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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Limited Partnership Interests
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 requirements for the past 90 days: Yes X No
----- -----
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ALZA TTS RESEARCH PARTNERS, LTD.
FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Description Page
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Item 1. Description of Business ................................ 1
Item 2. Properties ............................................. 9
Item 3. Legal Proceedings ...................................... 9
Item 4. Submission of Matters to a Vote of Security Holders .... 9
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .................................. 10
Item 6. Selected Financial Data ................................ 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 11
Item 8. Financial Statements and Supplementary Data ............ 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 15
Item 10. Directors and Executive Officers of the Registrant .... 16
Item 11. Executive Compensation ................................ 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management ...................................... 17
Item 13. Certain Relationships and Related Transactions ........ 18
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K ................... 19
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
ALZA TTS Research Partners, Ltd. (the "Partnership") is a California
limited partnership formed on December 30, 1982. ALZA Development
Corporation, the general partner of the Partnership (the "General Partner"),
is a wholly-owned subsidiary of ALZA Corporation ("ALZA"). The business of
the Partnership is the development and licensing of products ("TTS
Partnership Products") combining certain generic drug compounds in specified
areas of therapy with ALZA's proprietary transdermal therapeutic system
("TTS") technology. In order to undertake its development activities, the
Partnership obtained from ALZA a nonexclusive, worldwide, royalty-free
license to use ALZA's TTS technology solely for the development, manufacture
and sale of TTS Partnership Products.
The Partnership completed the public sale of 3,200 units of Class A
limited partnership interests and the private sale of one Class B limited
partnership interest on April 22, 1983. The gross proceeds from these sales,
including a one percent capital contribution of the General Partner, were
$16,919,192.
PRODUCTS AND TECHNOLOGIES
The Partnership entered into a research and development agreement (the
"Development Contract") with ALZA for the development of TTS Partnership
Products in December 1982. As of December 31, 1987, substantially all of the
net proceeds from the sale of Partnership interests had been applied towards
work done under the Development Contract. As a result, the Partnership has
made no payments under the Development Contract since that time.
A substantial portion of the Partnership's total funds was allocated to
two major product development programs, TTS-fentanyl and TTS-testosterone.
TTS-fentanyl is a 72-hour transdermal therapeutic system which delivers the
narcotic analgesic fentanyl. In August 1990,
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TTS-fentanyl (which is being marketed under the trade name
Duragesic-Registered Trademark- (fentanyl transdermal system) CII) (see
"Distribution Arrangements" below) was cleared for marketing by the United
States Food and Drug Administration ("FDA") for management of severe chronic
pain when opioid analgesia is indicated, such as in the management of cancer
pain. Duragesic-Registered Trademark- has been cleared for marketing in more
than 30 additional countries, including several in each of Europe, South
America and Asia (excluding Japan). Duragesic-Registered Trademark- is
marketed by Janssen Pharmaceutica, Inc. (together with its affiliates,
"Janssen"), a subsidiary of Johnson and Johnson, and is co-promoted by ALZA
in the United States.
TTS-testosterone is a controlled release dosage form of the major male
hormone testosterone designed to re-establish in hypogonadal males the plasma
concentrations of testosterone observed in healthy young men.
TTS-testosterone was cleared for marketing in the United States in October
1993. In April 1994, ALZA, through its sales and marketing division, ALZA
Pharmaceuticals, began marketing the product in the United States under the
trade name Testoderm-Registered Trademark- (testosterone transdermal system)
CIII. Testoderm-Registered Trademark- has also been cleared for marketing in
China, Singapore and in more than ten European countries.
ALZA Pharmaceuticals will market this product outside the United States
through distributors. Commercialization agreements for Testoderm-Registered
Trademark- were signed with Scitech Genetics Limited and with Pharmagenesis,
Inc. in 1995 covering various Asian countries (excluding Japan). Subsequent
to year end, Scitech Genetics launched Testoderm-Registered Trademark- in
Singapore. During the fourth quarter of 1996, ALZA signed an agreement with
Ferring NV pursuant to which Ferring has the rights to market
Testoderm-Registered Trademark- in 12 countries in Europe.
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
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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.
CONTINUATION OPTION
The Partnership granted ALZA an option (the "Continuation Option") to
continue the development of any TTS Partnership Product which the Partnership
determined for any reason (including lack of funds) not to complete. ALZA
exercised the Continuation Option for all TTS Partnership Products in 1987.
As a result, ALZA may fund (or obtain funding for) the development of any TTS
Partnership Product through the earlier of (i) approval either by the FDA or
regulatory authorities in certain foreign countries or (ii) ALZA's exercise
of the "License Option" described below. The Duragesic-Registered Trademark-
and Testoderm-Registered Trademark- products were completed by ALZA, without
the use of the Partnership's funds, under the Continuation Option.
LICENSE OPTION
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. When the License Option is exercised for a TTS
Partnership Product, ALZA acquires a worldwide license, including the right
to sublicense, make, use and sell such product. The license is exclusive for
a period of thirteen years after the actual reduction to practice of the
product and nonexclusive thereafter. Under each license, ALZA would make
payments to the Partnership based on ALZA's and its affiliates' and
sublicensees' sales of the licensed product. If the License Option is not
exercised with respect to any TTS Partnership Product, the rights to such
product will
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remain with the Partnership, and the Partnership will need to find other
licensees or seek other methods of obtaining a commercial return on the
product.
In 1990, ALZA exercised its License Option for the Duragesic-Registered
Trademark- and Testoderm-Registered Trademark- products. Under the terms of
the agreements between ALZA and the Partnership, the payments to the
Partnership under the license for each TTS Partnership Product will be
reduced (subject to certain limitations) in proportion to the development
costs of the product not funded by the Partnership. In accordance with the
agreements, the Partnership receives 4% of net sales of the
Duragesic-Registered Trademark- and Testoderm-Registered Trademark- products.
As described above, ALZA's licenses for Testoderm-Registered Trademark-
and Duragesic-Registered Trademark- will remain exclusive until thirteen
years after the actual reduction to practice of the product. For
Testoderm-Registered Trademark-, the period of ALZA's exclusivity ends
July 26, 1998. For Duragesic-Registered Trademark-, the period of
exclusivity ends December 4, 1998. 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. ALZA
Development Corporation, a wholly-owned subsidiary of ALZA, might 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.
PURCHASE OPTION
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
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exercise price is $120 million, less "Excess Cash" distributed to the Limited
Partners. The exercise price may be paid in cash, ALZA common stock, or a
combination, at the General Partner's option. 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.
DISTRIBUTION ARRANGEMENTS
ALZA and the Partnership entered into an agreement with Janssen pursuant
to which Janssen has rights to market the Duragesic-Registered Trademark-
product in the United States and most international markets. ALZA has the
right to co-promote the product with Janssen in the United States, and
commenced co-promotion activities during the second quarter of 1994. Janssen
launched Duragesic-Registered Trademark- in the United States during the
second quarter of 1991, and in Canada during the second quarter of 1992.
Janssen has also launched the product in more than 20 other countries,
including several in each of Europe, South America and Asia (excluding Japan).
ALZA has entered into a commercialization agreement with Scitech Genetics
Limited to distribute the Testoderm-Registered Trademark- product in
Bangladesh, Brunei, Burma, India, Indonesia, Malaysia, Pakistan, Philippines,
Singapore, South Korea, Sri Lanka, Thailand and Vietnam and with
Pharmagenesis, Inc. to distribute in China, Hong Kong, Macau and Taiwan.
Scitech Genetics launched Testoderm-Registered Trademark- in Singapore in
January 1997. ALZA also entered into an agreement with Ferring NV pursuant
to which Ferring has the rights to distribute the Testoderm-Registered
Trademark- product in Austria, Belgium, Denmark, Finland, Germany, Ireland,
Luxembourg, the Netherlands, Norway, Sweden, Switzerland and the United
Kingdom.
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<PAGE>
PATENTS
Patent protection generally has been important in the pharmaceutical
industry, and patent applications with respect to the TTS Partnership
Products have been filed. The Partnership's success may in large part depend
upon (i) the strength of the existing ALZA patents covering the technology
used in the development of the TTS Partnership Products and (ii) the ability
to obtain strong patent protection for the TTS Partnership Products. ALZA
has obtained patents and has pending patent applications covering various
aspects of its technology licensed to the Partnership and for the
Duragesic-Registered Trademark- and Testoderm-Registered Trademark- products.
It is impossible to anticipate the breadth or degree of protection that such
patents (either current ALZA patents or future patents, if they are granted)
will provide to the TTS Partnership Products or the underlying technology.
Some of ALZA's earlier patents covering its TTS technology have begun to
expire; however, both of the Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- products are covered by their own
product-specific patents.
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.
GOVERNMENT REGULATION
TTS Partnership Products, similar to other pharmaceutical products,
require FDA marketing clearance before they can be sold in the United States
or, except on a very limited basis, exported to other countries. The
clearance of regulatory agencies is also required in
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foreign countries before TTS Partnership Products can be marketed in those
countries. It is impossible to anticipate the amount of time that will be
required to obtain regulatory clearance to market any product in any foreign
country or whether such clearance will be granted.
The Duragesic-Registered Trademark- product is cleared for marketing in
the United States, and in more than 30 additional countries, including
several in each of Europe, South America and Asia (excluding Japan). The
Testoderm-Registered Trademark- product has been cleared for marketing in the
United States, China, Singapore and in more than ten European countries.
Regulatory filings for the Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- products have been submitted in other
European and Asian countries.
COMPETITION
Competition among products using drug delivery technology is generally
based on performance characteristics and price. Marketing and acceptance by
hospitals, doctors and patients are also crucial to the success of a product.
Health care reimbursement policies of managed care organizations, insurers
and government agencies will continue to exert pressure on pricing. The
Duragesic-Registered Trademark- and Testoderm-Registered Trademark- products
face competition from more traditional forms of therapy using the same or
similar drugs, and from transdermal drug delivery systems developed by
others. Potential competitors in the area of more traditional forms of drug
delivery include all of the major pharmaceutical concerns throughout the
world. Many of these entities have greater financial resources, technical
staffs and marketing and manufacturing capabilities than does the Partnership
or ALZA. Many large and small companies are also competitors in the area of
newer drug delivery technologies, and some of these companies have developed
transdermal products, some of which are now in the marketplace.
The major markets for pharmaceutical products developed in the United
States are Europe, Japan, and North and South America.
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REVENUES
For the years ended December 31, 1996, 1995 and 1994, the Partnership had
royalty income of $6,265,401, $4,441,708 and $3,167,914, respectively,
derived from net sales of Duragesic-Registered Trademark- and
Testoderm-Registered Trademark-. Interest income for the years ended
December 31, 1996, 1995 and 1994 was $28,995, $20,192 and $10,398,
respectively.
EMPLOYEES
The Partnership has no employees. The Partnership requires certain
administrative, accounting, contract management and record keeping services
which are presently being provided by ALZA and are billed to the Partnership
at ALZA's standard administrative services rate.
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Item 2. PROPERTIES
The Partnership's principal office is located at 950 Page Mill Road,
P.O. Box 10950, Palo Alto, California 94303-0802. The Partnership does not
own any of its facilities.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the limited partnership
interests. The Partnership Agreement contains strict limitations on the
transfer of such interests. The Partnership has approximately 2,000 Class A
Limited Partners, one Class B Limited Partner and one General Partner. In
1996, 1995 and 1994, $6,097,442, $4,306,401 and $3,032,608, respectively,
were distributed to the Limited Partners and General Partner.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Royalty income $ 6,265,401 $ 4,441,708 $ 3,167,914 $ 2,720,568 $1,447,746
Interest 28,995 20,192 10,398 7,759 5,151
Net income 6,207,848 4,361,647 3,082,860 2,634,523 1,384,540
Net income,
Class A Limited Partners 6,035,020 4,318,031 3,052,032 2,608,178 656,259
Net income,
Class B Limited Partner 110,749 - - - 669,633
Net income,
General Partner 62,079 43,616 30,828 26,345 58,648
Total assets 77,586 48,245 28,155 17,757 9,996
Total liabilities 146,381 227,446 262,602 302,456 276,304
Total Cash Distribution 6,097,442 4,306,401 3,032,608 2,652,914 1,379,341
Class A Partners 5,768,192 4,073,856 2,868,864 2,509,632 1,294,880
Class B Partner 268,287 189,481 133,435 116,728 70,646
General Partner 60,963 43,064 30,309 26,554 13,815
</TABLE>
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Item 7. 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 Development
Contract) 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- and
Testoderm-Registered Trademark-. For the year ended December 31, 1996, cash
received from royalties from Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- increased to $6,265,401 from $4,441,708 for
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.
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 of $6,207,848, $4,361,647 and
$3,082,860 for 1996, 1995 and 1994, respectively. The Partnership received
royalty income of $6,265,401, $4,441,708
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and $3,167,914 for 1996, 1995 and 1994, respectively, from ALZA based on
Janssen's reported net sales of Duragesic-Registered Trademark- and ALZA's
net sales of Testoderm-Registered Trademark-. The increase in royalty income
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 interest income earned by the
Partnership was $28,995, $20,192, and $10,398 during the years ended December
31, 1996, 1995 and 1994, respectively. The increase was due to a higher
level of cash available for investment during 1996 as a result of the higher
royalty payments received from ALZA.
Under the terms of the Agreement of Limited Partnership (the
"Partnership Agreement"), 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. 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, any 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
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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 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.
There were no research and development expenses in 1996, 1995, or 1994
due to the fact that the Partnership had expended all of its Total Funds.
General and administrative expenses were $86,548, $100,253, and $95,452
for the years ended December 31, 1996, 1995 and 1994, respectively. These
expenses are payable to ALZA under an administrative services agreement
between ALZA and the Partnership.
In 1994 and 1995, payments made to ALZA for past administrative services
totaled $135,307 and $138,607, respectively. In 1996, payments for past and
current administrative services totaled $172,459. 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 due and payable to ALZA upon invoice; however, 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
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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
$10.00 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 unpaid past administrative costs (totalling
$116,691 as of December 31, 1996), are expected to be repaid by the fourth
quarter of 1997.
The Partnership maintains its books using a modified basis of cash
receipts and disbursements which is different from accrual basis accounting
in that royalty revenues are not recognized until the related cash is
received.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements: Incorporated herein by reference to the
Financial Statements and Additional Information attached as Exhibit 13.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. The affairs
of the Partnership are managed by its General Partner. David R. Hoffmann has
served as a director and officer of the General Partner from its inception.
James W. Young was named a director and a Vice President of the General
Partner in 1996 to replace a retiring director. There is presently a
vacancy on the Board of Directors due to the recent retirement of a director.
The current directors intend to appoint an additional director in the near
future.
Name Age Positions Held
---- --- ----------------------------------------------
David R. Hoffmann 52 President (Chief Executive Officer), Chief
Financial Officer and Director of the
General Partner; Vice President (since
1985) and Treasurer of ALZA (since 1987)
James W. Young 52 Vice President and Director of the
General Partner; Senior Vice President,
Commercial Development of ALZA (since 1995)
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Item 11. EXECUTIVE COMPENSATION
The directors and executive officers of the General Partner do not
receive any remuneration from the Partnership or the General Partner. All of
them do, however, receive salaries from ALZA for their services to ALZA. To
the extent that they perform administrative functions on behalf of the
Partnership, a portion of their salaries is billed by ALZA to the Partnership
as an administrative cost.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Percent
Name and Address of Amount and Nature of Beneficial of
Title of Class Beneficial Owner Ownership Class Class
- ------------------- ------------------------- ------------------------------- -------
<S> <C> <C> <C>
General ALZA Development General Partnership Interest 100%
Partnership Corporation which amounts to 1% of the total
Interest 950 Page Mill Road capital of the Partnership.
P.O. Box 10950
Palo Alto, CA
94303-0802
Class B Limited Stada Arzneimittel AG, Class B Limited Partnership 100%
Partnership Stadastrasse 2-18 61118 Interest which amounts to
Interest Bad Vilbel Germany $750,000.
</TABLE>
None of the directors or officers of the General Partner own any direct
interest in the Partnership or the General Partner. The General Partner has
an option to purchase all of the Limited Partners' interests for $120 million
(payable in cash, ALZA common stock or a combination, at the General
Partner's option), less an amount equal to all cash distributed to the
Limited Partners by the Partnership.
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of an administrative services agreement between ALZA and
the Partnership, in 1996 the Partnership paid ALZA a total of $172,459 for
past and current administrative expenses.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Annual Report on Form 10-K:
1. Financial Statements: Incorporated herein by reference to the
Financial Statements and Additional Information attached as
Exhibit 13.
2. Financial Statement Schedules: None.
3. Exhibits:
4.1 Agreement of Limited Partnership filed as Exhibit 3.A to
Amendment No. 1 to Form S-1 Registration Statement No. 2-80595
("Registration Statement") filed with the Securities and
Exchange Commission on February 11, 1983.
4.2 Certificate of Limited Partnership filed as Exhibit 3.B to the
Registration Statement.
10.1 Research and Development Contract between ALZA Corporation
and the Partnership dated 12/30/82 filed as Exhibit 10.A to the
Registration Statement.
10.2 Technology License Agreement between ALZA Corporation and the
Partnership dated 12/30/82 filed as Exhibit 10.B to the
Registration Statement.
10.3 Option Agreement between ALZA Corporation and the Partnership
dated 12/30/82 filed as Exhibit 10.C to the Registration
Statement.
13. Financial Statements and Additional Information.
23. Consent of Ernst & Young LLP, Independent Auditors.
27. Financial Data Schedule.
(b) Reports on Form 8-K: None.
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ALZA TTS Research Partners, Ltd.
Index to Financial Statements
(Item 14(a))
PAGE
FINANCIAL STATEMENTS: NUMBER
- --------------------- ------
Report of Ernst & Young LLP, Independent
Auditors 1
Statements of Assets, Liabilities, and Partners'
Capital (Deficit) at December 31, 1996 and 1995 2
Statements of Revenue Collected and Expenses for
the Years ended December 31, 1996, 1995 and 1994 3
Statements of Partners' Capital (Deficit) for the
Years ended December 31, 1996, 1995, 1994 4
Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994 5
Notes to Financial Statements 6 - 11
Additional Information 13 - 15
The above financial statements are included in the Financial Statements
and Additional Information, attached as Exhibit 13, and are hereby
incorporated by reference.
All schedules have been omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
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<PAGE>
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
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: March 26, 1997 /s/ David R. Hoffmann
-------------------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Date: March 26, 1997 /s/ James W. Young
------------------------------
James W. Young
Director and Vice
President
-21-
<PAGE>
EXHIBIT INDEX
ALZA TTS RESEARCH PARTNERS, LTD.
ANNUAL REPORT ON FORM 10-K
Exhibit Exhibit
Number Name
------- --------------------
4.1 Agreement of Limited Partnership
4.2 Certificate of Limited Partnership
10.1 Research and Development
Contract between ALZA Corporation and the Partnership
dated 12/30/82
10.2 Technology License Agreement between ALZA Corporation
and the Partnership dated 12/30/82
10.3 Option Agreement between ALZA Corporation and the
Partnership dated 12/30/82
13 Financial Statements and Additional Information
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
-22-
<PAGE>
Exhibit 4.1
ALZA TTS RESEARCH PARTNERS, LTD.
AGREEMENT
OF
LIMITED PARTNERSHIP
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
Table of Contents
Page
----
ARTICLE 1
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Partnership Business. . . . . . . . . . . . . . . . . . . . . . 2
1.5 Principal Place of Business . . . . . . . . . . . . . . . . . . 2
ARTICLE 2
CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Partners; Amount of Agreed Capital Contributions . . . . . . . . 3
2.3 Additional Partners. . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Additional Capital Contributions Not Required. . . . . . . . . . 5
2.5 No Interest on Capital . . . . . . . . . . . . . . . . . . . . . 5
2.6 No Withdrawal of Capital . . . . . . . . . . . . . . . . . . . . 5
2.7 No Voluntary Capital Contributions . . . . . . . . . . . . . . . 6
2.8 General Partner as Limited Partner . . . . . . . . . . . . . . . 6
ARTICLE 3
DISTRIBUTIONS, PROFITS AND LOSSES . . . . . . . . . . . . . . . . . . . 6
3.1 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2 Partnership Capital Percentage . . . . . . . . . . . . . . . . . 6
3.3 Allocation of Profits and Losses . . . . . . . . . . . . . . . . 7
3.4 Distributions to Partners. . . . . . . . . . . . . . . . . . . . 7
ARTICLE 4
ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . 8
<PAGE>
Table of Contents
(Continued)
Page
-----
4.1 Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Powers of General Partner. . . . . . . . . . . . . . . . . . . . 8
4.3 Time Devoted by the General Partner; Contracts
with the General Partner. . . . . . . . . . . . . . . . . . . . 11
4.4 Net Worth; Liability; Indemnification . . . . . . . . . . . . . 12
4.5 Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . 14
4.6 Class B Limited Partner's Right to Consult . . . . . . . . . . . 16
ARTICLE 5
ACCOUNTING AND REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . 16
5.1 Books and Records. . . . . . . . . . . . . . . . . . . . . . . . 16
5.2 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.3 Accounting Method . . . . . . . . . . . . . . . . . . . . . . . 16
5.4 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.5 Tax Returns and Other Reports . . . . . . . . . . . . . . . . . 18
ARTICLE 6
TRANSFERS AND OTHER DISPOSITIONS OF PARTNERSHIP
INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.1 Transfer of Interests . . . . . . . . . . . . . . . . . . . . . 18
6.2 Death or Incompetence of Class A Limited
Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 Sale or Transfer of Interest of a Limited
Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.4 Assignee or Transferee Bound by This
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.5 Effective Date of Transfer . . . . . . . . . . . . . . . . . . . 22
6.6 Nontransferability of Interest of a
General Partner . . . . . . . . . . . . . . . . . . . . . . . 22
6.7 Removal or Bankruptcy of General Partner . . . . . . . . . . . . 23
ARTICLE 7
PURCHASE OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.l Grant of Option . . . . . . . . . . . . . . . . . . . . . . . . 24
7.2 Time for Exercise . . . . . . . . . . . . . . . . . . . . . . . 24
7.3 Manner of Exercise . . . . . . . . . . . . . . . . . . . . . . . 24
-ii-
<PAGE>
Table of Contents
(Continued)
Page
----
7.4 Purchase Price; Payment. . . . . . . . . . . . . . . . . . . . . 24
7.5 Transfer of Title. . . . . . . . . . . . . . . . . . . . . . . . 25
7.6 Rights of ALZA Development Corporation . . . . . . . . . . . . . 25
ARTICLE 8
TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.2 Terminating Event . . . . . . . . . . . . . . . . . . . . . . . 26
8.3 Right to Dissolve the Partnership . . . . . . . . . . . . . . . 26
ARTICLE 9
DISSOLUTION AND FINAL DISTRIBUTION OF ASSETS . . . . . . . . . . . . . 27
9.1 Winding Up the Partnership . . . . . . . . . . . . . . . . . . . 27
9.2 Gains or Losses in Process of Liquidation. . . . . . . . . . . . 28
9.3 Waiver of Rights to Court Decree
of Dissolution . . . . . . . . . . . . . . . . . . . . . . . . 28
9.4 Return of Capital. . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 10
MEETINGS OF PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.1 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 11
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.1 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.2 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.3 Counterparts; Signature Pages . . . . . . . . . . . . . . . . . 30
11.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 30
11.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.6 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . 31
11.7 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 31
11.8 Authorization; Power of Attorney . . . . . . . . . . . . . . . 32
-iii-
<PAGE>
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
AGREEMENT OF LIMITED PARTNERSHIP
--------------------------------
AGREEMENT made this 30th day of December, 1982, by and between ALZA
DEVELOPMENT CORPORATION, a California corporation ("General Partner") and
Mary M. Roensch (the "Initial Class A Limited Partner" who, together with
those parties who shall hereafter be admitted as additional or substituted
Class A Limited Partners pursuant to the terms hereof, collectively shall be
called the "Class A Limited Partners"). The Class A Limited Partners,
together with the entity who hereafter shall be admitted as a Class B Limited
Partner (the "Class B Limited Partner") collectively shall be called "Limited
Partners". The Limited Partners, together with the General Partner,
collectively shall be called "Partners".
In consideration of the mutual promises and covenant contained herein,
the parties hereto agree as follows:
ARTICLE 1
GENERAL PROVISIONS
1.1 FORMATION. The General Partner and the Initial Class A Limited
Partner hereby form with each other a limited partnership (the "Partnership")
pursuant to the provisions of the California Uniform Limited Partnership Act
(the "Act").
<PAGE>
The Partnership shall continue without interruption as a limited partnership
under the provisions of the Act after the admission of additional Class A
Limited Partners and the Class B Limited Partner pursuant to the provisions
of Section 2.4 hereof and the withdrawal from the Partnership of the Initial
Class A Limited Partner.
1.2 NAME. The Partnership shall operate under the name of "ALZA TTS
Research Partners, Ltd."; provided, however, that the business of the
Partnership may be conducted, upon compliance with all applicable laws, under
any other name designated by the General Partner.
1.3 TERM. The Partnership shall commence on the date of the recording of
a Certificate of Limited Partnership in the Office of the Recorder of Santa
Clara County, and shall continue until January 31, 2004, unless earlier
terminated pursuant to the provisions of this Agreement.
1.4 PARTNERSHIP BUSINESS. The Partnership is formed (i) to develop,
obtain regulatory approval for, license, manufacture and market
pharmaceutical products combining transdermal therapeutic systems technology
with selected drug compounds and (ii) to engage in any lawful business
incidental thereto.
1.5 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the
Partnership shall be 950 Page Mill Road, Palo Alto, California 94304 or such
other place as the General Partner shall from time to time designate.
-2-
<PAGE>
ARTICLE 2
CAPITAL CONTRIBUTIONS
2.1 CAPITALIZATION. The minimum capitalization of the Partnership for
commencement of its business shall be $12,373,737 and the maximum
capitalization of the Partnership shall be $16,919,192.
2.2 PARTNERS; AMOUNT OF AGREED CAPITAL CONTRIBUTIONS. The capital
contributions to be made to the Partnership (the "Agreed Capital
Contributions") shall be as follows:
(a) The name, address and Agreed Capital Contribution of the General
Partner are set forth on Schedule A hereto, as amended from time to time. In
addition to its Agreed Capital Contribution, the General Partner shall
contribute additional capital to the Partnership, if necessary, so that the
General Partner's total Agreed Capital Contribution as general partner at all
times shall equal 1% of the aggregate contributions to capital of all
Partners.
(b) The name, place of residence and Agreed Capital Contribution of the
Initial Class A Limited Partner are set forth on Schedule A hereto, as
amended from time to time. Upon the admission of any additional Class A
Limited Partner pursuant to Section 2.4 hereof, the Initial Class A Limited
Partner shall withdraw from the Partnership and shall be entitled to receive
forthwith the return of her Agreed Capital Contribution, without interest or
deduction.
-3-
<PAGE>
2.3 ADDITIONAL PARTNERS.
(a) The General Partner is authorized to admit additional Class A
Limited Partners if, after the admission of such additional Class A Limited
Partners, the aggregate Agreed Capital Contribution of all the Class A
Limited Partners would not be less than $12,000,000 nor more than $16,000,000
(excluding the Agreed Capital Contribution of the Initial Limited Partner).
The manner of the offering of the additional Class A Limited Partnership
interests, the terms and conditions under which subscriptions for such
interests will be accepted, the manner of and conditions to the sale of such
interests to subscribers therefor and the admission of such subscribers as
additional Class A Limited Partners shall be in all material respects as
provided in the prospectus (the "Prospectus") contained in the Registration
Statement filed with the Securities and Exchange Commission for the
registration under the Securities Act of 1933, as amended, of the Class A
Limited Partnership interests and shall be subject to the provisions thereof.
Upon the admission of any additional Class A Limited Partners, the names,
places of residence and Agreed Capital Contributions of the additional Class
A Limited Partners shall be set forth on Schedule A, as amended from time to
time, and each such additional Class A Limited Partner shall execute a
signature page of this Agreement, which shall be deemed to be a counterpart
of this Agreement.
-4-
<PAGE>
(b) The General Partner is authorized to admit Stada Arzneimittel AG as
a Class B Limited Partner if it agrees to make an Agreed Capital Contribution
of $750,000. Upon the admission of the Class B Limited Partner, its name,
address and Agreed Capital Contribution shall be set forth on Schedule A
hereto, as amended from time to time, and such Class B Limited Partner shall
execute a signature page of this Agreement. The Agreed Capital Contribution
of the Class B Limited Partner shall be payable one-third on the date of its
admission to the Partnership, one-third one year from such date, and
one-third two years from such date. No interest shall be payable by the
Class B Limited Partner with respect to any installment of its Agreed Capital
Contribution that is paid when due.
(c) No additional General Partner may be admitted except as provided in
Article 6 hereof.
2.4 ADDITIONAL CAPITAL CONTRIBUTIONS NOT REQUIRED. The Partnership
interests of the Partners are nonassessable. Except as provided in Section
2.2(a) hereof with respect to the General Partner, no additional
contributions to capital shall be required.
2.5 NO INTEREST ON CAPITAL. No interest shall be paid on contributions to
the capital of the Partnership.
2.6 NO WITHDRAWAL OF CAPITAL. Except as provided in Section 2.2(b) and
Article 9 hereof, no Partner shall have the right to withdraw such Partner's
capital contribution.
-5-
<PAGE>
2.7 NO VOLUNTARY CAPITAL CONTRIBUTIONS. No Partner shall have the right
to make voluntary contributions to the capital of the Partnership.
2.8 GENERAL PARTNER AS LIMITED PARTNER. The General Partner also may be
a Limited Partner to the extent that it purchases or becomes the transferee
of all or any part of the Partnership interest of a Limited Partner. The
General Partner's Agreed Capital Contribution pursuant to Section 2.2(a)
hereof shall be made solely in its capacity as General Partner and, except as
provided in Section 6.7 hereof, shall not entitle the General Partner to any
rights as a Limited Partner.
ARTICLE 3
DISTRIBUTIONS, PROFITS AND LOSSES
3.1 CAPITAL ACCOUNTS. A "Capital Account" shall be maintained for each
Partner, which shall consist of the Partner's Agreed Capital Contribution,
increased by the Partner's allocable share of Partnership net income and by
any additional capital contributions of the Partner and decreased by the
Partner's allocable share of Partnership net losses and by the amount of any
distributions to the Partner.
3.2 PARTNERSHIP CAPITAL PERCENTAGE. The "Partnership Capital
Percentage" of each Partner shall be that proportion (expressed as a
percentage) that the amount of the Partner's Agreed Capital Contribution
bears to the total of all Partners' Agreed Capital Contributions.
-6-
<PAGE>
3.3 ALLOCATION OF INCOME AND LOSSES. All income and losses of the
Partnership shall be allocated as follows:
(a) Any net losses of the Partnership shall be allocated as follows: (i)
first, 99% to the Class A Limited Partners as a group (provided that no such
allocation shall reduce any Class A Limited Partner's Capital Account below
zero) and 1% to the General Partner; (ii) then, if the Capital Accounts of
all of the Class A Limited Partners have been reduced to zero, 99% to the
Class B Limited Partner (provided that no such allocation shall reduce the
Class B Limited Partner's Capital Account below zero) and 1% to the General
Partner; and (iii) thereafter, if the Capital Account of the Class B Limited
Partner has been reduced to zero, 100% to the General Partner. Among the
Class A Limited Partners, all net losses shall be allocated in proportion to
their respective Partnership Capital Percentages.
(b) Net income of the Partnership shall be allocated as follows: (i)
first, to the Partners to the extent of, in proportion to and in the inverse
order of net losses previously allocated pursuant to Section 3.3(a) hereof
and (ii) thereafter, to all Partners in proportion to their respective
Partnership Capital Percentages.
3.4 DISTRIBUTIONS TO PARTNERS. As soon as practicable after the close of
each calendar quarter, the General Partner shall distribute Excess Cash to
the Partners in proportion to
-7-
<PAGE>
their respective Partnership Capital Percentages. The term "Excess Cash" as
used herein, with respect to any quarter shall mean all cash funds received
by the Partnership in such quarter, other than Agreed Capital Contributions
and interest or other income earned on temporary investments thereof, less
the sum of (i) all amounts expended during such quarter by the General Partner
in the conduct of the Partnership's business and (ii) such working capital or
other reserves or amounts as the General Partner determines in its sole
discretion are necessary or appropriate for Partnership operations and
obligations.
ARTICLE 4
ADMINISTRATIVE PROVISIONS
4.1 CONTROL. Except as expressly provided herein, the General Partner
shall have exclusive control over the management, operation and policies of
the Partnership. The General Partner shall have all of the rights and powers
of a general partner as provided in the Act. The Limited Partners shall not
participate in the management of the business of the Partnership.
4.2 POWERS OF GENERAL PARTNER.
(a) Without limiting the provisions of Section 4.1 hereof, the General
Partner hereby is authorized, in carrying on the business of the Partnership:
-8-
<PAGE>
(i) to negotiate, enter into and execute contracts, licenses, joint
venture agreements and leases and incur obligations for and on behalf of the
Partnership;
(ii) to borrow monies for and on behalf of Partnership necessary or
desirable for Partnership operations, upon such terms and conditions as it
may deem advisable and proper, and to pledge the credit and mortgage or
otherwise encumber the assets of the Partnership for such purposes; provided,
however, that the Partnership may not, without amending this Agreement, have
outstanding at any one time in excess of $100,000 in principal amount of such
borrowings;
(iii) to acquire and sell real and personal property on behalf of the
Partnership upon such terms as the General Partner deems advisable;
(iv) to select depositories for the cash funds of the Partnership and to
designate signatures for the accounts in such depositories;
(v) to employ (and terminate the employment of) such persons, firms or
corporations on behalf of the Partnership as, in its sole discretion, the
General Partner shall deem advisable for the proper operation of the
Partnership business including, without limitation, consultants, lawyers and
accountants. The fact that the General Partner or any of its affiliates is
employed by or
-9-
<PAGE>
employs, or is directly or indirectly affiliated with, any such Person, firm
or corporation, shall not prohibit the General Partner from employing or
otherwise dealing with such person, firm or corporation;
(vi) to the extent that funds of the Partnership are, in the General
Partner's discretion, not immediately necessary to the conduct of the
Partnership's business, to invest temporarily such funds in cash, cash
equivalents and United States government securities;
(vii) to prosecute, protect and defend all patents, patent rights, trade
names, trademarks and service marks, and all applications with respect
thereto that may be held by the Partnership;
(viii) to prepay, in whole or in part, refinance, modify or extend any
agreement or promissory note, or any lease, mortgage or deed of trust
affecting property owned by the Partnership, and in connection therewith to
execute for and on behalf of the Partnership any and all extensions, renewals
and modifications of such instruments; and
(ix) to take any other actions incidental to any of the foregoing or to
the purposes of the Partnership.
The General Partner shall use its best efforts to cause the Partnership to be
formed, qualified or registered under assumed
-10-
<PAGE>
or fictitious name statutes or similar laws in any state in which the
Partnership owns property or transacts business, if such formation,
qualification or registration is necessary to protect the limited liability
of the Limited Partners or to permit the Partnership lawfully to own property
or to transact business in such state.
(b) No person shall be required to determine the General Partner's
authority to act on behalf of the Partnership.
(c) The General Partner shall, on the first federal income tax return of
the Partnership, treat research or experimentation expenditures of the
Partnership as deductible under Section 174 of the Internal Revenue Code of
1954, as amended, when paid or incurred; and the General Partner is
authorized, in its discretion, to make or decline to make any other elections
which may be made for federal or state tax purposes.
4.3 TIME DEVOTED BY THE GENERAL PARTNER; CONTRACTS WITH THE GENERAL
PARTNER.
(a) The General Partner shall devote such time as is reasonably
necessary to the conduct of the business of the Partnership. The General
Partner shall manage the affairs of the Partnership to the best of its
ability, and the General Partner shall use its best efforts to carry out the
purposes of the Partnership for the benefit of all Partners.
(b) The General Partner and any Limited Partner may engage in or possess
an interest in other business ventures
-11-
<PAGE>
of every nature and description, independently or with others, whether such
ventures are competitive with the Partnership or otherwise, and neither the
Partnership nor any Partner shall have any right by virtue of this Agreement
in or to such independent ventures or to the income or profits therefrom.
(c) The General Partner may, on behalf of the Partnership, enter into
contracts or other agreements including, without limitation, the contracts
set forth on Schedule I hereto, with the General Partner or any entity
directly or indirectly related to or affiliated with the General Partner.
4.4 NET WORTH; LIABILITY; INDEMNIFICATION.
(a) The General Partner shall be entitled to reimbursement from the
Partnership for all properly incurred Partnership expenses or obligations
paid by the General Partner out of its own funds including, without
limitation, amounts expended prior to the admission of additional Class A
Limited Partners.
(b) The General Partner represents that it presently does, and agrees
that it will, at all times during the term of the Partnership, (a) maintain a
net worth (computed without regard to the General Partner's interest in the
Partnership and in any other limited partnerships) equal to at least 10% of
(i) the aggregate capital contributions of the Partners and (ii) the
aggregate capital contributions of all partners to all other limited
partnerships in which the General
-12-
<PAGE>
Partner is the sole general partner and (b) meet all other criteria set forth
in Revenue Procedures 72-13 and 74-17 of the Internal Revenue Service with
respect to its ruling policy on the status of limited partnerships, unless
and until the General Partner has been advised by counsel that the foregoing
are not relevant to the classification of the Partnership as a partnership
for federal income tax purposes.
(c) Neither the General Partner nor any of its officers, directors,
employees or agents shall be liable to the Partnership or any Limited
Partners for any action or inaction of the General Partner in connection with
the business or affairs of the Partnership, so long as the person against
whom liability is asserted acted in good faith on behalf of the Partnership
and in a manner reasonably believed by such person to be in the best
interests of the Partnership, but only if such course of conduct does not
constitute gross negligence or willful misconduct. The General Partner and
its affiliates, officers, directors and agents shall be indemnified and held
harmless by the Partnership for any liability or loss suffered by them solely
by virtue of the performance by any of them of the duties of the General
Partner acting as general partner in connection with the Partnership's
business, so long as such indemnified person acted in good faith on behalf of
the Partnership and in a manner reasonably believed by such person to be in
the best interests of the Partnership, but only if
-13-
<PAGE>
such course of conduct does not constitute negligence or misconduct; provided
that such indemnification or agreement to hold harmless shall only be
recoverable out of assets of the partnership and not from the Limited
Partners.
4.5 LIMITED PARTNERS.
(a) The Limited Partners shall not take part in the management of the
Partnership business or transact any business for the Partnership, shall have
no power to sign for or to bind the Partnership, and shall not be personally
liable for any of the debts or obligations of the Partnership beyond the
amount of capital contributed by them to the Partnership, except as may be
required by applicable law; provided, however, that the Limited Partners
shall have the power to vote upon the following Partnership matters affecting
the basic structure of the Partnership, each of which shall require the
affirmative vote or written consent of the Limited Partners holding a
majority of the Partnership Capital Percentages of all Limited Partners as a
group:
(i) if and to the extent permitted by law, continuation of the
Partnership after a Terminating Event as defined in Section 8.2;
(ii) acceptance of resignation of General Partner;
(iii) election of a new General Partner after the occurrence of a
Terminating Event;
-14-
<PAGE>
(iv) sale of all or substantially all of the assets of the Partnership
other than as provided for in any of the contracts set forth on Schedule I
hereto;
(v) approval of sale of the Partnership Interest of the General
Partner;
(vi) removal of a General Partner;
(vii) termination of the Partnership other than by a Terminating Event
or the expiration of its term, but only after all of the Agreed Capital
Contributions (and interest and other income earned on temporary investments
thereof) have been expended; and
(viii) amendment of this Agreement.
Upon the approval of any of the foregoing Partnership matters pursuant to
this Section 4.5, the General Partner automatically shall be authorized and
directed to conclude any transaction so approved, and all Partners, including
any Limited Partners who may have been opposed to any such transaction, shall
be bound to conclude the transaction and to execute such documents and do
such things in furtherance thereof as the General Partner deems necessary or
convenient. A copy of each amendment shall be sent to each Limited Partner.
(b) Each Limited Partner shall provide to the Partnership prompt written
notice of any change of such Limited Partner's address from that set forth on
Schedule A hereto, and the General Partner may amend Schedule A to reflect
such change of address.
-15-
<PAGE>
4.6 CLASS B LIMITED PARTNER'S RIGHT TO CONSULT. The Class B Limited
Partner shall have the right to consult with the General Partner with respect
to any products to be developed by the partnership. This role shall be
advisory in nature and shall not in any way limit the power of the General
Partner under this Agreement.
ARTICLE 5
ACCOUNTING AND REPORTS
5.1 BOOKS AND RECORDS. The General Partner shall maintain proper and
complete books of account of the business of the Partnership, which shall be
open to inspection by any Partner, or such Partner's duly authorized
representative, at the Partnership's principal place of business upon
reasonable notice and for a proper purpose at all reasonable times during
normal business hours. The Partnership shall employ a firm of certified
public accountants, selected by the General Partner, to review its books
annually.
5.2 FISCAL YEAR. The fiscal year of the Partnership shall be the
calendar year.
5.3 ACCOUNTING METHOD. The books of the Partnership shall be maintained
on the cash basis of accounting.
5.4 REPORTS. (a) Within 75 days after the end of each year, the General
Partner shall notify in writing each Person who was a Partner at any time
during the year of such
-16-
<PAGE>
person's distributive share of the Partnership's net income and net losses
for such year and all other Partnership information necessary for the
preparation of such person's federal income tax returns. Within 90 days
after the end of each year, the General Partner shall furnish to each Partner
an annual report containing (i) financial statements of the Partnership
including, without limitation, a balance sheet and statements of income and
changes in financial position for such year, prepared in accordance with
generally accepted accounting principles and accompanied by a report of the
Partnership's certified public accountants and (ii) a general description of
the activities of the Partnership during the period covered by the report and
(iii) a description of any material transactions between the Partnership and
the General Partner or any of its affiliates.
(b) Within 60 days after the end of each calendar quarter (other than
the last fiscal quarter of any year) prior to the termination of this
Agreement, the General Partner shall furnish to each Partner a report
containing a balance sheet and an income statement for such quarterly period,
each of which will be prepared in accordance with generally accepted
accounting principles but which may be unaudited. The report also shall
contain a description of any material events concerning the business of the
Partnership that occurred during such fiscal quarter.
(c) As soon as practicable after the dissolution of the Partnership, the
General Partner shall furnish to
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all of the Partners reports equivalent to those furnished after the close of
each year, and a report showing the amount realized upon disposition of the
Partnership assets.
5.5 TAX RETURNS AND OTHER REPORTS. The General Partner shall cause
income tax returns of the Partnership to be prepared and timely filed with
the appropriate taxing authorities. The General Partner shall prepare and
file with appropriate state authorities any reports required to be filed by
such state authorities, and also shall prepare and file with the Securities
and Exchange Commission any reports required to be filed with such commission.
ARTICLE 6
TRANSFERS AND OTHER DISPOSITIONS
OF PARTNERSHIP INTERESTS
6.1 TRANSFER OF INTERESTS. The Partnership Interest of a Partner shall
not be sold, assigned, transferred or encumbered, except as provided in this
Agreement. A Partner's "Interest" shall refer to the entire ownership
interest of the Partner in the Partnership, including the right of such
Partner to any and all benefits to which such Partner may be entitled as
provided in this Agreement, together with the obligations of such Partner to
comply with all of the terms hereof. Any purported transfer or assignment
made other than in accordance with this Agreement shall be null and void and
of no force and effect, at the option of the General Partner. No transfer
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<PAGE>
or assignment to a minor (except in trust or pursuant to the Uniform Gifts to
Minors Act) Shall be effective.
6.2 DEATH OR INCOMPETENCE OF CLASS A LIMITED PARTNER. Subject to the
provisions of Sections 6.4 and 6.5 and the General Partner's option described
in Article 7, the personal representative or other successor of a deceased or
incompetent Class A limited Partner shall succeed to the Interest of a Class
A Limited Partner after such representative or successor shall have submitted
to the General Partner certified copies of court orders, or other evidence
satisfactory to the General Partner, establishing such incompetence or death
and the authority of such personal representative or successor; however, such
representative or successor shall not become a substituted Limited Partner
without the consent of the General Partner, which consent may be withheld in
the absolute discretion of the General Partner.
6.3 SALE OR TRANSFER OF INTEREST OF A LIMITED PARTNER.
(a) Subject to any restrictions on transferability required by law, the
provisions of Sections 6.4 and 6.5 hereof and the General Partner's option
described in Article 7 hereof, any Limited Partner may assign or otherwise
transfer such Limited Partner's Interest in the Partnership, provided:
(i) the transfer of a Class A Limited Partner's Interest is in an
increment of $5,000 of Agreed Capital Contribution, and the transfer by the
Class B Limited Partner is of its entire Interest;
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(ii) with respect to a Class A Limited Partner's Interest, the assignee
or transferee meets all requirements set forth in the Prospectus applicable
to additional Class A Limited Partners;
(iii) the General Partner consents in writing to such assignment or
transfer, which consent shall be withheld and may only be withheld if such
assignment or transfer (a) does not satisfy subparagraph (ii) above, (b)
would jeopardize the status of the Partnership for federal income tax
purposes, or (c) would violate, or cause the Partnership to violate, any
applicable law or governmental rule or regulation, including without
limitation, any applicable federal or state securities law;
(iv) if requested by the General Partner, an opinion from counsel for
the Partnership is delivered to the General Partner stating that, in the
opinion of such counsel, such transfer or assignment will not violate or
cause the Partnership to violate, any applicable law or governmental rule or
regulation including, without limitation, any applicable federal or state
securities law;
(v) the full Agreed Capital Contribution of the assignor or transferor
has been paid; and
(vi) prior to the transfer or assignment, the assignor or transferor
reimburses the General Partner and the Partnership for their expenses,
including
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<PAGE>
attorneys' fees, incurred in connection with the transfer or assignment.
In the event of any such assignment or transfer, such Limited Partner's
assignee or transferee shall be allocated the same Percentage of net income
and net losses that the transferring Limited Partner would have been
allocated had no such assignment or transfer been made; however, such
assignee or transferee shall not become a substituted Limited Partner without
the consent of the General Partner, which consent may be withheld in the
absolute discretion of the General Partner.
(b) Each Limited Partner shall indemnify and hold harmless the
Partnership, the General Partner and any Limited Partner who was or is a
party to, or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding of any kind whatsoever, by reason of or
arising from any actual or alleged misrepresentation or misstatement of facts
or omission to state facts made or omitted to be made by such Limited Partner
in connection with any assignment, transfer, encumbrance or other disposition
of all or any part of an Interest in the Partnership, or the admission of a
substituted Limited Partner to the Partnership, against expenses for which
the Partnership, the General Partner or any such Limited Partner has not
otherwise been reimbursed including, without limitation, reasonable
attorneys' fees, judgments, fines and amounts paid in settlement, actually
and reasonably incurred in connection with such action, suit or proceeding.
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<PAGE>
6.4 ASSIGNEE OF TRANSFEREE BOUND BY THIS AGREEMENT. The assignee or
transferee of any Limited Partner's Interest shall be subject to all the
terms, conditions, restrictions and obligations of this Agreement. No
transfer or assignment shall be recognized until and unless the transferee or
assignee shall have so acknowledged in writing to the General Partner in a
manner and form reasonably satisfactory to the General Partner.
6.5 EFFECTIVE DATE OF TRANSFER. Any assignment which is permitted
hereunder shall be effective as of the close of the calendar month during
which all required documentation is received by the General Partner. In
addition to the conditions set forth above, an assignee, transferee, heir or
legatee of a Limited Partner (to the extent of the Interest acquired from the
Limited Partner) shall become a substituted Limited Partner as that term is
used in the Act only upon the consent of the General Partner and upon the
recording of an amended Certificate of Limited Partnership, if required under
the Act.
6.6 NONTRANSFERABILITY OF INTEREST OF A GENERAL PARTNER. The General
Partner shall not voluntarily resign or withdraw from the Partnership as
General Partner without (i) obtaining the affirmative vote or written consent
of the Limited Partners holding a majority of the Partnership Capital
Percentages of all Limited Partners, (ii) providing at least one successor
general partner (to whom the resigning General
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<PAGE>
Partner shall assign its Interest as General Partner in the Partnership)
satisfactory to Limited Partners holding a majority of the Partnership
Capital Percentages of all Limited Partners, and (iii) delivering to the
Partnership an opinion of the Partnership's counsel that such resignation or
withdrawal will not subject the Partnership to federal income taxation as an
association taxable as a corporation. Notwithstanding anything in this
Agreement to the contrary, if the General Partner resigns or withdraws from
the Partnership in a manner contrary to the foregoing, (i) its then existing
capital account automatically shall be converted into a capital account which
is subordinated to all debts and obligations of the Partnership and which
shall be due and payable only upon termination of the Partnership and (ii)
the General Partner shall not be entitled thereafter to share in any profits
or losses of the Partnership or receive any distributions from the
Partnership other than on liquidation. In the event of the resignation or
withdrawal by the General Partner, the Limited Partners shall elect whether
to carry on the business of the Partnership with one or more substituted
general partners.
6.7 REMOVAL OR BANKRUPTCY OF GENERAL PARTNER. If the General Partner is
removed or becomes bankrupt, and the Partnership is not terminated, the
General Partner's Interest shall be converted into a Class A Limited
Partnership Interest with an equal Capital Account balance and equal
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<PAGE>
Partnership Capital Percentage, as though an additional Class A Limited
Partner had been admitted to the Partnership.
ARTICLE 7
PURCHASE OPTION
7.1 GRANT OF OPTION. Each Limited Partner hereby grants to the General
Partner an irrevocable option to purchase all of such Limited Partner's
Interest in the Partnership (the "Purchase Option").
7.2 TIME FOR EXERCISE. The Purchase Option may be exercised at any time
during the period commencing on January 1, 1987 and expiring upon the
dissolution of the Partnership. The Purchase option with respect to any
Limited Partner's Interest may be exercised only if the Purchase Option is
exercised as to all Limited Partners' Interests.
7.3 MANNER OF EXERCISE. The General Partner may exercise the Purchase
Option only by a notice of exercise to the Partnership and each Limited
Partner (or his assignee or transferee), which notice shall specify a date
(the "Closing Date"), no later than 30 days after the date of the notice,
upon which the General Partner desires to consummate the purchase of the
Limited Partners' Interests.
7.4 PURCHASE PRICE; PAYMENT. If the Agreed Capital Contributions of all
Limited Partners are $16,750,000, the aggregate purchase price for the
Limited Partners' Interests will be as follows:
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If Exercised During Lump Sum Payment
------------------- ----------------
calendar year 1987 $60,000,000
calendar year 1988 $90,000,000
calendar year 1989 and thereafter $120,000,000
less, in each case, an amount equal to all Excess Cash distributed to the
Limited Partners by the Partnership; provided, however, that the lump sum
payment to be made by the General partner upon any exercise after December
31, 1989 shall in no event be less than $50,000,000. Notwithstanding the
foregoing, if the Agreed Capital Contributions of all Limited Partners are
less than $16,750,000, each of the amounts set forth above shall be reduced
proportionately. On the Closing Date, the General Partner will forward to
each Limited Partner, by check, in United States dollars, such Limited
Partner's proportionate share of the purchase price paid, based on such
Limited Partner's Partnership Capital Percentage.
7.5 TRANSFER OF TITLE. On the Closing Date, upon payment by the General
Partner of the purchase price, title to all of the Limited Partners'
Interests automatically will be transferred to the General Partner without
the necessity of any action an the part of any Limited Partner.
7.6 RIGHTS OF ALZA DEVELOPMENT CORPORATION. Notwithstanding anything
else contained in this Agreement or any amendment of this Agreement, ALZA
Development Corporation shall retain the right to exercise the Purchase
Option even if it is no longer a general partner of the Partnership.
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<PAGE>
ARTICLE 8
TERMINATION
8.1 TERMINATION. The Partnership shall terminate upon the earliest of
the following events to occur:
(a) January 31, 2004;
(b) the occurrence of a Terminating Event without the appointment of a
successor general partner, as provided in Section 8.2;
(c) a vote of the Limited Partners as provided in Section 4.5; and
(d) a sale (by means other than the entering into one or more license
agreements) by the Partnership of all or substantially all of its assets,
unless the Partnership is continued by the vote or written consent of the
Limited Partners as provided in Section 4.5.
8.2 TERMINATING EVENT. Upon the resignation, removal, withdrawal or
bankruptcy of the General Partner ("Terminating Event"), the Partnership
shall terminate unless the Limited Partners shall, within 90 days after the
occurrence of the Terminating Event, elect a successor general partner by the
vote required in Section 4.5.
8.3 RIGHT TO DISSOLVE THE PARTNERSHIP. Except as provided in this
Article 8, no Partner shall have the right to cause the dissolution of the
Partnership before the expiration of the term for which it is formed.
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ARTICLE 9
DISSOLUTION AND FINAL
DISTRIBUTION OF ASSETS
9.1 WINDING UP THE PARTNERSHIP. If the Partnership terminates, the
Partnership immediately shall commence to wind up its affairs. The assets of
the Partnership shall be applied in the following order:
(a) Payment to creditors of the Partnership, other than
Partners, in the order of priority provided by law. In the
discretion of the General Partner, reserves may be established
to meet any contingent obligations or liabilities and, if and
when such contingencies shall cease to exist, any remaining
assets in such reserves shall be distributed as provided in
this Section 9.1.
(b) Payment to each Limited Partner of any credit balance
in such Limited Partner's Capital Account.
(c) Payment to the General Partner of any credit balance
in its Capital Account or payment to the Limited Partners, in
proportion to their Partnership Capital Percentages, of the
total amount of any debit balance in the General Partner's
Capital Account.
(d) Payment to the Partners of any remaining assets in
proportion to their respective Partnership Capital Percentages.
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A Limited Partner may, but shall not have the right to, receive property
other than cash in return for such Limited Partner's capital contribution.
9.2 GAINS OR LOSSES IN PROCESS OF LIQUIDATION. Any gain or loss on
disposition of Partnership properties in the process of liquidation shall be
credited or charged to the Partners in the proportion of their interests in
profits or losses as specified in Section 3.3. Any property distributed in
kind in the liquidation shall be valued and treated as though the property
were sold and the cash proceeds were distributed. The difference between the
value of the property distributed in kind and its book value shall be treated
as gain or loss on sale of the property and shall be credited or charged to
the Partners in the proportions of their interests in income or losses as
specified in Section 3.3.
9.3. WAIVER OF RIGHTS TO COURT DECREE OF DISSOLUTION. The parties agree
that irreparable damage would be done to the goodwill and reputation of the
Partnership if any Partner should bring an action in court to dissolve the
Partnership. Care has been taken in this Agreement to provide for fair and
just Payment in liquidation of the interests of all Partners. Accordingly,
each party hereby waives and renounces his right to seek a court decree of
dissolution or the appointment by the court of a liquidator for the
Partnership.
9.4 RETURN OF CAPITAL. Except as provided in this Article 9, no Partner
shall have the right to demand return of
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the partner's Agreed Capital Contribution or distribution of any of the
assets or income of the Partnership. Each Partner shall look solely to the
assets of the Partnership for the return of the Partner's Agreed Capital
Contribution; and, if the Partnership property remaining after the payment or
discharge of its debts, liabilities or distributions is insufficient to
return the Agreed Capital Contributions, the Partners shall have no recourse
against the General Partner or any Limited Partner, except as provided in
Section 4.4(c).
ARTICLE 10
MEETINGS OF PARTNERS
10.1 MEETINGS. Meetings of the Partnership may be called by the General
Partner, or by Limited Partners holding more than ten percent of the
Partnership Capital Percentages of all Partners, for matters upon which the
Partners may vote as set forth in this Agreement. A list of the names and
addresses of all Limited Partners shall be maintained as part of the books
and records of the Partnership and shall be made available on request to the
Limited Partners or their representatives at the requesting Partner's cost.
Within ten days after receipt of a written request for a meeting stating the
purpose of the meeting, the General Partner shall provide all Partners with a
written notice setting forth (i) a date, not less than 15 nor more than 60
days after the date of the notice, on which the meeting will
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be held, (ii) the purpose of the meeting and (iii) the time and place of the
meeting. In lieu of a meeting, the General Partner may submit proposed
amendments to this Agreement to the Limited Partners for action by their
written consent.
ARTICLE 11
MISCELLANEOUS
11.1 COSTS. The Partnership shall assume and pay all obligations and
all reasonable costs and fees in connection with the organization of the
Partnership and shall bear all expenses properly chargeable to the
administration or operation of the Partnership or its business, the
protection of Partnership assets or the carrying out of this Agreement or the
purposes of the Partnership.
11.2 HEADINGS. Headings are inserted in this Agreement for convenience
only and shall not be referred to in the interpretation of this Agreement.
11.3 COUNTERPARTS; SIGNATURE PAGES. This Agreement may be executed in
counterparts each of which shall be deemed an original but all of which
together shall constitute one and the same Agreement. Any Partner executing
a signature page of this Agreement shall be deemed to have executed a
counterpart hereof.
11.4 ENTIRE AGREEMENT. This Agreement comprises the entire agreement
between the parties hereto relating to the
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rights and obligations of the General Partner and Limited Partners,
respectively.
11.5 NOTICES. Any notice, request or other communication shall be in
writing and shall be deemed duly given if personally delivered or if mailed
by registered or certified mail if in the United States and air mail if
outside the United States, return receipt requested (in the United States),
postage prepaid, to the Partnership at its principal place of business and to
any Partner at the address shown from time to time on Schedule A. The
Partnership or any Partner may change the address to which notice may be
given or any other communication sent by serving notice of such change of
address upon the Partnership (or upon the other Partners if the Partnership
is the one giving notice) in the manner herein specified. Any notice given
in conformity with this Section 11.5 shall be effective when delivered, if
delivered personally, and five days after mailing, if mailed.
11.6 APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California as applied between
residents of that state entering into contracts wholly to be performed in
that state.
11.7 SUCCESSORS AND ASSIGNS. Except as herein provided to the contrary,
this Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, administrators, executors, distributees,
successors and permitted assigns.
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<PAGE>
11.8 AUTHORIZATION; POWER OF ATTORNEY. Each of the Limited Partners
irrevocably constitutes and appoints ALZA Development Corporation, the
General Partner of ALZA TTS Research Partners, Ltd., with full power of
substitution, the true and lawful attorney for such Limited Partner and in
such Limited Partner's name, place and stead to make, execute, sign,
acknowledge, swear to, deliver, record and file any documents or instruments
which may be considered necessary or desirable by the General Partner to
carry out fully the provisions of this Agreement including, without
limitation, (i) an amendment or amendments of this Agreement and the
Certificate of Limited Partnership of the Partnership for the purpose of
adding such Limited Partner and other persons as Limited Partners of the
Partnership as contemplated by this Agreement, (ii) other amendments of this
Agreement and the Certificate of Limited Partnership or cancellation of the
same and (iii) documents necessary or desirable for the consummation of the
purchase of the Limited Partners' interests under the Purchase Option. The
power of attorney hereby granted shall be deemed to be coupled with an
interest, shall be irrevocable and shall survive the death, incapacity,
insolvency, dissolution or termination of
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such Limited Partner or any transfer or assignment of all or any portion of
such Limited Partner's Interest.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
General Partner: Initial Class A Limited
Partner:
ALZA DEVELOPMENT CORPORATION
By /s/ Peter F. Carpenter /s/ Mary M. Roensch
------------------------------ --------------------------
Peter F. Carpenter, President Mary M. Roensch
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Schedule I
Research and Development Agreement dated December 30, 1982 between ALZA TTS
Research Partners, Ltd. and ALZA Corporation.
Technology License Agreement dated December 30, 1982 between ALZA TTS
Research Partners, Ltd. and ALZA Corporation
Option Agreement dated December 30, 1982 between ALZA TTS Research Partners,
Ltd. and ALZA Corporation
Distribution Agreement dated as of December 30, 1982 among ALZA TTS Research
Partners, Ltd., ALZA Corporation and Stada Arzneimittel AG
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Class of Agreed Capital
Name Partner Address Contribution
- ----- -------- ------- --------------
<S> <C> <C> <C>
ALZA General 950 Page Mill Road 1% of the aggregate capital
Development Partner Palo Alto, CA 94304 contributions of all
Corporation Attention: President Partners
Mary M. Class A 2178 Spanishgate $990
Roensch Limited Court
Partner San Jose, CA 95132
</TABLE>
<PAGE>
Exhibit 4.2
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
Heller, Ehrman, White & McAuliffe
44 Montgomery Street
San Francisco, California 94104
Attention: Virginia Lim, Esq.
CERTIFICATE OF LIMITED PARTNERSHIP
----------------------------------
WE, THE UNDERSIGNED, ALZA DEVELOPMENT CORPORATION ("General Partner")
and MARY M. ROENSCH ("Initial Limited Partner") desire to form a limited
partnership (the "Partnership") pursuant to the California Uniform Limited
Partnership Act, and do hereby certify in accordance with the provisions of
California Corporations Code Section 15502(1)(a) that:
I
The name of the Partnership is ALZA TTS RESEARCH PARTNERS, LTD.
II
The character of the business is to develop, obtain regulatory approval
for, license, manufacture and market pharmaceutical products combining
transdermal therapeutic systems technology with selected drug compounds.
III
The location of the principal place of business of the Partnership
initially shall be 950 Page Mill Road,
<PAGE>
Palo Alto, California 94304, and thereafter such other place or places as the
General Partner may from time to time determine.
IV
The class, name and place of residence of each partner ("Partner") of
the Partnership is set forth on Schedule A attached hereto and incorporated
herein by this reference. The Partnership shall have two classes of limited
partners ("Limited Partners"): Class A Limited Partners and a Class B
Limited Partner.
V
The Partnership shall continue until January 31, 2004 unless sooner
terminated upon the occurrence of any one or more of the following events:
(a) the resignation, removal, withdrawal or bankruptcy of the General
Partner, unless the Limited Partners elect, within 90 days thereafter, to
carry on the business of the Partnership and elect a successor General
Partner by the affirmative vote or written consent of a majority of the
Partnership Capital Percentages of the Limited Partners;
(b) the affirmative vote or written consent of a majority of the
Partnership Capital Percentages of the Limited Partners voluntarily to
dissolve the Partnership, but only after all of the capital contributions of
the Partners, and any interest or other income earned on temporary
investments thereof, have been expended;
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<PAGE>
(c) the sale (by means other than entering into of one or more license
agreements) by the Partnership of all or substantially all of its assets; or
(d) the Partnership is terminated by operation of law or judicial
decree.
"Partnership Capital Percentage" is the proportion that the amount of
each Partner's Capital Contribution (the amount each Partner has agreed to
contribute to the capital of the Partnership) bears to the total of all
Partners' Agreed Capital Contributions.
VI
The amount of cash contributed by each Partner is set forth on Schedule
A. The General Partner is authorized to admit additional Class A Limited
Partners and a Class B Limited Partner (see Article XI below) and shall
prepare an amended Schedule A which sets forth the name, address and capital
contribution of each Partner.
VII
The General Partner may not require any Limited Partner to make
additional contributions to the capital of the Partnership.
VIII
The contribution of the Initial Class A Limited Partner shall be
returned to her without interest or deduction
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on the date of the admission of any additional Class A Limited Partner, and
her interest in the Partnership thereupon shall be terminated. The capital
contribution of all other Limited Partners shall be returned only upon the
dissolution of the Partnership.
IX
Net losses of the Partnership will be allocated as follows:
(i) first, 99% to the Class A Limited Partners in proportion to their
respective Partnership Capital Percentages as set forth from time to time on
Schedule A (provided however, that no such allocation shall reduce their
respective capital accounts below zero) and one percent to the General
Partner;
(ii) then, if the capital accounts of all of the Class A Limited
Partners have been reduced to zero, 99% to the Class B Limited Partner
(provided however, that no such allocation shall reduce its capital account
below zero), and one percent to the General Partner; and
(iii) thereafter, if the capital account of the Class B Limited Partner
has been reduced to zero, 100% to the General Partner.
Net income of the Partnership will be allocated to the Partners to the extent
of, in proportion to and in the inverse order of net losses previously
allocated; thereafter, to the Partners
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in proportion to their respective Partnership Capital Percentages.
As soon as practicable after the close of each calendar quarter, the
General Partner shall distribute Excess Cash to the Partners in proportion to
their respective Partnership Capital Percentages. "Excess Cash" is defined
as all cash funds received by the Partnership in such quarter (other than
funds received as capital contributions and interest or other income earned
on temporary investments thereof) less the sum of all amounts expended during
such quarter by the General Partner in the conduct of the Partnership's
business and such working capital or other reserves or amounts that the
General Partner determines in its sole discretion are necessary or
appropriate for Partnership operations and obligations.
Upon any dissolution or termination of the Partnership, the proceeds
from the sale of assets available for distribution to the Partners shall be
distributed in accordance with Section 9.1 of the Agreement of Limited
Partnership, which provides, in part, as follows:
9.1 WINDING UP THE PARTNERSHIP. If the Partnership terminates, the
Partnership immediately shall commence to wind up its affairs. The assets of
the Partnership shall be applied in the following order:
(a) Payment to creditors of the Partnership, other than
Partners, in the order of priority provided by law. In the discretion
of the General Partner, reserves may be established to meet any
contingent obligations or liabilities and, if and
-5-
<PAGE>
when such contingencies shall cease to exist, any remaining assets in
such reserves shall be distributed as provided in this Section 9.1.
(b) Payment to each Limited Partner of any credit balance in
such Limited Partner's Capital Account.
(c) Payment to the General Partner of any credit balance in its
Capital Account or payment to the Limited Partners, in proportion to
their Partnership Capital Percentages, of the total amount of any debit
balance in the General Partner's Capital Account.
(d) Payment to the Partners of any remaining assets in
proportion to their respective Partnership Capital Percentages.
X
The right of a Limited Partner to substitute an assignee in his place
and the terms and conditions of such substitution are set forth in Article 6
of the Agreement of Limited Partnership, the applicable sections of which
provide as follows:
6.1 TRANSFER OF INTERESTS. The Partnership Interest of a Partner shall
not be sold, assigned, transferred or encumbered, except as provided in this
Agreement. A Partner's "Interest" shall refer to the entire ownership
interest of the Partner in the Partnership, including the right of such
Partner to any and all benefits to which such Partner may be entitled as
provided in this Agreement, together with the obligations of such Partner to
comply with all of the terms hereof. Any purported transfer or assignment
made other than in accordance with this Agreement shall be null and void and
of no force and effect, at the option of the General Partner. No transfer or
assignment to a minor (except in trust or pursuant to the Uniform Gifts to
Minors Act) shall be effective.
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<PAGE>
6.2 DEATH OR INCOMPETENCE OF CLASS A LIMITED PARTNER. Subject to the
provisions of Sections 6.4 and 6.5 and the General Partner's option described
in Article 7, the personal representative or other successor of a deceased or
incompetent Class A Limited Partner shall succeed to the Interest of a Class
A Limited Partner after such representative or successor shall have submitted
to the General Partner certified copies of court orders, or other evidence
satisfactory to the General Partner, establishing such incompetence or death
and the authority of such personal representative or successor; however, such
representative or successor shall not become a substituted Limited Partner
without the consent of the General Partner, which consent may be withheld in
the absolute discretion of the General Partner.
6.3 SALE OR TRANSFER OF INTEREST OF A LIMITED PARTNER.
(a) Subject to any restrictions on transferability required by
law, the provisions of Sections 6.4 and 6.5 hereof and the General Partner's
option described in Article 7 hereof, any Limited Partner may assign or
otherwise transfer such Limited Partner's Interest in the Partnership,
provided:
(i) the transfer of a Class A Limited Partner's Interest
is in an increment of $5,000 of Agreed Capital Contribution, and the
transfer by the Class B Limited Partner is of its entire Interest;
(ii) with respect to a Class A Limited Partner's Interest,
the assignee or transferee meets all requirements set forth in the
Prospectus applicable to additional Class A Limited Partners;
(iii) the General Partner consents in writing to such
assignment or transfer, which consent shall be withheld and may only be
withheld if such assignment or transfer (a) does not satisfy subparagraph
(ii) above, (b) would jeopardize the status of the Partnership for
federal income tax purposes, or (c) would violate, or cause the
Partnership to violate, any applicable law or governmental rule or
regulation, including without limitation, any applicable federal or
state securities law;
(iv) if requested by the General Partner, an opinion from
counsel for the Partnership is delivered to the General Partner stating
that, in the opinion of
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<PAGE>
such counsel, such transfer or assignment will not violate or cause the
Partnership to violate, any applicable law or governmental rule or
regulation including, without limitation, any applicable federal or
state securities law;
(v) the full Agreed Capital Contribution of the assignor or
transferor has been paid; and
(vi) prior to the transfer or assignment, the assignor or
transferor reimburses the General Partner and the Partnership for their
expenses, including attorneys' fees, incurred in connection with the
transfer or assignment.
In the event of any such assignment or transfer, such Limited Partner's
assignee or transferee shall be allocated the same percentage of net income
and net losses that the transferring Limited Partner would have been
allocated had no such assignment or transfer been made; however, such
assignee or transferee shall not become a substituted Limited Partner without
the consent of the General Partner, which consent may be withheld in the
absolute discretion of the General Partner.
(b) Each Limited Partner shall indemnify and hold harmless the
Partnership, the General Partner and any Limited Partner who was or is a
party to, or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding of any kind whatsoever, by reason of or
arising from any actual or alleged misrepresentation or misstatement of facts
or omission to state facts made or omitted to be made by such Limited Partner
in connection with any assignment, transfer, encumbrance or other disposition
of all or any part of an Interest in the Partnership, or the admission of a
substituted Limited Partner to the Partnership, against expenses for which
the Partnership, the General Partner or any such Limited Partner has not
otherwise been reimbursed including, without limitation, reasonable
attorneys' fees, judgments, fines and amounts paid in settlement, actually
and reasonably incurred in connection with the action, suit or proceeding.
6.4 ASSIGNEE OR TRANSFEREE BOUND BY THIS AGREEMENT. The assignee or
transferee of any Limited Partner's Interest shall be subject to all the
terms, conditions, restrictions and obligations of this Agreement. No
transfer or assignment shall be recognized until and unless the transferee or
assignee shall have so acknowledged in writing to the General Partner in a
manner and form reasonably satisfactory to the General Partner.
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<PAGE>
6.5 EFFECTIVE DATE OF TRANSFER. Any assignment which is permitted
hereunder shall be effective as of the close of the calendar month during
which all required documentation is received by the General Partner. In
addition to the conditions set forth above, an assignee, transferee, heir or
legatee of a Limited Partner (to the extent of the Interest acquired from the
Limited Partner) shall become a substituted Limited Partner as that term is
used in the Act only upon the consent of the General Partner and upon the
recording of an amended Certificate of Limited Partnership, if required under
the Act.
XI
The General Partner may admit additional Class A Limited Partners if,
after the admission of such additional Class A Limited Partners, the
aggregate contribution of all of the Class A Limited Partners (excluding the
Initial Class A Limited Partner) would not be less than $12,000,000 or more
than $16,000,000. Each additional Class A Limited Partner must make a
minimum capital contribution of $5,000.
The General Partner may admit one Class B Limited Partner who will make
an Agreed Capital Contribution of $750,000 to the Partnership.
The General Partner has an option, beginning on January 1, 1987 and
expiring ninety days after the dissolution of the Partnership, to purchase
the Partnership interests of all of the Limited Partners as a group. The
General Partner shall pay, upon exercise of the option, a purchase price
calculated as follows:
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<PAGE>
7.4 PURCHASE PRICE; PAYMENT.
If the Agreed Capital Contributions of all Limited Partners are
$16,750,000, the aggregate purchase price for the Limited Partners' Interests
will be as follows:
If Exercised During Lump Sum Payment
------------------- ----------------
calendar year 1987 $ 60,000,000
calendar year 1988 $ 90,000,000
calendar year 1989 and thereafter $120,000,000
less, in each case, an amount equal to all Excess Cash distributed to the
Limited Partners by the Partnership; provided, however, that the lump sum
payment to be made by the General Partner upon any exercise after December
31, 1989 shall in no event be less than $50,000,000. Notwithstanding the
foregoing, if the Agreed Capital Contributions of all Limited Partners are
less than $16,750,000, each of the amounts set forth above shall be reduced
proportionately. On the Closing Date, the General Partner will forward to
each Limited Partner, by check, in United States dollars, such Limited
Partner's proportionate share of the purchase price paid, based on such
Limited Partner's Partnership Capital Percentage.
XII
Net losses and net income shall be allocated as described in Article IX
above.
XIII
The Partnership shall be dissolved on the date on which the General
Partner resigns, is removed or is adjudicated a bankrupt unless the Limited
Partners elect a successor General Partner by the vote or written consent of
a majority of the Partnership Capital Percentage of all Limited Partners.
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<PAGE>
XIV
A Limited Partner may, but shall not have the right to, receive property
other than cash in return for such Limited Partner's contribution.
XV
(a) The Limited Partners have the right to vote on the matters
described in Section 15507(b) of the California Corporations Code and the
Partnership matters listed below. Limited Partners holding a majority of
Partnership Capital Percentages of all Limited Partners as a group must vote or
consent to take any of the actions listed.
1. To amend the Partnership Agreement.
2. To consent to the resignation of the General Partner.
3. If and to the extent permitted by law, to elect, within 90 days
after the occurrence of a "Terminating Event", to carry on the business
of the Partnership with one or more substitute general partners. A
Terminating Event shall mean the resignation, removal, withdrawal or
bankruptcy of the General Partner.
4. To elect a new general partner after the occurrence of a
Terminating Event.
5. To terminate the Partnership (other than by a Terminating Event
or at the expiration of its term); provided, however, that such right
shall exist only after all capital contributions to the Partnership by
the Limited Partners (including all interest or other income earned on
temporary investments thereof) have been expended.
6. To remove the General Partner.
7. To approve the sale (by means other than the entering into of
one or more license agreements) of all or substantially all of the
assets of the Partnership.
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<PAGE>
8. To approve the sale of the Partnership interest of the General
Partner.
Dated: December 30, 1982.
THE GENERAL PARTNER
ALZA Development Corporation
By /s/ Peter F. Carpenter
---------------------------------
Peter F. Carpenter, President
THE INITIAL CLASS A LIMITED PARTNER
/s/ Mary M. Roensch
---------------------------------
Mary M. Roensch
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<PAGE>
SCHEDULE A
-----------
MEMBERS OF THE PARTNERSHIP
----------------------------
<TABLE>
<CAPTION>
Partnership
Name and Place Capital Capital
Class of Residence Contribution Percentage
- ----- -------------- ------------ -----------
<S> <C> <C> <C>
General Partner ALZA Development $ 10 1%
Corporation
950 Page Mill Road
Palo Alto, CA 94304
Initial Class A Mary M. Roensch $990 99%
Limited Partner 2178 Spanishgate Court
San Jose, CA 95132
</TABLE>
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On December 30, 1982, before me, Sharon Ryan, a Notary Public in
and for said County and State, personally appeared Peter F. Carpenter, known
to me to be the President of the corporation that executed the within
instrument, known to me to be the person who executed the within instrument
on behalf of the corporation therein named, and acknowledged to me that such
corporation executed the within instrument pursuant to its by-laws or a
resolution of its board of directors.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the City and County of San Francisco the day and year in this
certificate above written.
/s/ Sharon Ryan
-------------------------------
Notary Public
State of California
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 30th day of December, 1982, before me, Sharon Ryan, a Notary
Public, State of California, duly commissioned and sworn, personally appeared
Mary M. Roensch, known to me to be the person whose name is subscribed to the
within instrument and acknowledged to me that she executed the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the City and County of San Francisco the day and year in this
certificate above written.
/s/ Sharon Ryan
-------------------------------
Notary Public
State of California
<PAGE>
Exhibit 10.1
RESEARCH AND DEVELOPMENT AGREEMENT
AGREEMENT made this 30th day of December, 1982, by and between ALZA
CORPORATION, a California corporation (the "Contractor"), and ALZA TTS RESEARCH
PARTNERS, LTD., a California limited partnership (the "Partnership").
R E C I T A L S:
- - - - - - - -
A. The Partnership is a limited partnership organized for the
purpose of developing and commercializing pharmaceutical products that combine
Transdermal Therapeutic Systems with Drug Candidates.
B. Contractor is engaged in the business of research and development
in connection with Transdermal Therapeutic Systems technology.
C. The Partnership desires to pursue the development and commercial
exploitation of Products utilizing Transdermal Therapeutic Systems technology.
D. The Partnership desires to have Contractor perform, on behalf of
the Partnership, research and development activities in connection with
Products.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "Affiliate" shall mean a corporation or any other entity
that directly, or indirectly through one or
<PAGE>
more intermediaries, controls, is controlled by, or is under common control
with, the designated party. "Control" shall mean ownership of at least 50%
of the shares of stock entitled to vote for the election of directors in the
case of a corporation, and at least 50% of the interests in profits in the
case of a business entity other than a corporation.
1.2 "ALZA Proprietary Rights" shall mean Proprietary Rights
of Contractor to the extent now or hereafter owned and controlled by
Contractor and which ALZA has or will have the right to license.
1.3 "Class B Limited Partner" shall mean Stada Arzneimittel
AG, the sole Class B Limited Partner of the Partnership.
1.4 "Completion" of a Product shall mean the actual reduction
to practice of a Product within the meaning of Section 102(g) of Title 35 of
the United States Code. "Completion of all Products" shall mean such actual
reduction to practice of all Products.
1.5 "Development Cost(s)" shall mean Contractor's Direct
Expenses and Indirect Charges (as defined in Schedule A hereof) and all other
expenses incurred by Contractor in the performance of its duties hereunder,
determined in accordance with Schedule A hereof.
-2-
<PAGE>
1.6 "Drug Candidate" shall mean drug compounds selected for a
Feasibility Evaluation or Product Development Program in accordance with this
Agreement. Drug Candidates shall be listed on Schedule B hereof, which
schedule may be modified from time to time by written agreement between the
parties.
1.7 "Feasibility Evaluation" shall mean a project to be
carried out by Contractor on behalf of the Partnership for the evaluation of
the economic and technical feasibility of development of a Drug Candidate
into a Product Candidate, as described in the Prospectus.
1.8 "General Partner" shall mean ALZA Development Corporation.
1.9 "Licensed Technology" shall mean ALZA Proprietary Rights
existing during the term of this Agreement which are necessary or useful for
the development, manufacture, commercialization or sale of Products.
1.10 "Nonproprietary" shall mean not covered by a patent in
the United States on December 31, 1983.
1.11 "Option Agreement" shall mean the Option Agreement
between Contractor and the Partnership of even date herewith.
1.12 "Partnership Technology" shall mean (i) Proprietary
Rights that are generated, developed,
-3-
<PAGE>
conceived or first reduced to practice by Contractor for or on behalf of the
Partnership under this Agreement, but solely to the extent such Proprietary
Rights are required for the purposes hereunder or are necessary to make, use,
commercialize and sell Products and (ii) such other rights relating to
Products and Product Candidates as may be acquired by the Partnership from
persons other than Contractor and relating to the subject matter of this
Agreement.
1.13 "Product" shall mean a Product Candidate designated by
the Partnership for Final Product Development under a Product Development
Program in accordance with Section 2.7 hereof.
1.14 "Product Candidate" shall mean a Transdermal Therapeutic
System in combination with a Drug Candidate accepted by the Partnership for
Initial Product Development pursuant to Section 2.3 or 2.4 hereof. Such
accepted Product Candidates shall be listed on Schedule C hereof, which
schedule may be modified from time to time by written agreement between the
parties.
1.15 "Product Development Program" shall mean a program to be
carried out by Contractor on behalf of the Partnership to develop a Drug
Candidate into a Product and shall include the two stages of development,
"Initial Product Development and Final Product Development", each as
described in the Prospectus.
1.16 "Proprietary Rights" shall mean data, inventions,
information, processes, know-how, patents, patent applications and trade
secrets.
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<PAGE>
1.17 "Prospectus" shall mean the prospectus included in
Registration Statement No. ________________ filed with the Securities and
Exchange Commission.
1.18 "Technology License Agreement" shall mean that certain
Technology License Agreement of even date herewith between Contractor and the
Partnership.
1.19 "Therapeutic Categories" shall mean the therapeutic
categories of pharmaceutical products listed in Schedule E hereof.
1.20 "Total Funds" shall mean the sum of (a) net proceeds from
the sale by the Partnership of the Class A limited partnership interests as
described in the Prospectus; (b) the General Partner's and the Class B Limited
Partner's capital contributions to the Partnership as described in the
Prospectus; and (c) interest and other income earned through temporary
investment of Partnership funds pending their application to Partnership
business; less (d) all necessary or appropriate expenses of operating (other
than amounts paid under this Agreement), winding up and liquidating the
Partnership, including reasonable reserves for present and future obligations,
the amount of which may be determined from time to time by the Partnership in
its sole and absolute discretion.
1.21 "Transdermal Therapeutic System" shall mean a system for the
continuous and controlled systemic administration of a drug compound through
intact skin.
-5-
<PAGE>
2. FEASIBILITY EVALUATIONS AND PRODUCT DEVELOPMENT PROGRAMS
2.1 Within 30 days after the closing of the offering described
in the Prospectus, Contractor shall provide the Partnership with a list of at
least 20 Nonproprietary drug compounds within the Therapeutic Categories that
Contractor recommends for Feasibility Evaluation by the Partnership. From time
to time during the term of this Agreement, Contractor may recommend to the
Partnership for Feasibility Evaluation additional Nonproprietary drug compounds
within the Therapeutic Categories, in which case such drug compounds will be
treated in the same manner as those on the initial list.
2.2 Upon the written request of the Partnership, Contractor
shall submit to the Partnership, on a Development Cost basis and at the expense
of the Partnership, either of the following:
(a) an estimate of the activities necessary to carry out a
Feasibility Evaluation for any of the listed drug compounds designated by
the Partnership, including an estimated work plan and budget therefor; or
(b) an estimate of the activities necessary to carry out a
Product Development Program for a Product based upon such drug compound,
including an estimated work plan and budget therefor.
-6-
<PAGE>
2.3 Within 60 days after submission by Contractor to the
Partnership of a Feasibility Evaluation or Product Development Program in
accordance with Section 2.2 hereof, the Partnership shall notify Contractor in
writing of its acceptance or rejection thereof.
2.4 Upon acceptance of a Feasibility Evaluation as provided in
Section 2.3 hereof, the drug compound shall be listed on Schedule B as a Drug
Candidate, and Contractor shall perform or cause to be performed with due
diligence all activities thereunder. Within 60 days after Contractor notifies
the Partnership of the completion and results of the Feasibility Evaluation for
any Drug Candidate, the Partnership shall notify Contractor of its written
acceptance or rejection of the Drug Candidate for futher development. If the
Drug Candidate is accepted by the Partnership, Contractor shall submit to the
Partnership a Product Development Program therefor.
2.5 Upon acceptance of a Product Development Program by the
Partnership pursuant to either Section 2.3 or Section 2.4 hereof, the Drug
Candidate so accepted will become a Product Candidate and will be listed on
Schedule C hereof, and Contractor or its employees or agents shall perform or
cause to be performed with due diligence all Initial Product Development
activities under the Product Development Program.
2.6 If the Partnership initially rejects any Drug Candidate or
fails to notify Contractor in accordance with
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<PAGE>
Section 2.3 or 2.4, the Partnership may, at any time during the term of this
Agreement, request Contractor to perform a Feasibility Evaluation or Product
Development Program for such Drug Candidate, all in accordance with this Section
2.
2.7 Upon the completion of the Initial Product Development for
any Product Candidate, Contractor shall so notify the Partnership. At any time
thereafter during the term of this Agreement, the Partnership may authorize
Contractor to begin Final Product Development for the Product Candidate. Upon
such request by the Partnership, the Product Candidate shall become a Product
and shall be listed on Schedule D hereof.
2.8 From time to time hereunder Contractor may, in its absolute
discretion, propose that the Partnership consider for a Feasibility Evaluation
or Product Development Program a drug compound that either is (i) not within one
of the Therapeutic Categories or (ii) not a Nonproprietary drug compound;
provided, however, that Contractor shall be under no obligation to do so. If
Contractor makes any such proposal, the Feasibility Evaluation or Product
Development Program therefor will be subject to and undertaken in accordance
with this Section 2, and, if the drug compound is accepted by the Partnership
for a Feasibility Evaluation or Product Development Program, it shall be listed
on the appropriate schedules hereof and shall become a Drug Candidate, Product
Candidate or Product, as the case may be.
-8-
<PAGE>
Notwithstanding any other provision of this Agreement, if the Partnership
rejects such drug compound or fails to notify Contractor in accordance with
Section 2.3 or Section 2.4 hereof, the drug compound shall be deemed rejected by
the Partnership and the Partnership shall have no further rights (i) with
respect thereto or to any product of which it is or may become a part or (ii) to
request at a later date a Feasibility Evaluation or Product Development Program
for such drug compound.
2.9 If the Partnership authorizes a Product Development Program
for any Product Candidate and later determines not to complete development
thereof for any reason, the Partnership immediately shall so notify Contractor.
3. RESEARCH AND DEVELOPMENT; SERVICES; BUDGETS
3.1 The Partnership hereby hires Contractor to perform all
research, development and experimentation to develop Products in accordance with
this Agreement and to undertake such other activities as the parties may agree.
The Partnership and Contractor shall cooperate in good faith with respect to
mutually acceptable work plans and budgets for Feasibility Evaluations and
Product Development Programs and for such other activities as the parties may
agree. Each party shall use its best efforts and diligence to execute such work
plans and to report significant deviations therefrom in a timely manner.
Contractor shall use its best efforts to obtain on behalf of and at the expense
of the Partnership any patent or technology
-9-
<PAGE>
license necessary to enable the Partnership or any licensee or assignee
commercially to exploit Products.
3.2 The parties recognize that technological and commercial
uncertainties make it extremely difficult to predict the relative priorities
that should be assigned to Feasibility Evaluations and Product Development
Programs. For this reason, Contractor shall have full discretion, subject to
Section 2 hereof, to determine from time to time (i) the priority of Feasibility
Evaluations and Product Development Programs and the order in which they are
selected for commencement and completion; (ii) the allocation of resources of
Contractor (facilities, equipment and personnel) that are available to the
Partnership for each Feasibility Evaluation and Product Development Program; and
(iii) the portion of Total Funds allocated to each Feasibility Evaluation and
Product Development Program.
3.3 The portion of Total Funds agreed upon by the parties as
available under the work plans and budgets for each Feasibility Evaluation and
Product Development Program shall be set forth on Schedule F, which may be
modified by the parties from time to time.
4. PAYMENT FOR SERVICES; TIMING OF PAYMENTS
4.1 In consideration of the work to be carried out by Contractor
hereunder, the Partnership shall reimburse Contractor for all of its Development
Costs, but not in excess of Total Funds.
-10-
<PAGE>
4.2 The Partnership shall pay to Contractor quarterly, in
advance, on a calendar-year basis (prorated for partial periods), an amount
equal to Contractor's estimate of the portion of Development Costs expected to
be paid or incurred by Contractor during such next quarter. Such estimate shall
be set forth in an invoice prepared by Contractor in reasonable detail and
submitted to the Partnership at least 15 business days prior to the beginning of
each quarter. Each such invoice shall be paid in full by the Partnership no
later than 15 days thereafter. Each invoice also shall include any anticipated
adjustments for the quarter in which it is delivered to reflect Development
Costs already incurred in the quarter and those anticipated to be incurred in
the remainder of the quarter.
4.3 Within 45 days after the end of each calendar quarter, the
Partnership shall pay to Contractor all amounts shown to be due to Contractor on
the report for such quarter described in Section 5.1.
4.4 Neither the Partnership nor Contractor makes any warranty,
express or implied, that Total Funds will be sufficient for Completion of all
Products; however, the parties acknowledge that the objective of this Agreement
is to use Total Funds for the Completion of an estimated four to six Products if
Total Funds are in excess of $16,000,000, and proportionately fewer Products if
Total Funds are less than $16,000,000.
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<PAGE>
5. REPORT AND RECORDS
5.1 Within 30 days after the end of each calendar quarter,
Contractor shall provide to the Partnership a reasonably detailed report setting
forth (a) all Development Costs incurred and paid during such quarter, and all
such amounts owed by or credited to the Partnership; (b) the work performed by
Contractor and its employees and agents during such quarter; and (c) the status
of all Feasibility Evaluations and the Product Development Programs at the end
of the quarter.
5.2 Within 60 days after the end of each calendar year,
Contractor shall provide to the Partnership a reasonably detailed report setting
forth and reconciling all Development Costs during the year.
5.3 Within 90 days after the termination of this Agreement,
Contractor shall provide to the Partnership a reasonably detailed final report
setting forth a reconciliation of all Development Costs paid by the Partnership
through the termination of this Agreement.
5.4 Contractor shall keep and maintain, in accordance with
generally accepted accounting principles, proper and complete records and books
of account documenting all Development Costs. The Partnership shall have the
right, at all reasonable times and at its own expense, to examine or to have
examined by a certified public accountant or similar person reasonably
acceptable to Contractor, pertinent books and records of Contractor, for the
sole purpose of determining the
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<PAGE>
correctness of Development Costs invoiced hereunder. Such examination with
respect to any quarterly accounting period hereunder shall take place not later
than two years following the expiration of such period.
6. LICENSE OF TECHNOLOGY
6.1 The Partnership hereby grants to Contractor a sublicense to
practice Licensed Technology and a license to practice Partnership Technology
solely for purposes of performing its duties hereunder.
6.2 Termination of the license granted under the Technology
License Agreement automatically shall terminate the license and sublicense
granted to Contractor under this Agreement.
7. OWNERSHIP AND PATENTS
7.1 Subject to the Option Agreement, the Partnership shall have
the full and exclusive right, title and interest in and to all Partnership
Technology and all physical manifestations or embodiments thereof including,
without limitation, all documents, records, notebooks, writings, engineering and
manufacturing information, schematics, product samples and specifications which
result under either a Feasibility Evaluation or a Product Development Program
carried out for or by the Partnership. There shall, however, be excluded from
the foregoing and specifically retained by Contractor all of the right, title
and interest in and to all Proprietary Rights generated, developed, conceived or
first reduced to practice during the term of this Agreement and not included
within Partnership Technology;
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<PAGE>
provided, however, that Contractor shall have no right to sublicense any of the
foregoing to Ciba-Geigy Limited, a corporation of Switzerland, or any of its
Affiliates. Contractor hereby assigns to the Partnership, and waives any right,
title and interest in and to, any Partnership Technology. To the extent
necessary to perfect the rights granted or retained hereunder, each party under
whose name any patent is issued shall grant to the other party an appropriate
license to such patent.
7.2 Contractor agrees to cause appropriate patent applications
to be prepared and prosecuted on behalf of the Partnership with respect to
inventions included in Partnership Technology which are commercially and
technically significant, and to cause such patents to be maintained, as the
Partnership shall request in writing, all at the Partnership's expense.
Contractor further agrees to use its best efforts to cause each of its employees
and agents to do all such acts and to execute, acknowledge and deliver all
instruments or writings reasonably requested and necessary for the Partnership
to perfect its beneficial ownership of all right, title and interest to
Partnership Technology and to secure Letters Patent and all reissues, renewals
and extensions thereof, as contemplated above.
7.3 Upon the Completion of any Product, Contractor shall so
notify the Partnership. Subject to the Option Agreement, if requested by the
Partnership after the Completion of a Product, Contractor shall deliver to the
Partnership or its designee all Partnership Technology and other property
related to the completed
-14-
<PAGE>
Product to which the Partnership has ownership rights pursuant to Section 7.1 or
7.2 held by or under the control of Contractor.
7.4 Within 60 days after the termination of this Agreement for
any reason, Contractor shall deliver to the Partnership all Partnership
Technology and other property in which the Partnership has ownership rights
pursuant to Section 7.1 and 7.2 held by or under the control of Contractor.
8. CONFIDENTIALITY
8.1 Subject to the other provisions of this Agreement, during
the term of this Agreement and for a period of five years following its
termination, Contractor shall maintain in confidence all Partnership Technology,
shall not disclose it to any third party (except as otherwise provided herein or
in any other agreement between the parties), and shall use it only to perform
its obligations under this Agreement, unless such technology:
(a) is known to or used by Contractor prior to the time of
disclosure hereunder;
(b) lawfully is disclosed to Contractor by a third party
having the right to disclose it; or
(c) either before or after the time of disclosure to
Contractor becomes known to the public other than by an unauthorized act or
omission of Contractor or its employees or agents.
8.2 Nothing contained in Section 8.1 shall prevent Contractor
from disclosing any Partnership Technology
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<PAGE>
to the extent that such Partnership Technology (i) is required to be disclosed
in connection with the securing of necessary governmental authorization for the
marketing of Products or (ii) is required to be disclosed by law for the purpose
of complying with governmental regulations.
8.3 The obligations of Contractor pursuant to this Section 8
shall survive the termination of this Agreement for any reason.
9. ACCESS TO INFORMATION
9.1 Subject to the terms of this Agreement, the General Partner
or its duly authorized representatives reasonably acceptable to Contractor shall
be permitted access to the premises of Contractor during normal business hours,
for the purpose of monitoring the progress of the Feasibility Projects and
Development Programs.
9.2 Contractor shall keep full and complete records and
notebooks containing all experiments performed during all phases of each
Feasibility Evaluation and Product Development Program and the results thereof.
Such items and copies of all documentation shall be available during normal
business hours for inspection by the General Partner or its duly authorized
representatives reasonably acceptable to Contractor. In addition, Contractor
shall provide to the Partnership such other information as the General Partner
reasonably may request.
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<PAGE>
10. DISCLAIMERS
10.1 CONTRACTOR DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (i)
THAT PARTNERSHIP TECHNOLOGY OR LICENSED TECHNOLOGY, OR THE USE THEREOF, OR THE
PRODUCT CANDIDATES AND PRODUCTS INCORPORATING OR MANUFACTURED BY THE USE
THEREOF, WILL BE FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR
UNLAWFUL USE OF PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (ii) OF THE
ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR
MERCHANTABILITY OF THE PARTNERSHIP TECHNOLOGY AND LICENSED TECHNOLOGY OR THEIR
SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT LIMITATION,
THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF PRODUCT CANDIDATES OR
PRODUCTS.
10.2 CONTRACTOR DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER
NATURE, EXPRESS OR IMPLIED.
11. EFFECTIVE DATE; TERM AND TERMINATION
11.1 This Agreement automatically shall become effective on the
closing of the sale of the Class A Limited Partnership interests described in
the Prospectus.
11.2 This Agreement shall terminate upon the earliest of:
(a) Completion of all Products and payment in full of all
Development Costs and other expenses, if any, otherwise provided for under
this Agreement;
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<PAGE>
(b) the expenditure of Total Funds; and
(c) the dissolution and liquidation of the Partnership.
11.3 The Partnership may, in its discretion, terminate this
Agreement in the event that Contractor:
(a) breaches any material obligation hereunder or under the
Technology License Agreement, Option Agreement or any license thereunder
and such breach continues for a period of 60 days after written notice
thereof by the Partnership to Contractor; or
(b) enters into any proceeding, whether voluntary or
otherwise, in bankruptcy, reorganization or arrangement for the appointment
of a receiver or trustee to take possession of Contractor's assets or any
other proceeding under any law for the relief of creditors, or makes an
assignment for the benefit of its creditors.
12. FORCE MAJEURE
Neither party to this Agreement shall be liable for delay in the
performance of any of its obligations hereunder if such delay is due to causes
beyond its reasonable control including, without limitation, acts of God, fires,
strikes, acts of war, or intervention of any governmental authority, but any
such delay or failure shall be remedied by such party as soon as possible.
-18-
<PAGE>
13. RELATIONSHIP OF THE PARTIES
Nothing contained in this Agreement is intended or is to be construed
to constitute the Partnership and Contractor as partners or joint venturers or
Contractor as an employee of the Partnership. Neither party hereto shall have
any express or implied right or authority to assume or create any obligations on
behalf of or in the name of the other party or to bind the other party to any
contract, agreement or undertaking with any third party.
14. LIMITATION ON CONTRACTOR'S ACTIVITIES
During the term of this Agreement, Contractor and its Affiliates shall
not (i) engage in research with respect to or (ii) license or sublicense, except
pursuant to any subcontract under Section 22, the Licensed Technology to others
for the development, manufacture or marketing of any products which both (a)
combine a Transdermal Therapeutic System with a Nonproprietary drug compound and
(b) have their primary pharmaceutical indication within any of the Therapeutic
Categories listed on Schedule E. However, Contractor reserves the right to use,
license and sublicense the Licensed Technology for any other purposes
whatsoever,including, without limitation, the development, manufacture and sale
of (i) any products combining Transdermal Therapeutic Systems with drug
compounds within the Therapeutic Categories that are not Nonproprietary and (ii)
any products in therapeutic categories not listed on Schedule E.
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<PAGE>
15. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and all of which when
taken together shall constitute this Agreement.
16. NOTICES
Any notice or other communication required or permitted to be given to
either party under this Agreement shall be given in writing and shall be
delivered by hand or by registered or certified mail, postage prepaid and return
receipt requested, addressed to each party at the following addresses or such
other address as may be designated by notice pursuant to this Section 16:
If to the Partnership: ALZA TTS RESEARCH PARTNERS, LTD.
c/o ALZA Development Corporation
950 Page Mill Road
Palo Alto, California 94304
Attention: President
If to Contractor: ALZA Corporation
950 Page Mill Road
Palo Alto, California 94304
Attention: President
Any notice or communication given in conformity with this Section 16 shall be
deemed to be effective when received by the addressee, if delivered by hand, and
five days after mailing, if mailed.
17. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California as
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<PAGE>
applied to residents of that state entering into contracts wholly to be
performed in that state.
18. SEVERABILITY
If any provision in this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall continue in full force without being impaired or invalidated in any way.
19. AMENDMENTS
No amendment, modification or addition hereto shall be effective or
binding on either party unless set forth in writing and executed by a duly
authorized representative of the party to be charged.
20. WAIVER
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any breach or failure to perform shall be deemed to be a waiver of
any future breach or failure to perform or of any other right arising under this
Agreement.
21. HEADINGS
The section headings contained in this Agreement are included for
convenience only and form no part of the agreement between the parties.
22. ASSIGNMENT
Contractor may not assign its rights and obligations hereunder without
the prior written consent of Partnership,
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<PAGE>
which consent may not be unreasonably withheld; provided, however, that ALZA
Corporation may assign such rights and obligations hereunder to any person or
entity with which ALZA Corporation is merged or consolidated or which purchases
all or substantially all of the assets of ALZA Corporation. Contractor may
subcontract a portion of its duties hereunder to third parties, in its sole
discretion; provided, however, that any such subcontractor shall be bound by the
terms of this Agreement.
23. NO AFFECT ON OTHER AGREEMENTS
No provision of this Agreement shall be construed so as to negate,
modify or affect in any way the provisions of any other agreement between the
parties unless specifically referred to and solely to the extent provided, in
any such other agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
ALZA TTS RESEARCH PARTNERS, LTD.
By ALZA Development Corporation,
its General Partner
By /s/ Peter F. Carpenter
-------------------------------------
Peter F. Carpenter, President
ALZA Corporation
By /s/ Martin S. Gerstel
-------------------------------------
Martin S. Gerstel, President
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<PAGE>
Schedule A
ALZA CORPORATION
Invoicing for
RESEARCH AND DEVELOPMENT COSTS
RESEARCH AND DEVELOPMENT COSTS ARE EQUAL TO THE SUM OF RESEARCH
EXPENSES PLUS GENERAL AND ADMINISTRATIVE OVERHEAD EXPENSES PLUS
CAPITAL ASSET COSTS
RESEARCH EXPENSES include all Direct and Indirect Research Expenses of product
development, including clinical testing, with cost elements as outlined on
Exhibit I. Direct Expenses are Direct Research Salaries and Supplies acquired
and Other Expenses incurred specifically for purposes of carrying out the
Agreement. Indirect Research Expenses include General Research Management and
Support Costs of the Product Development and Research Organization. Indirect
Research Expenses are allocated to all projects and are billed to the
Partnership at a fixed rate of 160%(1) of Direct Research Salary Expense.
GENERAL AND ADMINISTRATIVE OVERHEAD EXPENSE includes cost elements outlined
on Exhibit II. Total General and Administrative Overhead is allocated to the
two operating divisions of the Contractor: the Product Development and
Research Division and the Commercial Operations Division. The portion of
General and Administrative Overhead Expense which is allocated to the Product
Development and Research Division is then allocated to all projects and
billed to clients at a fixed rate of 80%(1) of Direct Research Salary
Expense.
CAPITAL ASSET COSTS are the amounts of depreciation deductions actually taken
by Contractor for federal income tax purposes in respect of new Capital
Assets acquired specifically for purposes of the Agreement.
- ----------------
(1) These fixed billing rates will not be changed prior to January 1,
1985, and if changed on or after January 1, 1985, such changes (a)
will be limited to not more than one per calendar year and (b)
shall be a maximum of 10% of the rate in effect at the time of the
increase and (c) will be increased only if increased in other
recently executed or modified agreements between Contractor and
other third party clients.
<PAGE>
Exhibit I
RESEARCH EXPENSES
DIRECT RESEARCH EXPENSES
Direct Research Salaries*
Project Clinical Expenses and Outside Services
Project Specific Supplies
Project Travel Expense
Miscellaneous Project Expenses, if any
INDIRECT RESEARCH EXPENSES
Research Management and Indirect Salaries*
Research Supplies and Materials
Research Consulting and Outside Services
Facilities Expenses
Telephone and Communications
Equipment Depreciation, Rent, Maintenance and Services
Research Travel Expenses
Patent and Trademark Expenses
Miscellaneous Indirect Research Expenses
*Salaries include Fringe Benefits
<PAGE>
Exhibit II
GENERAL AND ADMINISTRATIVE OVERHEAD EXPENSES
Corporate Management, Administrative, and Indirect Salaries*
Telephone and Communications
Equipment Depreciation, Rent, Maintenance and Services
Board of Directors and Corporate Consulting
Annual Audit and Independent Accounting
General Corporate Legal Expense
Shareholder Reports
Facilities Expenses
Interest Expense
Miscellaneous General and Administrative Overhead Expenses
*Salaries include Fringe Benefits
<PAGE>
Schedule B
DRUG CANDIDATES
<PAGE>
Schedule C
PRODUCT CANDIDATES
<PAGE>
Schedule D
PRODUCTS
<PAGE>
Schedule E
THERAPEUTIC CATEGORIES
Drugs to Treat Congestive Heart Failure
Drugs to Lower Blood Pressure
Narcotic Drugs to Relieve Pain
Drugs to Relieve Various Gastrointestinal Tract Disorders
Drugs to Treat Parkinson's Disease and Related Disorders
Sedatives and Mild Tranquilizers
<PAGE>
Schedule F
ALLOCATION OF TOTAL FUNDS
<PAGE>
Exhibit 10.2
TECHNOLOGY LICENSE AGREEMENT
-----------------------------
AGREEMENT made this 30th day of December, 1982 by and between ALZA
CORPORATION, a California corporation ("ALZA"), and ALZA TTS RESEARCH PARTNERS,
LTD., a California limited partnership (the "Partnership").
R E C I T A L S:
-----------------
A. ALZA has proprietary rights to the Licensed Technology.
B. The Partnership proposes to undertake research and development of
products utilizing the Licensed Technology and expects to develop and own
certain technology in connection therewith.
C. ALZA is willing to grant to the Partnership a license to practice the
Licensed Technology under certain circumstances as hereinafter set forth in
consideration of the Partnership's execution of the Option Agreement.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "Affiliate" shall have the meaning set forth in the Development
Contract.
1.2 "ALZA Proprietary Rights" shall mean all Proprietary Rights of
ALZA to the extent now or hereafter owned and controlled by ALZA and which ALZA
has or will have the right to license.
<PAGE>
1.3 "Completion" of a Product shall mean the actual reduction to
practice of a Product within the meaning of Section 102(g) of Title 35 of the
United States Code. "Completion of all Products" shall mean such actual
reduction to practice of all Products.
1.4 "Confidential Information" shall mean, without limitation, the
originals or copies of all documents, inventions, laboratory notebooks,
drawings, specifications, bills of materials, devices, equipment, prototype
models and tangible manifestations relating to or embodying any Licensed
Technology disclosed hereunder except any of the foregoing which:
(a) is known to or used by the Partnership prior to the time of
disclosure hereunder;
(b) lawfully is disclosed to the Partnership by a third party
having the right to disclose it; or
(c) either before or after the time of disclosure to the
Partnership becomes known to the public other than by an unauthorized act or
omission of the Partnership or its employees or agents.
1.5 "Development Contract" shall mean the Research and Development
Agreement of even date herewith between the Partnership and ALZA.
1.6 "Feasibility Evaluation" shall have the meaning set forth in the
Development Contract.
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<PAGE>
1.7 "Licensed Technology" shall mean ALZA Proprietary Rights existing
during the term of this Agreement which are necessary or useful for the
development, manufacture or commercialization of Products.
1.8 "Option Agreement" shall mean the Option Agreement of even date
herewith between the Partnership and ALZA.
1.9 "Partnership Technology" shall have the meaning set forth in the
Development Contract.
1.10 "Product" shall have the meaning set forth in the Development
Contract.
1.11 "Product Development Program" shall have the meaning set forth in
the Development Contract.
1.12 "Proprietary Rights" shall mean data, inventions, information,
processes, know how, patents, patent applications and trade secrets.
1.13 "Prospectus" shall have the meaning set forth in the Development
Contract.
2. LICENSE OF ALZA TECHNOLOGY FOR RESEARCH AND DEVELOPMENT; TERM
2.1 GRANT OF LICENSE. ALZA hereby grants to the Partnership, upon
the terms and conditions of this Agreement, a royalty-free, worldwide license
to practice the Licensed Technology (i) in either a Feasibility Evaluation or
a Product Development Program (ii) to sublicense ALZA under the terms of the
Development Contract for the purposes thereof and (iii) to
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<PAGE>
sublicense third parties to complete the development of Products in accordance
with the terms of the Option Agreement, but for no other purpose whatsoever,
except as set forth in Section 3.
2.2 TERM. The term of the license granted under Section 2.1 shall
commence on the date hereof and shall continue, with respect to any Product,
until the Completion of that Product.
3. LICENSE OF ALZA PROPRIETARY TECHNOLOGY FOR COMMERCIAL EXPLOITATION
3.1 GRANT OF LICENSE. ALZA hereby grants to the Partnership, upon
the terms and conditions of this Agreement, a royalty-free, worldwide
license, with the right to sublicense, to practice the Licensed Technology to
manufacture, use and sell Products.
3.2 TERM. The term of the license granted under Section 3.1
hereof shall commence, as to each Product, upon Completion of such Product
and shall continue in full force and effect thereafter as to such Product.
4. EFFORTS OF LICENSEE
The Partnership promptly shall commence to use the Licensed Technology
to develop or have developed Products under the Development Contract.
5. PATENTS
5.1 INFRINGEMENTS. Each party shall notify the other of infringement
or alleged infringement of any patent
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<PAGE>
rights included in the Licensed Technology or of any unauthorized or alleged
unauthorized use of the Licensed Technology. In the event of any such alleged,
infringement or unauthorized use, ALZA shall have the right, at its own expense
and with the right to all recoveries, to take appropriate action to restrain
such alleged infringement or unauthorized use. If ALZA fails to take such
action, and if the infringing product or products achieve ten percent of the
sales volume of any Product, the Partnership may institute, in its own name, at
its own expense and with the right to all recoveries, such litigation or other
appropriate action as the Partnership may deem necessary to terminate such
infringement or unauthorized use; provided, however, that the Partnership shall
first give ALZA 60 days advance notice of its intention to take such action and,
provided further, that ALZA has not taken appropriate action during such 60-day
period. In either case, the other party shall cooperate with the party
initiating such action at the initiating party's expense.
5.2 DEFENSE OF SUITS. If any controversy, litigation or
proceeding is threatened or brought by any person against either party hereto
alleging that any use, application, or disclosure of the Licensed Technology
infringes any patent or other proprietary right held by such person, the
parties shall confer promptly with respect to such controversy, litigation or
proceeding. If the parties agree to proceed jointly,
-5-
<PAGE>
they shall share equally the defense expenses and costs, including attorneys'
fees, and neither party shall settle or compromise such controversy, litigation
or proceeding without the consent of the other party. If the parties do not
agree to proceed jointly, then each party may proceed on its own and at its sole
expense, and each party shall have the right to settle or compromise on such
controversy, litigation or proceeding on its own behalf and at its own expense.
6. CONFIDENTIALITY
Subject to the other provisions of this Agreement, during the term
of this Agreement and for a period of five years following its termination,
the Partnership shall maintain in confidence all Confidential Information;
provided, however, that nothing contained herein shall prevent the
Partnership from disclosing any Confidential Information to the extent that
such Confidential Information is required to be disclosed (i) in connection
with the securing of necessary governmental authorization for the marketing
of Products, (ii) for the purpose of complying with governmental regulations
or (iii) for the purpose of any sublicense allowed hereunder. The
obligations of the parties pursuant to this Section 6 shall survive the
termination of this Agreement for any reason.
7. DISCLAIMERS
ALZA DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (i) THAT THE LICENSED
TECHNOLOGY, OR THE USE THEREOF, OR THE
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<PAGE>
PRODUCTS INCORPORATING OR MANUFACTURED BY THE USE THEREOF WILL BE FREE FROM
CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF PROPRIETARY
INFORMATION OF ANY THIRD PARTY OR (ii) OF THE ACCURACY, RELIABILITY,
TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF THE
LICENSED TECHNOLOGY OR ITS SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER
INCLUDING, WITHOUT LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE
OF PRODUCTS. ALZA DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER NATURE, EXPRESS OR
IMPLIED.
8. EFFECTIVE DATE; TERMINATION
8.1 EFFECTIVE DATE. This Agreement automatically shall become
effective on the closing of the sale of the Class A Limited Partnership
interests described in the Prospectus.
8.2 TERMINATION. Either party may terminate this Agreement
effective upon the giving of written notice of such termination to the other
party in the event such other party:
(a) breaches any of its material obligations hereunder and
such breach continues for a period of 60 days after written notice thereof by
the other party; or
(b) enters into any proceeding, whether voluntary or
otherwise, in bankruptcy, reorganization, or arrangement for the appointment
of a receiver or trustee to take possession of such other party's assets or
any other
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<PAGE>
proceeding under any law for the relief of creditors, or makes an assignment for
the benefit of such other party's creditors.
9. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
when so executed shall be deemed to be an original and all of which when taken
together shall constitute this Agreement.
10. NOTICES
Any notice or other communication required or permitted to be given by
either party under this Agreement shall be given in writing and shall be
delivered by hand or by registered or certified mail, postage prepaid and return
receipt requested, addressed to each party at the following addresses or such
other address as may be designated by notice pursuant to this Section 10:
If to the Partnership: ALZA TTS RESEARCH PARTNERS, LTD.
c/o ALZA Development Corporation
950 Page Mill Road
Palo Alto, California 94304
Attention: President
If to ALZA: ALZA CORPORATION
950 Page Mill Road
Palo Alto, California 94304
Attention: President
Any notice or communication so given in conformity with this Section 10
shall be deemed to be effective when received by the addressee, if delivered by
hand, and five days after mailing, if mailed.
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<PAGE>
11. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California as applied between residents of that state
entering into contracts wholly to be performed in that state.
12. SEVERABILITY
If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall continue in full force without being impaired or invalidated in any way.
13. AMENDMENTS
No amendment, modification or addition hereto shall be effective or binding
on either party unless set forth in writing and executed by a duly authorized
representative of the party to be charged.
14. WAIVER
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any breach or failure to perform shall be deemed to be a waiver of
any future breach or failure to perform or of any other right arising under this
Agreement.
15. HEADINGS
The section headings contained in this Agreement are included for
convenience only and form no part of the agreement between the parties.
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<PAGE>
16. NO EFFECT ON OTHER AGREEMENTS
No provision of this Agreement shall be construed so as to negate,
modify or affect in any way the provisions of any other agreement between the
parties unless specifically referred to, and to the extent specifically
provided, in such other agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
ALZA TTS RESEARCH PARTNERS, LTD.
By ALZA Development Corporation,
its General Partner
By: /s/ Peter F. Carpenter
-------------------------------
Peter F. Carpenter, President
ALZA CORPORATION
By: /s/ Martin S. Gerstel
-------------------------------
Martin S. Gerstel, President
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<PAGE>
Exhibit 10.3
OPTION AGREEMENT
AGREEMENT made this 30th day of December, 1982 by and between ALZA
CORPORATION, a California corporation ("ALZA") and ALZA TTS RESEARCH PARTNERS,
LTD., a California limited partnership (the "Partnership").
R E C I T A L S:
- - - - - - - -
A. On the date hereof, ALZA and the Partnership have entered into a
Technology License Agreement and a Development Contract.
B. Pursuant to the Development Contract, the Partnership will employ
ALZA to perform the research and development work described therein, which is
anticipated to result in Products.
C. In order to induce ALZA to enter into the Technology License
Agreement and in order to carry out the commercial exploitation of Products,
the Partnership desires to grant to ALZA certain options as set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "ALZA Proprietary Rights" shall have the meaning set forth in
the Development Contract.
<PAGE>
1.2 "Confidential Information" shall mean all Partnership
Technology disclosed to ALZA hereunder except information that:
(a) is known to or used by ALZA prior to the time of disclosure
hereunder;
(b) lawfully is disclosed to ALZA by a third party having the
right to disclose it; or
(c) either before or after the time of disclosure to ALZA
becomes known to the public other than by an unauthorized act or omission
of ALZA or its employees or agents.
1.3 "Completion" of a Product shall mean the actual reduction to
practice of such Product within the meaning of Section 102(g) of Title 35 of
the United States Code.
1.4 "Continuation Option" shall mean the option granted to ALZA
pursuant to Section 3 of this Agreement.
1.5 "Development Contract" shall mean the Research and Development
Agreement of even date herewith between the Partnership and ALZA.
1.6 "Discontinued Product" shall mean any Product or Product
Candidate for which the Partnership (i) has commenced a Product Development
Program but has determined for any reason to discontinue permanently the
activities thereunder prior to obtaining regulatory approval in the United
States or in two other Major Market Countries and (ii) has given ALZA the
notice described in Section 3.1 hereof.
-2-
<PAGE>
1.7 "FDA" shall mean the United States Food and Drug
Administration.
1.8 "License Option" shall mean the option granted to ALZA
pursuant to Section 2 of this Agreement.
1.9 "Licensed Technology" shall have the meaning set forth in the
Development Contract.
1.10 "Major Market Country" shall mean any one of the United
States, Japan, West Germany, Italy, France or the United Kingdom.
1.11 "NDA" shall mean a new drug application as that term is
defined in the United States Food, Drug and Cosmetics Act.
1.12 "Partnership License Agreement" shall mean an exclusive
license agreement between ALZA and the Partnership substantially in the form
of Exhibit A to this Agreement.
1.13 "Partnership Technology" shall have the meaning set forth in
the Development Contract.
1.14 "Product" shall have the meaning set forth in the Development
Contract.
1.15. "Product Candidate" shall have the meaning set forth in the
Development Contract.
1.16 "Product Development Program" shall have the meaning set forth
in the Development Contract.
1.17 "Proprietary Rights" shall have the meaning set forth in the
Development Contract.
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<PAGE>
1.18 "Prospectus" shall have the meaning set forth in the Development
Contract.
1.19 "Technology License Agreement" shall mean the Technology License
Agreement of even date herewith between ALZA and the Partnership.
2. LICENSE OPTION
2.1 GRANT OF LICENSE OPTION. On the terms and subject to the
conditions of this Agreement, the Partnership hereby grants to ALZA a License
Option for each Product.
2.2 TIME FOR EXERCISE. Subject to Section 3.7, ALZA may exercise
the License Option with respect to each Product at any time beginning one
year and one day after the Completion of the Product and ending on the later
of (i) 90 days after such date and (ii) 90 days after the Partnership
notifies ALZA of receipt of the first to be received of either (a) approval
by the FDA of the NDA relating to the Product or (b) comparable regulatory
approval of the Product in any two other Major Market Countries. The License
Option for any Product automatically will expire if not exercised within the
foregoing time period. The Partnership promptly will notify ALZA upon the
Completion of each Product.
2.3 MANNER OF EXERCISE. ALZA shall exercise any License Option by
delivering to the Partnership, within the time period described in Section
2.2 above, a notice of exercise specifying the Product as to which the
License Option is exercised. A Partnership License Agreement for such Product
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<PAGE>
shall be deemed to be effective as of the date of such notice of exercise
without the necessity of any additional action by the parties. For the
convenience of the parties, however, the Partnership shall, upon receipt of
ALZA's notice, forward to ALZA two executed copies of a Partnership License
Agreement dated the effective date; ALZA shall execute both copies and return
one to the Partnership as soon as possible. Failure of either or both of the
parties to execute such Partnership License Agreement shall not, however,
affect the effectiveness of the license granted thereby. The parties shall
enter into a separate Partnership License Agreement for each Product as to
which ALZA elects to exercise a License Option.
3. CONTINUATION OPTION
3.1 GRANT OF CONTINUATION OPTION. In the event that the
Partnership determines to discontinue permanently the Product Development
Program for any Product or Product Candidate prior to obtaining regulatory
approval either (i) by the FDA or (ii) by comparable regulatory authorities
in two other Major Market Countries, the Partnership immediately shall notify
ALZA to such effect. On the date of such notice, such Product or Product
Candidate automatically shall become a Discontinued Product. On the terms
and subject to the conditions of this Agreement, the Partnership hereby
grants to ALZA a Continuation Option with respect to each Discontinued
Product. Under each Continuation Option, ALZA shall have the right to
continue the
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<PAGE>
development of a Discontinued Product until the earlier of receipt of (i)
approval by the FDA of the NDA relating to the Product or (ii) comparable
regulatory approval in two other Major Market Countries. If ALZA exercises the
Continuation Option, ALZA will proceed with a view to Completion of the
Discontinued Product and obtaining regulatory approvals thereof. From time to
time as reasonably requested by the Partnership, ALZA will provide the
Partnership with reports on the progress of the development of a Discontinued
Product and any regulatory approvals thereof.
3.2 TIME FOR EXERCISE. ALZA may exercise its Continuation Option
with respect to any Discontinued Product at any time beginning on the date on
which it receives the notice described in Section 3.l and ending 90 days
after the termination for any reason of the Development Contract; provided,
however, that if at any time beginning 90 days after such notice for any
Product or Product Candidate, ALZA has not exercised its Continuation Option
for such Product or Product Candidate and the Partnership obtains an offer
from a third party to Complete the Product or Product Candidate, the
Partnership shall so notify ALZA and, for a period of 30 days thereafter,
ALZA may exercise its Continuation Option for such Product. If ALZA does not
exercise its Continuation Option within such 30-day period, but the
Partnership for any reason does not consummate an agreement with the third
party to Complete the
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<PAGE>
Product or Product Candidate, the Continuation Option for the Product or
Product Candidate will remain in effect. If the Partnership enters into a
written agreement with such third party to Complete the Product or Product
Candidate, on the date of such agreement, ALZA's License Option and
Continuation Option for such Product or Product Candidate automatically shall
terminate.
3.3 MANNER OF EXERCISE. ALZA shall exercise its Continuation
Option by delivering to the Partnership, within the applicable time periods
described in Section 3.2 above, a notice of exercise specifying the
Discontinued Product as to which the Continuation Option is being exercised.
3.4 SIMULTANEOUS OPTIONS. Subject to the other provisions of this
Agreement, if the Partnership already has notified ALZA of the Completion of
a Product in accordance with Section 2.2 prior to determining to discontinue
the Product Development Program for that Product, then ALZA will have a
simultaneous License Option and Continuation Option for such Discontinued
Product, and ALZA may exercise either or both such options in accordance with
the applicable provisions of this Agreement.
3.5 ALZA RIGHTS UPON COMPLETION OF A DISCONTINUED PRODUCT. If
ALZA exercises a Continuation Option prior to the Completion of a
Discontinued Product, ALZA immediately shall notify the Partnership upon the
Completion of the Discontinued Product, and thereafter ALZA shall have the
right to
-7-
<PAGE>
exercise its License Option for such Discontinued Product during the same
periods and in the same manner as described in Sections 2.2 and 2.3. After
such notice, ALZA may nonetheless, without exercising the License Option for
such Discontinued Product, continue the development of such Product until the
earlier of (i) FDA approval of the NDA for the Discontinued Product or (ii)
comparable regulatory approval in two other Major Market Countries.
3.6 PARTNERSHIP LICENSE AGREEMENTS FOR DISCONTINUED PRODUCTS. If
ALZA exercises the License Option for any Discontinued Product in accordance
with Section 2, the parties shall enter into a Partnership License Agreement
on the same terms as set forth in Exhibit A hereof, except that the royalties
to be paid to the Partnership by ALZA in respect of any Discontinued Product
shall be the royalties payable under subsections 3.1(a) and 3.1(b) of Exhibit
A reduced by the number obtained by multiplying the royalties otherwise so
payable by a fraction, the numerator of which shall be all Development Costs
(as defined and described in the Development Contract) paid by ALZA with
respect to the Discontinued Product through the date of the earlier of (i)
approval of the Product by the FDA or (ii) approval of the Product by
comparable regulatory authorities in two other Major Market Countries, and
the denominator of which shall be all of the Development Costs paid with
respect to such Discontinued Product by both ALZA and
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<PAGE>
the Partnership through such date. Within 60 days after ALZA's exercise of
any License Option for a Discontinued Product, each party shall provide the
other party with a written accounting of all Development Costs of the
Discontinued Product paid or expended by such party through the date of such
exercise. As soon as practicable thereafter, the Partnership shall forward
to ALZA two copies of an executed Partnership License Agreement modified in
accordance with this Section 3.6; ALZA shall execute both copies and return
one to the Partnership as soon as possible. The Partnership License
Agreement shall be deemed to be effective as of the date of ALZA's notice of
exercise of the License Option for the Discontinued Product, and failure of
either or both of the parties to execute the Partnership License Agreement
shall not affect the effectiveness of the license granted thereby. If, on
the effective date of the Partnership License Agreement, the Product has not
been approved by either (i) the FDA or (ii) comparable regulatory authorities
in two other Major Market Countries, the Partnership License Agreement for
that Product automatically shall be amended, on and effective as of the date
that the earlier of such approvals is obtained, to fix a new royalty rate
calculated as set forth above, but reflecting the total Development Costs
paid by ALZA through the date of the FDA approval or the regulatory approvals
in two other Major Market Countries, whichever is earlier. Within 60 days
after receipt of the relevant approval or
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<PAGE>
approvals, ALZA will provide the Partnership with a complete accounting of
all such Development Costs and the parties shall execute an amendment to the
Partnership License Agreement setting forth the new royalty rate, which shall
be payable with respect to all royalties due beginning on the date of such
approval or approvals.
3.7 RIGHTS UPON TERMINATION OF OR FAILURE TO CONTINUE DEVELOPMENT.
If ALZA exercises its Continuation Option with respect to any Discontinued
Product and continues the development thereof, but either does not later
exercise its License Option or determines, prior to receipt of either (i) FDA
approval or (ii) comparable regulatory approval in two other Major Market
Countries not to further continue such development for any reason, ALZA shall
so notify the Partnership and the License Option for such Product
automatically shall terminate on the date of such notice. Beginning on the
date of such notice, the Partnership shall have the right to license,
manufacture, use, commercialize, sell or otherwise dispose of the
Discontinued Product in the same manner and to the same extent as though ALZA
had not exercised the Continuation Option; provided, however, that 50% of the
proceeds of any such license, manufacture, use, commercialization, sale or
other disposition of the Discontinued Product received by the Partnership
shall be paid by the Partnership to ALZA until ALZA has been reimbursed for
all Development Costs of the Discontinued Product paid by
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<PAGE>
ALZA through the date of ALZA's notice hereunder. Within 60 days after such
notice, ALZA shall deliver to the Partnership a written accounting of the
Development Costs of such Discontinued Product paid or expended by it through
the date of ALZA's notice.
3.8 REVIEW OF BOOKS AND RECORDS. In the event of the exercise of
any Continuation Option hereunder, each party shall have the right, at all
reasonable times and at its own expense, to examine or have examined by a
certified public accountant or similar person reasonably acceptable to the
other party, pertinent books and records of the other party, for the sole
purpose of determining the Development Costs paid or expended by the other
party. This right may be exercised only once with respect to each Product or
Product Candidate and must be exercised within two years after the license or
other disposition of the Product.
4. NO CONFLICT
The Partnership agrees that no license, sale or other commercial
exploitation of any Product or Product Candidate has been or shall be made or
offered to any person or entity on any basis that is or will be in conflict
with this Agreement or any Product License Agreement unless or until, with
respect to any Product or Product Candidate, the periods of time set forth in
Section 2.2 and Section 3.2, as applicable, have elapsed.
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<PAGE>
5. ACCESS TO INFORMATION
5.1 INFORMATION AVAILABLE. Subject to the restrictions on
disclosure of Confidential Information set forth in Section 6 below, the
Partnership shall make available to ALZA at all reasonable times all
Partnership Technology.
5.2 CONSULTATION. The Partnership shall consult with ALZA and
inform it on a continuing basis of developments and the current state of the
Partnership Technology and will review from time to time with ALZA the
progress towards Completion of the Products.
6. CONFIDENTIALITY
6.1 USE OF CONFIDENTIAL INFORMATION. During the term of this
Agreement, and for a period of five years following its termination, ALZA
shall maintain in confidence all Confidential Information; provided, however,
that nothing contained herein shall prevent ALZA from disclosing any
Confidential Information to the extent that such Confidential Information (i)
is required to be disclosed in connection with the securing of necessary
governmental authorization for the marketing of Products or (ii) is required
to be disclosed by law for the purpose of complying with governmental
regulations.
6.2 SURVIVAL OF TERMS. The obligations of ALZA pursuant to
Section 6.1 shall survive the termination of this Agreement for any reason.
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<PAGE>
7. DISCLAIMERS
THE PARTNERSHIP DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (i) THAT
PARTNERSHIP TECHNOLOGY OR LICENSED TECHNOLOGY OR THE USE THEREOF, OR ANY PRODUCT
CANDIDATES OR PRODUCTS INCORPORATING OR MANUFACTURED BY THE USE THEREOF, WILL BE
FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF
PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (ii) OF THE ACCURACY,
RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR
MERCHANTABILITY OF THE PARTNERSHIP TECHNOLOGY OR LICENSED TECHNOLOGY OR THEIR
SUITABILITY OR THE FITNESS THEREOF FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT
LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF PRODUCT
CANDIDATES OR PRODUCTS. THE PARTNERSHIP DISCLAIMS ALL OTHER WARRANTIES OF
WHATEVER NATURE, EXPRESS OR IMPLIED.
8. EFFECTIVE DATE; TERMINATION
8.1 EFFECTIVE DATE. This Agreement automatically shall become
effective on the date of the closing of the sale of the Class A Limited
Partnership interests described in the Prospectus.
8.2 TERMINATION. This Agreement shall terminate when all of the
License Options and Continuation Options either shall have been exercised or
shall have terminated in accordance with Sections 2 and 3 of this Agreement
as to each Product or Product Candidate.
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<PAGE>
9. MISCELLANEOUS
9.1 WAIVER. No waiver of any right under this Agreement shall be
deemed effective unless contained in a writing signed by the party charged
with such waiver, and no waiver of any right arising from any breach or
failure to perform shall be deemed to be a waiver of any future breach or
failure to perform or of any other right arising under this Agreement.
9.2 NOTICES. Any notice or other communication required or
permitted to be given to either party under this Agreement shall be given in
writing and shall be delivered by hand or by registered or certified mail,
postage prepaid and return receipt requested, addressed to each party at the
following addresses or such other address as may be designated by a notice
pursuant to this Section 9.2:
If to Partnership: ALZA TTS Research Partners, Ltd.
c/o ALZA Development Corporation
950 Page Mill Road
Palo Alto, California 94304
Attention: President
If to ALZA: ALZA Corporation
950 Page Mill Road
Palo Alto, California 94304
Attention: President
Any notice or communication given in conformity with this Section 9.2 shall be
deemed effective when received by the addressee, if delivered by hand, and five
days after mailing, if mailed.
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<PAGE>
9.3 HEADINGS. The section headings contained in this Agreement
are included for convenience only and form no part of the Agreement between
the parties.
9.4 SEVERABILITY. If any provision in this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall continue in full force without being impaired or
invalidated in any way.
9.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute this Agreement.
9.6 AMENDMENTS. No amendment, modification or addition hereto
shall be effective or binding on either party unless set forth in writing and
executed by a duly authorized representative of the party to be charged.
9.7 NO EFFECT ON OTHER AGREEMENTS. No provision of this Agreement
shall be construed so as to negate, modify or affect in any way the
provisions of any other agreement between the parties except as specifically
provided in such other agreements.
9.8 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the
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<PAGE>
State of California as applied to residents of that state entering into
contracts wholly to be performed in that state.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
ALZA TTS RESEARCH PARTNERS, LTD.
by ALZA Development Corporation,
its General Partner
By /s/ Peter F. Carpenter
---------------------------------
Peter F. Carpenter, President
ALZA Corporation
By /s/ Martin S. Gerstel
---------------------------------
Martin S. Gerstel, President
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<PAGE>
Exhibit A
PARTNERSHIP LICENSE AGREEMENT
Agreement made this * day of *, 19*, by and between ALZA
Corporation, a California corporation ("Licensee"), and ALZA TTS Research
Partners, Ltd., a California limited partnership ("Licensor").
R E C I T A L S:
- - - - - - - -
A. Licensor and Licensee have entered into an Option Agreement and
related agreements dated December 30, 1982.
B. Section 2 of the Option Agreement provides for a license, the terms
of which are to be set forth herein.
NOW THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "Affiliate" shall mean a corporation or any other business
entity that directly, or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with, the designated
party. "Control" shall mean ownership of least 50% of the shares of stock
entitled to vote for the election of directors in the case of a corporation
and at least 50% of the interests in profits in the case of a business entity
other than a corporation.
* To be dated in accordance with section 2.3 of the Option Agreement.
<PAGE>
1.2 "ALZA Proprietary Rights" shall mean Proprietary Rights to the
extent owned or controlled by ALZA and which ALZA has the right to license.
1.3 "Confidential Information" shall mean all Partnership
Technology including, without limitation, the originals or copies of all
documents, inventories, laboratory, notebooks, drawings, specifications,
bills of materials, devices, equipment, prototype models and tangible
manifestations relating to or embodying any Partnership Technology disclosed
by Licensor to Licensee hereunder, except any of the foregoing that:
(a) is known to or used by Licensee prior to the time of
disclosure hereunder;
(b) lawfully is disclosed to Licensee by a third party having
the right to disclose it; or
(c) either before or after the time of disclosure to Licensee
becomes known to the public other than by an unauthorized act or omission
of Licensee or its employees or agents.
1.4 "Development Contract" shall mean the Research and Development
Agreement between the parties dated December 30, 1982.
l.5 "FDA" shall mean the United States Food and Drug Administration.
1.6 "Licensed Product" shall mean the product listed on Schedule A
hereto.
2
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1.7 "Licensed Technology" shall mean ALZA Proprietary Rights
existing during the term of this Agreement which are necessary or useful for
the development, manufacture or commercialization of the Licensed Product.
1.8 "Major Market Country" shall mean any one of France, Italy,
Japan, the United Kingdom, the United States or West Germany.
1.9 "NDA" shall mean a new drug application as defined under The
United States Food, Drug and Cosmetic Act, pursuant to which FDA permission
to market a "new drug" is requested.
1.10 "Net Sales" shall mean the amount received from commercial
sales of a Licensed Product by any person to independent, unrelated parties
in bona fide arm's-length transactions, less the following deductions: (i)
trade and/or quantity discounts actually allowed and taken in such amounts as
are customary in the trade; (ii) commissions paid or allowed to independent
brokers and agents; (iii) taxes on any sale to the extent included in the
amount billed; (iv) three percent of the amount billed or invoiced to cover
transportation charges and discounts other than those described above; and
(v) amounts repaid or credited by reason of rejections, defects or returns or
because of retroactive price reductions.
1.11 "Option Agreement" shall mean the Option Agreement between the
parties dated December 30, 1982.
3
<PAGE>
1.12 "Partnership Technology" shall mean (i) Proprietary Rights
which are generated, developed, conceived or first reduced to practice by or
for the benefit of Licensor pursuant to the Development Contract, but solely
to the extent such Proprietary Rights are required to make, use and sell the
Licensed Product and (ii) such other rights relating to the Licensed Product
as may be acquired by Licensor from persons other than Licensee and relating
to the subject matter of this Agreement.
1.13 "Patent Rights" shall mean any and all patents which cover
inventions included within Partnership Technology. Copies of such patents
shall be attached to this Agreement as Schedule B, which shall be modified as
required from time to time.
1.14 "Proprietary Rights" shall mean data, inventions, information,
processes, know how, patents, patent applications and trade secrets.
2. GRANT OF LICENSE
Licensor hereby grants to Licensee the worldwide right and license
to practice, and to sublicense others to practice, the Partnership Technology
to manufacture, use, commercialize and sell the Licensed Product; provided,
however, that Licensee shall not have the right to grant any sublicense to
Ciba-Geigy Limited, a corporation of Switzerland, or any of its Affiliates.
The license granted hereunder shall be an
4
<PAGE>
exclusive license until the date that is thirteen years after the actual
reduction to practice of the Licensed Product. As soon as the Licensed
Product has been actually reduced to practice, Licensor promptly shall so
notify Licensee and the date until which this License is exclusive shall be
set forth on Schedule A by each party. On the date listed on Schedule A, the
license granted hereby automatically shall become a non-exclusive license,
but Licensee shall continue to have sublicensing rights to the extent set
forth above.
3. ROYALTIES AND OTHER PAYMENTS
3.1 PAYMENTS. In consideration of the grant of the license,
Licensee shall make the following payments to Licensor with respect to the
Licensed Product:
(a) A royalty of five percent (or such lesser percentage as
may be required by applicable laws of any country) of the Net Sales by
Licensee and its Affiliates for Licensed Products sold or otherwise disposed
of by Licensee and its Affiliates, but not with respect to any sales to
distributors who agree to pay royalties or make percentage of sale payments
to Licensee or such Affiliates (in which case such royalties or payments
shall be subject to Section 3(b) below).
(b) A payment of 50 percent of any royalties or percentage of
sales payments received by Licensee or any Affiliate under either (i) any
sublicense of the
5
<PAGE>
Partnership Technology for the manufacture, use, commercialization or sale of
the Licensed Product or (ii) any distribution agreements for the Licensed
Product entered into with distributors who agree to pay royalties or make
percentage of sales payments to Licensee or any Affiliate.
(c) A payment of 50 percent of any "front-end" distribution
fees, prepaid royalties, or similar one-time, infrequent or special payments
not included in Section 3.1(b).
3.2 GUARANTEED PAYMENTS. If, at the end of any calendar year, the
aggregate payments by Licensee to Licensor pursuant to section 3.1(a), 3.1(b)
and 3.1(c) (together, the "Aggregate Payments") and the "Guaranteed
Payments", if any under this Section 3.2 are less than 4% of the aggregate
Net Sales of the Licensed Product by the sublicensees and distributors from
whom the Aggregate Payments were received, Licensee shall pay Licensor an
additional amount (a "Guaranteed Payment") equal to the difference between
(i) the Aggregate Payments and any Guaranteed Payments theretofore made and
(ii) 4% of such Net Sales to such date. The Guaranteed Payment, if any, due
to Licensor under this Section 3.2 shall be calculated annually. The
Guaranteed Payment, if any, due for any calendar year shall be included in
and shall be paid simultaneously with, the
6
<PAGE>
last quarterly report for such year by Licensee under Section 6.
3.3 TERM OF PAYMENTS. The obligation to pay royalties hereunder
shall continue until (i) the expiration of the last to expire of the Patent
Rights or (ii) if there never are any Patent Rights, 20 years after the date
of the actual reduction to practice of the Licensed Product.
4. CREDITS AGAINST PAYMENTS DUE
Notwithstanding the provisions of Section 3, Licensee shall
receive, as a credit against payments otherwise due under Section 3, an
amount equal to 50% of Licensee's costs and expenses of obtaining regulatory
approval of the Licensed Product in any country incurred after regulatory
approval has been obtained from either (i) the FDA or (ii) comparable
regulatory authorities in two other Major Market Countries. Such credit with
respect to any such additional approval shall be taken against payments
otherwise due under Section 3 after the date of such additional approval.
5. CONFIDENTIAL INFORMATION
Licensee agrees that it, its Affiliates and its sublicensees shall
not use Confidential Information received from Licensor hereunder for any
other purpose than for fulfilling the purpose of this Agreement. Licensee
agrees that
7
<PAGE>
it, its Affiliates and its sublicensees shall, during the term of this
Agreement and for a period of five years after its termination for any
reason, hold in confidence all Confidential Information except to the extent
that such Confidential Information (i) is required to be disclosed in
connection with the securing of necessary governmental authorization for the
marketing of the Licensed Product, (ii) is required to be disclosed by law
for the purpose of complying with governmental regulations or (iii) is
required to be disclosed for the purpose of sublicensing or distribution as
provided herein.
6. ACCOUNTING
6.1 REPORTS. Within 90 days after the end of each calendar
quarter during the term of this Agreement, Licensee shall render an
accounting to Licensor with respect to all payments due and all credits taken
for such quarter. Such report shall indicate for such calendar quarter the
quantity and dollar amount of sales of the Licensed Product by Licensee, its
Affiliates, sublicensees and distributors with respect to which such payments
are due or credits are taken; provided, however, that if Licensee shall not
have received from any foreign sublicensee or distributor a report of its
sales, then such sales may be included in the next quarterly report. In case
no payment is due for any calendar quarter, Licensee shall so report.
Licensee shall keep accurate records in sufficient detail to enable the
payments due hereunder to be determined.
8
<PAGE>
The report for the last quarter of each calendar year also shall include the
calculation of any Guaranteed Payment due under Section 3.2.
6.2 REVIEW BY ACCOUNTANTS. At Licensor's request, Licensee shall
permit an independent public accountant selected by Licensor to have access,
once in each calendar year during regular business hours and upon reasonable
notice to Licensee, to such of the records of Licensee as may be necessary to
verify the accuracy of the reports and payment made under this Agreement, but
said accountant shall not disclose to Licensor any information except that
which should properly have been contained in such reports. The right of
review of each quarterly account shall terminate two years after Licensor's
receipt thereof.
7. TIMES AND CURRENCIES OF PAYMENTS
7.1 PAYMENTS. Payments shown by each calendar quarter report to
have accrued shall be due and payable on the date such report is due and
shall be paid in United States dollars. Any and all taxes due or payable on
such payments or with respect to the remittance thereof shall be deducted
from such payments and shall be paid by Licensee to the proper taxing
authorities, and proof of payment shall be secured and sent to Licensor as
evidence of such payment. The rate of exchange to be used in computing the
amount of the United States dollars due to Licensor in satisfaction of
9
<PAGE>
payment obligations with respect to sales in foreign countries shall be
calculated at the exchange ratio set by Citibank N.A., New York, New York for
the purchase of United States dollars with the currency of the country of
origin of such payment on the last business day of the calendar quarter for
which payment is being made. Settlement of payment obligations shall be made
by bank wire transfers.
7.2 CERTAIN FOREIGN PAYMENTS. If governmental regulations prevent
remittance from any foreign country of any amounts due under Section 3 in
respect of that country, Licensee shall so notify Licensor in writing, and
the obligation under this Agreement to make payments in respect of sales in
that country shall be suspended (but the amounts due but not paid shall
continue to accrue) until such remittances are possible. Licensor shall have
the right, upon written notice to Licensee, to receive payment in any such
country in the local currency.
7.3 LATE PAYMENTS. Any payments due hereunder that are not made
when due shall bear interest at the lesser of 18% per annum or the maximum
rate as may be allowed by law, beginning on the date when Licensor has
notified Licensee that such payments are overdue.
8. PATENTS
8.l NOTICE OF PATENTS. Licensor shall advise Licensee of the
issuance, lapse, revocation, surrender,
10
<PAGE>
invalidation or abandonment of any patent included in Patent Rights;
provided, however, that Licensor shall not revoke, surrender, abandon or
permit to lapse any such patent without 60 days prior written notice to
Licensee of its intention to do so. In the event of such notice, Licensee
shall have the right to continue the prosecution or maintenance of any such
patent at its own expense, and such patent shall thereafter be licensed to
Licensee on a royalty-free basis.
8.2 PATENT INFRINGEMENT.
(a) If a third party infringes, by the manufacture or sale of
a Product competitive with the Licensed Product in any country, any patent
included within Patent Rights, Licensee may, at its own expense and with the
right to all recoveries, bring legal action to restrain such infringement and
for damages. If Licensee fails to take the necessary steps to restrain such
infringement by litigation or otherwise, and if such infringing product
achieves a sales volume equal to ten percent of the sales volume of the
Licensed Product sold by Licensee, its Affiliates, sublicensees and
distributors in the country, then Licensor may institute, in its own name, at
its own expense and with the right to all recoveries, such litigation or
other appropriate action as it may deem necessary to terminate such
infringement, provided that Licensor has first given to Licensee 60 days
advance notice of its intention to take such action, and, provided further,
that Licensee has not itself taken appropriate action during such 60-day
period.
11
<PAGE>
(b) If Licensor desires to bring such action in accordance
with this Section 8, Licensee agrees to cooperate fully with Licensor.
Licensor shall indemnify Licensee against liability for any costs awarded to
the third party. If the third party in any such action brings a
counteraction for invalidation or misuse of a patent included within Patent
Rights, Licensor promptly shall notify Licensee and Licensee may, within 180
days of the notification, join and participate in such action at its own
expense.
(c) Each party agrees not to settle any action it brings in a
manner that is prejudicial to any patent included within Patent Rights
without the other party's prior written approval.
9. EFFECTIVE DATE AND TERM
This Agreement will become effective on the day and year first
above written in accordance with Section 2.3 of the Option Agreement and,
unless terminated in accordance with any of the provisions hereof, shall
remain in full force and effect thereafter; provided, however, that the
obligation to make payments under Section 3 hereof shall terminate as set
forth in Section 3.
10. DISCLAIMERS.
LICENSOR DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (i) THAT THE
PARTNERSHIP TECHNOLOGY OR THE USE THEREOF OR THE LICENSED PRODUCT WILL BE
FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF
PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (ii) OF THE ACCURACY,
12
<PAGE>
RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR
MERCHANTABILITY OF THE PARTNERSHIP TECHNOLOGY OR THE LICENSED PRODUCT OR
THEIR SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT
LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF THE LICENSED
PRODUCT. LICENSOR DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER NATURE, EXPRESS
OR IMPLIED.
11. TERMINATION.
11.1 Licensor may, in its discretion, terminate this Agreement in the
event that Licensee:
(a) breaches any material obligation hereunder and such
breach continues for a period of 60 days after written notice thereof; or
(b) enters into any proceeding, whether voluntary or
otherwise, in bankruptcy, reorganization or arrangement for the appointment
of a receiver or trustee to take possession of Licensee's assets or any other
proceedings under any law for the relief of creditors or makes an assignment
for the benefit of its creditors.
11.2 CONSEQUENCES OF TERMINATION. Termination of this Agreement
for any reason shall be without prejudice to:
(i) the obligations of confidentiality provided in Section 5;
(ii) the rights and obligations provided for in Section 6;
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<PAGE>
(iii)Licensor's right to receive all payments accrued under
Section 3 prior to the effective date of such termination; and
(iv) any other remedies which either party may then or thereafter
have hereunder or otherwise.
If Licensor terminates this Agreement pursuant to this Section 11, Licensee
shall (i) cease to use the Partnership Technology and Confidential
Information received from Licensor hereunder, (ii) discontinue production of
the Licensed Product and (iii) return to Licensor all documents and materials
containing Confidential Information and Partnership Technology supplied by
Licensor hereunder.
12. ASSIGNMENT
Licensee may assign its rights under this Agreement to any
Affiliate or any third party with which Licensee is merged or consolidated or
by which Licensee is acquired or which purchases, directly or indirectly, all
or substantially all of its assets. Licensee may assign its rights hereunder
in whole or in part with the prior written consent of Licensor, which consent
shall not be withheld unreasonably; provided, however, that any successor
shall execute an agreement, in form reasonably satisfactory to Licensor,
assuming each of Licensee's obligations hereunder. This Agreement shall not
otherwise be assignable by Licensee without the prior written consent of
Licensor.
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<PAGE>
13. ARBITRATION
13.1 DISPUTES; SERVICE. In case any dispute arises out of this
Agreement, the parties will endeavor to settle such dispute amicably. If the
parties fail to agree, any such dispute shall be finally settled by
arbitration conducted in San Francisco, California in accordance with the
then existing rules of the American Arbitration Association, and judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The parties hereby agree that service of any notices
in the course of such arbitration at their respective addresses as provided
in Section 14 of this Agreement shall be valid and sufficient.
13.2 ARBITRATORS. In any arbitration pursuant to Section 13.1, the
award shall be rendered by a majority of the members of a board of
arbitration consisting of three members, all of whom will be appointed by the
parties jointly or, if the parties cannot agree as to three arbitrators
within 30 days after commencement of the arbitration proceeding, one
arbitrator shall be appointed by each party within 45 days after the
commencement of the arbitration proceeding, and the third shall be appointed
by mutual agreement of the two appointed arbitrators, In the event of failure
of said two arbitrators to agree upon the third arbitrator within 75 days
after commencement of the arbitration proceeding, the third arbitrator shall
be appointed by the American Arbitration
15
<PAGE>
Association in accordance with its then existing rules. Notwithstanding the
foregoing, if any party shall fail to appoint an arbitrator within the
specified time period, such arbitrator as well as the third arbitrator shall
be appointed by the American Arbitration Association in accordance with its
then existing rules. For the purposes of this Section 13.2, the
"commencement of arbitration proceeding" shall be deemed to be the date upon
which a written demand for arbitration is received by one party from the
other.
14. NOTICES
Any notice or other communication required or permitted to be given
to either party under this Agreement shall be in writing and shall be
delivered by hand or registered mail, postage prepaid and return receipt
requested, addressed to each party at the following addresses or such other
addresses as may be designated by notice pursuant to this Section 14:
If to Licensor: ALZA TTS RESEARCH PARTNERS, LTD.
c/o ALZA Development Corporation
950 Page Mill Road
Palo Alto, California 94304
Attention: President
If to Licensee: ALZA CORPORATION
950 Page Mill Road
Palo Alto, California 94304
Attention: President
Any notice or communication given in conformity with this Section 14 shall be
deemed to be effective when received by the
16
<PAGE>
addressee, if delivered by hand, and five days after mailing, if mailed.
15. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each
of which when so executed shall be deemed to be an original and all of which
when taken together shall constitute this Agreement.
16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance
with the laws of the State of California as applied between residents of that
state entering into contracts wholly to be performed in that state.
17. SEVERABILITY
If any provision of this Agreement shall be held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless, continue in full force without being impaired or
invalidated in any way.
18. AMENDMENTS.
No amendment, modification or addition hereto shall be effective or
binding on either party unless set forth in writing and executed by a duly
authorized representative of the party to be charged.
19. WAIVER.
No waiver of any right under this Agreement shall be deemed
effective unless contained in a writing signed
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<PAGE>
by the party charged with such a waiver, and no waiver of any breach or
failure to perform shall be deemed to be a waiver of any future breach or
failure to perform or of any other right arising under this Agreement.
20. HEADINGS.
The section headings contained in this Agreement are included for
convenience only and form no part of the agreement between the parties.
21. NO EFFECT ON OTHER AGREEMENTS.
No provision of this Agreement shall be construed so as to negate,
modify or affect in any way the provisions of any other agreement between the
parties unless specifically referred to, and only as specifically provided, in
such other agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first set forth above.
ALZA TTS RESEARCH PARTNERS, LTD.
By Alza Development corporation
its General Partner
By: /s/ none
---------------------------
President
ALZA Corporation
By: /s/ none
---------------------------
President
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<PAGE>
SCHEDULE A
THE PRODUCT:
DATE ON WHICH THIS LICENSE BECOMES NONEXCLUSIVE:
<PAGE>
SCHEDULE B
PATENTS
<PAGE>
Exhibit 13
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
with
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Partners
ALZA TTS Research Partners, Ltd.
(A limited partnership)
We have audited the accompanying statements of assets, liabilities and
partners' capital (deficit) of ALZA TTS Research Partners, Ltd. as of
December 31, 1996 and 1995, and the related statements of revenue collected
and expenses, partners' capital (deficit) and cash flows for each of the
three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1, 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 our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities and partners' capital
(deficit) of ALZA TTS Research Partners Ltd., at December 31, 1996 and 1995,
and its revenue collected and expenses and cash flows for each of the three
years in the period ended December 31, 1996, on the basis of accounting
described in Note 1.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying additional
information is prepared on a federal income tax basis and is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such additional information has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Palo Alto, California
February 13, 1997
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Assets, Liabilities, and
Partners' Capital (Deficit)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 77,586 $ 48,245
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Payable to ALZA Corporation $ 146,381 $ 227,446
Partners' capital (deficit):
Class A Limited Partners,
3,200 units outstanding (69,904) (336,732)
Class B Limited Partner 1,805 159,343
General Partner (696) (1,812)
------------ ------------
Total partners' deficit (68,795) (179,201)
------------ ------------
$ 77,586 $ 48,245
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
-2-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Revenue Collected and Expenses
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- ------------
<S> <C> <C> <C>
REVENUE:
Royalty income $ 6,265,401 $ 4,441,708 $ 3,167,914
Interest income 28,995 20,192 10,398
----------- ----------- -----------
Total revenue 6,294,396 4,461,900 3,178,312
EXPENSES:
General and administrative 86,548 100,253 95,452
----------- ----------- -----------
NET INCOME $ 6,207,848 $ 4,361,647 $ 3,082,860
----------- ----------- -----------
----------- ----------- -----------
ALLOCATION OF NET INCOME:
General Partner $ 62,079 $ 43,616 $ 30,828
Class A Limited Partners 6,035,020 4,318,031 3,052,032
Class B Limited Partner 110,749 - -
----------- ----------- -----------
$ 6,207,848 $ 4,361,647 $ 3,082,860
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
-3-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Partners' Capital (Deficit)
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Total
Class A Class B Partners'
Limited Limited General Capital
Partners Partner Partner (Deficit)
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
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 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)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes.
-4-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,207,848 $ 4,361,647 $ 3,082,860
Adjustments to reconcile net
income to net cash
used in operating activities:
Decrease in liabilities:
Payable to ALZA Corporation (81,065) (35,156) (39,854)
Payments to partners (6,097,442) (4,306,401) (3,032,608)
----------- ------------ ------------
Net increase in cash 29,341 20,090 10,398
Cash at beginning of year 48,245 28,155 17,757
----------- ------------ ------------
Cash at end of year $ 77,586 $ 48,245 $ 28,155
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes.
-5-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ALZA TTS Research Partners, Ltd. (the "Partnership") was
formed on December 30, 1982 to conduct research and
development of products combining ALZA Corporation's ("ALZA")
proprietary transdermal therapeutic system technology with
certain generic compounds. On April 22, 1983 the closing of
the sale to the public of Class A Limited Partnership
interests took place. At December 31, 1996 and 1995, the
capital consisted of 3,200 Class A Limited Partnership units
which had been sold for $5,000 each, an original investment by
the Class B Limited Partner of $750,000 (paid as follows:
$250,000 in 1983, $250,000 in 1984 and $250,000 in 1985) and
an original investment by the General Partner (ALZA
Development Corporation, a wholly-owned subsidiary of ALZA
Corporation) of $169,192. Under the terms of the Agreement of
Limited Partnership (the "Partnership Agreement"), 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. 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 any
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, any 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 in 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. Therefore, the amount
available for distribution to the limited partners is net of
ongoing administrative costs (primarily
-6-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
accounting and legal expenses, quarterly reports, tax returns and
auditor's reports). Given the methodology for the allocation of
losses and income as discussed above, deficit 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.
All available Partnership development funds were utilized
before 1988. In 1987, ALZA exercised its continuation option, an
option granted to it by the Partnership, to continue the
development of all Partnership products without Partnership
funding. Duragesic-Registered Trademark- (fentanyl transdermal
system) CII and Testoderm-Registered Trademark- (testosterone
transdermal system) CIII were completed by ALZA under the
continuation option. Duragesic-Registered Trademark- has been
cleared for marketing in the United States and in more than 30
additional countries, including several in each of Europe, South
America and Asia (excluding Japan). Testoderm-Registered Trademark-
has been cleared for marketing in the United States, China, Singapore
and in more than ten European countries. For products at earlier
stages of development, no arrangements have been made with development
partners, and further activities are not contemplated at this time.
ALZA has an option, exercisable for limited periods, to acquire
worldwide licenses to manufacture and market, or sublicense to
others, any or all products developed by the Partnership. ALZA has
exercised its option to acquire worldwide licenses (with the right
to sublicense) for the Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- products. These licenses are
exclusive for each product until thirteen years after the actual
reduction to practice of such product and will become non-exclusive
thereafter. For Testoderm-Registered Trademark-, the period of
ALZA's exclusivity ends on July 26, 1998. For Duragesic-Registered
Trademark-, the period of ALZA's exclusivity ends on December 4,
1998.
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. ALZA Development Corporation, a wholly-owned
subsidiary of ALZA, might 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.
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.
-7-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
The exercise price is $120 million, less "Excess Cash" distributed
to the Limited Partners. The exercise price may be paid in cash,
ALZA common stock, or a combination, at the General Partner's
option. 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.
A summary of the Partnership's significant accounting policies follows:
Research and Development:
Until 1987, when Partnership funds had been fully expended, the
Partnership funded research and development costs quarterly, in
advance, in an amount equal to ALZA's estimate of the research and
development costs to be incurred by ALZA during the next quarter.
Research and development expense was recognized by the Partnership
during the period in which work was performed by ALZA.
Royalty income:
Janssen Pharmaceutica, Inc. (together with its affiliates,
"Janssen"), a subsidiary of Johnson and Johnson, began marketing
Duragesic-Registered Trademark- in the United States during the
second quarter of 1991, and in Canada during the second quarter of
1992. In addition, Janssen has launched Duragesic-Registered
Trademark- in more than 20 other countries, including several in
each of Europe, South America and Asia (excluding Japan). During
the second quarter of 1994, ALZA, through its sales and marketing
division, ALZA Pharmaceuticals, began co-promoting
Duragesic-Registered Trademark- in the United States with Janssen.
As provided by the agreement between ALZA and Janssen, quarterly
sales reports and the resulting payments to ALZA on
Duragesic-Registered Trademark- sold by Janssen are due no later
than 90 days after the end of each quarter.
In April 1994, ALZA, through ALZA Pharmaceuticals, began marketing
Testoderm-Registered Trademark- in the United States. The product
will be marketed by one or more distributors outside the United
States. Commercialization agreements for Testoderm-Registered
Trademark- have been signed with Scitech Genetics Limited, in 1995,
covering Bangladesh, Brunei, Burma, India, Indonesia, Malaysia,
Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Thailand
and Vietnam and with Pharmagenesis, Inc., also in 1995, covering
China, Hong Kong, Macau and Taiwan. Scitech Genetics launched
Testoderm-Registered Trademark- in Singapore in January
-8-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
1997. As provided by the agreements between ALZA and Scitech and
ALZA and Pharmagenesis, quarterly sales reports and the resulting
payments to ALZA on Testoderm-Registered Trademark- sold by Scitech
and Pharmagenesis are due within 45 days after the end of each
quarter.
During the fourth quarter of 1996, ALZA signed an agreement with
Ferring NV pursuant to which Ferring has the rights to market
Testoderm-Registered Trademark- in Austria, Belgium, Denmark,
Finland, Germany, Ireland, Luxembourg, the Netherlands, Norway,
Sweden, Switzerland and the United Kingdom. As provided by the
agreement between ALZA and Ferring, quarterly sales reports and
the resulting payments to ALZA on Testoderm-Registered Trademark-
sold by Ferring will be due within 45 days after the end of the
quarter. The Partnership received a license fee of $250,000 from
ALZA pursuant to the terms of the License Agreement between the
Partnership and ALZA for Testoderm-Registered Trademark-.
Agreements between ALZA and the Partnership provide for ALZA to
report sales and make associated royalty payments to the
Partnership within 90 days after the end of the quarter in which
ALZA receives payment from Janssen on sales of Duragesic-Registered
Trademark-. In addition, within 90 days after the end of each
calendar quarter, ALZA reports sales and makes associated royalty
payments to the Partnership with respect to ALZA's sales of
Testoderm-Registered Trademark- in the United States during such
quarter. Under these agreements, the Partnership is entitled to
receive 4% of net sales of Duragesic-Registered Trademark- and
Testoderm-Registered Trademark-.
The Partnership currently records income in the quarter in which
cash is received. The Partnership maintains its books using a
modified basis of cash receipts and disbursements which is
different from accrual basis accounting in that royalty revenues
are not recognized until the related cash is received.
Distributions:
After payment of the Partnership expenses, distributions to the
partners by the Partnership are to be made on a quarterly basis as
soon as practicable after the end of each calendar quarter in which
the Partnership receives a payment from ALZA.
According to the Partnership Agreement, quarterly distributions to
the Limited Partners consist of 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. Therefore, the amount available for
distribution to the Limited Partners is net of ongoing
administrative expenses. These
-9-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
costs have been advanced by ALZA on behalf of the Partnership since
December 1987 at which time all Partnership funds had been
utilized. Initially, ALZA had agreed that the Partnership could
reimburse these costs to ALZA at the rate of $5.00 per Partnership
unit per quarter, 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 adminstrative expenses of the
Partnership for the previous quarter plus $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 unpaid past administrative costs
(totalling $116,691 as of December 31, 1996) are expected to be
repaid by the fourth quarter of 1997.
Income taxes:
Income or loss of the Partnership is included in the tax returns of
the individual partners. Accordingly, no provision for income taxes
has been made by the Partnership.
2. TAX BASIS
Prior to fiscal year 1994, the Partnership's income tax reporting
method was consistent with the modified basis of cash receipts and
disbursements method used for financial reporting purposes.
The Partnership applied to the Internal Revenue Service ("IRS") to
change its income tax reporting method to the accrual basis,
effective January 1, 1994. The IRS accepted the application and
agreed to the Partnership making a one time adjustment to be
recognized over three years, beginning in 1994. The application
was filed to change the Partnership's income tax reporting method
to a method consistent with the current Internal Revenue Code.
The following is a reconciliation of partners' deficit for
financial reporting purposes, as described in this report, to the
partners' capital for federal income tax reporting purposes. The
current difference between the financial and tax basis statements
is due to i) the deferred revenue resulting from the accounting
method change (see paragraph below), ii) royalty and license income
accrued to be consistent with the accounting
-10-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Notes to Financial Statements
December 31, 1996
method change and iii) the syndication costs, which reduce
partners' capital for financial reporting purposes but which are
recorded as an asset for tax purposes.
Partners' deficit for financial reporting
purposes at December 31, 1996 $ (68,795)
Deferred Revenue - Section 481(a) adjustment
due to accounting method change
(Total adjustment $1,123,277; 1994
adjustment $374,426; 1995 adjustment
$374,426; 1996 adjustment $374,425) 0
Accounts Receivable - Accrued royalty
and license revenue 3,911,256
Syndication costs charged to partners'
capital for financial purposes 1,810,059
-------------
Partners' capital for tax reporting
purposes at December 31, 1996 $ 5,652,520
-------------
-------------
3. RELATED PARTIES
ALZA Development Corporation, a wholly-owned subsidiary of
ALZA, is the general partner of the Partnership.
ALZA, under a research and development contract, performed all
research and development for the Partnership. The Partnership
requires certain administrative, accounting, contract management
and record keeping services which are presently being provided by
ALZA and billed to the Partnership at ALZA's standard
administrative services rate ($86,548 for 1996, $100,253 for 1995
and $95,452 for 1994).
4. CONTINGENT LIABILITIES
ALZA performed research and development work during 1987
amounting to $78,789. This amount has not been accrued for and will
not be accrued for unless and until the Partnership has additional
funding as provided in the Partnership Agreement. This accrual was
not made because the Partnership was required under the research and
-11-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Notes to Financial Statements
December 31, 1996
development contract with ALZA to pay only its Total Funds (as defined in the
research and development contract).
-12-
<PAGE>
ADDITIONAL INFORMATION
-13-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Assets, Liabilities, and Partners' Capital
(Income tax basis)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 77,586 $ 48,245
Accounts receivable from ALZA Corporation 3,911,256 2,688,432
------------ -------------
Total current assets 3,988,842 2,736,677
Syndication costs 1,810,059 1,810,059
------------ -------------
Total Assets $ 5,798,901 $ 4,546,736
------------ -------------
------------ -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Payable to ALZA Corporation $ 146,381 $ 227,446
Deferred revenue - Section 481(a)
adjustment due to accounting
method change (Note 2) - 374,425
------------ -------------
Total current liabilities 146,381 601,871
Partners' capital:
Class A Limited Partners 5,341,728 3,665,728
Class B Limited Partner 254,267 239,710
General Partner 56,525 39,427
------------ -------------
Total partners' capital 5,652,520 3,944,865
------------ -------------
Total Liabilities and Partners' Capital $ 5,798,901 $ 4,546,736
------------ -------------
------------ -------------
</TABLE>
-14-
<PAGE>
ALZA TTS Research Partners, Ltd.
(A limited partnership)
Statements of Operations
(Income tax basis)
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Royalty income (includes $374,425 in 1996
and $374,426 in both 1995 and 1994
recognized due to the accounting
change in 1994) $ 7,612,650 $ 5,595,628 $ 4,328,001
License fee 250,000 - -
Interest income 28,995 20,192 10,398
----------- ----------- -----------
Total revenue 7,891,645 5,615,820 4,338,399
EXPENSES:
General and administrative 86,548 100,253 95,452
----------- ----------- -----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 7,805,097 5,515,567 4,242,947
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE:
Conversion from modified
cash to accrual basis, January 1, 1994 - - 1,123,277
Less portion of above
deferred to be recognized
as revenue from 1994 through 1996 - - (1,123,277)
----------- ----------- -----------
Effect of accounting
change at December 31, 1994 - - 0
----------- ----------- -----------
NET INCOME $ 7,805,097 $ 5,515,567 $ 4,242,947
----------- ----------- -----------
----------- ----------- -----------
ALLOCATION OF NET INCOME:
General Partner $ 78,061 $ 55,151 $ 42,435
Class B Limited Partner 282,844 - -
Class A Limited Partners 7,444,192 5,460,416 4,200,512
----------- ----------- -----------
$ 7,805,097 $ 5,515,567 $ 4,242,947
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER CLASS A
LIMITED PARTNERSHIP UNIT $ 2,326.31 $ 1,706.38 $ 1,312.66
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
-15-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Partners' Capital
(Income tax basis)
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Class A Class B Total
Limited Limited General Partners'
Partners Partner Partner Capital
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
BALANCE
DECEMBER 31,
1993 $ 947,520 $ 562,626 $ 15,214 $ 1,525,360
Net income 4,200,512 - 42,435 4,242,947
Payments to
Partners (2,868,864) (133,435) (30,309) (3,032,608)
----------- ---------- ----------- -----------
BALANCE
DECEMBER 31,
1994 2,279,168 429,191 27,340 2,735,699
Net income 5,460,416 - 55,151 5,515,567
Payments to
Partners (4,073,856) (189,481) (43,064) (4,306,401)
----------- ---------- ----------- -----------
BALANCE
DECEMBER 31,
1995 3,665,728 239,710 39,427 3,944,865
Net income 7,444,192 282,844 78,061 7,805,097
Payments to
Partners (5,768,192) (268,287) (60,963) (6,097,442)
----------- ---------- ----------- -----------
BALANCE
DECEMBER 31,
1996 $ 5,341,728 $ 254,267 $ 56,525 $ 5,652,520
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
-16-
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of ALZA TTS Research Partners, Ltd. of our report dated February 13,
1997 included in the 1996 Financial Statements and Additional Information of
ALZA TTS Research Partners, Ltd included at Exhibit 13.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Palo Alto, California
March 26, 1997
<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-K DATED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 77
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 77
<CURRENT-LIABILITIES> 146
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (69)
<TOTAL-LIABILITY-AND-EQUITY> 77
<SALES> 0
<TOTAL-REVENUES> 6,294
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,208
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,208
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
