<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 March 31, 1997 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
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 494-5300
-----------------
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 Ended March 31,
1997 1996
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<S> <C> <C>
REVENUE:
Royalty income $2,081,221 $1,217,549
Interest income 8,359 5,564
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Total revenue 2,089,580 1,223,113
EXPENSES:
General and administrative 40,003 27,450
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NET INCOME $2,049,577 $1,195,663
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Allocation of net income:
General Partner $ 20,496 $ 11,957
Class A Limited Partners 1,938,900 1,183,706
Class B Limited Partner 90,181 -
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NET INCOME $2,049,577 $1,195,663
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------------ ------------
NET INCOME PER CLASS A
LIMITED PARTNERSHIP UNIT $ 605.91 $ 369.91
------------ ------------
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</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Assets, Liabilities and
Partners' Capital (Deficit)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
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(unaudited)
<S> <C> <C>
Current assets - Cash $ 86,005 $ 77,586
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LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities - Payable to
ALZA Corporation $ 122,927 $ 146,381
Partners' capital (deficit):
Class A Limited Partners,
3,200 units outstanding (39,740) (69,904)
Class B Limited Partner 3,207 1,805
General Partner (389) (696)
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Total partners' deficit (36,922) (68,795)
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$ 86,005 $ 77,586
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</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statement of Partners' Capital (Deficit)
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Total
Limited Limited General Partners'
Partners Partner Partner Capital
--------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
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 6,035,020 110,749 62,079 6,207,848
Payments to
partners (5,768,192) (268,287) (60,963) (6,097,442)
--------------- ------------ -------------- -------------
BALANCE,
DECEMBER 31,
1996 (69,904) 1,805 (696) (68,795)
Net income 1,938,900 90,181 20,496 2,049,577
Payments to
partners (1,908,736) (88,779) (20,189) (2,017,704)
--------------- ------------ -------------- -------------
BALANCE,
MARCH 31,
1997 $ (39,740) $ 3,207 $ (389) $ (36,922)
--------------- ------------ -------------- -------------
--------------- ------------ -------------- -------------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1996
Increase (Decrease) in Cash
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,049,577 $ 1,195,663
Adjustments to reconcile net income
to net cash used in operating
activities:
Payments to Partners (2,017,704) (1,183,722)
Decrease in liabilities:
Payable to ALZA Corporation (23,454) (6,375)
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Net cash provided by operating
activities 8,419 5,566
Cash at beginning of period 77,586 48,245
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Cash at end of period $ 86,005 $ 53,811
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</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1997
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, 1996. The accompanying
interim financial statements of the Partnership for the three months
ended March 31, 1997 and March 31, 1996 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 March 31, 1997 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"),
net losses were allocated as follows: first, 1% to
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ALZA TTS Research Partners, Ltd.
March 31, 1997
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. To the extent
losses were allocated 100% to the General Partner, net income was
allocated 100% to the General Partner in an amount equal to such losses
prior to allocation of net income to the Class A and Class B Limited
Partners. Then, to the extent losses were allocated 99% to the Class B
Limited Partner, net income was 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 were 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, once the amount of net income allocated to the
Class A Limited Partners and the General Partner equaled previously
allocated losses (which occurred during the third quarter of 1996),
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 as discussed above,
deficit capital account balances have resulted in the Class A
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ALZA TTS Research Partners, Ltd.
March 31, 1997
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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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1997
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
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).
For the quarter ended March 31, 1997, cash provided from royalties from
Duragesic-Registered Trademark- and Testoderm-Registered Trademark-
increased to $2,081,221 from $1,217,549 for the same period of 1996.
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 in more than 20 countries
worldwide. The product has been cleared for marketing in seven
additional countries. Submissions for marketing clearance are on file in
a number of other countries. ALZA Pharmaceuticals, the sales and
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1997
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. ALZA Pharmaceuticals will market
Testoderm-Registered Trademark- through distributors outside the United
States. Commercialization agreements covering 17 Asian countries
(excluding Japan) were signed with Scitech Genetics Limited and
Pharmagenesis, Inc. in 1995. Scitech Genetics launched
Testoderm-Registered Trademark- in Singapore in January 1997. An
agreement was signed during the fourth quarter of 1996 with Ferring NV,
pursuant to which Ferring has the right to distribute
Testoderm-Registered Trademark- in 12 European countries.
Testoderm-Registered Trademark- has been cleared for marketing in more
than ten European countries.
TTS Partnership Products other than the Duragesic-Registered Trademark-
and Testoderm-Registered Trademark- products were at very early stages
of development when the Partnership's available funds were exhausted in
1987. Substantial expenditures would be required if the development of
these products were to be completed and the products commercialized.
For these products at early stages of development, no arrangements have
been made with development partners, and further activities are not
contemplated at this time.
The Partnership granted ALZA an option (the "License Option") to acquire
a license for any or all of the TTS Partnership Products, on a
product-by-product basis. In 1990, ALZA exercised its option to acquire
worldwide licenses (with the right to sublicense) to make, use and sell
the Duragesic-Registered Trademark- and Testoderm-Registered
Trademark- products. These licenses for each product are exclusive until
thirteen years after the actual reduction to practice of such product
and become nonexclusive thereafter. For Testoderm-Registered
Trademark-, the period of ALZA's exclusivity ends July 26, 1998. For
Duragesic-Registered Trademark-, the period of ALZA's exclusivity ends
December 4, 1998.
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1997
If ALZA's license for a product becomes nonexclusive, the General
Partner will need to determine whether to appoint others to market and
sell the product. Under ALZA's agreement with Janssen covering the
Duragesic-Registered Trademark- product, if the product were to be
introduced by a third party after ALZA's loss of exclusivity from the
Partnership, ALZA's royalty rate due from Janssen with respect to
Duragesic-Registered Trademark- would drop significantly. The
Partnership's right to receive 4% of net sales from ALZA would not
change. It is likely that ALZA Development Corporation, a wholly-owned
subsidiary of ALZA, would have a conflict of interest in connection with
any Partnership decision as to whether the product should be licensed to
a third party in addition to ALZA. In such an event, ALZA Development
Corporation would likely resign as the General Partner and the
Partnership would have to appoint a new general partner.
The General Partner has an option (the "Purchase Option"), exercisable
at any time, to purchase all (but not less than all) of the Limited
Partners' interests in the Partnership. The exercise price is $120
million, less Excess Cash distributed to the Limited Partners. The
exercise price will be paid by check to the Limited Partners. The
General Partner is under no obligation to exercise the Purchase Option,
and the General Partner will exercise the Purchase Option only if ALZA
deems such exercise to be in its best interest. The General Partner has
not made a determination as to whether to exercise the Purchase Option.
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
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ALZA TTS Research Partners, Ltd.
March 31, 1997
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 first quarter of 1997 of
$2,049,577 as compared to $1,195,663 for the first quarter of 1996. The
Partnership's royalty income received from ALZA based on Janssen's
reported net sales of Duragesic-Registered Trademark- and ALZA's net
sales of Testoderm-Registered Trademark- was $2,081,221 during the first
quarter of 1997 as compared to $1,217,549 for the first quarter of 1996.
The increase is due to increased sales of Duragesic-Registered
Trademark-. As stated above, the Partnership does not make
commercialization decisions regarding TTS Partnership Products;
therefore, its potential royalty stream and income are not within the
Partnership's control. The Partnership had interest income of $8,359
for the first quarter of 1997 as compared to interest income of $5,564
for the first quarter of 1996. The increase was due to a higher level
of cash available for investment during the first quarter of 1997 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 $40,003 for the first quarter
of 1997 as compared to $27,450 for the first quarter of 1996. The
increase is due to the timing of the payment to the Partnership's
auditor for services provided in connection with their review of
quarterly and year end reports for 1996.
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
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1997
Product sales), costs for administrative services totaled $295,000.
Such costs were due and payable to ALZA upon invoice but were not paid
when due. In 1991, ALZA agreed that the costs could be reimbursed over
time, initially, at a quarterly rate of $5.00 per Partnership unit,
which were 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
the $10.00 per Partnership unit to repay past administrative costs.
ALZA has not charged any interest on the past due amounts. At the rate
of $10.00 per Partnership unit per quarter, all remaining past
administrative costs, totaling $69,315 as of March 31, 1997, are
expected to be repaid by the fourth quarter of 1997. In the first
quarter of 1997, payments for past and current administrative expenses
totaled $77,067. In 1994, 1995 and 1996, payments made to ALZA for past
and current administrative expenses totaled $135,307, $138,607 and
$172,459, respectively.
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1997
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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>
ALZA TTS Research Partners, Ltd.
March 31, 1997
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: May 14, 1997 By: /s/ David R. Hoffmann
-----------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Date: May 14, 1997 By: /s/ James W. Young
-----------------------
James W. Young
Vice President and
Director
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ALZA TTS Research Partners, Ltd.
March 31, 1997
Exhibit Index
Exhibit
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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 MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 86
<CURRENT-LIABILITIES> 123
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (37)
<TOTAL-LIABILITY-AND-EQUITY> 86
<SALES> 0
<TOTAL-REVENUES> 2090
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2050
<INCOME-TAX> 0
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<NET-INCOME> 2050
<EPS-PRIMARY> 0
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</TABLE>
