-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JEe8Q+1GQIgq4SL5fPMVY0P02QX1WECEMrvk9wDNIVLzkbyHTUe+xaqYF+ll3fWW bYKZ1N2ErwhPFibWfllRgg== 0000004310-99-000014.txt : 19990514 0000004310-99-000014.hdr.sgml : 19990514 ACCESSION NUMBER: 0000004310-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALZA CORP CENTRAL INDEX KEY: 0000004310 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 770142070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06247 FILM NUMBER: 99619086 BUSINESS ADDRESS: STREET 1: 950 PAGE MILL RD STREET 2: PO BOX 10950 CITY: PALO ALTO STATE: CA ZIP: 94303-0802 BUSINESS PHONE: 4154945000 MAIL ADDRESS: STREET 1: 950 PAGE MILL RD STREET 2: PO BOX 10950 CITY: PALO ALTO STATE: CA ZIP: 94303 10-Q 1 10Q TEXT 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, 1999 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 1-6247 ALZA CORPORATION (Exact name of registrant as specified in its charter) Delaware 77-0142070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 950 Page Mill Road P.O. Box 10950 Palo Alto, California 94303-0802 (Address of principal executive offices) Registrant's telephone number, including area code (650) 494-5000 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 ( ) Number of shares outstanding of each of the registrant's classes of common stock as of April 30, 1999: Common Stock, $.01 par value - 100,809,606 shares ALZA CORPORATION FORM 10-Q for the Quarter Ended March 31, 1999 INDEX Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statement of Income 3 Condensed Consolidated Balance Sheet 4 Condensed Consolidated Statement of Cash Flows 5 Notes to Financial Statements 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25 Part II. Other Information Item 1. Legal Proceedings 25 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 Exhibits PART I. FINANCIAL INFORMATION Item 1. Financial Statements ALZA CORPORATION Condensed Consolidated Statement of Operations (unaudited) (In millions, except per share amounts) Quarter Ended March 31, 1999 1998 ______________________________ Revenues Net sales $ 96.2 $ 66.8 Royalties, fees and other 58.9 50.4 Research and development 30.4 26.3 ______________________________ Total revenues 185.5 143.5 Costs and expenses Costs of products shipped 34.3 31.3 Research and development 44.1 40.2 Selling, general and administrative 55.2 24.4 SEQUUS merger-related costs 32.6 - ______________________________ Total costs and expenses 166.2 95.9 ______________________________ Operating income 19.3 47.6 Interest expense 14.9 14.2 Interest and other income (5.0) (6.9) ______________________________ Net interest and other expense 9.9 7.3 ______________________________ Income before income taxes 9.4 40.3 Provision for income taxes 5.7 13.8 ______________________________ Net income $ 3.7 $ 26.5 ============================== Earnings per share Basic $ 0.04 $ 0.27 ============================== Diluted $ 0.04 $ 0.27 ============================== Shares used in per share computation Basic 100.4 98.2 ============================== Diluted 103.2 100.1 ============================== See accompanying notes. ALZA Corporation Condensed Consolidated Balance Sheet (unaudited) (In millions) March 31, December 31, 1999 1998 ______________________________ ASSETS Current assets: Cash and cash equivalents $ 68.4 $ 110.1 Short-term investments 68.5 86.1 Receivables, net 166.5 148.6 Inventories, at cost: Raw materials 16.1 18.2 Work in process 10.1 10.6 Finished goods 29.3 25.8 ______________________________ Total inventories 55.5 54.6 Prepaid expenses and other current assets 44.5 26.3 ______________________________ Total current assets 403.4 425.7 Property, plant and equipment 501.5 504.7 Less accumulated depreciation and amortization (130.1) (132.3) ______________________________ Net property, plant and equipment 371.4 372.4 Investments in long-term securities 347.3 317.9 Deferred product acquisition payments 272.9 279.1 Other assets 271.3 271.5 ______________________________ Total assets $ 1,666.3 $ 1,666.6 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 27.4 $ 59.6 Accrued liabilities 71.1 61.5 Other current liabilities 6.8 7.4 ______________________________ Total current liabilities 105.3 128.6 5% convertible subordinated debentures 500.0 500.0 5-1/4% zero coupon convertible subordinated debentures 428.2 422.6 Other long-term liabilities 74.0 83.5 Stockholders' equity: Common stock and additional paid-in capital 660.8 645.5 Accumulated other comprehensive loss (2.8) (10.6) Accumulated deficit (99.2) (103.0) ______________________________ Total stockholders' equity 558.8 531.9 ______________________________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,666.3 $ 1,666.6 ============================== See accompanying notes. ALZA CORPORATION Condensed Consolidated Statement of Cash Flows (unaudited) (In millions) Quarter Ended March 31, 1999 1998 ____________________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3.7 $ 26.5 Non-cash adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8.9 10.4 Amortization of product acquisition payments 6.3 2.6 Interest on 5-1/4% zero coupon convertible subordinated debentures 5.6 5.2 Changes in current assets: Receivables (17.9) (8.2) Inventories (0.8) 4.4 Prepaid expenses and other current assets (4.4) (1.9) Changes in liabilities: Accounts payable (12.3) (8.9) Accrued liabilities 11.8 (16.0) Other long-term liabilities (3.4) (0.6) Asset write-down 9.5 - ____________________ Total adjustments 3.3 (13.0) ____________________ Net cash provided by operating activities 7.0 13.5 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (15.8) (13.4) Product acquisition payments (20.0) (5.0) Purchases of available-for-sale securities (72.8) (99.1) Sales and maturities of available-for-sale securities 50.9 92.0 Maturities of available-for-sale securities 4.0 17.5 Other investing activities (1.5) (5.4) ____________________ Net cash used in investing activities (55.2) (13.4) CASH FLOWS FROM FINANCING ACTIVITIES: Issuances of common stock 13.0 20.0 Principal payments on long-term debt (6.5) (2.9) ____________________ Net cash provided by financing activities 6.5 17.1 ____________________ Net (decrease) increase in cash and cash equivalents (41.7) 17.2 Cash and cash equivalents at beginning of period 110.1 71.7 ____________________ Cash and cash equivalents at end of period $ 68.4 $ 88.9 ==================== See accompanying notes. ALZA CORPORATION Notes to Condensed Consolidated Financial Statements (unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The information at March 31, 1999 and for the quarters ended March 31, 1999 and 1998 includes all adjustments (consisting only of normal recurring adjustments) that the management of ALZA Corporation ("ALZA") believes necessary for fair presentation of the results for the periods presented. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in ALZA's Annual Report on Form 10-K for the year ended December 31, 1998 and the Form 8-K filed concurrently with this Form 10-Q, which restates financial information for prior periods to reflect the combined results of ALZA and SEQUUS Pharmaceuticals, Inc. ("SEQUUS"). In March 1999, all of the outstanding shares of SEQUUS were acquired by ALZA in a business combination accounted for as a pooling-of-interests. Accordingly, the financial data for prior periods has been restated to represent the combined financial results of ALZA and SEQUUS (Note 4). Comprehensive Income Total comprehensive income includes net income plus other comprehensive income, which, for ALZA, primarily comprises net unrealized gains or losses on available-for-sale securities. Other comprehensive income (loss) was $7.9 million and $(0.1) million for the quarters ended March 31, 1999 and 1998, respectively. Total comprehensive income was $11.6 million and $26.4 million for the quarters ended March 31, 1999 and 1998, respectively. Supplemental Disclosures of Cash Flow Information Noncash Investing and Financing Quarter Ended March 31, Activities (In millions) 1999 1998 ____________________________ Investment in low-income housing in exchange for long-term debt $ - $ 10.1 Acquisition of building in lieu of repayment of note receivable - 17.5 Reclassification Certain amounts in the prior year's financial statements have been reclassified to conform to the 1999 presentation. NOTE 2. PER SHARE INFORMATION Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income, as adjusted, by the weighted average common shares outstanding for the period plus the dilutive effect of stock options, warrants and convertible securities. The following table sets forth the computation of ALZA's basic and diluted earnings per share: Quarter Ended March 31, (in millions, except per share amounts) 1999 1998 _______________________________________________________________ NUMERATOR: Basic Net income $ 3.7 $ 26.5 =============================================================== Diluted Net income $ 3.7 $ 26.5 =============================================================== DENOMINATOR: Basic Weighted average shares 100.4 98.2 =============================================================== Diluted Weighted average shares 100.7 98.2 Effect of dilutive securities: Employee stock options 2.5 1.7 Warrants - 0.2 _______________________________________________________________ Weighted average shares and assumed conversions 103.2 100.1 =============================================================== Basic earnings per share $ 0.04 $ 0.27 =============================================================== Diluted earnings per share $ 0.04 $ 0.27 =============================================================== Stock options and warrants to purchase 1.1 million shares of common stock were excluded from the diluted earnings per share calculation for the quarters ended March 31, 1999 and 1998, because the exercise price of the options and warrants was greater than the average market price of the common shares during the quarter, and therefore the effect of including those options and warrants would have been anti-dilutive. Assumed conversions of ALZA's outstanding 5% convertible subordinated debentures due 2006 ("5% Debentures") and 5-1/4% zero coupon convertible subordinated debentures due 2014 ("5-1/4% Debentures") were not included in the diluted earnings per share calculation for the periods presented, as their inclusion would have been anti-dilutive. NOTE 3. CRESCENDO PHARMACEUTICALS CORPORATION (RELATED PARTY) Under the Development Agreement between ALZA and Crescendo Pharmaceuticals Corporation ("Crescendo"), ALZA recorded product development revenues of $23.3 million for the quarter ended March 31, 1999, compared with $19.9 million for the quarter ended March 31, 1998. ALZA expects that Crescendo will have expended all its available funds during 2000. Under the Technology License Agreement between ALZA and Crescendo, ALZA recorded technology fee revenue from Crescendo of $2.0 million for the first quarter of 1999, compared with $3.0 million for the first quarter of 1998, in accordance with the terms of the agreement. ALZA recognizes the technology fee from Crescendo when earned. Since Crescendo owes the fee at the end of each month if, and only if, at least two of the "Initial Products" remain in development and/or have been licensed by ALZA at the end of each month, the fee is not earned until the end of each month in which these conditions are met. Development of any or all of the Initial Products could be terminated by Crescendo at any time. Three of the seven Initial Products were in development and/or had been licensed at March 31, 1999. The monthly technology fee payments are not guaranteed, and the conditions precedent to their payment have not been fulfilled and cannot be fulfilled before the end of each month. At the time ALZA accrues the Crescendo technology fee, ALZA has no future performance obligations to Crescendo in order to earn the fee that is being accrued. ALZA has an option to acquire an exclusive, royalty-bearing license to each product developed by Crescendo under the Development Agreement. The option is exercisable on a product-by- product, country-by-country, basis. In December 1998, ALZA exercised its option to obtain a worldwide license to OROS- registered trademark- oxybutynin (marketed by ALZA in the United States as Ditropan-registered trademark- XL). Under the license agreement for this product, ALZA must pay Crescendo 2.5% of net sales of the licensed product in the first year of sales, and 3% in the second and third years. Thereafter, until 15 years after the date of the first commercial sale of the product, the percentage owed to Crescendo would be based upon development costs paid by Crescendo; based upon current information this rate is expected to be between 5% and 6%. NOTE 4. ACQUISITION OF SEQUUS PHARMACEUTICALS, INC. On March 16, 1999, ALZA completed a merger with SEQUUS by acquiring all of SEQUUS' outstanding stock in a tax-free, stock- for-stock transaction. SEQUUS stockholders received 0.4 shares of ALZA common stock for each share of SEQUUS common stock. ALZA issued 13.2 million shares in the merger. ALZA accounted for the transaction as a pooling of interests. Accordingly, ALZA's consolidated financial statements have been retroactively restated for prior periods to include the combined financial results of ALZA and SEQUUS. For the quarter ended March 31, 1999, the consolidated results of operations of the combined companies have been presented and no adjustments were necessary to conform the accounting practices of the two companies. The table below presents the separate results of operations for ALZA and SEQUUS for the periods prior to the merger and combined results after the merger: Merger- related (In millions) ALZA SEQUUS adjustments Total _________________________________________________________________ Quarter Ended March 31, 1999 Revenues $ 173.1 $ 12.4 $ - $ 185.5 Net income 42.0 (5.7) (a)(32.6) 3.7 _________________________________________________________________ Quarter Ended March 31, 1998 Revenues $ 130.7 $ 12.4 $ - $ 143.5 Net income (loss) 28.3 (3.0) (b) 1.2 26.5 _________________________________________________________________ (a) Represents expenses incurred by ALZA related to the SEQUUS merger. (b) Represents a 40% tax benefit derived from SEQUUS' net loss. As a result of the SEQUUS acquisition, ALZA incurred merger- related costs that consisted of merger transaction costs, exit costs and employee severance costs. Merger transaction costs consisted primarily of fees for investment bankers, attorneys, accountants, filing fees, financial printing costs and other related charges. Exit costs include costs such as cancellation of lease agreements and the write-down of SEQUUS assets that will not be used in continuing operations. The following table shows the details of the merger-related costs for the quarter ended March 31, 1999: Merger- Balance related at March 31, (In millions) costs Utilized 1999 _________________________________________________________________ Merger transaction costs $13.2 $ 5.4 $ 7.8 Exit costs 14.3 9.5 4.8 Employee severance 5.1 5.0 0.1 _______________________________ Total $32.6 $19.9 $12.7 =============================== NOTE 5. SEGMENT REPORTING ALZA has two operating segments: ALZA Pharmaceuticals and ALZA Technologies. The ALZA Pharmaceuticals segment includes sales of products directly to the pharmaceutical marketplace, research and development of potential products to be marketed by ALZA (including revenues and expenses relating to products under development with Crescendo) and co-promotion revenues for products co-promoted by ALZA. The ALZA Technologies segment includes research, development and manufacturing for client companies and ALZA Pharmaceuticals, and royalties and fees (including milestone payments) from ALZA's client companies under joint product development and commercialization agreements. The "Other" category primarily comprises corporate general and administrative expenses, including finance, legal, human resources, commercial development, executive and other functions not directly attributable or allocated to the activities of the operating segments, as well as rental and service fee revenues. SEQUUS' net sales, costs of products shipped, research and development for potential products to be marketed by ALZA and sales and marketing expenses are included in ALZA Pharmaceuticals; royalties and fee revenues and research and development expenses are included in ALZA Technologies; and general and administrative expenses are included in Other. ALZA evaluates performance and allocates resources based on operating income or loss from operations (before allocation of certain general and administrative expenses, net interest expense, investment gains and losses and income taxes). ALZA does not assess segment performance or allocate resources based on a segment's total assets, and therefore ALZA's assets are not reported by segment. ALZA allocates certain long-lived assets to operating segments for purposes of allocating depreciation and amortization expense. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. ALZA accounts for intersegment revenues based on prices negotiated between the segments, which generally approximate the prices charged to third parties. ALZA's reported segments are strategic operating units that distribute products to different types of customers and provide different types of services. They are managed differently because ALZA Pharmaceuticals' sales and marketing efforts are extensive and disparate from the revenue generation process resulting from arrangements with client companies. The following tables contain information about segment operating income (loss) for the quarter ended March 31, 1999 and 1998: Quarter Ended March 31, (In millions) 1999 1998 ____________________________________________________________ Revenues from external customers Net sales ALZA Pharmaceuticals $ 67.9 $ 41.8 ALZA Technologies 28.3 25.0 Royalties, fees and other ALZA Pharmaceuticals 3.1 3.8 ALZA Technologies 55.4 46.3 Other 0.4 0.3 Research and development ALZA Pharmaceuticals 23.2 19.5 ALZA Technologies 7.2 6.8 ___________________________ Total $185.5 $143.5 =========================== Intersegment revenues Net sales ALZA Pharmaceuticals $ - $ - ALZA Technologies 4.2 1.5 Research & development ALZA Pharmaceuticals - - ALZA Technologies 32.5 31.2 ___________________________ Total $ 36.7 $ 32.7 =========================== Segment operating income (loss) ALZA Pharmaceuticals $ (3.0) $ 2.2 ALZA Technologies 61.0 51.4 Other (38.7) (6.0) ___________________________ Total $ 19.3 $ 47.6 =========================== The following table contains a reconciliation of ALZA's income before taxes to that reported by segment in the tables above: Quarter Ended March 31, (In millions) 1999 1998 ____________________________________________________________ Income (loss) before taxes Total operating income for reportable segments $ 58.0 $ 53.6 Other loss (38.7) (6.0) Unallocated amounts: Interest income 5.0 6.9 Interest expense (14.9) (14.2) ____________________________ Income before income taxes $ 9.4 $ 40.3 ============================ NOTE 6. SUBSEQUENT EVENTS In April 1999, AlZA sold three of its buildings located in Palo Alto, California. The net proceeds from the sale of the buildings were $6.4 million. ALZA will lease back these buildings through December 31, 1999, when it expects to complete occupancy of its new premises under construction in Mountain View, California. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Notice Concerning Forward-Looking Statements Some of the statements made in this Form 10-Q are forward- looking in nature, including, without limitation, plans concerning the commercialization of products, statements concerning potential product sales, future costs of products shipped (and gross margins), associated sales and marketing expenses, plans concerning development of products and other statements that are not historical facts. The occurrence of the events described, and the achievement of the intended results, are subject to various risk factors that could cause ALZA's actual results to be materially different than those presented, some or all of which are not predictable or within ALZA's control. Many risks and uncertainties are inherent in the pharmaceutical industry; others are more specific to ALZA's business. Many of the significant risks related to ALZA's business are described in ALZA's Annual Report on Form 10-K for the year ended December 31, 1998. RESULTS OF OPERATIONS SUMMARY Quarter Ended March 31, (In millions, except per share amounts) 1999 1998 ________________________________________________________________ Revenues $ 185.5 $ 143.5 ________________________________________________________________ Operating income 19.3 47.6 ________________________________________________________________ Net income 3.7 26.5 ________________________________________________________________ Diluted earnings per share 0.04 0.27 ________________________________________________________________ ALZA's net income for the quarter ended March 31, 1999 was $3.7 million or $0.04 per diluted share compared with a net income of $26.5 million or $0.27 per diluted share for the quarter ended March 31, 1998. Net income for the quarter ended March 31, 1999 included merger-related charges of $24.8 million (net of tax effect of $7.8 million), or $0.24 per share, and should be excluded in order to analyze comparable operating results for the two quarters. On a comparable basis, for the quarter ended March 31, 1999, ALZA's net income increased 8% to $28.5 million, or $0.28 per diluted share, excluding the merger-related charges discussed above, compared with $26.5 million or $0.27 per share for the quarter ended March 31, 1998. The increase in net income for the quarter ended March 31, 1999 resulted primarily from the following: - Net sales increased 44% to $96.2 million for the quarter ended March 31, 1999 from $66.8 million for the quarter ended March 31, 1998. The increase in sales resulted from a 63% increase in sales of products by ALZA Pharmaceuticals to $67.9 million for the quarter ended March 31, 1999 from $41.8 million for the quarter ended March 31, 1998. This increase in ALZA Pharmaceuticals' sales can be primarily attributed to $22.0 million in sales of Ditropan-registered trademark- XL (oxybutynin chloride), which was launched on February 1, 1999, and a 29% increase in sales of Doxil-registered trademark-/Caelyx- registered trademark- (doxorubicin HCl liposome injection) for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998. In addition, revenues from contract manufacturing increased 13% to $28.3 million for the quarter ended March 31, 1999 from $25.0 million for the quarter ended March 31, 1998 due to higher shipments of NicoDerm-registered trademark- CQ-trademark- (nicotine) to SmithKline Beecham ("SB"), Covera-HS-trademark- (verapamil) to G.D. Searle & Co. ("Searle") and Glucotrol XL-registered trademark- (glipizide) to Pfizer Inc. ("Pfizer"). - Gross margin increased to 64% for the quarter ended March 31, 1999 from 53% for the quarter ended March 31, 1998. The increase in gross margin was due to an increase in sales of ALZA- marketed products as a percentage of total net sales and, to a lesser extent, an improvement in margins of contract manufactured products. - Royalties, fees and other revenues increased 17% to $58.9 million for the quarter ended March 31, 1999 from $50.4 million for the quarter ended March 31, 1998. The increase in royalties is primarily due to an increase in royalties on sales of Duragesic-registered trademark- (fentanyl) by Janssen Pharmaceutica, Inc.(together with its affiliates, "Janssen"), NicoDerm CQ by SB and Cardura XL-registered trademark- (doxazosin mesylate) and Glucotrol XL by Pfizer, partially offset by a decrease in royalties from sales of Procardia XL-registered trademark- by Pfizer. Fee revenue decreased for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998. - Research and development revenues increased 16% to $30.4 million for the quarter ended March 31, 1999 from $26.3 million for the quarter ended March 31, 1998. The increase is due to research and development revenue from Crescendo of $23.3 million for the quarter ended March 31, 1999 compared with $19.9 million for the quarter ended March 31, 1998. - ALZA's effective tax rate declined to 32% for the quarter ended March 31, 1999 compared to 34% for the quarter ended March 31, 1998. Substantially offsetting these contributions to net income in 1999 were the following: - Research and development expenses increased 10% to $44.1 million for the quarter ended March 31, 1999 from $40.2 million for the quarter ended March 31, 1998. - Selling, general and administrative expenses increased 127% to $55.2 million for the quarter ended March 31, 1999 from $24.4 million for the quarter ended March 31, 1998. The increase was due to the expansion of the sales organization in 1998, the increase in marketing expenditures related to the launch of Ditropan XL in the first quarter of 1999 and increased marketing expenses for ALZA's expanded product portfolio. - Interest income declined 27% to $5.0 million for the quarter ended March 31, 1999 compared with $6.9 million for the quarter ended March 31, 1998, primarily due to lower cash balances as a result of a payment in the third quarter of 1998 of $91.2 million for the exercise of the option to acquire all of the outstanding limited partnership interests in ALZA TTS Research Partners, Ltd. (the "TTS Partnership"). OPERATING SEGMENT SUMMARY ALZA has two operating segments: ALZA Pharmaceuticals and ALZA Technologies. ALZA Pharmaceuticals markets and sells products developed by ALZA Technologies or others directly to the pharmaceutical marketplace in the United States and Canada and to distributors who sell such products outside the United States and Canada. ALZA Pharmaceuticals also conducts product development, co- promotes products with third parties, and engages ALZA Technologies and others to conduct product development and manufacture products for ALZA Pharmaceuticals. ALZA Technologies conducts research and development of ALZA's drug delivery technologies and products for ALZA Pharmaceuticals and Crescendo and other pharmaceutical company clients, and manufactures products for sale by ALZA Pharmaceuticals and client companies. The "Other" category primarily comprises corporate general and administrative activities and the associated costs related to finance, legal, human resources, commercial development, executive and other functions not directly attributable (or allocated) to the activities of the operating segments, as well as rental and service fee revenues. SEQUUS' net sales, costs of products shipped, research and development for products marketed by, and potential products to be marketed by, ALZA and sales and marketing expenses are included in ALZA Pharmaceuticals; royalties and fee revenues, research and development revenues and related expenses (largely for activities undertaken on behalf of ALZA Pharmaceuticals) are included in ALZA Technologies; and general and administrative expenses are included in Other. OPERATING SEGMENT SUMMARY Quarter Ended March 31, (In millions) 1999 1998 _________________________________________________________________ Revenues ALZA PHARMACEUTICALS $ 94.2 $ 65.1 ALZA TECHNOLOGIES 127.6 110.8 OTHER 0.4 0.3 _________________________________________________________________ Total segment revenues 222.2 176.2 Intersegment elimination (36.7) (32.7) _________________________________________________________________ Total revenues $ 185.5 $ 143.5 _________________________________________________________________ Operating income (loss) ALZA PHARMACEUTICALS $ (3.0) $ 2.2 ALZA TECHNOLOGIES 61.0 51.4 OTHER (38.7) (6.0) _________________________________________________________________ Total operating income $ 19.3 $ 47.6 _________________________________________________________________ ALZA PHARMACEUTICALS The decrease in ALZA Pharmaceuticals' operating income in the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998, was due to a 55% increase in operating expenses reflecting the substantial expansion of ALZA's sales organization and increased marketing expenses related to the launch of Ditropan-registered trademark- XL and its expanded product portfolio. The increase in operating expenses was partially offset by a 63% increase in net sales of ALZA-marketed products. ALZA TECHNOLOGIES Operating income for ALZA Technologies increased 19% in the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998. This increase was primarily due to a 20% increase in royalties, fees and other revenues and a 13% increase in contract manufacturing sales. OTHER Operating loss for the "Other" segment increased significantly in the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998. The increase in the operating loss was due primarily to $32.6 million of merger-related charges recorded in the quarter ended March 31, 1999 related to the SEQUUS acquisition. NET SALES Net Sales Quarter Ended March 31, (In millions) 1999 1998 __________________________________________________________________ ALZA PHARMACEUTICALS Ditropan-registered trademark- XL $ 22.0 $ - Doxil-registered trademark-/ Caelyx-registered trademark- 14.3 10.7 Ethyol-registered trademark- 8.6 8.1 Mycelex-registered trademark- Troche 5.0 5.9 Elmiron-registered trademark- 4.9 7.0 Testoderm-registered trademark- TTS line 4.5 2.0 Other 8.6 8.1 __________________________________________________________________ Total 67.9 41.8 __________________________________________________________________ ALZA TECHNOLOGIES Contract manufacturing 28.3 25.0 Intersegment 4.2 1.5 __________________________________________________________________ Total 32.5 26.5 __________________________________________________________________ Intersegment eliminations (4.2) (1.5) __________________________________________________________________ Total net sales $ 96.2 $ 66.8 __________________________________________________________________ Total net sales as a percentage of total revenues 52% 47% __________________________________________________________________ ALZA PHARMACEUTICALS Included in net sales of ALZA-marketed products are sales of the products marketed directly by ALZA in the United States and Canada, and sales of those products in other countries through distributors. Net sales of ALZA-marketed products increased 63% for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998, resulting from initial sales of Ditropan XL, which was launched in February 1999, and a 29% increase in sales of Doxil for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998. Partially offsetting these increases was a 31% decline in sales of Elmiron-registered trademark- (pentosan polysulfate sodium) and a 14% decline in sales of Mycelex-registered trademark- (clotrimazole) Troche. Net sales of ALZA-marketed products can be expected to vary from quarter to quarter, particularly in the first years after launch of a new product. Ditropan XL was launched in the first quarter of 1999, and Doxil, Ethyol-registered trademark- (amifostine), Elmiron and Testoderm-registered trademark- TTS (Testosterone Transdermal System) were cleared for marketing during the past few years. These products have not yet achieved their steady-state sales levels. Wholesaler stocking patterns, managed care and formulary acceptance, the introduction of competitive products, and acceptance by patients and physicians will affect future sales of these products. ALZA TECHNOLOGIES Net sales from contract manufacturing include sales generated from contract manufacturing activities for ALZA's client companies and for ALZA Pharmaceuticals. Net sales from contract manufacturing increased 13% for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998, primarily due to an increase in ALZA shipments of NicoDerm CQ to SB and Covera-HS to Searle. The timing and quantities of orders for products marketed by client companies are not within ALZA's control. Net sales to client companies can be expected to fluctuate from period to period, sometimes significantly, depending on the volume, mix and timing of orders of products shipped to client companies, and in some quarters, due to the shipment of launch quantities of products to clients. GROSS MARGIN Quarter Ended March 31, Gross margin 1999 1998 ________________________________________________________________ ALZA PHARMACEUTICALS (1) 83% 76% ALZA TECHNOLOGIES (1) 20% 13% ________________________________________________________________ Gross margin(2) 64% 53% ________________________________________________________________ (1) Includes intersegment revenues or expenses. (2) After intersegment eliminations. The increase in total gross margin for the quarter ended March 31, 1999 compared to March 31, 1998 was due to increased sales of higher-margin products by ALZA Pharmaceuticals and, to a lesser extent, an increase in margins on products shipped by ALZA Technologies to client companies. ALZA expects its gross margin on net sales to increase from historical rates over the longer term, although quarter-to-quarter fluctuations, even significant ones, can be expected to continue to occur. A trend of higher gross margins may be achieved through a proportionate increase in direct sales by ALZA Pharmaceuticals in relation to sales from contract manufacturing and, to a lesser extent, increased utilization of capacity and greater operating efficiencies by ALZA Technologies. ALZA PHARMACEUTICALS The gross margin on net sales of ALZA-marketed products increased in the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 due to a shift in product mix toward sales of higher-margin products, including Ditropan XL, which was launched February 1, 1999. ALZA TECHNOLOGIES The gross margin on net sales of products manufactured by ALZA Technologies for sale by client companies and ALZA Pharmaceuticals increased in the quarter ended March 31, 1999 compared with the quarter ended March 31, 1998 as a result of an increase in shipments of higher-margin products to client companies. ALZA Technologies' gross margin on its contract manufacturing sales is usually considerably lower than ALZA Pharmaceuticals' gross margin on its sales of ALZA-marketed products. ALZA's client-funded product development agreements generally provide for a supply price that is intended to cover ALZA's costs to manufacture the product plus a small margin. ALZA also receives royalties on the clients' sales of the products, which are included in royalties, fees and other revenues. Sales to ALZA Pharmaceuticals are based upon negotiated prices, which generally approximate the prices charged to third parties. ROYALTIES, FEES AND OTHER REVENUES Royalties, Fees and Other Revenues Quarter Ended March 31, (In millions) 1999 1998 _________________________________________________________________ ALZA PHARMACEUTICALS $ 3.1 $ 3.8 ALZA TECHNOLOGIES 55.4 46.3 OTHER 0.4 0.3 _________________________________________________________________ Total royalties, fees and other revenues $ 58.9 $ 50.4 _________________________________________________________________ Percentage of total revenues 32% 35% _________________________________________________________________ ALZA PHARMACEUTICALS For the quarter ended March 31, 1999, fee revenue for AlZA Pharmaceuticals included technology fees of $2.0 million from Crescendo compared to $3.0 million from Crescendo for the quarter ended March 31, 1998, as provided in the agreements between ALZA and Crescendo. ALZA TECHNOLOGIES Royalties, fees and other revenues increased 20% for the quarter ended March 31, 1999, compared to the quarter ended March 31, 1998. The first quarter increase in royalties, fees and other revenues was primarily due to an increase of 26% in royalties resulting from higher royalties on product sales of Duragesic, NicoDerm CQ, Cardura XL, and Glucotrol XL, partially offset by a decrease in royalties from sales of Procardia XL. Sales of Procardia XL, as reported by Pfizer, decreased 27% in the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998. Several companies have filed Abbreviated New Drug Applications ("ANDA") with the United States Food and Drug Administration ("FDA") requesting clearance to market generic equivalents to Procardia XL, and one company has received tentative FDA approval of its ANDA. Pfizer has filed suit against these companies for infringement of patent rights relating to the nifedipine active drug substance in Procardia XL, and is also involved in litigation with the FDA and one of the ANDA applicants concerning the regulatory status of the applicant's product. It is not possible to predict the timing and amount of the negative impact on sales of Procardia XL that will result from competition from these or other potential generic sustained release nifedipine products. During the next several years, ALZA intends to continue to reduce its dependence on royalties and fees by further expanding ALZA's sales and marketing activities and by directly marketing and selling more products. However, there can be no assurance that ALZA will be successful in undertaking this expansion, or that any expanded sales and marketing activities will be successful, due to factors such as the risks associated with developing, clinically testing and obtaining regulatory clearance of products for ALZA marketing, the difficulties and costs associated with acquiring products from third parties for ALZA to market, the length of the regulatory approval process, the uncertainties surrounding the acceptance of new products by the intended markets, the marketing of competitive products, the risks relating to patents and proprietary rights and the current health care cost containment environment in the United States. ALZA expects that, in the near term, royalties on sales by clients of currently marketed products will continue to be a substantial contributor to net income. RESEARCH AND DEVELOPMENT Research and Development Revenues Quarter Ended March 31, (In millions) 1999 1998 _________________________________________________________________ ALZA PHARMACEUTICALS Crescendo $ 23.2 $ 19.5 _________________________________________________________________ ALZA TECHNOLOGIES Crescendo $ - $ 0.5 Other clients 7.2 6.3 Intersegment 32.5 31.2 _________________________________________________________________ Total 39.7 38.0 _________________________________________________________________ Intersegment elimination (32.5) (31.2) _________________________________________________________________ Total research and development revenues $ 30.4 $ 26.3 _________________________________________________________________ Percentage of total revenues 16% 18% _________________________________________________________________ ALZA PHARMACEUTICALS ALZA Pharmaceuticals derives research and development revenues from Crescendo. Revenues from Crescendo are offset by intersegment charges from ALZA Technologies for research and development expenses incurred on behalf of ALZA Pharmaceuticals related to products under development for marketing by ALZA Pharmaceuticals. ALZA expects that Crescendo will have expended all its available funds during 2000. ALZA has an option to acquire an exclusive, royalty-bearing license to each product developed by Crescendo under the Development Agreement. The option is exercisable on a product-by- product, country-by-country, basis. In December 1998, ALZA exercised its option to obtain a worldwide license to OROS oxybutynin (Ditropan XL). Under the license agreement, ALZA must pay Crescendo 2.5% of net sales of the licensed product for the first year of sales and 3% for the second and third years. Thereafter, until 15 years after the date of the first commercial sale of the product, the percentage owed to Crescendo would be based upon development costs paid by Crescendo; based upon current information this rate is expected to be between 5% and 6%. ALZA TECHNOLOGIES Research and development revenues increased 4% for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 reflecting an increase in product development activities under agreements with client companies. Research and Development Expenses Quarter Ended March 31, (In millions) 1999 1998 _________________________________________________________________ ALZA PHARMACEUTICALS Intersegment $ 32.5 $ 31.2 Product development expense 6.0 3.7 _________________________________________________________________ Total ALZA Pharmaceuticals 38.5 34.9 _________________________________________________________________ ALZA TECHNOLOGIES 38.1 36.5 _________________________________________________________________ Intersegment elimination (32.5) (31.2) _________________________________________________________________ Total research and development expenses $ 44.1 $ 40.2 _________________________________________________________________ As a percentage of total revenues 24% 28% _________________________________________________________________ ALZA PHARMACEUTICALS ALZA Pharmaceuticals engages ALZA Technologies to perform research and development services, which are charged under the same formula ALZA charges client companies. Expenses related to these services were relatively constant for the quarters ended March 31, 1999 and 1998. Product development expense increased in the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 primarily due to an increase in development costs related to products currently marketed by ALZA Pharmaceuticals. ALZA TECHNOLOGIES Research and development expenses increased 4% in the quarter ended March 31, 1999, compared to the quarter ended March 31, 1998, reflecting an increase in product development activities under agreements with client companies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses Quarter Ended March 31, (In millions) 1999 1998 __________________________________________________________________ ALZA PHARMACEUTICALS Sales and marketing expenses $ 42.8 $ 15.4 __________________________________________________________________ ALZA PHARMACEUTICALS Amortization of product acquisition payments 3.9 2.6 ALZA TECHNOLOGIES Amortization of product acquisition payments 2.2 - __________________________________________________________________ Total 6.1 2.6 __________________________________________________________________ OTHER General and administrative expenses 6.3 6.4 __________________________________________________________________ Total selling, general and administrative expenses $ 55.2 $ 24.4 ================================================================== Total selling, general and administrative expenses as a percentage of total revenues 30% 17% __________________________________________________________________ ALZA PHARMACEUTICALS Sales and marketing expense increased substantially for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 as a result of the significant increase in the size of ALZA's sales organization, the increased sales and marketing activities due to the launch of Ditropan XL and the increased marketing expense for ALZA's expanded product portfolio. During the second half of 1998, ALZA expanded its sales organization by approximately 260 sales professionals. In 1998, ALZA entered into an agreement with UCB Pharma, Inc. ("UCB Pharma") under which approximately 350 sales professionals of UCB Pharma are co- promoting Ditropan XL in the United States with ALZA. UCB Pharma receives payments based on sales of Ditropan XL above certain levels, as well as payments for calls made. The term of the co- promotion arrangement continues through March 2002. Amortization of product acquisition payments for the ALZA Pharmaceuticals segment increased 50% in the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 due to the amortization of payments for products that were acquired in the second half of 1998 and the amortization of additional payments made since the first quarter of 1998 related to product acquisitions. ALZA TECHNOLOGIES Amortization of product acquisition payments for ALZA Technologies relates to three months amortization of the $91.2 million exercise price paid in August 1998 to acquire all of the outstanding limited partnership interests in the TTS Partnership. NET INTEREST Net Interest Quarter Ended March 31, (In millions) 1999 1998 _________________________________________________________________ Interest and other income $ (5.0) $ (6.9) Interest expense 14.9 14.2 _________________________________________________________________ Net interest and other expense $ 9.9 $ 7.3 _________________________________________________________________ Interest and other income declined 28% for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 due to significantly lower average invested cash balances. ALZA's lower cash balance in the first quarter of 1999 was attributable to the payment of $91.2 million for the exercise of the option to acquire all of the outstanding limited partnership interest in the TTS Partnership, which occurred in the third quarter of 1998. Interest expense was slightly higher for the quarter ended March 31, 1999 as compared to the same period for 1998, primarily due to accreted interest on ALZA's outstanding 5-1/4% Debentures. Effective Tax Rate For the first quarter of 1999, the effective income tax rate was 32%, excluding the tax effect of $7.8 million on merger- related costs of $32.6 million, compared to 34% for the first quarter of 1998. ALZA's annual effective combined federal and state income tax rate for 1999 is estimated to be 32% assuming utilization of SEQUUS' net operating losses. The actual effective income tax rate will depend upon the actual level of earnings, potential changes in the tax laws, the amount of investment and research credits available and ALZA's ability to utilize such credits. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY AND CAPITAL RESOURCES March 31, December 31, (In millions) 1999 1998 __________________________________________________________________ Working capital $ 298.1 $ 297.1 Cash and investments 484.2 514.1 Total assets 1,666.3 1,666.6 Long-term debt 962.7 966.1 __________________________________________________________________ Quarter ended March 31, (In millions) 1999 1998 __________________________________________________________________ Net cash provided by (used in) operating activities $ 7.0 $ (13.0) Capital expenditures 15.8 13.4 Product acquisition payments 20.0 5.0 __________________________________________________________________ Cash flow provided by operating activities for the quarter ended March 31, 1999 was $7.0 million (or $17.3 million excluding payments for merger-related expenses) compared to $13.5 million for the quarter ended March 31, 1998. ALZA's capital spending for the quarter ended March 31, 1999 was $15.8 million for additions to facilities and equipment to support its research, development and manufacturing activities, compared to capital spending of $13.4 million in the same period in 1998. While ALZA believes its current facilities and equipment (including the facilities currently under construction) are sufficient to meet its current operating requirements, ALZA is expanding its facilities and equipment to support its medium- term and long-term requirements. Capital expenditures during the remainder of 1999 are expected to continue to increase over 1998 levels to complete the Mountain View facilities discussed below. As a result of ALZA's investment in a real estate joint venture and construction of buildings in Mountain View, California, which are scheduled to be completed in late 1999, ALZA has been evaluating its real estate holdings and future facilities needs. In April 1999, ALZA sold three of its buildings located in Palo Alto, California for a total of $6.4 million. ALZA will lease back these buildings through December 31, 1999, when it expects to complete occupancy of the new buildings in Mountain View. ALZA expects to sell or lease certain other Palo Alto and/or Mountain View properties in the near term, which could result in additional gains in 1999 and lease income in 2000 and beyond. ALZA believes that its existing cash and investment balances are adequate to fund its cash needs for 1999 and beyond. In addition, should the need arise, ALZA believes it would be able to borrow additional funds or otherwise raise additional capital. ALZA may consider using its capital to make strategic investments or to acquire or license technology or products. Year 2000 ALZA is reliant upon its computer systems and applications, including scientific and manufacturing equipment containing computer-related components, to conduct its business. Key internal systems and applications include manufacturing production management, raw materials supply, inventory control, research and development activities and project management, documentation, marketing and financial systems. The majority of ALZA's significant operating and accounting systems are currently Year 2000 compliant. The financial and accounting systems that are not currently Year 2000 compliant have been identified and are in the process of being upgraded or replaced. Other internal systems have been inventoried and evaluated for Year 2000 compliance. Internal systems will be upgraded or replaced or contingency plans will be developed, as necessary. Year 2000 issues are expected to be resolved with respect to all systems critical to ALZA's business by the end of 1999. In addition to its internal systems, ALZA is also reliant upon the capabilities of the computer systems of its distributors, customers, vendors, banks, and government agencies. ALZA has initiated communications with third parties with whom it has material direct business relationships in order to determine their level of Year 2000 compliance. Year 2000 costs incurred to date have not been material. Total costs to modify ALZA's systems for Year 2000 compliance are expected to be less than $2.0 million. Such costs do not include normal system upgrades and replacements and the actual financial impact could exceed this estimate. If ALZA is unable to bring its systems into compliance in the expected timeframe, any noncompliance could have a material impact on ALZA's operations, and could result in delays or failures in manufacturing, research and development and similar activities. The extent of such impact cannot presently be determined. ALZA may also experience delays or failures in manufacturing, distribution, order entry, order processing, product shipping and distribution, invoicing, payment, or similar normal business activities, if certain third party distributors, customers, vendors and banks are not Year 2000 compliant. In addition, ALZA may experience some delay in obtaining approvals to market ALZA products from government agencies if government computer systems are not Year 2000 compliant. There can be no assurances that third parties' failure to ensure Year 2000 compliance would not have an adverse impact on ALZA's financial condition or results of operations. ALZA is currently identifying and developing specific contingency plans intended to mitigate the effects of any potential Year 2000 disruption, including the effects of operational problems and costs that may result from a failure of ALZA and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis or from abnormal buying patterns in anticipation of Year 2000. ALZA expects to have contingency plans in place by the middle of 1999. Item 3. Quantitative and Qualitative Disclosures about Market Risk Financial market risks related to changes in interest rates and foreign currency exchange rates are described in Part II, Item 7A, Quantitative and Qualitative Disclosure About Market Risk, in ALZA's Annual Report on Form 10-K for the year ended December 31, 1998 and the Form 8-K filed concurrently with this Form 10-Q, which restates financial information for prior periods to reflect the combined results of ALZA and SEQUUS. ALZA is exposed to equity price risks on the marketable portion of equity securities included in its portfolio of investments entered into to further its business and strategic objectives. These investments are generally in small capitalization stocks in the pharmaceutical and biotechnology industry sector, in companies with which ALZA has research and development or product agreements. ALZA typically does not attempt to reduce or eliminate its market exposure on these securities. A 20% adverse change in equity prices would result in an approximate $14 million decrease in ALZA'S available-for- sale securities, based upon a sensitivity analysis performed on ALZA's financial position at March 31, 1999. However, actual results may differ materially. PART II. OTHER INFORMATION Item 1. Legal Proceedings Product liability suits have been filed against Janssen and ALZA from time to time relating to the Duragesic product. Janssen is managing the defense of these suits in consultation with ALZA under an agreement between the parties. Historically, the cost of resolution of liability claims against ALZA (including product liability claims) has not been significant, and ALZA is not aware of any asserted or unasserted claims pending against it, including the suits mentioned above, the resolution of which would have a material adverse impact on the operations or financial position of ALZA. Pursuant to a Remedial Action Order No. HSA 88/89-016 issued by the California Department of Toxic Substances Control ("DTSC"), ALZA has been named as one of a number of potentially responsible parties in connection with the cleanup and environmental remediation of the Hillview-Porter Regional Site Project near ALZA's Palo Alto facilities. The purpose of the DTSC action is, in part, to apportion responsibility for cleanup costs among the parties involved. Cleanup costs for the entire region have been estimated at approximately $16 million. ALZA believes that it did not discharge any of the chemicals of concern at the site in question. ALZA does not believe that its liability in this matter, if any, will be material. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Composite By-laws of ALZA Corporation 27 Financial Data Schedule (b) On March 16, 1999, ALZA filed a current report on Form 8-K to report the closing of its acquisition of SEQUUS. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALZA CORPORATION Date: May 12, 1999 By: /s/ E. Mario ________________________________ Dr. Ernest Mario Chairman and Chief Executive Officer Date: May 12, 1999 By: /s/ Bruce C. Cozadd ________________________________ Bruce C. Cozadd Senior Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit 3.1 Composite bylaws of ALZA Corporation 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN PART I, ITEM 1 FOR FORM 10-Q DATED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 68 69 171 4 56 403 502 130 1,666 105 928 0 0 1 558 1,666 96 186 34 78 0 0 15 9 6 4 0 0 0 4 .04 .04
EX-3 3 EXHIBIT 3.1 EXHIBIT 3.1 COMPOSITE BYLAWS OF ALZA CORPORATION REGISTERED OFFICE AND REGISTERED AGENT 1. REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington County of New Castle, State of Delaware. 2. OTHER OFFICES. The corporation may also have offices at such other places, both within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. MEETINGS OF STOCKHOLDERS 3. TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall be held at such time and place, either within or without the State of Delaware, as shall be fixed by the Board of Directors and stated in the notice or waiver of notice of the meeting. 4. ANNUAL MEETING. An annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on such date and at such time and place as the Board of Directors shall each year designate. 5. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of meeting, may be called only by the Board of Directors, the Chairman of the Board or the President of the corporation. 6. NO ACTION WITHOUT MEETING. At any time when the corporation has more than one stockholder of any class of capital stock, no action required to be taken or which may be taken at any annual or special meeting of the stockholders of such class of capital stock of the corporation may be taken without a meeting, and the power of stockholders to consent in writing without a meeting, to the taking of any action is specifically denied. 7. NOTICE. (a) Written notice of the place, date, and time of all meetings of the stockholders shall be given not less than ten nor more than 60 days before the date on which the meeting is to be held to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the corporation). (b) When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken and the adjournment is for not more than thirty days; provided, however, that if the date of any adjourned meeting is more than thirty days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 8. NOMINATIONS AND PROPOSALS: (a) The Board of Directors of the corporation may nominate candidates for election as directors of the corporation and may propose such other matters for approval of the stockholders as the board deems necessary or appropriate. (b) Any stockholder entitled to vote for directors may nominate candidates for election as directors of the corporation; provided, however, that so long as the corporation has more than one stockholder, no nominations for director of the corporation by any person other than the Board of Directors shall be presented to any meeting of stockholders unless the person making the nomination is a record stockholder and shall have delivered a written notice to the Secretary of the corporation in a timely manner in accordance with paragraph (d). Such notice shall (i) set forth the name and address of the person advancing such nomination and the nominee, together with such information concerning the person making the nomination and the nominee as would be required by the appropriate rules and regulations of the Securities and Exchange Commission to be included in a proxy statement soliciting proxies for the election of such nominee, and (ii) shall include the duly executed written consent of such nominee to serve as director if elected. (c) No proposal by any person other than the Board of Directors shall be submitted for the approval of the stockholders at any regular or special meeting of the stockholders of the corporation unless the person advancing such proposal shall have delivered a written notice to the Secretary of the corporation in a timely manner in accordance with paragraph (d). Such notice shall set forth the name and address of the person advancing the proposal, any material interest of such person in the proposal, and such other information concerning the person making such proposal and the proposal itself as would be required by the appropriate rules and regulations of the Securities and Exchange Commission to be included in a proxy statement soliciting proxies for the proposal. (d) In order to be timely, a notice by a stockholder under paragraph (b) or (c) shall be delivered to the Secretary of the corporation not later than 75 days prior to the first anniversary of the date on which the corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced by more than 30 days prior to, or delayed by more than 30 days after, the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. 9. QUORUM AND REQUIRED VOTE. (a) At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote on the subject matter at the meeting, present in person or by proxy shall constitute a quorum, unless or except to the extent that the presence of a larger number may be required by law. Except as provided in Section 42 of these bylaws or as may be required by law, the affirmative vote of a majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. (b) If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date or time. (c) If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then, except as provided in Section 42 of these bylaws or as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. 10. VOTE REQUIRED FOR BUSINESS COMBINATION. (a) In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as expressly provided in Subparagraph (b) of this Section 10, any Business Combination (as hereinafter defined) with a Related Person (as hereinafter defined) shall require the affirmative vote of the holders of at least eighty percent of the voting power of all of the then outstanding shares of all classes of stock of the corporation entitled to vote for the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement. (b) The provisions of this Section 10 shall not apply to any Business Combination if: (i) A majority of the Continuing Directors (as hereinafter defined) of the corporation then in office has by resolution approved the Business Combination either in advance of or subsequent to such Related Person's having become a Related Person; (ii) The Business Combination is solely between the corporation and another corporation, one hundred percent of the Voting Stock of which is owned directly or indirectly by the corporation; or (iii) The Business Combination is a merger or consolidation and the cash or fair market value (as determined by a majority of the Continuing Directors) of the property, securities or other consideration to be received per share by holders of stock of the corporation in the Business Combination is not less than the Highest Per Share Price or the Highest Equivalent Price (as these terms are hereinafter defined) paid by the Related Person in acquiring any of the corporation's stock. (c) For the purpose of this Section 10: (i) The term "Business Combination" shall mean (A) any merger or consolidation of the corporation with or into a Related Person, (B) any sale, lease, exchange, transfer or other disposition, including, without limitation, a mortgage or any other security device, of assets of the corporation or any subsidiary of the corporation, to a Related Person if such assets constitute a Substantial Part (as hereinafter defined), (C) any merger or consolidation of a Related Person with or into the corporation or a subsidiary of the corporation, (D) the issuance of any securities of the corporation or a subsidiary of the corporation to a Related Person, (E) any recapitalization that would have the effect of increasing the voting power in the corporation of a Related Person, and (F) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination. (ii) The term "Related Person" shall mean any individual, corporation or other entity which, alone or together with (A) its "Affiliates" and "Associates" (as defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect at the date of the adoption of this Section 10 by the stockholders of the corporation (collectively, and as so in effect, the "Exchange Act")) or (B) members of a "group" (as defined with reference to Section 13(d)(3) of the Exchange Act) of which such individual, corporation or other entity is a member, "beneficially owns" (as defined in Rule 13d-3 of the Exchange Act) shares of the outstanding common stock of the corporation which, in the aggregate, have (or, in the case of convertible securities, would have, if such convertible securities were, at the time the determination is being made, convertible and had been converted) 20 percent or more of the total combined power to elect directors of the corporation. (iii) For the purposes of subparagraph (b)(iii) of this Section 10, the term "other consideration to be received" shall include, without limitation, common stock of the corporation retained by its existing stockholders in the event of a Business Combination in which the corporation is the surviving corporation. (iv) The term "Continuing Director" shall mean a director who is unaffiliated with the Related Person and who was a member of the Board of Directors of the corporation immediately prior to the time that the Related Person involved in a Business Combination became a Related Person. (v) The term "Substantial Part" shall mean assets having a book value in excess of 30 percent of the book value of the total consolidated assets of the corporation and its subsidiaries taken as a whole as of the end of its most recent fiscal year ended prior to the time the determination is made. (vi) The terms "Highest Per Share Price" and "Highest Equivalent Price" shall mean the following: If there is only one class of capital stock of the corporation issued and outstanding, the Highest Per Share Price shall mean the highest price that can be determined by a majority of the Continuing Directors then in office to have been paid at any time by the Related Person for any share or shares of that class of capital stock. If there is more than one class of capital stock of the corporation issued and outstanding, the Highest Equivalent Price shall mean, with respect to each class of capital stock of the corporation, the amount determined by a majority of the Continuing Directors then in office, on whatever basis they believe is appropriate, to be the highest per share price equivalent to the highest per share price that can be determined to have been paid at any time by the Related Person for any share or shares of any class of capital stock of the corporation. In determining the Highest Per Share Price and Highest Equivalent Price, all purchases by the Related Person shall be taken into account regardless of whether the shares were purchased before or after the Related Person became a Related Person. Also, the Highest Per Share Price and the Highest Equivalent Price shall include any brokerage commissions, transfer taxes and soliciting dealers' fees paid by the Related Person with respect to the shares of capital stock of the corporation acquired by the Related Person. (d) A majority of the Continuing Directors of the corporation then in office (including directors purporting, in good faith, to be Continuing Directors) shall have the power and duty to determine, for the purposes of this Section 10, on the basis of information then known to them, whether any individual, corporation or other entity is a Related Person. Any such determination made in good faith shall be conclusive and binding for all purposes of this Section 10. (e) The provisions set forth in this Section 10 may not be repealed or amended in any respect without: (i) The affirmative vote of not less than 80 percent of the Board of Directors and of a majority of the Continuing Directors then in office, and (ii) The affirmative vote of the holders of 80 percent or more of the Voting Stock, voting together as a single class; PROVIDED, HOWEVER, that the provisions of this paragraph (e) shall not apply to any amendment or repeal of any provision of this Section 10 that is recommended to the stockholders by a resolution adopted by (A) a majority of the Board of Directors, and (B) not less than 80 percent of the Continuing Directors then in office, in which case any such amendment or repeal shall require only the affirmative vote of a majority of the Voting Stock. 11. ORGANIZATIONS. The Chairman of the Board or, in his or her absence, the President of the corporation or, in the absence of both, such person as may be designated by the Board of Directors or, if there is no such designation, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. 12. CONDUCT OF BUSINESS. The Chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. 13. PROXIES AND VOTING. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedures established for the meeting. 14. STOCK LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each such stockholder and the number of shares of each class registered in his or her name, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any stockholder present. BOARD OF DIRECTORS 15. POWERS. The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors. 16. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number of directors of the corporation who shall constitute the whole board shall be eight but may be increased or decreased from time to time either by a resolution or bylaw duly adopted by the Board of Directors. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1988; each initial director in Class II shall hold office until the annual meeting of stockholders in 1989; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1990. Notwithstanding the foregoing, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. 17. REMOVAL. Any director may be removed from office, only with cause, by the holders of a majority of the shares entitled to vote in an election of directors. 18. RESIGNATIONS. A director may resign at any time by giving written notice to the corporation. Such resignation shall be effective when given unless the director specifies a later time. The resignation shall be effective regardless of whether it is accepted by the corporation. 19. NEWLY-CREATED DIRECTORSHIPS AND VACANCIES. In the event of any increase or decrease in the authorized number of directors, any newly-created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Newly-created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office (and not by stockholders), even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. 20. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. 21. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or any two directors. 22. NOTICE OF MEETINGS. (a) Special meetings, and regular meetings not fixed as provided in these Bylaws, shall be held upon four days' notice by mail or two days' notice delivered personally or by telephone or telegraph to each director who does not waive such notice. The notice shall state the place, date and time of the meeting. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. (b) Notice of a reconvened meeting need not be given if the place, date and time of the reconvened meeting are announced at the meeting at which the adjournment is taken and the adjournment is not for more than 24 hours. If a meeting is adjourned for more than 24 hours, notice of the reconvened meeting shall be given prior to the time of that reconvened meeting to the directors who were not present at the time of the adjournment. 23. ACTION WITHOUT MEETING. Except as required by law, any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or any committee thereof, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the Board of Directors or committee. 24. MEETING BY TELEPHONE. Except as required by law, members of the Board of Directors or any committee thereof may participate in the meeting of the Board of Directors or committee by means of conference telephone or similar communications equipment if all persons who participate in the meeting can hear each other. Such participation in a meeting shall constitute presence in person at such meeting. 25. QUORUM AND MANNER OF ACTING. At any meeting of the Board of Directors, a majority of the directors then in office shall constitute a quorum for all purposes. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date or time, without further notice or waiver thereof. Except as provided herein, the act of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. 26. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend or to authorize the issuance of stock if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. The principles set forth in Sections 15 through 25 of these Bylaws shall apply to committees of the Board of Directors and to actions taken by such committees. All members of any Audit Committee of this Company designated by the Board of Directors shall be directors who are not also employees of the corporation. 27. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof, and may receive fixed fees and other compensation for their services as directors. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation for such service. OFFICERS 28. TITLES. The officers of the corporation shall be chosen by the Board of Directors and shall include a Chairman of the Board or a President or both, a Secretary and a Treasurer. The Board of Directors may also appoint one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers or other officers. Any number of offices may be held by the same person. All officers shall perform their duties and exercise their powers subject to the Board of Directors. 29. ELECTION, TERM OF OFFICE AND VACANCIES. The officers shall be elected annually by the Board of Directors at its regular meeting following the annual meeting of the stockholders, and each officer shall hold office until the next annual election of officers and until the officer's successor is elected and qualified, or until the officer's death, resignation or removal. Any officer may be removed at any time, with or without cause, by the Board of Directors. Any vacancy occurring in any office may be filled by the Board of Directors. 30. RESIGNATION. Any officer may resign at any time upon notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. The resignation of an officer shall be effective when given unless the officer specifies a later time. The resignation shall be effective regardless of whether it is accepted by the corporation. 31. CHIEF EXECUTIVE OFFICER. The Board of Directors shall designate either the Chairman of the Board or the President as the chief executive officer and may prescribe the duties and powers of the chief executive officer. In the absence of such a designation, the Chairman of the Board shall be the chief executive officer. If there is no Chairman of the Board, the President shall be the chief executive officer. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the chief executive officer shall have the responsibility for the general management and control of the business and affairs of the corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. Either the Chairman of the Board or the President and such other officers as may, from time to time, be expressly designated by the Board of Directors shall have power to sign all stock certificates, contracts and other instruments of the corporation which are authorized. 32. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the stockholders and the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. At the request of the Secretary, or in the Secretary's absence or disability, any Assistant Secretary shall perform any of the duties of the Secretary and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Secretary. 33. TREASURER AND ASSISTANT TREASURERS. Unless the Board of Directors designates another chief financial officer, the Treasurer shall be the chief financial officer of the corporation. Unless otherwise determined by the Board of Directors or the chief executive officer, the Treasurer shall have custody of the corporate funds and securities, shall keep adequate and correct accounts of the corporation's properties and business transactions, shall disburse such funds of the corporation as may be ordered by the Board or the chief executive officer (taking proper vouchers for such disbursements), and shall render to the chief executive officer and the Board, at regular meetings of the Board or whenever the Board may require, an account of all transactions and the financial condition of the corporation. At the request of the Treasurer, or in the Treasurer's absence or disability, any Assistant Treasurer may perform any of the duties of the Treasurer and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. 34. OTHER OFFICERS. The other officers of the corporation, if any, shall exercise such powers and perform such duties as the Board of Directors or the chief executive officer shall prescribe. 35. COMPENSATION. The Board of Directors shall fix the compensation of the chief executive officer and may fix the compensation of other employees of the corporation, including the other officers. If the Board does not fix the compensation of the other officers, the chief executive officer shall fix such compensation. 36. ACTIONS WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the Chairman of the Board, the President or any officer of the corporation authorized by the Chairman of the Board or the President, shall have power to vote and otherwise act on behalf of the corporation, in person or by proxy, at any meeting of stockholders of, or with respect to any action of stockholders of, any other corporation in which the corporation may hold securities and otherwise shall have power to exercise any and all rights and powers which the corporation may possess by reason of its ownership of securities in such other corporation. STOCK AND DIVIDENDS 37. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of, the corporation by the Chairman, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificates may be facsimile. 38. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the corporation kept at an office of the corporation or by transfer agents designated to transfer shares of the stock of the corporation. Except where a certificate is issued in accordance with the next sentence of this Section, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. 39. REGULATIONS. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. RECORD DATE 40. RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix in advance, a record date, which shall not be more than 60 nor less than ten days before the date of such meeting, nor more than 60 days prior to any other action. If no record date is fixed, the record date (1) for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (2) for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the reconvened meeting. WAIVER OF NOTICE 41. WAIVER OF NOTICE. Whenever notice is required to be given by law or these Bylaws, a written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless so required by the Certificate of Incorporation or these Bylaws, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. AMENDMENTS 42. AMENDMENTS. These Bylaws may be amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors. Notwithstanding the foregoing, no provision of Section 10 may be amended or repealed except in accordance with Section 10(e) and no provision of Sections 16 or 19 may be amended or repealed except by a resolution adopted by the affirmative vote of not less than 75% of the members of the Board of Directors or by the affirmative vote of the holders of at least 80% of the outstanding shares of capital stock entitled to vote in an election of directors. MISCELLANEOUS 43. FISCAL YEAR. The fiscal year of the corporation shall be as fixed by the Board of Directors. 44. TIME PERIODS. In applying any provision of these Bylaws which requires that an act be done or not done within a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. 45. FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the corporation may be used whenever and as authorized by the Board of Directors. 46. CORPORATE SEAL. The Board of Directors may provide a suitable seal, containing the name of the corporation, which seal shall be in the charge of the Secretary. Duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. 47. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the corporation, including reports made to the corporation by any of its officers, by an independent certified public accountant or by an appraiser. 48. INDEMNIFICATION OF EMPLOYEES. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("a proceeding"), because he or she is or was an employee of the corporation or is or was serving at the request of the corporation as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans from the date of plan adoption), shall be indemnified and held harmless by the corporation against all expense, liability and loss (including attorneys' fees, judgments, penalties, fines, Employee Retirement Income Security Act of 1974 excise taxes or penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided in any event that such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation; and provided further that the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if the proceeding (or part thereof) was authorized by the Board of Directors of the corporation. Such indemnification shall continue as to a person who has ceased to be an employee and shall inure to the benefit of his or her heirs, executors or administrators. -----END PRIVACY-ENHANCED MESSAGE-----