8-K 1 0001.txt 8K TEXT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: October 30, 2000 Date of earliest event reported: September 29, 2000 Commission File Number 1-6247 ALZA CORPORATION (Exact name of registrant as specified in its charter) Delaware 77-0142070 (State or other jurisdiction of incorporation (I.R.S.Employer of organization) Identification No.) 1900 Charleston Road, P.O. Box 7210, Mountain View, CA 94303-0802 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650)564-5000 Item 5. Other Events On September 29, 2000, ALZA Corporation ("ALZA") exercised its option to acquire all of the Class A Common Stock (the "Stock") of Crescendo Pharmaceuticals Corporation ("Crescendo") for a cash payment of $100.0 million. Crescendo was formed by ALZA for the purpose of selecting and developing new human pharmaceutical products and commercializing such products, most likely through licensing to ALZA. Since it commenced operations on September 30, 1997, Crescendo's principal activity has been conducting product development under its agreements with ALZA. ALZA exercised its option to acquire the Crescendo Stock pursuant to the terms of the purchase option set forth in Crescendo's Restated Certificate of Incorporation. The closing date of the transaction is scheduled for November 13, 2000. ALZA will fund the acquisition through available working capital. Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits Item 7a. Financial Statements of the Business Acquired ALZA incorporates by reference the following documents: - The financial statements of Crescendo and notes thereto, and the Report of Ernst and Young LLP, Independent Auditors, set forth at pages 21 to 36 under Item 8 of Crescendo's Annual Report on Form 10-K/A for the year ended December 31, 1999. - The unaudited financial statements of Crescendo and notes thereto set forth at pages 3 to 13 under Item 1 of Crescendo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. Item 7b. Pro Forma Financial Information Pro forma financial information for the year ended December 31, 1999 and the six months ended June 30, 2000 are included herein. The transaction described in Item 5 will be accounted for as a purchase, and, accordingly, the purchase price will be allocated to cash and investments, a deferred tax asset, developed products and acquired in-process research and development ("IPR&D"). The cash and investments will be valued at their fair market values at the closing date. The valuation of the deferred tax asset represents estimated future tax savings that ALZA will likely receive as a result of the Crescendo acquisition. The remaining purchase price will be allocated to developed products, as deferred product acquisition costs, and IPR&D using a risk-adjusted present value calculation of the future royalties ALZA would have paid for products Crescendo has developed and is in the process of developing. The following unaudited pro forma combined condensed financial information reflects the business combination between ALZA and Crescendo accounted for using the purchase method of accounting. The pro forma combined condensed statements of operations combine ALZA's historical statements of operations with Crescendo's historical statements of operations for the year ended December 31, 1999, and the six months ended June 30, 2000. The pro forma combined condensed statements of operations reflect the combination as if it had occurred at the beginning of each period presented. The pro forma combined balance sheet combines ALZA's historical balance sheet with Crescendo's historical balance sheet as of June 30, 2000 and reflects the combination as if it occurred at the end of the period presented. The pro forma adjustments are based on preliminary estimates, available information and assumptions that management deems appropriate. These adjustments may differ significantly from the final purchase price allocation as of the closing date of the transaction (See Note 1 to the Pro Forma Combined Condensed Financial Statements: The Acquisition). The unaudited pro forma combined condensed statements of operations are not necessarily indicative of the operating results that would have been achieved had the transaction been effected as of the beginning of such periods and should not be construed as representative of future operations. ALZA Corporation Pro Forma Combined Condensed Balance Sheet (unaudited) (In millions) June 30, 2000 Pro Forma Pro Forma ALZA Crescendo Adjustments Combined ____________________________________________________________________________ ASSETS Current assets: Cash and cash equivalents $ 183.8 $ 42.2 $(100.0)(1) $ 126.0 Short-term investments 80.1 0.1 - 80.2 Receivables, net 166.6 1.5 (16.8)(2a) 151.3 Inventories, at cost: Raw materials 19.9 - - 19.9 Work in process 17.8 - - 17.8 Finished goods 35.1 - - 35.1 Total inventories 72.8 - - 72.8 Prepaid expenses and other current assets 20.3 3.2 - 23.5 __________________________________________ Total current assets 523.6 47.0 (116.8) 453.8 Property, plant and equipment 575.7 - - 575.7 Less accumulated depreciation and amortization (160.2) - - (160.2) __________________________________________ Net property, plant and equipment 415.5 - - 415.5 Long-term investments 387.8 14.3 - 402.1 Deferred product acquisition costs 278.3 - 21.2 (1) 299.5 Cash surrender value of life insurance 178.8 - - 178.8 Other assets 195.0 0.3 28.0 (1) 223.3 __________________________________________ TOTAL ASSETS $1,979.0 $ 61.6 $ (67.6) $1,973.0 ========================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 45.2 $ 15.3 $ (15.3)(2a) $ 45.2 Accrued liabilities 64.8 - (1.5)(2a) 63.3 Other current liabilities 7.5 - - 7.5 __________________________________________ Total current liabilities 117.5 15.3 (16.8) 116.0 5% convertible subordinated debentures 495.4 - - 495.4 5 1/4% zero coupon convertible subordinated debentures 455.3 - - 455.3 Other long-term liabilities 84.4 - - 84.4 Stockholders' equity: Common stock and additional paid-in capital 764.9 297.6 (297.6)(2b) 764.9 Accumulated other comprehensive income (2.4) (0.3) 0.3 (2b) (2.4) 251.0 (2b) Retained earnings (deficit) 63.9 (251.0) (4.5)(1) 59.4 __________________________________________ Total stockholders' equity 826.4 46.3 (50.8) 821.9 TOTAL LIABILITIES AND __________________________________________ STOCKHOLDERS' EQUITY $1,979.0 $ 61.6 $ (67.6) $1,973.0 ========================================== ALZA Corporation Pro Forma Condensed Statement of Operations (unaudited) (In millions, except per share amounts) Six Months Ended June 30, 2000 _____________________________________________ Pro Forma Pro Forma ALZA Crescendo Adjustments (3) Combined _____________________________________________ Revenues: Net sales $ 243.4 $ - - $ 243.4 Royalties, fees and other 154.3 2.4 (4.4) (a) 152.3 Research and development 57.4 - (40.2) (a) 17.2 _____________________________________________ Total revenues 455.1 2.4 (44.6) 412.9 Expenses: Costs of products shipped 76.7 - (2.4) (a) 74.3 Research and development 92.7 42.2 (42.2) (a) 92.7 Selling, general and administrative 157.6 0.6 0.7 (b) 158.9 Acquisitions of in-process research and development - - - - Merger-related expenses - - - - _____________________________________________ Total expenses 327.0 42.8 (43.9) 325.9 Operating income (loss) 128.1 (40.4) (0.7) 87.0 Interest expense 30.7 - - 30.7 Interest and other income (12.6) (2.0) - (14.6) Net interest and other expense (income) 18.1 (2.0) - 16.1 Income (loss) before _____________________________________________ income taxes 110.0 (38.4) (0.7) 70.9 Provision for income taxes 34.1 - (15.6) (c) 18.5 _____________________________________________ Net income (loss) $ 75.9 $ (38.4) $ 14.9 $ 52.4 ============================================= Earnings (loss) per share Basic $ 0.74 $ (7.88) $ 0.51 Diluted $ 0.72 $ (7.88) $ 0.50 Weighted average shares Basic 102.4 4.9 102.4 Diluted 129.7 4.9 104.4 ALZA Corporation Pro Forma Condensed Statement of Operations (unaudited) (In millions, except per share amounts) Year Ended December 31, 1999 _____________________________________________ Pro Forma Pro Forma ALZA Crescendo Adjustments (3) Combined _____________________________________________ Revenues: Net sales $ 448.0 $ - $ - $ 448.0 Royalties, fees and other 227.1 2.4 (9.1) (a) 220.4 Research and development 120.8 - (91.0) (a) 29.8 _____________________________________________ Total revenues 795.9 2.4 (100.1) 698.2 Expenses: Costs of products shipped 158.4 - (2.4) (a) 156.0 Research and development 259.0 97.7 (97.7) (a) 259.0 Selling, general and administrative 183.6 1.6 1.4 (b) 186.6 Acquisitions of in-process research and development - - - - Merger-related expenses 45.7 - - 45.7 _____________________________________________ Total expenses 646.7 99.3 (98.7) 647.3 Operating income (loss) 149.2 (96.9) (1.4) 50.9 Interest expense 58.1 - - 58.1 Interest and other income (41.6) (7.4) - (49.0) Net interest and _____________________________________________ other expense (income) 16.5 (7.4) - 9.1 Income (loss) before income taxes 132.7 (89.5) (1.4) 41.8 Provision for income taxes 41.7 - (36.4) (c) 5.3 _____________________________________________ Net income (loss) $ 91.0 $ (89.5) $ 35.0 $ 36.5 ============================================= Earnings (loss) per share Basic $ 0.90 $(17.89) $ 0.36 Diluted $ 0.88 $(17.89) $ 0.35 Weighted average shares Basic 101.1 4.9 101.1 Diluted 103.5 4.9 103.5 NOTE 1 - THE ACQUISITION The total purchase price of $100.0 million will be allocated to cash and investments, a deferred tax asset, developed products and IPR&D. Allocation of the purchase price as of June 30, 2000 will be as follows (in millions): Total purchase price $ 100.0 ======== Cash and investments $ 42.8 Deferred tax asset 28.0 Deferred product acquisition costs 21.2 In-process research & development 4.5 Other assets 3.5 Cash, investments and other assets were valued at their fair market values at June 30, 2000. The deferred tax asset balance represents estimated future tax savings that ALZA will likely receive as a result of the Crescendo acquisition. The amounts allocated to developed products, as deferred acquisition costs, and IPR&D acquired from Crescendo were determined using a risk-adjusted present value calculation of the future royalties ALZA would have paid for products Crescendo has developed and is in the process of developing. Using this valuation methodology the fair value of developed products and IPR&D was calculated to be $190.2 million and $39.6 million, respectively. As the fair value of the tangible and intangible assets from the Crescendo acquisition exceed the $100 million purchase price, amounts allocated to the non-monetary assets (deferred product acquisition costs and IPR&D) have been proportionately reduced pursuant to Accounting Principles Board Opinion No. 16 "Business Combinations". The purchase price allocation at June 30, 2000 was based on preliminary estimates, available information and assumptions that management deems appropriate. The final purchase price allocation, at the closing date, may differ from the allocation as of June 30, 2000 primarily due to a change in the amount of cash and investments on hand and further research and development spending by Crescendo. To the extent cash and investment balances of Crescendo at the closing date decline from balances at June 30, 2000, the amounts allocated to deferred product acquisition costs and IPR&D will increase proportionately as discussed above. The purchase price allocation, at the closing date, is expected to be as follows (in millions): Cash and investments $14.0 - 16.0 Deferred product acquisition costs 45.0 - 50.0 Deferred tax asset 25.0 - 30.0 In-process research & development 8.0 - 12.0 NOTE 2 - ADJUSTMENTS TO THE BALANCE SHEET a. The pro forma combined condensed balance sheet for June 30, 2000 reflects the payment of the receivable and the payable of $15.3 million for the development of certain products by ALZA and funded by Crescendo. Accrued royalties of $1.5 million on sales of Ditropan XL-registered trademark- (oxybutynin chloride) that are payable by ALZA to Crescendo are also reflected as being paid prior to the purchase allocation. b. Reflects the purchase of Crescendo's net assets as of June 30, 2000. NOTE 3 - ADJUSTMENTS TO THE STATEMENTS OF OPERATIONS a. The pro forma combined condensed statements of operations for the six months ended June 30, 2000 and the year ended December 31, 1999, reflects the elimination of $40.2 million and $91.0 million, respectively, for product development revenues from Crescendo, and $4.4 million and $9.1 million of intercompany royalties and fee revenues, respectively. b. Reflects amortization of deferred product acquisition costs of $0.7 million and $1.4 million for the six months ended June 30, 2000 and the year ended December 31, 1999, respectively, assuming an estimated life cycle of 15 years for the products acquired. c. Reflects tax benefit from Crescendo's operating loss to ALZA's provision for income taxes and tax benefit on the amortization of the deferred product acquisition costs, at the statutory income tax rate of 40%. NOTE 4 - NONRECURRING CHARGES The nonrecurring charge of $4.5 million resulting from IPR&D has been reflected in the pro forma combined condensed balance sheet as of June 30, 2000. However, this charge has been excluded from the pro forma combined condensed statements of operations for the year ended December 31, 1999 and the six months ended June 30, 2000 pursuant to Article 11 of Regulation S-X. ALZA's statement of operations for the period in which the transaction will close will include the nonrecurring charge for IPR&D. Item 7c. Exhibits 20.1 Press Release dated October 2, 2000, announcing ALZA's exercise of its option to acquire Crescendo's Class A Common Stock 23.1 Consent of Ernst & Young LLP, Independent Auditors 99.1 Crescendo's Audited Financial Statements * Statement of operations for the years ended December 31, 1999, and 1998 Balance sheet at December 31, 1999 and 1998 Statement of stockholder's equity for the years ended December 31, 1999 and 1998 Statement of cash flows for the years ended December 31, 1999 and 1998 Notes to the financial statements Report of Ernst & Young LLP, Independent Auditors 99.2 Crescendo's Unaudited Interim Condensed Financial Statements ** Condensed statement of operations for the quarter and six months ended June 30, 2000 and 1999 Condensed balance sheet at June 30, 2000 Condensed statement of cash flows for the six months ended June 30, 2000 and 1999 Notes to the condensed financial statements * Incorporated by reference from Crescendo's Annual Report on Form 10-K/A for the year ended December 31, 1999. ** Incorporated by reference from Crescendo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 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 CORPORATION By: /s/ Matthew K. Fust Matthew K. Fust Senior Vice President and Chief Financial Officer Date: October 30, 2000 EXHIBIT INDEX 20.1 Press Release dated October 2, 2000, announcing ALZA's exercise of its option to acquire Crescendo's Class A Common Stock 23.1 Consent of Ernst & Young LLP, Independent Auditors 99.1 Crescendo's Audited Financial Statements 99.2 Crescendo's Unaudited Interim Condensed Financial Statements