<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________.
Commission File Number 0-11839
ALZA TTS RESEARCH PARTNERS, LTD.
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(Exact name of registrant as specified in its charter)
California 94-2863497
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(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification Number)
950 Page Mill Road, P.O. Box 10950, Palo Alto, CA, 94303-0802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 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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<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 March 31,
1998 1997
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<S> <C> <C>
REVENUE:
Royalty income $ 2,644,646 $ 2,081,221
Interest income 11,345 8,359
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Total revenue 2,655,991 2,089,580
EXPENSES:
General and administrative 37,251 40,003
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NET INCOME $ 2,618,740 $ 2,049,577
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----------- -----------
ALLOCATION OF NET INCOME:
General Partner $ 26,187 $ 20,496
Class A Limited Partners 2,477,328 1,938,900
Class B Limited Partner 115,225 90,181
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NET INCOME $ 2,618,740 $ 2,049,577
----------- -----------
----------- -----------
NET INCOME PER CLASS A
LIMITED PARTNERSHIP UNIT $ 774.17 $ 605.91
----------- -----------
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</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Assets, Liabilities and
Partners' Capital
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
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(unaudited)
<S> <C> <C>
Current assets - Cash $ 120,454 $ 109,262
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---------- ---------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities - Payable to
ALZA Corporation $ 37,098 $ 17,635
Partners' capital:
Class A Limited Partners,
3,200 units outstanding 74,007 81,863
Class B Limited Partner 8,500 8,864
General Partner 849 900
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Total partners' capital 83,356 91,627
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$ 120,454 $ 109,262
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</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statement of Partners' Capital
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Total
Limited Limited General Partners'
Partners Partner Partner Capital
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
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 8,469,527 393,932 89,530 8,952,989
Payments to partners (8,317,760) (386,873) (87,934) (8,792,567)
----------- ---------- --------- -----------
BALANCE,
DECEMBER 31, 1997 81,863 8,864 900 91,627
Net income 2,477,328 115,225 26,187 2,618,740
Payments to partners (2,485,184) (115,589) (26,238) (2,627,011)
----------- ---------- --------- -----------
BALANCE,
MARCH 31, 1998 $ 74,007 $ 8,500 $ 849 $ 83,356
----------- ---------- --------- -----------
----------- ---------- --------- -----------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A limited partnership)
Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
Increase (Decrease) in Cash
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,618,740 $ 2,049,577
Adjustments to reconcile net income
to net cash used in operating
activities:
Payments to Partners (2,627,011) (2,017,704)
Increase (decrease) in liabilities:
Payable to ALZA Corporation 19,463 (23,454)
----------- -----------
Net cash provided by operating
activities 11,192 8,419
Cash at beginning of period 109,262 77,586
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Cash at end of period $ 120,454 $ 86,005
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1998
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, 1997. The accompanying interim
financial statements of the Partnership for the three months ended March
31, 1998 and March 31, 1997 are unaudited but include all adjustments which
the General Partner (ALZA Development Corporation, a wholly-owned
subsidiary of ALZA Corporation ("ALZA")) 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 ALZA's proprietary transdermal
therapeutic systems technology with certain generic compounds (the "TTS
Partnership Products"). On April 22, 1983, the closing of the sale to the
public of Class A Limited Partnership units took place. At March 31, 1998,
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 the General Partner and 99%
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ALZA TTS Research Partners, Ltd.
March 31, 1998
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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ALZA TTS Research Partners, Ltd.
March 31, 1998
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), the two major product
development programs funded by the Partnership. In addition, in 1996, ALZA
Pharmaceuticals introduced Testoderm-Registered Trademark- with Adhesive as
an addition to the Testoderm-Registered Trademark- line.
Testoderm-Registered Trademark- with Adhesive was developed without
Partnership funds. However, regulatory clearance of the product was
obtained through a supplemental New Drug Application to the
Testoderm-Registered Trademark- New Drug Application, and ALZA makes the
same payment to the Partnership with respect to Testoderm-Registered
Trademark- with Adhesive as it does with respect to the original
Testoderm-Registered Trademark- product.
For the quarter ended March 31, 1998, cash provided from royalties
increased to $2,644,646 from $2,081,221 for the same period of 1997.
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
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ALZA TTS Research Partners, Ltd.
March 31, 1998
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 30 other countries worldwide.
The product has been cleared for marketing in thirteen additional
countries. Submissions for marketing clearance 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-and Testoderm-Registered Trademark- with Adhesive in the
United States. Testoderm-Registered Trademark- has also been cleared for
marketing in China, Singapore and in more than ten European countries.
Testoderm-Registered Trademark- with Adhesive has also been cleared for
marketing in Germany and Singapore. ALZA Pharmaceuticals plans to
market the Testoderm-Registered Trademark- line through distributors
outside the United States. Commercialization agreements currently
covering the distribution of the Testoderm-Registered Trademark- line in
14 Asian countries (excluding Japan) have been signed with Scitech
Genetics Limited ("Scitech") and Pharmagenesis, Inc. Scitech launched
Testoderm-Registered Trademark- in Singapore in January 1997. An
agreement was signed during the fourth quarter of 1996 with Ferring NV
(together with its affiliates "Ferring"), pursuant to which Ferring has
the right to distribute Testoderm-Registered Trademark- and
Testoderm-Registered Trademark- with Adhesive in 12 European countries.
On April 2, 1998, Ferring launched Testoderm-Registered Trademark- with
Adhesive in Germany.
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
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ALZA TTS Research Partners, Ltd.
March 31, 1998
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. Each license is exclusive until thirteen years after the actual
reduction to practice of the relevant product and 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.
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 would have a conflict of
interest in connection with any Partnership decision as to whether
Testoderm-Registered Trademark- or Duragesic-Registered Trademark- 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 a
new general partner would have to be appointed.
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
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ALZA TTS Research Partners, Ltd.
March 31, 1998
the Limited Partners. As of March 31, 1998, the exercise price would be
$27,216 per $5,000 unit. 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.
The Partnership's internal computer systems are not currently year 2000
compliant. However, the Partnership is exploring methods to achieve year
2000 compliance and does not expect the cost of ensuring year 2000
compliance to be significant. There is no guarantee that the systems of
the General Partner and other companies with which the Partnership either
directly or indirectly interacts will not be affected by computer problems
arising from the year 2000. However, the Partnership does not expect its
financial condition or results of operations to be materially adversely
affected by year 2000 issues.
RESULTS OF OPERATIONS
From 1982 through 1987, the Partnership utilized all of the funds raised at
the time of its formation, primarily to fund product development at ALZA.
Until the introduction of Duragesic-Registered Trademark- in 1991, the
Partnership had been without cash for either operations or distribution
since 1987.
The Partnership earned net income during the first quarter of 1998 of
$2,618,740 as compared to $2,049,577 for the first quarter of 1997. 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- and Testoderm-Registered Trademark- with
Adhesive was $2,644,646 during the first quarter of 1998 as compared to
$2,081,221 for the first quarter of 1997. 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;
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ALZA TTS Research Partners, Ltd.
March 31, 1998
therefore, its potential royalty stream and income are not within the
Partnership's control.
The Partnership had interest income of $11,345 for the first quarter of
1998 as compared to interest income of $8,359 for the first quarter of
1997. The increase was due to a higher level of cash available for
investment during the first quarter of 1998 as a result of the higher
royalty payment received from ALZA during the quarter.
General and administrative expenses for the continuing administrative
support required for the Partnership are payable to ALZA under an
administrative services agreement between ALZA and the Partnership.
General and administrative expenses were $37,251 for the first quarter of
1998 as compared to $40,003 for the first quarter of 1997. Current general
and administrative expenses are paid to ALZA in the quarter following the
quarter in which the expenses were incurred.
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1998
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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<PAGE>
ALZA TTS Research Partners, Ltd.
March 31, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant by its General Partner and in the
capacities and on the dates indicated.
Date: May 14, 1998 By: /s/ David R. Hoffmann
-------------------------------
David R. Hoffmann
President (Chief Executive
Officer), Chief Financial
Officer and Director
Date: May 14, 1998 By: /s/ James W. Young
-------------------------------
James W. Young
Vice President and
Director
Date: May 14, 1998 By: /s/ Robert M. Myers
-------------------------------
Robert M. Myers
Vice President and
Director
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ALZA TTS Research Partners, Ltd.
March 31, 1998
Exhibit Index
Exhibit
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27 Financial Data Schedule
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 120
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 120
<CURRENT-LIABILITIES> 37
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 83
<TOTAL-LIABILITY-AND-EQUITY> 120
<SALES> 0
<TOTAL-REVENUES> 2656
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<INCOME-PRETAX> 2619
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</TABLE>
