<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997 or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________.
Commission File Number 0-11839
ALZA TTS RESEARCH PARTNERS, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2863497
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
950 Page Mill Road, P.O. Box 10950, Palo Alto, CA, 94303-0802
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 494-5300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Revenue Collected and Expenses
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended, June 30, Six Months Ended, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Royalty income $1,911,236 $1,821,191 $3,992,457 $3,038,740
License Fee 250,000 - 250,000 -
Interest income 10,312 8,294 18,671 13,858
---------- ---------- ---------- ----------
Total revenue 2,171,548 1,829,485 4,261,128 3,052,598
EXPENSES:
General and administrative 26,830 18,441 66,833 45,891
---------- ---------- ---------- ----------
NET INCOME $2,144,718 $1,811,044 $4,194,295 $3,006,707
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allocation of net income:
General Partner $ 21,447 $ 18,110 $ 41,943 $ 30,067
Class A Limited Partners 2,028,903 1,792,934 3,967,803 2,976,640
Class B Limited Partner 94,368 - 184,549 -
---------- ---------- ---------- ----------
NET INCOME $2,144,718 $1,811,044 $4,194,295 $3,006,707
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER CLASS A
LIMITED PARTNERSHIP UNIT $ 634.03 $ 560.29 $ 1,239.94 $ 930.20
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Assets, Liabilities and
Partners' Capital (Deficit)
June 30, December 31,
1997 1996
----------- ------------
(unaudited)
ASSETS
Current assets - Cash $96,317 $ 77,586
------- --------
------- --------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities - Payable to
ALZA Corporation $62,318 $146,381
Partners' capital (deficit):
Class A Limited Partners,
3,200 units outstanding 27,307 (69,904)
Class B Limited Partner 6,328 1,805
General Partner 364 (696)
------- --------
Total partners' capital (deficit) 33,999 (68,795)
------- --------
Total liabilities and partners'
capital (deficit) $96,317 $ 77,586
------- --------
------- --------
See accompanying notes.
-3-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statement of Partners' Capital (Deficit)
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Total
Limited Limited General Partners'
Partners Partner Partner Capital
----------- ---------- -------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ (580,907) $ 348,824 $ (2,364) $ (234,447)
Net income 4,318,031 - 43,616 4,361,647
Payments to partners (4,073,856) (189,481) (43,064) (4,306,401)
----------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1995 (336,732) 159,343 (1,812) (179,201)
Net income 6,035,020 110,749 62,079 6,207,848
Payments to partners (5,768,192) (268,287) (60,963) (6,097,442)
----------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1996 (69,904) 1,805 (696) (68,795)
Net income 3,967,803 184,549 41,943 4,194,295
Payments to partners (3,870,592) (180,026) (40,883) (4,091,501)
----------- ---------- -------- ------------
BALANCE, JUNE 30, 1997 $ 27,307 $ 6,328 $ 364 $ 33,999
----------- ---------- -------- ------------
----------- ---------- -------- ------------
</TABLE>
See accompanying notes.
-4-
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
Increase (Decrease) in Cash
(unaudited)
Six Months Ended June 30,
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 4,194,295 $ 3,006,707
Adjustments to reconcile net income
to net cash used in operating
activities:
Payments to Partners (4,091,501) (2,971,087)
Decrease in liabilities:
Payable to ALZA Corporation (84,063) (21,560)
----------- -----------
Net cash provided by operating
activities 18,731 14,060
Cash at beginning of period 77,586 48,245
----------- -----------
Cash at end of period $ 96,317 $ 62,305
----------- -----------
----------- -----------
See accompanying notes.
-5-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
INTRODUCTION
The financial statements of ALZA TTS Research Partners, Ltd. (the
"Partnership") included herein should be read in conjunction with the
audited financial statements included in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1996. The accompanying interim
financial statements of the Partnership for the three and six months ended
June 30, 1997 and June 30, 1996 are unaudited but include all adjustments
which the General Partner (ALZA Development Corporation, a wholly-owned
subsidiary of ALZA Corporation) believes necessary for fair presentation.
These financial statements have been prepared on a modified basis of cash
receipts and disbursements, which is a comprehensive basis of accounting
other than generally accepted accounting principles in that royalty
revenues are not recognized until the related cash is received.
ORGANIZATION
The Partnership was formed on December 30, 1982 to conduct research and
development on products combining the proprietary transdermal therapeutic
system technology of ALZA Corporation ("ALZA") with certain generic
compounds (the "TTS Partnership Products"). On April 22, 1983, the closing
of the sale to the public of Class A Limited Partnership units took place.
At June 30, 1997 the Partnership's capital consisted of 3,200 Class A
Limited Partnership units purchased for $5,000 each, an original investment
by the Class B Limited Partner of $750,000 and an original investment by
the General Partner of $169,192. Under the terms of the Agreement of
Limited Partnership (the "Partnership Agreement"), net losses were
allocated as follows: first, 1% to
-6-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
the General Partner and 99% to the Class A Limited Partners and then,
after the capital account of the Class A Limited Partners was reduced to
zero, 1% to the General Partner and 99% to the Class B Limited Partner.
After the capital accounts of the Class A and Class B Limited Partners
were reduced to zero, losses were allocated 100% to the General Partner.
Under the terms of the Partnership Agreement, net income is allocated in
the inverse order of the losses previously allocated. To the extent losses
were allocated 100% to the General Partner, net income was allocated 100%
to the General Partner in an amount equal to such losses prior to
allocation of net income to the Class A and Class B Limited Partners.
Then, to the extent losses were allocated 99% to the Class B Limited
Partner, net income was allocated 99% to the Class B Limited Partner (and
1% to the General Partner) in an amount equal to such losses prior to any
net income being allocated to the Class A Limited Partners. Then, to the
extent losses were allocated 99% to the Class A Limited Partners, net
income was allocated 99% to the Class A Limited Partners (and 1% to the
General Partner.) As provided in the Partnership Agreement, once the
amount of net income allocated to the Class A Limited Partners and the
General Partner equaled previously allocated losses (which occurred during
the third quarter of 1996), subsequent income began to be allocated 99% to
the Class A and Class B Limited Partners, pro rata, and 1% to the General
Partner.
The General Partner is required by the Partnership Agreement to distribute,
on a quarterly basis, all of the Partnership's Excess Cash (which consists
of all cash received by the Partnership less all amounts expended in the
conduct of the Partnership's business, including administrative expenses,
and working capital) in proportion to the Partners' respective capital
contribution percentages.
-7-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
All of the Partnership's Total Funds (as defined in the research and
development contract between ALZA and the Partnership) have been utilized
in the development of TTS Partnership Products. Total Funds consisted of
the net proceeds from the sale by the Partnership of the Class A Limited
Partnership units, the General Partner's and Class B Limited Partner's
capital contributions to the Partnership, and interest and other income
earned through temporary investment of Partnership funds, less all
necessary expenses of operating the Partnership.
In accordance with the agreements between ALZA and the Partnership, the
Partnership is entitled to receive 4% of net sales of Duragesic-Registered
Trademark- (fentanyl transdermal system) CII and Testoderm-Registered
Trademark- (testosterone transdermal system). For the quarter ended June
30, 1997, cash provided from royalties from Duragesic-Registered Trademark-
and Testoderm-Registered Trademark- increased to $1,911,236 from $1,821,191
for the same period of 1996. Excess Cash (defined as cash received by the
Partnership, less all amounts expended in the conduct of the Partnership's
business, including administrative expenses, and working capital) is
distributed to the Partners. Because the Partnership does not make
commercialization decisions regarding TTS Partnership Products, its
potential royalty stream and income are not within the Partnership's
control.
Janssen Pharmaceutica, Inc. (together with its affiliates "Janssen"), a
subsidiary of Johnson and Johnson, markets Duragesic-Registered Trademark-
in the United States, Canada and in more than 25 other countries worldwide.
The product has been cleared for marketing in six additional countries.
Submissions for marketing clearance are on file in a number of other
countries. ALZA Pharmaceuticals, the sales and
-8-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
marketing division of ALZA, co-promotes Duragesic-Registered Trademark-
in the United States with Janssen.
ALZA, through ALZA Pharmaceuticals, markets Testoderm-Registered Trademark-
in the United States. ALZA Pharmaceuticals will market Testoderm-
Registered Trademark- through distributors outside the United States.
Commercialization agreements covering 17 Asian countries (excluding Japan)
were signed with Scitech Genetics Limited and Pharmagenesis, Inc. in 1995.
Scitech Genetics launched Testoderm-Registered Trademark- in Singapore in
January 1997. An agreement was signed during the fourth quarter of 1996
with Ferring NV, pursuant to which Ferring has the right to distribute
Testoderm-Registered Trademark- in 12 European countries. Testoderm-
Registered Trademark- has been cleared for marketing in more than ten
European countries.
TTS Partnership Products other than the Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- products were at very early stages of
development when the Partnership's available funds were exhausted in 1987.
Substantial expenditures would be required if the development of these
products were to be completed and the products commercialized. For these
products at early stages of development, no arrangements have been made
with development partners, and further activities are not contemplated at
this time.
The Partnership granted ALZA an option (the "License Option") to acquire a
license for any or all of the TTS Partnership Products, on a product-by-
product basis. In 1990, ALZA exercised its option to acquire worldwide
licenses (with the right to sublicense) to make, use and sell the
Duragesic-Registered Trademark- and Testoderm-Registered Trademark-
products. These licenses for each product are exclusive until thirteen
years after the actual reduction to practice of such product and become
nonexclusive thereafter. For Testoderm-Registered Trademark-, the period
of ALZA's exclusivity ends July 26, 1998. For Duragesic-Registered
Trademark-, the period of ALZA's exclusivity ends December 4, 1998.
-9-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
If ALZA's license for a product becomes nonexclusive, the General
Partner will need to determine whether to appoint others to market and
sell the product. Under ALZA's agreement with Janssen covering the
Duragesic-Registered Trademark- product, if the product were to be
introduced by a third party after ALZA's loss of exclusivity from the
Partnership, ALZA's royalty rate due from Janssen with respect to
Duragesic-Registered Trademark- would drop significantly. The
Partnership's right to receive 4% of net sales from ALZA would not
change. It is likely that ALZA Development Corporation, a wholly-
owned subsidiary of ALZA, would have a conflict of interest in
connection with any Partnership decision as to whether the product
should be licensed to a third party in addition to ALZA. In such
an event, ALZA Development Corporation would likely resign as the
General Partner and the Partnership would have to appoint a new
general partner.
The General Partner has an option (the "Purchase Option"), exercisable at
any time, to purchase all (but not less than all) of the Limited Partners'
interests in the Partnership. The exercise price is $120 million, less
Excess Cash distributed to the Limited Partners. The exercise price will
be paid by check to the Limited Partners. The General Partner is under no
obligation to exercise the Purchase Option, and the General Partner will
exercise the Purchase Option only if ALZA deems such exercise to be in its
best interest. The General Partner has not made a determination as to
whether to exercise the Purchase Option.
RESULTS OF OPERATIONS
From 1982 through 1987 the Partnership utilized all of the funds raised
at the time of its formation, primarily to fund product development at
ALZA. Until the introduction of Duragesic-Registered Trademark- in 1991,
the Partnership had been without cash for either operations or
distribution since 1987.
-10-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
The Partnership earned net income of $2,144,718 and $4,194,295 for the
three and six months ended June 30, 1997 as compared with $1,811,044 and
$3,006,707 for the three and six months ended June 30, 1996. The
Partnership's royalty income received from ALZA based on Janssen's
reported net sales of Duragesic-Registered Trademark- and ALZA's net
sales of Testoderm-Registered Trademark- was $1,911,236 and $3,992,457
for the three and six months ended June 30, 1997 as compared with
$1,821,191 and $3,038,740 for the three and six months ended June 30,
1996. The increase is due to increased sales of Duragesic-Registered
Trademark-. In addition, during the second quarter of 1997, the
Partnership received a license fee from ALZA relating to
Testoderm-Registered Trademark- as described below. 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.
During the fourth quarter of 1996, an agreement was signed with Ferring NV
pursuant to which Ferring has the right to distribute Testoderm-Registered
Trademark- in 12 European countries. As a result of the execution of the
agreement with Ferring, during the second quarter of 1997, 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-.
The Partnership had interest income of $10,312 and $18,671 for the three
and six months ended June 30, 1997 as compared with interest income of
$8,294 and $13,858 for the three and six months ended June 30, 1996. The
increase was due to a higher level of cash available for investment during
the second quarter of 1997 as a result of the higher royalty payment and
license fee payment received from ALZA during the quarter.
-11-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
General and administrative expenses for the continuing administrative
support required for the Partnership are payable to ALZA under an
administrative services agreement between ALZA and the Partnership.
General and administrative expenses were $26,830 and $66,833 for the three
and six months ended June 30, 1997 as compared with $18,441 and $45,891 for
the three and six months ended June 30, 1996. The increase is due to the
timing of certain payments, including the payment to the Partnership's
auditor for professional services.
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 costs for administrative services totaled $295,000. Such costs
were due and payable to ALZA upon invoice but were not paid when due. In
1991, ALZA agreed that the costs could be reimbursed over time, initially,
at a quarterly rate of $5.00 per Partnership unit, which were deducted from
Excess Cash from December 1991 through December 1993. In March 1994, the
quarterly rate was increased to $10.00 per Partnership unit. In June 1996,
it was determined that a further increase in the reimbursement rate was
necessary to fully reimburse ALZA for past administrative costs on a more
timely basis. Therefore, beginning with the September 1996 distribution, a
quarterly deduction has been made from Excess Cash in an amount equal to
the actual administrative expenses of the Partnership for the previous
quarter plus the $10.00 per Partnership unit to repay past administrative
costs. ALZA has not charged any interest on the past due amounts. At the
rate of $10.00 per Partnership unit per quarter, all remaining past
administrative costs, totaling $31,488 as of June 30, 1997, are expected to
be repaid by the fourth quarter of 1997. As of June 30, 1997, payments for
past and current administrative expenses totaled $168,505. In 1994, 1995
and 1996, payments made to ALZA for past and current
-12-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
administrative expenses totaled $135,307, $138,607 and $172,459,
respectively.
-13-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
-14-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALZA TTS Research Partners, Ltd.
(Registrant)
By: ALZA Development Corporation
General Partner
By: /s/ David R. Hoffmann
---------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant by its General Partner and in the capacities and on the dates
indicated.
Date: August 11, 1997 By: /s/ David R. Hoffmann
-----------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Date: August 11, 1997 By: /s/ James W. Young
-----------------------
James W. Young
Vice President and
Director
-15-
<PAGE>
ALZA TTS Research Partners, Ltd.
June 30, 1997
Exhibit Index
EXHIBIT
- -------
27 Financial Data Schedule
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 96
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 96
<CURRENT-LIABILITIES> 62
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 34
<TOTAL-LIABILITY-AND-EQUITY> 96
<SALES> 0
<TOTAL-REVENUES> 4,261
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,194
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,194
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
