11/14/97 12:05 PM
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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, 1997
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
__________ to __________
Commission File Number 0-22927
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 ___ No X(1)
Number of shares outstanding of each of the registrant's classes
of common stock as of October 31, 1997:
Class A Common Stock, $.01 par value - 4,965,470 shares
Class B Common Stock, $1.00 par value - 1,000 shares
(1) The registrant became subject to the filing requirements of
the Securities Exchange Act of 1934 on September 5, 1997.
CRESCENDO PHARMACEUTICALS CORPORATION
FORM 10-Q for the Quarter Ended
September 30, 1997
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Statement of Operations 3
Condensed Balance Sheet 4
Condensed Statement of Cash Flows 5
Notes to Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
Part II. Other Information
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statement of Operations (unaudited)
Three Months Period from inception
Ended (June 26, 1997)
September 30, to September 30,
1997 1997
______________________________________________________________________
Revenues:
Interest income $ 91,223 $ 91,223
Expenses:
Research and development 6,366,193 6,366,193
General and administrative 1,149 1,149
______________________________________________________________________
Total expenses 6,367,342 6,367,342
______________________________________________________________________
Net loss $ (6,276,119) $ (6,276,119)
======================================================================
Loss per common share $ (113.53)
=================
Weighted average common
shares 55,282
=================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Balance Sheet (unaudited)
September 30, July 7,
1997 1997
______________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 300,092,223 $ 1,000
______________________________________________________________________
Total current assets 300,092,223 1,000
______________________________________________________________________
Total assets $ 300,092,223 $ 1,000
======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 6,367,193 -
Accrued liabilities 1,149 -
______________________________________________________________________
Total current liabilities 6,368,342 -
Stockholders' equity:
Common Stock, $1.00 par value,
100 shares authorized and outstanding
at inception - 100
Class A Common Stock, $0.01 par value,
6,000,000 shares authorized; 4,965,470
issued and outstanding 49,655 -
Class B Common Stock, $1.00 par value,
1,000 shares authorized, issued and
outstanding 1,000 -
Additional paid-in capital 299,949,345 900
Accumulated deficit (6,276,119) -
______________________________________________________________________
Total stockholders' equity 293,723,881 1,000
______________________________________________________________________
Total liabilities and
stockholders' equity $ 300,092,223 $ 1,000
======================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statement of Cash Flows (unaudited)
For the period
from inception
Three months ended (June 26, 1997)
September 30, to September 30,
1997 1997
______________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,276,119) $ (6,276,119)
Non-cash adjustments to reconcile
net loss to net cash provided by
operating activities:
Increase in current liabilities 6,368,342 6,368,342
______________________________________________________________________
Net cash provided by operating activities 92,223 92,223
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 300,000,000 300,000,000
______________________________________________________________________
Net cash provided by financing
activities 300,000,000 300,000,000
______________________________________________________________________
Net increase in cash and
cash equivalents 300,092,223 300,092,223
______________________________________________________________________
Cash and cash equivalents
at beginning of period - -
______________________________________________________________________
Cash and cash equivalents
at end of period $ 300,092,223 $ 300,092,223
======================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
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. 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 it commenced operations,
Crescendo's principal activities have been obtaining capital,
recruiting a chief executive officer and a board of directors and
commencing product development under its agreements with ALZA.
In accordance with generally accepted accounting principles,
Crescendo is considered a development stage company, and
accordingly must present financial information for the quarter
ended September 30, 1997 and for the period from inception (June
26, 1997) to September 30, 1997.
The information at July 7, 1997 was derived from the audited
financial statements included in Crescendo's prospectus dated
September 5, 1997. The information at September 30, 1997 and for
the period from inception to September 30, 1997 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 results for the
full year.
Accounting for Revenues and Expenses
Crescendo's revenues in early years will consist solely of
investment income. In later years Crescendo may also derive
revenues from the sale or license of its 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 paid to ALZA under a
Technology License Agreement, will be recorded as research and
development expenses when incurred. Amounts paid to ALZA under a
Services Agreement will be recorded as administrative expenses
when incurred. See Note 2 for a description of the agreements
between Crescendo and ALZA.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
1. Basis of Presentation and Significant Accounting Policies
(continued)
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 and cash equivalents
Crescendo considers all highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents. At September 30, 1997, cash equivalents consisted
primarily of investments in institutional money market funds.
Per share information
The loss per share amount has been computed using the
weighted average number of shares outstanding for the period.
The effect of stock options was excluded from the calculation,
as their inclusion would have had an anti-dilutive effect. The
significant loss per share for the quarter ended September 30,
1997 resulted from the net loss for the quarter being divided by
a low number of weighted average common shares outstanding,
because the 4,965,470 shares of Crescendo Class A Common Stock
were outstanding for only one day of the quarter.
2. Arrangements with ALZA Corporation
On September 29, 1997, ALZA contributed $300 million in cash
to Crescendo. On September 30, 1997, all of the outstanding
shares of Crescendo Class A Common Stock (the "Crescendo
Shares"), a total of 4,965,470 Crescendo Shares, were distributed
to the holders of ALZA common stock and ALZA's outstanding
convertible subordinated debentures. Crescendo Shares are traded
on the Nasdaq National Market under the symbol "CNDO." ALZA
continues to hold 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. The agreements between
Crescendo and ALZA are more fully described in the Crescendo
Registration Statement on Form S-1
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
2. Arrangements with ALZA Corporation (continued)
(Registration No. 333-31281) filed with the Securities and Exchange
Commission on September 5, 1997.
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 Crescendo by ALZA plus interest thereon, less
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 to fund the development
of seven products (the "Initial Products"), the development of
which was commenced by ALZA and Therapeutic Discovery Corporation
("TDC"), from August 25, 1997, the date on which TDC ceased
funding such products, through October 31, 1997. The Initial
Products are OROS-Registered Trademark- oxybutynin, DUROS-
Trademark- leuprolide, OROS-Registered Trademark-
methylphenidate, IUTS progesterone, D-TRANS-Trademark-
testosterone matrix, E-TRANS-Trademark- LHRH and E-TRANS-
Trademark- insulin. Crescendo recorded research and development
expenses of $5.4 million payable to ALZA in the period ended
September 30, 1997 for the Development Costs of the Initial
Products through September 30, 1997. Continuation of development
of the Initial Products after October 31, 1997 was subject to
ALZA proposing, and Crescendo's Board of Directors accepting,
work plans and cost estimates for the products. On October 21,
1997, the Board of Directors of Crescendo approved, based upon
ALZA's recommendation, work plans for the continued development
of six of the Initial Products. On ALZA's recommendation,
Crescendo determined not to fund additional development of the D-
TRANS-Trademark- testosterone matrix product at this time.
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 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 will pay a Technology Fee to ALZA, payable monthly over
a period of three years, in the amount of $1 million per month
for the 12 months following the distribution of Crescendo Shares,
$667,000 per month for the following 12 months and $333,000 per
month for the following 12 months. 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 $1 million for the
period ended September 30, 1997, which is included in research
and development expenses.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
2. Arrangements with ALZA Corporation (continued)
In the License Option Agreement entered into by Crescendo and
ALZA, Crescendo has granted ALZA an option to acquire a license
to each product developed under the Development Agreement,
including the Initial Products. 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 United States Food and Drug Administration
("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 theextent 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, 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 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 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.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
2. Arrangements with ALZA Corporation (continued)
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 licensed 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. Crescendo may terminate the Services Agreement at any
time upon 60 days' written notice.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
3. 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 ended
September 30, 1997, 50,000 options were granted to an employee at
an exercise price of $11.00 per share, the fair market value at
the date of grant. The options vest in four equal annual
installments beginning on September 30, 1998 and expire ten years
after the date of grant.
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 but 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. Many of the significant risks related to Crescendo's
business are described in Crescendo's Registration Statement on
Form S-1 (Registration No. 333-31281) filed with the Securities
and Exchange Commission on September 5, 1997, including risks
associated with technology and product development, clinical
development, 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 reimbursements), commercializing products (including
competition), conflicts of interest between ALZA and Crescendo
and the risk of a lack of funds to complete development of
products.
RESULTS OF OPERATIONS
On September 29, 1997, ALZA contributed $300 million in cash
to Crescendo in exchange for the Crescendo Shares. On September
30, 1997, ALZA distributed the Crescendo Shares to holders of
ALZA common stock and ALZA's outstanding convertible subordinated
debentures.
Crescendo commenced operations on September 30, 1997, and its
net loss for the quarter then ended was $6.3 million, or $113.53
per share. The loss resulted from research and development
expenses of $5.4 million related to development of the Initial
Products from August 25, 1997, the date TDC ceased funding such
products, through September 30, 1997. Additionally, research and
development expenses included a Technology Fee payable to ALZA of
$1 million. Because the funds were contributed by ALZA on
September 29, 1997, interest income was not significant for this
period. The significant loss per share for the quarter ended
September 30, 1997 resulted from the net loss for the quarter
being divided by a low number of weighted average common shares
outstanding, because the 4,965,470 Crescendo Shares were
outstanding for only one day of the quarter. Had the Crescendo
Shares been outstanding for the entire quarter, the loss per
share would have been $1.26.
In its early years, results of operations of Crescendo are
expected to reflect primarily interest income on the funds
contributed by ALZA, and research and development expenses
related to development of the Crescendo products and the
Technology Fee. Crescendo is expected to continue to record net
losses in future periods, as product development expenses under
its agreements with ALZA are expected to exceed investment
income. However, because all of the Crescendo Shares will be
outstanding for all of each future period, weighted average
shares of common stock outstanding in future quarters will be
greater, which will result in lower ongoing losses per share than
in the quarter ended September 30, 1997.
Under the Development Agreement between Crescendo and ALZA,
Crescendo agreed to fund the development of the Initial Products,
the development of which was commenced by ALZA and TDC, from
August 25, 1997, the date on which TDC ceased funding such
products, through October 31, 1997. The Initial Products are
OROS-Registered Trademark- oxybutynin, DUROS-Trademark-
leuprolide, OROS-Registered Trademark- methylphenidate, IUTS
progesterone, D-TRANS-Trademark- testosterone matrix, E-TRANS-
Trademark- LHRH and E-TRANS-Trademark- insulin. Crescendo
recorded research and development expenses payable to ALZA of
$5.4 million in the period ended September 30, 1997 for the
Development Costs of the Initial Products through September 30,
1997. Continuation of development of the Initial Products after
October 31, 1997 was subject to ALZA proposing, and Crescendo's
Board of Directors accepting, work plans and cost estimates for
the products. On October 21, 1997, the Board of Directors of
Crescendo approved, based upon ALZA's recommendation, work plans
for the continued development of six of the Initial Products. On
ALZA's recommendation, Crescendo determined not to fund
additional development of the D-TRANS-Trademark- testosterone
matrix product at this time.
Under the Technology License Agreement between Crescendo and
ALZA, ALZA has granted to Crescendo a worldwide license to use
ALZA technology solely to select and develop Crescendo products,
and 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 will pay a
Technology Fee to ALZA, payable monthly over a period of three
years in the amount of $1 million per month for the 12 months
following the distribution of Crescendo Shares, $667,000 per
month for the following 12 months and $333,000 per month for the
following 12 months. 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 option, granted to it by Crescendo, to
license any or all Crescendo products. Crescendo recorded a
Technology Fee expense of $1 million for the period ended
September 30, 1997, which is included in research and development
expenses.
General and administrative expenses for the period ended
September 30, 1997 were not material. It is anticipated that
such expenses will increase in future reporting periods,
particularly with respect to expenses under the 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.
LIQUIDITY AND CAPITAL RESOURCES
Crescendo received a cash contribution of $300 million from
ALZA on September 29, 1997, as described above. These funds,
plus investment income earned thereon, are expected to fund the
development of Crescendo products and to conduct related
activities over a period of approximately three to four years.
Funds not immediately required for development activities will be
invested in low-risk securities.
PART II. OTHER INFORMATION
Item 5. Other Information
Prior to October 15, 1997, certain officers of ALZA acted as
directors of Crescendo. Such persons resigned effective October
15, 1997. Until his resignation on September 30, 1997, an
officer of ALZA served as the president and chief executive
officer of Crescendo. Following the resignations of the initial
directors, six new directors of Crescendo, unaffiliated with
ALZA, one of whom is also the president and chief executive
officer of Crescendo, were appointed. These six directors have
been granted options to acquire shares of Crescendo Class A
Common Stock (50,000 shares for the president and chief executive
officer and 10,000 shares each for the remaining directors). All
options were granted at an exercise price equal to the fair
market value 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Services Agreement between Crescendo and ALZA
10.2 Restated Certificate of Incorporation of Crescendo, as
corrected, filed as Exhibit 10.1 to ALZA Corporation's
Form 10-Q (File No. 1-6247) dated November 6, 1997.*
10.3 Technology License Agreement between Crescendo and
ALZA, filed as Exhibit 10.2 to ALZA Corporation's Form
10-Q (File No. 1-6247) dated November 6, 1997.*
10.4 Development Agreement between Crescendo and ALZA, filed
as Exhibit 10.3 to ALZA Corporation's Form 10-Q (File
No. 1-6247) dated November 6, 1997.*
10.5 License Option Agreement between Crescendo and ALZA,
filed as Exhibit 10.4 to ALZA Corporation's Form 10-Q
(File No. 1-6247) dated November 6, 1997.*
10.6 1997 Stock Option Plan, filed as Exhibit 10.6 to
Crescendo Pharmaceutical Corporation's Form S-1 (File
No.333-31281) dated September 5, 1997.*
27 Financial Data Schedule
*Incorporated by reference
(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 14, 1997 By: /s/ Gary L. Neil
_________________________________
Gary L. Neil
President and
Chief Executive Officer
Date: November 14, 1997 By: /s/ David R. Hoffmann
_________________________________
David R. Hoffmann
Vice President, Finance
and Secretary