-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WE4qFJWP8ScXdvWd6datpYrOPz3XLtOD1PIU6WL4lL5biLKEUtHtzon1hxqelEjg 6Z3EN1plCnyZ0iC1QYrkpw== /in/edgar/work/0000004310-00-000013/0000004310-00-000013.txt : 20001031 0000004310-00-000013.hdr.sgml : 20001031 ACCESSION NUMBER: 0000004310-00-000013 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001030 ITEM INFORMATION: FILED AS OF DATE: 20001030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALZA CORP CENTRAL INDEX KEY: 0000004310 STANDARD INDUSTRIAL CLASSIFICATION: [2834 ] IRS NUMBER: 770142070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-06247 FILM NUMBER: 748924 BUSINESS ADDRESS: STREET 1: 1900 CHARLESTON RD STREET 2: PO BOX 7210 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94309 BUSINESS PHONE: 6504945000 MAIL ADDRESS: STREET 1: 1900 CHARLESTON RD STREET 2: PO BOX 7210 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94309-7210 8-K 1 0001.txt 8K TEXT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: October 30, 2000 Date of earliest event reported: September 29, 2000 Commission File Number 1-6247 ALZA CORPORATION (Exact name of registrant as specified in its charter) Delaware 77-0142070 (State or other jurisdiction of incorporation (I.R.S.Employer of organization) Identification No.) 1900 Charleston Road, P.O. Box 7210, Mountain View, CA 94303-0802 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650)564-5000 Item 5. Other Events On September 29, 2000, ALZA Corporation ("ALZA") exercised its option to acquire all of the Class A Common Stock (the "Stock") of Crescendo Pharmaceuticals Corporation ("Crescendo") for a cash payment of $100.0 million. Crescendo was formed by ALZA for the purpose of selecting and developing new human pharmaceutical products and commercializing such products, most likely through licensing to ALZA. Since it commenced operations on September 30, 1997, Crescendo's principal activity has been conducting product development under its agreements with ALZA. ALZA exercised its option to acquire the Crescendo Stock pursuant to the terms of the purchase option set forth in Crescendo's Restated Certificate of Incorporation. The closing date of the transaction is scheduled for November 13, 2000. ALZA will fund the acquisition through available working capital. Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits Item 7a. Financial Statements of the Business Acquired ALZA incorporates by reference the following documents: - The financial statements of Crescendo and notes thereto, and the Report of Ernst and Young LLP, Independent Auditors, set forth at pages 21 to 36 under Item 8 of Crescendo's Annual Report on Form 10-K/A for the year ended December 31, 1999. - The unaudited financial statements of Crescendo and notes thereto set forth at pages 3 to 13 under Item 1 of Crescendo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. Item 7b. Pro Forma Financial Information Pro forma financial information for the year ended December 31, 1999 and the six months ended June 30, 2000 are included herein. The transaction described in Item 5 will be accounted for as a purchase, and, accordingly, the purchase price will be allocated to cash and investments, a deferred tax asset, developed products and acquired in-process research and development ("IPR&D"). The cash and investments will be valued at their fair market values at the closing date. The valuation of the deferred tax asset represents estimated future tax savings that ALZA will likely receive as a result of the Crescendo acquisition. The remaining purchase price will be allocated to developed products, as deferred product acquisition costs, and IPR&D using a risk-adjusted present value calculation of the future royalties ALZA would have paid for products Crescendo has developed and is in the process of developing. The following unaudited pro forma combined condensed financial information reflects the business combination between ALZA and Crescendo accounted for using the purchase method of accounting. The pro forma combined condensed statements of operations combine ALZA's historical statements of operations with Crescendo's historical statements of operations for the year ended December 31, 1999, and the six months ended June 30, 2000. The pro forma combined condensed statements of operations reflect the combination as if it had occurred at the beginning of each period presented. The pro forma combined balance sheet combines ALZA's historical balance sheet with Crescendo's historical balance sheet as of June 30, 2000 and reflects the combination as if it occurred at the end of the period presented. The pro forma adjustments are based on preliminary estimates, available information and assumptions that management deems appropriate. These adjustments may differ significantly from the final purchase price allocation as of the closing date of the transaction (See Note 1 to the Pro Forma Combined Condensed Financial Statements: The Acquisition). The unaudited pro forma combined condensed statements of operations are not necessarily indicative of the operating results that would have been achieved had the transaction been effected as of the beginning of such periods and should not be construed as representative of future operations. ALZA Corporation Pro Forma Combined Condensed Balance Sheet (unaudited) (In millions) June 30, 2000 Pro Forma Pro Forma ALZA Crescendo Adjustments Combined ____________________________________________________________________________ ASSETS Current assets: Cash and cash equivalents $ 183.8 $ 42.2 $(100.0)(1) $ 126.0 Short-term investments 80.1 0.1 - 80.2 Receivables, net 166.6 1.5 (16.8)(2a) 151.3 Inventories, at cost: Raw materials 19.9 - - 19.9 Work in process 17.8 - - 17.8 Finished goods 35.1 - - 35.1 Total inventories 72.8 - - 72.8 Prepaid expenses and other current assets 20.3 3.2 - 23.5 __________________________________________ Total current assets 523.6 47.0 (116.8) 453.8 Property, plant and equipment 575.7 - - 575.7 Less accumulated depreciation and amortization (160.2) - - (160.2) __________________________________________ Net property, plant and equipment 415.5 - - 415.5 Long-term investments 387.8 14.3 - 402.1 Deferred product acquisition costs 278.3 - 21.2 (1) 299.5 Cash surrender value of life insurance 178.8 - - 178.8 Other assets 195.0 0.3 28.0 (1) 223.3 __________________________________________ TOTAL ASSETS $1,979.0 $ 61.6 $ (67.6) $1,973.0 ========================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 45.2 $ 15.3 $ (15.3)(2a) $ 45.2 Accrued liabilities 64.8 - (1.5)(2a) 63.3 Other current liabilities 7.5 - - 7.5 __________________________________________ Total current liabilities 117.5 15.3 (16.8) 116.0 5% convertible subordinated debentures 495.4 - - 495.4 5 1/4% zero coupon convertible subordinated debentures 455.3 - - 455.3 Other long-term liabilities 84.4 - - 84.4 Stockholders' equity: Common stock and additional paid-in capital 764.9 297.6 (297.6)(2b) 764.9 Accumulated other comprehensive income (2.4) (0.3) 0.3 (2b) (2.4) 251.0 (2b) Retained earnings (deficit) 63.9 (251.0) (4.5)(1) 59.4 __________________________________________ Total stockholders' equity 826.4 46.3 (50.8) 821.9 TOTAL LIABILITIES AND __________________________________________ STOCKHOLDERS' EQUITY $1,979.0 $ 61.6 $ (67.6) $1,973.0 ========================================== ALZA Corporation Pro Forma Condensed Statement of Operations (unaudited) (In millions, except per share amounts) Six Months Ended June 30, 2000 _____________________________________________ Pro Forma Pro Forma ALZA Crescendo Adjustments (3) Combined _____________________________________________ Revenues: Net sales $ 243.4 $ - - $ 243.4 Royalties, fees and other 154.3 2.4 (4.4) (a) 152.3 Research and development 57.4 - (40.2) (a) 17.2 _____________________________________________ Total revenues 455.1 2.4 (44.6) 412.9 Expenses: Costs of products shipped 76.7 - (2.4) (a) 74.3 Research and development 92.7 42.2 (42.2) (a) 92.7 Selling, general and administrative 157.6 0.6 0.7 (b) 158.9 Acquisitions of in-process research and development - - - - Merger-related expenses - - - - _____________________________________________ Total expenses 327.0 42.8 (43.9) 325.9 Operating income (loss) 128.1 (40.4) (0.7) 87.0 Interest expense 30.7 - - 30.7 Interest and other income (12.6) (2.0) - (14.6) Net interest and other expense (income) 18.1 (2.0) - 16.1 Income (loss) before _____________________________________________ income taxes 110.0 (38.4) (0.7) 70.9 Provision for income taxes 34.1 - (15.6) (c) 18.5 _____________________________________________ Net income (loss) $ 75.9 $ (38.4) $ 14.9 $ 52.4 ============================================= Earnings (loss) per share Basic $ 0.74 $ (7.88) $ 0.51 Diluted $ 0.72 $ (7.88) $ 0.50 Weighted average shares Basic 102.4 4.9 102.4 Diluted 129.7 4.9 104.4 ALZA Corporation Pro Forma Condensed Statement of Operations (unaudited) (In millions, except per share amounts) Year Ended December 31, 1999 _____________________________________________ Pro Forma Pro Forma ALZA Crescendo Adjustments (3) Combined _____________________________________________ Revenues: Net sales $ 448.0 $ - $ - $ 448.0 Royalties, fees and other 227.1 2.4 (9.1) (a) 220.4 Research and development 120.8 - (91.0) (a) 29.8 _____________________________________________ Total revenues 795.9 2.4 (100.1) 698.2 Expenses: Costs of products shipped 158.4 - (2.4) (a) 156.0 Research and development 259.0 97.7 (97.7) (a) 259.0 Selling, general and administrative 183.6 1.6 1.4 (b) 186.6 Acquisitions of in-process research and development - - - - Merger-related expenses 45.7 - - 45.7 _____________________________________________ Total expenses 646.7 99.3 (98.7) 647.3 Operating income (loss) 149.2 (96.9) (1.4) 50.9 Interest expense 58.1 - - 58.1 Interest and other income (41.6) (7.4) - (49.0) Net interest and _____________________________________________ other expense (income) 16.5 (7.4) - 9.1 Income (loss) before income taxes 132.7 (89.5) (1.4) 41.8 Provision for income taxes 41.7 - (36.4) (c) 5.3 _____________________________________________ Net income (loss) $ 91.0 $ (89.5) $ 35.0 $ 36.5 ============================================= Earnings (loss) per share Basic $ 0.90 $(17.89) $ 0.36 Diluted $ 0.88 $(17.89) $ 0.35 Weighted average shares Basic 101.1 4.9 101.1 Diluted 103.5 4.9 103.5 NOTE 1 - THE ACQUISITION The total purchase price of $100.0 million will be allocated to cash and investments, a deferred tax asset, developed products and IPR&D. Allocation of the purchase price as of June 30, 2000 will be as follows (in millions): Total purchase price $ 100.0 ======== Cash and investments $ 42.8 Deferred tax asset 28.0 Deferred product acquisition costs 21.2 In-process research & development 4.5 Other assets 3.5 Cash, investments and other assets were valued at their fair market values at June 30, 2000. The deferred tax asset balance represents estimated future tax savings that ALZA will likely receive as a result of the Crescendo acquisition. The amounts allocated to developed products, as deferred acquisition costs, and IPR&D acquired from Crescendo were determined using a risk-adjusted present value calculation of the future royalties ALZA would have paid for products Crescendo has developed and is in the process of developing. Using this valuation methodology the fair value of developed products and IPR&D was calculated to be $190.2 million and $39.6 million, respectively. As the fair value of the tangible and intangible assets from the Crescendo acquisition exceed the $100 million purchase price, amounts allocated to the non-monetary assets (deferred product acquisition costs and IPR&D) have been proportionately reduced pursuant to Accounting Principles Board Opinion No. 16 "Business Combinations". The purchase price allocation at June 30, 2000 was based on preliminary estimates, available information and assumptions that management deems appropriate. The final purchase price allocation, at the closing date, may differ from the allocation as of June 30, 2000 primarily due to a change in the amount of cash and investments on hand and further research and development spending by Crescendo. To the extent cash and investment balances of Crescendo at the closing date decline from balances at June 30, 2000, the amounts allocated to deferred product acquisition costs and IPR&D will increase proportionately as discussed above. The purchase price allocation, at the closing date, is expected to be as follows (in millions): Cash and investments $14.0 - 16.0 Deferred product acquisition costs 45.0 - 50.0 Deferred tax asset 25.0 - 30.0 In-process research & development 8.0 - 12.0 NOTE 2 - ADJUSTMENTS TO THE BALANCE SHEET a. The pro forma combined condensed balance sheet for June 30, 2000 reflects the payment of the receivable and the payable of $15.3 million for the development of certain products by ALZA and funded by Crescendo. Accrued royalties of $1.5 million on sales of Ditropan XL-registered trademark- (oxybutynin chloride) that are payable by ALZA to Crescendo are also reflected as being paid prior to the purchase allocation. b. Reflects the purchase of Crescendo's net assets as of June 30, 2000. NOTE 3 - ADJUSTMENTS TO THE STATEMENTS OF OPERATIONS a. The pro forma combined condensed statements of operations for the six months ended June 30, 2000 and the year ended December 31, 1999, reflects the elimination of $40.2 million and $91.0 million, respectively, for product development revenues from Crescendo, and $4.4 million and $9.1 million of intercompany royalties and fee revenues, respectively. b. Reflects amortization of deferred product acquisition costs of $0.7 million and $1.4 million for the six months ended June 30, 2000 and the year ended December 31, 1999, respectively, assuming an estimated life cycle of 15 years for the products acquired. c. Reflects tax benefit from Crescendo's operating loss to ALZA's provision for income taxes and tax benefit on the amortization of the deferred product acquisition costs, at the statutory income tax rate of 40%. NOTE 4 - NONRECURRING CHARGES The nonrecurring charge of $4.5 million resulting from IPR&D has been reflected in the pro forma combined condensed balance sheet as of June 30, 2000. However, this charge has been excluded from the pro forma combined condensed statements of operations for the year ended December 31, 1999 and the six months ended June 30, 2000 pursuant to Article 11 of Regulation S-X. ALZA's statement of operations for the period in which the transaction will close will include the nonrecurring charge for IPR&D. Item 7c. Exhibits 20.1 Press Release dated October 2, 2000, announcing ALZA's exercise of its option to acquire Crescendo's Class A Common Stock 23.1 Consent of Ernst & Young LLP, Independent Auditors 99.1 Crescendo's Audited Financial Statements * Statement of operations for the years ended December 31, 1999, and 1998 Balance sheet at December 31, 1999 and 1998 Statement of stockholder's equity for the years ended December 31, 1999 and 1998 Statement of cash flows for the years ended December 31, 1999 and 1998 Notes to the financial statements Report of Ernst & Young LLP, Independent Auditors 99.2 Crescendo's Unaudited Interim Condensed Financial Statements ** Condensed statement of operations for the quarter and six months ended June 30, 2000 and 1999 Condensed balance sheet at June 30, 2000 Condensed statement of cash flows for the six months ended June 30, 2000 and 1999 Notes to the condensed financial statements * Incorporated by reference from Crescendo's Annual Report on Form 10-K/A for the year ended December 31, 1999. ** Incorporated by reference from Crescendo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ALZA CORPORATION By: /s/ Matthew K. Fust Matthew K. Fust Senior Vice President and Chief Financial Officer Date: October 30, 2000 EXHIBIT INDEX 20.1 Press Release dated October 2, 2000, announcing ALZA's exercise of its option to acquire Crescendo's Class A Common Stock 23.1 Consent of Ernst & Young LLP, Independent Auditors 99.1 Crescendo's Audited Financial Statements 99.2 Crescendo's Unaudited Interim Condensed Financial Statements EX-20.1 2 0002.txt EXHIBIT 20.1 Contact: Karen L. Bergman AL-445-092500 Patty Eisenhaur (650) 564-5222 ALZA Exercises Option to Acquire Crescendo Pharmaceuticals Corporation MOUNTAIN VIEW, Calif., October 2, 2000 .... ALZA Corporation (NYSE: AZA) and Crescendo Pharmaceuticals Corporation (Nasdaq: CNDO) today announced that on Friday, September 29, 2000, ALZA has exercised its option to acquire all of the outstanding shares of Crescendo Class A common stock. The exercise price is $100 million and will be paid in cash. Crescendo holders of record on the closing date will receive approximately $20.27 per share. The closing date will be November 13, 2000, subject to satisfaction of any regulatory requirements. "The decision to exercise our option at this time reflects the significant value that has been created by Crescendo, both in terms of the pharmaceutical products that have been developed and commercialized, as well as products currently under development," said Dr. Ernest Mario, ALZA's chairman and chief executive officer. "The integration of Crescendo and its products into ALZA represents another major milestone in our growthtransition asto a research- based pharmaceutical products company. We remain committed to the earnings growth targets we have set for the year." "We are very pleased that ALZA has chosen to exercise its option to acquire Crescendo, demonstrating that we have attained our corporate objective by achieving the shareholder value we set out to create," said Dr. Gary L. Neil, Crescendo's president and chief executive officer. "We are proud of Crescendo's involvement in the research and development of so many important products." Crescendo Pharmaceuticals Corporation was formed in 1997 to select and develop new human pharmaceutical products and to commercialize such products, most likely through licensing to ALZA. ALZA Corporation, headquartered in Mountain View, Calif., is a research-based pharmaceutical company with leading drug delivery technologies. The company applies its delivery technologies to develop pharmaceutical products with enhanced therapeutic value for its own portfolio and for many of the world's leading pharmaceutical companies. ALZA's sales and marketing efforts are focused on urology, oncology and central nervous system products. ### EX-23.1 3 0003.txt Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Form S-8 and the Registration Statements (Forms S-3 No. 33-53671 and No. 333- 02765 and Forms S-8 No. 2-92629, No 2-97422, No 33-21810, No 33- 36141, No. 33-49824, No. 33-51890, No. 333-21877, No. 333-49483, No. 333-70799, No. 333-74791 and No. 333-82589) of ALZA Corporation, of our report dated February 4, 2000 with respect to the financial statements of Crescendo Pharmaceuticals Corporation incorporated by reference in this current Report (Form 8-K) dated October 30, 2000. /s/Ernst & Young LLP Palo Alto, California October 30, 2000 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 EX-99.2 5 0005.txt 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 Three months Six months inception ended ended (June 26, 1997) June 30, June 30, to June 30, 2000 1999 2000 1999 2000 __________________________________________________________________________ Revenues: Net interest and investment income $ 909 $ 2,057 $ 2,039 $ 4,318 $ 27,473 Royalty revenue 1,377 430 2,394 920 4,779 __________________________________________________ Total revenues 2,286 2,487 4,433 5,238 32,252 Expenses: Research & development performed under contract with ALZA Corporation(a related party) 21,830 31,866 42,186 54,140 278,123 General & administrative 346 290 578 560 3,718 __________________________________________________________________________ Total expenses 22,176 32,156 42,764 54,700 281,841 __________________________________________________________________________ Loss before taxes (19,890) (29,669) (38,331) (49,462) (249,589) Income taxes - - - - 1,421 __________________________________________________ Net loss $(19,890)$(29,669) $(38,331)$(49,462) $(251,010) ========================================================================== Net loss per common share Basic and Diluted $(4.11) $(5.98) $(7.88) $(9.96) $(55.37) ========================================================================== See accompanying notes. Crescendo Pharmaceuticals Corporation (a development stage company) Condensed Balance Sheets (unaudited) (in thousands, except number of shares and per share amounts) June 30, December 31, 2000 1999 _________________________________________________________________ ASSETS Current assets: Cash and cash equivalents $ 42,181 $ 54,682 Short-term investments 66 6,989 Interest receivable 41 321 Taxes receivable 3,209 3,502 Accounts receivable (from ALZA Corporation, a related party) 1,405 707 Other current assets 44 120 _________________________________________________________________ Total current assets 46,946 66,321 Employee loan 300 300 Long-term investments 14,346 31,448 _________________________________________________________________ Total assets $ 61,592 $ 98,069 ================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Payable to ALZA Corporation $ 15,294 $ 12,120 (a related party) Accrued liabilities 23 97 _________________________________________________________________ Total current liabilities 15,317 12,217 Stockholders' equity: Class A Common Stock, $0.01 par value, 6,000,000 shares authorized; 4,833,509 and 4,908,198 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively 49 49 Class B Common Stock, $1.00 par value, 1,000 shares authorized, issued and outstanding 1 1 Additional paid-in capital 297,566 298,951 Accumulated other comprehensive loss (331) (470) Deficit accumulated during development stage (251,010) (212,679) _________________________________________________________________ Total stockholders' equity 46,275 85,852 _________________________________________________________________ Total liabilities and stockholders' equity $ 61,592 $ 98,069 ================================================================= 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 Six months ended (June 26, 1997) June 30, to June 30, 2000 1999 2000 ___________________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (38,331) $ (49,462) $(251,010) Non-cash adjustments to reconcile net loss to net cash used in operating activities: (Increase) decrease in assets: Interest receivable 280 1,075 (41) Taxes receivable 293 - (3,209) Accounts receivable from ALZA Corporation (a related party) (698) - (1,405) Other current assets 76 (2,276) (44) Increase (decrease) in liabilities: Payable to ALZA Corporation 3,174 370 15,294 Accrued liabilities (74) (7) 23 ___________________________________________________________________________ Total adjustments 3,051 (838) 10,618 Net cash used in operating activities (35,280) (50,300) (240,392) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities - (12,042) (228,660) Sales of available-for-sale securities 24,164 55,843 208,917 Maturities of available-for- sale securities - 5,000 5,000 Employee loan, long-term - - (300) ___________________________________________________________________________ Net cash provided by (used in) investing activities 24,164 48,801 (15,043) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock to ALZA Corporation - - 300,000 Repurchase of common stock (1,385) (548) (2,384) ___________________________________________________________________________ Net cash provided by financing activities (1,385) (548) 297,616 ___________________________________________________________________________ Net increase (decrease) in cash and cash equivalents (12,501) (2,047) 42,181 ___________________________________________________________________________ Cash and cash equivalents at beginning of period 54,682 54,326 - ___________________________________________________________________________ Cash and cash equivalents at end of period $ 42,181 $ 52,279 $ 42,181 =========================================================================== 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. Crescendo incurred research and development expenses of approximately $21.8 million and $42.2 million for the three months and six months ended June 30, 2000, respectively. This compares with $31.9 million and $54.1 million for the three months and six months ended June 30, 1999, respectively. Research and development expenses have totaled approximately $278.1 million for the period from inception (June 26, 1997) through June 30, 2000. If Crescendo continues to fund the development of Crescendo Products at the current rate, funds available for product development will likely be exhausted by the end of 2000 and product development funding by Crescendo will cease at that time. When Available Funds (described below) are nearly exhausted, certain critical timetables relating to ALZA's purchase option with respect to all of Crescendo's Class A Common Stock (the "Crescendo Shares") and ALZA's option to license any or all Crescendo Products not yet licensed by ALZA 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 Crescendo 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. The information at June 30, 2000, for the three months and six months ended June 30, 2000 and 1999, and for the period from inception (June 26, 1997) through June 30, 2000 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, 1999 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, 1999 included in Crescendo's 1999 Annual Report on Form 10-K. Accounting for Revenues and Expenses At June 30, 2000, Crescendo's revenue consisted of interest and investment income and product payments, referred to as royalty revenue in Crescendo's financial statements. Since the first quarter of 1999, Crescendo has accrued royalty revenue based on net sales in the United States of one Crescendo Product, Ditropan XL- Registered Trademark-, licensed by ALZA. Royalties in respect of Ditropan XL are recognized in the period in which earned (the period in which product sales are made by ALZA, from which Crescendo receives product payments) 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. NOTE 2. INVESTMENTS Crescendo has classified its entire investment portfolio, including cash and cash equivalents of approximately $42.2 million and $54.7 at June 30, 2000 and December 31, 1999, 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 losses for the periods ended June 30, 2000 and December 31, 1999 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 June 30, 2000(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 $ 4,991 $ - $(85) $ 4,906 Collateralized mortgage obligations and asset backed securities 9,752 - (246) 9,506 Corporate debt securities - - - - Money market funds 40,232 - - 40,232 ____________________________________________________________________ $54,975 $ - $(331) $ 54,644 ==================================================================== The amortized cost and estimated fair value of securities at June 30, 2000, 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 $ 40,299 $ 40,298 Due after one year through three years 14,676 14,346 ____________________________________________________________________ $ 54,975 $ 54,644 =================================================================== 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 from ALZA. During the second quarter of 2000, Crescendo purchased 37,764 Crescendo Shares for approximately $0.7 million. As of June 30, 2000, Crescendo had purchased a total of 131,961 Crescendo Shares under this program for approximately $2.4 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 third quarter of 2000, subject to the availability of Crescendo Shares at an appropriate price. 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 Three months Six months inception ended ended (June 26, 1997) June 30, June 30, to June 30, 2000 1999 2000 1999 2000 _____________________________________________________________ NUMERATOR (IN THOUSANDS): BASIC AND DILUTED Net loss $(19,890) $(29,669) $(38,331) $(49,460) $(251,010) ============================================================================== DENOMINATOR (IN THOUSANDS): BASIC AND DILUTED Weighted average shares outstanding 4,843 4,962 4,864 4,964 4,533 ============================================================================== BASIC NET LOSS PER SHARE $(4.11) $(5.98) $(7.88) $(9.96) $(55.37) ============================================================================== DILUTED NET LOSS PER SHARE $(4.11) $(5.98) $(7.88) $(9.96) $(55.37) ============================================================================== The potentially dilutive effect of outstanding options to purchase 100,000 Crescendo Shares in the three months and six months ended June 30, 2000 and 1999, and for the period from inception (June 26, 1997) through June 30, 2000, 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 Market-Registered Trademark- 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 use 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 June 30, 2000, three of the Initial Products (OROS-Registered Trademark- oxybutynin, DUROS-Registered 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 and six months ended June 30, 2000, were approximately $21.8 million and $42.2 million, respectively. This compares with $31.9 million and $54.1 million for the three and six months ended June 30, 1999, respectively. All periods include a Technology Fee paid by Crescendo to ALZA. For the period from inception (June 26, 1997) through June 30, 2000, Crescendo recorded research and development expenses of approximately $278.1 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 for the following 12 months and $333,000 per month for the next 12 months(beginning in September 1999)(the "Technology Fee"). The Technology Fee is not payable after August 2000. Crescendo recorded a Technology Fee expense of $1.0 million and $2.0 million for the three months and six months ended June 30, 2000, as compared with $2.0 million and $4.0 million for the three and six months ended June 30, 1999. For the period from inception (June 26, 1997) through June 30, 2000, Crescendo recorded $23.3 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 United States Food and Drug Administration (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 oxybutynin from Crescendo. ALZA launched the product in the United States under the name Ditropan XL on February 1, 1999. Under the terms of the license agreement between Crescendo and ALZA, Crescendo receives payments from ALZA based on worldwide net sales of the product. For the first three years the rates are 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. On January 1, 2000, the payment rate increased from 2.5% to 3.0% of net sales. Royalty revenue for the three and six months ended June 30, 2000 was approximately $1.4 million and $2.4 million, respectively, and was derived from net sales of Ditropan XL in the United States. On June 19, 2000, Sanofi-Synthelabo, ALZA's marketing partner in Europe for Ditropan XL, received approval to market Ditropan XL in the United Kingdom and launched the product in July 2000. Under the terms of its license agreement with ALZA, Crescendo will receive payments from ALZA based on Sanofi-Synthelabo's net sales of the product. On March 3, 2000, DUROS leuprolide (Viadur-Trademark-) 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 9.0% and 9.5%, based on the Development Costs of the product to date and future anticipated Development Costs to be paid by Crescendo. On April 5, 2000, ALZA announced that it had entered into a U.S. commercialization agreement for Viadur with Bayer Corporation ("Bayer"). Under the terms of its license agreement with ALZA, Crescendo will receive payments from ALZA based on Bayer's net sales of the product. 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 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 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. Crescendo accrues estimated expenses on a monthly basis under the Services Agreement. Such expenses 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. As a result of a change in certain estimates, Crescendo recorded a net credit of $15,000 from ALZA under the Services Agreement for the three months ended March 31, 2000. Expenses incurred under this agreement for the three months ended June 30, 2000 were $81,000, as compared with $15,000 for the three months ended June 30, 1999. Because of the credit in the first quarter of 2000, expenses under the Services Agreement for the six months ended June 30, 2000 were approximately $66,000, as compared with $61,000 for the six months ended June 30, 1999. General and administrative expenses incurred under the Services Agreement for the period from inception (June 26, 1997) through June 30, 2000 were approximately $564,000. At June 30, 2000, the amount payable to ALZA under the Development Agreement and the Services Agreement was approximately $15.3 million. The Technology Fee is paid in the month it is accrued. NOTE 5. SUBSEQUENT EVENTS On August 1, 2000, OROS methylphenidate (Concerta-Trademark-) was approved for marketing by the FDA. Also on August 1, 2000, ALZA exercised its option to obtain a worldwide license to OROS methylphenidate 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 8.5% and 9.0%, based on the Development Costs of the product to date and future anticipated Development Costs to be paid by Crescendo. On April 18, 2000, ALZA announced that it had entered into an agreement with McNeil Consumer Healthcare ("McNeil"), a Johnson & Johnson company, to co- promote the product in the United States. -----END PRIVACY-ENHANCED MESSAGE-----