UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
March 31, 1999
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
__________ to __________
Commission File Number 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 April 30, 1999: $73,240,683
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
March 31, 1999
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 12-15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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 inception
Three months ended (June 26, 1997)
March 31, to March 31,
1999 1998 1999
____________________________________________
Revenues:
Net interest and
investment income $ 2,261 $ 3,838 $ 20,256
Royalty revenue 490 - 490
________ ________ ________
Total revenues 2,751 3,838 20,746
Expenses:
Research & development
performed under
contract with ALZA
Corporation(a related
party) 22,274 21,425 160,519
General & administrative 271 295 1,832
___________________________________________
Total expenses 22,545 21,720 162,351
___________________________________________
Loss before taxes (19,794) (17,882) (141,605)
Income taxes - - 2,425
___________________________________________
Net loss $(19,794) $(17,882) $(144,030)
===========================================
Net loss per
common share
Basic $ (3.99) $ (3.60) $ (33.77)
==============================================
Diluted $ (3.99) $ (3.60) $ (33.77)
=============================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Balance Sheets (unaudited)
(in thousands, except number of shares and per share amounts)
March 31, December 31,
1999 1998
_________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 52,291 $ 54,326
Short-term investments 59,650 57,410
Interest receivable 1,407 1,861
Prepaid expenses and other
current assets 1,390 627
_______________________
Total current assets 114,738 114,224
Employee loan 300 300
Long-term investments 56,391 79,387
_________________________
Total assets $ 171,429 $ 193,911
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 14,896 $ 17,596
(a related party)
Accrued liabilities 40 77
________________________
Total current liabilities 14,936 17,673
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 523 474
Deficit accumulated during development
stage (144,030) (124,236)
___________________________
Total stockholders' equity 156,493 176,238
___________________________
Total liabilities and
stockholders' equity $ 171,429 $193,911
===========================
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 from inception
Three months ended (June 26, 1997)
March 31, to March 31,
1999 1998 1999
_____________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(19,794) $(17,882) $(144,030)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Interest receivable 454 (978) (1,407)
Prepaid expenses and other
assets (763) (224) (1,390)
Increase (decrease) in liabilities:
Payable to ALZA Corporation (2,700) (1,299) 14,896
Accrued liabilities (37) 21 40
___________________________________
Total adjustments (3,046) (2,480) 12,139
Net cash used in
operating activities (22,840) (20,362) (131,891)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (12,042) (91,703) (228,660)
Sales of available-for-sale
securities 32,847 624 113,142
Employee loan, long-term - - (300)
___________________________________
Net cash provided by (used in)
investing activities 20,805 (91,079) (115,818)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock to
ALZA Corporation - - 300,000
___________________________________
Net cash provided by financing
activities - - 300,000
___________________________________
Net increase (decrease) in cash and
cash equivalents (2,035) (111,441) 52,291
____________________________________
Cash and cash equivalents
at beginning of period 54,326 179,971 -
____________________________________
Cash and cash equivalents
at end of period $ 52,291 $68,530 $ 52,291
====================================
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. Crescendo was formed for the purpose of
selecting and developing human pharmaceutical products (the
"Crescendo Products") and commercializing such products, most likely
through licensing to ALZA Corporation ("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.
The information at March 31, 1999, for the three months ended
March 31, 1999 and 1998, and for the period from inception (June 26,
1997) through March 31, 1999 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, 1998 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, 1998 included in Crescendo's
1998 Annual Report on Form 10-K.
Accounting for Revenues and Expenses
At March 31, 1999, Crescendo's revenue consisted of interest and
investment income and royalty revenue. In the first quarter of
1999, Crescendo accrued royalty revenue based on net sales 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).
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 (described below) 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.
Comprehensive Loss
During the first quarter of 1999 and 1998, comprehensive loss
was not materially different from reported net loss.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities",
which will be effective for Crescendo's fiscal year 2000. This
statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative
instruments imbedded 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. 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 $52.3 million
and $54.3 at March 31, 1999 and December 31, 1998, respectively, as
available-for-sale. Investments in the available-for-sale category
are generally carried at fair market value with unrealized gains and
losses recorded as a separate component of stockholders' equity.
Realized gains and losses for the periods ended March 31, 1999 and
March 31, 1998 were not material. The cost of securities when sold
is based upon specific identification.
The following is a summary of Crescendo's investment portfolio
at March 31, 1999 (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 $ 44,451 $ 98 $ (7) $ 44,542
Collateralized
mortgage
obligations and
asset backed
securities 28,435 143 - 28,578
Corporate debt
securities 47,482 289 - 47,771
Money market funds 47,061 - - 47,061
_________________________________________________
$167,429 $ 530 $ (7) $167,952
=================================================
The amortized cost and estimated fair value of securities at March
31, 1999, 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 $ 111,490 $ 111,560
Due after one year through
three years 27,346 27,526
Due after three years through
five years 28,593 28,866
_______________________________
$ 167,429 $ 167,952
================================
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 inception
Three months ended (June 26, 1997)
March 31, to March 31,
1999 1998 1999
____________________________________________
NUMERATOR (in thousands):
Basic and Diluted
Net loss $(19,794) $(17,882) $(144,030)
===========================================
DENOMINATOR (in thousands):
Basic and Diluted
Weighted average shares
outstanding 4,966 4,966 4,265
==========================================
Basic net loss per share $ (3.99) $ (3.60) $(33.77)
==========================================
Diluted net loss per share $ (3.99) $ (3.60) $(33.77)
==========================================
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
months ended March 31, 1999 and 1998, and for the period from
inception through March 31, 1999, 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 shares) were distributed to the holders of ALZA
common stock and ALZA's convertible subordinated debentures.
Crescendo Shares are traded on The NASDAQ Stock MarketSM-Service
Mark-- 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 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 products (the "Initial Products"). As
of March 31, 1999, three of the Initial Products (OROS-Registered
Trademark- oxybutynin, DUROS-Trademark- leuprolide and OROS-
Registered Trademark- methylphenidate) remained in active
development and/or had been licensed by ALZA. Research and
development expenses for the three months ended March 31, 1999 and
1998 were approximately $22.3 million and $21.4 million,
respectively, including a Technology Fee expense of $2.0 million and
$3.0 million, respectively. For the period from inception (June 26,
1997) through March 31, 1999, Crescendo recorded research and
development expenses of approximately $160.5 million, including a
Technology Fee expense of $16.7 million.
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(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). Crescendo recorded a
Technology Fee of $2.0 million and $3.0 million for the three months
ended March 31, 1999 and 1998, respectively. For the period from
inception (June 26, 1997) through March 31, 1999, Crescendo recorded
$16.7 million of Technology Fee expense. 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.
In December 1998, ALZA exercised its option to obtain a worldwide
license to OROS oxbutynin from Crescendo. ALZA launched the product in
the United States as Ditropan-Registered Trademark- XL 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 and 6%, based on the Development Costs of the
product to date and future anticipated Development Costs to be paid by
Crescendo. In the first quarter of 1999, Crescendo accrued royalty
revenue of approximately $490,000, based on ALZA's sales of Ditropan
XL.
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 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
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 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 its direct
costs of providing the services, including fully-allocated overhead,
plus all out of pocket costs and expenses, but without any profit
(i.e. ALZA's fully-burdened cost). 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 three months ended March 31, 1999 and 1998
were approximately $15,000 and $50,000, respectively. General and
administrative expenses incurred under the Services Agreement for
the period from inception through March 31, 1999 were approximately
$281,000. 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 March 31, 1999, the amount payable to ALZA under the
Development Agreement was approximately $14.9 million.
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, 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, 1998.
Results of Operations
Revenues, consisting of net interest and investment income
earned on invested funds, and royalty revenue, were approximately
$2.8 million and $3.8 million for the three months ended March 31,
1999 and 1998, respectively. Revenue for the three months ended
March 31, 1999 included royalties of $490,000 resulting from the
initial sales by ALZA of Ditropan XL. ALZA launched the product
in the United States on February 1, 1999. For the period from
Crescendo's inception (June 26, 1997) through March 31, 1999, total
revenues were approximately $20.8 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 has been and is expected to continue
decreasing.
Crescendo incurred research and development expenses of
approximately $22.3 million and $21.4 million for the three months
ended March 31, 1999 and 1998, respectively. For the period from
inception (June 26, 1997) through March 31, 1999, Crescendo recorded
research and development expenses of approximately $160.5 million.
These expenses related primarily to development of the Crescendo
Products and include payment of the Technology Fee. The Technology
Fee paid to ALZA for the three months ended March 31, 1999 and 1998
were $2.0 million and $3.0 million, respectively ($16.7 million from
inception (June 26, 1997) through March 31, 1999). Crescendo's
research and development expenses are expected to continue at
approximately current levels during 1999, although quarterly
fluctuations can be expected.
General and administrative expenses for the three months ended
March 31, 1999 and 1998 were approximately $0.3 million and $0.3
million, respectively. For the period from inception through March
31, 1999, general and administrative expenses were approximately
$1.8 million. Expenses incurred by Crescendo under its Services
Agreement with ALZA were approximately $15,000 and $50,000 for the
three months ended March 31, 1999 and 1998, respectively. For the
period from inception (June 26, 1997) through March 31, 1999,
expenses incurred by Crescendo under its Services Agreement with
ALZA were approximately $281,000. It is anticipated that general
and administrative expenses will remain at approximately current
levels during 1999.
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. Royalty revenue, which
was first accrued in the first quarter of 1999, is not expected to
contribute significantly to Crescendo's income in the near future.
Crescendo's net loss for the three months ended March 31, 1999 and
1998 was approximately $19.8 million or $3.99 per share and $17.9
million or $3.60 per share, respectively. The net loss from its
inception (June 26, 1997) through March 31, 1999 was approximately
$144 million or $33.77 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 Readiness
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 ongoing communications with
third parties with whom it has material direct business
relationships. All of Crescendo's investment managers have
confirmed that they are Year 2000 compliant. If any third parties
experience failures in their computer systems due to Year 2000 non-
compliance, this failure could materially affect Crescendo's ability
to engage in normal business activities and, in particular, the
status of certain product development activities being conducted by
ALZA.
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 March 31, 1999, and December 31, 1998, Crescendo had cash,
cash equivalents and short-and long-term investments of
approximately $168.3 million and $191.1 million, respectively. 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 Crescendo Products currently under development, it is
expected that Crescendo's Available Funds will be exhausted during the
year 2000. At that time, product development funding by Crescendo will
cease. However, several factors could impact the level and timing of
Crescendo funding, including the addition of any new Crescendo
Products, the discontinuation of the development of any Crescendo
Products, any commercial arrangements between ALZA and other companies
which would cause ALZA to exercise its License Option with respect to
any Crescendo Product, 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 Crescendo Products currently in development.
As of March 31, 1999, Crescendo had $155.3 million of Available
Funds remaining. When Crescendo's Available Funds are 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 or all Crescendo Products 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 Available Funds are exhausted, Crescendo
will not have funds to continue or complete development of any
remaining Crescendo Products. It is not likely that Crescendo would be
able to raise any additional funds during the period when ALZA's
Purchase Option is outstanding, because of the existence of such
option. After the expiration of the Purchase Option, if it is not
exercised, Crescendo's ability to obtain additional funding will be
subject to the perception of those investors with funds available, or
the public markets, of the value of Crescendo's portfolio.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For financial market risks related to changes in interest rates
are described in Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in the Crescendo's Annual Report on
Form 10-K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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: May 12, 1999 By: /s/ Gary L. Neil
_________________________________
Gary L. Neil
President and
Chief Executive Officer
Date: May 12, 1999 By: /s/ David R. Hoffmann
_________________________________
David R. Hoffmann
Vice President, Finance
and Secretary
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule