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of
the Company's then outstanding securities, increases such
Person's beneficial ownership of such securities to 30% or
more of such combined voting power; or
(iv) the Board adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in
Control has occurred.
(V) "Retirement" shall be deemed the reason for the
termination by the Company or the Executive of the Executive's employment
ifsuch employment is terminated in accordance with the Company's
retirement policy, not including retirement before the age of 65
(or such later age as may be established in such policy),
generally applicable to its salaried employees, as in effect
immediately prior to the Change in Control, or in accordance with
any retirement arrangement established with the Executive's
written consent with respect to the Executive.
(W) "Severance Payments" shall mean those payments
described in Section 6.1 hereof.
(X) "Shares" shall mean shares of the common stock,
$.01 par value, of the Company.
(Y) "Total Payments" shall mean those payments
described in Section 6.2 hereof.
ALZA Corporation
By: _______________________________
Name:
Title:
__________________________________
Dr. Ernest Mario, Ph.D.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in Part I, Item 1 of Form 10-Q dated June 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 92
<SECURITIES> 58
<RECEIVABLES> 171
<ALLOWANCES> 4
<INVENTORY> 59
<CURRENT-ASSETS> 446
<PP&E> 511
<DEPRECIATION> 131
<TOTAL-ASSETS> 1,730
<CURRENT-LIABILITIES> 118
<BONDS> 934
0
0
<COMMON> 1
<OTHER-SE> 596
<TOTAL-LIABILITY-AND-EQUITY> 1,730
<SALES> 199
<TOTAL-REVENUES> 381
<CGS> 75
<TOTAL-COSTS> 167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 60
<INCOME-TAX> 22
<INCOME-CONTINUING> 38
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38
<EPS-BASIC> .38
<EPS-DILUTED> .37
</TABLE>
