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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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
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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 Identification
of incorporation or organization) No.)
950 PAGE MILL ROAD, P.O. BOX 10950, PALO 94303-0802
ALTO, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 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, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
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<S> <C>
Item 1. Business........................................................................................... 1
Item 2. Properties......................................................................................... 4
Item 3. Legal Proceedings.................................................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders................................................ 4
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......................... 5
Item 6. Selected Financial Data............................................................................ 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 5
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................ 7
Item 8. Financial Statements and Supplementary Data........................................................ 7
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 7
Item 10. Directors and Executive Officers of the Registrant................................................ 8
Item 11. Executive Compensation............................................................................ 8
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 8
Item 13. Certain Relationships and Related Transactions.................................................... 9
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 9
</TABLE>
<PAGE>
PART I
ITEM 1. 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 with ALZA's proprietary transdermal
("D-TRANS-TM-") therapeutic systems technology. In order to undertake its
development activities, the Partnership obtained from ALZA a nonexclusive,
worldwide, royalty-free license to use ALZA's D-TRANS-TM- 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, and has not engaged in product
development activities, since that time.
A substantial portion of the Partnership's total funds was allocated to two
major product development programs, a D-TRANS-TM- fentanyl product and a
D-TRANS-TM- testosterone product. The fentanyl product is a 72-hour transdermal
therapeutic system which delivers the narcotic analgesic fentanyl. In August
1990, the product (which is being marketed under the trade name
Duragesic-Registered Trademark- in the United States and
Durogesic-Registered Trademark- outside the United States) (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. The product
has been cleared for marketing in more than 35 additional countries, including
several in each of Europe, South America and Asia (excluding Japan). It 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.
The testosterone product developed on behalf of the Partnership is a
controlled release dosage form of the major male hormone testosterone indicated
for testosterone replacement therapy in males for conditions associated with a
deficiency or absence of endogenous testosterone. The product 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-.
Testoderm-Registered Trademark- has also been cleared for marketing in China,
Singapore and in more than ten European countries. In 1996, ALZA Pharmaceuticals
introduced Testoderm-Registered Trademark- with Adhesive as an addition to the
Testoderm-Registered Trademark- line. This product 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 ("NDA"), and ALZA makes the
same payments to the Partnership with respect to Testoderm-Registered Trademark-
with Adhesive as it does with respect to the original
Testoderm-Registered Trademark- product.
ALZA Pharmaceuticals plans to commercialize this product outside the United
States through distributors. Commercialization agreements for
Testoderm-Registered Trademark- were signed with Scitech Genetics Limited
("Scitech") and with Pharmagenesis, Inc. ("Pharmagenesis") in 1995 covering 17
Asian countries (excluding Japan). Scitech launched
Testoderm-Registered Trademark- in Singapore in January 1997. During the fourth
quarter of 1996,
1
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ALZA signed an agreement with Ferring NV (together with its affiliates,
"Ferring") pursuant to which Ferring has the right to market
Testoderm-Registered Trademark- in 12 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.
CONTINUATION OPTION
At the time of its funding, 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.
Development of the Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- products was completed by ALZA, without the use
of the Partnership's funds, under the Continuation Option.
LICENSE OPTION
The Partnership also 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, to 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 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. 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- and 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.
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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 exercise price is $120 million, less Excess
Cash (as defined in the Agreement of Limited Partnership (the "Partnership
Agreement")) distributed to the Limited Partners. The exercise price would be
paid by check to the Limited Partners. As of December 31, 1997, the purchase
price would be $27,992 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.
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. 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 25 other countries, including several in each
of Europe, South America and Asia (excluding Japan). 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.
ALZA has entered into a commercialization agreement with Scitech 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 to distribute in
China, Hong Kong, Macau and Taiwan. Scitech launched
Testoderm-Registered Trademark- in Singapore in January 1997. ALZA also entered
into an agreement with Ferring pursuant to which Ferring has the right to
distribute the Testoderm-Registered Trademark- product in Austria, Belgium,
Denmark, Finland, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden,
Switzerland and the United Kingdom.
PATENTS
Patent protection generally has been important in the pharmaceutical
industry, and patent applications with respect to the TTS Partnership Products
were 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 the D-TRANS-TM- 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.
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 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.
3
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The Duragesic-Registered Trademark- product is cleared for marketing in the
United States, and in more than 35 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.
In March of 1998, ALZA launched a transdermal testosterone product under the
trade name Testoderm-Registered Trademark- TTS (testosterone transdermal system)
CIII which is designed to be worn on the arm, back or torso and which will
compete with the Partnership's Testoderm-Registered Trademark- product, which is
worn on the scrotum. It should be expected that sales of
Testoderm-Registered Trademark- TTS will erode sales of the Partnership's
transdermal testosterone product.
Other 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.
REVENUES
For the years ended December 31, 1997, 1996 and 1995, the Partnership had
royalty income of $8,776,814, $6,265,401 and $4,441,708, respectively, derived
from net sales of Duragesic-Registered Trademark- and
Testoderm-Registered Trademark-. In addition, as a result of the agreement
between ALZA and Ferring, the Partnership received a $250,000 license fee from
ALZA in 1997 relating to Testoderm-Registered Trademark-. Interest income for
the years ended December 31, 1997, 1996 and 1995 was $31,687, $28,995 and
$20,192, 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.
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.
4
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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 1997, 1996 and
1995, $8,792,567, $6,097,442 and $4,306,401, respectively, were distributed to
the Limited Partners and the General Partner.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Royalty income....................................... $ 8,776,814 $ 6,265,401 $ 4,441,708 $ 3,167,914 $ 2,720,568
License fee.......................................... 250,000 -- -- -- --
Interest............................................. 31,687 28,995 20,192 10,398 7,759
Net income........................................... 8,952,989 6,207,848 4,361,647 3,082,860 2,634,523
Net income, Class A Limited Partners................. 8,469,527 6,035,020 4,318,031 3,052,032 2,608,178
Net income, Class B Limited Partner.................. 393,932 110,749 -- -- --
Net income, General Partner.......................... 89,530 62,079 43,616 30,828 26,345
Total assets......................................... 109,262 77,586 48,245 28,155 17,757
Total liabilities.................................... 17,635 146,381 227,446 262,602 302,456
Total Cash Distributions............................. 8,792,567 6,097,442 4,306,401 3,032,608 2,652,914
Class A Partners................................... 8,317,760 5,768,192 4,073,856 2,868,864 2,509,632
Class B Partner.................................... 386,873 268,287 189,481 133,435 116,728
General Partner.................................... 87,934 60,963 43,064 30,309 26,554
</TABLE>
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) ("Total Funds") 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, 1997, cash
received from royalties from Duragesic-Registered Trademark- and
Testoderm-Registered Trademark- increased to $8,776,814 from $6,265,401 for
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.
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.
5
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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 $8,952,989, $6,207,848 and $4,361,647
for 1997, 1996 and 1995, respectively. The Partnership received royalty income
of $8,776,814, $6,265,401 and $4,441,708 for 1997, 1996 and 1995, 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-. In addition, as a result of
the execution of the agreement between ALZA and Ferring, the Partnership
received a license fee of $250,000 from ALZA in 1997 pursuant to the terms of
the License Agreement between the Partnership and ALZA with respect to
Testoderm-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 $31,687, $28,995, and $20,192
during the years ended December 31, 1997, 1996 and 1995, respectively. The
increase was due to a higher level of cash available for investment during 1997
as a result of the higher royalty payments received from ALZA.
Under the terms of 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 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 in proportion to the
Partners' respective capital contribution percentages.
There were no research and development expenses in 1997, 1996, or 1995 due
to the fact that the Partnership had expended all of its Total Funds.
General and administrative expenses were $105,512, $86,548, and $100,253 for
the years ended December 31, 1997, 1996 and 1995, respectively. These expenses
are payable to ALZA under an administrative services agreement between ALZA and
the Partnership.
In 1995 and 1996, payments made to ALZA for past and current administrative
services totaled $138,607 and $172,459, respectively. In 1997, payments for past
and current administrative services totaled $256,496. 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
6
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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
was 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 had not charged any interest on
the past due amounts. All remaining past administrative costs were paid in full
as of September 30, 1997.
On November 20, 1997, an unsolicited tender offer was filed on Schedule
14D-1 with the Securities and Exchange Commission ("SEC") by PharmaInvest,
L.L.C., on behalf of Pharmaceutical Royalties, L.L.C. and Pharmaceutical Royalty
Investments, Ltd., to purchase up to 1,400 units, representing approximately 44%
of the total outstanding units of the Partnership. On December 4, 1997, the
Partnership filed a Schedule 14D-9 with the SEC in response to the filing by
PharmaInvest, L.L.C. On December 19, 1997, PharmaInvest, L.L.C. filed an
amendment with the SEC extending the time for the offer. On January 16, 1998,
PharmaInvest, L.L.C. filed an additional amendment with the SEC to extend the
term and increase the offer. On January 26, 1998, the Partnership filed an
amendment to its Schedule 14D-9 in response to the two amendments by
PharmaInvest, L.L.C. As a result of this tender offer, approximately 76 units
have been transferred to PharmaInvest, L.L.C.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are 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.
7
<PAGE>
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 since its inception. James W.
Young was named a director and a Vice President of the General Partner in 1996
to replace a retired director. Robert M. Myers was named a director and a Vice
President of the General Partner in 1997 to replace a retired director.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
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<S> <C> <C>
David R. Hoffmann...... 53 President (Chief Executive Officer), Chief Financial Officer,
Secretary and Director of the General Partner; Vice President (since
1985) and Treasurer of ALZA (since 1987)
James W. Young......... 53 Vice President and Director of the General Partner; Senior Vice
President, Research and Development of ALZA (since 1997); Senior
Vice President, Commercial Development of ALZA (1995-1997); Senior
Vice President, Corporate Development and President, Pharmaceutical
Division of Affymax NV (1992-1995)
Robert M. Myers........ 34 Vice President and Director of the General Partner; Vice President,
Commercial Development of ALZA (since 1997); Senior Director,
Commercial Development (1996-1997); Director, Commercial Development
(1995-1996); Director, Development Programs (1994-1995); Manager,
Strategic Projects (1993-1994); Manager, ET Product Development
(1992-1993)
</TABLE>
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
AMOUNT AND NATURE OF BENEFICIAL OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS CLASS
- ---------------------- --------------------------------------- --------------------------------------- -----------
<S> <C> <C> <C>
General Partnership ALZA Development Corporation General Partnership Interest 100%
Interest 950 Page Mill Road which amounts to 1% of the
P.O. Box 10950 total capital of the Partnership.
Palo Alto, CA
94303-0802
Class B Limited Stada Arzneimittel AG, Class B Limited Partnership 100%
Partnership Interest Stadastrasse 2-18 61118 Interest which amounts to
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 by check), less Excess Cash distributed to the Limited Partners by the
Partnership. As of December 31, 1997, the purchase price would be $27,992 per
$5,000 unit.
8
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of an administrative services agreement between ALZA and the
Partnership, in 1997 the Partnership paid ALZA a total of $256,496 for past and
current administrative expenses.
PART IV
ITEM 14. EXHIBITS, 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.
9
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
INDEX TO FINANCIAL STATEMENTS
(ITEM 14(a))
<TABLE>
<CAPTION>
PAGE
FINANCIAL STATEMENTS: NUMBER
- -------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................... 14
Statements of Assets, Liabilities, and Partners' Capital (Deficit) at December 31, 1997 and 1996........ 15
Statements of Revenue Collected and Expenses for the Years ended December 31, 1997, 1996 and 1995....... 16
Statements of Partners' Capital (Deficit) for the Years ended December 31, 1997, 1996, 1995............. 17
Statements of Cash Flows for the Years ended December 31, 1997, 1996 and 1995........................... 18
Notes to Financial Statements........................................................................... 19 - 23
Additional Information.................................................................................. 24 - 27
</TABLE>
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.
10
<PAGE>
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
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.
<TABLE>
<S> <C>
Date: March 30, 1998 /s/ DAVID R. HOFFMANN
----------------------------------------
David R. Hoffmann
PRESIDENT (CHIEF EXECUTIVE OFFICER),
CHIEF FINANCIAL OFFICER AND DIRECTOR
Date: March 30, 1998 /s/ JAMES W. YOUNG
----------------------------------------
James W. Young
DIRECTOR AND VICE PRESIDENT
Date: March 30, 1998 /s/ ROBERT M. MYERS
----------------------------------------
Robert M. Myers
DIRECTOR AND VICE PRESIDENT
</TABLE>
11
<PAGE>
EXHIBIT INDEX
ALZA TTS RESEARCH PARTNERS, LTD.
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER NAME
- ------------- --------------------------------------------------------------------------------------------------------
<C> <S>
13 Financial Statements and Additional Information
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
12
<PAGE>
EXHIBIT 13
ALZA TTS RESEARCH PARTNERS, LTD.
(A LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
WITH
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
13
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and
its revenue collected and expenses and cash flows for each of the three years in
the period ended December 31, 1997, 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, 1998
14
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF ASSETS, LIABILITIES, AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................... $ 109,262 $ 77,586
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Payable to ALZA Corporation........................................................ $ 17,635 $ 146,381
Partners' capital (deficit):
Class A Limited Partners, 3,200 units outstanding.................................. 81,863 (69,904)
Class B Limited Partner............................................................ 8,864 1,805
General Partner.................................................................... 900 (696)
------------ ------------
Total partners' capital (deficit)................................................ 91,627 (68,795)
------------ ------------
$ 109,262 $ 77,586
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
15
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF REVENUE COLLECTED AND EXPENSES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Royalty income........................................................ $ 8,776,814 $ 6,265,401 $ 4,441,708
License fee........................................................... 250,000 -- --
Interest income....................................................... 31,687 28,995 20,192
------------ ------------ ------------
Total revenue....................................................... 9,058,501 6,294,396 4,461,900
EXPENSES:
General and administrative............................................ 105,512 86,548 100,253
------------ ------------ ------------
NET INCOME.............................................................. $ 8,952,989 $ 6,207,848 $ 4,361,647
------------ ------------ ------------
------------ ------------ ------------
ALLOCATION OF NET INCOME:
General Partner....................................................... $ 89,530 $ 62,079 $ 43,616
Class A Limited Partners.............................................. 8,469,527 6,035,020 4,318,031
Class B Limited Partner............................................... 393,932 110,749 --
------------ ------------ ------------
$ 8,952,989 $ 6,207,848 $ 4,361,647
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
16
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
TOTAL
CLASS A CLASS B PARTNERS'
LIMITED LIMITED GENERAL CAPITAL
PARTNERS PARTNER PARTNER (DEFICIT)
------------- ----------- ---------- -------------
<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................................................. 8,469,527 393,932 89,530 8,952,989
Payment to Partners........................................ (8,317,760) (386,873) (87,934) (8,792,567)
------------- ----------- ---------- -------------
BALANCE DECEMBER 31, 1997.................................. $ 81,863 $ 8,864 $ 900 $ 91,627
------------- ----------- ---------- -------------
------------- ----------- ---------- -------------
</TABLE>
See accompanying notes.
17
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 8,952,989 $ 6,207,848 $ 4,361,647
Adjustments to reconcile net income to net cash used in operating
activities:
Decrease in liabilities:
Payable to ALZA Corporation.................................. (128,746) (81,065) (35,156)
Payments to partners............................................... (8,792,567) (6,097,442) (4,306,401)
------------- ------------- -------------
Net increase in cash................................................. 31,676 29,341 20,090
Cash at beginning of year............................................ 77,586 48,245 28,155
------------- ------------- -------------
Cash at end of year.................................................. $ 109,262 $ 77,586 $ 48,245
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
18
<PAGE>
ALZA TTS RESEARCH PARNTERS, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 ("D-TRANS-TM-") therapeutic
systems 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, 1997 and 1996, 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: $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) 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 net 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 accounting and legal
expenses, quarterly reports, tax returns and auditor's reports).
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. A D-TRANS-TM- fentanyl product (marketed under the trade
name Duragesic-Registered Trademark- in the United States and
Durogesic-Registered Trademark- outside the United States) and a D-TRANS-TM-
testosterone product (marketed under the trade name
Testoderm-Registered Trademark-) were completed by ALZA under the continuation
option. Duragesic-Registered Trademark- has been cleared for marketing in the
United States and in more than 35 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. In 1996, ALZA,
through its sales and marketing division, ALZA Pharmaceuticals, introduced
Testoderm-Registered Trademark- with Adhesive as an addition to the
Testoderm-Registered Trademark- line. This product was developed
19
<PAGE>
ALZA TTS RESEARCH PARNTERS, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 ("NDA"), and ALZA makes the
same payments to the Partnership with respect to Testoderm-Registered Trademark-
with Adhesive as it does with respect to the original
Testoderm-Registered Trademark- product. 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. The 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 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 Pharmaceutica, Inc (together with its
affiliates, "Janssen"), a subsidiary of Johnson and Johnson, 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- and 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 would be paid by
check to the Limited Partners. As of December 31, 1997, the purchase price would
be $27,992 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.
A summary of the Partnership's significant accounting policies follows:
RESEARCH AND DEVELOPMENT:
Until 1987, when Partnership funds raised at the time of its formation 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.
20
<PAGE>
ALZA TTS RESEARCH PARNTERS, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ROYALTY INCOME:
Janssen 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 25 other countries, including several in each of Europe, South America and
Asia (excluding Japan). During the second quarter of 1994, 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 Pharmaceuticals began marketing
Testoderm-Registered Trademark- in the United States. ALZA Pharmaceuticals plans
to commercialize the product outside the United States through distributors.
Commercialization agreements for Testoderm-Registered Trademark- have been
signed with Scitech Genetics Limited ("Scitech") and Pharmagenesis, Inc.
("Pharmagenesis") in 1995 covering 17 Asian countries (excluding Japan). Scitech
launched Testoderm-Registered Trademark- in Singapore in January 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
(together with its affiliates, "Ferring") pursuant to which Ferring has the
right to market Testoderm-Registered Trademark- in 12 European countries. 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. As a result of
the agreement between ALZA and Ferring, the Partnership received a license fee
of $250,000 from ALZA in 1997 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 are made from Excess Cash. Therefore, the amount available for
distribution to the Limited Partners is net of
21
<PAGE>
ALZA TTS RESEARCH PARNTERS, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ongoing administrative expenses. 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), administrative costs were advanced by ALZA on behalf
of the Partnership. Initially, ALZA agreed that the Partnership could reimburse
these costs to ALZA over time 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 was 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 had not charged any interest on the past due amounts. All remaining past
administrative costs were paid in full as of September 30, 1997. In 1997,
payments made to ALZA for past and current administrative costs totaled
$256,496. In 1995 and 1996, payments made for past and current administrative
costs totaled $138,607 and $172,459, respectively.
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) royalty and license income
accrued to be consistent with the accounting method change and ii) the
syndication costs, which reduce partners' capital for financial reporting
purposes but which are recorded as an asset for tax purposes.
<TABLE>
<S> <C>
Partners' capital for financial reporting purposes at December
31, 1997....................................................... $ 91,627
Accounts receivable--Accrued royalty............................. 5,206,338
Syndication costs charged to partners' capital for financial
reporting purposes............................................. 1,810,059
----------
Partners' capital for tax reporting purposes at December 31,
1997........................................................... $7,108,024
----------
----------
</TABLE>
22
<PAGE>
ALZA TTS RESEARCH PARNTERS, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 ($105,512 for 1997, $86,548 for
1996 and $100,253 for 1995).
4. CONTINGENT LIABILITIES
ALZA performed research and development work during 1987 amounting to
$78,789. This amount has not been accrued for due to a contractual limitation
and will not be accrued for unless and until the Partnership has additional
funding as provided in the Partnership Agreement.
23
<PAGE>
ADDITIONAL INFORMATION
24
<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,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................... $ 109,262 $ 77,586
Accounts receivable from ALZA Corporation.......................................... 5,206,338 3,911,256
------------ ------------
Total current assets................................................................. 5,315,600 3,988,842
Syndication costs.................................................................... 1,810,059 1,810,059
------------ ------------
Total Assets......................................................................... $7,125,659 $5,798,901
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Payable to ALZA Corporation........................................................ $ 17,635 $ 146,381
------------ ------------
Total current liabilities............................................................ 17,635 146,381
Partners' capital:
Class A Limited Partners........................................................... 6,718,656 5,341,728
Class B Limited Partner............................................................ 318,309 254,267
General Partner.................................................................... 71,059 56,525
------------ ------------
Total partners' capital.............................................................. 7,108,024 5,652,520
------------ ------------
Total Liabilities and Partners' Capital.............................................. $7,125,659 $5,798,901
------------ ------------
------------ ------------
</TABLE>
25
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF ASSETS, LIABILITIES, AND PARTNERS' CAPITAL
(INCOME TAX BASIS)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
REVENUES:
Royalty income (includes $374,425 in 1996 and $374,426 in 1995
recognized due to the accounting change in 1994).................. $ 10,321,896 $ 7,612,650 $ 5,595,628
License fee......................................................... -- 250,000 --
Interest income..................................................... 31,687 28,995 20,192
------------- ------------ ------------
Total revenue..................................................... 10,353,583 7,891,645 5,615,820
EXPENSES:
General and administrative.......................................... 105,512 86,548 100,253
------------- ------------ ------------
NET INCOME............................................................ $ 10,248,071 $ 7,805,097 $ 5,515,567
------------- ------------ ------------
------------- ------------ ------------
ALLOCATION OF NET INCOME:
General Partner..................................................... $ 102,468 $ 78,061 $ 55,151
Class A Limited Partners............................................ 9,694,688 7,444,192 5,460,416
Class B Limited Partners............................................ 450,915 282,844 --
------------- ------------ ------------
$ 10,248,071 $ 7,805,097 $ 5,515,567
------------- ------------ ------------
------------- ------------ ------------
NET INCOME PER CLASS A LIMITED PARTNERSHIP UNIT....................... $ 3,029.59 $ 2,326.31 $ 1,706.38
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
26
<PAGE>
ALZA TTS RESEARCH PARTNERS, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
(INCOME TAX BASIS)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
LIMITED LIMITED GENERAL PARTNERS'
PARTNERS PARTNER PARTNER CAPITAL
------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
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
Net income.................................................... 9,694,688 450,915 102,468 10,248,071
Payments to Partners.......................................... (8,317,760) (386,873) (87,934) (8,792,567)
------------ ---------- --------- ------------
BALANCE DECEMBER 31, 1997..................................... $ 6,718,656 $ 318,309 $ 71,059 $ 7,108,024
------------ ---------- --------- ------------
------------ ---------- --------- ------------
</TABLE>
27
<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, 1998
included in the 1997 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 27, 1998
28
<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, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 109
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 109
<CURRENT-LIABILITIES> 18
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 91
<TOTAL-LIABILITY-AND-EQUITY> 109
<SALES> 0
<TOTAL-REVENUES> 9,059
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,953
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,953
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
