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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001.
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28674
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CADUS PHARMACEUTICAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3660391
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
767 Fifth Avenue
New York, New York 10153
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 702-4315
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of
the Company, computed by reference to the closing price on March 15, 2002, was
$9,492,143.
Number of shares outstanding of each class of Common Stock, as of
March 15, 2002: 13,144,040 shares.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, particularly under Items
1 through 8, constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, technological uncertainties regarding the Company's technologies, the
Company's capital needs and uncertainty of future funding, risks and
uncertainties relating to the Company's ability to realize value from its
assets, uncertainties regarding the Company's ability to license its
technologies to third parties, uncertainties regarding the Company's future
acquisition and in-licensing of technologies, the Company's history of operating
losses, the Company's dependence on proprietary technology and the
unpredictability of patent protection, intense competition in the pharmaceutical
and biotechnology industries, rapid technological development that may result in
the Company's technologies becoming obsolete, as well as other risks and
uncertainties discussed in the Company's prospectus dated July 17, 1996.
PART I
ITEM 1. BUSINESS.
GENERAL
Cadus Pharmaceutical Corporation ("Cadus") was incorporated under the
laws of the State of Delaware in January 1992 and until July 30, 1999 devoted
substantially all of its resources to the development and application of novel
yeast-based and other drug discovery technologies. On July 30, 1999, Cadus sold
its drug discovery assets to OSI Pharmaceuticals, Inc. (OSI") and ceased its
internal drug discovery operations and research efforts for collaborative
partners. In December 2001, Cadus formed a wholly owned subsidiary, Cadus
Technologies, Inc. (the "Subsidiary"), and transferred all of its patents,
patent applications, know how, licenses and drug discovery technologies to the
Subsidiary. Cadus and the Subsidiary (collectively, the "Company") are currently
seeking to (i) realize value from their assets and (ii) use a portion of their
available cash to acquire technologies or products or to acquire or invest in
companies. The Subsidiary is currently seeking to license its drug discovery
technologies.
On July 30, 1999, Cadus sold to OSI, pursuant to an asset purchase
agreement, its drug discovery programs focused on G Protein-coupled receptors,
its directed library of approximately 150,000 small
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molecule compounds specifically designed for drug discovery in the G Protein-
coupled receptor arena, its collaboration with Solvay Pharmaceuticals B.V.
("Solvay Pharmaceuticals"), its lease to its research facility in Tarrytown, New
York together with the furniture and fixtures and its lease to equipment in the
facility, and its inventory of laboratory supplies. Pursuant to such sale
transaction, OSI assumed the Cadus's lease to Cadus's research facility in
Tarrytown, New York, Cadus's equipment lease with General Electric Capital
Corporation ("GECC") and Cadus's research collaboration and license agreement
with Solvay Pharmaceuticals. As consideration for the sale, Cadus received
approximately $1,500,000 in cash and OSI assumed certain liabilities of Cadus
relating to employees hired by OSI aggregating approximately $133,000. In
addition, Cadus would be entitled to royalties and up to $3.0 million in
milestone payments on the first product derived from compounds sold to OSI or
from the collaboration with Solvay Pharmaceuticals. Cadus licensed to OSI on a
non-exclusive basis certain technology solely to enable OSI to fulfill its
obligations under the collaboration with Solvay Pharmaceuticals. Cadus also
licensed to OSI on a non-exclusive basis certain proprietary software and
technology relating to chemical resins in order to enable OSI to fully benefit
from the compounds it acquired from Cadus. Cadus retained ownership of all its
other assets, including its core yeast technology for developing drug discovery
assays, its collection of over 25,000 proprietary yeast strains, human and
mammalian cell lines, and genetic engineering tools, its joint ownership of the
human orphan G Protein-coupled receptors identified pursuant to its
collaboration with Genomic Therapeutics Corporation, its proprietary software,
its genomics databases related to G Protein-coupled receptors, all assays and
technologies reverting to it from its collaboration with Bristol-Myers Squibb
Company, its equity position in Axiom Biotechnologies Inc., Cadus's cash and
cash equivalents, and the approximately $18.5 million plus interest thereon
being held in escrow pending appeal of the verdict in favor of a plaintiff in a
patent infringement action against Cadus (which verdict was subsequently
reversed and the monies held in escrow were released to Cadus). Cadus ceased its
drug discovery operations and research efforts for collaborators as a result of
this transaction and terminated all employees who were not hired by OSI or who
did not voluntarily resign, except for the Chief Executive Officer who resigned
in April 2000.
Prior to July 30, 1999, Cadus developed several proprietary
technologies that exploit the similarities between yeast and human genes to
elucidate gene function and cell signaling pathways. In February 2000, Cadus
licensed its yeast technologies and its bioinformatics software to OSI on a
non-exclusive basis. In December 2001, Cadus transferred all of its patents,
patent applications, know how, licenses and drug discovery technologies to the
Subsidiary. In December 2001, the Subsidiary licensed its yeast technologies to
a major pharmaceutical company on a non-exclusive basis. The Subsidiary is
seeking to license these technologies to other third parties on a non- exclusive
basis. Three of these technologies are used to identify small molecules that act
as agonists or antagonists to cell surface receptors: (i) a hybrid yeast cell
technology that expresses a functioning human receptor and a portion of its
signaling pathway in a yeast cell, (ii) the Autocrine Peptide Expression
("Apex(TM)") system that expresses in a hybrid yeast cell both a known human
ligand and the receptor that is activated by that ligand and (iii) the Company's
Self Selecting Combinatorial Library ("SSCL(TM)") technologies, which are used
to identify a ligand that activates a targeted orphan receptor (a receptor whose
function is not known).
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BACKGROUND
The human body is comprised primarily of specialized cells that
perform different physiological functions and that are organized into organs and
tissues. All human cells contain DNA, which is arranged in a series of subunits
known as genes. It is estimated that there are approximately 100,000 genes in
the human genome. Genes are responsible for the production of proteins. Proteins
such as hormones, enzymes and receptors are responsible for managing most of the
physiological functions of humans, including regulating the body's immune
system. Thus, genes are the indirect control center for all physiological
functions. Over the last few decades, there has been a growing recognition that
many major diseases have a genetic basis. It is now well established that genes
play an important role in diseases such as cancer, cardiovascular disease,
psychiatric disorders, obesity, and metabolic diseases. Significant resources
are being focused on genomics research based on the belief that the sequence and
function of a gene, and the protein that gene expresses, will lead to an
understanding of that gene's role in the functioning and malfunctioning of
cells. This understanding is expected in turn to lead to therapeutic and
diagnostic applications focused on molecular targets associated with the gene
and the protein it expresses.
Cell surface receptors are an important class of proteins involved in
cellular functioning because they are the primary mediators of cell to cell
communication. Their location on the cell surface also makes them the most
accessible targets for drug discovery. Cellular communication occurs when one
cell releases a chemical messenger, called a "ligand," which communicates with
another cell by binding to and activating the receptor on the exterior of the
second cell. Typically, a ligand binds only with one specific receptor or
families of related receptors. This binding event activates the receptor
triggering the transmission of a message through a cascade of signaling
molecules from the exterior to the interior of the cell. This process is called
signal transduction. When the signal is transmitted into the interior of the
cell, it may, among other things, activate or suppress specific genes that
switch on or switch off specific biological functions of the cell. The
biological response of the cell, such as the secretion of a protein, depends
primarily on the specific ligand and receptor involved in the communication.
Many diseases, such as cancer, stem from the malfunctioning of
cellular communication. Efforts to treat a particular disease often concentrate
on developing drugs that interact with the receptor or signaling pathway
believed to be associated with the malfunction. These drugs work by inhibiting
or enhancing the transmission of a signal through the cascade of signaling
molecules triggered by the receptor. Drugs that inhibit signal transduction by
blocking a receptor or the intracellular proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal transduction by
stimulating a receptor or associated intracellular proteins are called agonists.
Human cells carry many different types of receptors. Receptors are
classified into groups based upon similarities in their chemistry and structure.
Some of the major receptor groups involved in signal transduction are: G
Protein-coupled receptors, tyrosine kinase receptors and multisubunit immune
recognition receptors. G Protein-coupled receptors, which are located on the
surface of the cell, constitute the largest group of receptors. In humans, G
Protein-coupled receptors are involved in many of the body's
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most basic functions, including heartbeat, sight, sense of smell, cognition and
behavior and also mediate most of the body's basic responses such as secretion
from glands, contractility of blood vessels, movement of cells, growth and cell
death. Tyrosine kinase coupled receptors are involved in cell growth and
differentiation. Multisubunit immune recognition receptors activate the body's
immune defense system.
There are approximately 2,000 G Protein-coupled receptors estimated
to be in the human genome, half of which are believed to be involved in taste,
smell and sight. The importance of G Protein-coupled receptors is demonstrated
by the fact that more than 60% of all currently available prescription drugs
work by interacting with known G Protein-coupled receptors. These drugs include
the anti-ulcer agents Zantac and Tagamet, the anti-depressants Prozac and
Zoloft, and the anti- histamine Claritin. Many of these drugs were developed
through the application of time consuming and expensive trial and error methods
without an understanding of the chemistry and structure of the G Protein-coupled
receptors with which they interact. More efficient drug discovery methods are
available once the gene sequence, biological function and role in disease
processes of a G Protein-coupled receptor have been determined.
The sequences and functions of approximately 200 human G
Protein-coupled receptors have been identified. This knowledge has also been
used to help identify the sequence of at least 100 more orphan G Protein-coupled
receptors. The Company believes that the identification of the gene sequences
and functions of the remaining G Protein-coupled receptors (other than those
involved in taste, smell or sight) will yield a substantial number of potential
drug discovery targets. Scientists working on the Human Genome Project have
sequenced portions of thousands of genes and have published such sequences or
placed them in public databases. Although the Human Genome Project has produced
and made publicly available an ever increasing volume of raw DNA sequences
(including sequence fragments that may represent portions of human G
Protein-coupled receptors), such data cannot be used in drug discovery until (i)
a DNA sequence is recognized to comprise a portion of a G Protein-coupled
receptor (ii) the full DNA sequence of the G Protein-coupled receptor is
identified, (iii) the function of the G Protein-coupled receptor is elucidated,
and (iv) agonists and/or antagonists for the G Protein-coupled receptor are
identified.
TRADITIONAL DRUG DISCOVERY
Drug discovery consists of three key elements: (i) the target, such
as a receptor, on which the drug will act, (ii) the potential drug candidates,
which include organic chemicals, proteins or peptides, and (iii) the assays or
tests to screen these compounds to determine their effect on the target.
Historically, drug discovery has been an inefficient and expensive
process. Traditional drug discovery has been hampered by the limited number of
known targets and a reliance on IN VITRO assays as a format in which to test
compounds. Until scientists began to define the molecular structure of receptors
and ligands, there was no simple method to determine the function of such
molecules in the cell and, therefore, their utility as drug discovery targets.
Even when the target's molecular structure is known, incorporating that target
effectively into an IN VITRO assay can be difficult. For example, all known G
Protein-coupled receptors are woven through the cell membrane seven times in a
very complex, looped
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structure that cannot be maintained when the isolated protein is put into an IN
VITRO assay format. If an assay does not accurately replicate the structure of a
target receptor, the compounds identified in the assay may not function as
expected when applied to the target receptor on a living cell. Furthermore,
receptors, signal transduction proteins and other molecular targets for
therapeutic intervention do not exist in isolation in the cell. Their functional
activity results from a complex interrelationship with numerous other molecules
within the cell. Consequently, traditional drug screening assays often identify
compounds as potential drug candidates which, when tested in living cells, prove
to have no useful activity or are even toxic. A variety of methods have been
developed to address these problems, including using living cells in assays.
However, most live cell assays are slow, complex and expensive to maintain.
In recent years, scientific advances have created new and improved
tools for drug discovery. For example, molecular biology is identifying a
growing number of targets and their gene sequences. There have been significant
developments in turning these gene sequences into drug discovery candidates.
Cells have been genetically engineered to produce assays that more effectively
replicate the physiological environment of a living organism. Robotics have
enabled the creation of high-throughput screening systems. Combinatorial
chemistry has enhanced the ability to optimize lead compounds by improving their
pharmacological characteristics. However, due to the complexity of G
Protein-coupled receptors and limited knowledge of their gene sequences and
function, these advances do not offer a comprehensive, rapid and cost effective
approach to the identification of drug discovery candidates targeted at G
Protein-coupled receptors.
YEAST
The Company has developed technologies based on yeast that are useful
in identifying drug discovery candidates targeted at G Protein-coupled
receptors. Yeast is a single-celled microorganism that is commonly used to make
bread, beer and wine. In the 1980's, scientists discovered structural and
functional similarities between yeast cells and human cells. Both yeast and
human cells consist of a membrane, an intracellular region and a nucleus
containing genes. Basic cellular processes, including metabolism, cell division,
DNA and RNA synthesis and signal transduction, are the same in both human and
yeast cells. Yeast also have signal transduction pathways that function
similarly to human cell pathways. More than 40 percent of all human gene classes
have functional equivalents in yeast. The genes in yeast express proteins,
including cell-surface receptors such as G Protein-coupled receptors and
signaling molecules such as protein kinases, that are similar to human proteins.
The Company believes that yeast cells have several important
characteristics that are useful in drug discovery.
o The strong correlation between human and yeast gene classes
enables the evaluation of the biological function of human
proteins, including receptors and signaling molecules, of
unknown function. Proteins with comparable gene sequences
frequently carry out similar functions. This fact can be used
to determine the function of a human gene by genetically
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engineering a yeast cell to replace a yeast gene coding for a
known function with the human gene suspected of having a
comparable function. If the yeast cell retains its normal
function, it suggests that the human gene and its protein have
a biological function similar to that of their yeast
counterparts. Consequently, genetically engineered yeast cells
can replicate human gene function and provide a biologically
relevant context for evaluating interactions between receptors
and their related signaling pathways.
o In 1996, the yeast genome was fully sequenced. This knowledge
has facilitated analysis of the correlation between yeast and
human gene structure and aids in the definition of human gene
functions.
o While the yeast signaling mechanism bears many similarities to
the human signaling mechanism, the yeast intracellular
environment is less complex, thus eliminating much of the
ancillary and redundant intracellular signaling pathways that
exist in human cells.
o Yeast have the ability to absorb DNA fragments and incorporate
them into their genome. As a result, their genetic structure
can be easily manipulated using common genetic engineering
techniques.
o Yeast cells replicate rapidly. Speed of replication is
particularly important because creating a new yeast strain
that successfully incorporates new genetic material and adapts
to new conditions may take several generations and the strain
that so adapts is identifiable by growth. In addition, because
a yeast cell reproduces itself every two hours, compared with
24 to 48 hours for mammalian cells, a drug screen using yeast
can be developed and evaluated much faster than one using
human cell assays.
o Yeast can be easily and inexpensively grown in the laboratory
using standard microbiological techniques and, as a
consequence, can readily be used in automated screening
systems.
o Yeast are resistant both to the solvents often needed to
dissolve potentially active compounds and the toxins often
found in natural products. Consequently, hybrid yeast cells
can be used to screen libraries of synthetic compounds,
combinatorial chemicals or natural products.
THE COMPANY'S DRUG DISCOVERY TECHNOLOGIES
The Company has developed several proprietary drug discovery
technologies that address many of the limitations of traditional drug discovery
methods, including tools used to screen for compounds that act as agonists or
antagonists to cell surface receptors and tools used to identify ligands to
targeted orphan
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receptors. The Subsidiary is currently seeking to license these technologies on
a non-exclusive basis to third parties.
HYBRID YEAST CELLS
The Company has developed a proprietary technology to insert human
genes into yeast cells to create hybrid yeast cells. The Company focused its
hybrid yeast cell technology primarily on
G Protein-coupled receptors. The Company's scientists typically created hybrid
yeast cells by replacing yeast G Protein-coupled receptor genes and certain
signaling molecules with their human equivalents. As a result, these hybrid
yeast cells express a human G Protein-coupled receptor and a portion of its
signaling pathway. These hybrid yeast cells can be used to identify those
compounds that act as agonists or antagonists to that receptor or a molecule
that is in its signaling pathway. The Company has also created hybrid yeast
cells using other classes of human cell-surface receptors that have a functional
equivalent in yeast. To facilitate drug screen development, the Company has
designed and developed more than twenty-five thousand genetically different
yeast strains that can be used to build novel hybrid yeast cells.
The Company believes that hybrid yeast cells are highly effective for
screening compounds. Hybrid yeast cells can be used to measure the biological
activity of the human signaling pathway in which intervention is desired. In
addition, hybrid yeast cells contain a single human receptor which connects to a
defined signaling pathway. Accordingly, a specific change in cell behavior, such
as replication, is easily monitored and can be attributed to the compound being
tested. Also, because different human genes can be inserted into yeast, hybrid
yeast cells enable the user to identify compounds that act at virtually any site
in the human cell signaling pathway. These sites include the ligand binding site
on the receptor, as well as other sites on the receptor, and the protein
components of individual signaling pathways. Moreover, because yeast are
resistant to solvents and toxins often used to dissolve test compounds, hybrid
yeast cells can be used to screen synthetic organic libraries, combinatorial
libraries and natural product libraries. Hybrid yeast cells can also be used to
perform high throughput screening of compound libraries.
The Company has developed a biological database that catalogues the
Company's collection of proprietary cells, cell lines, yeast strains and genetic
engineering tools. This database currently has approximately 30,000 entries,
that include the phenotype and the genotype of the cell or yeast strain and its
storage site.
AUTOCRINE PEPTIDE EXPRESSION SYSTEM (APEX(TM))
The Company extended its hybrid yeast cell technology to develop a
novel drug screening technology. Biological signaling frequently involves the
concerted behavior of at least two cells: one that sends the signal and a second
that receives and responds to that signal. The Company's scientists converted
this natural multi-cell process into a single cell process by inserting into a
hybrid yeast cell both the human G Protein-coupled receptor and the gene that
causes the yeast cell to produce the ligand that naturally binds to the receptor
being expressed by the same hybrid yeast cell. As a result, the Company's
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scientists made the cell self-stimulating, or "autocrine," in that it both sends
a signal through production and secretion of a ligand and responds, by
replication, to that same signal through the receptor. The Company believes that
the autocrine nature of the APEX(TM) system makes it an effective tool for the
identification of compounds that act as agonists or antagonists with respect to
that receptor or a molecular target in its signaling pathway. As a result, drug
screening may be conducted in an accelerated, cost effective process as compared
to conventional screening techniques.
SELF SELECTING COMBINATORIAL LIBRARY TECHNOLOGY (SSCL(TM))
The Company developed its proprietary SSCL(TM) technology to identify
a ligand that activates an orphan receptor. The SSCL(TM) technology involves the
creation of a library of peptides encoded in DNA, called a combinatorial peptide
expression library. This library is inserted into a strain of hybrid yeast cells
that all express the same orphan receptor. The activation of this receptor is
functionally coupled with cell replication. Each of the millions of yeast cells
in the strain incorporates a different peptide encoded in DNA, resulting in a
library of yeast cells which all express the same orphan receptor but are each
programmed to secrete a different peptide. Most of the secreted peptides have no
effect on the orphan receptor and the hybrid yeast cells producing these
peptides do not replicate. The Company estimates that one in a million hybrid
yeast cells generates a peptide ligand that activates the orphan receptor. These
particular hybrid yeast cells replicate and, therefore, are readily identified.
Thus, the SSCL(TM) technology uses self selection to identify the ligand that
binds to the targeted orphan receptor. The sequence of the peptide ligand can
then be rapidly identified and undergo further evaluation. One to ten million
peptides can be tested in a matter of hours. The Company has used its SSCL(TM)
technology to successfully identify ligands to orphan receptors in less than a
month, significantly accelerating this step in the drug discovery process.
Identifying ligands to orphan receptors is the critical first step in
determining the biological function of orphan receptors and demonstrating their
value as drug discovery targets.
The strains of hybrid yeast cells constructed for the SSCL(TM) can
simultaneously be used as screens for large libraries of chemical compounds.
This capability enabled the Company to seek to identify a peptide ligand to an
orphan receptor while simultaneously creating a high throughput screen for small
molecule agonists and antagonists to that receptor.
BIOINFORMATICS FOR TARGET IDENTIFICATION
The Company has developed proprietary software algorithms that can be
used to rapidly search through the data generated by the Human Genome Project
for DNA sequences that are likely to be those of G Protein-coupled receptors.
HUMAN ORPHAN G PROTEIN-COUPLED RECEPTORS
On July 25, 1998, the Company entered into a collaboration agreement
with Genome Therapeutics Corporation ("GTC"), which has bioinformatics
technologies and know-how that it uses to identify and
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sequence orphan G Protein-coupled receptors. Pursuant to the collaboration, the
Company and Genome Therapeutics Corporation identified and isolated fifty-six
(56) human orphan G Protein-coupled receptors. The rights to such fifty-six (56)
human orphan G Protein-coupled receptors are owned jointly by the Company and
GTC. Each of the Company and GTC will share in any research funding, equity
investments, license fees, milestone payments and royalties that may be received
from third party pharmaceutical companies that enter into collaboration
agreements with the Company and/or GTC with respect to such G Protein-coupled
receptors. As of November 1999, the Company and GTC ceased collaborating.
INVESTMENT IN AXIOM BIOTECHNOLOGIES INC.
Cadus has an equity interest in Axiom Biotechnologies Inc. ("Axiom")
which is using its human cell based physio-genomics technology and pharmacology
profiling systems in drug discovery, both internally and with collaborative
partners. Russell D. Glass, the Company's Chief Executive Officer, is a director
of Axiom.
COLLABORATIVE ARRANGEMENTS
The Company no longer has any collaborations with pharmaceutical
companies. The Bristol- Myers Squibb Company collaboration expired in July 1999,
the Solvay Pharmaceuticals collaboration was assigned to OSI in July 1999 and
the Company and SmithKline Beecham p.l.c. agreed to terminate their
collaboration in September 1999. Each of Bristol-Myers Squibb Company and
SmithKline Beecham p.l.c. is required to make payments to the Company upon the
achievement by it of certain pre-clinical and drug development milestones and to
pay the Company royalties on the sale of any drugs developed as a result of the
research collaboration with the Company or through the use of the Company's drug
discovery technologies. There can be no assurance that any such milestones will
be achieved or any such drugs developed.
LICENSING ARRANGEMENTS
In February 2000, Cadus licensed to OSI, on a non-exclusive basis,
its yeast technologies, including various reagents and its library of over
25,000 yeast strains, and its bioinformatics software. OSI paid to Cadus a
license fee of $100,000 and an access fee of $600,000. OSI is also obligated to
pay an annual maintenance fee of $100,000 until the earlier of 2010 or the
termination of the license and a supplemental license fee of $250,000, which was
paid in December 2000 after the lifting of the injunction obtained by a
plaintiff in a patent infringement action against Cadus. OSI may terminate the
license at any time on 30 days prior written notice. In December 2001, Cadus
transferred its license with OSI to the Subsidiary.
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In December 2001, the Subsidiary licensed to a major pharmaceutical
company, on a non- exclusive basis, its yeast technologies, including various
reagents and its library of over 25,000 yeast strains. The licensee paid to the
Subsidiary an up-front non-refundable fee of $500,000. The licensee is also
obligated to pay to the Subsidiary an additional $1,000,000 if the licensee
achieves a research milestone. The license terminates on December 31, 2006;
however the licensee may extend the term for additional one-year periods by
paying to the Subsidiary $250,000 for each one- year extension. The Subsidiary
is seeking to license its yeast technologies to other third parties on a
non-exclusive basis.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
The Subsidiary relies upon patents and trade secrets to protect its
proprietary technologies. As of March 15, 2002, the Subsidiary was the assignee
of seven issued U.S. patents covering aspects of its yeast technology and was
the exclusive worldwide licensee of three issued U.S. patents for use in drug
discovery. In addition, as of such date, the Subsidiary had filed or held
licenses to 18 other U.S. patent applications, as well as related foreign patent
applications.
Cadus has obtained from Duke University an exclusive worldwide
license to three issued U.S. patents and U.S. and international patent
applications covering hybrid yeast cell technologies, which Cadus transferred to
the Subsidiary in December 2001. These patents and patent applications are
directed to hybrid yeast cells engineered to express human G Protein-coupled
receptors and to methods of their use. In consideration for such license, the
Subsidiary pays a minimum annual royalty and is required to make payments upon
the achievement by the Subsidiary of certain drug development milestones and to
pay royalties (net of minimum royalties) on the sale of drugs by the Subsidiary
which were initially identified by the Subsidiary through the use of the
licensed technology. In lieu of milestones and royalty payments on sales of
drugs by sublicensees initially identified by sublicensees through the use of
the licensed technology, the Subsidiary pays an annual fee (net of the minimum
annual royalty) for each sublicense granted by it to such technology.
Cadus has also filed patent applications based on inventions by
Cadus's scientists directed to hybrid yeast cells and yeast cells engineered to
produce both peptide libraries and human proteins that can function in certain
signal transduction pathways of the engineered yeast cell. These applications
seek to protect aspects of the APEX(TM) and SSCL(TM) technologies. Cadus has
also filed patent applications directed to methods, constructs and reagents,
including engineered cells, for discovering ligands to orphan receptors.
Peptides, and mimetics thereof, which have been discovered using the SSCL(TM)
technology are also covered in these patent applications both as compositions
and for their therapeutic use. Cadus transferred these patent applications to
the Subsidiary in December 2001.
The Company has granted a non-exclusive license to use several of its
patents and patent applications relating to its yeast-based technologies to OSI
and, for certain limited purposes, to a major pharmaceutical company and Solvay
Pharmaceuticals.
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In addition to patent protection, the Company relies upon trade
secrets and proprietary know-how to maintain its competitive position. To
maintain the confidentiality of its trade secrets and proprietary information,
the Company requires its employees and consultants to execute confidentiality
agreements upon the commencement of their relationships with the Company. Such
agreements with employees and consultants also provide that all inventions
resulting from work performed by them while in the employ of the Company will be
the exclusive property of the Company.
Patent law as it relates to inventions in the biotechnology field is
still evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, no predictions can be made
regarding the breadth or enforceability of claims allowed in the patents that
have been issued to the Company or its licensors or in patents that may be
issued to the Company or its licensors in the future. Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign counterparts or
as may be subsequently interpreted by courts inside or outside the United
States, will be sufficiently broad to protect the Company's proprietary rights,
will be commercially valuable or will provide competitive advantages to the
Company and its present or future collaborative partners or licensees. Further,
there can be no assurance that patents will be granted with respect to any of
the Company's pending patent applications or with respect to any patent
applications filed by the Company in the future. There can be no assurance that
any of the Company's issued or licensed patents would ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful.
The field of gene discovery has become intensely competitive. A
number of pharmaceutical companies, biotechnology companies, universities and
research institutions have filed patent applications or received patents
covering their gene discoveries. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects with
claims made under the Company's applications. Moreover, because patent
applications in the United States are maintained in secrecy until patents issue
and because patent applications in certain other countries generally are not
published until more than eighteen months after they are filed and because
publication of technological developments in the scientific or patent literature
often lags behind the date of such developments, the Company cannot be certain
that it was the first to invent the subject matter covered by its patents or
patent applications or that it was the first to file patent applications for
such inventions. If an issue regarding priority of inventions were to arise with
respect to any of the patents or patent applications of the Company or its
licensors, the Company might have to participate in litigation or interference
proceedings declared by the United States Patent and Trademark Office or similar
agencies in other countries to determine priority of invention. Any such
participation could result in substantial cost to the Company, even if the
eventual outcome were favorable to the Company.
In some cases, litigation or other proceedings may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
the Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial cost to and
12
diversion of resources by the Company. An adverse outcome in any such litigation
or proceeding could subject the Company to significant liabilities, require the
Company to cease using the subject technology or require the Company to license
the subject technology from the third party, all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. If any licenses are required, there can be no assurance that the
Company will be able to obtain any such license on commercially favorable terms,
if at all, and if these licenses are not obtained, the Company might be
prevented from using certain of its technologies.
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") (which was acquired
by Merck & Co. in 1999) commenced a patent infringement action against Cadus
alleging infringement by Cadus of a patent concerning the use of cells,
engineered to express any type of cell surface receptor and a reporter gene,
used to report results in the screening of compounds against target assays and
seeking injunctive relief and monetary damages. After trial, on December 18,
1998, the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. On January 29, 1999 the United States District Court granted
SIBIA's request for injunctive relief that precluded Cadus from using the method
claimed in SIBIA's patent. On February 26, 1999, the United States District
Court denied Cadus's motions to set aside the jury verdict, to grant a new trial
and to reduce or set aside the $18.0 million judgment awarded by the jury. Cadus
appealed the judgment. In order to stay execution pending appeal of the $18.0
million judgment obtained by SIBIA, in March 1999, Cadus deposited $18.5 million
in escrow to secure payment of the judgments in the event Cadus were to lose the
appeal. On September 6, 2000 the United States Court of Appeals ruled in favor
of Cadus and overturned the prior judgment entered by the U.S. District Court.
The Court of Appeals ruled that the claims of the SIBIA patent asserted against
Cadus were invalid and that the District Court erred in denying Cadus's motion
for judgment as a matter of law on the issue of invalidity. On October 30, 2000,
the U.S. District Court set aside the $18.0 million judgment in favor of SIBIA
and vacated the injunction against Cadus. Separately, in October 2000, Cadus
obtained the release of the cash escrow of $19.9 million representing the
original $18.5 million and interest that accumulated thereon.
COMPETITION
The biotechnology and pharmaceutical industries are intensely
competitive. The Company's technologies consist principally of genetically
engineered yeast cells. The Company is aware of companies, such as American Home
Products Corporation and Glaxo Smith Kline, Plc, that may use yeast as a drug
discovery medium. In addition, many smaller companies are pursuing these areas
of research. The Company is also aware of other companies that are inserting
human orphan G Protein-coupled receptors into yeast and other cells and using
these hybrid cells for drug discovery purposes. Certain other companies are
seeking to determine the functions of human orphan G Protein-coupled receptors
by identifying agonists to these receptors and by other research methods. All of
the above companies are significant competitors of the Company. Many of the
Company's competitors have greater financial and human resources, and more
experience in research and development than the Company. There can be no
assurance that competitors of the Company will not develop competing drug
discovery technologies that
13
are more effective than those developed by the Company thereby rendering the
Company's drug discovery technologies obsolete or noncompetitive. Moreover,
there can be no assurance that the Company's competitors will not obtain patent
protection or other intellectual property rights that would limit the Company's
ability to use or license its drug discovery technologies, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In order to compete successfully, the Company's goal is to obtain
patent protection for its drug discovery technologies and to make these
technologies available to pharmaceutical and biotechnology companies through
licensing arrangements for use in discovering drugs. There can be no assurance,
however, that the Company will obtain patents covering its technologies that
protect it against competitors. Moreover, there can be no assurance that the
Company's competitors will not succeed in developing technologies that
circumvent the Company's technologies or that such competitors will not succeed
in developing technologies that are more effective than those developed by the
Company or that would render technology of the Company less competitive or
obsolete.
GOVERNMENT REGULATION
The development, manufacturing and marketing of drugs developed
through the use of the Company's technologies are subject to regulation by
numerous governmental agencies in the United States and in other countries. To
date, none of the Company's technologies has resulted in any clinical drug
candidates. The FDA and comparable regulatory agencies in other countries impose
mandatory procedures and standards for the conduct of certain preclinical
testing and clinical trials and the production and marketing of drugs for human
therapeutic use. Product development and approval of a new drug are likely to
take a number of years and involve the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include:(i) preclinical studies; (ii) the submission to the FDA of
a request for authorization to conduct clinical trials on an investigational new
drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug for its intended use; (iv) submission to the
FDA of a new drug application (an "NDA"); and (v) review and approval of the NDA
by the FDA before the drug may be shipped or sold commercially.
In the United States, preclinical testing includes both IN VITRO and
IN VIVO laboratory evaluation and characterization of the safety and efficacy of
a drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
14
Clinical trials, which involve the administration of the
investigational drug to healthy volunteers or to patients under the supervision
of a qualified principal investigator, are typically conducted in three
sequential phases, although the phases may overlap with one another. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board (the
"IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual
intended patient population and seek to assess the efficacy of the drug for
specific targeted indications, to determine dose tolerance and the optimal dose
range and to gather additional information relating to safety and potential
adverse effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company or the FDA may suspend
clinical trials at any time if it is believed that individuals participating in
such trials are being exposed to unacceptable health risks. Even assuming that
clinical trials are completed and that an NDA is submitted to the FDA, there can
be no assurance that the NDA will be reviewed by the FDA in a timely manner or
that once reviewed, the NDA will be approved. The approval process is affected
by a number of factors, including the severity of the targeted indications, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. The FDA may deny an NDA if applicable regulatory criteria
are not satisfied, or may require additional testing or information with respect
to the investigational drug. Even if initial FDA approval is obtained, further
studies, including post-market studies, may be required in order to provide
additional data on safety and will be required in order to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially tested. The FDA will also require post-market
reporting and may require
15
surveillance programs to monitor the side effects of the drug. Results of
post-marketing programs may limit or expand the further marketing of the drug.
Further, if there are any modifications to the drug, including changes in
indication, manufacturing process or labeling, an NDA supplement may be required
to be submitted to the FDA.
Each manufacturing establishment for new drugs is also required to
receive some form of approval by the FDA. Among the conditions for such approval
is the requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
There can be no assurance that the regulatory framework described
above will not change or that additional regulations will not arise that may
affect approval of or delay an IND or an NDA. The Company has no preclinical or
clinical development expertise and intends to rely on third party clinical
research organizations to design and conduct most of such activities if
required.
Prior to the commencement of marketing a product in other countries,
regulatory approval in such countries is required, whether or not FDA approval
has been obtained for such product. The requirements governing the conduct of
clinical trials and product approvals vary widely from country to country, and
the time required for approval may be longer or shorter than the time required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general, each country has its own procedures and
requirements.
The Company is also subject to regulation under other Federal laws
and regulation under state and local laws, including laws relating to
occupational safety, laboratory practices, the use, handling and disposition of
radioactive materials, environmental protection and hazardous substance control.
Although the Company believes that it is in compliance with these laws and
regulations in all material respects, there can be no assurance that it will not
be required to incur significant costs to comply with environmental and other
laws or regulations in the future.
EMPLOYEES
As of March 15, 2002, the Company had no employees. Russell D. Glass,
the Chief Executive Officer of Cadus and the Subsidiary, is not an employee of
Cadus or the Subsidiary and is serving as the Chief Executive Officer of Cadus
and the Subsidiary without compensation.
ITEM 2. PROPERTIES.
Cadus leases storage space in Tarrytown, New York.
16
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings. In March 2002,
the arbitrator in the arbitration proceeding commenced against Cadus by Philip
N. Sussman, the former Senior Vice President, Finance and Corporate Development,
and Chief Financial Officer of Cadus, ruled in favor of Mr. Sussman and awarded
him approximately $750,000 in severance pay, interest and attorneys and other
costs and fees.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Cadus's common stock, $.01 par value per share (the "Common Stock"),
was traded on the Nasdaq National Market under the symbol KDUS until September
27, 1999 when it was delisted. Since September 27, 1999, Cadus's Common Stock
has traded on the over-the-counter bulletin board under the symbol KDUS.OB. The
table below sets forth the high and low sales price per share of the Common
Stock for the periods indicated, as reported by the Nasdaq National Market or
the over-the-counter bulletin board, as the case may be.
FISCAL YEAR 2001 HIGH LOW
First quarter ended March 31, 2001 $1.09 $0.63
Second quarter ended June 30, 2001 $1.12 $0.77
Third quarter ended September 30, 2001 $1.00 $0.75
Fourth quarter ended December 31, 2001 $1.20 $0.81
FISCAL YEAR 2000 HIGH LOW
First quarter ended March 31, 2000 $5.56 $0.30
Second quarter ended June 30, 2000 $2.00 $0.69
Third quarter ended September 30, 2000 $1.72 $0.53
Fourth quarter ended December 31, 2000 $1.22 $0.38
17
As of March 15, 2002, there were approximately 67 holders of record
of Cadus's Common Stock.
Cadus has not declared or paid any cash dividends on its Common Stock
during the past two fiscal years and does not anticipate paying any such
dividends in the foreseeable future. Cadus intends to retain any earnings for
the growth of and for use in its business.
EQUITY COMPENSATION PLAN INFORMATION.
The following table sets forth certain information with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of Cadus were authorized for issuance as of December 31, 2001:
- -----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -----------------------------------------------------------------------------------------------------------------------
Plan Category Number of Weighted-average Number of securities
securities to be exercise price of remaining available
issued upon outstanding options, for future issuance
exercise of warrants and rights under equity
outstanding compensation plans
options, warrants (excluding securities
and rights reflected in column
(a))
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation 285,906 $1.68 1,736,221
plans approved by
security holders
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation 323,403 $2.42 0
plans not approved by
security holders
- -----------------------------------------------------------------------------------------------------------------------
Total 609,309 $2.08 1,736,221
- -----------------------------------------------------------------------------------------------------------------------
RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, Cadus has not issued and sold securities
that were not registered under the Securities Act of 1933, as amended (the
"Act").
ITEM 6. SELECTED FINANCIAL DATA.
18
The selected financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto included elsewhere in this report.
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 600 $ 979 $ 6,028 $ 12,576 $ 9,013
Operating costs and expenses:
Research and development -- -- 9,116 15,389 11,561
General and administrative 1,079 1,652 3,643 8,977 4,092
------------ ------------ ------------ ------------ ------------
Total operating costs and
expenses 1,079 1,652 12,759 24,366 15,653
------------ ------------ ------------ ------------ ------------
Operating loss (479) (673) (6,731) (11,790) (6,640)
Net income (loss) ....................... $(317)(1) $18,051(2) ($8,524) ($29,690)(3) ($5,411)
============ ============ ============ ============ ============
Basic and diluted net income (loss)
per share $(0.02) $1.37 ($0.65) ($2.32) ($0.44)
============ ============ ============ ============ ============
Shares used in calculation of basic
and diluted net (loss)
income per share 13,144,040 13,133,615 13,068,940 12,811,525 12,225,463
DECEMBER 31,
------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 24,469 $ 24,383(4) $ 5,082(4) $ 10,976(4) $ 36,762
Total assets 26,201 25,709 26,699 36,587 42,241
Short-term debt -- -- -- -- 150
Accumulated deficit (34,322) (34,005) (52,056) (43,532) (13,842)
Stockholders' equity ............... 25,356 25,672 7,465 15,989 40,500
Cadus has not paid any dividends since its inception and does not anticipate
paying any dividends on its common stock in the foreseeable future.
(1) The net loss of $317,000 for the year ended December 31, 2001
includes an arbitration award of approximately $750,000 to a
former employee and a $155,402 reimbursement of SIBIA
litigation costs offset by legal costs of $29,786.
(2) The net income of $18.1 million for the year ended December
31, 2000 includes the reversal of the reserve for litigation
damages of $18.8 million (net of legal costs) as a result of
the reversal by the Court of Appeals on September 6, 2000 of
the judgment that had been obtained by SIBIA in December 1998.
(3) The net loss of $29.7 million for the year ended December 31,
1998 includes an $18.5 million reserve for litigation damages
with respect to the patent infringement litigation with SIBIA.
19
(4) In order to stay execution pending appeal of the $18.0 million
judgment obtained by SIBIA, in March 1999, Cadus deposited
$18.5 million in escrow to secure payment of the judgment in
the event Cadus were to lose the appeal. Such $18.5 million
was classified, as of December 31, 1998, as "restricted cash
noncurrent" and Cadus's "cash and cash equivalents" was
reduced by $18.5 million. Interest earned on the restricted
cash has been added to restricted cash. Upon the reversal of
such judgment by the Court of Appeals on September 6, 2000 the
cash ceased to be classified as "restricted" and was included
in "cash and cash equivalents".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Cadus was incorporated in 1992 and until July 30, 1999, devoted substantially
all of its resources to the development and application of novel yeast-based and
other drug discovery technologies. On July 30, 1999, Cadus sold its drug
discovery assets to OSI Pharmaceuticals, Inc. ("OSI") and ceased its internal
drug discovery operations and research efforts for collaborative partners. Cadus
terminated all employees who were not hired by OSI or who did not voluntarily
resign except for the Chief Executive Officer, who resigned in April 2000.
The Company has incurred operating losses in each year since its inception,
including an operating loss of approximately $477,000 during the year ended
December 31, 2001. At December 31, 2001, the Company had an accumulated deficit
of approximately $34.3 million. The Company's losses have resulted principally
from costs incurred in connection with its research and development activities
and from general and administrative costs associated with the Company's
operations. These costs have exceeded the Company's revenues and interest
income. As a result of the sale of its drug discovery assets to OSI and the
cessation of its internal drug discovery operations and research efforts for
collaborative partners, the Company ceased to have research funding revenues and
substantially reduced its operating expenses.
The following accounting policies are important to understanding our financial
condition and results of operations and should be read as an integral part of
the discussion and analysis of the results of our operations and financial
position. For additional accounting policies, see note 2 to our consolidated
financial statements, "Significant Accounting Policies"
REVENUE RECOGNITION. We have entered into various license agreements with other
pharmaceutical companies. Up-front non-refundable fees received under license
agreements are generally recognized over the term of the related research
period. Up-front non-refundable fees received under license agreements which do
not require any further research and development activities on the part of the
Company are recognized upon receipt. Milestone payments, which reduce the
development risk associated with a product and are determinable based on the
terms of the collaboration agreement, are typically progress payments for
specific events of development, such as completion of pre-clinical or clinical
activities, regulatory submission or approval, or manufacturing objectives prior
to commercialization of a product. Milestone payments are generally
non-refundable and the amount of revenue recognized during an accounting period
is determined by the nature of the contracted provision included in the
collaboration agreements.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, we are
20
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations. Significant management judgment is required in
determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax
assets.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Revenues for 2001 decreased to $600,000 from $978,500 in 2000. This
decrease is primarily attributable to the Company receiving less licensing fees.
OPERATING EXPENSES
General and administrative expenses decreased to $1.1 million for
2001 from $1.7 million for 2000. This decrease was attributable primarily to the
elimination of approximately $608,000 in compensation to the former Chief
Executive Officer (including $497,500 in severance) offset in part by an
increase in patent maintenance costs and professional fees of approximately
$150,000.
NET INTEREST INCOME
Net interest income for 2001 increased to $838,000 from $639,000 in
2000. This increase is attributable primarily to the increase in the Company's
unrestricted cash equivalent balances as compared to 2000 as a result of the
release of funds that were held in escrow in connection with the SIBIA
litigation.
EQUITY IN OTHER VENTURES
Equity in other ventures in 2001 reflects income of $3,086 from the
Company's investment in Laurel Partners Limited Partnership. The investment in
Axiom Biotechnologies, Inc. has been written down to zero as of December 31,
2000.
GAIN ON REVERSAL OF LITIGATION JUDGMENT
In 2001, pursuant to a court order the Company received $155,402 in
reimbursement of SIBIA litigation costs which was partially offset by legal
costs incurred of $29,786. The $18,841,489 gain recognized in 2000 was the
result of the United States Court of Appeals ruling in favor of the Company
overturning a 1998 judgment by the U.S. District Court in the patent
infringement suit filed by SIBIA.
SETTLEMENT OF ARBITRATION
21
In March 2002, the arbitrator in the arbitration proceeding commenced
against Cadus by Philip N. Sussman, the former Senior Vice President, Finance
and Corporate Development, and Chief Financial Officer of Cadus, ruled in favor
of Mr. Sussman and awarded him approximately $750,000 in severance pay, interest
and attorneys and other costs and fees.
NET (LOSS) INCOME
The net loss for 2001 was $317,000 compared to net income of $18.1
million in 2000. This decrease is primarily attributable to the approximately
$18.8 million gain on the reversal of the SIBIA litigation judgment being
recognized in 2000 and there being no comparable gain in 2001 and the
arbitration award in 2001 of approximately $750,000 against Cadus in favor of a
former employee.
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES
Revenues for 2000 decreased to $978,500 from $6.0 million in 1999.
This decrease was primarily attributable to the Company having ceased research
efforts for collaborators and, therefore, not receiving any research funding in
2000. The Company's revenues in 2000 were derived solely from its licensing of
its yeast technology to OSI.
OPERATING EXPENSES
The Company's research and development expenses for 2000 decreased to
$0 from $9.1 million for 1999. This decrease was attributable to the Company
having ceased its drug discovery operations and research efforts for
collaborators and having no research personnel after its asset sale in July
1999.
General and administrative expenses decreased to $1.7 million for
2000 from $3.6 million for 1999. This decrease was attributable primarily to the
elimination of facility related expenses and the reduction in administrative
personnel. In 2000, the Chief Executive Officer's compensation was approximately
$608,000 which includes $497,500 in severance pay.
NET INTEREST INCOME
Net interest income for 2000 increased to $639,000 from $552,000 in
1999. The increase is attributable primarily to the increase in the Company's
unrestricted cash equivalent balances as compared to 1999 upon release of the
funds that were held in escrow in connection with the SIBIA litigation.
EQUITY IN OTHER VENTURES
Equity in other ventures reflects losses associated with the
Company's two equity investments. For 2000 the Company recognized a net loss of
$834,413 in its investment in Axiom Biotechnologies, Inc. and a net loss of
$2,649 in its investment in Laurel Partners Limited Partnership. The investment
in Axiom Biotechnologies, Inc. has been written down to zero as of December 31,
2000.
GAIN ON REVERSAL OF LITIGATION JUDGMENT
22
On September 6, 2000 the United States Court of Appeals ruled in
favor of the Company and overturned the 1998 judgment entered by the U.S.
District Court in the patent infringement suit filed by SIBIA. The gain
recognized represents the original $18.5 million reserve plus interest accrued
on the escrow balance of $1,341,489 less legal fees of $1,000,000 that were
contingent on the success of the appeal.
NET INCOME (LOSS)
The net income for 2000 increased to $18.1 million from a loss of
$8.5 million for 1999. This increase can be attributed to the reversal of the
SIBIA litigation reserve for litigation damages (net of legal expense) and a
decrease in operating expenses partially offset by a decrease in revenue.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001 the Company held cash and cash equivalents of
$24.5 million. The Company's working capital at December 31, 2001 was $24.2
million.
On July 30, 1999, Cadus sold its drug discovery assets to OSI and
ceased its internal drug discovery operations and research efforts for
collaborative partners. Pursuant to such sale transaction, OSI assumed, among
other things, Cadus's lease to the Company's research facility in Tarrytown, New
York and Cadus's equipment lease with General Electric Capital Corporation.
Cadus terminated all employees who were not hired by OSI or who did not
voluntarily resign, except for the Chief Executive Officer. As a result of the
foregoing, Cadus ceased to have research funding revenues and substantially
reduced its operating expenses.
In February 2000, Cadus licensed to OSI, on a non-exclusive basis,
its yeast technologies. OSI paid to Cadus a license fee of $100,000 and an
access fee of $600,000. OSI is also obligated to pay an annual maintenance fee
of $100,000 until the earlier of 2010 or the termination of the license and a
supplemental license fee of $250,000 which was paid in December 2000 after the
lifting of the injunction obtained by SIBIA. OSI may terminate the license at
any time on 30 days prior written notice. In December 2001, Cadus transferred
its license with OSI to the Subsidiary.
In December 2001, the Subsidiary licensed to a major pharmaceutical
company, on a non- exclusive basis, its yeast technologies. The licensee paid to
the Subsidiary an up-front non- refundable fee of $500,000. The licensee is also
obligated to pay to the Subsidiary an additional $1,000,000 if the licensee
achieves a research milestone. The license terminates on December 31, 2006;
however, the licensee may extend the term for additional one-year periods by
paying to the Subsidiary $250,000 for each one-year extension.
The Company believes that its existing resources, together with
interest income, will be sufficient to support its current and projected funding
requirements through the end of 2003. This forecast of the period of time
through which the Company's financial resources will be adequate to support its
operation is a forward-looking statement that may not prove accurate and, as
such, actual results may vary. The Company's capital requirements may vary as a
result of a number of factors, including the transactions, if any, arising from
the Company's efforts to license its technologies and otherwise realize value
from its assets, the transactions, if any arising from the Company's efforts to
acquire technologies or products or to acquire or invest in companies and the
expenses of pursuing such transactions.
23
At December 31, 2001 the Company had tax net operating loss
carryforwards of approximately $28.4 million and research and development credit
carryforwards of approximately $2.5 million which expire in years 2009 through
2020. The Company's ability to utilize such net operating loss and research and
development credit carryforwards is subject to certain limitations due to
ownership changes as defined by rules enacted with the Tax Reform Act of 1986.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses the accounting for
acquisitions of businesses and is effective for acquisitions occurring on or
after July 1, 2001. SFAS 142 addresses the method of identifying and measuring
goodwill and other intangible assets, eliminates further amortization of
goodwill and intangible assets that have indefinite useful lives, and requires
periodic evaluations of impairment of goodwill balances and intangible assets.
Statement 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Live Assets to
be Disposed Of." SFAS 142 is effective for fiscal years beginning after December
15, 2001. The adoption of SFAS 141 will have no effect on the Company's
financial position or results of operations. SFAS 142 will require the Company
to reassess the useful lives of the capitalized patent costs reflected in the
accompanying balance sheets as other assets. The Company amortized $80,905 of
capitalized patent costs during the years ended December 31, 2001 and 2000. The
Company is currently assessing the impact of the adoption of SFAS 142.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. We are
currently assessing the impact of SFAS No. 144 on our financial position and
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due
to changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities. The Company does not believe it is materially
exposed to changes in interest rates. Under its current policies the Company
does not use interest rate derivative instruments to manage exposure to interest
rate changes.
ITEM 8. FINANCIAL STATEMENTS.
24
The financial statements and notes thereto may be found following
Item 14 of this report. For an index to the financial statements and
supplementary data, see Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information with respect to the executive officers and directors of
Cadus as of March 15, 2002 is set forth below:
NAME AGE POSITION
- ---- --- --------
Russell D. Glass 39 Chief Executive Officer,
President and Director
James R. Broach, Ph.D. 53 Director
Carl C. Icahn 66 Director
Peter S. Liebert, M.D.(1) 66 Director
Professor Siegfried G. Schaefer 53 Director
Jack G. Wasserman (1) 64 Director
- ----------
(1) Member of the Compensation Committee.
RUSSELL D. GLASS became a director of Cadus in June 1998 and
President and Chief Executive Officer in April 2000. From April 1998 until 2002
Mr. Glass served as President and Chief Investment Officer of Icahn Associates
Corp., a diversified investment firm, and as Vice-Chairman and Director of
Lowestfare.com, Inc., an internet travel reservations company. Previously, Mr.
Glass had been a partner in Relational Investors LLC, from 1996 to 1998, and in
Premier Partners Inc., from 1988 to 1996, firms engaged in investment research
and management. From 1984 to 1986 he served as an investment banker with Kidder,
Peabody & Co. Previously, Mr. Glass served as a Director of Automated Travel
Systems, Inc., a software development firm. He currently serves as a Director of
Axiom Biotechnologies Inc., a developer of pharmacology profiling systems;
National Energy Group, Inc., an oil & gas exploration and production company;
Next Generation Technology Holdings, Inc.; and the A.G. Spanos Corporation, a
national real estate developer and owner of the NFL San Diego Chargers Football
Club. Mr. Glass earned a B.A. in economics from Princeton University and an
M.B.A. from the Stanford University Graduate School of Business.
JAMES R. BROACH, PH.D., a scientific founder of Cadus and inventor of
Cadus's yeast-based drug discovery technology, has been Director of Research of
Cadus since its inception. He is and has been since
25
1984 a Professor at Princeton University in the Department of Molecular Biology.
In 1984, Dr. Broach and his collaborators were the first ones to demonstrate
that human genes could be successfully implanted into yeast cells. He received
his Ph.D. in Biochemistry from University of California at Berkeley and his B.S.
from Yale University.
CARL C. ICAHN became a director of Cadus in July 1993. He was a
Co-Chairman of the Board of Directors from May 1995 to May 1996. Mr. Icahn has
served as Chairman of the Board and a Director of Starfire Holding Corporation
(formerly Icahn Holding Corporation), a privately-held holding company, and
Chairman of the Board and a Director of various subsidiaries of Starfire,
including ACF Industries, Incorporated, a privately-held railcar leasing and
manufacturing company, since 1984. He has also been Chairman of the Board and
President of Icahn & Co., Inc., a registered broker-dealer and a member of the
National Association of Securities Dealers, since 1968. Since November 1990, Mr.
Icahn has been Chairman of the Board of American Property Investors, Inc., the
general partner of American Real Estate Partners, L.P., a public limited
partnership that invests in real estate. Since August 1998, he has also served
as Chairman of the Board of Lowestfare.com, LLC, an internet travel reservations
company. From October 1998, Mr. Icahn has been President and a Director of
Stratosphere Corporation which operates the Stratosphere Hotel and Casino. Since
September 29, 2000, Mr. Icahn has served as the Chairman of the Board of GB
Holdings, Inc., GB Property Funding, Inc. and Great Bay Hotel & Casino, Inc.
which owns and operates the Sands Hotel in Atlantic City, NJ. Mr. Icahn received
his B.A. from Princeton University.
PETER S. LIEBERT, M.D., became a director of Cadus in April 1995. Dr.
Liebert has been a pediatric surgeon in private practice since 1968 and is
affiliated with Babies Hospital of Columbia Presbyterian. He is Clinical
Associate Professor of Surgery, College of Physicians and Surgeons, Columbia
University. He is also Chairman of the Board of Rx Vitamins, Inc. Dr. Liebert
holds an M.D. from Harvard University Medical School and a B.A. from Princeton
University.
PROFESSOR SIEGFRIED G. SCHAEFER became a director of Cadus in January
1998. Dr. Schaefer has been head of worldwide research at Solvay Pharmaceuticals
since July 1997 and the head of research at a Dutch division of Solvay
Pharmaceuticals from May 1996 to July 1997. From September 1992 to July 1997 Dr.
Schaefer was a department head for project management at an affiliate of Solvay
Pharmaceuticals. Dr. Schaefer has a Ph.D. in Biology from the University of
Bochum and a Doctorate in Pharmacology and Toxicology from the University of
Munich. Dr. Shaefer is currently a Professor at the University of Hamburg in the
Department of Pharmacology and Toxicology.
JACK G. WASSERMAN became a director of Cadus in May 1996. For the
past five years, Mr. Wasserman has been a senior partner in Wasserman,
Schneider, Babb & Reeds, a New York law firm that concentrates its practice in
legal matters relating to international trade. Mr. Wasserman is a director of
American Property Investors, Inc., the general partner of American Real Estate
Partners, L.P., a public limited partnership that invests in real estate. Mr.
Wasserman is also a director of National Energy Group, Inc., a public company
engaged in oil exploration. Mr. Wasserman received a B.A. from Adelphi
26
University, a J.D. from Georgetown University and a Graduate Diploma from the
Johns Hopkins University School of Advanced International Studies.
Directors are elected by the stockholders of Cadus at each annual
meeting of stockholders and serve until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
removal or resignation.
The Board of Directors of Cadus has a Compensation Committee,
consisting of Messrs. Liebert and Wasserman, which makes recommendations
regarding salaries and incentive compensation for employees of and consultants
to Cadus and which administers the 1993 Stock Option Plan and the 1996 Incentive
Plan.
The non-employee directors receive $1,000 for each meeting of the
Board of Directors attended and $500 for each meeting of a committee of the
Board of Directors attended.
OTHER MATTERS RELATING TO DIRECTORS
On January 5, 2001, Reliance Group Holdings, Inc. ("Reliance")
commenced an action in the United States District Court for the Southern
District of New York against Carl C. Icahn, Icahn Associates Corp. and High
River Limited Partnership ("High River") (a limited partnership controlled by
Mr. Icahn) alleging that High River's tender offer for Reliance 9% senior notes
violated Section 14(e) of the Securities Exchange Act of 1934. Reliance sought a
temporary restraining order and preliminary and permanent injunctive relief to
prevent defendants from purchasing the notes. The Court initially imposed a
temporary restraining order. Defendants then supplemented the tender offer
disclosures. The Court conducted a hearing on the disclosures and other matters
raised by Reliance. The Court then denied Reliance's motion for a preliminary
injunction and ordered dissolution of the temporary restraining order following
dissemination of the supplement. Reliance took an immediate appeal to the United
States Court of Appeals for the Second Circuit and sought a stay to restrain
defendants from purchasing notes during the pendency of the appeal. On January
30, 2001, the Court of Appeals denied plaintiffs' stay application. On January
30, Reliance also sought a further temporary restraining order from the District
Court. The Court considered the matter and reimposed its original restraint
until noon the next day, at which time the restraint against Mr. Icahn and his
affiliates was dissolved. On March 22, 2001, the Court of Appeals ruled in favor
of Mr. Icahn by affirming the judgment of the District Court.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Cadus's directors and
executive officers, and persons who own more than ten percent of a registered
class of Cadus's equity securities, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock of Cadus. Reporting persons are required by SEC
regulation to furnish the Company with copies of all such filed reports. To
Cadus's knowledge, based solely on a review of copies of such
27
filed reports furnished to Cadus, all of Cadus's directors, officers and greater
than ten percent beneficial owners made all required filings during fiscal year
2001 in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
compensation paid or accrued by Cadus for services rendered to Cadus in all
capacities for the fiscal years ended December 31, 2001, 2000 and 1999, by its
Chief Executive Officer and each of the Cadus's other executive officers whose
total salary and bonus exceeded $100,000 during 2001 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION ------------------- OPTIONS (#) COMPENSATION
--------------------------- ----------- ------------
YEAR SALARY ($) BONUS ($)
---- ---------- ---------
Russell D. Glass (1)............................ 2001 -- -- -- --
President and Chief Executive 2000 -- -- -- --
Officer
- -------------------
(1) Mr. Russell D. Glass became the Company's President and Chief Executive
Officer in April 2000. He serves in such capacity without compensation.
OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2001 by Cadus to the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERMS ($)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ----------- ----------- --------- ------ -- ---
Russell D. Glass............... --- --- --- --- -- --
OPTION EXERCISES AND HOLDINGS
28
The following table sets forth certain information concerning each
exercise of stock options, during the fiscal year ended December 31, 2001 by the
Named Executive Officers and unexercised stock options held by the Named
Executive Officers as of the end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2001(#) DECEMBER 31, 2001($)
---------------------- ---------------------
SHARES AGGREGATE
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
Russell D. Glass............. -- -- -- -- -- --
INCENTIVE PLANS
1993 STOCK OPTION PLAN
Cadus's 1993 Stock Option Plan (the "1993 Stock Option Plan")
provides for the grant of options to purchase shares of Common Stock to
officers, employees and consultants of the Company. The maximum number of shares
of Common Stock that may be issued pursuant to the 1993 Stock Option Plan is
666,667 (plus any shares that are the subject of canceled or forfeited awards).
Effective as of May 10, 1996, the 1993 Stock Option Plan was replaced by the
1996 Incentive Plan with respect to all future awards to the Company's employees
and consultants. See "Incentive Plans -- 1996 Incentive Plan."
The 1993 Stock Option Plan is administered by the Compensation
Committee which is presently comprised of Peter Liebert and Jack G. Wasserman.
Under the 1993 Stock Option Plan, the Compensation Committee may
establish with respect to each option granted such vesting provisions as it
determines to be appropriate or advisable. In general, options granted under the
1993 Stock Option Plan have a ten-year term, and such options vest or have
vested over four-year periods at various rates. Unexercised options
automatically terminate upon the termination of the holder's relationship with
the Company. However, the Compensation Committee may accelerate a vesting
schedule and/or extend the time for exercise of all or any part of an option in
the event of the termination of the holder's relationship with the Company. In
addition, the 1993 Stock Option Plan includes a provision authorizing the
Compensation Committee to adjust the number of shares of Common Stock available
for grant, the number of shares of Common Stock subject to outstanding awards
thereunder and the per share exercise price thereof in the event of any stock
dividend, stock split, recapitalization, merger or certain other events. The
Compensation Committee may terminate the 1993 Stock Option Plan at any time but
any such termination will not adversely affect options previously granted.
29
Options granted under the 1993 Stock Option Plan are nontransferable
except by will or the laws of descent and distribution.
During 2001, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 15, 2002, an aggregate of 276,739 shares of Common Stock
were subject to outstanding stock options granted under the 1993 Stock Option
Plan. As of March 15, 2002, options to purchase 276,739 shares were exercisable
at prices ranging from $1.37 to $3.51 per share.
Cadus has registered the shares issuable upon exercise of stock
options granted under the 1993 Stock Option Plan pursuant to a registration
statement on Form S-8.
STOCK OPTION AGREEMENTS
Cadus has granted non-qualified stock options to directors, officers,
employees and consultants of Cadus by means of stock option agreements. During
2001, there were no stock options granted pursuant to stock option agreements.
As of March 15, 2002, an aggregate of 323,403 shares of Common Stock were
subject to outstanding stock options granted under stock option agreements, and
options to purchase 323,403 shares under such option agreements were exercisable
at prices ranging from $1.50 to $6.75 per share.
Cadus has registered the shares issuable upon exercise of stock
options granted under such stock option agreements pursuant to a registration
statement on Form S-8.
1996 INCENTIVE PLAN
Cadus's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted
by the Board of Directors and approved by the stockholders of Cadus in May 1996.
The 1996 Incentive Plan replaced the 1993 Stock Option Plan, effective as of May
10, 1996, with respect to all future awards by Cadus to the Company's employees
and consultants. However, while all future awards will be made under the 1996
Incentive Plan, awards made under the 1993 Stock Option Plan will continue to be
administered in accordance with the 1993 Stock Option Plan. See "Incentive Plans
- -- 1993 Stock Option Plan." In December 1996, the Board of Directors of Cadus
amended the 1996 Incentive Plan to (i) increase the maximum number of shares of
Common Stock that may be the subject of awards under the 1996 Incentive Plan
from 333,334 to 833,334 (plus any shares that are the subject of canceled or
forfeited awards) and (ii) provide for the grant of stock options to directors
of the Company . The stockholders of Cadus approved such amendments to the 1996
Incentive Plan in June 1997. In December 1997, the Board of Directors amended
the 1996 Incentive Plan to increase the maximum number of shares of Common Stock
that may be the subject of awards under the 1996 Incentive Plan from 833,334 to
1,833,334 (plus any shares that are the subject of canceled or forfeited
awards). The stockholders of Cadus approved this amendment to the 1996 Incentive
Plan in June 1998.
The 1996 Incentive Plan is administered by the Compensation
Committee, which has the power and authority under the 1996 Incentive Plan to
determine which of Cadus's employees, consultants and directors will receive
30
awards, the time or times at which awards will be made, the nature and amount of
the awards, the exercise or purchase price, if any, of such awards, and such
other terms and conditions applicable to awards as it determines to be
appropriate or advisable.
Options granted under the 1996 Incentive Plan may be either
non-qualified stock options or options intended to qualify as incentive stock
options under Section 422 of the Code. The term of incentive stock options
granted under the 1996 Incentive Plan cannot extend beyond ten years from the
date of grant (or five years in the case of a holder of more than 10% of the
total combined voting power of all classes of stock of Cadus on the date of
grant).
Shares of Common Stock may either be awarded or sold under the 1996
Incentive Plan and may be issued or sold with or without vesting and other
restrictions, as determined by the Compensation Committee.
Under the 1996 Incentive Plan, the Compensation Committee may
establish with respect to each option or share awarded or sold such vesting
provisions as it determines to be appropriate or advisable. Unvested options
will automatically terminate within a specified period of time following the
termination of the holder's relationship with Cadus and in no event beyond the
expiration of the term. Cadus may either repurchase unvested shares of Common
Stock at their original purchase price upon the termination of the holder's
relationship with the Company or cause the forfeiture of such shares, as
determined by the Compensation Committee. All options granted and shares sold
under the 1996 Incentive Plan to employees of the Company may, in the discretion
of the Compensation Committee, become fully vested upon the occurrence of
certain corporate transactions if the holders thereof are terminated in
connection therewith.
The exercise price of options granted and the purchase price of
shares sold under the 1996 Incentive Plan are determined by the Compensation
Committee, but may not, in the case of incentive stock options, be less than the
fair market value of the Common Stock on the date of grant (or, in the case of
incentive stock options granted to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, 110% of such fair market value), as determined by the Compensation
Committee.
The Compensation Committee may also grant, in combination with
non-qualified stock options and incentive stock options, stock appreciation
rights ("Tandem SARs"), or may grant Tandem SARs as an addition to outstanding
non-qualified stock options. A Tandem SAR permits the participant, in lieu of
exercising the corresponding option, to elect to receive any appreciation in the
value of the shares subject to such option directly from Cadus in shares of
Common Stock. The amount payable by Cadus upon the exercise of a Tandem SAR is
measured by the difference between the market value of such shares at the time
of exercise and the option exercise price. Generally, Tandem SARs may be
exercised at any time after the underlying option vests. Upon the exercise of a
Tandem SAR, the corresponding portion of the related option must be surrendered
and cannot thereafter be exercised. Conversely, upon exercise of an option to
which a Tandem SAR is attached, the Tandem SAR may no longer be exercised to the
extent that the corresponding option has been exercised. Nontandem stock
appreciation rights ("Nontandem SARs") may also be awarded by the Compensation
Committee. A Nontandem SAR permits the participant to elect to receive from
Cadus that number of shares of Common Stock having an aggregate market value
equal to the excess of the market value of the shares covered by the Nontandem
31
SAR on the date of exercise over the aggregate base price of such shares as
determined by the Compensation Committee. With respect to both Tandem and
Nontandem SARs, the Compensation Committee may determine to cause Cadus to
settle its obligations arising out of the exercise of such rights in cash or a
combination of cash and shares, in lieu of issuing shares only.
Under the 1996 Incentive Plan, the Compensation Committee may also
award tax offset payments to assist employees in paying income taxes incurred as
a result of their participation in the 1996 Incentive Plan. The amount of the
tax offset payments will be determined by applying a percentage established from
time to time by the Compensation Committee to all or a portion of the taxable
income recognizable by the employee upon: (i) the exercise of a non-qualified
stock option or an SAR; (ii) the disposition of shares received upon exercise of
an incentive stock option; (iii) the lapse of restrictions on restricted shares;
or (iv) the award of unrestricted shares.
The number and class of shares available under the 1996 Incentive
Plan may be adjusted by the Compensation Committee to prevent dilution or
enlargement of rights in the event of various changes in the capitalization of
Cadus. At the time of grant of any award, the Compensation Committee may provide
that the number and class of shares issuable in connection with such award be
adjusted in certain circumstances to prevent dilution or enlargement of rights.
The Board of Directors of Cadus may suspend, amend, modify or
terminate the 1996 Incentive Plan. However, Cadus's stockholders must approve
any amendment that would (i) materially increase the aggregate number of shares
issuable under the 1996 Incentive Plan, (ii) materially increase the benefits
accruing to employees under the 1996 Incentive Plan or (iii) materially modify
the requirements for eligibility to participate in the 1996 Incentive Plan.
Awards made prior to the termination of the 1996 Incentive Plan shall continue
in accordance with their terms following such termination. No amendment,
suspension or termination of the 1996 Incentive Plan shall adversely affect the
rights of an employee or consultant in awards previously granted without such
employee's or consultant's consent.
As of March 15, 2002, an aggregate of 9,167 shares of Common Stock
were subject to outstanding stock options granted under the 1996 Incentive Plan.
As of March 15, 2002, stock options to purchase 9,167 shares were exercisable at
prices ranging from $6.38 to $6.63 per share.
Cadus has registered the shares issuable upon exercise of stock
options granted or which may be granted under the 1996 Incentive Plan pursuant
to a registration statement on Form S-8.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Cadus's Compensation Committee is composed of Peter Liebert and Jack
G. Wasserman. Neither Mr. Liebert nor Mr. Wasserman is or was an officer or
employee of the Company.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
32
The Compensation Committee of the Board of Directors of Cadus is
responsible for determining and administering the Company's compensation
policies for the remuneration of Cadus's officers. The Compensation Committee
annually evaluates individual and corporate performance from both a short-term
and long-term perspective. In 2001, Cadus had no officers other than its current
Chief Executive Officer who is serving in such capacity without compensation.
Accordingly, the following report of the Compensation Committee is not directly
applicable to calendar year 2001 but is presented for historical perspective.
PHILOSOPHY
Cadus's executive compensation program historically has sought to
encourage the achievement of business objectives and superior corporate
performance by the Cadus's executives. The program enables Cadus to reward and
retain highly qualified executives and to foster a performance-oriented
environment wherein management's long-term focus is on maximizing stockholder
value through equity-based incentives. The program calls for consideration of
the nature of each executive's work and responsibilities, unusual
accomplishments or achievements on the Company's behalf, years of service, the
executive's total compensation and the Company's financial condition generally.
COMPONENTS OF EXECUTIVE COMPENSATION
Historically, Cadus's executive employees have received cash-based
and equity-based compensation.
CASH-BASED COMPENSATION. Base salary represents the primary cash
component of an executive employee's compensation, and is determined by
evaluating the responsibilities associated with an employee's position at the
Company and the employee's overall level of experience. In addition, the
Committee, in its discretion, may award bonuses. The Compensation Committee and
the Board believe that the Company's management and employees are best motivated
through stock option awards and cash incentives.
EQUITY-BASED COMPENSATION. Equity-based compensation principally has
been in the form of stock options. The Compensation Committee and the Board
believe that stock options represent an important component of a well-balanced
compensation program. Because stock option awards provide value only in the
event of share price appreciation, stock options enhance management's focus on
maximizing long- term stockholder value and thus provide a direct relationship
between an executive's compensation and the stockholders' interests. No specific
formula is used to determine stock option awards for an employee. Rather,
individual award levels are based upon the subjective evaluation of each
employee's overall past and expected future contributions to the success of the
Company.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The philosophy, factors and criteria of the Compensation Committee
generally applicable to the Company's officers have historically been applicable
to the Chief Executive Officer. However, the current Chief Executive Officer,
Russell D. Glass, is serving in such capacity without compensation.
33
Peter Liebert
Jack G. Wasserman
COMPARATIVE STOCK PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
return* for the Nasdaq Stock Market (US) Index, the Nasdaq Biotechnology Index
and Cadus since December 31, 1996
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG CADUS PHARMACEUTICAL CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ BIOTECHNOLOGY INDEX
[Data below represents a line chart in the printed piece]
CADUS NASDAQ NASDAQ
PHARMACEUTICAL STOCK MARKET BIO-
CORPORATION (U.S.) TECHNOLOGY
-------------- ------------ ----------
12/96 100.00 100.00 100.00
12/97 72.86 122.48 99.93
12/98 22.14 172.68 144.18
12/99 3.58 320.89 290.72
12/00 8.22 193.01 357.52
12/01 13.37 153.15 244.86
* $100 Invested on 12/31/96 in stock or index--including reinvestment of
dividends. Fiscal year ending December 31.
Corresponding index values and Cadus's Common Stock price values are
given below:
34
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
--------- -------- -------- -------- -------- --------
Cadus 100.00 72.86 22.14 3.58 8.22 13.37
Nasdaq Stock Market (U.S.) Index 100.00 122.48 172.68 320.89 193.01 153.15
Nasdaq Biotechnology Index 100.00 99.93 144.18 290.72 357.52 244.86
Cadus Closing Stock Price $ 8.750 6.375 1.938 0.313 0.719 1.170
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 15, 2002 with respect to
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers and (iv) all directors and officers as a group. All
information is based upon ownership filings made by such persons with the
Securities and Exchange Commission (the "Commission") or upon information
provided by such persons to the Company.
NUMBER OF SHARES
AMOUNT AND NATURE PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OF BENEFICIAL OWNERSHIP OWNED(2)
- ---------------------------------------- ----------------------- -------------------------
Carl C. Icahn............................................ 3,373,216(3) 25.64%
767 Fifth Avenue
New York, New York 10153
Bristol-Myers Squibb..................................... 1,927,673 14.67%
P.O. Box 4000
Route 206 and Province Line Road
Princeton, New Jersey 08543-4000
Physica B.V. (4) ........................................ 1,599,942 12.17%
C.J. van Houtenlaan 36
1381 CP Weesp
The Netherlands
SmithKline Beecham Corporation........................... 660,962(5) 5.03%
One Franklin Plaza
Philadelphia, PA 19102
Charles Woler............................................ ---- *
James R. Broach.......................................... ---- *
Russell D. Glass......................................... ---- *
Peter S. Liebert, M.D.................................... 20,334(6) *
Siegfried G. Schaefer, Ph.D.............................. 1,599,942(7) 12.17%
Jack G. Wasserman........................................ 14,500(8) *
All executive officers and directors as a................ 5,007,992(9) 37.99%
group (7 persons)
- ----------
35
* Less than one percent
(1) Except as otherwise indicated above, the address of each stockholder
identified above is c/o the Company, 767 Fifth Avenue, New York, NY
10153. Except as indicated in the other footnotes to this table, the
persons named in this table have sole voting and investment power
with respect to all shares of Common Stock.
(2) Share ownership in the case of each person listed above includes
shares issuable upon the exercise of options held by such person as
of March 15, 2002, that may be exercised within 60 days after such
date for purposes of computing the percentage of Common Stock owned
by such person, but not for purposes of computing the percentage of
Common Stock owned by any other person.
(3) Includes 2,258,790 shares of Common Stock held by High River
Limited Partnership. Mr. Icahn is the sole shareholder of the sole
general partner of High River Limited Partnership. Also includes
12,000 shares of Common Stock that Mr. Icahn currently has the
right to acquire upon the exercise of stock options.
(4) Physica B.V. is an affiliate of Solvay Pharmaceuticals.
(5) Includes 330,481 shares of Common Stock held by SmithKline Beecham
p.l.c., an affiliate of SmithKline Beecham Corporation.
(6) Includes 12,000 shares of Common Stock which Dr. Liebert currently
has the right to acquire upon the exercise of stock options.
(7) Consists of 1,599,942 shares of Common Stock held by Physica B.V.,
an affiliate of Solvay Pharmaceuticals. Professor Schaefer is the
head of worldwide research at Solvay Pharmaceuticals. Professor
Schaefer may be deemed the beneficial owner of the 1,599,942
shares of Common Stock held by Physica B.V., but disclaims such
beneficial ownership.
(8) Consists of 14,500 shares of Common Stock which Mr. Wasserman
currently has the right to acquire upon the exercise of stock
options.
(9) Includes (a) 38,500 shares of Common Stock issuable upon exercise
of options and (b) 1,599,942 shares of Common Stock held by
Physica B.V. See footnotes (3), (6), (7), (8) and (9).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In August 1999, Cadus's guarantee of a $286,000 loan made to Dr.
James Broach by a third party was called by such third party, which also
foreclosed on $286,000 of cash collateral securing Cadus's guarantee. Dr. Broach
executed and delivered to Cadus a $286,000 interest-bearing promissory note
payable to the order of Cadus on August 31, 2000 to evidence his debt to Cadus
arising from Cadus's guarantee of such loan. In March 2000, Dr. Broach prepaid
the promissory note in its entirety.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS PAGE
-------------------- ----
Index to Financial Statements F-1
36
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.
(c) Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Certificate of Incorporation
of Cadus Pharmaceutical Corporation ( "Cadus"), as
filed with the Secretary of State of Delaware on
July 22, 1996. (1)
3.2 By-laws of Cadus. (2)
4.1 Specimen of Common Stock Certificate of Cadus. (2)
4.2 1993 Cadus Pharmaceutical Corporation Stock Option
Plan. (2)
4.3 Cadus Pharmaceutical Corporation 1996 Incentive
Plan. (2)
4.4 Amendment to Cadus Pharmaceutical Corporation 1996
Incentive Plan. (1)
4.5 Form of Incentive Stock Option Agreement utilized in
connection with issuances of stock options under
the Cadus Pharmaceutical Corporation 1996
Incentive Plan. (1)
4.6 Form of Stock Option Agreement between Cadus and each
of the following employees of Cadus: Philip N.
Sussman, John Manfredi, Andrew Murphy, Jeremy Paul,
Lauren Silverman, Joshua Trueheart, James S. Rielly,
Thomas F. Deuel, Norman R. Klinman, Elliott M. Ross,
Jeremy Thorner, Arnold Levine, John Ransom, Christine
Klein, Suzanne K. Wakamoto, Christopher Pleiman, Algis
Anilionis, Anupama K. Nadkarni, Mitchell Silverstein,
Michael A. Spruyt and David Fruhling. (1)
4.7 Form of Stock Option Agreement between Cadus and each
of the following non- employee directors of Cadus:
Theodore Altman, Harold First, Carl Icahn, Peter
Liebert,
37
Robert Mitchell, Mark Rachesky, William Scott, Jack
Wasserman and Samuel D. Waksal. (1)
4.8 Stock Purchase Agreement between Cadus and SmithKline
Beecham Corporation, dated as of February 25, 1997.
(3)
4.9 Registration Rights Agreement between Cadus and
SmithKline Beecham Corporation, dated as of February
25, 1997. (3)
10.1 Form of Indemnification Agreement entered into between
Cadus and its directors and officers. (2)
10.2 Form of Agreement Regarding Assignment of Inventions,
Confidentiality and Non- Competition. (2)
10.3 The 401(k) Plan of the Cadus Pharmaceutical
Corporation. (2)
10.4 Employment Agreement between Jeremy M. Levin and
Cadus. (2)
10.5 Preferred Stock Purchase Agreement dated as of July 30,
1993 between Cadus and the purchasers of Series A
Preferred Stock, together with the First and Second
Amendments thereto dated as of July 26, 1994 and
October 31, 1995, respectively. (2)
10.6 Preferred Stock Purchase Agreement dated as of July
26, 1994 between Cadus and Bristol-Myers Squibb
Company ("Bristol-Myers") concerning Series B
Preferred Stock, together with the First Amendment
thereto dated as of October 31, 1995. (2)
10.7 Preferred Stock Purchase Agreement dated as of
November 1, 1995 between Cadus and Physica B.V.
concerning Series B Preferred Stock. (2)
10.8 Research Collaboration and License Agreement, dated as
of July 26, 1994, between Cadus and Bristol-Myers. (2)
10.9 Screening and Option Agreement, dated as of July 26,
1994, between Cadus and Bristol-Myers. (2)
10.10 Research Collaboration and License Agreement, dated as
of November 1, 1995 between Cadus and Solvay
Pharmaceuticals B.V. (2)
10.11 Sublease Agreement, dated as of October 19, 1994,
between Cadus and Union Carbide Corporation. (2)
38
10.12 Lease, dated as of June 20, 1995 between Cadus and
Keren Limited Partnership. (2)
10.13 Consulting Agreement between Cadus and James R.
Broach, dated February 1, 1994. (2)
10.14 Amended and Restated License Agreement between Cadus
and Duke University, dated May 10, 1994. (2)
10.15 License Agreement between Cadus and National Jewish
Center for Immunology and Respiratory Medicine dated
November 1, 1994. (2)
10.16 Stock Option Agreement, dated as of November 1, 1994,
between Cadus and John C. Cambier. (2)
10.17 Stock Option Agreement, dated as of November 1, 1994,
between Cadus and Gary L. Johnson. (2)
10.18 Consulting Agreement, dated as of November 1, 1994,
between Cadus and John C. Cambier. (2)
10.19 Consulting Agreement, dated as of November 1, 1994,
between Cadus and Gary L. Johnson. (2)
10.20 Research Collaboration Agreement, dated as of January
9, 1995, between Cadus and Houghten Pharmaceuticals,
Inc., together with the Amendment thereto dated as of
March 1996. (2)
10.21 Stock Option Agreement, dated as of December 18, 1995,
between Cadus and James R. Broach. (2)
10.22 Waiver, dated May 17, 1996, of Section 1.05 of the
Preferred Stock Purchase Agreement dated as of July
26, 1994 between Cadus and Bristol-Myers, as amended
by the First Amendment thereto dated as of October 31,
1995. (2)
10.23 Waiver, dated May 17, 1996, of Section 1.04 of the
Preferred Stock Purchase Agreement dated as of
November 1, 1995 between Cadus and Physica B.V. (2)
10.24 Research Collaboration and License Agreement among
Cadus, SmithKline Beecham Corporation and SmithKline
Beecham p.l.c., dated as of February 25, 1997. (3)
10.25 Employment Agreement, dated as of June 30, 1998,
between Cadus and Charles Woler. (4)
39
10.26 Employment Agreement, dated as of September 10, 1998,
between Cadus and Philip N. Sussman. (4)
10.27 Agreement and Instructions to Stakeholder among Cadus,
SIBIA and Security Trust Company entered into in March
1999. (5)
10.28 Asset Purchase Agreement, dated as of July 30, 1999,
between Cadus and OSI Pharmaceuticals, Inc. (Schedules
to the Asset Purchase Agreement have been
intentionally omitted. Cadus hereby undertakes to
furnish supplementally to the Securities and Exchange
Commission upon request a copy of the omitted
schedules.) (6)
10.29 Yeast Technology License Agreement, dated as of
February 15, 2000, between Cadus and OSI
Pharmaceuticals, Inc. (Exhibits to the Yeast
Technology Agreement have been intentionally omitted.
Cadus hereby undertakes to furnish supplementally to
the Securities and Exchange Commission upon request a
copy of the omitted exhibits.) (7)
23 Consent of KPMG LLP, independent auditors.
24 Power of Attorney (filed as part of the signature page
to this Report).
- -----------------
(1) Filed with Cadus's Registration Statement on Form S-8 (Registration No.
333-21871), dated February 14, 1997.
(2) Filed with Cadus's Registration Statement on Form S-1 (Registration No.
333-4441), declared effective by the Commission on July 17, 1996.
(3) Filed with Cadus's Current Report on Form 8-K, dated March 7, 1997.
(4) Filed with Cadus's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1998.
(5) Filed with Cadus's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
(6) Filed with Cadus's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
(7) Filed with Cadus's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000.
40
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CADUS PHARMACEUTICAL CORPORATION
By: /s/ Russell D. Glass
----------------------------------
Russell D. Glass, Chief Executive
Officer and President
Each person whose signature appears below constitutes and appoints
Russell D. Glass and Jack G. Wasserman, or either of them, each with the power
of substitution, his true and lawful attorney-in-fact to sign any amendments to
this report and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact, or his substitute,
may do or choose to be done by virtue hereof.
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated below.
NAME TITLE DATE
---- ----- ----
/s/ Russell D. Glass Chief Executive Officer, President and Director March 28, 2002
- -------------------------
Russell D. Glass (Principal Executive Officer and Principal
Accounting Officer)
Director March , 2002
- ---------------
Carl C. Icahn
/s/ James R. Broach Director March 28, 2002
- ---------------------------------
James R. Broach
/s/ Peter S. Liebert Director March 28, 2002
- ----------------------------------
Peter S. Liebert
/s/ Siegfried G. Schaefer Director March 28, 2002
- ----------------------------------
Siegfried G. Schaefer
/s/ Jack G. Wasserman Director March 18, 2002
- ------------------------------------
Jack G. Wasserman
41
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
INDEX
Page No.
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2001 and 2000 F-3
Consolidated Statements of Operations - For the years ended
December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity - For the years
ended December 31 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows - For the years ended
December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cadus Pharmaceutical Corporation:
We have audited the accompanying consolidated balance sheets of Cadus
Pharmaceutical Corporation and subsidiary (the "Company") as of December 31,
2001 and 2000 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cadus Pharmaceutical
Corporation and subsidiary as of December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
March 15, 2002
F-2
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2001 2000
----------- -----------
Current assets:
Cash and cash equivalents $24,469,357 $24,383,352
License fee receivable 500,000 --
Prepaid and other current assets 75,000 81,250
-----------
Total current assets 25,044,357 24,464,602
Investment in other ventures 165,614 162,528
Other assets, net 990,622 1,081,527
----------- -----------
Total assets $26,200,593 $25,708,657
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other current
Liabilities $ 95,032 $ 36,244
Arbitration settlement 750,000 --
----------- -----------
Total current liabilities 845,032 36,244
----------- -----------
Commitments and contingencies (note 14)
Stockholders' equity:
Common stock, $.01 par value. Authorized 35,000,000 shares at December 31,
2001 and 2000; issued 13,285,707 shares at December 31, 2001 and 2000;
outstanding 13,144,040 shares at December 31, 2001
and 2000 132,857 132,857
Additional paid-in capital 59,844,355 59,844,355
Accumulated deficit (34,321,576) (34,004,724)
Treasury stock, 141,667 shares of common
stock at December 31, 2001 and 2000 (300,075) (300,075)
----------- -----------
Total stockholders' equity 25,355,561 25,672,413
----------- -----------
Total liabilities and stockholders'
equity $26,200,593 $25,708,657
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2001 2000 1999
----------- ----------- -----------
Revenues, principally from
related parties $ -- $ -- $ 6,027,544
License and maintenance fees 600,000 978,500 --
------------ ------------ ------------
Total revenues 600,000 978,500 6,027,544
------------ ------------ ------------
Costs and expenses
Research and development costs -- -- 9,115,504
General and administrative 1,079,614 1,652,067 3,643,365
(Gain) loss in equity in other ventures (3,086) 837,062 1,334,491
(Gain) loss on sale of equipment
and impairment loss -- (100,000) 220,216
------------ ------------ ------------
Total costs and expenses 1,076,528 2,389,129 14,313,576
------------ ------------ ------------
Operating loss (476,528) (1,410,629) (8,286,032)
------------ ------------ ------------
Other income and (expenses):
Interest income 837,639 638,954 551,539
Gain on reversal of litigation
judgment, net of legal fees 125,616 18,841,489 --
Arbitration settlement
(750,000) -- --
Loss on sale of assets to OSI -- -- (805,555)
------------ ------------ ------------
Total other income and
(expenses) 213,255 19,480,443 (254,016)
------------ ------------ ------------
Income (loss) before income tax provision (benefit) (263,273) 18,069,814 (8,540,048)
State and local tax provision (benefit) 53,579 18,419 (16,359)
------------ ------------ ------------
Net income (loss) ($316,852) $ 18,051,395 ($ 8,523,689)
============ ============ ============
Basic and diluted net income (loss)
per share ($ 0.02) $ 1.37 ($0.65)
============ ============ ============
Weighted average shares of common
stock outstanding - basic and
diluted 13,144,040 13,133,615 13,068,940
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------------ --------- ------------ ------------ ------- --------
Balance at January 1, 1999 13,210,607 $ 132,106 $59,689,446 ($43,532,430) (141,667) ($300,075) $ 15,989,047
Net loss for year ended
December 31, 1999 -- -- -- (8,523,689) -- -- (8,523,689)
------------ ----------- ------------- ------------ --------- ------------ ------------
Balance at December 31, 1999 13,210,607 132,106 59,689,446 (52,056,119) (141,667) (300,075) 7,465,358
Issuance of common stock
for cash in connection
with exercise of options 75,100 751 154,909 -- -- -- 155,660
Net income for the year ended
December 31, 2000 -- -- -- 18,051,395 -- -- 18,051,395
------------ ---------- ------------ ------------ ---------- ---------- ------------
Balance at December 31, 2000 13,285,707 132,857 59,844,355 (34,004,724) (141,667) (300,075) 25,672,413
------------ ---------- ------------ ------------ ---------- ---------- ------------
Net loss for the year ended
December 31, 2001 -- -- -- (316,852) -- -- (316,852)
------------ ---------- ------------ ------------ ---------- ---------- ------------
Balance at December 31, 2001 13,285,707 $ 132,857 $59,844,355 ($34,321,576) (141,667) ($300,075) $ 25,355,561
============ ========== ============ ============ ========== ========== ============
See accompanying notes to consolidated financial statements.
F-5
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) ($316,852) $18,051,395 ($8,523,689)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 80,905 80,905 719,510
(Gain) loss in equity in other ventures (3,086) 837,062 1,334,491
(Gain) loss on sale of equipment and
impairment loss -- (100,000) 220,216
Loss on sale of assets to OSI -- -- 805,555
Changes in assets and liabilities:
Increase in license fee receivable (500,000) -- --
(Increase) decrease in prepaid and
other current assets 6,250 (11,467) 215,084
Decrease in other assets 10,000 11,126 117,520
(Decrease) increase in deferred revenue -- (28,500) 28,500
(Decrease) increase in litigation damages -- (19,065,431) 565,431
(Decrease) in accounts payable -- (17,644) (199,770)
(Decrease) increase in accrued expenses
and other current liabilities 808,788 (85,599) (1,608,178)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 86,005 (328,153) (6,325,330)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets -- -- (470,378)
Proceeds from sale of patents and
fixed assets -- 100,000 1,644,073
Decrease (increase) in restricted cash -- 19,078,997 (292,997)
Capitalized patent costs -- -- (167,500)
----------- ----------- -----------
Net cash provided by investing activities -- 19,178,997 713,198
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock
upon exercise of stock options -- 155,660 --
Decrease (increase in due from officer
and director -- 294,636 (281,184)
----------- ----------- -----------
Net cash provided by (used in) financing activities -- 450,296 (281,184)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 86,005 $19,301,140 (5,893,316)
Cash and cash equivalents -
beginning of period $24,383,352 $ 5,082,212 $10,975,528
----------- ----------- -----------
Cash and cash equivalents -
end of period $24,469,357 $24,383,352 $ 5,082,212
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(1) Organization and Basis of Preparation
Cadus Pharmaceutical Corporation ("Cadus") was incorporated on January
23, 1992, under the laws of the State of Delaware and until July 30,
1999, devoted substantially all of its resources to the development
and application of novel yeast-based and other drug discovery
technologies. As further discussed in Note 3, on July 30, 1999, Cadus
sold its drug discovery assets to OSI Pharmaceutical, Inc. ("OSI") and
ceased its internal drug discovery operations and research efforts for
collaborative partners. Cadus terminated all employees who were not
hired by OSI or who did not voluntarily resign, except for the chief
executive officer who resigned in April 2000. Cadus is seeking to
license its technologies and to otherwise realize value from its
assets. Cadus is also seeking to use a portion of its available cash
to acquire technologies or products or to acquire or invest in
companies.
In December 2001, Cadus organized a wholly owned subsidiary, Cadus
Technologies, Inc. (the "Subsidiary"), and transferred its yeast-based
drug discovery technologies to the Subsidiary. On December 19, 2001,
the Subsidiary licensed such yeast-based drug discovery technologies
on a non-exclusive basis to a major pharmaceutical company (see
further discussion at note 9).
Cadus and the Subsidiary (collectively, the "Company") have incurred
operating losses in each year since the Company's inception. At
December 31, 2001, the Company had an accumulated deficit of
approximately $34.3 million. The Company's losses have resulted
principally from costs incurred in connection with its research and
development activities and from general and administrative costs
associated with the Company's operations. These costs have exceeded
the Company's revenues and interest income. As a result of the sale of
its drug discovery assets to OSI and the cessation of its internal
drug discovery operations and research efforts for collaborative
partners, the Company ceased to have research funding revenues and
substantially reduced its operating expenses.
The Company believes that its existing resources, together with
interest income, will be sufficient to support its current and
projected funding requirements through the end of 2003. This forecast
of the period of time through which the Company's financial resources
will be adequate to support its operations is a forward-looking
statement that may not prove accurate and, as such, actual results may
vary. The Company's capital requirements may vary as a result of a
number of factors, including the transactions, if any, arising from
the Company's efforts to license its technologies and otherwise
realize value from its assets; the transactions, if any, arising from
the Company's efforts to acquire technologies or products or to
acquire or invest in companies; and the expenses of pursuing such
transactions.
(2) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Cadus and its wholly owned subsidiary; Cadus Technologies,
Inc. All intercompany balances and transactions have been
eliminated in consolidation. The Company operates in one
segment and leases novel yeast-based and other drug discovery
technologies.
(b) Cash Equivalents
F-7
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The Company includes as cash equivalents all highly liquid
investments with original maturities of three months or less
when purchased to be cash equivalents. Included in cash and
cash equivalents at December 31, 2001 and 2000 were cash
equivalents of $22,439,259 and $2,066,291, respectively.
(c) Other Assets
Other assets include capitalized patent costs that are
amortized on a straight-line basis over fifteen years. At
December 31, 2001 and 2000 accumulated amortization is
$389,272 and $308,366, respectively. Amortization expense
amounted to approximately $81,000, $81,000, and $94,000 for
the years ended December 31 2001, 2000 and 1999, respectively.
(d) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statements carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(e) Research and Development
Research and development costs are expensed as incurred and
include direct costs of research scientists and supplies and
an allocation of shared facilities, services and overhead.
(f) Revenue Recognition
The Company has entered into various license agreements with
other pharmaceutical companies. Upfront non-refundable fees
are generally recognized over the term of the related research
collaboration period in accordance with guidance rendered in
the Securities and Exchange Commission Staff Accounting
Bulletin No. 101 "Revenue in Financial Statements" as amended.
Milestone payments, which reduce the development risk
associated with a product and are determinable based on the
terms of the license agreement, are typically progress
payments for specific events of development, such as
completion of pre-clinical or clinical activities, regulatory
submission or approval, or manufacturing objectives prior to
commercialization of a product. Milestone payments are
generally non-refundable and the amount of revenue recognized
during an accounting period is determined by the nature of the
contracted provision included in the license agreements.
(g) Net Income (Loss) Per Share
Basic net income (loss) per share as of December 31, 2001,
2000 and 1999 is computed by dividing the net income (loss) by
the weighted average number of common shares
F-8
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
outstanding. Diluted earnings per share is calculated based on
the weighted average of common shares outstanding plus the
effect of dilutive common stock equivalents (stock options).
The effect of stock options totaling 609,309, 719,976 and
1,190,076 at December 31, 2001, 2000 and 1999, respectively,
were not included in the net income (loss) per share
calculation because their effect would have been
anti-dilutive.
(h) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(i) Fair Value of Financial Instruments
Management of the Company believes that the carrying value of
its monetary assets and liabilities approximates fair value as
a result of the short term nature of such assets and
liabilities.
(j) Stock-Based Compensation
We account for stock-based compensation using the intrinsic
value method in accordance with APB No. 25, "Accounting for
Stock Issued to Employees." Effective July 1, 1996, we adopted
the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation", which requires the disclosure of
pro forma net income and earnings per share as if we adopted
the fair value-based method in measuring compensation expense.
(k) Comprehensive Income
SFAS No. 130 requires that all items recognized under
accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed
with the same prominence as other annual financial statements.
Other comprehensive income may include foreign currency
translation adjustments, minimum pension liability adjustments
and unrealized gains and losses on marketable securities
classified as available-for-sale. Our operations did not give
rise to items includible in comprehensive income, which were
not already included in net income. Accordingly, our
comprehensive income is the same as our net income for all
periods presented.
(l) Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted the provisions
of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, which establishes new
accounting and reporting guidelines for derivative instruments
and hedging activities. SFAS No. 133 requires the recognition
of all derivative financial instruments as either assets or
liabilities in the consolidated balance sheet and measurement
of those
F-9
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
instruments at fair value. Changes in fair values of those
derivatives will be reported in earnings or other
comprehensive income depending on the designation of the
derivative and whether it qualifies for hedge accounting. The
accounting for gains and losses associated with changes in the
fair value of a derivative and the effect on the consolidated
financial statements will depend on its hedge designation and
whether the hedge is highly effective in achieving offsetting
changes in the fair value or cash flows of the asset or
liability hedged. Under the provisions of SFAS No. 133 the
method that will be used for assessing the effectiveness of a
hedging derivative, as well as the measurement approach for
determining the ineffective aspects of the hedge, must be
established at the inception of the hedging relationship. For
derivatives designated as cash flow hedges, the change in fair
value of the derivative instrument is adjusted to fair value
and is reported in other comprehensive income. The Company
does not enter into derivative instruments. The impact of
adopting SFAS No. 133 did not have any effect on the Company's
consolidated financial statements.
(3) Asset Sale to OSI Pharmaceuticals
On July 30, 1999, Cadus sold to OSI Pharmaceuticals, Inc. ("OSI"),
pursuant to an asset purchase agreement, its drug discovery programs
focused on G protein-coupled receptors, its directed library of
approximately 150,000 small molecule compounds specifically designed
for drug discovery in the G protein-coupled receptor arena, its
collaboration with Solvay Pharmaceuticals B.V. ("Solvay
Pharmaceuticals"), its lease to its research facility in Tarrytown, New
York together with the furniture and fixtures and its lease to
equipment in the facility, and its inventory of laboratory supplies.
Pursuant to such sale transaction, OSI assumed Cadus's lease to Cadus's
research facility in Tarrytown, New York, Cadus's equipment lease with
General Electric Capital Corporation and the Cadus's research
collaboration and license agreement with Solvay Pharmaceutical B.V.
("Solvay Pharmaceutical"). As consideration for the sale, Cadus
received approximately $1,500,000 in cash and OSI assumed certain
liabilities of Cadus relating to employees hired by OSI aggregating
approximately $133,000. In addition, Cadus would be entitled to
royalties and up to $3.0 million in milestone payments on the first
product derived from compounds sold to OSI or from the collaboration
with Solvay Pharmaceutical. Cadus licensed to OSI on a non-exclusive
basis certain technology solely to enable OSI to fulfill its
obligations under the collaboration with Solvay Pharmaceutical. Cadus
also licensed to OSI on a non-exclusive basis certain proprietary
software and technology relating to chemical resins in order to enable
OSI to fully benefit from the compounds it acquired from the Cadus.
Cadus retained ownership of all its other assets, including its core
yeast technology for developing drug discovery assays, its collection
of over 25,000 proprietary yeast strains, human and mammalian cell
lines, and genetic engineering tools, its joint ownership of the human
orphan G protein-coupled receptors identified pursuant to its
collaboration with Gennome Therapeutics Corporation, its proprietary
software, its genomics databases related to G protein-coupled
receptors, all assays and technologies reverting to it from its
collaboration with Bristol-Meyers Squibb Company, its equity position
in Axiom Biotechnologies, Inc., Cadus's cash and cash equivalents, and
the approximately $18.5 million (plus interest thereon) then being held
in escrow pending appeal of the verdict in favor of SIBIA
Neurosciences, Inc. ("SIBIA") (see further discussion at note 4).
F-10
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Cadus recognized a loss on the sale of assets to OSI in 1999. A summary
of the loss recognized is as follows:
Proceeds:
Purchase price $1,500,000
Liabilities assumed by OSI 133,000
----------
Total 1,633,000
Less:
Net book value of patents sold 183,000
Net book value of other assets sold 2,256,000
----------
Loss on sale of assets $ 806,000
==========
Cadus ceased its drug discovery operations and research efforts for
collaborators as a result of this transaction. Consequently, Cadus
terminated all employees who were not hired by OSI or who did not
voluntarily resign, except for the chief executive officer who resigned
in April 2000.
(4) Litigation
In July 1996, SIBIA (which was acquired by Merck and Co. in 1999)
commenced a patent infringement action against Cadus alleging
infringement by Cadus of a patent concerning the use of cells,
engineered to express any type of cell surface receptor and a reporter
gene, used to report results in the screening of compounds against
target assays and seeking injunctive relief and monetary damages. After
trial, on December 18, 1998, the jury issued a verdict in favor of
SIBIA and awarded SIBIA $18.0 million in damages. On January 29, 1999
the United States District Court granted SIBIA's request for injunctive
relief that precludes Cadus from using the method claimed in SIBIA's
patent. On February 26, 1999, the United States District Court denied
Cadus's motions to set aside the jury verdict, to grant a new trial and
to reduce or set aside the $18.0 million judgment awarded by the jury.
Cadus appealed the judgment. In order to stay execution pending appeal
of the $18.0 million judgment obtained by SIBIA in March 1999, Cadus
deposited $18.5 million in escrow to secure payment of the judgment in
the event Cadus were to lose the appeal. Cadus recorded a reserve for
litigation damages of $18.5 million in its statement of operations for
the year ended December 31, 1998. Interest earned on the restricted
cash was added to the reserve for litigation damages, which was $19.1
million at December 31, 1999. On September 6, 2000 the United States
Court of Appeals ruled in favor of Cadus and overturned the 1998
judgment entered by the U.S. District Court. The Court of Appeals ruled
that the claims of the SIBIA patent asserted against Cadus were invalid
and that the District Court erred in denying Cadus's motion for
judgment as a matter of law on the issue of invalidity. On October 30,
2000, the U.S. District Court set aside the $18,000,000 judgment in
favor of SIBIA and vacated the injunction against Cadus. Separately, in
October 2000, Cadus obtained the release of the cash escrow of $19.9
million representing the original $18.5 million and interest that
accumulated thereon. The reserve for litigation of $18,841,489 (net of
direct legal costs of $1 million) has been reversed and credited to the
statement of operations for the year ended December 31, 2000. Pursuant
to a court order, Cadus received in February 2001 a $155,402
reimbursement of SIBIA litigation costs which was partially offset by
legal costs incurred of $29,786.
In March 2002, the arbitrator in the arbitration proceeding commenced
against Cadus by Philip N. Sussman, the former Senior Vice President,
Finance and Corporate Development, and Chief Financial Officer of
Cadus, ruled in favor of Mr. Sussman and awarded him approximately
$750,000 in severance pay, interest and attorneys and other costs and
fees. A charge of $750,000 was recorded in the accompanying
consolidated statement of operations for the year ended December 31,
2001.
F-11
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(5) Fixed Assets
During fiscal year 1999, Cadus sold a majority of its fixed assets to
OSI and wrote off the remaining fixed assets as Cadus ceased its drug
discovery operations. The loss on the impairment of the fixed assets of
$370,801 is included in gain (loss) on sale of equipment and impairment
loss on the statement of operations.
During fiscal year 2000, Cadus sold its remaining fully depreciated
fixed assets to M.I.T. for $100,000. The gain on the sale of these
fixed assets of $100,000 is included in gain (loss) on sale of
equipment and impairment loss on the statement of operations.
Depreciation and amortization expense for the year ended December 31,
1999 was approximately $625,000.
(6) Related Party Transactions
During 1998, Cadus loaned $15,000 to Dr. Charles Woler, the former
Chief Executive Officer of Cadus. The loan bore interest at 5.5% per
annum. Principal and interest were repayable in monthly installments of
$453 over three years. This loan was fully repaid in 2000.
In August 1998, Cadus guaranteed the payment of a $286,000 loan made to
a board member and secured its guarantee obligation with cash
collateral of $286,000. In August 1999, the lender called on the
guarantee and foreclosed on the cash collateral. The Director executed
an interest bearing promissory note in the amount of $286,000 in favor
of Cadus, which was payable, together with accrued interest, on August
31, 2000. This loan was repaid in its entirety in March 2000.
See Notes 7 and 10 for further discussion of transactions with related
parties.
(7) Investments in Other Ventures
In December 1996, Cadus issued a $150,000 promissory note bearing
interest at 7% per annum in exchange for a 42% limited partnership
interest in Laurel Partners Limited Partnership ("Laurel"), a limited
partnership of which a shareholder of Cadus is the general partner. An
interest payment of $10,500 was accrued at December 31, 1997 and paid
in January 1998. The principal amount and interest thereon was paid in
December 1998. In addition, Cadus purchased for $160,660 in cash, a 47%
limited partnership interest in Laurel from Tortoise Corporation, a
corporation wholly-owned by the shareholder. Laurel's purpose is to
invest, directly or indirectly, in securities of biotechnology
companies. Cadus had the right to require the shareholder to match any
future investment made by Cadus in Laurel up to an aggregate investment
on the part of the shareholder of $5.0 million. This right expired on
December 31, 1999. Cadus is not required to make any additional
investment in Laurel. The investment is accounted for under the equity
method with the recognition of losses limited to Cadus's capital
contributions. For the years ended December 31, 2001, 2000 and 1999
Cadus recognized gains (losses) of $3,086, ($2,649) and $20,513,
respectively, related to the investment. The remaining investment in
Laurel of $165,614 and $162,528 at December 31, 2001 and 2000,
respectively, is included in investments in other ventures on the
balance sheet.
F-12
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
In May 1997, Cadus purchased $2.0 million of convertible preferred
stock in Axiom Biotechnologies, Inc. ("Axiom"), representing
approximately 26% of the outstanding shares of Axiom on an as converted
basis. As part of the arrangement, Axiom agreed to deliver and license
to Cadus its first High Throughput Pharmacology System (HT-PS). Cadus
purchased an additional $2.0 million of convertible preferred stock in
Axiom on June 5, 1998, after Cadus received and accepted Axiom's HT-PS.
Russell D. Glass, Cadus's Chief Executive Officer, is a director of
Axiom. Cadus's investment is accounted for under the equity method with
Cadus recognizing 100% of Axiom's net losses prior to an outside
investment in Axiom and 50% after such investment. Such percentage
represents the extent to which Cadus was deemed to be funding Axiom's
losses. For the years ended December 31, 2001, 2000 and 1999, Cadus
recognized $-0-, $834,413 and $1,355,004, respectively, in losses
generated by Axiom. The investment was written down to zero as of
December 31, 2000.
(8) Income Taxes
Deferred tax assets of approximately $15,554,000 and $15,777,000 at
December 31, 2001 and 2000, respectively, relate principally to net
operating loss carryforwards of $27,990,000 and $28,387,000, research
and development credit carryforwards of $2,535,000 and $2,675,000, and
equity losses on investments of $4,000,000 and $4,000,000 at December
31, 2001 and 2000, respectively. An offsetting valuation allowance has
been established for the full amount of the deferred tax assets to
reduce such assets to zero, as a result of the significant uncertainty
regarding their ultimate realization. The aggregate valuation allowance
decreased $230,000 and $8,492,000 during the year ended December 31,
2001 and 2000, respectively.
The Company's net operating loss carryforwards and research and
development credit carryforwards noted above expire in various years
from 2009 to 2019. The Company's ability to utilize such net operating
loss and research and development credit carryforwards is subject to
certain limitations due to ownership changes, as defined by rules
enacted with the Tax Reform Act of 1986.
The Company is subject to New York State tax on capital.
(9) Licensing Agreements
In December 2001, Cadus Technologies, Inc., Cadus's wholly owned
subsidiary, licensed its yeast-based drug discovery technologies on a
non-exclusive basis to a major pharmaceutical company. Under the
licensing agreement, the subsidiary received an up-front non-refundable
fee of $500,000 that is recorded as revenue in the accompanying
consolidated statement of operations as the Company has no further
involvement with the development of the product. The subsidiary will
receive an additional licensing fee of $1,000,000 if the licensee
achieves a research milestone. The licensee is entitled to use the
technologies for five years if it makes such $1,000,000 payment.
Following the initial five year term, the licensee may renew the
license annually upon payment of an annual licensing fee of $250,000.
For the year ended December 31, 2001, the Company recognized $500,000
in license revenue from the licensee, which amount was received in
January 2002.
In February 2000, Cadus licensed to OSI, on a non-exclusive basis, its
yeast-based drug discovery technologies, including various reagents and
its library of over 30,000 yeast strains, and its bioinformatics
software. OSI paid to Cadus a license fee of $100,000 and an access fee
of $600,000, which have been recorded as license fee revenue in the
accompanying consolidated statement of operations for the year ended
December 31, 2000. OSI is also obligated to pay an annual maintenance
fee of $100,000 until the
F-13
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
earlier of 2010 or the termination of the license and a supplemental
license fee of $250,000 which was paid in December 2000 after the
lifting of the injunction obtained by SIBIA and recorded as license fee
revenue. OSI may terminate the license at any time on 30 days prior
written notice. For the years ended Decmeber 31, 2001 and 2000, the
Company recognized $100,000 and $950,000, respectively, in license and
maintenance fees from OSI.
(10) Research Collaboration and License Agreements
Cadus no longer has any collaborations with pharmaceutical companies.
The Bristol-Myers Squibb Company collaboration expired in July 1999,
the Solvay Pharmaceutical collaboration was assigned to OSI in July
1999 and Cadus and SmithKline Beecham p.l.c. agreed to terminate their
collaboration in September 1999. Each of Bristol-Myers Squibb Company
and SmithKline Beecham p.l.c. is required to make payments to Cadus
upon the achievement by it of certain pre-clinical and drug development
milestones and to pay Cadus royalties on the sale of any drugs
developed as a result of the research collaboration with Cadus or
through the use of Cadus's drug discovery technologies. There can be no
assurance that any such milestones will be achieved or any such drugs
developed.
For the year ended December 31, 1999, the Company recognized $1.3
million in revenues for research funding from Bristol-Myers Squibb,
which constituted 22% of the Company's revenues in 1999.
For the year ended December 31, 1999, the Company recognized $1.6
million in revenues for research funding from Solvay Pharmaceutical, an
affiliate of Physical B.V., which constituted 26% of the Company's
revenues in 1999. Siegfried G. Schaefer, a director of Cadus, is the
head of worldwide research at Solvay Pharmaceutical.
For the year ended December 31, 1999, Cadus recognized $2.1 million in
research revenues and a $1.0 million research milestone payment from
SmithKline Beecham p.l.c., which represented 52% of Cadus's revenues in
1999.
(11) Sponsored Research and License Agreements
The Company has entered into license agreements with various third
parties. Generally, the agreements provide that the Company will pay
license fees and/or maintenance payments, in return for the use of
technology and information and the right to manufacture, use and sell
future products. These agreements provide for payments based on the
completion of milestone events, as well as royalty payments based upon
a percentage of product or assay sales. License fees and maintenance
payments for the years ended December 31, 2001, 2000 and 1999 were
$25,000, $48,194 and approximately $536,000, respectively.
(12) Stock Options
F-14
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(a) The 1993 Stock Option Plan ("the 1993 Plan") was adopted in
January 1993. The 1993 Plan provides for the grant of options to
reward executives, consultants and employees in order to foster
in such personnel an increased personal interest in the future
growth and prosperity of Cadus. The options granted under the
1993 Plan may be either incentive stock options or nonqualified
options. An aggregate of 666,667 common shares were reserved for
issuance under the 1993 Plan.
Options granted under the 1993 Plan expire no later than ten
years from the date of grant. The option price is required to be
at least 100% and 85% of the fair market value on the date of
grant as determined by the Board of Directors for incentive stock
options and nonqualified options, respectively. The options
generally become exercisable according to a schedule of vesting
as determined by the Compensation Committee of the Board of
Directors. The schedule prescribes the date or dates on which the
options become exercisable, and may provide that the option
rights accrue or become exercisable in installments over a period
of months or years.
Activity under the 1993 Plan is as follows:
Options Outstanding
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
Balance at January 1, 1999 455,311 $1.65
1998 activity
Granted -- --
Exercised -- --
Canceled (138,572) $2.00
-------
Balance at December 31, 1999 316,739 $1.50
2000 activity
Granted -- --
Exercised (40,000) $1.37
Canceled -- --
-------
Balance at December 31, 2000 276,739 $1.52
2001 activity
Granted -- --
Exercised -- --
Canceled -- --
-------
Balance at December 31, 2001 276,739 $1.52
=======
At December 31, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.37 to $3.51
and 1.63 years, respectively.
F-15
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
At December 31, 2001 and 2000, the number of options exercisable was
276,739 and the weighted-average exercise price of those options was
$1.52.
The following table summarizes stock option information for the 1993
Plan as of December 31, 2001:
F-16
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- ----- ----------- -----
$1.37 to $1.50 270,072 1.63 $1.47 270,072 $1.47
$3.51 6,667 1.50 $3.51 6,667 $3.51
------- -------
$1.37 to $3.51 276,739 1.63 $1.52 276,739 $1.52
======= =======
(b) Cadus entered into stock option agreements not pursuant to any
plan with certain directors, employees, founders and
consultants. These options generally become exercisable
according to a schedule of vesting as determined by the
Compensation Committee of the Board of Directors. The options
become exercisable in installments over a period of months or
years. As of December 31, 2001, an aggregate of 323,403 common
shares was reserved for issuance pursuant to such stock option
agreements.
In November 1996, the Compensation Committee granted to
certain directors then in office an option to purchase 12,000
shares of common stock at an exercise price of $6.75 per
share. Each stock option grant is exercisable in four
cumulative annual installments of 3,000 shares commencing in
November 1997 and expires in November 2006.
Activity for all the above grants not issued pursuant to
any plan is as follows:
OPTIONS OUTSTANDING
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
Balance at January 1, 1999 597,257 $3.02
1999 activity
Granted -- --
Exercised -- --
Canceled (158,087) $4.56
--------
Balance at December 31, 1999 439,170 $2.47
2000 activity
Granted -- --
Exercised (5,100) $3.60
Canceled -- --
--------
Balance at December 31, 2000 434,070 $2.46
2001 activity
Granted -- --
Exercised -- --
Canceled
(110,667) $2.57
--------
Balance at December 31, 2001 323,403 $2.42
========
F-17
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
At December 31, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 to $6.75 and
3.22 years, respectively.
At December 31, 2001 and 2000, the number of options exercisable was
323,403 and 434,070, respectively, and the weighted-average exercise
price of those options was $2.42 and $2.46, respectively.
The following table summarizes stock option information for grants not
subject to any plan as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- ----- ----------- -----
$1.50 to $2.57 253,334 1.84 $1.50 253,334 $1.50
$3.60 22,069 3.97 $3.60 22,069 $3.60
$6.75 48,000 4.88 $6.75 48,000 $6.75
------- --------
$1.50 to $6.75 323,403 3.22 $2.42 323,403 $2.42
======= ========
(c) Effective May 10, 1996, the 1993 Plan was replaced by the 1996 Incentive
Plan ("the 1996 Plan") with respect to all future awards to Cadus's
employees and consultants. However, awards made under the 1993 Plan will
continue to be administered in accordance with the 1993 Plan.
The 1996 Plan was adopted in May 1996. The options granted under the
1996 Plan may be either incentive stock options or nonqualified options.
In December 1996, the maximum number of shares of common stock that may
be the subject of awards under the 1996 Incentive Plan was increased
from 333,334 to 833,334 (plus any shares that are the subject of
canceled or forfeited awards) by the Board of Directors and such
increase was approved by the stockholders of Cadus in June 1997. In
December 1997, the maximum number of shares of common stock that may be
the subject of awards under the 1996 Incentive Plan was increased to
1,833,334 (plus any shares that are the subject of canceled or forfeited
awards) by the Board of Directors and approved by the stockholders of
Cadus in June 1998.
Options granted under the 1996 Plan expire no later than ten years from
the date of grant. The option price is required to be at least 100% of
the fair value on the date of grant as determined by the Board of
Directors for incentive and nonqualified stock options. The options
generally become exercisable according to a schedule of vesting as
determined by the Compensation Committee of the Board of Directors. The
schedule prescribes the date or dates on which the options become
exercisable in installments over a period of months or years.
F-18
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Activity under the 1996 Plan is as follows:
OPTIONS OUTSTANDING
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
Balance at January 1, 1999 1,519,240 $4.70
1999 activity
Granted 129,855 $1.88
Exercised -- --
Canceled (1,214,928) $5.15
----------
Balance at December 31, 1999 434,167 $2.57
2000 activity
Granted -- --
Exercised (30,000) $2.75
Canceled (395,000) $2.46
----------
Balance at December 31, 2000 9,167 $6.56
2001 activity
Granted -- --
Exercised -- --
Canceled -- --
----------
Balance at December 31, 2001 9,167 $6.56
==========
At December 31, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $6.38 to $6.63 and
5.24 years, respectively.
At December 31, 2001 and 2000, the number of options exercisable was
9,167 and the weighted average exercise price of those options was
$6.56.
The following table summarizes stock option information for the 1996
Plan as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ------------------ -------- ----------- ---------
$6.38 to $6.63 9,167 5.24 $6.56 9,167 $6.56
F-19
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Cadus applies APB 25 in accounting for its stock option plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. If Cadus had elected to recognize
compensation cost based on the fair value of the options granted at the
grant date under SFAS No. 123, net income (loss) and income (loss) per
share would have been increased to the pro forma amounts indicated in
the table below (in thousands, except per share amounts):
2001 2000 1999
------- ------- -------
Net income (loss) - as reported ($317) $18,051 ($8,524)
Net income (loss) - pro forma ($317) $18,051 ($8,614)
Income (loss) per share - as reported ($0.02) $1.37 ($0.65)
Income (loss) per share - pro forma ($0.02) $1.37 ($0.65)
Pro forma net income (loss) reflects only options granted since 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
1999
----
Expected dividend yield 0%
Expected stock price volatility 1.85
Risk-free interest rate 6.31%
Expected life of options 9 years
The weighted average fair value of options granted during the year
ended December 31, 1999 was $1.88 per share. There were no options
granted during the years ended December 31, 2001 and 2000. There is no
remaining compensation expense relating to options previously granted.
(13) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following:
2001 2000
---- ----
Accrued professional fees $75,608 $25,000
Other accrued expenses 19,424 11,244
-------- -------
Total $ 95,032 $36,244
======== =======
F-20
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(14) Commitments and Contingencies
Lease Commitments
Cadus currently leases storage space on a month to month basis.
Rent expense, excluding utility and operating costs, for the years
ended December 31, 2001, 2000 and 1999 amounted to approximately
$5,000, $5,000, and $409,507, respectively.
Employment Agreement
Dr. Woler was employed as President and Chief Executive Officer under a
three year employment agreement with Cadus, which was extendable to
four years at Cadus's option, entered into effective as of October 1,
1998. Pursuant to his agreement, Dr. Woler received an annual base
salary of $300,000 for his first year of employment, $330,000 for his
second year of employment and $360,000 for his third year of
employment. In November 1999, Cadus and Dr. Woler entered into a term
sheet to amend his employment agreement to provide that if Cadus fails
to make at least a $20 million investment in biotechnology prior to
April 15, 2000 and if Dr. Woler resigns during the 90 day period
beginning on April 15, 2000, Cadus will pay to Dr. Woler a lump sum
severance payment equal to the base salary he would have earned for the
balance of his agreement. Cadus did not make the $20 million investment
in biotechnology and Dr. Woler resigned and received a severance
payment of $497,500. This amount has been recorded in general and
administrative expenses in the statement of operations as of December
31, 2000.
(15) Supplemental Cash Flow Information
2001 2000 1999
-------- ------- -------
Cash payment for:
Interest $ - $ - $ -
Income taxes $ - $ - $15,476
(16) - Quarterly Financial Data (Unaudited)
Fiscal 2001 Quarter Ended December 31 September 30 June 30 March 31
License and maintenance fees $500,000 $-- $-- $ 100,000
------- -------- -------- --------
Operating income (loss) 232,214 (161,813) (405,476) (141,453)
Net income (loss) (448,566) 23,533 (170,683) 278,864
Net income (loss) per share:
Basic and diluted $(0.03) $0.00 $(0.01) $0.02
F-21
CADUS PHARMACEUTICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Fiscal 2000 Quarter Ended December 31 September 30 June 30 March 31
License and maintenance fee $ 255,030 $ 23,470 $ -- $ 700,000
----------- ----------- ----------- -----------
Operating income (loss) 58,350 (354,649) (701,514) (412,816)
Net income (loss) 447,969 18,574,415 (629,870) (341,119)
Net income (loss) per share:
Basic and diluted $ 0.04 $ 1.41 $ (0.05) $ (0.03)
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