UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 1998
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
__________ to __________
Commission File Number 0-22927
CRESCENDO PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0460388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1454 Page Mill Road, Palo Alto, California 94304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 494-5600
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 October 31, 1998:
Class A Common Stock, $.01 par value - 4,965,470 shares
Class B Common Stock, $1.00 par value - 1,000 shares
CRESCENDO PHARMACEUTICALS CORPORATION
FORM 10-Q for the Quarter Ended
September 30, 1998
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Operations (unaudited)
(in thousands, except per share amounts)
Period from Period from
Three months inception Nine months inception
ended (June 26, 1997), ended (June 26, 1997)
Sept. 30, to Sept. 30, Sept. 30, to Sept. 30,
1998 1997* 1998 1998
__________________________________________________________________________
Revenues:
Net interest and
investment income $ 3,786 $ 91 $ 10,988 $ 15,071
Expenses:
Research & development
performed under
contract with ALZA
Corporation 28,422 6,366 78,453 110,732
General & admin 331 1 1,004 1,249
_________________________________________________________________________
Total expenses 28,753 6,367 79,457 111,981
_________________________________________________________________________
Net loss $ (24,967) $ (6,276) $ (68,469) $ (96,910)
=========================================================================
Net loss per
common share
Basic $ (5.03) $ (113.53) $ (13.79) $ (24.32)
=========================================================================
Diluted $ (5.03) $ (113.53) $ (13.79) $ (24.32)
=========================================================================
* See Note 1
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Balance Sheets (unaudited)
(in thousands, except number of shares and per share amounts)
September 30, December 31,
1998 1997
_____________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 58,490 $179,971
Short-term investments 56,574 29,601
Interest receivable 1,895 967
Prepaid expenses and other
current assets 246 110
_____________________________________________________________________
Total current assets 117,205 210,649
Employee loan 300 300
Long-term investments 103,849 75,638
_____________________________________________________________________
Total assets $ 221,354 $286,587
=====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 16,392 $ 15,068
Accrued liabilities 34 40
_____________________________________________________________________
Total current liabilities 16,426 15,108
Stockholders' equity:
Class A Common Stock, $0.01 par value,
6,000,000 shares authorized; 4,965,470
issued and outstanding 50 50
Class B Common Stock, $1.00 par value,
1,000 shares authorized, issued and
outstanding 1 1
Additional paid-in capital 299,949 299,949
Accumulated other comprehensive income
(loss) 1,838 (80)
Deficit accumulated during development
stage (96,910) (28,441)
_____________________________________________________________________
Total stockholders' equity 204,928 271,479
_____________________________________________________________________
Total liabilities and
stockholders' equity $ 221,354 $286,587
=====================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Cash Flows (unaudited)
Increases (Decreases) in Cash and Cash Equivalents
(in thousands)
Period Period
Nine months from inception from inception
ended (June 26, 1997)(June 26, 1997)
Sept. 30, to Sept. 30, to Sept. 30,
1998 1997* 1998
______________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (68,469) $ (6,276) $ (96,910)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
Increase in assets:
Interest receivable (928) - (1,895)
Prepaid expenses and other
assets (136) - (246)
Increase (decrease) in liabilities:
Payable to ALZA Corporation 1,324 6,368 16,392
Accrued liabilities (6) - 34
_____________________________________________________________________________
Total adjustments 254 6,368 14,285
Net cash (used in) provided by (68,215) 92 (82,625)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (111,299) - (216,618)
Sales of available-for-sale
securities 58,033 - 58,033
Employee loan, long-term - - (300)
_____________________________________________________________________________
Net cash used in investing activities (53,266) - (158,885)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock to
ALZA Corporation - 300,000 300,000
_____________________________________________________________________________
Net cash provided by financing
activities - 300,000 300,000
_____________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (121,481) 300,092 58,490
_____________________________________________________________________________
Cash and cash equivalents
at beginning of period 179,971 - -
_____________________________________________________________________________
Cash and cash equivalents
at end of period $ 58,490 $ 300,092 $ 58,490
=============================================================================
*See Note 1.
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
Note 1. Basis of Presentation and Significant Accounting Policies
Crescendo Pharmaceuticals Corporation ("Crescendo") was
incorporated in Delaware on June 26, 1997 and commenced operations on
September 30, 1997, at which time Crescendo incurred $6 million of
research and development expenses, representing reimbursement to ALZA
for contract research work performed by ALZA during an approximate one
month period prior to September 30, 1997. Crescendo was formed for
the purpose of selecting and developing human pharmaceutical products
and commercializing such products, most likely through licensing to
ALZA Corporation ("ALZA"). Since its formation, Crescendo's principal
activities have been conducting product development under its
agreements with ALZA. In accordance with generally accepted
accounting principles, Crescendo is considered a development stage
company.
The information at September 30, 1998, for the three and nine
months ended September 30, 1998, the period from inception through
September 30, 1997, and for the period from inception through
September 30, 1998 is unaudited, and includes all adjustments
(consisting only of normal recurring adjustments) that the management
of Crescendo believes necessary for fair presentation of the results
for the periods presented. Interim results are not necessarily
indicative of the results for the full year. The balance sheet for
December 31, 1997 was derived from the audited balance sheet. The
financial statements should be read in conjunction with the audited
financial statements and accompanying notes for the year ended
December 31, 1997 included in Crescendo's 1997 Annual Report on Form
10-K.
Accounting for Revenues and Expenses
Crescendo's revenue currently consists solely of interest and
investment income. If and when any products of Crescendo are
commercialized, Crescendo will also derive revenue from the sale or
license of such products, most likely through the sale of licensed
products by third parties. Royalty and other product revenue will be
recorded as earned.
Crescendo expects to incur most of its expenses under its
agreements with ALZA. Development costs paid to ALZA under a
Development Agreement, and a Technology Fee (defined below) paid to
ALZA under a Technology License Agreement, are recorded as research
and development expenses when incurred. Amounts paid to ALZA under a
Services Agreement are recorded as administrative expenses when
incurred. See Note 4 for a description of the agreements between
Crescendo and ALZA.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents include cash balances and investments
with maturities of three months or less at the time of purchase.
Short-term investments include commercial paper and other highly
liquid investments with maturities less than one year. The carrying
amount reported on the balance sheet for cash, cash equivalents, and
short-term investments, approximates their fair value.
New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS
131 established standards for annual and interim disclosures of
operating segments, products and services, geographic areas and major
customers, and is effective in 1998. The adoption of SFAS 131 will
have no impact on Crescendo's results of operations or financial
condition.
Comprehensive Income (Loss)
As of January 1, 1998, Crescendo adopted Statement of Financial
Accounting Standards No 130, "Reporting Comprehensive Income" ("SFAS
130") which establishes standards for reporting comprehensive income
and its components. Comprehensive loss includes net loss plus other
comprehensive loss. For Crescendo, other comprehensive loss primarily
comprises net unrealized gains or losses on available-for-sale
securities. Total comprehensive loss was approximately $25.0 million
and $68.5 million for the three months and nine months ended September
30, 1998, respectively. For the period ended September 30, 1997 the
net loss was approximately $6.3 million. For the period from
inception through September 30, 1998 the total comprehensive loss was
approximately $96.9 million. The adoption of SFAS 130 had no impact
on Crescendo's results of operations or financial condition.
Note 2. Investments
Crescendo has classified its entire investment portfolio,
including cash and cash equivalents of approximately $58.5 million at
September 30, 1998, as available-for-sale. Investments in the
available-for-sale category are carried at fair market value with
unrealized gains and losses recorded as a separate component of
stockholders' equity. Realized gains and losses for the period ended
September 30, 1998 were not material. The cost of securities when
sold is based upon specific identification.
The following is a summary of available-for-sale securities at
September 30, 1998 (in thousands):
Available-for-Sale Securities
______________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
______________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 78,350 $ 707 $ - $ 79,057
Collateralized
mortgage
obligations and
asset backed
securities 31,240 398 - 31,638
Corporate securities
(commercial paper,
corporate notes and
money market funds) 107,409 733 - 108,142
______________________________________________________________________
$216,999 $ 1,838 $ - $218,837
======================================================================
The amortized cost and estimated fair value of debt and marketable
securities at September 30, 1998, by contractual maturity, are shown
below (in thousands). Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to
prepay obligations without prepayment penalties.
Estimated
Amortized Fair
Cost Value
______________________________________________________________________
Due in one year or less $ 114,843 $ 114,988
Due after one year through
three years 51,529 52,264
Due after three years through
five years 50,627 51,585
______________________________________________________________________
$ 216,999 $ 218,837
=====================================================================
Investment Risk
Crescendo invests excess cash in money market and fixed income
securities of companies with strong credit ratings, from a variety of
industries, and in U.S. government obligations. These securities
typically bear minimal credit risk and Crescendo has not experienced
any losses on its investments to date due to credit risk.
Note 3. Per Share Information
Basic loss per share is calculated by dividing net loss by the
weighted average common shares outstanding for the period. Diluted
loss per share is calculated by dividing net loss by the weighted
average common shares outstanding for the period plus the dilutive
effect of stock options.
The following table sets forth the computation of Crescendo's
basic and diluted loss per share:
Period from Period from
inception inception
Three months (June 26, 1997) Nine months (June 26, 1997)
ended to ended to
Sept. 30, 1998 Sept. 30, 1997* Sept. 30, 1998 Sept. 30, 1998
________________________________________________________________________________
NUMERATOR (in thousands):
Basic and Diluted
Net loss $ (24,967) $ (6,276) $ (68,469) $ (96,910)
================================================================================
DENOMINATOR (in thousands):
Basic and Diluted
Weighted average shares
outstanding 4,966 55 4,966 3,984
================================================================================
Basic net loss
per share $ (5.03) $(113.53) $ (13.79) $ (24.32)
================================================================================
Diluted net loss
per share $ (5.03) $(113.53) $ (13.79) $ (24.32)
*See Note 1.
The potentially dilutive effect of outstanding options to
purchase 100,000 shares of Crescendo Class A Common Stock (the
"Crescendo Shares") would have been anti-dilutive in the three and
nine months ended September 30, 1998, for the period ended September
30, 1997, and for the period from inception through September 30,
1998, and they were therefore excluded from the diluted per share
calculations.
Note 4. Arrangements with ALZA Corporation
On September 29, 1997, ALZA contributed $300 million in cash to
Crescendo. On September 30, 1997, all of the Crescendo Shares, a
total of 4,965,470, were distributed to the holders of ALZA Common
Stock and ALZA's convertible subordinated debentures. Crescendo
Shares are traded on The NASDAQ Stock Market-Servicemark- under the
symbol "CNDO." ALZA holds 1,000 shares of Crescendo Class B Common
Stock.
In connection with ALZA's contribution to Crescendo and the
distribution of Crescendo Shares, Crescendo and ALZA entered into a
number of agreements, including a Development Agreement, Technology
License Agreement, License Option Agreement and Services Agreement,
discussed below.
Crescendo and ALZA have entered into a Development Agreement
pursuant to which ALZA conducts product development and related
activities on behalf of Crescendo under work plans and cost estimates
which have been proposed by ALZA and approved by Crescendo. Crescendo
is required to utilize the cash initially contributed to it by ALZA
plus interest thereon, less Crescendo's administrative expenses, the
Technology Fee paid to ALZA and reserves of up to $2 million (the
"Available Funds") to conduct activities under the Development
Agreement.
Under the Development Agreement, Crescendo agreed initially to
fund the development of seven products (the "Initial Products"). As
of October 31, 1998, three of the Initial Products (OROS-Registered -
Trademark- oxybutynin, DUROS-Trademark- leuprolide and OROS-Registered
Trademark- methylphenidate) remained in active development. During
the third quarter of 1998, ALZA completed feasibility evaluations for
the E-TRANS-Trademark- LHRH and E-TRANS-Trademark- Macroflux-
Trademark- insulin products. Based on the results of the evaluations,
on ALZA's recommendation, Crescendo is not funding additional
development of these products, beginning in the third quarter of 1998.
The other disclosed product in active development with ALZA is an E-
TRANS-Trademark- fentanyl product for chronic pain. Research and
development expenses for the three months and nine months ended
September 30, 1998 were approximately $28.4 million and $78.5 million,
respectively, including a Technology Fee expense of $2.7 million and
$8.7 million, respectively. Research and development expenses for the
period ended September 30, 1997 were approximately $6.4 million,
including a Technology Fee expense of $1.0 million. For the period
from inception through September 30, 1998, Crescendo recorded research
and development expenses of approximately $110.7 million, including a
Technology Fee expense of $12.7 million.
Crescendo and ALZA have entered into a Technology License Agreement
pursuant to which ALZA has granted to Crescendo a worldwide license to
use ALZA technology solely to select and develop human pharmaceutical
products (the "Crescendo Products") (including the Initial Products),
to conduct related activities, and to commercialize such products. In
exchange for the license to use existing ALZA technology relating to
the Initial Products, Crescendo pays a Technology Fee to ALZA, monthly
over a period of three years, in the amount of $1 million per month
for the first 12 months following the distribution of Crescendo
Shares, $667,000 per month(beginning in September 1998) for the
following 12 months and $333,000 per month for the next 12 months (the
"Technology Fee"). The Technology Fee will no longer be payable at
such time as fewer than two of the Initial Products are being
developed by Crescendo and/or have been licensed by ALZA pursuant to
the License Option (defined below). The Technology Fee is included in
research and development expenses.
Pursuant to the License Option Agreement entered into by Crescendo
and ALZA, Crescendo has granted ALZA an option to acquire a license to
each Crescendo Product (the "License Option"). The License Option for
any such Crescendo Product is exercisable on a country-by-country
basis at any time until (i) with respect to the United States, 30 days
after clearance by the FDA to market such Crescendo Product in the
United States and (ii) with respect to any other country, 90 days
after the earlier of (a) clearance by the appropriate regulatory
agency to market the Crescendo Product in such country and (b)
clearance by the FDA to market the Crescendo Product in the United
States. The License Option will expire, to the extent not previously
exercised, 30 days after the expiration of ALZA's option to purchase
all of the outstanding Crescendo Shares, described below. If and to
the extent the License Option is exercised as to any Crescendo
Product, ALZA will acquire a perpetual, exclusive license (with the
right to sublicense) to develop, make, have made and use the licensed
product, and to sell and have sold the licensed product in the country
or countries as to which the License Option is exercised.
Under the License Agreement for each licensed product (a form of
which is attached to the License Option Agreement), ALZA will make
payments to Crescendo with respect to the licensed product equal to 1%
of net sales of the licensed product by ALZA and its sublicensees,
distributors and marketing partners, plus an additional 0.1% of such
net sales for each full $1 million of development costs (as defined in
the Development Agreement) of the licensed product that have been paid
by Crescendo, not to exceed 2.5% of net sales in the first year a
licensed product is sold in a major market country, and not to exceed
3% for the following two years. ALZA has the right to buy out
Crescendo's right to receive payments for licensed products on a
country-by-country or global basis in accordance with a formula set
forth in the License Agreement.
Pursuant to Crescendo's Restated Certificate of Incorporation, ALZA
has a purchase option which gives ALZA the right to purchase all (but not
less than all) of the Crescendo Shares (the "Purchase Option"). The
Purchase Option will be exercisable by written notice to Crescendo at any
time until January 31, 2002, provided that such date will be extended for
successive six month periods if, as of any July 31 or January 31
beginning with July 31, 2001, Crescendo has not paid (or accrued expenses
for) at least 95% of Available Funds pursuant to the Development
Agreement. In any event, the Purchase Option will terminate on the 60th
day after Crescendo provides ALZA with a statement that, as of the end of
any calendar month, there are less than $2.5 million of Available Funds
remaining, accompanied by a report of Crescendo's independent auditors.
If the Purchase Option is exercised, the exercise price will be the
greatest of:
(a)(i) 25 times the actual payments made by or due from ALZA to
Crescendo under the Development Agreement and the License
Agreement for any product (and, in addition, such payments as
would have been made by or due from ALZA to Crescendo if ALZA had
not previously exercised its payment buy-out option with respect
to any such payments) for the four calendar quarters immediately
preceding the quarter in which the Purchase Option is exercised
(provided, however, that for any product which has not been
commercially sold during each of such four calendar quarters, the
portion of the exercise price for such product will be 100 times
the average of the quarterly payments made by or due from ALZA to
Crescendo for each of such calendar quarters during which such
product was commercially sold) less (ii) any amounts previously
paid to exercise any payment buy-out option;
(b) the fair market value of one million shares of ALZA common
stock;
(c) $325 million less all amounts paid by or due from Crescendo
under the Development Agreement to the date the Purchase Option is
exercised; and
(d) $100 million.
In each case, the amount payable as the Purchase Option exercise
price will be reduced to the extent, if any, that Crescendo's
liabilities at the time of exercise (other than liabilities under the
Development Agreement, the Technology License Agreement and the
Services Agreement, described below) exceed Crescendo's cash and cash
equivalents, and short-term and long-term investments (excluding the
amount of Available Funds remaining at such time). ALZA may pay the
exercise price in cash, in ALZA common stock or in any combination of
cash and ALZA common stock.
Crescendo and ALZA have entered into a Services Agreement pursuant
to which ALZA has agreed to provide Crescendo with administrative
services, including accounting and legal services, on a fully-burdened
cost reimbursement basis. The Services Agreement has a one-year term
and will be renewed automatically for successive one-year terms during
the term of the Development Agreement unless terminated by Crescendo
at any time upon 60 days' written notice. General and administrative
expenses incurred under this agreement for the three and nine months
ended September 30, 1998 were approximately $66,000 and $192,000,
respectively. For the period ended September 30, 1997, total general
and administrative expenses were not material. General and
administrative expenses incurred under the Services Agreement for the
period from inception through September 30, 1998 were approximately
$283,000.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Crescendo was incorporated on June 26, 1997, and commenced
operations on September 30, 1997, at which time Crescendo incurred
approximately $6 million of research and development expenses,
representing reimbursement to ALZA Corporation for contract research
work performed by ALZA during an approximate one month period prior to
September 30, 1997. As a result, this Management's Discussion and
Analysis of Financial Condition and Results of Operations does not
include a comparison between the 1997 period of operations and the
three and nine months ended September 30, 1998, as such comparison
would not be meaningful.
Notice Concerning Forward-Looking Statements
Some of the statements made in this Form 10-Q, and particularly in
the Management's Discussion and Analysis of Financial Condition and
Results of Operations, are forward-looking in nature. Forward-looking
statements include but are not limited to statements that are not
historical facts and statements including forms of the words "intend",
"believe", "will", "may", "could", "expect", "anticipate", "possible"
and similar terms. The occurrence of the events described, and the
achievement of the intended results, are subject to the future
occurrence of many events, some or all of which are not predictable or
within Crescendo's control (including without limitation any possible
future actions by ALZA) and various risk factors; therefore, actual
results may differ materially from those anticipated in any forward-
looking statements. The significant risks related to Crescendo's
business are those associated with product selection, technology and
product development, clinical development, product manufacturing,
regulatory clearance to market products, changes in the health care
marketplace, patent and intellectual property matters, medical and
market acceptance of products (including third party reimbursement),
commercializing products (including competition), conflicts of
interest between ALZA and Crescendo and the risk of a lack of funds to
complete the development of products. Such risks are described in
more detail in Crescendo's Annual Report on Form 10-K for the year
ended December 31, 1997.
Results of Operations
Revenues, consisting of net interest and investment income earned
on invested funds, were approximately $3.8 million and $11.0 million
for the three months and nine months ended September 30, 1998,
respectively. For the period from Crescendo's inception (June 26,
1997) through September 30, 1998, revenues were approximately $15.1
million. As Crescendo's funds are used under the Development
Agreement and to pay the Technology Fee, lower cash balances will be
available for investment and, therefore, interest and investment
income is expected to decrease. During the period in which all
Crescendo Products are under development and applications for
regulatory clearance are submitted and reviewed, Crescendo does not
anticipate revenues other than from interest and investment income.
If and when any Crescendo Product receives regulatory clearance and is
successfully commercialized, Crescendo will derive revenue from the
license or sale of such product.
Crescendo incurred research and development expenses of
approximately $28.4 million and $78.5 million for the three months and
nine months ended September 30, 1998, respectively. For the period
from inception through September 30, 1998, Crescendo recorded research
and development expenses of approximately $110.7 million. These
expenses related primarily to development of the Initial Products
through September 30, 1998 and payment of Technology Fees of $2.7
million and $8.7 million to ALZA during the three months and nine
months ended September 30, 1998, respectively ($12.7 million from
inception through September 30, 1998). Crescendo's research and
development expenses are expected to continue at approximately current
levels during 1998, although quarterly fluctuations can be expected.
General and administrative expenses for the three months and nine
months ended September 30, 1998 were approximately $0.3 million and
$1.0 million, respectively. For the period from inception through
September 30, 1998, general and administrative expenses were
approximately $1.2 million. Expenses incurred by Crescendo under its
Services Agreement with ALZA were approximately $66,000 and $192,000
for the three months and nine months ended September 30, 1998,
respectively. For the period from inception through September 30,
1998, expenses incurred by Crescendo under its Services Agreement with
ALZA were approximately $283,000.
The results of operations of Crescendo currently reflect
primarily interest and investment income on the funds contributed by
ALZA, and research and development expenses related to development of
Crescendo Products and the Technology Fee. Crescendo's net loss for
the three months and nine months ended September 30, 1998 was
approximately $25.0 million or $5.03 per share and $68.5 million or
$13.79 per share, respectively. The net loss from its inception
through September 30, 1998 was $96.9 million or $24.32 per share.
Crescendo is expected to continue to record significant net losses in
future periods, as product development expenses under its agreements
with ALZA are expected to continue to exceed income.
Year 2000
Many older computer software programs refer to years in terms of
their two final digits only. Such programs could misinterpret the
year 2000 as the year 1900, which, if not corrected, could cause date-
related systems failures. This is referred to as the "Year 2000"
problem.
Crescendo is reliant upon the QuickBooks Pro Version 5.0 software
application to conduct its business. This accounting software has
been represented by the manufacturer to be Year 2000 compliant.
In addition to its internal system, Crescendo is also reliant
upon the capabilities of the computer systems of its vendors,
contractors (including ALZA for administrative functions under the
Services Agreement and for contractual research and development), U.S.
government agencies, and its investment managers. In order to
determine the level of Year 2000 compliance of vendors, contractors
and investment managers, Crescendo has initiated communications with
third parties with whom it has material direct business relationships.
If any of these third parties experience failures in their computer
systems due to Year 2000 non-compliance, it could materially affect
Crescendo's investment portfolio, ability to engage in normal business
activities and, in particular, the status of certain product
development activities being conducted by ALZA. Although these risks
are outside of Crescendo's control, Crescendo will continue to assess
the responses it receives from third parties in an effort to address
any potential non-compliance issues.
Crescendo has not incurred any material costs in connection with
its Year 2000 assessment and no conversion of its internal system is
required. Due to the general uncertainty surrounding the Year 2000
readiness of third parties upon whom Crescendo relies, Crescendo is
unable to determine at this time whether or to what extent Year 2000
failures will have a material impact on its operations.
Liquidity and Capital Resources
On September 29, 1997, ALZA contributed $300 million in cash to
Crescendo in exchange for the Crescendo Shares. The funds contributed
by ALZA, plus investment income earned thereon, are used primarily to
fund the development of Crescendo Products and to conduct related
activities. Funds not immediately required for development activities
are invested in low-risk securities.
At September 30, 1998, and December 31, 1997, Crescendo had cash,
cash equivalents and short-and long-term investments of approximately
$218.9 million and $285.2 million, respectively. Crescendo's cash
expenditures for operating activities were approximately $68.2 million
for the nine months ended September 30, 1998 and approximately $82.6
million for the period from inception through September 30, 1998. As
Crescendo's funds continue to be utilized under the Development
Agreement and to pay the Technology Fee to ALZA, increasingly lower
cash balances will be available for investment.
Based on anticipated spending levels for the continued development of
all the current Crescendo Products, it is expected that Crescendo's funds
for product development will be exhausted during the next two to three
years. At that time, product development funding by Crescendo will
cease. However, several factors could impact the level and timing of
Crescendo funding, including receipt of FDA clearance of a Crescendo
Product, any commercial arrangements between ALZA and other companies
which would cause ALZA to exercise its License Option with respect to any
Crescendo Product and not request further funding with respect to such
Crescendo Product, the addition of any new Crescendo Products, the
discontinuation of the development of any Crescendo Products, any change
in the number of projects advancing to or continuing in later stages of
development or any adjustments in the rate of spending on products
currently in development.
When Crescendo's cash available for product development is exhausted,
certain critical timetables will be triggered. First, ALZA's Purchase
Option with respect to all of the Crescendo Shares will terminate on the
60th day after Crescendo provides ALZA with a statement that, as of the
end of any calendar month, there are less than $2.5 million of Available
Funds remaining, accompanied by a report of Crescendo's independent
auditors. In addition, ALZA has the right, for 30 days after expiration
of the Purchase Option, to license any or all Crescendo Products which
have not yet been licensed, on a product-by-product and country-by-
country basis. ALZA is under no obligation to exercise the Purchase
Option or the License Option with respect to any Crescendo Product and
will do so only if ALZA determines that it is in the best interests of
ALZA and its stockholders at the time the decision is made. In the event
that ALZA does not exercise the Purchase Option or the License Option for
all Crescendo Products after Crescendo's cash available for product
development is exhausted, Crescendo will not have funds to continue or
complete development of any remaining products.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amendment No.1 to Services Agreement between ALZA
Corporation and Crescendo Pharmaceuticals Corporation dated
August 24, 1998.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
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.
Crescendo Pharmaceuticals Corporation
Date: November 13 , 1998 By: /s/ Gary L. Neil
_________________________________
Gary L. Neil
President and
Chief Executive Officer
Date: November 13 , 1998 By: /s/ David R. Hoffmann
_________________________________
David R. Hoffmann
Vice President, Finance
and Secretary
EXHIBIT INDEX
Exhibit
10.1 Amendment No.1 to Services Agreement between ALZA Corporation and
Crescendo Pharmaceuticals Corporation dated August 24, 1998.
27 Financial Data Schedule
EXHIBIT 10.1
AMENDMENT NO. 1
TO SERVICES AGREEMENT
This AMENDMENT NO. 1 (the "Amendment") to Services
Agreement is entered into this 24th day of August, 1998,
effective as of September 5, 1997, between ALZA
Corporation ("ALZA") and Crescendo Pharmaceuticals
Corporation ("Crescendo").
RECITALS
A. ALZA and Crescendo are parties to a Services
Agreement (the"Agreement") dated as of September 5, 1997.
B. Pursuant to the Agreement, ALZA provides various
administrative services to Crescendo.
C. The parties wish to amend the Agreement as set
forth herein.
NOW, THEREFORE, the parties agree as follows:
1. Section 4 of the Agreement is eliminated in its
entirety andthe following is substituted therefor:
"4. Indemnification. Crescendo hereby agrees
to indemnify, protect and hold ALZA harmless from any
and all liabilities, costs or expenses incurred by
ALZA as a result of the services rendered by it under
this Agreement, including, without limitation,
lawsuits of and claims by third parties, except for
liabilities, costs or expenses resulting from ALZA's
gross negligence or willful misconduct. ALZA hereby
agrees to indemnify, protect and hold Crescendo
harmless from any and all liabilities, costs or
expenses incurred by Crescendo resulting from the
gross negligence or willful misconduct of ALZA or any
of its employees or agents in the performance of
services rendered by ALZA under this Agreement. The
party claiming the right to indemnification under
this Section 4 shall give the indemnifying party
prompt written notice, in the manner set forth in
Section 6.7 below, of any claim or demand made
against the party seeking indemnity for which such
party may be entitled to indemnification under this
Section4."
2. Except as set forth in this Amendment No. 1, the
Agreementremains in full force and effect as originally
executed.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first set forth above.
Crescendo Pharmaceuticals Corporation
By: /s/Gary L. Neil
Its: President & Chief Executive Officer
ALZA Corporation
By: /s/ Bruce C. Cozadd
Its: Sr. Vice Pres. & Chief Financial Officer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-Q DATED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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