EXHIBIT 99.1
Item 8. Financial Statements and Supplementary Data
Crescendo Pharmaceuticals Corporation
(a development stage company)
Statement of Operations
(in thousands, except per share amounts)
Periods from inception
Years ended (June 26, 1997) to
December 31, December 31,
1999 1998 1997 1999
_________________________________________________________________________
Revenues:
Net interest and
investment income $ 7,439 $ 13,912 $ 4,083 $ 25,434
Royalty revenue
from ALZA Corporation
(a related party) 2,385 - - 2,385
_______ ________ ________ ________
Total revenues 9,824 13,912 4,083 27,819
Expenses:
Research and development
performed under contract
with ALZA Corporation
(a related party) 97,692 105,966 32,279 235,937
General and administrative 1,579 1,316 245 3,140
________ ________ ________ ________
Total expenses 99,271 107,282 32,524 239,077
________ ________ ________ ________
Loss before taxes (89,447) (93,370) (28,441) (211,258)
Income taxes (1,004) 2,425 - 1,421
________ ________ ________ ________
Net loss $(88,443) $(95,795) $(28,441) $(212,679)
=========================================================================
Net loss per common share
Basic and Diluted $(17.89) $(19.29) $(11.33) $(47.62)
=========================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Balance Sheet
December 31,
(in thousands, except per share amounts)
1999 1998
____________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 54,682 $ 54,326
Short-term investments 6,989 57,410
Interest receivable 321 1,861
Taxes receivable 3,502 -
Accounts receivable
(from ALZA Corporation
a related party) 707 -
Other current assets 120 627
____________________________________________________________________
Total current assets 66,321 114,224
Employee loan 300 300
Long-term investments 31,448 79,387
____________________________________________________________________
Total assets $ 98,069 $ 193,911
====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation
(a related party) $ 12,120 $ 17,596
Accrued liabilities 97 77
____________________________________________________________________
Total current liabilities 12,217 17,673
Stockholders' equity:
Class A Common Stock,
$0.01 par value, 6,000
shares authorized; 4,909
and 4,965 shares issued
and outstanding at
December 31, 1999 and 1998,
respectively 49 50
Class B Common Stock,
$1.00 par value, 1 shares
authorized, issued and
outstanding 1 1
Additional paid-in capital 298,951 299,949
Accumulated other comprehensive
income (loss) (470) 474
Deficit accumulated during
development stage (212,679) (124,236)
____________________________________________________________________
Total stockholders' equity 85,852 176,238
____________________________________________________________________
Total liabilities and
stockholders' equity $ 98,069 $ 193,911
====================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(development stage company)
Statement of Stockholders' Equity
(in thousands, except number of shares and per share amounts)
DEFICIT
ACCUMULATED ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER DURING TOTAL
COMMON COMMON PAID-IN COMPREHENSIVE DEVELOPMENT STOCK-
STOCK STOCK CAPITAL INCOME(LOSS) STAGE HOLDERS'
EQUITY
Issuance of 4,965,470
Shares of Class A
Common Stock
for approximately $60.42
per share for cash to
ALZA in September
1997 $ 50 $ - $299,949 $ - $ - $299,999
Issuance of
Common Stock for
$10 per share for cash
to ALZA and its
subsequent conversion
in September 1997 into
1,000 shares of Class B
Common Stock - 1 - - - 1
Comprehensive loss:
Net loss - - - - (28,441) (28,441)
Net change in
unrealized loss on
available-for-sale
securities - - - (80) - (80)
Total comprehensive
loss - - - - - (28,521)
Balance,
December 31,
1997 50 1 299,949 (80) (28,441) 271,479
Comprehensive loss:
Net loss - - - - (95,795) (95,795)
Net change in
unrealized gain on
available-for-sale
securities - - - 554 - 554
Total comprehensive
loss (95,241)
____________________________________________________________________
Balance,
December 31,
1998 50 1 299,949 474 (124,236) 176,238
Repurchase of Class
A Common Stock (1) - (998) - - (999)
Comprehensive loss:
Net loss - - - - (88,443) (88,443)
Net change in
unrealized loss on
available-for-sale
securities - - - (944) - (944)
Total comprehensive
loss (89,387)
___________________________________________________________
Balance,
December 31,
1999 $ 49 $ 1 $298,951 $ (470) $(212,679) $85,852
================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Statement of Cash Flows
Increases (Decreases) in Cash and Cash Equivalents
(in thousands)
Periods from inception
Years ended (June 26, 1997) to
December 31, December 31,
1999 1998 1997 1999
________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (88,443) $(95,795) $(28,441) $(212,679)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Interest receivable 1,540 (894) (967) (321)
Taxes receivable (3,502) - - (3,502)
Accounts receivable from
ALZA Corporation (707) - - (707)
Other current assets 507 (517) (110) (120)
Increase (decrease) in liabilities:
Payable to ALZA Corporation (5,476) 2,528 15,068 12,120
Accrued liabilities 20 37 40 97
_______________________________________________________________________________
Total adjustments (7,618) 1,154 14,031 7,567
________________________________________________________________________________
Net cash used in
operating activities (96,061) (94,641) (14,410) (205,112)
______________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale
securities (12,042) (111,299) (105,319) (228,660)
Maturities of available-for-
sale securities 5,000 - - 5,000
Sales of available-for sale
securities 104,458 80,295 - 184,753
Employee loan, long-term - - (300) (300)
________________________________________________________________________________
Net cash provided by (used in)
investing activities 97,416 (31,004) (105,619) (39,207)
________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock to
ALZA Corporation - - 300,000 300,000
Repurchase of common stock (999) - - (999)
________________________________________________________________________________
Net cash (used in) provided by
financing activities (999) - 300,000 299,001
________________________________________________________________________________
Net increase (decrease) in cash
and cash equivalents 356 (125,645) 179,971 54,682
________________________________________________________________________________
Cash and cash equivalents
at beginning of period 54,326 179,971 - -
________________________________________________________________________________
Cash and cash equivalents
at end of period $ 54,682 $ 54,326 $ 179,971 $ 54,682
================================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Financial Statements
Note 1. Basis of Presentation and Significant Accounting Policies
Crescendo was incorporated in Delaware on June 26, 1997 and
commenced operations on 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. Since its formation, Crescendo's principal
activity has been conducting product development under its
agreements with ALZA. In accordance with generally accepted
accounting principles, Crescendo is considered a development stage
company.
Crescendo incurred research and development expenses of
approximately $97.7 million during 1999, $106.0 million during 1998,
and $32.3 million for the period from inception (June 26, 1997)
through December 31, 1997. Research and development expenses have
totaled approximately $235.9 million for the period from inception
(June 26, 1997) to December 31, 1999. Based on Crescendo's current
rate of expenditures on Crescendo Products, it is expected that
funds for product development will be exhausted during the second
half of 2000 and product development by Crescendo will cease. When
Available Funds are exhausted, ALZA's purchase option with respect
to all of Crescendo's Class A Common Stock and option to license
Crescendo Products on a product-by-product basis will be triggered,
as described more fully in Note 4 below. The Board of Directors of
Crescendo has initiated activities to establish a contingency plan
for the continued operations of Crescendo in the event that ALZA
chooses not to exercise the purchase option, and has the right,
under its agreements with ALZA, to take necessary steps to cease
development funding and maintain a cash reserve of up to $2 million
to ensure Crescendo's ability to meet its operating cash needs
through at least December 31, 2000.
Accounting for Revenues and Expenses
At December 31, 1999, Crescendo's revenue consisted of interest
and investment income and royalty revenue. Since the first quarter
of 1999, Crescendo has accrued royalty revenue based on the net
sales in the United States of one Crescendo Product licensed by
ALZA. Royalties are recognized in the period in which earned(the
period in which product sales are made by third parties from whom
Crescendo receives, directly or indirectly, product royalties),
based on information reported to Crescendo by ALZA.
Crescendo has incurred and expects to incur most of its expenses
under its agreements with ALZA. Development Costs paid to ALZA
under a Development Agreement and amounts paid to ALZA under a
Services Agreement are recorded as research and development expenses
and general and administrative expenses, respectively, and are
recognized on an accrual basis as incurred. These expenses are
recorded in the period in which services have been provided by ALZA
to Crescendo or in which expenses have been incurred by ALZA on
behalf of Crescendo. The Technology Fee paid to ALZA under a
Technology License Agreement is recorded monthly, as incurred, as
research and development expense. See Note 4 for a description of
the agreements between Crescendo and ALZA.
Investment Risk
Crescendo invests excess cash in money market and fixed income
securities of banks and companies with strong credit ratings, from a
variety of industries, and in U.S. government obligations. These
securities typically bear minimal risk and Crescendo has not
experienced any losses on its investments due to institutional failure
or bankruptcy. Crescendo's investment policy is designed to limit
exposure with any one institution.
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. Cash, cash
equivalents and short-term investments are stated at their fair
value.
Segment Information
Effective January 1, 1998, Crescendo adopted Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). Crescendo
has organized its business in one operating segment, since
Crescendo's only business is to engage in pharmaceutical product
development and related activities under its agreements with ALZA.
At December 31, 1999, all of Crescendo's revenue was derived from
its investments in the United States and from product payments on
net sales in the United States.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued the Statement of Financial Accounting Standard No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting
standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. In June 1999, the FASB
issued Statement of Financial Accounting Standard No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS 133". As a result, Crescendo
is required to adopt SFAS 133 in its fiscal year 2001. Crescendo
believes the adoption of SFAS 133 will not have a material effect on
its financial statements.
Note 2. Investments
Crescendo has classified its entire investment portfolio,
including cash and cash equivalents of approximately $54.7 million
and $54.3 million at December 31, 1999 and 1998, respectively, 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. The cost
of securities when sold is based upon specific identification.
Realized gains for the years ended December 31, 1999 and 1998 were
approximately $25,000 and $0.2 million, respectively. For the
period from inception (June 26, 1997) through December 31, 1997,
realized gains were not material.
The following is a summary of Crescendo's investment portfolio
(in thousands):
December 31, 1999 Available-for-Sale Securities
____________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 10,387 $ - $ (89) $ 10,298
Collateralized
mortgage
obligations and
asset backed
securities 18,270 - (280) 17,990
Corporate debt
securities 16,983 - (101) 16,882
Money market funds 46,928 - - 46,928
____________________________________________________________________
$ 92,568 $ - $(470) $ 92,098
====================================================================
December 31, 1998 Available-for-Sale Securities
____________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 57,602 $ 228 $ - $ 57,830
Collateralized
mortgage
obligations and
asset backed
securities 32,364 85 (310) 32,139
Corporate debt
securities 52,896 472 - 53,368
Money market funds 47,091 - - 47,091
____________________________________________________________________
$189,953 $ 785 $ (310) $190,428
====================================================================
The amortized cost and estimated fair value of securities at
December 31, 1999 and 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.
1999 1998
_____________________________________________________________________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
_____________________________________________________________________________
Due in one year or less $ 60,653 $ 60,649 $110,905 $111,041
Due after one year through
three years 31,707 31,244 44,460 44,731
Due after three years through
five years 208 205 34,588 34,656
_____________________________________________________________________________
$ 92,568 $ 92,098 $189,953 $190,428
=============================================================================
Note 3. Stockholders' Equity
Common Stock Repurchase
On May 27, 1999, Crescendo's board of directors announced a
program under which Crescendo may purchase Crescendo Shares in the
open market from time to time using product payments received by
ALZA. As of December 31, 1999, Crescendo had purchased 57,272
Crescendo Shares under this program for approximately $1.0 million.
The excess of the purchase price of the Crescendo Shares over their
stated value has been reflected as a decrease in additional paid-in
capital on the accompanying balance sheet. The board of directors
has determined that the program will continue in the first quarter
of 2000.
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 (in thousands, except per share
amounts):
Periods from inception
Years ended (June 26, 1997)to
December 31, December 31,
1999 1998 1997 1999
____________________________________________________________________
NUMERATOR:
Basic and Diluted
Net loss $ (88,443) $(95,795) $(28,441) $(212,679)
DENOMINATOR:
Basic and Diluted
Weighted average shares
outstanding 4,944 4,966 2,511 4,466
====================================================================
Basic and Diluted
net loss per share $(17.89) $(19.29) $(11.33) $(47.62)
====================================================================
The potentially dilutive effect of outstanding options to
purchase 100,000 Crescendo Shares in the years ended December 31,
1999 and 1998, and for the periods from inception (June 26, 1997)
through December 31, 1997 and 1999, were excluded from the diluted
per share calculations as they would have been anti-dilutive for all
periods.
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 then outstanding
Crescendo Shares (a total of 4,965,470 shares) were distributed to
the holders of ALZA common stock and ALZA's convertible subordinated
debentures. Crescendo Shares are traded on The Nasdaq Stock Marketr
under the symbol "CNDO." ALZA holds all 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 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 initially agreed to
fund the development of seven identified products (the "Initial
Products"). As of December 31, 1999, three of the seven Initial
Products (OROS oxybutynin, DUROS leuprolide and OROS
methylphenidate) remained in active development and/or had been
licensed by ALZA. During the third quarter of 1999, the FDA filed
the NDAs for DUROS leuprolide and OROS methylphendidate. For the
years ended December 31, 1999 and 1998 and the period from inception
(June 26, 1997) through December 31, 1997, Crescendo recorded
research and development expenses of $97.7 million, $106.0 million and
$32.3 million, respectively. For the period from inception (June 26,
1997) through December 31, 1999, Crescendo recorded research and
development expenses of approximately $235.9 million. All periods
include a Technology Fee paid by Crescendo to ALZA. These expenses
related primarily to the development of the Crescendo Products.
Crescendo and ALZA have a Technology License Agreement pursuant
to which ALZA has granted to Crescendo a worldwide license to use
ALZA technology solely to select and develop Crescendo 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,
payable 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 for the following 12 months
and $333,000 per month for the next 12 months (beginning in
September 1999). 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 (described below). Crescendo recorded a
Technology Fee expense of $6.7 million, $10.7 million, and $4.0
million for the years ended December 31, 1999 and 1998, and for the
period from inception (June 26, 1997) through December 31, 1997,
respectively which is included in research and development expenses.
Three of the seven Initial Products were in active development
and/or had been licensed at December 31, 1999.
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 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 Purchase Option,
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 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 any or all licensed
products on a country-by-country or global basis in accordance with
a formula set forth in the License Agreement.
In December 1998, ALZA exercised its option to obtain a worldwide
license to OROS oxybutynin (Ditropan XL) from Crescendo. ALZA
launched the product in the United States on February 1, 1999.
Under the terms of the license agreement between Crescendo and ALZA,
Crescendo will receive payments from ALZA based on worldwide net
sales of the product. For the first three years the rates will be
2.5%, 3.0%, and 3.0% of net sales, respectively; thereafter the rate
is expected to be between 5.5% and 6.5%, based on the Development
Costs of the product to date and future anticipated Development
Costs to be paid by Crescendo. Royalty revenue for the year ended
December 31, 1999 totaled approximately $2.4 million and was derived
from net sales of Ditropan XL in the United States. In 1999, the
royalty rate was 2.5% of net sales. Beginning on January 1, 2000
the rate will be increased to 3% of net sales.
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 is 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 Crescendo's Available Funds which have not been
expended under the Development Agreement, 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 a Services Agreement pursuant to which
ALZA provides certain administrative services, including accounting
and legal services, to Crescendo. Specified charges for such
services are generally intended to allow ALZA to recover direct
costs including fully allocated overheads of providing the services,
plus all out of pocket costs and expenses, but without any profit.
The Services Agreement originally had a one year term and is 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 years ended December 31, 1999
and 1998 and the period from inception (June 16, 1997) through
December 31, 1997 were approximately $232,000, $224,000, and
$42,000, respectively, and approximately $498,000 for the period
from inception (June 26, 1997) through December 31, 1999. Crescendo
accrues on a monthly basis these expenses, which include (i) third
party direct expenses paid by ALZA on behalf of Crescendo; (ii)
actual salaries, including benefits, of ALZA's personnel performing
services for Crescendo; and (iii) ALZA's standard administrative
overhead charge, calculated as a percent of salaries.
At December 31, 1999, the amount payable to ALZA was
approximately $12.1 million. This payable is comprised of
approximately $11.9 million under the Development Agreement and
approximately $0.2 million under the Services Agreement. At
December 31, 1998, the amount payable to ALZA was approximately
$17.6 million. This payable was comprised of approximately $17.4
million under the Development Agreement and approximately $0.2
million under the Services Agreement. The Technology Fee is paid in
the month it is accrued.
Note 5. Stock Option Plan
Crescendo has a stock option plan under which 200,000 shares of
Crescendo Class A Common Stock have been reserved for issuance to
employees, consultants and directors. During the period from
inception (June 26, 1997) through December 31, 1997, options to
purchase 50,000 shares were granted to Crescendo's president and
chief executive officer at an exercise price of $11.00 per share.
Each of the five remaining members of Crescendo's Board of Directors
were granted options to purchase 10,000 shares at exercise prices
ranging from $11.28 to $11.50 per share in 1997. All outstanding
options have an exercise price equal to the fair market value of the
Crescendo Class A Common Stock on the date of grant. The options
are exercisable in four equal annual installments beginning one year
after the date of grant and expire ten years after the date of
grant.
Financial Accounting Standards Board SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), prescribes a fair value
method of accounting for stock options. SFAS 123 gives companies a
choice of recognizing related compensation expense by adopting the
new fair value method or continuing to measure compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Crescendo has elected to follow APB
25 in accounting for its stock options.
Had compensation expense for stock options been determined
using the fair value method in accordance with SFAS 123, Crescendo's
pro forma net loss and net loss per share would have been as
follows:
Periods from inception
(In thousands, Years ended (June 26,1997)to
except per share amounts) December 31, December 31,
1999 1998 1997 1999
______________________________________________________________________
Net loss
As reported $ (88,443) $ (95,795) $ (28,441) $(212,679)
Pro forma (88,519) (95,919) (28,471) (212,909)
Net loss per share
(basic and diluted)
As reported $(17.89) $(19.29) $(11.33) $(47.62)
Pro forma (17.90) (19.32) (11.34) (47.67)
The historical proforma impact of applying the fair value
method is not representative of the impact that may be expected in
the future due to additional options that may be granted in the
future.
The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1997
______________________________________________________________________
Risk-free interest rate 6.0%
Expected dividend yield 0
Expected volatility 23.0%
Expected life (in years) 3.5
No options were granted during the years ended December 31,
1999 and 1998.
Changes in the assumptions can materially affect the fair value
estimate and therefore the existing models do not necessarily
provide a reliable single measure of the fair value of Crescendo's
stock options.
A summary of Crescendo's stock option activity, and related
information for years ended 1999 and 1998 and the period ended 1997,
follows:
____________________________________________________________________
Options Weighted Average
(in thousands) Exercise Price
1999 1998 1997 1999 1998 1997
____________________________________________________________________
Outstanding-beginning
of period 100 100 - $ - $ - $ -
Granted 100 11.23 11.23 11.23
____________________________________________________________________
Outstanding-end
of period 100 100 100 $11.23 $11.23 $11.23
====================================================================
Exercisable-end
of year 50 25 - $11.23 $11.23 $ -
Weighted-average fair
value of options
granted during 1997 $2.93
At December 31, 1999, 100,000 shares were available for grant under
Crescendo's Stock Option Plan. At December 31, 1999, the weighted
average remaining contractual life of the outstanding options was
7.78 years.
Note 6. Dividends
Crescendo's Restated Certificate of Incorporation prohibits the
payment of dividends from Available Funds.
Note 7. Income Taxes
The provision for income taxes consists of:
Periods from inception
Years ended (June 26, 1997) to
December 31, December 31,
1999 1998 1997 1999
______________________________________________________________________
(in thousands)
Taxes currently payable:
Federal $(1,400) $1,919 $ - $ 519
State 396 506 - 902
________ ______ _______ _______
Total $(1,004) $2,425 $ - $1,421
======== ====== ======= =======
A reconciliation of the provision for income taxes to the federal
statutory tax rate (35%) follows:
Periods from inception
Years ended (June 26, 1997) to
December 31, December 31,
1999 1998 1997 1999
__________________________________________________________________________
(in thousands)
Expected tax benefit-
statutory rate $ (30,547) $(32,680) $ (9,954) $ (73,181)
State taxes (4,991) (5,340) (1,621) (11,952)
Tax effect of capitalized
expenses which provide no
current tax benefit 34,534 40,445 11,575 86,554
_______ _______ _______ ________
Total $ (1,004) $ 2,425 $ - $ 1,421
======= ======= ======== ========
Taxes receivable consist primarily of research expenditures
capitalized for income taxes purposes only. Deferred tax assets of
approximately $84.9 million and $52.0 million at December 31, 1999
and 1998, respectively, have been fully offset by a valuation
allowance because of Crescendo's lack of earnings history. The
valuation allowance for deferred tax assets increased by $32.9
million during the year ended December 31, 1999, $40.4 million for
the year ended December 31, 1998 and $11.6 million for the period
from inception (June 26, 1997) to December 31, 1997.
Note 8. Quarterly Financial Data (unaudited)
The net loss and loss per share for the eight quarters beginning
with the quarter ended March 31, 1998, and ending with the quarter
ended December 31, 1999 were, sequentially, approximately, $17.9
million and $3.60 per share, $25.6 million and $5.16 per share,
$25.0 million and $5.03 per share, $27.3 million and $5.50 per
share, $19.8 million and $3.99 per share, $29.7 million and $5.98
per share, $19.6 million and $3.97 per share, and $19.4 million and
$3.95 per share.
Note 9. Events Subsequent to Date of Independent Auditors Report
On March 3, 2000, DUROS leuprolide was approved for marketing by
the FDA. Also on March 3, 2000, ALZA exercised its option to obtain
a worldwide license to DUROS leuprolide from Crescendo. Under the
terms of the license agreement between Crescendo and ALZA, Crescendo
will receive payments from ALZA based on worldwide net sales of the
product. For the first three years the rates will be 2.5%, 3.0%,
and 3.0% of net sales, respectively; thereafter the rate is expected
to be between 7.5% and 8.5%, based on the Development Costs to date
and future anticipated Development Costs to be paid by Crescendo.
Between January 1, 2000 and March 9, 2000, Crescendo purchased an
additional 36,925 Crescendo Shares under the stock repurchase
program for approximately $0.7 million, using the product payments
received by Crescendo from ALZA in December of 1999.
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CRESCENDO PHARMACEUTICALS CORPORATION
We have audited the accompanying balance sheets of Crescendo
Pharmaceuticals Corporation (a development stage company) as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31,
1999 and 1998 and for the periods from inception (June 26, 1997) to
December 31, 1997 and December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Crescendo
Pharmaceuticals Corporation (a development stage company) at December
31, 1999 and 1998, and the results of its operations and its cash
flows for the years ended December 31, 1999 and 1998 and for the
periods from inception (June 26, 1997) to December 31, 1997 and
December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 4, 2000
