<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended September 30, 1997 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________.
Commission File Number 0-11839
ALZA TTS RESEARCH PARTNERS, LTD.
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(Exact name of registrant as specified in its charter)
California 94-2863497
--------------------------------- ----------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification Number)
950 Page Mill Road, P.O. Box 10950, Palo Alto, CA, 94303-0802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 494-5300
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Revenue Collected and Expenses
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Royalty income $ 2,437,181 $ 1,466,697 $6,429,638 $4,505,437
License fee - - 250,000 -
Interest income 2,110 7,054 20,781 20,912
----------- ------------ ---------- ----------
Total revenue 2,439,291 1,473,751 6,700,419 4,526,349
EXPENSES:
General and administrative 20,973 12,711 87,805 58,602
----------- ------------ ---------- ----------
NET INCOME $ 2,418,318 $ 1,461,040 $6,612,614 $4,467,747
----------- ------------ ---------- ----------
----------- ------------ ---------- ----------
Allocation of net income:
General Partner $ 24,183 $ 14,610 $ 66,126 $ 44,678
Class A Limited Partners 2,287,729 1,412,245 6,255,533 4,388,884
Class B Limited Partner 106,406 34,185 290,955 34,185
----------- ------------ ---------- ----------
NET INCOME $ 2,418,318 $ 1,461,040 $6,612,614 $4,467,747
----------- ------------ ---------- ----------
----------- ------------ ---------- ----------
NET INCOME PER CLASS A
LIMITED PARTNERSHIP UNIT $ 714.91 $ 441.33 $ 1,954.85 $ 1,371.53
----------- ------------ ---------- ----------
----------- ------------ ---------- ----------
</TABLE>
See accompanying notes.
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ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Assets, Liabilities and
Partners' Capital (Deficit)
September 30, December 31,
ASSETS 1997 1996
------------- ------------
(unaudited)
Current assets - Cash $ 98,427 $ 77,586
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities - Payable to
ALZA Corporation $ 20,973 $ 146,381
Partners' capital (deficit):
Class A Limited Partners,
3,200 units outstanding 68,445 (69,904)
Class B Limited Partner 8,239 1,805
General Partner 770 (696)
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Total partners' capital (deficit) 77,454 (68,795)
---------- ----------
Total liabilities and partners'
capital (deficit) $ 98,427 $ 77,586
---------- ----------
---------- ----------
See accompanying notes.
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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 6,255,533 290,955 66,126 6,612,614
Payments to
partners (6,117,184) (284,521) (64,660) (6,466,365)
----------- ---------- --------- ------------
BALANCE,
SEPTEMBER 30,
1997 $ 68,445 $ 8,239 $ 770 $ 77,454
----------- ---------- --------- ------------
----------- ---------- --------- ------------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
Increase (Decrease) in Cash
(unaudited)
Nine Months Ended September 30,
1997 1996
------------ ------------
Cash flows from operating activities:
Net income $ 6,612,614 $ 4,467,747
Adjustments to reconcile net income
to net cash used in operating
activities:
Payments to Partners (6,466,365) (4,384,516)
Decrease in liabilities:
Payable to ALZA Corporation (125,408) (62,317)
----------- -----------
Net cash provided by operating
activities 20,841 20,914
Cash at beginning of period 77,586 48,245
----------- -----------
Cash at end of period $ 98,427 $ 69,159
----------- -----------
----------- -----------
See accompanying notes.
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<PAGE>
ALZA TTS Research Partners, Ltd.
September 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 nine months ended September
30, 1997 and September 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 September
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:
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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, 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.
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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 September
30, 1997, cash provided from royalties from Duragesic-Registered Trademark-
and Testoderm-Registered Trademark- increased to $2,437,181 from $1,466,697
for the same period of 1996. The increase is due to increased sales of
Duragesic-Registered Trademark-. 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 five additional countries.
Submissions for marketing clearance
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are on file in a number of other countries. ALZA Pharmaceuticals, the sales
and marketing division of ALZA, co-promotes Duragesic-Registered Trademark-
in the United States with Janssen.
ALZA, through ALZA Pharmaceuticals, markets Testoderm-Registered
Trademark-in the United States. 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,
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1998. For Duragesic-Registered Trademark-, the period of ALZA's 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. It is likely that ALZA Development
Corporation, a wholly-owned subsidiary of ALZA, would have a conflict of
interest in connection with any Partnership decision as to whether the
product should be licensed to a third party in addition to ALZA. In such an
event, ALZA Development Corporation would likely resign as the General
Partner and the Partnership would have to appoint a new general partner.
The General Partner has an option (the "Purchase Option"), exercisable at
any time, to purchase all (but not less than all) of the Limited Partners'
interests in the Partnership. The exercise price is $120 million, less
Excess Cash distributed to the Limited Partners. The exercise price will be
paid by check to the Limited Partners. The General Partner is under no
obligation to exercise the Purchase Option, and the General Partner will
exercise the Purchase Option only if ALZA deems such exercise to be in its
best interest. The General Partner has not made a determination as to
whether to exercise the Purchase Option.
RESULTS OF OPERATIONS
From 1982 through 1987 the Partnership utilized all of the funds raised
at the time of its formation, primarily to fund product development at ALZA.
Until the
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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 $2,418,318 and $6,612,614 for the
three and nine months ended September 30, 1997 as compared with $1,461,040
and $4,467,747 for the three and nine months ended September 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 $2,437,181 and $6,429,638 for the three
and nine months ended September 30, 1997 as compared with $1,466,697 and
$4,505,437 for the three and nine months ended September 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 $2,110 and $20,781 for the three
and nine months ended September 30, 1997 as compared with interest income of
$7,054 and $20,912 for the three and nine months ended September 30, 1996.
General and administrative expenses for the continuing administrative
support required for the Partnership are payable to ALZA under an administrative
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services agreement between ALZA and the Partnership. General and
administrative expenses were $20,973 and $87,805 for the three and nine
months ended September 30, 1997 as compared with $12,711 and $58,602 for the
three and nine months ended September 30, 1996. The increase is due to
normal quarterly fluctuations in addition to the timing of certain payments,
including payments to the Partnership's auditor for professional services and
payments relating to the filing of the Partnership's annual report on Form
10-K.
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. All remaining past
administrative costs were paid as of September 30, 1997. As of September 30,
1997, payments for past and current administrative expenses totaled $230,823.
In 1994, 1995 and 1996, payments made to ALZA for past and current
administrative expenses totaled $135,307, $138,607 and $172,459, respectively.
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ALZA TTS Research Partners, Ltd.
September 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.
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ALZA TTS Research Partners, Ltd.
September 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: November 13, 1997 By: /s/ David R. Hoffmann
----------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Date: November 13, 1997 By: /s/ James W. Young
--------------------
James W. Young
Vice President and
Director
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Exhibit Index
Exhibit
27 Financial Data Schedule
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 98
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 98
<CURRENT-LIABILITIES> 21
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 77
<TOTAL-LIABILITY-AND-EQUITY> 98
<SALES> 0
<TOTAL-REVENUES> 6700
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6613
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6613
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
