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, 2003.
[ ] 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 CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3660391
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
767 Fifth Avenue
New York, New York 10153
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 702-4367
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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:
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12-b-2 of the Act). Yes: No: X
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As of June 30, 2003, the aggregate market value of the registrant's
voting common equity held by non-affiliates was $8,864,100.
Number of shares outstanding of each class of Common Stock, as of March
15, 2004: 13,144,040 shares.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended.
All statements other than statements of historical fact are "forward-looking
statements" for purposes of federal and stated securities laws, including any
projections or expectations of earnings, revenue, financial performance,
liquidity and capital resources or other financial items; any statement of our
plans, strategies and objectives for our future operations; any statements
regarding future economic conditions or performance; any statements of belief;
and any statements of assumption underlying any of the foregoing.
Forward-looking statements may include the words "may," "will," "should,"
"could," "would," "predicts," "potential," "continue," "expects," "anticipates,"
"future," "intends," "plans," "believes," "estimates" and other similar words.
Although the Company believes that the expectations reflected in our
forward-looking statements are reasonable, 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, risks and
uncertainties relating to the Company's ability to license its technologies to
third parties, the Company's ability to acquire and operate other companies, the
Company's capital needs and uncertainty of future funding, 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 other filings with the Securities and
Exchange Commission. The forward-looking statements made in this Annual Report
on Form 10-K are made only as of the date hereof and the Company does not have
or undertake any obligation to publicly update any forward-looking statements to
reflect subsequent events or circumstances unless otherwise required by law.
PART I
ITEM 1. BUSINESS.
GENERAL
Cadus 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
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Subsidiary. Cadus and the Subsidiary (collectively, the "Company") are currently
seeking to (i) license the Subsidiary's drug discovery technologies, (ii) engage
in joint ventures that will utilize the Subsidiary's drug discovery technologies
and (iii) 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. Cadus changed its name
to Cadus Corporation from Cadus Pharmaceutical Corporation on June 20, 2003. The
change in name was approved by Cadus's stockholders at Cadus's Annual Meeting of
Stockholders held on June 18, 2003.
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
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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).
THE COMPANY'S DRUG DISCOVERY TECHNOLOGIES
BACKGROUND
The human body is comprised primarily of specialized cells that perform
different physiological functions and that are organized into organs and
tissues. All human cells contain DNA, which is arranged in a series of subunits
known as genes. It is estimated that there are approximately 100,000 genes in
the human genome. Genes are responsible for the production of proteins. Proteins
such as hormones, enzymes and receptors are responsible for managing most of the
physiological functions of humans, including regulating the body's immune
system. Thus, genes are the indirect control center for all physiological
functions. Over the last few decades, there has been a growing recognition that
many major diseases have a genetic basis. It is now well established that genes
play an important role in diseases such as cancer, cardiovascular disease,
psychiatric disorders, obesity, and metabolic diseases. Significant resources
are being focused on genomics research based on the belief that the sequence and
function of a gene, and the protein that gene expresses, will lead to an
understanding of that gene's role in the functioning and malfunctioning of
cells. This understanding is expected in turn to lead to therapeutic and
diagnostic applications focused on molecular targets associated with the gene
and the protein it expresses.
Cell surface receptors are an important class of proteins involved in
cellular functioning because they are the primary mediators of cell to cell
communication. Their location on the cell surface also makes them the most
accessible targets for drug discovery. Cellular communication occurs when one
cell releases a chemical messenger, called a "ligand," which communicates with
another cell by binding to and activating the receptor on the exterior of the
second cell. Typically, a ligand binds only with one specific receptor or
families of related receptors. This binding event activates the receptor
triggering the transmission of a message through a cascade of signaling
molecules from the exterior to the interior of the cell. This process is called
signal transduction. When the signal is transmitted into the interior of the
cell, it may, among other things, activate or suppress specific genes that
switch on or switch off specific biological functions of the cell. The
biological response of the cell, such as the secretion of a protein, depends
primarily on the specific ligand and receptor involved in the communication.
Many diseases, such as cancer, stem from the malfunctioning of cellular
communication. Efforts to treat a particular disease often concentrate on
developing drugs that interact with the receptor or signaling pathway believed
to be associated with the malfunction. These drugs work by inhibiting or
enhancing the transmission of a signal through the cascade of signaling
molecules triggered by the receptor. Drugs that inhibit signal transduction by
blocking a receptor or the intracellular proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal transduction by
stimulating a receptor or associated intracellular proteins are called agonists.
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Human cells carry many different types of receptors. Receptors are
classified into groups based upon similarities in their chemistry and structure.
Some of the major receptor groups involved in signal transduction are: G
Protein-coupled receptors, tyrosine kinase receptors and multisubunit immune
recognition receptors. G Protein-coupled receptors, which are located on the
surface of the cell, constitute the largest group of receptors. In humans, G
Protein-coupled receptors are involved in many of the body's most basic
functions, including heartbeat, sight, sense of smell, cognition and behavior
and also mediate most of the body's basic responses such as secretion from
glands, contractility of blood vessels, movement of cells, growth and cell
death. Tyrosine kinase coupled receptors are involved in cell growth and
differentiation. Multisubunit immune recognition receptors activate the body's
immune defense system.
There are approximately 2,000 G Protein-coupled receptors estimated to
be in the human genome, half of which are believed to be involved in taste,
smell and sight. The importance of G Protein-coupled receptors is demonstrated
by the fact that 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
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assays as a format in which to test compounds. Until scientists began to define
the molecular structure of receptors and ligands, there was no simple method to
determine the function of such molecules in the cell and, therefore, their
utility as drug discovery targets. Even when the target's molecular structure is
known, incorporating that target effectively into an IN VITRO assay can be
difficult. For example, all known G Protein-coupled receptors are woven through
the cell membrane seven times in a very complex, looped structure that cannot be
maintained when the isolated protein is put into an IN VITRO assay format. If an
assay does not accurately replicate the structure of a target receptor, the
compounds identified in the assay may not function as expected when applied to
the target receptor on a living cell. Furthermore, receptors, signal
transduction proteins and other molecular targets for therapeutic intervention
do not exist in isolation in the cell. Their functional activity results from a
complex interrelationship with numerous other molecules within the cell.
Consequently, traditional drug screening assays often identify compounds as
potential drug candidates which, when tested in living cells, prove to have no
useful activity or are even toxic. A variety of methods have been developed to
address these problems, including using living cells in assays. However, most
live cell assays are slow, complex and expensive to maintain.
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.
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o The strong correlation between human and yeast gene classes
enables the evaluation of the biological function of human
proteins, including receptors and signaling molecules, of
unknown function. Proteins with comparable gene sequences
frequently carry out similar functions. This fact can be used
to determine the function of a human gene by genetically
engineering a yeast cell to replace a yeast gene coding for a
known function with the human gene suspected of having a
comparable function. If the yeast cell retains its normal
function, it suggests that the human gene and its protein have
a biological function similar to that of their yeast
counterparts. Consequently, genetically engineered yeast cells
can replicate human gene function and provide a biologically
relevant context for evaluating interactions between receptors
and their related signaling pathways.
o In 1996, the yeast genome was fully sequenced. This knowledge
has facilitated analysis of the correlation between yeast and
human gene structure and aids in the definition of human gene
functions.
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 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
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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 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
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a signal through production and secretion of a ligand and responds, by
replication, to that same signal through the receptor. The Company believes that
the autocrine nature of the APEX(TM) system makes it an effective tool for the
identification of compounds that act as agonists or antagonists with respect to
that receptor or a molecular target in its signaling pathway. As a result, drug
screening may be conducted in an accelerated, cost effective process as compared
to conventional screening techniques.
SELF SELECTING COMBINATORIAL LIBRARY TECHNOLOGY (SSCL(TM))
The Company developed its proprietary SSCL(TM) technology to identify a
ligand that activates an orphan receptor. The SSCL(TM) technology involves the
creation of a library of peptides encoded in DNA, called a combinatorial peptide
expression library. This library is inserted into a strain of hybrid yeast cells
that all express the same orphan receptor. The activation of this receptor is
functionally coupled with cell replication. Each of the millions of yeast cells
in the strain incorporates a different peptide encoded in DNA, resulting in a
library of yeast cells which all express the same orphan receptor but are each
programmed to secrete a different peptide. Most of the secreted peptides have no
effect on the orphan receptor and the hybrid yeast cells producing these
peptides do not replicate. The Company estimates that one in a million hybrid
yeast cells generates a peptide ligand that activates the orphan receptor. These
particular hybrid yeast cells replicate and, therefore, are readily identified.
Thus, the SSCL(TM) technology uses self selection to identify the ligand that
binds to the targeted orphan receptor. The sequence of the peptide ligand can
then be rapidly identified and undergo further evaluation. One to ten million
peptides can be tested in a matter of hours. The Company has used its SSCL(TM)
technology to successfully identify ligands to orphan receptors in less than a
month, significantly accelerating this step in the drug discovery process.
Identifying ligands to orphan receptors is the critical first step in
determining the biological function of orphan receptors and demonstrating their
value as drug discovery targets.
The strains of hybrid yeast cells constructed for the SSCL(TM) can
simultaneously be used as screens for large libraries of chemical compounds.
This capability enabled the Company to seek to identify a peptide ligand to an
orphan receptor while simultaneously creating a high throughput screen for small
molecule agonists and antagonists to that receptor.
BIOINFORMATICS FOR TARGET IDENTIFICATION
The Company has developed proprietary software algorithms that can be
used to rapidly search through the data generated by the Human Genome Project
for DNA sequences that are likely to be those of G Protein-coupled receptors.
HUMAN ORPHAN G PROTEIN-COUPLED RECEPTORS
On July 25, 1998, the Company entered into a collaboration agreement
with Genome Therapeutics Corporation ("GTC"), which has bioinformatics
technologies and know-how that it uses to identify and sequence orphan G
Protein-coupled receptors. Pursuant to the collaboration, the Company and Genome
Therapeutics Corporation identified and isolated fifty-six (56) human orphan
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G Protein-coupled receptors. The rights to such fifty-six (56) human orphan G
Protein-coupled receptors are owned jointly by the Company and GTC. Each of the
Company and GTC will share in any research funding, equity investments, license
fees, milestone payments and royalties that may be received from third party
pharmaceutical companies that enter into collaboration agreements with the
Company and/or GTC with respect to such G Protein-coupled receptors. As of
November 1999, the Company and GTC ceased collaborating.
INVESTMENT IN 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. On September 12, 2003, the parties entered into
an addendum to the agreement pursuant to which the Company extended the license
to an affiliate of the licensee in consideration for the licensee agreeing to
pay $120,000 to the Company. The license terminates on December 31,
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2006; however the licensee may extend the term for additional one-year periods
by paying to the Subsidiary $250,000 for each one-year extension. The Subsidiary
is seeking to license its yeast technologies to other third parties on a
non-exclusive basis.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
The Subsidiary relies upon patents and trade secrets to protect its
proprietary technologies. As of March 15, 2004, the Subsidiary is the assignee
of ten issued U.S. patents and 20 related granted foreign patents covering
aspects of its yeast technology and is the exclusive worldwide licensee of three
issued U.S. patents and 16 related granted foreign patents for use in drug
discovery. In addition, as of such date, the Subsidiary has filed or held
licenses to 15 other U.S. patent applications, as well as eight 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
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performed by them while in the employ of the Company will be the exclusive
property of the Company.
Patent law as it relates to inventions in the biotechnology field is
still evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, no predictions can be made
regarding the breadth or enforceability of claims allowed in the patents that
have been issued to the Company or its licensors or in patents that may be
issued to the Company or its licensors in the future. Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign counterparts or
as may be subsequently interpreted by courts inside or outside the United
States, will be sufficiently broad to protect the Company's proprietary rights,
will be commercially valuable or will provide competitive advantages to the
Company and its present or future collaborative partners or licensees. Further,
there can be no assurance that patents will be granted with respect to any of
the Company's pending patent applications or with respect to any patent
applications filed by the Company in the future. There can be no assurance that
any of the Company's issued or licensed patents would ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful.
The field of gene discovery has become intensely competitive. A number
of pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents covering their
gene discoveries. Some of these applications or patents may be competitive with
the Company's applications or conflict in certain respects with claims made
under the Company's applications. Moreover, because patent applications in the
United States are maintained in secrecy until patents issue and because patent
applications in certain other countries generally are not published until more
than eighteen months after they are filed and because publication of
technological developments in the scientific or patent literature often lags
behind the date of such developments, the Company cannot be certain that it was
the first to invent the subject matter covered by its patents or patent
applications or that it was the first to file patent applications for such
inventions. If an issue regarding priority of inventions were to arise with
respect to any of the patents or patent applications of the Company or its
licensors, the Company might have to participate in litigation or interference
proceedings declared by the United States Patent and Trademark Office or similar
agencies in other countries to determine priority of invention. Any such
participation could result in substantial cost to the Company, even if the
eventual outcome were favorable to the Company.
In some cases, litigation or other proceedings may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
the Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial cost to and 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
12
be able to obtain any such license on commercially favorable terms, if at all,
and if these licenses are not obtained, the Company might be prevented from
using certain of its technologies.
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") (which was acquired
by Merck & Co. in 1999) commenced a patent infringement action against Cadus
alleging infringement by Cadus of a patent concerning the use of cells,
engineered to express any type of cell surface receptor and a reporter gene,
used to report results in the screening of compounds against target assays and
seeking injunctive relief and monetary damages. After trial, on December 18,
1998, the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. On January 29, 1999 the United States District Court granted
SIBIA's request for injunctive relief that precluded Cadus from using the method
claimed in SIBIA's patent. On February 26, 1999, the United States District
Court denied Cadus's motions to set aside the jury verdict, to grant a new trial
and to reduce or set aside the $18.0 million judgment awarded by the jury. Cadus
appealed the judgment. In order to stay execution pending appeal of the $18.0
million judgment obtained by SIBIA, in March 1999, Cadus deposited $18.5 million
in escrow to secure payment of the judgments in the event Cadus were to lose the
appeal. On September 6, 2000 the United States Court of Appeals ruled in favor
of Cadus and overturned the prior judgment entered by the U.S. District Court.
The Court of Appeals ruled that the claims of the SIBIA patent asserted against
Cadus were invalid and that the District Court erred in denying Cadus's motion
for judgment as a matter of law on the issue of invalidity. On October 30, 2000,
the U.S. District Court set aside the $18.0 million judgment in favor of SIBIA
and vacated the injunction against Cadus. Separately, in October 2000, Cadus
obtained the release of the cash escrow of $19.9 million representing the
original $18.5 million and interest that accumulated thereon.
COMPETITION
The biotechnology and pharmaceutical industries are intensely
competitive. The Company's technologies consist principally of genetically
engineered yeast cells. The Company is aware of companies, such as American Home
Products Corporation and Glaxo Smith Kline, Plc, that may use yeast as a drug
discovery medium. In addition, many smaller companies are pursuing these areas
of research. The Company is also aware of other companies that are inserting
human orphan G Protein-coupled receptors into yeast and other cells and using
these hybrid cells for drug discovery purposes. Certain other companies are
seeking to determine the functions of human orphan G Protein-coupled receptors
by identifying agonists to these receptors and by other research methods. All of
the above companies are significant competitors of the Company. Many of the
Company's competitors have greater financial and human resources, and more
experience in research and development than the Company. There can be no
assurance that competitors of the Company will not develop competing drug
discovery technologies that 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.
13
In order to compete successfully, the Company's goal is to obtain
patent protection for its drug discovery technologies and to make these
technologies available to pharmaceutical and biotechnology companies through
licensing arrangements for use in discovering drugs. There can be no assurance,
however, that the Company will obtain patents covering its technologies that
protect it against competitors. Moreover, there can be no assurance that the
Company's competitors will not succeed in developing technologies that
circumvent the Company's technologies or that such competitors will not succeed
in developing technologies that are more effective than those developed by the
Company or that would render technology of the Company less competitive or
obsolete.
GOVERNMENT REGULATION
The development, manufacturing and marketing of drugs developed through
the use of the Company's technologies are subject to regulation by numerous
governmental agencies in the United States and in other countries. To date, none
of the Company's technologies has resulted in any clinical drug candidates. The
FDA and comparable regulatory agencies in other countries impose mandatory
procedures and standards for the conduct of certain preclinical testing and
clinical trials and the production and marketing of drugs for human therapeutic
use. Product development and approval of a new drug are likely to take a number
of years and involve the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include:(i) preclinical studies; (ii) the submission to the FDA of
a request for authorization to conduct clinical trials on an investigational new
drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug for its intended use; (iv) submission to the
FDA of a new drug application (an "NDA"); and (v) review and approval of the NDA
by the FDA before the drug may be shipped or sold commercially.
In the United States, preclinical testing includes both IN VITRO and IN
VIVO laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
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
14
things, ethical factors, the safety of human subjects and the possible liability
of the institution. Compounds must be formulated according to the FDA's Good
Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company or the FDA may suspend
clinical trials at any time if it is believed that individuals participating in
such trials are being exposed to unacceptable health risks. Even assuming that
clinical trials are completed and that an NDA is submitted to the FDA, there can
be no assurance that the NDA will be reviewed by the FDA in a timely manner or
that once reviewed, the NDA will be approved. The approval process is affected
by a number of factors, including the severity of the targeted indications, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. The FDA may deny an NDA if applicable regulatory criteria
are not satisfied, or may require additional testing or information with respect
to the investigational drug. Even if initial FDA approval is obtained, further
studies, including post-market studies, may be required in order to provide
additional data on safety and will be required in order to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially tested. The FDA will also require post-market
reporting and may require surveillance programs to monitor the side effects of
the drug. Results of post-marketing programs may limit or expand the further
marketing of the drug. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling, an NDA
supplement may be required to be submitted to the FDA.
Each manufacturing establishment for new drugs is also required to
receive some form of approval by the FDA. Among the conditions for such approval
is the requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations,
15
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, 2004, the Company had no employees. Michele A. 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 on a month-to-month basis in Tarrytown, New
York.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
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.
16
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 2003 HIGH LOW
First quarter ended March 31, 2003 $1.16 $1.03
Second quarter ended June 30, 2003 $1.48 $1.13
Third quarter ended September 30, 2003 $1.51 $1.36
Fourth quarter ended December 31, 2003 $1.57 $1.39
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
As of March 15, 2004, there were approximately 66 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").
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 consolidated financial statements
and notes thereto included elsewhere in this report.
17
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (dollars in thousands, except share and per share data)
Revenues $ 220 $1,100 $600 $979 $6,028
------- ------ ---- ---- ------
Operating costs and expenses:
Total costs and expenses 837 886 1,077 2,389 12,759
-------- ----- ----- ----- ------
Operating (loss) gain (617) 214 (477) (1,411) (6,731)
Net (loss) income ($ 190)(1) $1,316(2) ($317)(3) $18,051(4) ($8,524)
========= ====== ====== ======= =======
Basic and diluted net (loss) income per
share ($ 0.01) $0.10 ($0.02) $1.37 ($0.65)
========== ===== ====== ===== =======
Shares used in calculation of basic
and diluted net (loss) income per share 13,144,040 13,144,040 13,144,040 13,133,615 13,068,940
DECEMBER 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents $24,369 $24,923 $24,469 $24,383(5) $5,082(5)
Total assets 26,807 26,870 26,201 25,709 26,699
Short-term debt -- -- -- -- --
Accumulated deficit (33,196) (33,006) (34,322) (34,005) (52,056)
Stockholders' equity 26,758 26,458 25,356 25,672 7,465
Cadus has not paid any dividends since its inception and does not anticipate
paying any dividends on its common stock in the foreseeable future.
(1) The net loss of $190,000 for the year ended December 31, 2003
includes a realized gain of $313,189 related to common shares
of Sequenom released from escrow which had been received in
connection with the merger of Axiom (in which Cadus had an
equity interest) with Sequenom.
(2) 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.
(3) The net loss of $317,000 for the year ended December 31, 2001
includes an arbitration award cost of approximately $750,000 to
a former employee and a $155,402 reimbursement of SIBIA
litigation costs offset by legal costs of $29,786.
(4) 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.
18
(5) 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". The restricted cash at December
31, 1999 has been reclassified as of December 31, 2000 to cash
and cash equivalents for purposes of the preceding table.
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 for the year ended
December 31, 2002. At December 31, 2003, the Company had an accumulated deficit
of approximately $33.2 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. However, the Company continues to
incur general and administrative expenses. For the year ended December 31, 2003,
such expenses aggregated $834,631 and included patent costs (including legal
fees) and license fees of approximately $319,000, legal (other than in
connection with patents) and accounting fees of approximately $242,000 and
insurance premiums of approximately $98,000. Since the Company only had revenues
of $220,000, it incurred an operating loss of $616,748 for the year ended
December 31, 2003.
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.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. Our long-lived assets
(principally capitalized patent costs) are required to be measured at the lower
of carrying amount or fair value, less cost to sell, whether reported in
continuing operations or discontinued operations. Intangibles with determinable
lives and other long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. Our judgments regarding the existence of impairment indicators are
based on historical and projected future operating results, changes in our
overall business strategy, and market and economic trends. In the future, events
could cause us to conclude that impairment indicators exist and that certain
intangibles with determinable lives and other long-lived assets are impaired
which may result in an adverse impact on our financial condition and results of
operations. The provisions of SFAS No. 144 did not have an impact on our
financial statements as of and for the year ended December 31, 2003.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
REVENUES
Revenues for 2003 decreased to $220,000 from $1,100,000 in 2002. This
decrease is attributable to the Company having received in 2002 a $1,000,000
research milestone payment from a licensee which it did not receive in 2003,
offset by a one-time fee of $120,000 received in 2003 in consideration for the
Company's extension of a license to an affiliate of the licensee.
OPERATING EXPENSES
General and administrative expenses decreased to $834,631 for 2003 from
$885,406 in 2002. This decrease was attributable to a decrease of $33,037 in the
maintenance and protection of patents, a decrease of $23,743 in insurance costs
and a decrease in directors' fees of $9,000, offset by an increase of $9,881 in
shareholder relations costs and an increase of $5,124 in sundry expenses.
EQUITY IN OTHER VENTURES
Equity in other ventures in 2003 reflects a loss of $2,117 from the
Company's investment in Laurel Partners Limited Partnership. There was a $692
loss in 2002 from such investment.
20
INTEREST INCOME
Interest income for 2003 decreased to $171,218 from $335,614 in 2002.
This decrease was attributable primarily to the decrease in the average interest
earned on invested funds to approximately 0.7% in 2003 from approximately 1.4%
in 2002.
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. The Company recorded a realized gain of
$823,189 with respect to 338,761 of such shares of common stock of Sequenom in
the consolidated statement of operations for the year ended December 31, 2002.
Pursuant to the merger, 102,685 shares of the Company's common shares
of Sequenom were held in escrow for a one-year period. The value of the escrowed
shares was recorded as a deferred gain on marketable securities on the
consolidated balance sheet of the Company as of December 31, 2002. On August 30,
2003, the escrowed shares were released to the Company and accordingly, the
Company recorded a realized gain on marketable securities of $313,189 in the
consolidated statement of operations for the year ended December 31, 2003.
NET (LOSS) INCOME
The net loss for 2003 was $189,696 compared to net income of $1,315,705
for 2002. The decrease is primarily attributable to a $880,000 decrease in
license fees, a decrease of the realized gain in marketable securities of
$510,000, a decrease in interest income of $164,396 offset by a decrease of
$50,775 in general and administrative expenses.
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 in 2002 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 costs.
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. In 2001, there was
a gain of $3,086 from the Company's investment in Laurel Partners Limited
Partnership.
21
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.
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 338,761 of such
shares of common stock of Sequenom 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 marketable securities 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003 the Company held cash and cash equivalents of
$24.4 million. The Company's working capital at December 31, 2003 was $25.8
million.
On July 30, 1999, Cadus sold its drug discovery assets to OSI and
ceased its internal drug discovery operations and research efforts for
collaborative partners. Pursuant to such sale transaction, OSI assumed, among
other things, Cadus's lease to the Company's research facility in Tarrytown, New
York and Cadus's equipment lease with General Electric Capital Corporation.
Cadus terminated all employees who were not hired by OSI or who did not
voluntarily resign, except for the Chief Executive Officer. As a result of the
foregoing, Cadus ceased to have research funding revenues and substantially
reduced its operating expenses.
In February 2000, Cadus licensed to OSI, on a non-exclusive basis, its
yeast technologies. OSI paid to Cadus a license fee of $100,000 and an access
fee of $600,000. OSI is also obligated to pay an annual maintenance fee of
$100,000 until the earlier of 2010 or the termination of the license
22
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. In September 2003, the licensee agreed to pay to
the Subsidiary an additional $120,000 pursuant to an addendum to the license
agreement under which the Company extended the license to an affiliate of the
licensee. 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 2005. 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, 2003 the Company had tax net operating loss
carryforwards of approximately $28.8 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.
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.
ITEM 9A. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures as
of the end of the period covered by 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
23
the Company's disclosure controls and procedures are effective in the timely
identification of material information required to be included in the Company's
periodic filings with the Securities and Exchange Commission. During the year
ended December 31, 2003, there have been no changes in the Company's internal
control over financial reporting identified in connection with the evaluation
thereof, which have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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, 2004 is set forth below:
NAME AGE POSITION
- ---- --- --------
Michele A. Paige 34 Chief Executive Officer, President and Director
James R. Broach, Ph.D. 56 Director
Russell D. Glass 41 Director
Carl C. Icahn 68 Director
Peter S. Liebert, M.D. (1) 68 Director
Jack G. Wasserman (1) 66 Director
- ----------
(1) Member of the Compensation Committee.
MICHELE A. PAIGE became a director and President, Chief Executive
Officer, Treasurer and Secretary of Cadus in February 2003. From July 2001 until
February 2004 Ms. Paige 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. From 2002 to 2003 Mr. Glass served as 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., a 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
24
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 is also
Chairman of the Board of Directors and a Director of Starfire Holding
Corporation, a Delaware corporation ("SHC"), and Chairman of the Board and a
Director of various of SHC's subsidiaries. SHC is primarily engaged in the
business of holding, either directly or through subsidiaries, various businesses
and investments and its address is 100 South Bedford Road, Mount Kisco, New York
10549. Mr. Icahn is on the executive committee of and owns the sole member of
ACF Industries LLC ("ACF") and was Chairman of the Board of Directors of its
predecessor ACF Industries Incorporated since October 29, 1984 and a Director of
ACF since June 29, 1984. ACF is a railroad freight and tank car leasing, sales
and manufacturing company. He has also been Chairman of the Board of Directors
and President of Icahn & Co., Inc. since 1968. Icahn & Co., Inc. is a registered
broker-dealer and a member of the National Association of Securities Dealers.
ACF and Icahn & Co., Inc. are directly or indirectly owned and controlled by
Carl C. Icahn. In January 2003, Mr. Icahn became Chairman of the Board and a
Director of XO Communications, Inc., a telecommunications company. Mr. Icahn has
been Chairman of the Board of the General Partner of American Real Estate
Partners, L.P. ("AREP") since November 15, 1990. Since October 1998, Mr. Icahn
has been the President and a Director of Stratosphere Corporation which operates
the Stratosphere Hotel and Casino and which is now a subsidiary of AREP. Since
September 29, 2000, Mr. Icahn has served as the Chairman of the Board of GB
Holdings, Inc., GB Property Funding, Inc. and Greate Bay Hotel & Casino, Inc.
which owns and operates the Sands Hotel. He also owns two other Las Vegas hotel
casinos. In addition to the foregoing, Mr. Icahn has substantial equity
interests in and/or owns various partnerships and corporations that invest in
publicly traded securities.
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 has served as a director of Cadus since May 1966. Mr.
Wasserman is an attorney and a member of the Bars of New York, Florida, and the
District of Columbia. From 1966 until 2001 he was a senior partner of Wasserman,
Schneider, Babb & Reed, a New York-based law
25
firm and its predecessors. Since September 2001 Mr. Wasserman has been engaged
in the practice of law as a sole practitioner. Since 1993 he has been a director
of American Property Investors, Inc., the general partner of American Real
Estate Partners, LP and, in 2003, became a director of its indirect
subsidiaries, American Casino & Entertainment Properties and American
Entertainment & Casino Finance Corp. Mr. Wasserman has been licenced by the New
Jersey State Casino Control Commission and the Nevada State Gaming Control
Commission. Since December 1, 1998, Mr. Wasserman has been a director of
National Energy Group, Inc. which, on December 4, 1998, sought protection under
the federal bankruptcy laws; a Plan of Reorganization became effective August 4,
2000, and a final decree closing the case and settling all matters relating to
the bankruptcy proceeding became effective on December 13, 2001. In 2003,
National Energy Group, Inc., became an indirect subsidiary of American Real
Estate Partners, LP. On March 11, 2004, Mr. Wasserman was appointed to the Board
of Directors of Triarc Companies, Inc.
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.
The Company does not have a separately-designated standing audit
committee or a committee performing similar functions. The entire Board of
Directors of the Company acts as the audit committee. The Board of Directors of
the Company has determined that it does not have an "audit commitee financial
expert" as such term is defined in the new rules adopted by the Securities and
Exchange Commission requiring companies to disclose whether or not at least one
member of the audit committee is an "audit committee financial expert." While it
might be possible to recruit a person who meets these qualifications, the Board
of Directors has determined that in order to fulfill all the functions of the
Board of Directors, each member of the Board of Directors should meet all the
criteria that have been established by the Board of Directors for members of the
Board of Directors, and it is not in the best interests of the Company to
nominate as a director someone who does not have all the experience, attributes
and qualifications the Company seeks. The Board of Directors believes that its
members are fully qualified to monitor the performance of management, the public
disclosures by the Company of its financial condition and performance, the
Company's internal accounting operations and its independent auditors. In
addition, the Board of Directors retains independent accountants or other
consultants whenever it deems appropriate.
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
26
Associates Corp. and High River Limited Partnership ("High River") (a limited
partnership controlled by Mr. Icahn) alleging that High River's tender offer for
Reliance 9% senior notes violated Section 14(e) of the Securities Exchange Act
of 1934. Reliance sought a temporary restraining order and preliminary and
permanent injunctive relief to prevent defendants from purchasing the notes. The
Court initially imposed a temporary restraining order. Defendants then
supplemented the tender offer disclosures. The Court conducted a hearing on the
disclosures and other matters raised by Reliance. The Court then denied
Reliance's motion for a preliminary injunction and ordered dissolution of the
temporary restraining order following dissemination of the supplement. Reliance
took an immediate appeal to the United States Court of Appeals for the Second
Circuit and sought a stay to restrain defendants from purchasing notes during
the pendency of the appeal. On January 30, 2001, the Court of Appeals denied
plaintiffs' stay application. On January 30, Reliance also sought a further
temporary restraining order from the District Court. The Court considered the
matter and reimposed its original restraint until noon the next day, at which
time the restraint against Mr. Icahn and his affiliates was dissolved. On March
22, 2001, the Court of Appeals ruled in favor of Mr. Icahn by affirming the
judgment of the District Court.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Cadus's directors and
executive officers, and persons who own more than ten percent of a registered
class of Cadus's equity securities, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock of Cadus. Reporting persons are required by SEC
regulation to furnish the Company with copies of all such filed reports. To
Cadus's knowledge, based solely on a review of copies of such 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 2003 in a
timely manner.
CODE OF ETHICS
Cadus has not adopted a code of ethics for its principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions due to the fact that it does not have
any employees, does not have any operations (other than those related to the
licensing of its technologies) and has only one officer (who is not an
employee).
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, 2003, 2002 and 2001, by its
Chief Executive Officer and each of the Cadus's other executive officers whose
total salary and bonus exceeded $100,000 during 2003 (collectively, the "Named
Executive Officers"):
27
Summary Compensation Table
--------------------------
Long-term
Compensation
Awards
------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation
--------------------------- ---- ---------- --------- ----------- ------------
Michele A. Paige (1)..................... 2003 -- -- -- --
President and Chief Executive 2002 -- -- -- --
Officer 2001 -- -- -- --
Russell D. Glass (2)..................... 2003 -- -- -- --
President and Chief Executive 2002 -- -- -- --
Officer 2001 -- -- -- --
- ----------
(1) Michele A. Paige has been the Company's President and Chief Executive
Officer from February 2003 and has served in such capacity without
compensation.
(2) Mr. Russell D. Glass was the Company's President and Chief Executive
Officer from April 2000 until February 2003 and served in such capacity
without compensation.
OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2003 by Cadus to the Named
Executive Officers:
28
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------------
Potential Realizable Value
Percent of at Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration -----------------------
Name Granted (#) Fiscal Year ($/share) Date 5% 10%
---- ----------- ----------- --------- ---------- -- ---
Michele A. Paige........... -- -- -- -- -- --
Russell D. Glass........... -- -- -- -- -- --
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning each
exercise of stock options, during the fiscal year ended December 31, 2003 by the
Named Executive Officers and unexercised stock options held by the Named
Executive Officers as of the end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-money Options at
December 31, 2003(#) December 31, 2003($)
Shares Aggregate ---------------------- ---------------------
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Michele A. Paige......... -- -- -- -- -- --
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.
29
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 2003, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 15, 2004, an aggregate of 101,737 shares of Common Stock were
subject to outstanding stock options granted under the 1993 Stock Option Plan.
As of March 15, 2004, options to purchase 101,737 shares were exercisable at
$1.50 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 that were
not issued pursuant to any written incentive plan of the Company. During 2003,
there were no stock options granted pursuant to such stock option agreements. As
of March 15, 2004, an aggregate of 323,403 shares of Common Stock were subject
to outstanding stock options granted under such stock option agreements, and
options to purchase 323,403 shares under such option agreements were exercisable
at prices ranging from $1.50 to $6.75 per share.
Cadus has registered the shares issuable upon exercise of stock options
granted under such stock option agreements pursuant to a registration statement
on Form S-8.
1996 INCENTIVE PLAN
Cadus's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted by the
Board of Directors and approved by the stockholders of Cadus in May 1996. The
1996 Incentive Plan replaced the 1993 Stock Option Plan, effective as of May 10,
1996, with respect to all future awards by Cadus to the Company's employees and
consultants. However, while all future awards will be made under the 1996
Incentive Plan, awards made under the 1993 Stock Option Plan will continue to be
administered in accordance with the
30
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.
31
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.
32
As of March 15, 2004, 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, 2004, 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 2003, 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 2003 but is presented for an 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.
33
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 Officers
in 2003, Russell D. Glass and Michele A. Paige, served in such capacity without
compensation and the current Chief Executive Officer, Michele A. Paige, is
serving in such capacity without compensation.
Peter Liebert
Jack G. Wasserman
34
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, 1998
[GRAPHIC OMITTED]
Corresponding index values and Cadus's Common Stock price values are
given below:
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- -------- --------
Cadus 100.00 16.15 37.11 60.39 56.26 76.90
Nasdaq Stock Market (U.S.) Index 100.00 192.96 128.98 67.61 62.17 87.61
Nasdaq Biotechnology Index 100.00 226.87 291.54 245.15 150.17 220.05
Cadus Closing Stock Price $1.94 0.31 0.72 1.17 1.09 1.49
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, 2004 with respect to
(i) each person known by the Company to be the
35
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 or upon information
provided by such persons to the Company.
NUMBER OF SHARES
AMOUNT AND NATURE PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL OUTSTANDING
OWNER (1) OWNERSHIP OWNED(2)
- ------------------------------ ----------------- --------------
Carl C. Icahn................................... 4,973,158(3) 37.80%
767 Fifth Avenue
New York, New York 10153
Jay D. Johnson ................................. 1,090,325(4) 8.30%
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 A. Paige................................ ---- *
Jack G. Wasserman............................... 14,500(7) *
All executive officers and directors as a ...... 5,007,992(8) 37.99%
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, 2004, 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 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.
36
(4) Jay D. Johnson has shared voting power and shared investment power with
respect to 1,090,325 shares of Common Stock, Lakeshore Capital, Inc.
has shared voting power and investment power with respect to 718,825
shares of Common Stock, Hyatt Johnson Capital, LLC has shared voting
power and shared investment power with respect to 294,000 shares of
Common Stock, and Aqua Fund L.P. has shared voting power and shared
investment power with respect to 66,000 shares of Common Stock. Jay D.
Johnson is the President of Lakeshore Capital, Inc. and the Managing
Partner of Hyatt Johnson Capital, LLC. 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, 2003:
(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 110,904 $1.92 1,736,221
plans approved by
security holders
Equity compensation 323,403 $2.42 0
plans not approved by
security holders
Total 434,307 $2.29 1,736,221
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees incurred by the Company for the
services of KPMG LLP in 2003 and 2002:
2003 2002
---- ----
o Audit Fees.............................. $ 64,500 $ 63,000
o Audit-Related Fees...................... $ - $ -
o Tax Fees................................ $ 18,500 $ 23,140
o All Other Fees.......................... $ - $ -
Audit fees consist of services rendered to the Company for the audit of
the Company's annual consolidated financial statements, reviews of the Company's
quarterly financial statements and related services.
Tax fees consist of tax compliance and related tax services.
The Company's policy is that, before accountants are engaged by the
Company to render audit or non-audit services, the engagement is approved by
Cadus's Board of Directors. Cadus's Board of Directors approved KPMG LLP's
engagement as the Company's independent auditors for the fiscal year ending
December 31, 2003 before KPMG LLP was so engaged. All of the 2003 services
described above were approved by the Board of Directors.
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 F-5
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.
38
(c) Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
3.1 Certificate of Amendment of Amended and Restated Certificate of Incorporation
of Cadus Pharmaceutical Corporation ("Cadus"), as filed with the Secretary of
State of Delaware on June 20, 2003, and Amended and Restated Certificate of
Incorporation of Cadus, as filed with the Secretary of State of Delaware on July
22, 1996.(1)
3.2 By-laws of Cadus. (2)
4.1 Specimen of Common Stock Certificate of Cadus. (2)
4.2 1993 Cadus Pharmaceutical Corporation Stock Option Plan. (2)
4.3 Cadus Pharmaceutical Corporation 1996 Incentive Plan. (2)
4.4 Amendment to Cadus Pharmaceutical Corporation 1996 Incentive Plan. (1)
4.5 Form of Incentive Stock Option Agreement utilized in connection with issuances of
stock options under the Cadus Pharmaceutical Corporation 1996 Incentive Plan. (1)
4.6 Form of Stock Option Agreement between Cadus and each of the following
employees of Cadus: Philip N. Sussman, John Manfredi, Andrew Murphy, Jeremy
Paul, Lauren Silverman, Joshua Trueheart, James S. Rielly, Thomas F. Deuel,
Norman R. Klinman, Elliott M. Ross, Jeremy Thorner, Arnold Levine, John
Ransom, Christine Klein, Suzanne K. Wakamoto, Christopher Pleiman, Algis
Anilionis, Anupama K. Nadkarni, Mitchell Silverstein, Michael A. Spruyt and
David Fruhling. (1)
4.7 Form of Stock Option Agreement between Cadus and each of the following non-
employee directors of Cadus: Theodore Altman, Harold First, Carl Icahn, Peter
Liebert, Robert Mitchell, Mark Rachesky, William Scott, Jack Wasserman and
Samuel D. Waksal. (1)
4.8 Stock Purchase Agreement between Cadus and SmithKline Beecham Corporation,
dated as of February 25, 1997. (3)
4.9 Registration Rights Agreement between Cadus and SmithKline Beecham
Corporation, dated as of February 25, 1997. (3)
39
10.1 Form of Indemnification Agreement entered into between Cadus and its directors
and officers. (2)
10.2 Form of Agreement Regarding Assignment of Inventions, Confidentiality and
Non-Competition. (2)
10.3 The 401(k) Plan of the Cadus Pharmaceutical Corporation. (2)
10.4 Employment Agreement between Jeremy M. Levin and Cadus. (2)
10.5 Preferred Stock Purchase Agreement dated as of July 30, 1993 between Cadus and
the purchasers of Series A Preferred Stock, together with the First and Second
Amendments thereto dated as of July 26, 1994 and October 31, 1995, respectively. (2)
10.6 Preferred Stock Purchase Agreement dated as of July 26, 1994 between Cadus and
Bristol-Myers Squibb Company ("Bristol-Myers") concerning Series B Preferred Stock,
together with the First Amendment thereto dated as of October 31, 1995. (2)
10.7 Preferred Stock Purchase Agreement dated as of November 1, 1995 between
Cadus and Physica B.V. concerning Series B Preferred Stock. (2)
10.8 Research Collaboration and License Agreement, dated as of July 26, 1994,
between Cadus and Bristol-Myers. (2)
10.9 Screening and Option Agreement, dated as of July 26, 1994, between Cadus and
Bristol-Myers. (2)
10.10 Research Collaboration and License Agreement, dated as of November 1, 1995
between Cadus and Solvay Pharmaceuticals B.V. (2)
10.11 Sublease Agreement, dated as of October 19, 1994, between Cadus and Union
Carbide Corporation. (2)
10.12 Lease, dated as of June 20, 1995 between Cadus and Keren Limited Partnership. (2)
10.13 Consulting Agreement between Cadus and James R. Broach, dated February 1,
1994. (2)
40
10.14 Amended and Restated License Agreement between Cadus and Duke University,
dated May 10, 1994. (2)
10.15 License Agreement between Cadus and National Jewish Center for Immunology
and Respiratory Medicine dated November 1, 1994. (2)
10.16 Stock Option Agreement, dated as of November 1, 1994, between Cadus and John
C. Cambier. (2)
10.17 Stock Option Agreement, dated as of November 1, 1994, between Cadus and Gary
L. Johnson. (2)
10.18 Consulting Agreement, dated as of November 1, 1994, between Cadus and John C.
Cambier. (2)
10.19 Consulting Agreement, dated as of November 1, 1994, between Cadus and Gary L.
Johnson. (2)
10.20 Research Collaboration Agreement, dated as of January 9, 1995, between Cadus
and Houghten Pharmaceuticals, Inc., together with the Amendment thereto dated
as of March 1996. (2)
10.21 Stock Option Agreement, dated as of December 18, 1995, between Cadus and
James R. Broach. (2)
10.22 Waiver, dated May 17, 1996, of Section 1.05 of the Preferred Stock Purchase
Agreement dated as of July 26, 1994 between Cadus and Bristol-Myers, as
amended by the First Amendment thereto dated as of October 31, 1995. (2)
10.23 Waiver, dated May 17, 1996, of Section 1.04 of the Preferred Stock Purchase
Agreement dated as of November 1, 1995 between Cadus and Physica B.V. (2)
10.24 Research Collaboration and License Agreement among Cadus, SmithKline
Beecham Corporation and SmithKline Beecham p.l.c., dated as of February 25,
1997. (3)
10.25 Employment Agreement, dated as of June 30, 1998, between Cadus and Charles
Woler. (4)
10.26 Employment Agreement, dated as of September 10, 1998, between Cadus and
Philip N. Sussman. (4)
41
10.27 Agreement and Instructions to Stakeholder among Cadus, SIBIA and Security
Trust Company entered into in March 1999. (5)
10.28 Asset Purchase Agreement, dated as of July 30, 1999, between Cadus and OSI
Pharmaceuticals, Inc. (Schedules to the Asset Purchase Agreement have been
intentionally omitted. Cadus hereby undertakes to furnish supplementally to the
Securities and Exchange Commission upon request a copy of the omitted
schedules.) (6)
10.29 Yeast Technology License Agreement, dated as of February 15, 2000, between Cadus
and OSI Pharmaceuticals, Inc. (Exhibits to the Yeast Technology Agreement have been
intentionally omitted. Cadus hereby undertakes to furnish supplementally to the
Securities and Exchange Commission upon request a copy of the omitted exhibits.)(7)
23 Consent of KPMG LLP, independent auditors.
24 Power of Attorney (filed as part of the signature page to this Report).
31 Certifications
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- ----------
(1) Filed with Cadus's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2003.
(2) Filed with Cadus's Registration Statement on Form S-1 (Registration No.
333-4441), declared effective by the Securities and Exchange Commission on
July 17, 1996.
(3) Filed with Cadus's Current Report on Form 8-K, dated March 7, 1997.
(4) Filed with Cadus's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1998.
42
(5) Filed with Cadus's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
(6) Filed with Cadus's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
(7) Filed with Cadus's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000.
43
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CADUS CORPORATION
By: /s/ Michele A. Paige
------------------------------------
Michele A. Paige, Chief Executive Officer and President
Each person whose signature appears below constitutes and appoints
Michele A. Paige and Jack G. Wasserman, or either of them, each with the power
of substitution, his true and lawful attorney-in-fact to sign any amendments to
this report and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact, or his substitute,
may do or choose to be done by virtue hereof.
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated below.
NAME TITLE DATE
---- ----- ----
/S/ Michele A. Paige Chief Executive Officer, President and Director March 29, 2004
- ------------------------- (Principal Executive Officer and Principal
Michele A. Paige Accounting Officer)
/s/ James R. Broach Director March 26, 2004
- -------------------------
James R. Broach
/s/ Russell D. Glass Director March 26, 2004
- -------------------------
Russell D. Glass
Director March __, 2004
- -------------------------
Carl C. Icahn
/s/ Peter S. Liebert Director March 26, 2004
- -------------------------
Peter S. Liebert
/s/ Jack G. Wasserman Director March 26, 2004
- -------------------------
Jack G. Wasserman
44
CADUS CORPORATION AND SUBSIDIARY
INDEX
Page No.
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2003 and 2002 F-3
Consolidated Statements of Operations - For the years ended
December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income - For the years ended December 31 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows - For the years ended
December 31, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cadus Corporation:
We have audited the accompanying consolidated balance sheets of Cadus
Corporation and subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cadus Corporation
and subsidiary as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
Melville, New York
March 19, 2004 /s/ KPMG LLP
F-2
CADUS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31, 2003 December 31, 2002
------------------ ------------------
Current assets:
Cash and cash equivalents $24,369,223 $24,923,071
Prepaid and other current assets 34,393 79,053
Investment in marketable securities 1,412,627 794,603
--------- -------
Total current assets 25,816,243 25,796,727
Investment in other ventures 162,805 164,922
Other assets, net 827,935 908,841
------- -------
Total assets $26,806,983 $26,870,490
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accrued expenses and other current liabilities $49,164 $227,810
Deferred gain on marketable securities -- 184,833
------ -------
Total current liabilities 49,164 412,643
------ -------
Commitments and contingencies (Note 13)
Stockholders' equity
Common stock, $.01 par value. Authorized 35,000,000
shares at December 31, 2003 and 2002 issued
13,285,707 shares at December 31, 2003 and 2002;
outstanding 13,144,040 shares at December 31, 2003
and 2002 132,857 132,857
Additional paid-in capital 59,844,355 59,844,355
Accumulated deficit (33,195,567) (33,005,871)
Accumulated other comprehensive income (loss) 276,249 (213,419)
Treasury stock, 141,667 shares of common stock at
December 31, 2003 and 2002 (300,075) (300,075)
-------- --------
Total stockholders' equity 26,757,819 26,457,847
---------- ----------
Total liabilities and stockholders' equity $26,806,983 $26,870,490
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
CADUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2003 2002 2001
------------------- -------------------- -------------------
License and maintenance fees $220,000 $1,100,000 $600,000
-------- ---------- --------
Total revenues 220,000 1,100,000 600,000
------- --------- -------
Costs and expenses:
General and administrative 834,631 885,406 1,079,614
Loss (gain) of equity in other ventures 2,117 692 (3,086)
----- --- -------
Total costs and expenses 836,748 886,098 1,076,528
------- ------- ---------
Operating (loss) gain (616,748) 213,902 (476,528)
--------- ------- ---------
Other income (expenses):
Interest income 171,218 335,614 837,639
Gain on reversal of litigation judgment, net
of legal fees -- -- 125,616
Arbitration settlement -- -- (750,000)
Realized gain on marketable securities 313,189 823,189 --
------- ------- -------
Total other income, net 484,407 1,158,803 213,255
------- --------- -------
(Loss) income before income tax provision (132,341) 1,372,705 (263,273)
State tax provision 57,355 57,000 53,579
------ ------ ------
Net (loss) income ($189,696) $1,315,705 ($316,852)
========= ========== =========
Basic and diluted net (loss) income per share ($0.01) $0.10 ($0.02)
====== ===== ======
Weighted average shares of common stock outstanding - 13,144,040 13,144,040 13,144,040
basic and diluted ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
CADUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Stock Additional Paid-in Accumulated
Shares Amount Capital Deficit
---------------------------------- --------------------- -----------------
Balance at December 31, 2000 13,285,707 $132,857 $59,844,355 ($34,004,724)
Net loss for the year ended
December 31, 2001 -- -- -- (316,852)
--------------- ------------- --------------------- -----------------
Balance at December 31, 2001 13,285,707 132,857 59,844,355 (34,321,576)
Net income for the year ended
December 31, 2002 -- -- -- 1,315,705
Unrealized loss on investment in
marketable securities -- -- -- --
Comprehensive income
--------------- ------------- --------------------- -----------------
Balance at December 31, 2002 13,285,707 132,857 59,844,355 (33,005,871)
Net loss for the year ended
December 31, 2003 -- -- -- (189,696)
Unrealized gain on investment in
marketable securities -- -- -- --
Comprehensive income
--------------- ------------- --------------------- -----------------
Balance at December 31, 2003 13,285,707 $132,857 $59,844,355 ($33,195,567)
=============== ============= ===================== =================
Accumulated Other
Comprehensive Treasury Stock
Income (Loss) Shares Amount Total
-------------------- --------------------------------- ----------------
-- 141,667 ($300,075) $25,672,413
-- -- -- (316,852)
-------------------- -------------- -------------- ----------------
-- (141,667) (300,075) 25,355,561
-- -- -- 1,315,705
(213,419) -- -- (213,419)
----------------
1,102,286
-------------------- -------------- -------------- ----------------
(213,419) (141,667) (300,075) 26,457,847
-- -- -- (189,696)
489,668 -- -- 489,668
----------------
299,972
-------------------- -------------- -------------- ----------------
$276,249 141,667 ($300,075) $26,757,819
==================== ============== ============== ================
See accompanying notes to consolidated financial statements.
F-5
CADUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2003 2002 2001
------------------ ---------------- ----------------
Cash flows from operating activities:
Net (loss) income ($189,696) $1,315,705 ($316,852)
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Amortization 80,906 80,906 80,905
Loss (gain) of equity in other ventures 2,117 692 (3,086)
Realized gain on marketable securities (313,189) (823,189) --
Changes in assets and liabilities:
License fee receivable -- 500,000 (500,000)
Prepaid and other current assets 44,660 (4,053) 6,250
Other assets -- 875 10,000
Accrued expenses and other current liabilities (178,646) (617,222) 808,788
--------- ------- -------
Net cash (used in) provided by operating activities (553,848) 453,714 86,005
--------- ------- ------
Net (decrease) increase in cash and cash (553,848) 453,714 86,005
equivalents
Cash and cash equivalents - beginning of period 24,923,071 24,469,357 24,383,352
---------- ---------- ----------
Cash and cash equivalents - end of period $24,369,223 $24,923,071 $24,469,357
=========== ----------- -----------
See accompanying notes to consolidated financial statements.
F-6
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
====================
(1) Organization and Basis of Preparation
Cadus Corporation ("Cadus") was incorporated on January 23, 1992,
under the laws of the State of Delaware. Cadus changed its name to
Cadus Corporation from Cadus Pharmaceutical Corporation on June 20,
2003. The change in name was approved by the stockholders of Cadus at
Cadus's annual meeting of stockholders held on June 18, 2003.
Until July 30, 1999, Cadus devoted substantially all of its resources
to the development and application of novel yeast-based and other drug
discovery technologies. As further discussed in Note 3, on July 30,
1999, Cadus sold its drug discovery assets to OSI Pharmaceuticals,
Inc. ("OSI") and ceased its internal drug discovery operations and
research efforts for collaborative partners. Cadus is seeking to
license its technologies, to otherwise realize value from its assets
and to use a portion of its available cash to acquire technologies or
products or to acquire or invest in companies.
In December 2001, Cadus organized a wholly owned subsidiary, Cadus
Technologies, Inc. (the "Subsidiary"), and transferred its yeast-based
drug discovery technologies to the Subsidiary. On December 19, 2001,
the Subsidiary licensed such yeast-based drug discovery technologies
on a non- exclusive basis to a major pharmaceutical company (see
further discussion at Note 7).
(2) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts
of Cadus and its wholly owned subsidiary, Cadus
Technologies, Inc. All intercompany balances and
transactions have been eliminated in consolidation. The
Company operates in one segment and licenses novel
yeast-based and other drug discovery technologies.
(b) Cash Equivalents
The Company includes as cash equivalents all highly liquid
investments with original maturities of three months or less
when purchased to be cash equivalents. Included in cash and
cash equivalents at December 31, 2003 and 2002 were cash
equivalents of $22,921,511 and $22,757,378, respectively.
(c) Other Assets
Other non-current assets represent capitalized patent costs
that are amortized on a straight- line basis over seventeen
years. At December 31, 2003 and 2002 accumulated
amortization is $551,084 and $470,178, respectively.
Amortization expense amounted to approximately $81,000 for
each of the years ended December 31 2003, 2002 and 2001. The
annual amortization for the next five years will be
approximately $81,000 per year.
(d) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statements carrying amounts of
existing assets and liabilities and their
F-7
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that
includes the enactment date.
(e) Revenue Recognition
The Company has entered into license agreements with two
companies to use its yeast technology on a non-exclusive
basis. The agreements provide for the payment of non-
refundable license fees to the Company. The Company
recognizes the license fees as income when received, as
there are no continuing performance obligations of the
Company to the licensees.
(f) Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing
the net (loss) income by the weighted average number of
common shares outstanding. Diluted earnings per share is
calculated based on the weighted average of common shares
outstanding plus the effect of dilutive common stock
equivalents (stock options). The effect of stock options
totaling 434,307, 609,309 and 609,309 for the years ended
December 31, 2003, 2002 and 2001, respectively, were not
included in the net (loss) income per share calculation
because their effect would have been anti-dilutive.
(g) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ
from those estimates.
(h) Fair Value of Financial Instruments
Management of the Company believes that the carrying value
of its monetary assets and liabilities approximates fair
value as a result of the short term nature of such assets
and liabilities.
(i) Stock-Based Compensation
The Company applies the intrinsic-value-based method of
accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations including Financial Accounting
Standards Board (FASB) Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN
INTERPRETATION OF APB OPINION NO. 25, issued in March 2000,
to account for its fixed-plan employee stock options. Under
this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying
stock exceeded the exercise price. Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting
F-8
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
===============
for Stock-Based Compensation - Transition and Disclosure,"
established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123 and
SFAS 148, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above,
and has adopted only the disclosure requirements of SFAS No.
123.
Pro forma net (loss) income would be the same as the
reported net (loss) income for each of the years in the
three-year period ended December 31, 2003 had the
fair-value-based method been applied to all outstanding
awards, which were fully vested as of December 31, 1999.
On April 22, 2003, the FASB determined that stock-based
compensation should be recognized as a cost in the financial
statements and that such cost be measured according to the
fair value of the stock options. The FASB has not as yet
determined the methodology for calculating fair value and
plans to issue an exposure draft and final statement in
2004. We will continue to monitor communications on this
subject from the FASB in order to determine the impact on
the Company's consolidated financial statements.
(j) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires
that all items recognized under accounting standards as
components of comprehensive income be reported in an annual
financial statement that is displayed with the same
prominence as other annual financial statements. Other
comprehensive income may include foreign currency
translation adjustments, minimum pension liability
adjustments and unrealized gains and losses on marketable
securities classified as available-for-sale. The Company's
operations in 2003 gave rise to an unrealized gain on
marketable securities classified as available for sale. The
Company's operations in 2002 gave rise to an unrealized loss
on marketable securities classified as available for sale.
(3) Asset Sale to OSI Pharmaceuticals, Inc.
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. 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,
genetic engineering tools, and its genomics databases related to G
protein-coupled receptors.
F-9
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
=================
(4) Litigation
In July 1996, SIBIA (which was acquired by Merck and Co. in 1999)
commenced a patent infringement action against Cadus alleging
infringement by Cadus of a patent. After trial, on December 18, 1998,
the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. Cadus appealed the judgment. In order to stay
execution pending appeal of the $18.0 million judgment obtained by
SIBIA, in March 1999 Cadus deposited $18.5 million in escrow to secure
payment of the judgment in the event Cadus were to lose the appeal. On
September 6, 2000 the United States Court of Appeals ruled in favor of
Cadus and overturned the 1998 judgment entered by the U.S. District
Court. The Court of Appeals ruled that the claims of the SIBIA patent
asserted against Cadus were invalid and that the District Court erred
in denying Cadus's motion for judgment as a matter of law on the issue
of invalidity. On October 30, 2000, the U.S. District Court set aside
the $18.0 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. The
reserve for litigation of $18,841,489 (net of direct legal costs of $1
million) has been reversed and credited to the statement of operations
for the year ended December 31, 2000. Pursuant to a court order, Cadus
received in February 2001 a $155,402 reimbursement of SIBIA litigation
costs which was partially offset by legal costs incurred of $29,786.
In March 2002, the arbitrator in the arbitration proceeding commenced
against Cadus by Philip N. Sussman, the former Senior Vice President,
Finance and Corporate Development, and Chief Financial Officer of
Cadus, ruled in favor of Mr. Sussman and awarded him approximately
$750,000 in severance pay, interest and attorneys and other costs and
fees. A charge of $750,000 was recorded in the accompanying
consolidated statement of operations for the year ended December 31,
2001. The Company paid the arbitration settlement during 2002.
(5) Investments in Other Ventures
In December 1996, Cadus issued a $150,000 promissory note bearing
interest at 7% per annum in exchange for a 42% limited partnership
interest in Laurel Partners Limited Partnership ("Laurel"), a limited
partnership of which a shareholder of Cadus is the general partner.
The principal amount and interest thereon was paid in December 1998.
In addition, Cadus purchased for $160,660 in cash, a 47% limited
partnership interest in Laurel from Tortoise Corporation, a
corporation wholly-owned by the shareholder. Laurel's purpose is to
invest, directly or indirectly, in securities of biotechnology
companies. Cadus had the right to require the shareholder to match any
future investment made by Cadus in Laurel up to an aggregate
investment on the part of the shareholder of $5.0 million. This right
expired on December 31, 1999. Cadus is not required to make any
additional investment in Laurel. The investment is accounted for under
the equity method with the recognition of losses limited to Cadus's
capital contributions. For the years ended December 31, 2003, 2002 and
2001 Cadus recognized (losses) gains of ($2,117), ($692) and $3,086,
respectively, related to the investment. The remaining investment in
Laurel of $162,805 and $164,922 at December 31, 2003 and 2002,
respectively, is reflected as investments in other ventures on the
accompanying consolidated balance sheets.
(6) Investment In Marketable Securities
Cadus had an equity interest in Axiom Biotechnologies, Inc. ("Axiom").
Due to Axiom's operating losses, Cadus's investment was written down
to zero as of December 31, 2000. On August 30, 2002 Axiom entered into
a merger agreement with a wholly owned subsidiary of Sequenom, Inc.
F-10
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
==============
("Sequenom") whose shares of common stock are publicly traded on the
Nasdaq National Market. Pursuant to the merger, Cadus received 441,446
common shares of Sequenom with a fair market value of $2.43 per share,
in exchange for its shares of Axiom. Pursuant to the merger, 102,685
of Cadus's 441,446 common shares of Sequenom were held in escrow (the
"Escrow Shares") for a one- year period that expired on August 30,
2003. The Escrow Shares were held to secure rights to indemnification,
compensation and reimbursement of Sequenom and other indemnitees as
provided in the merger agreement. Upon the closing of the transaction,
Cadus recorded a realized gain of $823,189 related to the 338,761
common shares received in the consolidated statement of operations for
the year ended December 31, 2002. The value of the Escrow Shares
received was recorded as a deferred gain on marketable securities on
the December 31, 2002 consolidated balance sheet. On August 30, 2003,
the escrow shares were released and accordingly, the Company recorded
a realized gain on marketable securities of $313,189 in the
consolidated statement of operations for the year ended December 31,
2003.
Pursuant to the provisions of SFAS No. 115, "Accounting for Certain
Debt and Equity Securities," management deems its investment in
Sequenom to be available for sale and reports its investment at fair
value with net unrealized gains or losses reported within
stockholders' equity. The Company's unrealized gain (loss) of 276,249
and ($213,419) on shares received is reflected in accumulated other
comprehensive income (loss) at December 31, 2003 and December 31,
2002, respectively.
(7) Licensing Agreements
In December 2001, Cadus Technologies, Inc., Cadus's wholly owned
subsidiary, licensed its yeast- based drug discovery technologies on a
non-exclusive basis to a major pharmaceutical company. Under the
licensing agreement, the subsidiary received an up-front
non-refundable fee of $500,000 that is recorded as revenue in the
accompanying consolidated statement of operations for the year ended
December 31, 2001 as the Company has no further involvement with the
development of the product. The subsidiary received an additional
licensing fee of $1,000,000 in October 2002 when the licensee achieved
a research milestone. On September 12, 2003, the parties entered into
an addendum to the agreement pursuant to which the Company extended
the license to an affiliate of the licensee in consideration for the
licensee agreeing to pay $120,000 to the Company. The licensee is
entitled to use the technologies for five years from December 2001.
Following the initial five year term, the licensee may renew the
license annually upon payment of an annual licensing fee of $250,000.
For the years ended December 31, 2003, 2002 and 2001, the Company
recognized $120,000, $1,000,000 and $500,000, respectively, in license
revenue from the licensee.
In February 2000, Cadus licensed to OSI, on a non-exclusive basis, its
yeast-based drug discovery technologies, including various reagents
and its library of over 30,000 yeast strains, and its bioinformatics
software. OSI paid to Cadus a license fee of $100,000 and an access
fee of $600,000, which have been recorded as license fee revenue in
the accompanying consolidated statement of operations for the year
ended December 31, 2000. OSI is also obligated to pay an annual
maintenance fee of $100,000 until the earlier of 2010 or the
termination of the license and a supplemental license fee of $250,000
which was paid in December 2000 after the lifting of the injunction
obtained by SIBIA and recorded as license fee revenue. OSI may
terminate the license at any time on 30 days prior written notice. For
the years ended December 31, 2003, 2002 and 2001, the Company
recognized $100,000 each year in license and maintenance fees from
OSI.
(8) Research Collaboration and License Agreements
F-11
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
Cadus no longer has any collaborations with pharmaceutical companies.
The Bristol-Myers Squibb Company collaboration expired in July 1999,
the Solvay Pharmaceutical collaboration was assigned to OSI in July
1999 and Cadus and SmithKline Beecham p.l.c. agreed to terminate their
collaboration in September 1999. Each of Bristol-Myers Squibb Company
and SmithKline Beecham p.l.c. is required to make payments to Cadus
upon the achievement by it of certain pre-clinical and drug
development milestones and to pay Cadus royalties on the sale of any
drugs developed as a result of the research collaboration with Cadus
or through the use of Cadus's drug discovery technologies. There can
be no assurance that any such milestones will be achieved or any such
drugs developed.
The Company has entered into license agreements with various third
parties. Generally, the agreements provide that the Company will pay
license fees and/or maintenance payments, in return for the use of
technology and information and the right to manufacture, use and sell
future products. These agreements provide for payments based on the
completion of milestone events, as well as royalty payments based upon
a percentage of product or assay sales. License fees and maintenance
payments for the years ended December 31, 2003, 2002 and 2001 were
$27,000, $25,000 and $25,000, respectively.
(9) Income Taxes
Deferred tax assets of approximately $15,139,000 and $15,011,000 at
December 31, 2003 and 2002, respectively, relate principally to net
operating loss carryforwards of $28,811,000 and $28,296,000, research
and development credit carryforwards of $2,535,000 and $2,535,000, and
equity losses on investments of $2,864,000 and $3,177,000 at December
31, 2003 and 2002, respectively. An offsetting valuation allowance has
been established for the full amount of the deferred tax assets to
reduce such assets to zero, as a result of the significant uncertainty
regarding their ultimate realization. The aggregate valuation
allowance increased $128,000 and decreased $543,000 during the years
ended December 31, 2003 and 2002, respectively.
The Company's net operating loss carryforwards and research and
development credit carryforwards noted above expire in various years
from 2009 to 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. The Company's tax provision
for each year represents a minimum New York state tax on capital.
There was no provision for federal income taxes in 2002, as taxable
income was offset by the utilization of the Company's available net
operating loss carryforwards for Federal and state purposes.
(10) Stock Options
(a) The 1993 Stock Option Plan ("the 1993 Plan") was adopted in
January 1993. The 1993 Plan provides for the grant of
options to reward executives, consultants and employees in
order to foster in such personnel an increased personal
interest in the future growth and prosperity of Cadus. The
options granted under the 1993 Plan may be either incentive
stock options or nonqualified options. An aggregate of
666,667 common shares were reserved for issuance under the
1993 Plan.
Options granted under the 1993 Plan expire no later than ten
years from the date of grant. The option price is required
to be at least 100% and 85% of the fair market value on the
date of grant as determined by the Board of Directors for
incentive stock options and nonqualified options,
respectively. The options generally become exercisable
according to a schedule of vesting as determined by the
Compensation Committee of the Board of
F-12
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
=============
Directors. The schedule prescribes the date or dates on
which the options become exercisable, and may provide that
the option rights accrue or become exercisable in
installments over a period of months or years.
Activity under the 1993 Plan is as follows:
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
------ --------------
Balance at January 1, 2001 276,739 $1.52
2001 activity
Granted - -
Exercised - -
Canceled or expired - -
-------
Balance at December 31, 2001 276,739 $1.52
2002 activity
Granted - -
Exercised - -
Canceled or expired - -
-------
Balance at December 31, 2002 276,739 $1.52
2003 activity
Granted - -
Exercised - -
Canceled or expired (175,002) -
---------
Balance at December 31, 2003 101,737 $1.50
=======
The following table summarizes stock option information for the
1993 Plan as of December 31, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ------------ -------
$1.50 101,737 .30 $1.50 101,737 $1.50
F-13
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
============
(b) Cadus entered into stock option agreements not pursuant to
any plan with certain directors, employees, founders and
consultants. These options generally become exercisable
according to a schedule of vesting as determined by the
Compensation Committee of the Board of Directors. The
options become exercisable in installments over a period of
months or years. As of December 31, 2003, an aggregate of
323,403 common shares was reserved for issuance pursuant to
such stock option agreements.
In November 1996, the Compensation Committee granted to
certain directors then in office an option to purchase
12,000 shares of common stock at an exercise price of $6.75
per share. Each stock option grant is fully exercisable and
expires in November 2006 and is included in the table below.
Activity for all the above grants not issued pursuant to any
plan is as follows:
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
------ --------------
Balance at January 1, 2001 434,070 $2.46
2001 activity
Granted - -
Exercised - -
Canceled or expired (110,667) $2.57
--------
Balance at December 31, 2001 323,403 $2.42
2002 activity
Granted - -
Exercised - -
Canceled or expired - -
--------
Balance at December 31, 2002 323,403 $2.42
2003 activity
Granted - -
Exercised - -
Canceled or expired - -
-------
Balance at December 31, 2003 323,403 $2.42
=======
The following table summarizes stock option information for grants
not subject to any plan as of December 31, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
$1.50 253,334 .84 $1.50 253,334 $1.50
F-14
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
=============
$3.60 22,069 1.97 $3.60 22,069 $3.60
$6.75 48,000 2.88 $6.75 48,000 $6.75
------- -------
$1.50 to $6.75 323,403 1.22 $2.42 323,403 $2.42
======= =======
(c) Effective May 10, 1996, the 1993 Plan was replaced by the
1996 Incentive Plan ("the 1996 Plan") with respect to all
future awards to Cadus's employees and consultants. However,
awards made under the 1993 Plan will continue to be
administered in accordance with the 1993 Plan. The options
granted under the 1996 Plan may be either incentive stock
options or nonqualified options. In December 1996, the
maximum number of shares of common stock that may be the
subject of awards under the 1996 Incentive Plan was
increased from 333,334 to 833,334 (plus any shares that are
the subject of canceled or forfeited awards) by the Board of
Directors and such increase was approved by the stockholders
of Cadus in June 1997. In December 1997, the maximum number
of shares of common stock that may be the subject of awards
under the 1996 Incentive Plan was increased to 1,833,334
(plus any shares that are the subject of canceled or
forfeited awards) by the Board of Directors and approved by
the stockholders of Cadus in June 1998.
Options granted under the 1996 Plan expire no later than ten
years from the date of grant. The option price is required
to be at least 100% of the fair value on the date of grant
as determined by the Board of Directors for incentive and
nonqualified stock options. The options generally become
exercisable according to a schedule of vesting as determined
by the Compensation Committee of the Board of Directors. The
schedule prescribes the date or dates on which the options
become exercisable in installments over a period of months
or years.
Activity under the 1996 Plan is as follows:
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
------ --------------
Balance at January 1, 2001 9,167 $6.56
2001 activity
Granted - -
Exercised - -
Canceled or expired - -
-------
Balance at December 31, 2001 9,167 $6.56
2002 activity
Granted - -
Exercised - -
Canceled or expired - -
-------
Balance at December 31, 2002 9,167 $6.56
2003 activity
Granted - -
Exercised - -
Canceled or expired - -
-------
F-15
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
============
Balance at December 31, 2003 9,167 $6.56
==========
The following table summarizes stock option information for the 1996
Plan as of December 31, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ------------- --------
$6.38 to $6.63 9,167 3.24 $6.56 9,167 $6.56
(11) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following:
2003 2002
---------- -----------
Accrued professional fees $ 45,365 $203,943
Other accrued expenses and taxes 3,799 23,867
--------- --------
Total $ 49,164 $227,810
========= ========
(12) Related Party Transactions
One director provides consulting services to the Company for patent
and license related matters. Fees paid to this director in fiscal
2003, 2002 and 2001 were approximately $13,000, $7,000 and $6,000,
respectively.
(13) Commitments
Lease Commitments
Cadus currently leases storage space on a month-to-month basis. Rent
expense, excluding utility and operating costs, for the years ended
December 31, 2003, 2002 and 2001 amounted to approximately $13,400,
$6,370 and $5,000, respectively.
F-16
CADUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
==========
(14) Quarterly Financial Data (Unaudited)
Fiscal 2003 Quarter Ended December 31 September 30 June 30 March 31
License and maintenance fees $ - $ 120,000 $ - $ 100,000
Operating loss (130,793) (49,110) (240,791) (196,054)
Net (loss) income (153,780) 300,522 (193,971) (142,467)
Net (loss) income per share:
Basic and diluted (0.01) 0.02 (0.01) (0.01)
Fiscal 2002 Quarter Ended December 31 September 30 June 30 March 31
License and maintenance fees $ 1,000,000 $ - $ - $ 100,000
Operating income (loss) 848,275 (194,235) (277,110) (163,028)
Net income (loss) 864,886 710,770 (191,491) (68,460)
Net income (loss) per share:
Basic and diluted 0.07 0.05 (0.01) (0.01)
F-17