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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, 2002.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28674
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CADUS PHARMACEUTICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3660391
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
767 Fifth Avenue
New York, New York 10153
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 702-4367
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b-2 of the Act). Yes:___ No: _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, 2003, was
$6,292,100.
Number of shares outstanding of each class of Common Stock, as of March
15, 2003: 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, uncertainties
regarding the Company's ability to license its technologies to third parties,
the Company's history of operating losses, the Company's dependence on
proprietary technology and the unpredictability of patent protection, intense
competition in the pharmaceutical and biotechnology industries, rapid
technological development that may result in the Company's technologies becoming
obsolete, as well as other risks and uncertainties discussed in the Company's
prospectus dated July 17, 1996.
PART I
ITEM 1. BUSINESS.
GENERAL
Cadus Pharmaceutical Corporation ("Cadus") was incorporated under the
laws of the State of Delaware in January 1992 and until July 30, 1999 devoted
substantially all of its resources to the development and application of novel
yeast-based and other drug discovery technologies. On July 30, 1999, Cadus sold
its drug discovery assets to OSI Pharmaceuticals, Inc. (OSI") and ceased its
internal drug discovery operations and research efforts for collaborative
partners. In December 2001, Cadus formed a wholly owned subsidiary, Cadus
Technologies, Inc. (the "Subsidiary"), and transferred all of its patents,
patent applications, know how, licenses and drug discovery technologies to the
Subsidiary. Cadus and the Subsidiary (collectively, the "Company") are currently
seeking to (i) license the Subsidiary's drug discovery technologies and (ii) use
a portion of their available cash to acquire or invest in companies or income
producing assets. While such companies or assets might be in the biotechnology
or pharmaceutical industries, the Company will consider acquisitions or
investments in other industries as well.
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On July 30, 1999, Cadus sold to OSI, pursuant to an asset purchase
agreement, its drug discovery programs focused on G Protein-coupled receptors,
its directed library of approximately 150,000 small molecule compounds
specifically designed for drug discovery in the G Protein- coupled receptor
arena, its collaboration with Solvay Pharmaceuticals B.V. ("Solvay
Pharmaceuticals"), its lease to its research facility in Tarrytown, New York
together with the furniture and fixtures and its lease to equipment in the
facility, and its inventory of laboratory supplies. Pursuant to such sale
transaction, OSI assumed the Cadus's lease to Cadus's research facility in
Tarrytown, New York, Cadus's equipment lease with General Electric Capital
Corporation ("GECC") and Cadus's research collaboration and license agreement
with Solvay Pharmaceuticals. As consideration for the sale, Cadus received
approximately $1,500,000 in cash and OSI assumed certain liabilities of Cadus
relating to employees hired by OSI aggregating approximately $133,000. In
addition, Cadus would be entitled to royalties and up to $3.0 million in
milestone payments on the first product derived from compounds sold to OSI or
from the collaboration with Solvay Pharmaceuticals. Cadus licensed to OSI on a
non-exclusive basis certain technology solely to enable OSI to fulfill its
obligations under the collaboration with Solvay Pharmaceuticals. Cadus also
licensed to OSI on a non-exclusive basis certain proprietary software and
technology relating to chemical resins in order to enable OSI to fully benefit
from the compounds it acquired from Cadus. Cadus retained ownership of all its
other assets, including its core yeast technology for developing drug discovery
assays, its collection of over 25,000 proprietary yeast strains, human and
mammalian cell lines, and genetic engineering tools and its genomics databases
related to G Protein-coupled receptors. Cadus ceased its drug discovery
operations and research efforts for collaborators as a result of this
transaction and terminated all employees who were not hired by OSI or who did
not voluntarily resign, except for the Chief Executive Officer who resigned in
April 2000.
Prior to July 30, 1999, Cadus developed several proprietary technologies
that exploit the similarities between yeast and human genes to elucidate gene
function and cell signaling pathways. In February 2000, Cadus licensed its yeast
technologies and its bioinformatics software to OSI on a non-exclusive basis. In
December 2001, Cadus transferred all of its patents, patent applications, know
how, licenses and drug discovery technologies to the Subsidiary. In December
2001, the Subsidiary licensed its yeast technologies to a major pharmaceutical
company on a non-exclusive basis. The Subsidiary is seeking to license these
technologies to other third parties on a non- exclusive basis. Three of these
technologies are used to identify small molecules that act as agonists or
antagonists to cell surface receptors: (i) a hybrid yeast cell technology that
expresses a functioning human receptor and a portion of its signaling pathway in
a yeast cell, (ii) the Autocrine Peptide Expression ("Apex(TM)") system that
expresses in a hybrid yeast cell both a known human ligand and the receptor that
is activated by that ligand and (iii) the Company's Self Selecting Combinatorial
Library ("SSCL(TM)") technologies, which are used to identify a ligand that
activates a targeted orphan receptor (a receptor whose function is not known).
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
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in a series of subunits known as genes. It is estimated that there are
approximately 100,000 genes in the human genome. Genes are responsible for the
production of proteins. Proteins such as hormones, enzymes and receptors are
responsible for managing most of the physiological functions of humans,
including regulating the body's immune system. Thus, genes are the indirect
control center for all physiological functions. Over the last few decades, there
has been a growing recognition that many major diseases have a genetic basis. It
is now well established that genes play an important role in diseases such as
cancer, cardiovascular disease, psychiatric disorders, obesity, and metabolic
diseases. Significant resources are being focused on genomics research based on
the belief that the sequence and function of a gene, and the protein that gene
expresses, will lead to an understanding of that gene's role in the functioning
and malfunctioning of cells. This understanding is expected in turn to lead to
therapeutic and diagnostic applications focused on molecular targets associated
with the gene and the protein it expresses.
Cell surface receptors are an important class of proteins involved in
cellular functioning because they are the primary mediators of cell to cell
communication. Their location on the cell surface also makes them the most
accessible targets for drug discovery. Cellular communication occurs when one
cell releases a chemical messenger, called a "ligand," which communicates with
another cell by binding to and activating the receptor on the exterior of the
second cell. Typically, a ligand binds only with one specific receptor or
families of related receptors. This binding event activates the receptor
triggering the transmission of a message through a cascade of signaling
molecules from the exterior to the interior of the cell. This process is called
signal transduction. When the signal is transmitted into the interior of the
cell, it may, among other things, activate or suppress specific genes that
switch on or switch off specific biological functions of the cell. The
biological response of the cell, such as the secretion of a protein, depends
primarily on the specific ligand and receptor involved in the communication.
Many diseases, such as cancer, stem from the malfunctioning of cellular
communication. Efforts to treat a particular disease often concentrate on
developing drugs that interact with the receptor or signaling pathway believed
to be associated with the malfunction. These drugs work by inhibiting or
enhancing the transmission of a signal through the cascade of signaling
molecules triggered by the receptor. Drugs that inhibit signal transduction by
blocking a receptor or the intracellular proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal transduction by
stimulating a receptor or associated intracellular proteins are called agonists.
Human cells carry many different types of receptors. Receptors are
classified into groups based upon similarities in their chemistry and structure.
Some of the major receptor groups involved in signal transduction are: G
Protein-coupled receptors, tyrosine kinase receptors and multisubunit immune
recognition receptors. G Protein-coupled receptors, which are located on the
surface of the cell, constitute the largest group of receptors. In humans, G
Protein-coupled receptors are involved in many of the body's 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.
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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 a large number of currently available prescription drugs work by
interacting with known G Protein-coupled receptors. These drugs include the
anti-ulcer agents Zantac and Tagamet, the anti-depressants Prozac and Zoloft,
and the anti- histamine Claritin. Many of these drugs were developed through the
application of time consuming and expensive trial and error methods without an
understanding of the chemistry and structure of the G Protein-coupled receptors
with which they interact. More efficient drug discovery methods are available
once the gene sequence, biological function and role in disease processes of a G
Protein-coupled receptor have been determined.
The sequences and functions of several hundred human G Protein-coupled
receptors have been identified. 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
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candidates which, when tested in living cells, prove to have no useful activity
or are even toxic. A variety of methods have been developed to address these
problems, including using living cells in assays. However, most live cell assays
are slow, complex and expensive to maintain.
In recent years, scientific advances have created new and improved tools
for drug discovery. For example, molecular biology is identifying a growing
number of targets and their gene sequences. There have been significant
developments in turning these gene sequences into drug discovery candidates.
Cells have been genetically engineered to produce assays that more effectively
replicate the physiological environment of a living organism. Robotics have
enabled the creation of high-throughput screening systems. Combinatorial
chemistry has enhanced the ability to optimize lead compounds by improving their
pharmacological characteristics. However, due to the complexity of G
Protein-coupled receptors and limited knowledge of their gene sequences and
function, these advances do not offer a comprehensive, rapid and cost effective
approach to the identification of drug discovery candidates targeted at G
Protein-coupled receptors.
YEAST
The Company has developed technologies based on yeast that are useful in
identifying drug discovery candidates targeted at G Protein-coupled receptors.
Yeast is a single-celled microorganism that is commonly used to make bread, beer
and wine. In the 1980's, scientists discovered structural and functional
similarities between yeast cells and human cells. Both yeast and human cells
consist of a membrane, an intracellular region and a nucleus containing genes.
Basic cellular processes, including metabolism, cell division, DNA and RNA
synthesis and signal transduction, are the same in both human and yeast cells.
Yeast also have signal transduction pathways that function similarly to human
cell pathways. More than 40 percent of all human gene classes have functional
equivalents in yeast. The genes in yeast express proteins, including
cell-surface receptors such as G Protein-coupled receptors and signaling
molecules such as protein kinases, that are similar to human proteins.
The Company believes that yeast cells have several important
characteristics that are useful in drug discovery.
o The strong correlation between human and yeast gene classes
enables the evaluation of the biological function of human
proteins, including receptors and signaling molecules, of unknown
function. Proteins with comparable gene sequences frequently carry
out similar functions. This fact can be used to determine the
function of a human gene by genetically 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.
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o In 1996, the yeast genome was fully sequenced. This knowledge has
facilitated analysis of the correlation between yeast and human
gene structure and aids in the definition of human gene functions.
o While the yeast signaling mechanism bears many similarities to the
human signaling mechanism, the yeast intracellular environment is
less complex, thus eliminating much of the ancillary and redundant
intracellular signaling pathways that exist in human cells.
o Yeast have the ability to absorb DNA fragments and incorporate
them into their genome. As a result, their genetic structure can
be easily manipulated using common genetic engineering techniques.
o Yeast cells replicate rapidly. Speed of replication is
particularly important because creating a new yeast strain that
successfully incorporates new genetic material and adapts to new
conditions may take several generations and the strain that so
adapts is identifiable by growth. In addition, because a yeast
cell reproduces itself every two hours, compared with 24 to 48
hours for mammalian cells, a drug screen using yeast can be
developed and evaluated much faster than one using human cell
assays.
o Yeast can be easily and inexpensively grown in the laboratory
using standard microbiological techniques and, as a consequence,
can readily be used in automated screening systems.
o Yeast are resistant both to the solvents often needed to dissolve
potentially active compounds and the toxins often found in natural
products. Consequently, hybrid yeast cells can be used to screen
libraries of synthetic compounds, combinatorial chemicals or
natural products.
THE COMPANY'S DRUG DISCOVERY TECHNOLOGIES
The Company has developed several proprietary drug discovery technologies
that address many of the limitations of traditional drug discovery methods,
including tools used to screen for compounds that act as agonists or antagonists
to cell surface receptors and tools used to identify ligands to targeted orphan
receptors. The Subsidiary is currently seeking to license these technologies on
a non-exclusive basis to third parties.
HYBRID YEAST CELLS
The Company has developed a proprietary technology to insert human genes
into yeast cells to create hybrid yeast cells. The Company focused its hybrid
yeast cell technology primarily on G Protein-coupled receptors. The Company's
scientists typically created hybrid yeast cells by replacing
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yeast G Protein-coupled receptor genes and certain signaling molecules with
their human equivalents. As a result, these hybrid yeast cells express a human G
Protein-coupled receptor and a portion of its signaling pathway. These hybrid
yeast cells can be used to identify those compounds that act as agonists or
antagonists to that receptor or a molecule that is in its signaling pathway. The
Company has also created hybrid yeast cells using other classes of human
cell-surface receptors that have a functional equivalent in yeast. To facilitate
drug screen development, the Company has designed and developed more than
twenty-five thousand genetically different yeast strains that can be used to
build novel hybrid yeast cells.
The Company believes that hybrid yeast cells are highly effective for
screening compounds. Hybrid yeast cells can be used to measure the biological
activity of the human signaling pathway in which intervention is desired. In
addition, hybrid yeast cells contain a single human receptor which connects to a
defined signaling pathway. Accordingly, a specific change in cell behavior, such
as replication, is easily monitored and can be attributed to the compound being
tested. Also, because different human genes can be inserted into yeast, hybrid
yeast cells enable the user to identify compounds that act at virtually any site
in the human cell signaling pathway. These sites include the ligand binding site
on the receptor, as well as other sites on the receptor, and the protein
components of individual signaling pathways. Moreover, because yeast are
resistant to solvents and toxins often used to dissolve test compounds, hybrid
yeast cells can be used to screen synthetic organic libraries, combinatorial
libraries and natural product libraries. Hybrid yeast cells can also be used to
perform high throughput screening of compound libraries.
The Company has developed a biological database that catalogues the
Company's collection of proprietary cells, cell lines, yeast strains and genetic
engineering tools. This database currently has approximately 30,000 entries,
that include the phenotype and the genotype of the cell or yeast strain and its
storage site.
AUTOCRINE PEPTIDE EXPRESSION SYSTEM (APEX(TM))
The Company extended its hybrid yeast cell technology to develop a novel
drug screening technology. Biological signaling frequently involves the
concerted behavior of at least two cells: one that sends the signal and a second
that receives and responds to that signal. The Company's scientists converted
this natural multi-cell process into a single cell process by inserting into a
hybrid yeast cell both the human G Protein-coupled receptor and the gene that
causes the yeast cell to produce the ligand that naturally binds to the receptor
being expressed by the same hybrid yeast cell. As a result, the Company's
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.
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SELF SELECTING COMBINATORIAL LIBRARY TECHNOLOGY (SSCL(TM))
The Company developed its proprietary SSCL(TM) technology to identify a
ligand that activates an orphan receptor. The SSCL(TM) technology involves the
creation of a library of peptides encoded in DNA, called a combinatorial peptide
expression library. This library is inserted into a strain of hybrid yeast cells
that all express the same orphan receptor. The activation of this receptor is
functionally coupled with cell replication. Each of the millions of yeast cells
in the strain incorporates a different peptide encoded in DNA, resulting in a
library of yeast cells which all express the same orphan receptor but are each
programmed to secrete a different peptide. Most of the secreted peptides have no
effect on the orphan receptor and the hybrid yeast cells producing these
peptides do not replicate. The Company estimates that one in a million hybrid
yeast cells generates a peptide ligand that activates the orphan receptor. These
particular hybrid yeast cells replicate and, therefore, are readily identified.
Thus, the SSCL(TM) technology uses self selection to identify the ligand that
binds to the targeted orphan receptor. The sequence of the peptide ligand can
then be rapidly identified and undergo further evaluation. One to ten million
peptides can be tested in a matter of hours. The Company has used its SSCL(TM)
technology to successfully identify ligands to orphan receptors in less than a
month, significantly accelerating this step in the drug discovery process.
Identifying ligands to orphan receptors is the critical first step in
determining the biological function of orphan receptors and demonstrating their
value as drug discovery targets.
The strains of hybrid yeast cells constructed for the SSCL(TM) can
simultaneously be used as screens for large libraries of chemical compounds.
This capability enabled the Company to seek to identify a peptide ligand to an
orphan receptor while simultaneously creating a high throughput screen for small
molecule agonists and antagonists to that receptor.
BIOINFORMATICS FOR TARGET IDENTIFICATION
The Company has developed proprietary software algorithms that can be
used to rapidly search through the data generated by the Human Genome Project
for DNA sequences that are likely to be those of G Protein-coupled receptors.
HUMAN ORPHAN G PROTEIN-COUPLED RECEPTORS
On July 25, 1998, the Company entered into a collaboration agreement with
Genome Therapeutics Corporation ("GTC"), which has bioinformatics technologies
and know-how that it uses to identify and 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
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respect to such G Protein-coupled receptors. As of November 1999, the Company
and GTC ceased collaborating.
INVESTMENT IN SEQUENOM, INC.
The Company had an equity interest in Axiom Biotechnologies Inc.
("Axiom"). On August 30, 2002, Axiom entered into a merger agreement with a
wholly owned subsidiary of Sequenom, Inc. ("Sequenom"). Pursuant to the merger,
Cadus received 441,446 shares of common stock in Sequenom, a publicly traded
company, in exchange for its equity interest in Axiom.
COLLABORATIVE ARRANGEMENTS
The Company no longer has any collaborations with pharmaceutical
companies. The Bristol- Myers Squibb Company collaboration expired in July 1999,
the Solvay Pharmaceuticals collaboration was assigned to OSI in July 1999 and
the Company and SmithKline Beecham p.l.c. agreed to terminate their
collaboration in September 1999. Each of Bristol-Myers Squibb Company and
SmithKline Beecham p.l.c. is required to make payments to the Company upon the
achievement by it of certain pre-clinical and drug development milestones and to
pay the Company royalties on the sale of any drugs developed as a result of the
research collaboration with the Company or through the use of the Company's drug
discovery technologies. There can be no assurance that any such milestones will
be achieved or any such drugs developed.
LICENSING ARRANGEMENTS
In February 2000, Cadus licensed to OSI, on a non-exclusive basis, its
yeast technologies, including various reagents and its library of over 25,000
yeast strains, and its bioinformatics software. OSI paid to Cadus a license fee
of $100,000 and an access fee of $600,000. OSI is also obligated to pay an
annual maintenance fee of $100,000 until the earlier of 2010 or the termination
of the license and a supplemental license fee of $250,000, which was paid in
December 2000 after the lifting of the injunction obtained by a plaintiff in a
patent infringement action against Cadus. OSI may terminate the license at any
time on 30 days prior written notice. In December 2001, Cadus transferred its
license with OSI to the Subsidiary.
In December 2001, the Subsidiary licensed to a major pharmaceutical
company, on a non- exclusive basis, its yeast technologies, including various
reagents and its library of over 25,000 yeast strains. The licensee paid to the
Subsidiary an up-front non-refundable fee of $500,000. In October 2002, the
licensee paid to the Subsidiary an additional $1,000,000 when the licensee
achieved a research milestone. The license terminates on December 31, 2006;
however the licensee may extend the term for additional one-year periods by
paying to the Subsidiary $250,000 for each one-year extension. The Subsidiary is
seeking to license its yeast technologies to other third parties on a
non-exclusive basis.
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PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
The Subsidiary relies upon patents and trade secrets to protect its
proprietary technologies. As of March 15, 2003, the Subsidiary was the assignee
of nine issued U.S. patents covering aspects of its yeast technology and was the
exclusive worldwide licensee of three issued U.S. patents for use in drug
discovery. In addition, as of such date, the Subsidiary had filed or held
licenses to 15 other U.S. patent applications, as well as related foreign patent
applications.
Cadus has obtained from Duke University an exclusive worldwide license to
three issued U.S. patents and U.S. and international patent applications
covering hybrid yeast cell technologies, which Cadus transferred to the
Subsidiary in December 2001. These patents and patent applications are directed
to hybrid yeast cells engineered to express human G Protein-coupled receptors
and to methods of their use. In consideration for such license, the Subsidiary
pays a minimum annual royalty and is required to make payments upon the
achievement by the Subsidiary of certain drug development milestones and to pay
royalties (net of minimum royalties) on the sale of drugs by the Subsidiary
which were initially identified by the Subsidiary through the use of the
licensed technology. In lieu of milestones and royalty payments on sales of
drugs by sublicensees initially identified by sublicensees through the use of
the licensed technology, the Subsidiary pays an annual fee (net of the minimum
annual royalty) for each sublicense granted by it to such technology.
Cadus has also filed patent applications based on inventions by Cadus's
scientists directed to hybrid yeast cells and yeast cells engineered to produce
both peptide libraries and human proteins that can function in certain signal
transduction pathways of the engineered yeast cell. These applications seek to
protect aspects of the APEX(TM) and SSCL(TM) technologies. Cadus has also filed
patent applications directed to methods, constructs and reagents, including
engineered cells, for discovering ligands to orphan receptors. Peptides, and
mimetics thereof, which have been discovered using the SSCL(TM) technology are
also covered in these patent applications both as compositions and for their
therapeutic use. Cadus transferred these patent applications to the Subsidiary
in December 2001.
The Company has granted a non-exclusive license to use several of its
patents and patent applications relating to its yeast-based technologies to OSI
and, for certain limited purposes, to a major pharmaceutical company and Solvay
Pharmaceuticals.
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.
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Patent law as it relates to inventions in the biotechnology field is
still evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, no predictions can be made
regarding the breadth or enforceability of claims allowed in the patents that
have been issued to the Company or its licensors or in patents that may be
issued to the Company or its licensors in the future. Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign counterparts or
as may be subsequently interpreted by courts inside or outside the United
States, will be sufficiently broad to protect the Company's proprietary rights,
will be commercially valuable or will provide competitive advantages to the
Company and its present or future collaborative partners or licensees. Further,
there can be no assurance that patents will be granted with respect to any of
the Company's pending patent applications or with respect to any patent
applications filed by the Company in the future. There can be no assurance that
any of the Company's issued or licensed patents would ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful.
The field of gene discovery has become intensely competitive. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents covering their
gene discoveries. Some of these applications or patents may be competitive with
the Company's applications or conflict in certain respects with claims made
under the Company's applications. Moreover, because patent applications in the
United States are maintained in secrecy until patents issue and because patent
applications in certain other countries generally are not published until more
than eighteen months after they are filed and because publication of
technological developments in the scientific or patent literature often lags
behind the date of such developments, the Company cannot be certain that it was
the first to invent the subject matter covered by its patents or patent
applications or that it was the first to file patent applications for such
inventions. If an issue regarding priority of inventions were to arise with
respect to any of the patents or patent applications of the Company or its
licensors, the Company might have to participate in litigation or interference
proceedings declared by the United States Patent and Trademark Office or similar
agencies in other countries to determine priority of invention. Any such
participation could result in substantial cost to the Company, even if the
eventual outcome were favorable to the Company.
In some cases, litigation or other proceedings may be necessary to defend
against or assert claims of infringement, to enforce patents issued to the
Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial cost to and 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.
12
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") (which was acquired by
Merck & Co. in 1999) commenced a patent infringement action against Cadus
alleging infringement by Cadus of a patent concerning the use of cells,
engineered to express any type of cell surface receptor and a reporter gene,
used to report results in the screening of compounds against target assays and
seeking injunctive relief and monetary damages. After trial, on December 18,
1998, the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. On January 29, 1999 the United States District Court granted
SIBIA's request for injunctive relief that precluded Cadus from using the method
claimed in SIBIA's patent. On February 26, 1999, the United States District
Court denied Cadus's motions to set aside the jury verdict, to grant a new trial
and to reduce or set aside the $18.0 million judgment awarded by the jury. Cadus
appealed the judgment. In order to stay execution pending appeal of the $18.0
million judgment obtained by SIBIA, in March 1999, Cadus deposited $18.5 million
in escrow to secure payment of the judgments in the event Cadus were to lose the
appeal. On September 6, 2000 the United States Court of Appeals ruled in favor
of Cadus and overturned the prior judgment entered by the U.S. District Court.
The Court of Appeals ruled that the claims of the SIBIA patent asserted against
Cadus were invalid and that the District Court erred in denying Cadus's motion
for judgment as a matter of law on the issue of invalidity. On October 30, 2000,
the U.S. District Court set aside the $18.0 million judgment in favor of SIBIA
and vacated the injunction against Cadus. Separately, in October 2000, Cadus
obtained the release of the cash escrow of $19.9 million representing the
original $18.5 million and interest that accumulated thereon.
COMPETITION
The biotechnology and pharmaceutical industries are intensely
competitive. The Company's technologies consist principally of genetically
engineered yeast cells. The Company is aware of companies, such as American Home
Products Corporation and Glaxo Smith Kline, Plc, that may use yeast as a drug
discovery medium. In addition, many smaller companies are pursuing these areas
of research. The Company is also aware of other companies that are inserting
human orphan G Protein-coupled receptors into yeast and other cells and using
these hybrid cells for drug discovery purposes. Certain other companies are
seeking to determine the functions of human orphan G Protein-coupled receptors
by identifying agonists to these receptors and by other research methods. All of
the above companies are significant competitors of the Company. Many of the
Company's competitors have greater financial and human resources, and more
experience in research and development than the Company. There can be no
assurance that competitors of the Company will not develop competing drug
discovery technologies that 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
13
companies through licensing arrangements for use in discovering drugs. There can
be no assurance, however, that the Company will obtain patents covering its
technologies that protect it against competitors. Moreover, there can be no
assurance that the Company's competitors will not succeed in developing
technologies that circumvent the Company's technologies or that such competitors
will not succeed in developing technologies that are more effective than those
developed by the Company or that would render technology of the Company less
competitive or obsolete.
GOVERNMENT REGULATION
The development, manufacturing and marketing of drugs developed through
the use of the Company's technologies are subject to regulation by numerous
governmental agencies in the United States and in other countries. To date, none
of the Company's technologies has resulted in any clinical drug candidates. The
FDA and comparable regulatory agencies in other countries impose mandatory
procedures and standards for the conduct of certain preclinical testing and
clinical trials and the production and marketing of drugs for human therapeutic
use. Product development and approval of a new drug are likely to take a number
of years and involve the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include:(i) preclinical studies; (ii) the submission to the FDA of
a request for authorization to conduct clinical trials on an investigational new
drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug for its intended use; (iv) submission to the
FDA of a new drug application (an "NDA"); and (v) review and approval of the NDA
by the FDA before the drug may be shipped or sold commercially.
In the United States, preclinical testing includes both IN VITRO and IN
VIVO laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
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
14
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company or the FDA may suspend
clinical trials at any time if it is believed that individuals participating in
such trials are being exposed to unacceptable health risks. Even assuming that
clinical trials are completed and that an NDA is submitted to the FDA, there can
be no assurance that the NDA will be reviewed by the FDA in a timely manner or
that once reviewed, the NDA will be approved. The approval process is affected
by a number of factors, including the severity of the targeted indications, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. The FDA may deny an NDA if applicable regulatory criteria
are not satisfied, or may require additional testing or information with respect
to the investigational drug. Even if initial FDA approval is obtained, further
studies, including post-market studies, may be required in order to provide
additional data on safety and will be required in order to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially tested. The FDA will also require post-market
reporting and may require 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
15
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
There can be no assurance that the regulatory framework described above
will not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. The Company has no preclinical or
clinical development expertise and intends to rely on third party clinical
research organizations to design and conduct most of such activities if
required.
Prior to the commencement of marketing a product in other countries,
regulatory approval in such countries is required, whether or not FDA approval
has been obtained for such product. The requirements governing the conduct of
clinical trials and product approvals vary widely from country to country, and
the time required for approval may be longer or shorter than the time required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general, each country has its own procedures and
requirements.
The Company is also subject to regulation under other Federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that it is in compliance with these laws and regulations in
all material respects, there can be no assurance that it will not be required to
incur significant costs to comply with environmental and other laws or
regulations in the future.
EMPLOYEES
As of March 15, 2003, the Company had no employees. Michele Paige, the
Chief Executive Officer of Cadus and the Subsidiary, is not an employee of Cadus
or the Subsidiary and is serving as the Chief Executive Officer of Cadus and the
Subsidiary without compensation.
ITEM 2. PROPERTIES.
Cadus leases storage space in Tarrytown, New York.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
16
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Cadus's common stock, $.01 par value per share (the "Common Stock"), was
traded on the Nasdaq National Market under the symbol KDUS until September 27,
1999 when it was delisted. Since September 27, 1999, Cadus's Common Stock has
traded on the over-the-counter bulletin board under the symbol KDUS.OB. The
table below sets forth the high and low sales price per share of the Common
Stock for the periods indicated, as reported by the over-the-counter bulletin
board.
FISCAL YEAR 2002 HIGH LOW
First quarter ended March 31, 2002 $1.45 $1.09
Second quarter ended June 30, 2002 $1.50 $1.15
Third quarter ended September 30, 2002 $1.20 $1.08
Fourth quarter ended December 31, 2002 $1.21 $1.01
FISCAL YEAR 2001 HIGH LOW
First quarter ended March 31, 2001 $1.09 $0.63
Second quarter ended June 30, 2001 $1.12 $0.77
Third quarter ended September 30, 2001 $1.00 $0.75
Fourth quarter ended December 31, 2001 $1.20 $0.81
As of March 15, 2003, there were approximately 65 holders of record of
Cadus's Common Stock.
Cadus has not declared or paid any cash dividends on its Common Stock
during the past two fiscal years and does not anticipate paying any such
dividends in the foreseeable future. Cadus intends to retain any earnings for
the growth of and for use in its business.
RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, Cadus has not issued and sold securities
that were not registered under the Securities Act of 1933, as amended (the
"Act").
17
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.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA: (dollars in thousands, except share and per share data)
Revenues $1,100 $600 $979 $6,028 $12,576
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Research and development -- -- -- 9,116 15,389
General and administrative 885 1,079 1,652 3,643 8,977
---------- ---------- ---------- ---------- ----------
Total operating costs and
expenses 885 1,079 1,652 12,759 24,366
---------- ---------- ---------- ---------- ----------
Operating gain (loss) 214 (479) (673) (6,731) (11,790)
Net income (loss) $1,316(1) $(317)(2) $18,051(3) ($8,524) ($29,690)(3)
========== ========== ========== ========== ==========
Basic and diluted net income (loss)
per share $0.10 ($0.02) $1.37 ($0.65) ($2.32)
========== ========== ========== ========== ==========
Shares used in calculation of basic
and diluted net income (loss)
per share 13,144,040 13,144,040 13,133,615 13,068,940 12,811,525
DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents $24,923 $24,469 $24,383(4) $5,082(4) $10,976(4)
Total assets 26,870 26,201 25,709 26,699 36,587
Short-term debt -- -- -- -- --
Accumulated deficit (33,006) (34,322) (34,005) (52,056) (43,532)
Stockholders' equity 26,458 25,356 25,672 7,465 15,989
Cadus has not paid any dividends since its inception and does not anticipate
paying any dividends on its common stock in the foreseeable future.
(1) The net income of $1,316,000 for the year ended December 31, 2002
includes a realized gain of $823,189 related to common shares of
Sequenom received in connection with the merger of Axiom, in which
Cadus had an equity interest, with Sequenom.
(2) The net loss of $317,000 for the year ended December 31, 2001
includes an arbitration award of approximately $750,000 to a
former employee and a $155,402 reimbursement of SIBIA litigation
costs offset by legal costs of $29,786.
18
(3) 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.
(4) In order to stay execution pending appeal of the $18.0 million
judgment obtained by SIBIA, in March 1999, Cadus deposited $18.5
million in escrow to secure payment of the judgment in the event
Cadus were to lose the appeal. Such $18.5 million was classified,
as of December 31, 1998, as "restricted cash noncurrent" and
Cadus's "cash and cash equivalents" was reduced by $18.5 million.
Interest earned on the restricted cash has been added to
restricted cash. Upon the reversal of such judgment by the Court
of Appeals on September 6, 2000 the cash ceased to be classified
as "restricted" and was included in "cash and cash equivalents".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Cadus was incorporated in 1992 and until July 30, 1999, devoted substantially
all of its resources to the development and application of novel yeast-based and
other drug discovery technologies. On July 30, 1999, Cadus sold its drug
discovery assets to OSI Pharmaceuticals, Inc. ("OSI") and ceased its internal
drug discovery operations and research efforts for collaborative partners. Cadus
terminated all employees who were not hired by OSI or who did not voluntarily
resign except for the Chief Executive Officer, who resigned in April 2000. The
Company is currently seeking to (i) license the Subsidiary's drug discovery
technologies and (ii) to use a portion of its available cash to acquire or
invest in companies or income producing assets. While such companies or assets
might be in the biotechnology or pharmaceutical industries, the Company will
consider acquisitions or investments in other industries as well.
The Company has incurred operating losses in each year since its inception
except for an operating gain of approximately $214,000 during the year ended
December 31, 2002. At December 31, 2002, the Company had an accumulated deficit
of approximately $33.0 million. The Company's losses have resulted principally
from costs incurred in connection with its research and development activities
and from general and administrative costs associated with the Company's
operations. These costs have exceeded the Company's revenues and interest
income. As a result of the sale of its drug discovery assets to OSI and the
cessation of its internal drug discovery operations and research efforts for
collaborative partners, the Company ceased to have research funding revenues and
substantially reduced its operating expenses.
The following accounting policies are important to understanding our financial
condition and results of operations and should be read as an integral part of
the discussion and analysis of the results of our operations and financial
position. For additional accounting policies, see note 2 to our consolidated
financial statements, "Significant Accounting Policies"
REVENUE RECOGNITION. We have entered into license agreements with two companies
under which we have licensed to them our yeast technology on a non-exclusive
basis. The agreements provide for the payment of non-refundable license fees to
the Company. We recognize the license fees as income when received, as there are
no continuing performance obligations of the Company to the licensees.
19
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, we are required to estimate
our income taxes in each of the jurisdictions in which we operate. This process
involves us estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Revenues for 2002 increased to $1,100,000 from $600,000 in 2001. This
increase is primarily attributable to the Company receiving a $1,000,000
research milestone payment from a licensee.
OPERATING EXPENSES
General and administrative expenses decreased to $885,000 for 2002 from
$1.079 million for 2001. This decrease was attributable primarily to a decrease
in professional fees and insurance.
INTEREST INCOME
Interest income for 2002 decreased to $336,000 from $838,000 in 2001.
This decrease is attributable primarily to the decrease in interest rates.
EQUITY IN OTHER VENTURES
Equity in other ventures in 2002 reflects a loss of $692 from the
Company's investment in Laurel Partners Limited Partnership.
20
REALIZED GAIN ON MARKETABLE SECURITIES
On August 30, 2002, the Company's equity interest in Axiom was converted
into 441,446 shares of common stock of Sequenom pursuant to the merger of Axiom
with a subsidiary of Sequenom. Upon the closing of the transaction, the Company
recorded a realized gain of $823,189 with respect to the 338,761 shares of
common stock of Sequenom received in the merger in the consolidated statement of
operations for the year ended December 31, 2002. The value of the remaining
102,685 shares of common stock of Sequenom received in the merger and being held
in escrow was recorded as a deferred gain on exchange of equity interest in the
accompanying consolidated balance sheet.
GAIN ON REVERSAL OF LITIGATION JUDGMENT
In 2001, pursuant to a court order the Company received $155,402 in
reimbursement of SIBIA litigation costs which was partially offset by legal
costs incurred of $29,786.
SETTLEMENT OF ARBITRATION
In March 2002, the arbitrator in the arbitration proceeding commenced
against Cadus by Philip N. Sussman, the former Senior Vice President, Finance
and Corporate Development, and Chief Financial Officer of Cadus, ruled in favor
of Mr. Sussman and awarded him approximately $750,000 in severance pay, interest
and attorneys and other costs and fees which was included in the 2001 statement
of operations and paid in 2002.
NET INCOME (LOSS)
The net income for 2002 was $1,316,000 compared to a net loss of $317,000
for 2001. The increase is primarily attributable to a $500,000 increase in
license fees, a decrease in general and administrative expenses of $194,000 and
a realized gain on marketable securities of $823,189 offset by a decrease in
interest income of $502,000. In 2001 there was an arbitration award of
approximately $750,000 against Cadus in favor of a former employee.
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Revenues for 2001 decreased to $600,000 from $978,500 in 2000. This
decrease is primarily attributable to the Company receiving less licensing fees.
OPERATING EXPENSES
General and administrative expenses decreased to $1.1 million for 2001
from $1.7 million for 2000. This decrease was attributable primarily to the
elimination of approximately $608,000 in compensation to the former Chief
Executive Officer (including $497,500 in severance) offset in part by an
increase in patent maintenance costs and professional fees of approximately
$150,000.
21
INTEREST INCOME
Interest income for 2001 increased to $838,000 from $639,000 in 2000.
This increase is attributable primarily to the increase in the Company's
unrestricted cash equivalent balances as compared to 2000 as a result of the
release of funds that were held in escrow in connection with the SIBIA
litigation.
EQUITY IN OTHER VENTURES
Equity in other ventures in 2001 reflects income of $3,086 from the
Company's investment in Laurel Partners Limited Partnership. The investment in
Axiom Biotechnologies, Inc. was written down to zero as of December 31, 2000.
GAIN ON REVERSAL OF LITIGATION JUDGMENT
In 2001, pursuant to a court order the Company received $155,402 in
reimbursement of SIBIA litigation costs which was partially offset by legal
costs incurred of $29,786. The $18,841,489 gain recognized in 2000 was the
result of the United States Court of Appeals ruling in favor of the Company
overturning a 1998 judgment by the U.S. District Court in the patent
infringement suit filed by SIBIA.
SETTLEMENT OF ARBITRATION
In March 2002, the arbitrator in the arbitration proceeding commenced
against Cadus by Philip N. Sussman, the former Senior Vice President, Finance
and Corporate Development, and Chief Financial Officer of Cadus, ruled in favor
of Mr. Sussman and awarded him approximately $750,000 in severance pay, interest
and attorneys and other costs and fees which was included in the 2001 statement
of operations.
NET (LOSS) INCOME
The net loss for 2001 was $317,000 compared to net income of $18.1
million in 2000. This decrease is primarily attributable to the approximately
$18.8 million gain on the reversal of the SIBIA litigation judgment being
recognized in 2000 and there being no comparable gain in 2001 and the
arbitration award in 2001 of approximately $750,000 against Cadus in favor of a
former employee.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 the Company held cash and cash equivalents of $24.9
million. The Company's working capital at December 31, 2002 was $25.4 million.
On July 30, 1999, Cadus sold its drug discovery assets to OSI and ceased
its internal drug discovery operations and research efforts for collaborative
partners. Pursuant to such sale transaction, OSI assumed, among other things,
Cadus's lease to the Company's research facility in Tarrytown, New York and
Cadus's equipment lease with General Electric Capital Corporation. Cadus
terminated all employees who were not hired by OSI or who did not voluntarily
resign, except for the Chief Executive Officer. As a result of the foregoing,
Cadus ceased to have research funding revenues and substantially reduced its
operating expenses.
In February 2000, Cadus licensed to OSI, on a non-exclusive basis, its
yeast technologies. OSI paid to Cadus a license fee of $100,000 and an access
fee of $600,000. OSI is also obligated to pay an
22
annual maintenance fee of $100,000 until the earlier of 2010 or the termination
of the license and a supplemental license fee of $250,000 which was paid in
December 2000 after the lifting of the injunction obtained by SIBIA. OSI may
terminate the license at any time on 30 days prior written notice. In December
2001, Cadus transferred its license with OSI to the Subsidiary.
In December 2001, the Subsidiary licensed to a major pharmaceutical
company, on a non- exclusive basis, its yeast technologies. The licensee paid to
the Subsidiary an up-front non-refundable fee of $500,000. In October 2002, the
licensee paid to the Subsidiary an additional $1,000,000 when the licensee
achieved a research milestone. The license terminates on December 31, 2006;
however, the licensee may extend the term for additional one-year periods by
paying to the Subsidiary $250,000 for each one-year extension.
The Company believes that its existing resources, together with interest
income, will be sufficient to support its current and projected funding
requirements through the end of 2004. This forecast of the period of time
through which the Company's financial resources will be adequate to support its
operation is a forward-looking statement that may not prove accurate and, as
such, actual results may vary. The Company's capital requirements may vary as a
result of a number of factors, including the transactions, if any, arising from
the Company's efforts to license its technologies, the transactions, if any,
arising from the Company's efforts to acquire or invest in companies or income
producing assets and the expenses of pursuing such transactions.
At December 31, 2002 the Company had tax net operating loss carryforwards
of approximately $28.3 million and research and development credit carryforwards
of approximately $2.5 million which expire in years 2009 through 2022. 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.
23
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 15
of this report. For an index to the financial statements and supplementary data,
see Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information with respect to the executive officers and directors of Cadus
as of March 15, 2002 is set forth below:
Name Age Position
- ---- --- --------
Michele Paige 33 Chief Executive Officer, President and Director
James R. Broach, Ph.D. 54 Director
Russell D. Glass 40 Director
Carl C. Icahn 67 Director
Peter S. Liebert, M.D.(1) 67 Director
Jack G. Wasserman(1) 65 Director
- ----------
(1) Member of the Compensation Committee.
24
MICHELE PAIGE became a director and President, Chief Executive Officer,
Treasurer and Secretary of Cadus in February 2002. From July 2001 Ms. Paige has
served as an Investment Associate of Icahn Associates Corp. From September 1999
until June 2001, Ms. Paige studied at the Harvard Business School, from which
she received her MBA in 2001. From 1998-1999, Ms. Paige was a Research Associate
at The Conference Board, an economic think-tank, where she specialized in
mergers and acquisitions. Ms. Paige currently serves as a Trustee of The Leopold
Schepp Foundation, which awards scholarships that support both graduate and
undergraduate education for exceptional students with demonstrated financial
need. Ms. Paige earned her B.A. from Brown University and a J.D. from Yale Law
School, where she was a member of The Yale Law Review.
RUSSELL D. GLASS became a director of Cadus in June 1998. He served as
President and Chief Executive Officer of Cadus from April 2000 until February
2003. Since 2002 Mr. Glass has been the Co-Chairman and Chief Investment Officer
of Ranger Partners, an investment management company. From 1998 to 2002 Mr.
Glass served as President and Chief Investment Officer of Icahn Associates
Corp., a diversified investment firm, and as Vice-Chairman and Director of
Lowestfare.com, Inc., travel services 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; Axiom Biotechnologies, a pharmacology profiling
company; National Energy Group, an oil and gas exploration and production
company; and Next Generation Technology Holdings, a healthcare information
technology company. He currently serves as a Director of the A.G. Spanos
Corporation, a national real estate developer and owner of the NFL San Diego
Chargers Football Club. Mr. Glass earned a B.A. in economics from Princeton
University and an M.B.A. from the Stanford University Graduate School of
Business.
JAMES R. BROACH, Ph.D., a scientific founder of Cadus and inventor of
Cadus's yeast-based drug discovery technology, has been Director of Research of
Cadus since its inception. He is and has been since 1984 a Professor at
Princeton University in the Department of Molecular Biology. In 1984, Dr. Broach
and his collaborators were the first ones to demonstrate that human genes could
be successfully implanted into yeast cells. He received his Ph.D. in
Biochemistry from University of California at Berkeley and his B.S. from Yale
University.
CARL C. ICAHN became a director of Cadus in July 1993. He was a
Co-Chairman of the Board of Directors from May 1995 to May 1996. Mr. Icahn has
served as Chairman of the Board and a Director of Starfire Holding Corporation
(formerly Icahn Holding Corporation), a privately-held holding company, and
Chairman of the Board and a Director of various subsidiaries of Starfire,
including ACF Industries, Incorporated, a privately-held railcar leasing and
manufacturing company, since 1984. He has also been Chairman of the Board and
President of Icahn & Co., Inc., a registered broker-dealer and a member of the
National Association of Securities Dealers, since 1968. Since November 1990, Mr.
Icahn has been Chairman of the Board of American Property Investors, Inc., the
general partner of American Real Estate Partners, L.P., a public limited
partnership that invests in real estate. Since August 1998, he has also
25
served as Chairman of the Board of Lowestfare.com, LLC, an internet travel
reservations company. From October 1998, Mr. Icahn has been President and a
Director of Stratosphere Corporation which operates the Stratosphere Hotel and
Casino. Since September 29, 2000, Mr. Icahn has served as the Chairman of the
Board of GB Holdings, Inc., GB Property Funding, Inc. and Great Bay Hotel &
Casino, Inc. which owns and operates the Sands Hotel in Atlantic City, NJ. Mr.
Icahn received his B.A. from Princeton University.
PETER S. LIEBERT, M.D., became a director of Cadus in April 1995. Dr.
Liebert has been a pediatric surgeon in private practice since 1968 and is
affiliated with Babies Hospital of Columbia Presbyterian. He is Clinical
Associate Professor of Surgery, College of Physicians and Surgeons, Columbia
University. He is also Chairman of the Board of Rx Vitamins, Inc. Dr. Liebert
holds an M.D. from Harvard University Medical School and a B.A. from Princeton
University.
JACK G. WASSERMAN became a director of Cadus in May 1996. For the past
five years, Mr. Wasserman has been a senior partner in Wasserman, Schneider,
Babb & Reeds, a New York law firm that concentrates its practice in legal
matters relating to international trade. Mr. Wasserman is a director of American
Property Investors, Inc., the general partner of American Real Estate Partners,
L.P., a public limited partnership that invests in real estate. Mr. Wasserman is
also a director of National Energy Group, Inc., a public company engaged in oil
exploration. Mr. Wasserman received a B.A. from Adelphi University, a J.D. from
Georgetown University and a Graduate Diploma from the Johns Hopkins University
School of Advanced International Studies.
Directors are elected by the stockholders of Cadus at each annual meeting
of stockholders and serve until the next annual meeting of stockholders and
until their successors are elected and qualified or until their earlier removal
or resignation.
The Board of Directors of Cadus has a Compensation Committee, consisting
of Messrs. Liebert and Wasserman, which makes recommendations regarding salaries
and incentive compensation for employees of and consultants to Cadus and which
administers the 1993 Stock Option Plan and the 1996 Incentive Plan.
The non-employee directors receive $1,000 for each meeting of the Board
of Directors attended and $500 for each meeting of a committee of the Board of
Directors attended.
OTHER MATTERS RELATING TO DIRECTORS
On January 5, 2001, Reliance Group Holdings, Inc. ("Reliance") commenced
an action in the United States District Court for the Southern District of New
York against Carl C. Icahn, Icahn Associates Corp. and High River Limited
Partnership ("High River") (a limited partnership controlled by Mr. Icahn)
alleging that High River's tender offer for Reliance 9% senior notes violated
Section 14(e) of the Securities Exchange Act of 1934. Reliance sought a
temporary restraining order and preliminary and permanent injunctive relief to
prevent defendants from purchasing the notes. The Court initially imposed a
temporary
26
restraining order. Defendants then supplemented the tender offer disclosures.
The Court conducted a hearing on the disclosures and other matters raised by
Reliance. The Court then denied Reliance's motion for a preliminary injunction
and ordered dissolution of the temporary restraining order following
dissemination of the supplement. Reliance took an immediate appeal to the United
States Court of Appeals for the Second Circuit and sought a stay to restrain
defendants from purchasing notes during the pendency of the appeal. On January
30, 2001, the Court of Appeals denied plaintiffs' stay application. On January
30, Reliance also sought a further temporary restraining order from the District
Court. The Court considered the matter and reimposed its original restraint
until noon the next day, at which time the restraint against Mr. Icahn and his
affiliates was dissolved. On March 22, 2001, the Court of Appeals ruled in favor
of Mr. Icahn by affirming the judgment of the District Court.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Cadus's directors and
executive officers, and persons who own more than ten percent of a registered
class of Cadus's equity securities, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock of Cadus. Reporting persons are required by SEC
regulation to furnish the Company with copies of all such filed reports. To
Cadus's knowledge, based solely on a review of copies of such filed reports
furnished to Cadus, all of Cadus's directors, officers and greater than ten
percent beneficial owners made all required filings during fiscal year 2002 in a
timely manner.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
compensation paid or accrued by Cadus for services rendered to Cadus in all
capacities for the fiscal years ended December 31, 2002, 2001 and 2000, by its
Chief Executive Officer and each of the Cadus's other executive officers whose
total salary and bonus exceeded $100,000 during 2002 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation Securities
------------------------------------- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation
--------------------------- ---- ---------- --------- ----------- ------------
Russell D. Glass (1)..................... 2002 -- -- -- --
President and Chief Executive 2001 -- -- -- --
Officer 2000 -- -- -- --
- ----------
(1) Mr. Russell D. Glass was the Company's President and Chief Executive
Officer from April 2000 until February 2003 and served in such capacity
without compensation.
27
OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2002 by Cadus to the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Value
Percent of At Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration -------------------------
Name Granted (#) Fiscal Year ($/share) Date 5% 10%
---- ----------- ----------- --------- ------ ---- ---
Russell D. Glass........... -- -- -- -- -- --
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning each
exercise of stock options, during the fiscal year ended December 31, 2002 by the
Named Executive Officers and unexercised stock options held by the Named
Executive Officers as of the end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 2002(#) December 31, 2002($)
Shares Aggregate -------------------------- --------------------------
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Russell D. Glass........... -- -- -- -- -- --
INCENTIVE PLANS
1993 STOCK OPTION PLAN
Cadus's 1993 Stock Option Plan (the "1993 Stock Option Plan") provides
for the grant of options to purchase shares of Common Stock to officers,
employees and consultants of the Company. The maximum number of shares of Common
Stock that may be issued pursuant to the 1993 Stock Option Plan is 666,667 (plus
any shares that are the subject of canceled or forfeited awards). Effective as
of May 10, 1996, the 1993 Stock Option Plan was replaced by the 1996 Incentive
Plan with respect to all future awards to the Company's employees and
consultants. See "Incentive Plans -- 1996 Incentive Plan."
The 1993 Stock Option Plan is administered by the Compensation Committee
which is presently comprised of Peter Liebert and Jack G. Wasserman.
28
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 2002, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 15, 2003, an aggregate of 163,405 shares of Common Stock were
subject to outstanding stock options granted under the 1993 Stock Option Plan.
As of March 15, 2003, options to purchase 276,739 shares were exercisable at
prices ranging from $1.37 to $3.51 per share.
Cadus has registered the shares issuable upon exercise of stock options
granted under the 1993 Stock Option Plan pursuant to a registration statement on
Form S-8.
STOCK OPTION AGREEMENTS
Cadus has granted non-qualified stock options to directors, officers,
employees and consultants of Cadus by means of stock option agreements. During
2002, there were no stock options granted pursuant to stock option agreements.
As of March 15, 2003, an aggregate of 323,403 shares of Common Stock were
subject to outstanding stock options granted under stock option agreements, and
options to purchase 323,403 shares under such option agreements were exercisable
at prices ranging from $1.50 to $6.75 per share.
Cadus has registered the shares issuable upon exercise of stock options
granted under such stock option agreements pursuant to a registration statement
on Form S-8.
1996 INCENTIVE PLAN
Cadus's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted by
the Board of Directors and approved by the stockholders of Cadus in May 1996.
The 1996 Incentive Plan replaced the 1993 Stock Option Plan, effective as of May
10, 1996, with respect to all future awards by Cadus to the Company's employees
and
29
consultants. However, while all future awards will be made under the 1996
Incentive Plan, awards made under the 1993 Stock Option Plan will continue to be
administered in accordance with the 1993 Stock Option Plan. See "Incentive Plans
- -- 1993 Stock Option Plan." In December 1996, the Board of Directors of Cadus
amended the 1996 Incentive Plan to (i) increase the maximum number of shares of
Common Stock that may be the subject of awards under the 1996 Incentive Plan
from 333,334 to 833,334 (plus any shares that are the subject of canceled or
forfeited awards) and (ii) provide for the grant of stock options to directors
of the Company . The stockholders of Cadus approved such amendments to the 1996
Incentive Plan in June 1997. In December 1997, the Board of Directors amended
the 1996 Incentive Plan to increase the maximum number of shares of Common Stock
that may be the subject of awards under the 1996 Incentive Plan from 833,334 to
1,833,334 (plus any shares that are the subject of canceled or forfeited
awards). The stockholders of Cadus approved this amendment to the 1996 Incentive
Plan in June 1998.
The 1996 Incentive Plan is administered by the Compensation Committee,
which has the power and authority under the 1996 Incentive Plan to determine
which of Cadus's employees, consultants and directors will receive awards, the
time or times at which awards will be made, the nature and amount of the awards,
the exercise or purchase price, if any, of such awards, and such other terms and
conditions applicable to awards as it determines to be appropriate or advisable.
Options granted under the 1996 Incentive Plan may be either non-qualified
stock options or options intended to qualify as incentive stock options under
Section 422 of the Code. The term of incentive stock options granted under the
1996 Incentive Plan cannot extend beyond ten years from the date of grant (or
five years in the case of a holder of more than 10% of the total combined voting
power of all classes of stock of Cadus on the date of grant).
Shares of Common Stock may either be awarded or sold under the 1996
Incentive Plan and may be issued or sold with or without vesting and other
restrictions, as determined by the Compensation Committee.
Under the 1996 Incentive Plan, the Compensation Committee may establish
with respect to each option or share awarded or sold such vesting provisions as
it determines to be appropriate or advisable. Unvested options will
automatically terminate within a specified period of time following the
termination of the holder's relationship with Cadus and in no event beyond the
expiration of the term. Cadus may either repurchase unvested shares of Common
Stock at their original purchase price upon the termination of the holder's
relationship with the Company or cause the forfeiture of such shares, as
determined by the Compensation Committee. All options granted and shares sold
under the 1996 Incentive Plan to employees of the Company may, in the discretion
of the Compensation Committee, become fully vested upon the occurrence of
certain corporate transactions if the holders thereof are terminated in
connection therewith.
The exercise price of options granted and the purchase price of shares
sold under the 1996 Incentive Plan are determined by the Compensation Committee,
but may not, in the case of incentive stock options, be less than the fair
market value of the Common Stock on the date of grant (or, in the case of
incentive stock options granted to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, 110% of such fair market value), as determined by the Compensation
Committee.
30
The Compensation Committee may also grant, in combination with
non-qualified stock options and incentive stock options, stock appreciation
rights ("Tandem SARs"), or may grant Tandem SARs as an addition to outstanding
non-qualified stock options. A Tandem SAR permits the participant, in lieu of
exercising the corresponding option, to elect to receive any appreciation in the
value of the shares subject to such option directly from Cadus in shares of
Common Stock. The amount payable by Cadus upon the exercise of a Tandem SAR is
measured by the difference between the market value of such shares at the time
of exercise and the option exercise price. Generally, Tandem SARs may be
exercised at any time after the underlying option vests. Upon the exercise of a
Tandem SAR, the corresponding portion of the related option must be surrendered
and cannot thereafter be exercised. Conversely, upon exercise of an option to
which a Tandem SAR is attached, the Tandem SAR may no longer be exercised to the
extent that the corresponding option has been exercised. Nontandem stock
appreciation rights ("Nontandem SARs") may also be awarded by the Compensation
Committee. A Nontandem SAR permits the participant to elect to receive from
Cadus that number of shares of Common Stock having an aggregate market value
equal to the excess of the market value of the shares covered by the Nontandem
SAR on the date of exercise over the aggregate base price of such shares as
determined by the Compensation Committee. With respect to both Tandem and
Nontandem SARs, the Compensation Committee may determine to cause Cadus to
settle its obligations arising out of the exercise of such rights in cash or a
combination of cash and shares, in lieu of issuing shares only.
Under the 1996 Incentive Plan, the Compensation Committee may also award
tax offset payments to assist employees in paying income taxes incurred as a
result of their participation in the 1996 Incentive Plan. The amount of the tax
offset payments will be determined by applying a percentage established from
time to time by the Compensation Committee to all or a portion of the taxable
income recognizable by the employee upon: (i) the exercise of a non-qualified
stock option or an SAR; (ii) the disposition of shares received upon exercise of
an incentive stock option; (iii) the lapse of restrictions on restricted shares;
or (iv) the award of unrestricted shares.
The number and class of shares available under the 1996 Incentive Plan
may be adjusted by the Compensation Committee to prevent dilution or enlargement
of rights in the event of various changes in the capitalization of Cadus. At the
time of grant of any award, the Compensation Committee may provide that the
number and class of shares issuable in connection with such award be adjusted in
certain circumstances to prevent dilution or enlargement of rights.
The Board of Directors of Cadus may suspend, amend, modify or terminate
the 1996 Incentive Plan. However, Cadus's stockholders must approve any
amendment that would (i) materially increase the aggregate number of shares
issuable under the 1996 Incentive Plan, (ii) materially increase the benefits
accruing to employees under the 1996 Incentive Plan or (iii) materially modify
the requirements for eligibility to participate in the 1996 Incentive Plan.
Awards made prior to the termination of the 1996 Incentive Plan shall continue
in accordance with their terms following such termination. No amendment,
suspension or termination of the 1996 Incentive Plan shall adversely affect the
rights of an employee or consultant in awards previously granted without such
employee's or consultant's consent.
31
As of March 15, 2003, 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, 2003, stock options to purchase 9,167 shares were exercisable at
prices ranging from $6.38 to $6.63 per share.
Cadus has registered the shares issuable upon exercise of stock options
granted or which may be granted under the 1996 Incentive Plan pursuant to a
registration statement on Form S-8.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Cadus's Compensation Committee is composed of Peter Liebert and Jack G.
Wasserman. Neither Mr. Liebert nor Mr. Wasserman is or was an officer or
employee of the Company.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
The Compensation Committee of the Board of Directors of Cadus is
responsible for determining and administering the Company's compensation
policies for the remuneration of Cadus's officers. The Compensation Committee
annually evaluates individual and corporate performance from both a short-term
and long-term perspective. In 2002, Cadus had no officers other than its Chief
Executive Officer who served in such capacity without compensation. Accordingly,
the following report of the Compensation Committee is not directly applicable to
calendar year 2002 but is presented for historical perspective.
PHILOSOPHY
Cadus's executive compensation program historically has sought to
encourage the achievement of business objectives and superior corporate
performance by the Cadus's executives. The program enables Cadus to reward and
retain highly qualified executives and to foster a performance-oriented
environment wherein management's long-term focus is on maximizing stockholder
value through equity-based incentives. The program calls for consideration of
the nature of each executive's work and responsibilities, unusual
accomplishments or achievements on the Company's behalf, years of service, the
executive's total compensation and the Company's financial condition generally.
COMPONENTS OF EXECUTIVE COMPENSATION
Historically, Cadus's executive employees have received cash-based and
equity-based compensation.
CASH-BASED COMPENSATION. Base salary represents the primary cash
component of an executive employee's compensation, and is determined by
evaluating the responsibilities associated with an employee's position at the
Company and the employee's overall level of experience. In addition, the
Committee, in its discretion, may award bonuses. The Compensation Committee and
the Board believe that the Company's management and employees are best motivated
through stock option awards and cash incentives.
32
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 Company's Chief Executive Officer
in 2002, Russell D. Glass, served in such capacity without compensation and the
current Chief Executive Officer, Michele Paige, is serving in such capacity
without compensation.
Peter Liebert
Jack G. Wasserman
33
COMPARATIVE STOCK PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
return* for the Nasdaq Stock Market (US) Index, the Nasdaq Biotechnology Index
and Cadus since December 31, 1997
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG CADUS PHARMACEUTICAL CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ BIOTECHNOLOGY INDEX
[LINE CHART OMITTED]
* $100 Invested on 12/31/97 in stock or index--
including reinvestment of dividends.
Fiscal year ending December 31.
Corresponding index values and Cadus's Common Stock price values are
given below:
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------- -------- -------- -------- -------- --------
Cadus 100.00 30.39 4.91 11.28 18.35 17.10
Nasdaq Stock Market (U.S.) Index 100.00 140.99 261.48 157.42 124.89 86.34
Nasdaq Biotechnology Index 100.00 156.02 359.99 450.07 376.78 234.15
Cadus Closing Stock Price $6.375 1.938 0.31 0.72 1.17 1.09
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 15, 2003 with respect to
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers and (iv) all directors and officers as a group. All
information is based upon ownership filings made by such persons with the
Securities and Exchange Commission (the "Commission") or upon information
provided by such persons to the Company.
NUMBER OF SHARES PERCENTAGE OF
AMOUNT AND NATURE OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OF BENEFICIAL OWNERSHIP OWNED(2)
- ---------------------------------------- ----------------------- -------------
Carl C. Icahn........................... 4,973,158(3) 37.80%
767 Fifth Avenue
New York, New York 10153
Bristol-Myers Squibb.................... 1,232,500 9.38%
345 Park Avenue
New York, New York 10154
Jay D. Johnson ......................... 663,140(4) 5.05%
525 Buckingham Place
Downers Grove, IL 60516
SmithKline Beecham Corporation.......... 660,962(5) 5.03%
One Franklin Plaza
Philadelphia, PA 19102
James R. Broach......................... -- *
Russell D. Glass........................ -- *
Peter S. Liebert, M.D................... 20,334(6) *
Michele Paige........................... ---- *
Jack G. Wasserman....................... 14,500(7) *
All executive officers and directors ... 5,007,992(8) 37.99%
as a group (6 persons)
- ----------
* Less than one percent
(1) Except as otherwise indicated above, the address of each stockholder
identified above is c/o the Company, 767 Fifth Avenue, New York, NY
10153. Except as indicated in the other footnotes to this table, the
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock.
(2) Share ownership in the case of each person listed above includes shares
issuable upon the exercise of options held by such person as of March 15,
2002, that may be exercised within 60 days after such date for purposes
of computing the percentage of Common Stock owned by such person, but not
for purposes of computing the percentage of Common Stock owned by any
other person.
(3) Includes 2,258,790 shares of Common Stock held by High River Limited
Partnership and 1,599,942 shares of Common Stock held by Barberry Corp..
Mr. Icahn is the sole
35
shareholder of Barberry Corp. and Barberry Corp. is 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) Jay Johnson has shared voting power and shared investment power with
respect to 663,140 shares of Common Stock, Lakeshore Capital, Inc. has
shared voting power and investment power with respect to 551,240 shares
of Common Stock, and Aqua Fund L.P. has shared voting power and shared
investment power with respect to 228,100 shares of Common Stock. Jay D.
Johnson is the President of Lakeshore Capital, Inc. and Lakeshore
Capital, Inc. is the general partner of Aqua Fund L.P.
(5) Includes 330,481 shares of Common Stock held by SmithKline Beecham
p.l.c., an affiliate of SmithKline Beecham Corporation.
(6) Includes 12,000 shares of Common Stock which Dr. Liebert currently has
the right to acquire upon the exercise of stock options.
(7) Consists of 14,500 shares of Common Stock which Mr. Wasserman currently
has the right to acquire upon the exercise of stock options.
(8) Includes 38,500 shares of Common Stock issuable upon exercise of options.
See footnotes (3), (6) and (7).
EQUITY COMPENSATION PLAN INFORMATION.
The following table sets forth certain information with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of Cadus were authorized for issuance as of December 31, 2002:
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------
Plan Category Number of Weighted-average Number of securities
securities to be exercise price of remaining available for
issued upon outstanding options, future issuance under
exercise of warrants and rights equity compensation
outstanding options, plans (excluding
warrants and rights securities reflected in
column (a))
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation 285,906 $1.68 1,736,221
plans approved by
security holders
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation 323,403 $2.42 0
plans not approved by
security holders
- ------------------------------------------------------------------------------------------------------------------------
Total 609,309 $2.08 1,736,221
- ------------------------------------------------------------------------------------------------------------------------
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures
conducted within 90 days of the date of filing this annual report on Form 10-K,
the Company's President and Chief Executive Officer, who also performs functions
similar to those of a principal financial officer, concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15(d)-14(c) promulgated under the Securities Exchange Act of 1934) are
effective.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, nor were any corrective actions required with regard to
significant deficiencies and material weaknesses.
PART IV
ITEM 15. 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
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.
(c) Exhibits
37
EXHIBIT NO. DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Certificate of Incorporation of Cadus
Pharmaceutical Corporation( "Cadus"), as filed with the Secretary
of State of Delaware on July 22, 1996.(1)
3.2 By-laws of Cadus.(2)
4.1 Specimen of Common Stock Certificate of Cadus.(2)
4.2 1993 Cadus Pharmaceutical Corpora