EX-99.1 4 0004.txt 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