SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Date of Report: October 30, 2000
Date of earliest event reported: September 29, 2000
Commission File Number 1-6247
ALZA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0142070
(State or other jurisdiction of incorporation (I.R.S.Employer
of organization) Identification No.)
1900 Charleston Road, P.O. Box 7210, Mountain View, CA 94303-0802
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650)564-5000
<PAGE>
Item 5. Other Events
On September 29, 2000, ALZA Corporation ("ALZA")
exercised its option to acquire all of the Class A Common
Stock (the "Stock") of Crescendo Pharmaceuticals Corporation
("Crescendo") for a cash payment of $100.0 million.
Crescendo was formed by ALZA for the purpose of selecting
and developing new human pharmaceutical products and
commercializing such products, most likely through licensing
to ALZA. Since it commenced operations on September 30,
1997, Crescendo's principal activity has been conducting
product development under its agreements with ALZA. ALZA
exercised its option to acquire the Crescendo Stock pursuant
to the terms of the purchase option set forth in Crescendo's
Restated Certificate of Incorporation. The closing date of
the transaction is scheduled for November 13, 2000. ALZA
will fund the acquisition through available working capital.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial
Statements and Exhibits
Item 7a. Financial Statements of the Business Acquired
ALZA incorporates by reference the following documents:
- The financial statements of Crescendo and notes
thereto, and the Report of Ernst and Young LLP, Independent
Auditors, set forth at pages 21 to 36 under Item 8 of
Crescendo's Annual Report on Form 10-K/A for the year ended
December 31, 1999.
- The unaudited financial statements of Crescendo and
notes thereto set forth at pages 3 to 13 under Item 1 of
Crescendo's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.
Item 7b. Pro Forma Financial Information
Pro forma financial information for the year ended December
31, 1999 and the six months ended June 30, 2000 are included
herein.
The transaction described in Item 5 will be accounted
for as a purchase, and, accordingly, the purchase price will
be allocated to cash and investments, a deferred tax asset,
developed products and acquired in-process research and
development ("IPR&D"). The cash and investments will be valued
at their fair market values at the closing date. The
valuation of the deferred tax asset represents estimated
future tax savings that ALZA will likely receive as a result
of the Crescendo acquisition. The remaining purchase price
will be allocated to developed products, as deferred product
acquisition costs, and IPR&D using a risk-adjusted present
value calculation of the future royalties ALZA would have
paid for products Crescendo has developed and is in the
process of developing.
The following unaudited pro forma combined condensed
financial information reflects the business combination
between ALZA and Crescendo accounted for using the purchase
method of accounting. The pro forma combined condensed
statements of operations combine ALZA's historical
statements of operations with Crescendo's historical
statements of operations for the year ended December 31,
1999, and the six months ended June 30, 2000. The pro forma
combined condensed statements of operations reflect the
combination as if it had occurred at the beginning of each
period presented. The pro forma combined balance sheet
combines ALZA's historical balance sheet with Crescendo's
historical balance sheet as of June 30, 2000 and reflects
the combination as if it occurred at the end of the period
presented. The pro forma adjustments are based on
preliminary estimates, available information and assumptions
that management deems appropriate. These adjustments may
differ significantly from the final purchase price
allocation as of the closing date of the transaction (See
Note 1 to the Pro Forma Combined Condensed Financial
Statements: The Acquisition).
The unaudited pro forma combined condensed statements
of operations are not necessarily indicative of the
operating results that would have been achieved had the
transaction been effected as of the beginning of such
periods and should not be construed as representative of
future operations.
<PAGE>
ALZA Corporation
Pro Forma Combined Condensed Balance Sheet (unaudited)
(In millions)
June 30, 2000 Pro Forma Pro Forma
ALZA Crescendo Adjustments Combined
____________________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 183.8 $ 42.2 $(100.0)(1) $ 126.0
Short-term investments 80.1 0.1 - 80.2
Receivables, net 166.6 1.5 (16.8)(2a) 151.3
Inventories, at cost:
Raw materials 19.9 - - 19.9
Work in process 17.8 - - 17.8
Finished goods 35.1 - - 35.1
Total inventories 72.8 - - 72.8
Prepaid expenses and other
current assets 20.3 3.2 - 23.5
__________________________________________
Total current assets 523.6 47.0 (116.8) 453.8
Property, plant and equipment 575.7 - - 575.7
Less accumulated depreciation
and amortization (160.2) - - (160.2)
__________________________________________
Net property, plant and
equipment 415.5 - - 415.5
Long-term investments 387.8 14.3 - 402.1
Deferred product
acquisition costs 278.3 - 21.2 (1) 299.5
Cash surrender value of
life insurance 178.8 - - 178.8
Other assets 195.0 0.3 28.0 (1) 223.3
__________________________________________
TOTAL ASSETS $1,979.0 $ 61.6 $ (67.6) $1,973.0
==========================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 45.2 $ 15.3 $ (15.3)(2a) $ 45.2
Accrued liabilities 64.8 - (1.5)(2a) 63.3
Other current liabilities 7.5 - - 7.5
__________________________________________
Total current liabilities 117.5 15.3 (16.8) 116.0
5% convertible subordinated
debentures 495.4 - - 495.4
5 1/4% zero coupon convertible
subordinated debentures 455.3 - - 455.3
Other long-term liabilities 84.4 - - 84.4
Stockholders' equity:
Common stock and additional
paid-in capital 764.9 297.6 (297.6)(2b) 764.9
Accumulated other comprehensive
income (2.4) (0.3) 0.3 (2b) (2.4)
251.0 (2b)
Retained earnings (deficit) 63.9 (251.0) (4.5)(1) 59.4
__________________________________________
Total stockholders' equity 826.4 46.3 (50.8) 821.9
TOTAL LIABILITIES AND __________________________________________
STOCKHOLDERS' EQUITY $1,979.0 $ 61.6 $ (67.6) $1,973.0
==========================================
ALZA Corporation
Pro Forma Condensed Statement of Operations (unaudited)
(In millions, except per share amounts)
Six Months Ended
June 30, 2000
_____________________________________________
Pro Forma Pro Forma
ALZA Crescendo Adjustments (3) Combined
_____________________________________________
Revenues:
Net sales $ 243.4 $ - - $ 243.4
Royalties, fees and other 154.3 2.4 (4.4) (a) 152.3
Research and development 57.4 - (40.2) (a) 17.2
_____________________________________________
Total revenues 455.1 2.4 (44.6) 412.9
Expenses:
Costs of products shipped 76.7 - (2.4) (a) 74.3
Research and development 92.7 42.2 (42.2) (a) 92.7
Selling, general
and administrative 157.6 0.6 0.7 (b) 158.9
Acquisitions of in-process
research and development - - - -
Merger-related expenses - - - -
_____________________________________________
Total expenses 327.0 42.8 (43.9) 325.9
Operating income (loss) 128.1 (40.4) (0.7) 87.0
Interest expense 30.7 - - 30.7
Interest and other income (12.6) (2.0) - (14.6)
Net interest and
other expense (income) 18.1 (2.0) - 16.1
Income (loss) before _____________________________________________
income taxes 110.0 (38.4) (0.7) 70.9
Provision for income taxes 34.1 - (15.6) (c) 18.5
_____________________________________________
Net income (loss) $ 75.9 $ (38.4) $ 14.9 $ 52.4
=============================================
Earnings (loss) per share
Basic $ 0.74 $ (7.88) $ 0.51
Diluted $ 0.72 $ (7.88) $ 0.50
Weighted average shares
Basic 102.4 4.9 102.4
Diluted 129.7 4.9 104.4
<PAGE>
ALZA Corporation
Pro Forma Condensed Statement of Operations (unaudited)
(In millions, except per share amounts)
Year Ended
December 31, 1999
_____________________________________________
Pro Forma Pro Forma
ALZA Crescendo Adjustments (3) Combined
_____________________________________________
Revenues:
Net sales $ 448.0 $ - $ - $ 448.0
Royalties, fees and other 227.1 2.4 (9.1) (a) 220.4
Research and development 120.8 - (91.0) (a) 29.8
_____________________________________________
Total revenues 795.9 2.4 (100.1) 698.2
Expenses:
Costs of products shipped 158.4 - (2.4) (a) 156.0
Research and development 259.0 97.7 (97.7) (a) 259.0
Selling, general
and administrative 183.6 1.6 1.4 (b) 186.6
Acquisitions of in-process
research and development - - - -
Merger-related expenses 45.7 - - 45.7
_____________________________________________
Total expenses 646.7 99.3 (98.7) 647.3
Operating income (loss) 149.2 (96.9) (1.4) 50.9
Interest expense 58.1 - - 58.1
Interest and other income (41.6) (7.4) - (49.0)
Net interest and _____________________________________________
other expense (income) 16.5 (7.4) - 9.1
Income (loss) before
income taxes 132.7 (89.5) (1.4) 41.8
Provision for income taxes 41.7 - (36.4) (c) 5.3
_____________________________________________
Net income (loss) $ 91.0 $ (89.5) $ 35.0 $ 36.5
=============================================
Earnings (loss) per share
Basic $ 0.90 $(17.89) $ 0.36
Diluted $ 0.88 $(17.89) $ 0.35
Weighted average shares
Basic 101.1 4.9 101.1
Diluted 103.5 4.9 103.5
<PAGE>
NOTE 1 - THE ACQUISITION
The total purchase price of $100.0 million will be allocated
to cash and investments, a deferred tax asset, developed
products and IPR&D. Allocation of the purchase price as of
June 30, 2000 will be as follows (in millions):
Total purchase price $ 100.0
========
Cash and investments $ 42.8
Deferred tax asset 28.0
Deferred product acquisition costs 21.2
In-process research & development 4.5
Other assets 3.5
Cash, investments and other assets were valued at their fair
market values at June 30, 2000. The deferred tax asset
balance represents estimated future tax savings that ALZA
will likely receive as a result of the Crescendo
acquisition. The amounts allocated to developed products,
as deferred acquisition costs, and IPR&D acquired from
Crescendo were determined using a risk-adjusted present value
calculation of the future royalties ALZA would have paid for
products Crescendo has developed and is in the process of
developing. Using this valuation methodology the fair value
of developed products and IPR&D was calculated to be $190.2
million and $39.6 million, respectively. As the fair value
of the tangible and intangible assets from the Crescendo
acquisition exceed the $100 million purchase price, amounts
allocated to the non-monetary assets (deferred product
acquisition costs and IPR&D) have been proportionately
reduced pursuant to Accounting Principles Board Opinion No.
16 "Business Combinations".
The purchase price allocation at June 30, 2000 was based on
preliminary estimates, available information and assumptions
that management deems appropriate. The final purchase price
allocation, at the closing date, may differ from the
allocation as of June 30, 2000 primarily due to a change in
the amount of cash and investments on hand and further
research and development spending by Crescendo. To the
extent cash and investment balances of Crescendo at the
closing date decline from balances at June 30, 2000, the
amounts allocated to deferred product acquisition costs and
IPR&D will increase proportionately as discussed above. The
purchase price allocation, at the closing date, is expected
to be as follows (in millions):
Cash and investments $14.0 - 16.0
Deferred product acquisition costs 45.0 - 50.0
Deferred tax asset 25.0 - 30.0
In-process research & development 8.0 - 12.0
NOTE 2 - ADJUSTMENTS TO THE BALANCE SHEET
a. The pro forma combined condensed balance sheet for June
30, 2000 reflects the payment of the receivable and the
payable of $15.3 million for the development of certain
products by ALZA and funded by Crescendo. Accrued royalties
of $1.5 million on sales of Ditropan XL-registered trademark-
(oxybutynin chloride) that are payable by ALZA to Crescendo
are also reflected as being paid prior to the purchase
allocation.
b. Reflects the purchase of Crescendo's net assets as of
June 30, 2000.
NOTE 3 - ADJUSTMENTS TO THE STATEMENTS OF OPERATIONS
a. The pro forma combined condensed statements of
operations for the six months ended June 30, 2000 and the
year ended December 31, 1999, reflects the elimination of
$40.2 million and $91.0 million, respectively, for product
development revenues from Crescendo, and $4.4 million and
$9.1 million of intercompany royalties and fee revenues,
respectively.
b. Reflects amortization of deferred product acquisition
costs of $0.7 million and $1.4 million for the six months
ended June 30, 2000 and the year ended December 31, 1999,
respectively, assuming an estimated life cycle of 15 years
for the products acquired.
c. Reflects tax benefit from Crescendo's operating loss to
ALZA's provision for income taxes and tax benefit on the
amortization of the deferred product acquisition costs, at
the statutory income tax rate of 40%.
NOTE 4 - NONRECURRING CHARGES
The nonrecurring charge of $4.5 million resulting from IPR&D
has been reflected in the pro forma combined condensed
balance sheet as of June 30, 2000. However, this charge has
been excluded from the pro forma combined condensed
statements of operations for the year ended December 31,
1999 and the six months ended June 30, 2000 pursuant to
Article 11 of Regulation S-X. ALZA's statement of
operations for the period in which the transaction will
close will include the nonrecurring charge for IPR&D.
Item 7c. Exhibits
20.1 Press Release dated October 2, 2000, announcing
ALZA's exercise of its option to acquire Crescendo's
Class A Common Stock
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1 Crescendo's Audited Financial Statements *
Statement of operations for the years ended
December 31, 1999, and 1998
Balance sheet at December 31, 1999 and 1998
Statement of stockholder's equity for the years
ended December 31, 1999 and 1998
Statement of cash flows for the years ended
December 31, 1999 and 1998
Notes to the financial statements
Report of Ernst & Young LLP, Independent Auditors
99.2 Crescendo's Unaudited Interim Condensed Financial
Statements **
Condensed statement of operations for the quarter
and six months ended June 30, 2000 and 1999
Condensed balance sheet at June 30, 2000
Condensed statement of cash flows for the six
months ended June 30, 2000 and 1999
Notes to the condensed financial statements
* Incorporated by reference from Crescendo's Annual Report
on Form 10-K/A for the year ended December 31, 1999.
** Incorporated by reference from Crescendo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ALZA CORPORATION
By: /s/ Matthew K. Fust
Matthew K. Fust
Senior Vice President and
Chief Financial Officer
Date: October 30, 2000
<PAGE>
EXHIBIT INDEX
20.1 Press Release dated October 2, 2000, announcing ALZA's exercise of
its option to acquire Crescendo's Class A Common Stock
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1 Crescendo's Audited Financial Statements
99.2 Crescendo's Unaudited Interim Condensed Financial Statements
