<PAGE>
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 September 30, 1996 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 0-11839
ALZA TTS RESEARCH PARTNERS, LTD.
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(Exact name of registrant as specified in its charter)
California 94-2863497
---------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
950 Page Mill Road, P.O. Box 10950, Palo Alto, CA, 94303-0802
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 494-5300
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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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Revenue Collected and Expenses
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- --------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
---------- ---------- ---------- ----------
REVENUE:
Royalty income $1,466,697 $1,124,258 $4,505,437 $3,116,565
Interest income 7,054 5,219 20,912 13,510
---------- ---------- ---------- ----------
Total revenue 1,473,751 1,129,477 4,526,349 3,130,075
EXPENSES:
General and
administrative 12,711 16,333 58,602 72,473
---------- ---------- ---------- ----------
NET INCOME $1,461,040 $1,113,144 $4,467,747 $3,057,602
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allocation of net income:
General Partner $ 14,610 $ 11,131 $ 44,678 $ 30,576
Class A Limited Partners 1,412,245 1,102,013 4,388,884 3,027,026
Class B Limited Partner 34,185 -- 34,185 --
---------- ---------- ---------- ----------
NET INCOME $1,461,040 $1,113,144 $4,467,747 $3,057,602
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER CLASS A
LIMITED PARTNERSHIP UNIT $ 441.33 $ 344.38 $ 1,371.53 $ 945.95
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
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ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Assets, Liabilities and
Partners' Capital (Deficit)
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
ASSETS
- ------
Current assets - Cash $ 69,159 $ 48,245
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
- -------------------------------------------
Current liabilities - Payable to
ALZA Corporation $ 165,129 $ 227,446
Partners' capital (deficit):
Class A Limited Partners,
3,200 units outstanding (95,624) (336,732)
Class B Limited Partner 609 159,343
General Partner (955) (1,812)
---------- ----------
Total partners' (deficit) (95,970) (179,201)
---------- ----------
$ 69,159 $ 48,245
---------- ----------
---------- ----------
See accompanying notes.
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ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statement of Partners' Capital (Deficit)
(unaudited)
Class A Class B Total
Limited Limited General Partners'
Partners Partner Partner Capital
----------- --------- --------- -----------
BALANCE,
DECEMBER 31, 1993 $ (764,075) $ 482,259 $ (2,883) $ (284,699)
Net income 3,052,032 -- 30,828 3,082,860
Payments to
partners (2,868,864) (133,435) (30,309) (3,032,608)
---------- --------- -------- ----------
BALANCE,
DECEMBER 31, 1994 (580,907) 348,824 (2,364) (234,447)
Net income 4,318,031 -- 43,616 4,361,647
Payments to
partners (4,073,856) (189,481) (43,064) (4,306,401)
---------- --------- -------- ----------
BALANCE,
DECEMBER 31, 1995 (336,732) 159,343 (1,812) (179,201)
Net income 4,388,884 34,185 44,678 4,467,747
Payments to
partners (4,147,776) (192,919) (43,821) (4,384,516)
---------- --------- -------- ----------
BALANCE,
SEPTEMBER 30, 1996 $ (95,624) $ 609 $ (955) $ (95,970)
---------- --------- -------- ----------
---------- --------- -------- ----------
See accompanying notes.
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ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
Increase (Decrease) in Cash
(unaudited)
Nine Months Ended September 30,
1996 1995
----------- -----------
Cash flows from operating activities:
Net income $ 4,467,747 $ 3,057,602
Adjustments to reconcile net income
to net cash used in operating
activities:
Payments to Partners (4,384,516) (3,015,085)
Decrease in liabilities:
Payable to ALZA Corporation (62,317) (29,009)
----------- -----------
Net cash provided by operating
activities 20,914 13,508
Cash at beginning of period 48,245 28,155
----------- -----------
Cash at end of period $ 69,159 $ 41,663
----------- -----------
----------- -----------
See accompanying notes.
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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
INTRODUCTION
The financial statements of ALZA TTS Research Partners, Ltd. (the
"Partnership") included herein should be read in conjunction with the
audited financial statements included in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1995. The accompanying interim
financial statements of the Partnership for the nine months ended September
30, 1996 and September 30, 1995 are unaudited but include all adjustments
which the General Partner (ALZA Development Corporation, a wholly-owned
subsidiary of ALZA Corporation) believes necessary for fair presentation.
These financial statements have been prepared on a modified basis of cash
receipts and disbursements, which is a comprehensive basis of accounting
other than generally accepted accounting principles in that royalty
revenues are not recognized until the related cash is received.
ORGANIZATION
The Partnership was formed on December 30, 1982 to conduct research and
development on products combining the proprietary transdermal therapeutic
system technology of ALZA Corporation ("ALZA") with certain generic
compounds (the "TTS Partnership Products"). On April 22, 1983, the closing
of the sale to the public of Class A Limited Partnership units took place.
At September 30, 1996, the Partnership's capital consisted of 3,200 Class A
Limited Partnership units purchased for $5,000 each, an original investment
by the Class B Limited Partner of $750,000 and an original investment by
the General Partner of $169,192. Under the terms of the Agreement of
Limited Partnership (the "Partnership Agreement"),
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net losses were allocated as follows: first, 1% to the General
Partner and 99% to the Class A Limited Partners and then, after the
capital account of the Class A Limited Partners was reduced to zero, 1%
to the General Partner and 99% to the Class B Limited Partner. After
the capital accounts of the Class A and Class B Limited Partners were
reduced to zero, losses were allocated 100% to the General Partner.
Under the terms of the Partnership Agreement, net income is allocated in
the inverse order of the losses previously allocated. Therefore, to the
extent losses had been allocated 100% to the General Partner, net income
was allocated 100% to the General Partner in an amount equal to such losses
prior to any allocation of net income to the Class A and Class B Limited
Partners. Then, to the extent losses had been allocated 99% to the Class B
Limited Partner, net income was first allocated 99% to the Class B Limited
Partner (and 1% to the General Partner) in an amount equal to such losses
prior to any net income being allocated to the Class A Limited Partners.
Then, to the extent losses had been allocated 99% to the Class A Limited
Partners, net income was allocated 99% to the Class A Limited Partners (and
1% to the General Partner.) As provided in the Partnership Agreement,
when, in the third quarter of 1996, the amount of net income allocated to
the Class A Limited Partners and the General Partner equalled the
previously allocated losses, subsequent income began to be allocated 99% to
the Class A and Class B Limited Partners, pro rata, and 1% to the General
Partner.
The General Partner is required by the Partnership Agreement to distribute,
on a quarterly basis, all of the Partnership's Excess Cash (which consists
of all cash received by the Partnership less all amounts expended in the
conduct of the Partnership's business, including administrative expenses,
and working capital) in proportion to the Partners' respective capital
contribution percentages. Given the methodology for the allocation of
losses and income discussed above, deficit
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capital account balances have resulted in the Class A Limited
Partners' and General Partner's capital accounts and will continue until
future allocated income exceeds cumulative cash distributions required
of the General Partner.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Essentially all of the Partnership's Total Funds (as defined in the
research and development contract between ALZA and the Partnership) have
been utilized in the development of TTS Partnership Products. Total Funds
consisted of the net proceeds from the sale by the Partnership of the Class
A Limited Partnership units, the General Partner's and Class B Limited
Partner's capital contributions to the Partnership, and interest and other
income earned through temporary investment of Partnership funds, less all
necessary expenses of operating the Partnership.
In accordance with the agreements between ALZA and the Partnership, the
Partnership is entitled to receive 4% of net sales of Duragesic-Registered
Trademark- (fentanyl transdermal system) CII and Testoderm-Registered
Trademark- (testosterone transdermal system) CIII. For the quarter ended
September 30, 1996, cash provided from royalties from Duragesic-Registered
Trademark- and Testoderm-Registered Trademark- increased to $1,466,697 from
$1,124,258 for the same period of 1995. Excess Cash (defined as cash
received by the Partnership, less all amounts expended in the conduct of
the Partnership's business, including administrative expenses, and
working capital) is distributed to the Partners. Because the Partnership
does not make commercialization decisions regarding TTS Partnership
Products, its potential royalty stream and income are not within the
Partnership's control.
Janssen Pharmaceutica, Inc. (together with its affiliates "Janssen"), a
subsidiary of Johnson and Johnson, markets Duragesic-Registered Trademark-
in the United States, Canada and 15 other countries worldwide. The product
has been cleared for marketing in more than 13 additional countries,
including several in Europe, South America and the Far East (excluding
Japan). Submissions for marketing clearance are on file in a
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number of other countries. ALZA Pharmaceuticals, the sales and
marketing division of ALZA, co-promotes Duragesic-Registered Trademark-
in the United States with Janssen.
ALZA, through ALZA Pharmaceuticals, markets Testoderm-Registered Trademark-
in the United States. The product is expected to be marketed by one or
more distributors outside the United States and has been cleared for
marketing in Singapore and in more than ten European countries.
Commercialization agreements covering 17 Asian countries (excluding Japan)
have been signed.
TTS Partnership Products other than the Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- products were at very early stages of
development when essentially all of the Partnership's Total Funds were
exhausted. Substantial expenditures would be required if the development
of these products were to be completed and the products commercialized. No
arrangements have been made with development partners for such products and
further activities are not contemplated at this time.
RESULTS OF OPERATIONS
From 1982 through 1987 the Partnership utilized all of the funds raised at
the time of its formation, primarily to fund product development at ALZA.
Until the introduction of Duragesic-Registered Trademark- in 1991, the
Partnership had been without cash for either operations or distribution
since 1987.
The Partnership earned net income during the third quarter of 1996 of
$1,461,040 as compared to $1,113,144 for the third quarter of 1995. The
Partnership's royalty income received from ALZA, resulting from Janssen's
reported net sales of Duragesic-Registered Trademark- and ALZA's net sales
of Testoderm-Registered Trademark-, was $1,466,697 during the third quarter
of 1996 as compared to $1,124,258 for the third quarter of 1995. The
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increase is due to increased sales of Duragesic-Registered
Trademark-. The Partnership had interest income of $7,054 for the third
quarter of 1996 as compared to interest income of $5,219 for the third
quarter of 1995. The increase was due to a higher level of cash available
for investment during the third quarter of 1996 as a result of the higher
royalty payment received from ALZA during the quarter.
General and administrative expenses for the continuing administrative
support required for the Partnership are payable to ALZA under an
administrative services agreement between ALZA and the Partnership.
General and administrative expenses were $12,711 for the third quarter of
1996 as compared to $16,333 for the third quarter of 1995.
In 1994 and 1995, payments for past administrative services totaled
$135,307 and $138,607, respectively. In the first nine months of 1996,
payments for administrative services have totaled $124,021. Between
December 1987 (at which time all Partnership funds raised at the time of
its formation had been utilized) and December 1991 (when the Partnership
began receiving royalty revenues on TTS Partnership Product sales), the
administrative costs were approximately $20,000 per quarter, totaling
approximately $295,000. These costs were payable to ALZA upon receipt of
invoice; however, ALZA agreed that the costs could be reimbursed,
initially, at a quarterly rate of $5.00 per Partnership unit, which was
deducted from Excess Cash from December 1991 through December 1993. In
March 1994, the quarterly rate was increased to $10.00 per Partnership
unit. In June 1996, it was determined that a further increase in the
reimbursement rate was necessary to fully reimburse ALZA for past
administrative costs on a more timely basis. Therefore, beginning with
the September 1996 distribution, a quarterly deduction has been made from
Excess Cash in an amount equal to the actual administrative expenses of
the Partnership for the previous quarter plus $10 per Partnership unit to
repay past administrative costs. As of September 30, 1996, the Partnership
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owed ALZA $165,129 for administrative services, of which $151,918
is for past due administrative costs. ALZA has not charged any
interest on the past due amounts. At a rate of $10.00 per Partnership
unit per quarter, all past administrative costs are expected to be
repaid during the fourth quarter of 1997.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In January 1994, a suit was filed against ALZA by Cygnus Therapeutic
Systems ("Cygnus") in the United States District Court for the
Northern District of California, seeking a declaration of
unenforceability and invalidity of an ALZA patent relating to
transdermal administration of fentanyl and alleging violation of
antitrust laws. In April 1995, the District Court granted ALZA's
motion to dismiss the lawsuit. Cygnus appealed that ruling. In
August 1996, the Court of Appeals of the Federal Circuit upheld the
District Court's dismissal of Cygnus' claims against ALZA. Cygnus has
no further right of appeal.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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<PAGE>
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 TTS Research Partners, Ltd.
(Registrant)
By: ALZA Development Corporation
General Partner
By: /s/ David R. Hoffmann
----------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant by its General Partner and in the capacities and on the dates
indicated.
Date: November 13, 1996 By: /s/ David R. Hoffmann
----------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Date: November 13, 1996 By: /s/ Bonnie J. Burdett
----------------------
Bonnie J. Burdett
Vice President,
Secretary and Director
Date: November 13, 1996 By: /s/ James W. Young
------------------
James W. Young
Vice President and
Director
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<PAGE>
Exhibit Index
EXHIBIT
27 Financial Data Schedule
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 69
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 69
<CURRENT-LIABILITIES> 165
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (96)
<TOTAL-LIABILITY-AND-EQUITY> 69
<SALES> 0
<TOTAL-REVENUES> 4,526
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,468
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,468
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
