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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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________________ to ________________
Commission File Number 0-28674
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 incorporation or organization) (I.R.S. Employer Identification No.)
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) 702-4351
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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: ______
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, 2001, was
$8,047,025.
Number of shares outstanding of each class of Common Stock, as of March 15,
2001: 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" or the "Company") 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. Since
July 30, 1999, the Company has been seeking to (i) license its technologies and
otherwise realize value from its assets and (ii) use a portion of its available
cash to acquire technologies or products or to acquire or invest in companies.
On July 30, 1999, the Company 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 the Company's lease to the Company's research
facility in Tarrytown, New York, the Company's equipment lease with General
Electric Capital Corporation ("GECC") and the Company's research collaboration
and license agreement with Solvay Pharmaceuticals. As consideration for the
sale, the Company received approximately
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$1,500,000 in cash and OSI assumed certain liabilities of the Company relating
to employees hired by OSI aggregating approximately $133,000. In addition, the
Company 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. The Company licensed to OSI on a
non-exclusive basis certain technology solely to enable OSI to fulfill its
obligations under the collaboration with Solvay Pharmaceuticals. The Company
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 Company. The Company 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., the Company'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 the Company (which verdict was subsequently
reversed and the monies held in escrow were released to the Company). The
Company 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, the Company developed several proprietary
technologies that exploit the similarities between yeast and human genes to
elucidate gene function and cell signaling pathways. In February 2000, the
Company licensed its yeast technologies and its bioinformatics software to OSI
on a non-exclusive basis. The Company 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") 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") technologies, which are used to identify a ligand that activates a
targeted orphan receptor (a receptor whose function is not known).
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
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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 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
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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 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.
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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 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.
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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.
CADUS'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
receptors. The Company 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
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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
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
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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 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.
The Company has an equity interest in Axiom Biotechnologies Inc. ("Axiom")
which is developing a High Throughput Pharmacology System ("HT-PS(TM)"). The
HT-PS(TM) measures the immediate physiological responses to chemical compounds
of natural or genetically engineered human cells and performs both selectivity
profiles and dose-response curves. By automating the slow, labor-intensive and
costly process of assessing the pharmacological properties of potential
therapeutic
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compounds identified through primary screening, the HT-PS(TM) enables scientists
to accelerate the secondary screening process and thus the identification of
lead compounds. 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, the Company licensed to OSI, on a non-exclusive basis,
its yeast technologies, including various reagents and its library of over
30,000 yeast strains, and its bioinformatics software. OSI paid to the Company 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 the Company. OSI may terminate
the license at any time on 30 days prior written notice. The Company is seeking
to license these technologies to other third parties on a non-exclusive basis.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
The Company relies upon patents and trade secrets to protect its
proprietary technologies. As of March 15, 2001, the Company was the assignee of
two issued U.S. patents covering aspects of its yeast technology and was the
exclusive worldwide licensee of two issued U.S. patents for use in drug
discovery. In addition, as of such date, the Company had filed or held licenses
to 23 other U.S. patent applications, as well as related foreign patent
applications.
The Company has obtained from Duke University an exclusive worldwide
license to two issued U.S. patents and U.S. and international patent
applications covering hybrid yeast cell technologies. 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 Company pays a minimum annual royalty and is required to make
payments upon the achievement by the Company of certain drug development
milestones and to pay royalties (net of minimum royalties) on the sale of drugs
by the Company which were initially identified by the Company through the use of
the licensed
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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 Company pays an annual fee (net of the minimum annual
royalty) for each sublicense granted by it to such technology.
The Company 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. The Company
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.
During 1999, the Company ceased providing to Massachusetts Institute of
Technology ("M.I.T.") research funding for the LivingChip(TM), a technology that
was being co-developed by the Company and M.I.T. to miniaturize and automate the
Company's hybrid yeast cell technology. In March 2000, the Company's license to
M.I.T.'s LivingChip(TM) technology was terminated.
The Company has granted a license to use several of its patents and patent
applications relating to its yeast-based technologies to OSI and, for certain
purposes, to Solvay Pharmaceuticals and SmithKline Beecham.
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.
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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 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 the Company
alleging infringement by the Company 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 the Company from using the
method claimed in SIBIA's patent. On February 26, 1999, the United States
District Court denied the Company'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. The Company appealed the judgment. In order to stay execution
pending appeal of the $18.0 million judgment obtained by SIBIA, in March 1999,
the Company deposited $18.5 million in escrow to secure payment of the judgments
in the event the Company were to lose the appeal. On September 6, 2000 the
United States Court of Appeals ruled in favor of the Company 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
12
against the Company were invalid and that the District Court erred in denying
the Company'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 the Company.
Separately, in October 2000, the Company 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 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
13
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.
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
14
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 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.
15
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 its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by Federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
EMPLOYEES
As of March 15, 2001, the Company had no employees. Charles Woler, the
former Chief Executive Officer of the Company, resigned in April 2000. Russell
D. Glass, the current Chief Executive Officer, is not an employee of the Company
and is serving as the Company's Chief Executive Officer without compensation.
ITEM 2. PROPERTIES.
The Company leases storage space in Tarrytown, New York.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings that will have a
material adverse effect on the Company's operations or financial condition.
However, the Company is the respondent in an arbitration proceeding commenced
by Philip N. Sussman, the former Senior Vice President, Finance and Corporate
Development, and Chief Financial Officer of the Company, against the Company, on
October 4, 1999, seeking severance pay of approximately $525,000. The Company
believes that Mr. Sussman is not entitled to such severance pay and intends to
vigorously defend the action.
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.
The Company'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, the Company's Common
Stock has traded on the over-the-counter bulletin board under the symbol KDUS.
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.
16
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
FISCAL YEAR 1999 HIGH LOW
First quarter ended March 31, 1999 $ 2.31 $ 1.00
Second quarter ended June 30, 1999 $ 1.13 $ 0.75
Third quarter ended September 30, 1999 $ 0.91 $ 0.22
Fourth quarter ended December 31, 1999 $ 0.44 $ 0.09
As of March 15, 2001, there were approximately 55 holders of record of the
Company's Common Stock.
The Company 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. The Company intends to retain any earnings
for the growth of and for use in its business.
RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company has issued and sold the following
securities that were not registered under the Securities Act of 1933, as amended
(the "Act"), in reliance on an exemption from required registration pursuant to
Section 3(b) or 4(2) of the Act:
In May 1998, the Company sold 660,962 shares of its Common Stock to
SmithKline Beecham p.l.c. and SmithKline Beecham Corporation for approximately
$7.56 per share or an aggregate consideration of $5.0 million.
ITEM 6. SELECTED FINANCIAL DATA.
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.
17
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
(dollars in thousands, except share and per share data)
Revenues $979 $6,028 $12,576 $9,013 $6,500
Operating costs and expenses:
Research and development ............... -- 9,116 15,389 11,561 8,283
General and administrative ............. 1,652 3,643 8,977 4,092 2,315
----- ----- ----- ----- -----
Total operating costs and
expenses .............................. 1,652 12,759 24,366 15,653 10,598
----- ------ ------ ------ ------
Operating loss ....................... (673) (6,731) (11,790) (6,640) (4,098)
Net income (loss) .......................... $18,051(1) ($8,524) ($29,690)(1) ($5,411) ($2,441)
======= ======= ======= ====== ======
Basic and diluted net income (loss)
per share ............................... $1.37 ($0.65) ($2.32) ($0.44) ($0.39)
===== ====== ====== ====== =====
Shares used in calculation of basic
and diluted net income (loss) per share... 13,133,615 13,068,940 12,811,525 12,225,463 6,280,917
DECEMBER 31,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
(in thousands)
Cash and cash equivalents ................ $24,383(1) $5,082(2) $10,976 $36,762 $43,153
Total assets ......................... 25,709 26,699 36,587 42,241 47,287
Short-term debt ........................ -- -- -- 150 13
Long-term debt ......................... -- -- -- -- 166
Accumulated deficit ...................... (34,005) (52,056) (43,532) (13,842) (8,431)
Stockholders' equity ....................... 25,672 7,465 15,989 40,500 45,181
The Company 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 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. 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.
(2) In order to stay execution pending appeal of the $18.0 million judgment
obtained by SIBIA, in March 1999, the Company deposited $18.5 million in
escrow to secure payment of the judgment in the event the Company were to
lose the appeal. Such $18.5 million was classified, as of December 31,
1998, as "restricted cash noncurrent" and the Company'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.
18
OVERVIEW
The Company 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, the Company
sold its drug discovery assets to OSI Pharmaceuticals, Inc. ("OSI") and ceased
its internal drug discovery operations and research efforts for collaborative
partners. The Company 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 $673,000 during the year ended
December 31, 2000. At December 31, 2000, the Company had an accumulated deficit
of approximately $34.0 million, which reflects the reversal of an $18.5 million
charge plus interest thereon for litigation damages with respect to the patent
infringement litigation with SIBIA upon reversal by the Court of Appeals of the
judgment in SIBIA's favor in 2000. 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.
RESULTS OF OPERATIONS
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
19
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
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.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues for 1999 decreased to $6.0 million from $12.6 million in 1998.
This decrease was primarily attributable to the Company only receiving a
research milestone payment of $1.0 million from SmithKline Beecham p.l.c.
("SmithKline") in 1999 as compared to the $2.0 million technology development
fee it received from SmithKline in 1998; the termination in July 1999 of the
research collaboration with Bristol-Myers Squibb; the termination in August 1999
of the research collaboration with SmithKline; and the sale to OSI of the
research collaboration with Solvay Pharmaceuticals on July 30, 1999.
OPERATING EXPENSES
The Company's research and development expenses for 1999 decreased to $9.1
million from $15.4 million in 1998 due to the reduction in staff and research
activities as a result of the asset sale to OSI on July 30, 1999.
General and administrative expenses for 1999 decreased to $3.6 million from
$9.0 million in 1998. This decrease is attributable primarily to decreased
litigation expenses and the sale of drug discovery operations to OSI.
20
NET INTEREST INCOME
Net interest income for 1999 decreased to $552,000 from $1.8 million in
1998. This decrease is attributable primarily to decrease in the Company's
unrestricted cash balances as compared to 1998.
EQUITY IN OTHER VENTURES
Equity in other ventures reflects losses and gains associated with the
Company's two equity investments. For the years ended December 31, 1999 and
1998, the Company recognized gains of approximately $21,000 and $8,000,
respectively, related to its investment in Laurel Partners Limited Partnership.
For the years ended December 31, 1999 and 1998, the Company recognized
approximately $1.4 million and $1.2 million, respectively, in losses generated
by Axiom. The Company's investment in Axiom is accounted for under the equity
method with the Company recognizing 100% of Axiom's net losses prior to the
investment made by JAFCO Co. Ltd. ("JAFCO") in Axiom in June 1998. Following the
JAFCO investment, the Company began recognizing 50% of the net losses generated
by Axiom which is the extent to which the Company is deemed to be funding such
losses.
NET LOSS
The net loss for 1999 decreased to $8.5 million from $29.7 million in 1998.
This decrease can be attributed primarily to the establishment in 1998 of the
$18.5 million reserve for litigation damages with respect to the patent
infringement litigation with SIBIA as well as a decrease in the operating
expenses of the Company as described above which was partially offset by a
decrease in revenues.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000 the Company held cash and cash equivalents of $24.4
million. The Company's working capital at December 31, 2000 was $24.4 million.
On July 30, 1999, the Company 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, the Company's lease to the Company's research facility in
Tarrytown, New York and the Company's equipment lease with General Electric
Capital Corporation. The Company 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. As a result of the foregoing, the Company ceased to
have research funding revenues and substantially reduced its operating expenses.
In February 2000, the Company licensed to OSI, on a non-exclusive basis,
its yeast technologies. OSI paid to the Company 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.
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 2002. This forecast of the period of time
through which the Company's financial resources will be adequate to
21
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.
At December 31, 2000 the Company had tax net operating loss carryforwards
of approximately $27.7 million and research and development credit carryforwards
of approximately $2.7 million which expire in years 2009 through 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS 137 and SAFS 138, which will be adopted
by the Company in the first quarter of fiscal 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. Implementation of this statement will not have a
material impact on the Company's financial position or 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.
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 the
Company as of March 15, 2001 is set forth below:
22
NAME AGE POSITION
- ---- ---- ---------
Russell D. Glass 38 Chief Executive Officer, President and
Director
James R. Broach, Ph.D. 52 Director
Carl C. Icahn 65 Director
Peter S. Liebert, M.D.(1) 65 Director
Professor Siegfried G.
Schaefer 52 Director
Jack G. Wasserman (1) 63 Director
- -------------
(1) Member of the Compensation Committee.
RUSSELL D. GLASS became a director of the Company in June 1998 and
President and Chief Executive Officer in April 2000. Since April 1998 Mr. Glass
has been President and Chief Investment Officer of Icahn Associates Corp., a
diversified investment firm. Since August 1998 he has also served 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 the Company and inventor of
the Company's yeast-based drug discovery technology, has been Director of
Research of the Company since its inception. He is and has been since 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 the Company 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
23
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 the 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 Greate 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 the Company 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 the Company 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 the Company 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
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 the Company 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 has a Compensation Committee, consisting of Messrs.
Liebert and Wasserman, which makes recommendations regarding salaries and
incentive compensation for employees of and consultants to the Company 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
24
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company'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 the Company. Reporting persons are
required by SEC regulation to furnish the Company with copies of all such filed
reports. To the Company's knowledge, based solely on a review of copies of such
filed reports furnished to the Company, all of the Company's directors, officers
and greater than ten percent beneficial owners made all required filings during
fiscal year 2000 in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal years ended December 31, 2000, 1999 and 1998,
by its Chief Executive Officer and each of the Company's other executive
officers whose total salary and bonus exceeded $100,000 during 2000
(collectively, the "Named Executive Officers"):
Summary Compensation Table
--------------------------
Long-Term
Compensation
Awards
----------
Annual Compensation Securities
---------------------- Underlying All Other
Name and Principal Postion Year Salary($) Bonus($) Options(#) Compensation
- -------------------------- ---- --------- -------- ----------- -------------
Russell D. Glass (1)............... 2000 -- -- -- --
Charles Woler (2).................. 2000 110,000 -- -- 497,500(2)
President and Chief Executive 1999 307,500 -- 129,855 --
Officer 1998 125,000(3) -- 295,145 53,225(4)
___________________
(1) Mr. Russell D. Glass became the Company's President and Chief Executive
Officer in April 2000. He serves in such capacity without compensation.
(2) Dr. Woler resigned as President and Chief Executive Officer of the Company
in April 2000 and received a severance payment of $497,500 pursuant to his
employment agreement.
(3) Dr. Woler joined the Company in October 1998 and received a salary at the
rate of $300,000 per annum for 1998.
(4) All other compensation consists of relocation expenses paid by the Company
on behalf of Dr. Woler.
OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2000 by the Company to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
25
Individual Grants
----------------------------------------------------------------
Potential Realizable Value
Percent of At Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration ---------------------------
Name Granted(#) Fiscal Year ($/share) Date 5% 10%
- ---- ----------- ------------- --------- ---------- --- ---
Russell D. Glass....... -- -- -- -- -- --
Charles Woler.......... -- -- -- -- -- --
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning each exercise
of stock options, during the fiscal year ended December 31, 2000 by the Named
Executive Officers and unexercised stock options held by the Named Executive
Officers as of the end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
Shares Aggregate December 31, 2000(#) December 31, 2000($)
Acquired on Value ------------------------------- ------------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ----- ------------ ------------ ----------- ------------- ----------- -------------
Russell D. Glass.... -- -- -- -- -- --
Charles Woler....... 30,000 $82,500 -- -- -- --
INCENTIVE PLANS
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.
26
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.
Options granted under the 1993 Stock Option Plan are nontransferable except
by will or the laws of descent and distribution.
During 2000, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 15, 2001, 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, 2001, options to purchase 276,739 shares were exercisable at
prices ranging from $1.37 to $3.51 per share.
The Company 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
The Company has granted non-qualified stock options to directors, officers,
employees and consultants of the Company by means of stock option agreements.
During 2000, there were no stock options granted pursuant to stock option
agreements. As of March 15, 2001, an aggregate of 434,070 shares of Common Stock
were subject to outstanding stock options granted under stock option agreements,
and options to purchase 434,070 shares under such option agreements were
exercisable at prices ranging from $1.50 to $6.75 per share.
The Company 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
The Company's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company 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 the Company to its
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
27
1993 Stock Option Plan. See "Incentive Plans -- 1993 Stock Option Plan." In
December 1996, the Board of Directors 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 the
Company 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 the
Company 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 the Company's employees, consultants and directors will receive 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 the Company 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 the Company and in no event beyond
the expiration of the term. The Company 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.
28
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 the Company in shares
of Common Stock. The amount payable by the Company 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 the
Company 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
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 the Company 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 the Company. 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 may suspend, amend, modify or terminate the 1996
Incentive Plan. However, the Company'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.
29
As of March 15, 2001, 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, 2001, stock options to purchase 9,167 shares were exercisable at
prices ranging from $6.38 to $6.63 per share.
The Company 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
The Company'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
The Compensation Committee of the Board is responsible for determining and
administering the Company's compensation policies for the remuneration of the
Company's officers. The Compensation Committee annually evaluates individual and
corporate performance from both a short-term and long-term perspective. In 2000,
the Company had no officers other than its current Chief Executive Officer who
is serving in such capacity without compensation and its former Chief Executive
Officer who resigned in April 2000 and who was paid in accordance with his
existing employment agreement with the Company. Accordingly, the following
report of the Compensation Committee is not directly applicable to calendar year
2000 but is presented for historical perspective.
PHILOSOPHY
The Company's executive compensation program historically has sought to
encourage the achievement of business objectives and superior corporate
performance by the Company's executives. The program enables the Company 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, the Company'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
30
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.
Peter Liebert
Jack G. Wasserman
COMPARATIVE STOCK PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total return*
for the Nasdaq Composite Index, the Nasdaq Biotechnology Index and the Company
since the Company's initial public offering on July 17, 1996.
31
COMPARISON OF CUMULATIVE TOTAL RETURN
among Cadus Pharmaceutical Corporation, the Nasdaq Composite Index and the
Nasdaq Biotechnology Index
[GRAPH OMITTED]
* $100 invested July 17, 1996 in the Company's Common Stock or in the index
indicated, including reinvestment of dividends.
Corresponding index values and the Company's Common Stock price values are given
below:
7/17/96 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
------- -------- ------- -------- -------- --------
Cadus 100.000 125.00 91.071 27.686 4.429 10.287
Nasdaq Composite Index 100.000 118.808 144.513 201.784 374.482 227.352
Nasdaq Biotechnology Index 100.000 112.562 112.484 162.291 327.240 402.476
Cadus Closing Stock Price $7.000 8.750 6.375 1.938 0.31 0.72
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, 2001 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
32
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) 25.66%
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..................................... 110,667(6) *
Russell D. Glass.................................... * *
Peter S. Liebert, M.D............................... 20,334(7) *
Siegfried G. Schaefer, Ph.D......................... 1,599,942(8) 12.17%
Jack G. Wasserman................................... 14,500(9) *
All executive officers and directors as a
group (7 persons) .............................. 5,118,659(10) 38.83%
- ------------------------------
* 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,
2001, 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.
33
(5) Includes 330,481 shares of Common Stock held by SmithKline Beecham p.l.c.,
an affiliate of SmithKline Beecham Corporation.
(6) Consists of 110,667 shares of Common Stock which Dr. Broach currently has
the right to acquire upon the exercise of stock options.
(7) Includes 12,000 shares of Common Stock which Dr. Liebert currently has the
right to acquire upon the exercise of stock options.
(8) 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.
(9) Consists of 14,500 shares of Common Stock which Mr. Wasserman currently has
the right to acquire upon the exercise of stock options.
(10) Includes (a) 149,167 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.
During 1998, the Company loaned $15,000 to Dr. Charles Woler, the Chief
Executive Officer of the Company. The loan bore interest at 5.5% per annum.
Principal and interest were repayable in monthly installments of $453 over 3
years. In April 2000, Dr. Woler repaid the remaining balance of the loan.
In August 1999, the Company'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 the Company's guarantee. Dr.
Broach executed and delivered to the Company a $286,000 interest-bearing
promissory note payable to the order of the Company on August 31, 2000 to
evidence his debt to the Company arising from the Company'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
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
34
(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 (the "Company"), as filed with the
Secretary of State of Delaware on July 22, 1996. (1)
3.2 By-laws of the Company. (2)
4.1 Specimen of Common Stock Certificate of the Company. (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 the Company and each of
the following employees of the Company: 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 the Company and each of
the following non-employee directors of the Company: Theodore
Altman, Harold First, Carl Icahn, Peter Liebert, Robert
Mitchell, Mark Rachesky, William Scott, Jack Wasserman and
Samuel D. Waksal. (1)
4.8 Stock Purchase Agreement between the Company and SmithKline
Beecham Corporation, dated as of February 25, 1997. (3)
35
4.9 Registration Rights Agreement between the Company and SmithKline
Beecham Corporation, dated as of February 25, 1997. (3)
10.1 Form of Indemnification Agreement entered into between the
Company 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 the Company.
(2)
10.5 Preferred Stock Purchase Agreement dated as of July 30, 1993
between the Company 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 the Company 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 the Company and Physica B.V. concerning Series B
Preferred Stock. (2)
10.8 Research Collaboration and License Agreement, dated as of July
26, 1994, between the Company and Bristol-Myers. (2)
10.9 Screening and Option Agreement, dated as of July 26, 1994,
between the Company and Bristol-Myers. (2)
10.10 Research Collaboration and License Agreement, dated as of
November 1, 1995 between the Company and Solvay Pharmaceuticals
B.V. (2)
10.11 Sublease Agreement, dated as of October 19, 1994, between the
Company and Union Carbide Corporation. (2)
10.12 Lease, dated as of June 20, 1995 between the Company and Keren
Limited Partnership. (2)
10.13 Consulting Agreement between the Company and James R. Broach,
dated February 1, 1994. (2)
10.14 Amended and Restated License Agreement between the Company and
Duke University, dated May 10, 1994. (2)
36
10.15 License Agreement between the Company 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
the Company and John C. Cambier. (2)
10.17 Stock Option Agreement, dated as of November 1, 1994, between
the Company and Gary L. Johnson.(2)
10.18 Consulting Agreement, dated as of November 1, 1994, between the
Company and John C. Cambier. (2)
10.19 Consulting Agreement, dated as of November 1, 1994, between the
Company and Gary L. Johnson. (2)
10.20 Research Collaboration Agreement, dated as of January 9, 1995,
between the Company 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
the Company 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 the
Company 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
the Company and Physica B.V. (2)
10.24 Research Collaboration and License Agreement among the Company,
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 the
Company and Charles Woler. (4)
10.26 Employment Agreement, dated as of September 10, 1998, between
the Company and Philip N. Sussman. (4)
10.27 Agreement and Instructions to Stakeholder among the Company,
SIBIA and Security Trust Company entered into in March 1999. (5)
10.28 Asset Purchase Agreement, dated as of July 30, 1999, between the
Company and OSI Pharmaceuticals, Inc. (Schedules to the Asset
Purchase Agreement have been
37
intentionally omitted. The Company hereby undertakes to furnish
supplementally to the Securities and Exchange Commission upon
request a copy of the omitted schedules.) (6)
23 Consent of KPMG LLP, independent auditors.
24 Power of Attorney (filed as part of the signature page to this
Report).
- ----------------
(1) Filed with the Company's Registration Statement on Form S-8 (Registration
No. 333-21871), dated February 14, 1997.
(2) Filed with the Company's Registration Statement on Form S-1 (Registration
No. 333-4441), declared effective by the Commission on July 17, 1996.
(3) Filed with the Company's Current Report on Form 8-K, dated March 7, 1997.
(4) Filed with the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998.
(5) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
(6) Filed with the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
38
CADUS PHARMACEUTICAL CORPORATION
INDEX
Page No.
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets - December 31, 2000 and 1999 F-3
Statements of Operations - For the years ended
December 31, 2000, 1999 and 1998 F-4
Statements of Stockholders' Equity - For the years
ended December 31, 2000, 1999 and 1998 F-5
Statements of Cash Flows - For the years ended
December 31, 2000, 1999 and 1998 F-6
Notes to Financial Statements F-7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cadus Pharmaceutical Corporation:
We have audited the accompanying balance sheets of Cadus Pharmaceutical
Corporation (the "Company") as of December 31, 2000 and 1999 and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States 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 financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cadus Pharmaceutical
Corporation as of December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
March 22, 2001
F-2
CADUS PHARMACEUTICAL CORPORATION
BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
2000 1999
------------ -------------
Current assets:
Cash and cash equivalents $ 24,383,352 $ 5,082,212
Restricted cash -- 13,566
Due from officer and director -- 294,636
Prepaid and other current assets 81,250 69,783
------------ ------------
Total current assets 24,464,602 5,460,197
Restricted cash-noncurrent -- 19,065,431
Investment in other ventures 162,528 999,590
Other assets, net 1,081,527 1,173,558
------------ ------------
Total assets $ 25,708,657 $ 26,698,776
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 17,644
Accrued expenses and other current
liabilities 36,244 121,843
Deferred revenue -- 28,500
------------ ------------
Total current liabilities 36,244 167,987
Reserve for litigation damages -- 19,065,431
------------ ------------
Total liabilities 36,244 19,233,418
Stockholders' equity:
Common stock, $.01 par value. Authorized
35,000,000 shares at December 31, 2000
and 1999; issued 13,285,707 shares at
December 31, 2000 and 13,210,607 shares
at December 31, 1999; outstanding
13,144,040 shares at December 31, 2000
and 13,068,940 shares at December 31, 1999 132,857 132,106
Additional paid-in capital 59,844,355 59,689,446
Accumulated deficit (34,004,724) (52,056,119)
Treasury stock, 141,667 shares of common
stock at December 31, 2000 and 1999 (300,075) (300,075)
------------ ------------
Total stockholders' equity 25,672,413 7,465,358
------------ ------------
Total liabilities and stockholders'
equity $ 25,708,657 $ 26,698,776
============ ============
See accompanying notes to financial statements.
F-3
CADUS PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
----------- ------------ ------------
Revenues, principally from
related parties $ -- $ 6,027,544 $ 12,576,469
License and maintenance fee 978,500 -- --
----------- ------------ ------------
Total revenues 978,500 6,027,544 12,576,469
----------- ------------ ------------
Costs and expenses
Research and development costs -- 9,115,504 15,388,991
General and administrative 1,652,067 3,643,365 8,977,408
Loss in equity in other ventures 837,062 1,334,491 1,144,148
(Gain) loss on sale of equipment
and impairment loss (100,000) 220,216 (16,368)
----------- ------------ ------------
Total costs and expenses 2,389,129 14,313,576 25,494,179
----------- ------------ ------------
Operating loss (1,410,629) (8,286,032) (12,917,710)
----------- ------------ ------------
Other income and (expenses):
Interest income 638,954 551,539 1,844,177
Interest expense -- -- (10,500)
Gain on reversal of litigation
judgment, net of legal fees (note 4) 18,841,489 -- --
Reserve for litigation damages -- -- (18,500,000)
Loss on sale of assets to OSI -- (805,555) --
----------- ------------ ------------
Total other income and
(expenses) 19,480,443 (254,016) (16,666,323)
Income (loss) before income taxes 18,069,814 (8,540,048) (29,584,033)
State and local tax provision (benefit) 18,419 (16,359) 106,170
----------- ------------ ------------
Net income (loss) $18,051,395 ($8,523,689) ($29,690,203)
=========== ============ ============
Basic and diluted net income (loss)
per share $ 1.37 ($0.65) ($2.32)
=========== ============ ============
Weighted average shares of common
stock outstanding - basic and
diluted 13,133,615 13,068,940 12,811,525
=========== ============ ==========
See accompanying notes to financial statements.
F-4
CADUS PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Accumulated Treasury Stock
Shares Amount Capital Deficit Shares Amount Total
---------- -------- ----------- ------------- --------- ---------- ---------
Balance at January 1, 1998 12,500,156 $125,001 $54,517,519 ($13,842,227) (141,667) ($300,075) $ 40,500,218
Issuance of common stock
for cash in connection
with exercise of options 49,489 495 178,537 -- -- -- 179,032
Issuance of restricted
common stock in connec-
tion with Stock Purchase
Agreement with SmithKline
Beecham 660,962 6,610 4,993,390 -- -- -- 5,000,000
Net loss for year ended
December 31, 1998 -- -- -- (29,690,203) -- -- 29,690,203)
----------- -------- ----------- ------------ ----------- --------- ------------
Balance at December 31, 1998 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
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
----------- -------- ----------- ------------ ----------- --------- ------------
13,285,707 $132,857 $59,844,355 ($34,004,724) (141,667) ($300,075) $25,672,413
=========== ======== =========== ============ =========== ========= ============
See accompanying notes to financial statements.
F-5
CADUS PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 18,051,395 ($ 8,523,689) ($29,690,203)
Adjustments to reconcile net income (loss)
to net cash used in
operating activities:
Depreciation and amortization 80,905 719,510 992,224
Loss in equity in other ventures 837,062 1,334,491 1,144,148
(Gain) loss on sale of equipment
and impairment loss (100,000) 220,216 (16,368)
Loss on sale of assets to OSI -- 805,555 --
Changes in assets and liabilities:
(Increase) decrease in prepaid and
other current assets (11,467) 215,084 120,730
Decrease (increase) in other assets 11,126 117,520 (53,171)
(Decrease) Increase in deferred revenue 28,500 28,500 --
(Decrease) increase in litigation damages (19,065,431) 565,431 18,500,000
(Decrease) in accounts payable (17,644) (199,770) (675,222)
(Decrease) increase in accrued expenses
and other current liabilities (85,599) (1,608,178) 1,125,875
------------ ----------- ------------
Net cash used in
operating activities (328,158) (6,325,330) (8,551,987)
------------ ----------- ------------
Cash flows from investing activities:
Acquisition of fixed assets -- (470,378) (3,450,130)
Proceeds from sale of patents and
fixed assets 100,000 1,644,073 --
Sale and leaseback of fixed assets -- -- 2,463,888
Decrease (increase) in restricted cash 19,078,997 (292,997) (18,786,000)
Investments in other ventures -- -- (2,150,000)
Capitalized patent costs -- (167,500) (477,339)
------------ ----------- ------------
Net cash provided by (used in) investing
activities 19,178,997 713,198 (22,399,581)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock
upon exercise of stock options 155,660 -- 179,032
Proceeds from issuance of common stock -- -- 5,000,000
Decrease (increase) in due from officer
and director 294,636 (281,184) (13,452)
------------ ----------- ------------
Net cash provided by financing activities 450,296 (281,184) (5,165,580)
------------ ----------- ------------
Net increase (decrease) in cash and cash 19,301,140 (5,893,316) (25,785,988)
equivalents
Cash and cash equivalents -
beginning of period 5,082,212 10,975,528 36,761,516
------------ ----------- ------------
Cash and cash equivalents -
end of period $ 24,383,352 $ 5,082,212 $ 10,975,528
============ =========== ============
See accompanying notes to financial statements.
F-6
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
(1) Organization and Basis of Preparation
Cadus Pharmaceutical Corporation (the "Company") 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, the Company sold its drug
discovery assets to OSI Pharmaceutical, Inc. ("OSI") and ceased its
internal drug discovery operations and research efforts for collaborative
partners. Pursuant to such sale transaction, OSI assumed the Company's
lease to its research facility in Tarrytown, New York, the Company's
equipment lease with General Electric Capital Corporation ("GECC"), and the
Company's research collaboration and license agreement with Solvay
Pharmaceutical B.V. ("Solvay Pharmaceuticals"). The Company 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 is seeking to license its technologies and to otherwise realize
value from its assets. The Company is also seeking to use a portion of its
available cash to acquire technologies or products or to acquire or invest
in companies.
The Company has incurred operating losses in each year since its inception.
At December 31, 2000, the Company had an accumulated deficit of
approximately $34.0 million, after reversing the $18.5 million charge for
litigation damages with respect to the patent infringement litigation with
SIBIA after the Court of Appeals ruled in the Company's favor in 2000. 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 2001. 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) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash
equivalents. Included in restricted and unrestricted cash at December
31, 2000 and 1999 were cash equivalents of $24,383,352 and $5,095,778,
respectively.
F-7
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
(b) Other Assets, Net
Other assets include capitalized patent costs that are amortized on a
straight-line basis over fifteen years. At December 31, 2000 and 1999
accumulated amortization is $308,366 and $227,461 respectively.
Amortization expense amounted to $81,000, $94,000 and $78,000 for the
years ended December 31 2000, 1999 and 1998, respectively.
(c) 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
statement 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.
(d) 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.
(e) Revenue Recognition
The Company had entered into research agreements that provided for the
payment of nonrefundable fees during the term of the research
programs. In addition, the agreement provided for payment of fees when
certain milestone events had occurred. These fees are reflected as
revenue when earned, as related costs are incurred or when milestone
events have occurred.
Revenue recognized in the accompanying statements of operations is not
subject to repayment. Revenue received that is related to future
performance under such contracts is deferred and recognized as revenue
when earned.
On December 3, 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB No. 101). SAB No. 101 provides the SEC
staff's views on the recognition of revenue including non-refundable
technology access fees received by biotechnology companies in
connection with research collaborations with third parties. SAB No.
101 states that in certain circumstances the SEC staff believes that
up-front fees, even if non-refundable, should be deferred and
recognized systematically over the term of the research agreement. SAB
No. 101B, which amends the implementation date for SAB No. 101,
requires registrants to adopt the accounting guidance contained
therein by no later than the fourth fiscal quarter of the fiscal year
beginning after December 15, 1999. The adoption of SAB No. 101 did not
have any financial impact on the Company's financial position or
result of operations.
(f) Net Income (Loss) Per Share
F-8
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
Basic net income (loss) per share as of December 31, 2000, 1999 and
1998 is computed by dividing the net income (loss) by the weighted
average number of common shares 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 719,976,
1,190,076 and 2,571,808 at December 31, 2000, 1999 and 1998,
respectively, were not included in the net income (loss) per share
calculation because their effect would have been anti-dilutive.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(h) Fair Value of Financial Instruments
Management of the Company believes that the book value of its monetary
assets and liabilities approximates fair value as a result of the
short term nature of such assets and liabilities.
(i) Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123).
(j) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,
" which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and
distribution to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner
changes in equity (or other comprehensive income) such as unrealized
gains/losses on securities classified as available-for-sale, foreign
currency translation adjustments and minimum pension liability
adjustments.
Comprehensive and other comprehensive income must be reported on the
face of annual financial statements or in the case of interim
reporting, the footnote approach may be utilized. The Company's
operations did not give rise to items includible in comprehensive
income which were not already included in net income (loss).
Accordingly, the Company's comprehensive income is the same as its net
income (loss) for all periods presented.
(3) Asset Sale to OSI Pharmaceuticals
F-9
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
On July 30, 1999, the Company 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 the Company's lease to
the Company's research facility in Tarrytown, New York, the Company's
equipment lease with GECC and the Company's research collaboration and
license agreement with Solvay Pharmaceuticals. As consideration for
the sale, the Company received approximately $1,500,000 in cash and
OSI assumed certain liabilities of the Company relating to employees
hired by OSI aggregating approximately $133,000. In addition, the
Company 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. The Company
licensed to OSI on a non-exclusive basis certain technology solely to
enable OSI to fulfill its obligations under the collaboration with
Solvay Pharmaceuticals. The Company 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 Company. The Company 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., the Company'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 SIBIA Neurosciences,
Inc. ("SIBIA").
The Company 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
==========
The Company ceased its drug discovery operations and research efforts
for collaborators as a result of this transaction. Consequently, the
Company 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 the Company alleging
infringement by the Company of a patent concerning
F-10
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
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 the Company from using
the method claimed in SIBIA's patent. On February 26, 1999, the United
States District Court denied the Company'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. The Company appealed the
judgment. In order to stay execution pending appeal of the $18.0
million judgment obtained by SIBIA in March 1999, the Company
deposited $18.5 million in escrow to secure payment of the judgment in
the event the Company were to lose the appeal. Such $18.5 million was
classified, as of December 31, 1998, as "restricted cash-noncurrent"
and the Company's "cash and cash equivalents" was reduced by $18.5
million in 1998. The Company 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 the Company 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 the Company were
invalid and that the District Court erred in denying the Company'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 the
Company. Separately, in October 2000, the Company 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 as of
December 31, 2000.
On October 4, 1999, Philip N. Sussman, the former Senior Vice
President, Finance and Corporate Development, and Chief Financial
Officer of the Company commenced an arbitration proceeding against the
Company seeking severance pay of approximately $525,000. The Company
believes that Mr. Sussman is not entitled to such severance pay and
intends to vigorously defend the action.
(5) Fixed Assets
During fiscal year 1999, the Company sold a majority of its fixed
assets to OSI and wrote off the remaining fixed assets as the Company
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, the Company 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 years ended December 31,
2000, 1999 and 1998 was approximately $-0-, $625,000 and $914,000
respectively.
(6) Related Party Transactions
During 1998, the Company loaned $15,000 to Dr. Charles Woler, the
former Chief Executive Officer of the Company. The loan bore interest
at 5.5% per annum. Principal and interest were repayable in monthly
installments of $453 over three years. At December 31, 1999, the
outstanding balance of the loan was $8,636. This loan was fully repaid
in 2000.
In August 1998, the Company 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
F-11
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
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 the Company, which was payable, together with
accrued interest, on August 31, 2000. The amount owed as of December
31, 1999 of $286,000 is included in due from officer and director.
This loan was repaid in its entirety in March 2000.
See Notes 7 and 9 for further discussion of transactions with related
parties.
(7) Investments in Other Ventures
In December 1996, the Company 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 the
Company 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,
the Company 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. The
Company had the right to require the shareholder to match any future
investment made by the Company in Laurel up to an aggregate investment
on the part of the shareholder of $5.0 million. This right expired on
December 31, 1999. The Company 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 the Company's capital
contributions. For the years ended December 31, 2000, 1999 and 1998
the Company recognized (losses) gains of ($2,649), $20,513 and $7,968,
respectively, related to the investment. The remaining investment in
Laurel of $162,528 and $165,177 at December 31, 2000 and 1999,
respectively, is included in investments in other ventures on the
balance sheet.
In May 1997, the Company 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 the Company its first High Throughput Pharmacology
System (HT-PS). The Company purchased an additional $2.0 million of
convertible preferred stock in Axiom on June 5, 1998, after the
Company received and accepted Axiom's HT-PS. The additional investment
increased the Company's equity interest in Axiom to approximately 30%
of Axiom's outstanding shares on an as converted basis, after taking
into account an investment in Axiom by JAFCO Co., Ltd., ("JAFCO"), an
affiliate of the Nomura Group, in 1998. Russell D. Glass, the
Company's Chief Executive Officer, is a director of Axiom. The
Company's investment is accounted for under the equity method with the
Company recognizing 100% of Axiom's net losses prior to the JAFCO
investment and 50% after such investment. Such percentage represents
the extent to which the Company is deemed to be funding Axiom's
losses. For the years ended December 31, 2000, 1999 and 1998, the
Company recognized $834,413, $1,355,004 and $1,152,116, respectively,
in losses generated by Axiom. The remaining investment in Axiom of
$-0- and $834,413 at December 31, 2000 and 1999, respectively, is
included in investments in other ventures on the balance sheet.
(8) Income Taxes
Deferred tax assets of approximately $13,764,000 and $22,256,000 at
December 31, 2000 and 1999, respectively, related principally to tax
net operating loss carryforwards of $27,723,000 and $30,656,000,
research credit carryforwards of $2,675,000 and $2,594,000 and
litigation reserves of $0 and $19,100,000 at December 31, 2000 and
1999 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
F-12
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
result of the significant uncertainty regarding their ultimate
realization. The aggregate valuation allowance decreased $8,492,000
during the year ended December 31, 2000 as a result of a reversal of a
litigation judgment (see Note 4), and increased $2,674,000 during the
year ended December 31, 1999. The reversal of the litigaion reserve
(other than the portion attributable to accrued interest) in 2000 did
not generate taxable income as the original charge was not deductible
when taken in 1998.
The Company's net operating loss carryforwards and research and
development tax 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 tax 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) Research Collaboration and License Agreements
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.
For the years ended December 31, 2000, 1999 and 1998 the Company
recognized $-0-, $1.3 million and $4.4 million, respectively, in
revenues for research funding from Bristol-Myers Squibb, which
constituted 0%, 22% and 35%, respectively, of the Company's revenues
in 2000, 1999 and 1998.
For the years ended December 31, 2000, 1999 and 1998, the Company
recognized $-0-, $1.6 million and $2.6 million, respectively, in
revenues for research funding from Solvay Pharmaceuticals, an
affiliate of Physical B.V., which constituted 0%, 26% and 21%,
respectively, of the Company's revenues in 2000, 1999 and 1998.
Siegfried G. Schaefer, a director of the Company, is the head of
worldwide research at Solvay Pharmaceuticals.
For the year ended December 31, 2000, the Company received no research
revenues or technology development fees from SmithKline Beecham. For
the year ended December 31, 1999, the Company received and recognized
$2.1 million in research revenues and a $1.0 million research
milestone payment from SmithKline Beecham, which represented 52% of
the Company's revenues in 1999. For the year ended December 31, 1998,
the Company recognized $3.5 million in research revenues and the
one-time $2.0 million technology development fee from SmithKline
Beecham, which represented 44% of the Company's revenues in 1998.
(10) Sponsored Research and License Agreements
In January 1998 and January 1999, the Company entered into sponsored
research agreements with Massachusetts Institute of Technology
("M.I.T.") pursuant to which M.I.T. will use its expertise in
micro-robotics to co-develop the LivingChip(TM), a novel drug
discovery screening tool that would miniaturize and automate the
Company's proprietary hybrid yeast cell technology. During 1999, the
Company ceased providing M.I.T. with research funding and its license
to M.I.T.'s LivingChip(TM)
F-13
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
technology was terminated in March 2000. The Company provided M.I.T.
with full research funding for 1998 and partial funding for 1999.
The Company has entered into several other license and sponsored
research agreements with various third parties. Generally, the
agreements provide that the Company will make research payments and
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. Licenses fees and
maintenance payments, including payments made to M.I.T., for the years
ended December 31, 1999 and 1998, amounted to approximately $536,000
and $2.0 million, respectively. There were no payments made during the
year ended December 31, 2000.
(11) Equity Transactions
In May 1998, the Company sold, in a private placement, 660,962 shares
of its common stock to SmithKline Beecham p.l.c. and SmithKline
Beecham Corporation for approximately $7.56 per share or an aggregate
consideration of $5.0 million.
(12) Stock Options
(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 the Company. 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.
F-14
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
Activity under the 1993 Plan is as follows:
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
-------- ---------------
Balance at January 1, 1998 474,360 $1.65
1998 activity
Granted -- --
Exercised (18,813) 1.48
Canceled (236) 3.00
-------
Balance at December 31, 1998 455,311 1.65
1999 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
========
At December 31, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.37 to $3.51 and 2.63
years, respectively.
At December 31, 2000 and 1999, the number of options exercisable was 276,739 and
316,739, respectively, and the weighted-average exercise price of those options
was $1.52 and $1.50, respectively.
The following table summarizes stock option information for the 1993 Plan as of
December 31, 2000:
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 2.64 $1.47 270,072 $1.47
$3.51 6,667 2.50 $3.51 6,667 $3.51
-------- --------
$1.37 to $3.51 276,739 2.63 $1.52 276,739 $1.52
======== ========
F-15
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
(b) The Company 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, 2000, an aggregate of 434,070 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, 1998 610,800 $3.02
1998 activity
Granted -- --
Exercised -- --
Canceled (13,543) 2.84
--------
Balance at December 31, 1998 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
========
At December 31, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 to $6.75 and 3.28
years, respectively.
F-16
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
At December 31, 2000 and 1999, the number of options exercisable was 434,070 and
427,170, respectively, and the weighted-average exercise price of those options
was $2.46 and $2.35, respectively.
The following table summarizes stock option information for grants not subject
to any plan as of December 31, 2000:
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 $2.57 364,001 2.84 $1.83 364,001 $1.83
$3.60 22,069 4.97 $3.60 22,069 $3.60
$6.75 48,000 5.88 $6.75 48,000 $6.75
------- -------
$1.50 to $6.75 434,070 3.28 $2.46 434,070 $2.46
======= =======
(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 the Company'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 the Company 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 the Company 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 Director 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-17
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
Activity under the 1996 Plan is as follows:
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
-------- ---------------
Balance at January 1, 1998 655,406 $7.17
1998 activity
Granted 941,145 3.13
Exercised (17,133) 6.57
Canceled (60,178) 6.68
----------
Balance at December 31, 1998 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
==========
At December 31, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $6.38 to $6.63 and 6.24
years, respectively.
At December 31, 2000 and 1999, the number of options exercisable was 9,167 and
172,790, respectively, and the weighted average exercise price of those options
was $6.56 and $2.91, respectively.
The following table summarizes stock option information for the 1996 Plan as of
December 31, 2000:
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 6.24 $6.56 9,167 $6.56
F-18
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
The Company 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 the Company 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):
2000 1999 1998
------- --------- --------
Net income (loss) - as reported $18,051 ($8,524) ($29,690)
Net income (loss) - pro forma $18,051 ($8,614) ($31,314)
Income (loss) per share - as reported $ 1.37 ($.65) ($2.32)
Income (loss) per share - pro forma $ 1.37 ($.65) ($2.44)
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 1998
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 1.85 .88 to .99
Risk-free interest rate 6.31% 4.46% to 5.72%
Expected life of options 9 years 8 years
The weighted average fair value of options granted during the years ended
December 31, 1999 and 1998 was $1.88 per share and $2.67 per share. There
were no options granted during the year ended December 31, 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:
2000 1999
--------- --------
Accrued professional fees $ 25,000 $100,000
Other accrued expenses 11,244 21,843
--------- --------
Total $ 36,244 $121,843
========= ========
F-19
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
(14) Commitments
Lease Commitments
In October 1994, the Company entered into a sublease agreement with Union
Carbide Corporation to sublease laboratory and office space in Tarrytown,
New York. The term of this agreement was for a period of approximately
three years commencing on May 15, 1995 and expiring on December 30, 1997.
Pursuant to this agreement, the Company received the first four months rent
free, which was amortized through December 30, 1997 so as to produce a
level amount of rent expense over the life of the lease.
During 1997, the Company exercised its option to lease these facilities
directly from the landlord for a five-year period commencing January 1,
1998. Pursuant to the asset purchase agreement with OSI, OSI assumed the
lease of the Company's facilities in July 1999.
Rent expense, excluding utility and operating costs, for the years ended
December 31, 2000, 1999 and 1998 amounted to approximately $5,000, $409,507
and $728,407, respectively.
Equipment Lease Line of Credit
In November 1997, the Company signed a $3.5 million Master Lease Agreement
("Master Lease") with GECC. Under the agreement, the Company purchased
equipment and then entered into a sale-leaseback arrangement with GECC
whereby the Company sold the equipment to GECC and then leased back the
equipment for a period of 37 months. The lease arrangements were considered
operating leases for financial reporting purposes. Any gains recognized on
the difference between the equipment's book value and sale price were
booked to deferred revenue and recognized over the life of the lease.
Pursuant to the asset purchase agreement with OSI, OSI assumed the
equipment lease with GECC in July 1999.
F-20
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
The Company made the following drawdowns against the Master Lease:
Monthly
Lease
Amount Payment Deferred
------------- ---------- --------
Round #1 November 1997 $ 600,871 $13,650 $ 80,936
Round #2 December 1997 219,158 4,926 16,535
Round #3 March 1998 704,478 15,890 37,974
Round #4 July 1998 611,431 13,766 21,864
Round #5 October 1998 748,434 15,985 34,519
Round #6 December 1998 379,364 8,080 8,002
---------- --------- --------
Totals $3,263,736 $ 72,297 $199,830
========== ========= ========
The gains totaling $199,830 relating to the sale of the equipment to GECC
were credited to deferred revenue on the balance sheet and were being
amortized over the life of the individual leases. In July 1999 upon the
signing of the asset purchase agreement with OSI, the Company recognized
the remaining deferred revenue of $112,778 related to the GECC lease. Such
amount is included in loss on sale of assets to OSI in the accompanying
statement of operations. At December 31, 1998, $45,965 of the deferred gain
was recognized as gain on sale of equipment in the accompanying statement
of operations.
Employment Agreement
Dr. Woler was employed as President and Chief Executive Officer under a
three year employment agreement with the Company, which was extendable to
four years at the Company'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, the Company and Dr. Woler entered into a term sheet to amend his
employment agreement to provide that if the Company 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, the
Company 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. The
Company 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
2000 1999 1998
------ ---- ----
Cash payment for:
Interest $ -- $ -- $21,000
Income taxes $ -- $15,476 $89,170
F-21
CADUS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 AND 1998
====================================
(16) Employee Benefits
The Company terminated its 401 (k) savings plan in October 1999. The
Company did not make a matching contribution for the year ended December
31, 1999 to participants under its 401 (k) plan. In 1998, the Company
elected to match 25% of each participant's contribution up to a maximum of
$2,500. The total Company contribution for the years ended December 31,
2000, 1999 and 1998 was $-0-, $-0- and $89,976 respectively.
(17) License with OSI
In February 2000, the Company licensed to OSI, on a non-exclusive basis,
its yeast technologies, including various reagents and its library of over
30,000 yeast strains, and its bioinformatics software. OSI paid to the
Company a license fee of $100,000 and an access fee of $600,000, which has
been recorded as license fee revenue for the year ended December 31, 2000.
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 and recorded as license fee revenue.
OSI may terminate the license at any time on 30 days prior written notice.
(18) - Quarterly Financial Data (Unaudited)
Fiscal 2000 Quarter Ended December 31 September 30 June 30 March 31
Revenues $ -- $ -- $ -- $ --
License and maintenance fee 255,030 23,470 -- 700,000
----------- ------------- ----------- -----------
Total revenues 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) $ (.03)
Fiscal 1999 Quarter Ended December 31 September 30 June 30 March 31
Revenues $ -- $ 949,992 $ 2,038,776 $ 3,038,776
License and maintenance fee -- -- -- --
----------- ------------- ----------- -----------
Total revenues -- 949,992 2,038,776 3,038,776
Operating loss (1,285,687) (1,807,301) (2,698,537) (2,494,507)
Net loss (1,227,818) (2,537,320) (2,595,447) (2,163,104)
Net loss per share:
Basic and diluted $ (0.09) $ (0.19) $ (0.20) $ (.17)
F-22
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, March 26, 2001
- ------------------------- President and Director
Russell D. Glass (Principal Executive Officer and
Principal Accounting Officer)
Director March , 2001
- -------------------------
Carl C. Icahn
/s/ James R. Broach Director March 26, 2001
- -------------------------
James R. Broach
/s/ Peter S. Liebert Director March 26, 2001
- -------------------------
Peter S. Liebert
/s/ Siegfried G. Schaefer Director March 28, 2001
- -------------------------
Siegfried G. Schaefer
/s/ Jack G. Wasserman Director March 26, 2001
- -------------------------
Jack G. Wasserman