<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
_____________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________________________
Commission file number 0-15190
______________________________________________________
OSI Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3159796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Charles Lindbergh Boulevard, Uniondale, New York 11553
(Address of principal executive offices) (Zip Code)
516-222-0023
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report.)
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
___ ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
At July 31, 1999 the registrant had outstanding 21,503,007 shares of common
stock, $.01 par value.
This Form 10-Q/A is being filed to amend Items 5 and 6 of the Form 10-Q of the
registrant for the quarter ended June 30, 1999, which was filed with the
Securities and Exchange Commission on August 16, 1999 (the "Form 10-Q"). Item 5
is hereby amended to include additional information about the registrant's
acquisition of certain assets from Cadus Pharmaceutical Corporation as described
in the Form 10-Q and to provide reference to the financial statements and pro
forma financial information related thereto. Item 6 is hereby amended to include
Exhibit 23, the independent auditor's consent, Exhibit 99.1, financial
statements of Cadus Pharmaceutical Corporation, and Exhibit 99.2, pro forma
financial information related to the acquisition.
<PAGE> 2
PART II.
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Amendments to the Agreements Related to Anaderm Research Corp.
In 1996, the Company entered into a joint venture with Pfizer Inc.
("Pfizer") and New York University ("NYU") to form Anaderm Research Corp.
("Anaderm"), a company dedicated to the discovery and development of safe,
effective, pharmacologically active agents for certain cosmetic and
quality-of-life indications, such as skin pigmentation, hair loss and wrinkling.
On April 23, 1996, in connection with the formation of Anaderm, the Company,
Pfizer, and Anaderm, entered into a Collaborative Research Agreement (the "1996
Research Agreement") for the discovery and development of novel compounds to
treat the conditions to which Anaderm was dedicated. The Company also entered
into a Stockholders' Agreement (the "1996 Stockholders' Agreement") with Pfizer,
Anaderm, NYU and certain NYU faculty members (the "Faculty Members"). Under the
1996 Stockholders' Agreement, Anaderm issued common stock to Pfizer and the
Company and options to purchase common stock to NYU and the Faculty Members (who
have exercised their options fully). Pfizer holds 82%, the Company holds 14% and
NYU and the Faculty Members collectively hold 4% of Anaderm's common stock. In
exchange for its 14% of Anaderm's common stock, the Company provided formatting
for high throughput screens and conducted compound screening at its own expense
under the 1996 Research Agreement.
On April 23, 1999, the Company entered into an Amended and Restated
Collaborative Research Agreement (the "1999 Research Agreement") with Pfizer and
Anaderm to expand the collaborative program begun by the 1996 Research Agreement
and an Amended and Restated Stockholders' Agreement (the "1999 Stockholders'
Agreement") with Pfizer, Anaderm, NYU and the Faculty Members. The 1999 Research
Agreement is for a term of three years. Pfizer may terminate the 1999 Research
Agreement, however, after the first or second year of the term in its sole
discretion after consultation with Anaderm and the Company to determine whether
satisfactory progress has been made in the research program during the previous
year. The 1999 Research Agreement provides for funding by Pfizer of up to $35
million in total payments to Anaderm to fund the Company's research and
development activities during the three-year term and up to $15 million in
phase-down funding following expiration of the three-year term or earlier
termination by Pfizer. In the expanded program, the Company will continue to
provide a full range of capabilities including assay biology, high throughput
screening, compound libraries, combinatorial, medicinal, and natural product
chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. The
Company anticipates a significant increase in its staffing of the program to
conduct its drug discovery efforts during the term of the 1999 Research
Agreement. Anaderm or Pfizer will pay royalties to the Company on the sales of
products resulting from the collaboration.
A significant change to the 1996 Stockholders' Agreement by the 1999
Stockholders' Agreement is the addition of a right on the part of each of the
Company, NYU
2
<PAGE> 3
and each of the Faculty Members, exercisable at any time prior to December 31,
1999, to require Anaderm or Pfizer to purchase all, but not less than all, of
the shares of common stock of Anaderm held by each such stockholder for a fixed
price based upon a formula as set forth in the 1999 Stockholders' Agreement. The
stockholders, including the Company, also continue to have the right,
exercisable at any time subsequent to April 23, 2000, to require Anaderm or
Pfizer to purchase all, but not less than all, of the shares of common stock of
Anaderm held by each such stockholder at the "Fair Value" (as such term is
defined in the 1999 Stockholders' Agreement) of such shares. In addition,
Anaderm or Pfizer has the right, exercisable at any time subsequent to April 23,
2002, to require the Company, NYU or any Faculty Member to sell to Anaderm all,
but not less than all, of the shares of common stock of Anaderm held by such
stockholder at the Fair Value of such shares. In the 1996 Stockholders'
Agreement, this call right was exercisable by Anaderm only with respect to the
shares owned by NYU and the Faculty Members. Copies of the 1999 Research
Agreement and 1999 Stockholders' Agreement are attached hereto as Exhibits 10.1
and 10.2 and are incorporated herein by reference.
Development Agreement with Pfizer Inc.
Effective as of April 1, 1999, the Company entered into a Development
Agreement (the "Agreement") with Pfizer for the development of certain compounds
derived from the Collaborative Research Agreement, dated as of April 1, 1996,
between Pfizer and the Company. Under the Agreement, the Company will conduct a
development program formulated by the Company and Pfizer which includes
pre-clinical and clinical research through and including Phase II clinical
trials for compounds to assess their safety and efficacy to be developed as
therapeutic agents for the treatment of psoriasis and other related dermal
pathologies. Pursuant to the terms of the Agreement, Pfizer has granted to the
Company an exclusive, with the exception of Pfizer, license to make and use the
compounds for all research purposes in the development program other than the
sale or manufacture for sale of products or processes. At the end of the
development program, Pfizer must notify the Company of its intention to continue
development and commercialization of a compound within three (3) months
following receipt of the data package from the clinical studies. If Pfizer does
so notify the Company of such intention, it will have an exclusive, world-wide
license, with the right to grant sublicenses, to make, use, sell, offer for sale
and import products developed in the course of the development program. If
Pfizer fails to notify the Company of such intention, the Company will receive
an exclusive, world-wide, royalty-bearing license, including the right to grant
sublicenses, to manufacture, use, sell, offer for sale and import products
developed in the course of the development program. The Company, however, has
the right to refuse to accept this license. The party receiving the license must
pay milestone and royalty payments as consideration therefor. The duration of
the licenses is coextensive with the lives of patents related to the licensed
compounds. Each of the parties has rights and obligations to prosecute and
maintain patent rights related to specified areas of the research under the
Agreement. The Agreement is subject to early termination in the event of certain
defaults by the parties. A copy of the Agreement is attached hereto as Exhibit
10.3 and is incorporated herein by reference.
3
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Amendment to the Collaborative Agreement with Novartis Pharma AG
During the quarter ended June 30, 1999, the Company entered into
Amendment Nos. 1 and 2, dated April 13, 1999 and May 31, 1999, respectively, to
its Collaborative Agreement, dated April 19, 1995 (the "1995 Agreement") with
Novartis Pharma AG ("Novartis"). Pursuant to the 1995 Agreement, the Company
granted to Novartis an exclusive license with the right to grant sublicenses to
manufacture, have manufactured, use and sell products containing TGF-Beta 3 for
certain indications, referred to as Licensed Indications. The Company also
granted to Novartis an option (originally to expire in April 1999) to acquire
from the Company a license to manufacture, use and sell products containing
TGF-Beta 3 and other TGF-Betas for all other indications not included in the
Licensed Indications. The four year time limit to exercise the option was
extended until May 31, 1999 by Amendment No. 1 to the 1995 Agreement.
Amendment No. 2 changed certain terms of the 1995 Agreement including
the definition of Licensed Indications, the supply of TGF-Betas, the amount of
royalty payments, and the schedules of the Company's patents and applications
and Novartis' patents. Specifically, oral mucositis and the healing of soft
wound tissue were removed from the Licensed Indications. Novartis acknowledged
in Amendment No. 2 that it has discontinued development of products for the
indications of oral mucositis and healing of soft wound tissue. The parties
agreed that all licenses theretofore granted to Novartis with respect to such
discontinued indications are terminated and that the Company is free to continue
development work and to grant licenses to third parties with respect to such
discontinued indications. The Company is also free to use the results of any
development work with respect to the discontinued indications carried out by
Novartis prior to the date of Amendment No. 2 provided that the Company pays to
Novartis royalties and/or certain other agreed-upon amounts with respect to
sales of products resulting from any such continued development work by the
Company or a licensee thereof. Under Amendment No. 2, the new Licensed
Indications are bone, cartilage and tendon repair. Novartis' option was changed
in Amendment No. 2 from an option to include in the definition of Licensed
Indications all indications not already included to (a) an exclusive option to
include in Licensed Indications the treatment of transplant patients (e.g.,
graft protection), the treatment of ischemia (e.g., angina pectoris and
peripheral vascular disease), the treatment of stroke patients, and the
treatment of inflammatory bowel disease, and (b) a non-exclusive option to
include any other additional indications relating to TGF-Betas (other than the
discontinued indications). The payment terms for the option were also amended
and the time period to exercise the option was extended until May 31, 2003.
Copies of Amendment Nos. 1 and 2 are attached hereto as Exhibits 10.4 and 10.5
and are incorporated herein by reference.
Asset Purchase Agreement with Cadus Pharmaceutical Corporation
(a) Description of the Acquisition
On July 30, 1999, the Company acquired certain assets from Cadus
Pharmaceutical Corporation, a Delaware corporation ("Cadus"), pursuant to the
terms of an
4
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Asset Purchase Agreement (the "Asset Purchase Agreement") dated the same date.
The assets purchased (the "Assets") include (a) certain assets associated with
certain of Cadus' research programs (including the GPCR Directed Chemistry
Program and a collaboration with Solvay Pharmaceuticals B.V.), (b) Cadus'
compound library, (c) the purchase or license of certain intellectual property
rights, and (d) certain furniture, equipment, inventory, and supplies. Several
assets were retained by Cadus, including (a) monies in escrow in connection with
the judgment of SIBIA Neurosciences, Inc. against Cadus, (b) cash and accounts
receivable, (c) Cadus' Living Chip Technology, (d) Cadus' Functional Genomics
Program, and (e) Cadus' Research Collaboration and License Agreement with
SmithKline Beecham Corporation (the "SmithKline Research Agreement").
Forty-seven Cadus employees, consisting of thirty-six employed in science and
eleven employed in administration and support, were hired by the Company. The
Company intends to continue to utilize some of the Assets in the GPCR Directed
Chemistry Program and the collaboration with Solvay Pharmaceuticals B.V., but
expects to deploy the balance of the Assets in other research areas.
The purchase price for the Assets was $1.5 million in cash plus an
additional $74,096 in cash for certain prepaid expenses plus the assumption of
certain liabilities, including liabilities under Cadus' facility lease (the
"Facility Lease") in Tarrytown, New York (approximately 45,569 square feet) as
of July 1, 1999 (approximately $898,249 in rental payments per annum through
December 31, 2002) and an equipment lease with GECC Capital Corporation
("GECC"). On August 23, 1999, OSI elected to payoff the GECC lease in exchange
for a payment of $2.8 million and obtained ownership of the fixed assets covered
by the lease agreement. On September 21, 1999, Cadus reimbursed the Company
$308,000 in exchange for those fixed assets that have been retained by Cadus for
its own use. The source of the cash portion of the purchase price and the
subsequent decision to payoff the lease agreement with GECC was the Company's
existing cash resources. Liabilities assumed will be paid from such cash
resources and working capital.
In connection with the acquisition, the Company entered into the
following additional agreements with Cadus: (a) a Patent License Agreement, (b)
a Technology License Agreement, and (c) a Software License Agreement, pursuant
to which the Company obtained non-exclusive licenses for the use and practice of
certain of Cadus' patents, Cadus' technology and Cadus' software programs,
respectively. The Company and Cadus also entered into another Patent License
Agreement under which the Company will license back to Cadus on a non-exclusive
basis certain of the patents which were assigned to the Company as part of the
acquisition.
In connection with the acquisition, the Company adopted a Non-Qualified
Stock Option Plan for Former Employees of Cadus (the "Cadus Stock Plan") to
induce certain former employees of Cadus to accept employment with the Company.
The Company granted options to purchase an aggregate of 415,000 shares of common
stock of the Company at a purchase price of $5.00 per share. These options
become exercisable on July 30, 2000. The Asset Purchase Agreement and the Cadus
Stock Plan are attached hereto as Exhibits 2.1 and 2.2, and are incorporated
herein by reference.
5
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(b) Financial Statements of Business Acquired
The audited financial statements of Cadus as of December 31, 1998 and
1997 for each of the years in the three-year period ended December 31, 1998 are
filed herewith as Exhibit 99.1.
(c) Pro Forma Financial Information
The unaudited pro forma condensed combined financial information
related to the Cadus acquisition is filed herewith as Exhibit 99.2. The
unaudited pro forma condensed combined financial statements combine the
historical balance sheets and statements of operations of the Company and Cadus
giving effect to the asset acquisition using the purchase method of accounting
for a business combination.
Cadus' year-end is December 31. The unaudited pro forma condensed
combined statement of operations for the year ended September 30, 1998 includes
the audited consolidated statement of operations of the Company for the year
ended September 30, 1998 and the audited statement of operations of Cadus for
the year ended December 31, 1998. The unaudited pro forma condensed combined
statement of operations for the nine months ended June 30, 1999 includes the
Company's unaudited consolidated statement of operations for the nine months
ended June 30, 1999 and the combination of the unaudited statements of
operations of Cadus for the three months ended December 31, 1998 and the six
months ended June 30, 1999.
The unaudited pro forma condensed combined balance sheet gives effect
to the acquisition as if it had occurred on June 30, 1999. The unaudited pro
forma condensed combined statements of operations for the fiscal year ended
September 30, 1998 and the nine months ended June 30, 1999 assume the asset
acquisition was effected on October 1, 1997.
The unaudited pro forma condensed combined financial statements were
prepared by utilizing the accounting principles of the respective entities as
outlined in each entity's historical financial statements. The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable under the circumstances. The unaudited pro
forma condensed combined financial information is provided for illustrative
purposes only. The Company and the acquired research operations of Cadus may
have performed differently had they always been combined. The unaudited pro
forma condensed combined financial information may not be indicative of the
historical results that would have been achieved had the Company and the
acquired research operations always been combined nor the future results that
the Company will experience after the acquisition.
The information is only a summary and should be read in conjunction
with the Company's historical consolidated financial statements and related
notes contained in the annual reports and other information that was previously
filed with the Securities and Exchange Commission.
6
<PAGE> 7
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
2.1+* Asset Purchase Agreement, dated July 30, 1999, by and
between Cadus Pharmaceutical Corporation and the
Company.
2.2 OSI Pharmaceuticals, Inc. Non-Qualified Stock Option
Plan for Former Employees of Cadus Pharmaceutical
Corporation.
3.1 Certificate of Incorporation, as amended.(1)
3.2 Amended and Restated By-Laws.(2)
10.1* Collaborative Research Agreement, dated as of April
23, 1999, by and among Pfizer Inc., the Company and
Anaderm Research Corp.
10.2* Anaderm Research Corp. Amended and Restated
Stockholders' Agreement, dated April 23, 1999.
10.3* Development Agreement, dated as of April 1, 1999, by
and between Pfizer Inc. and the Company.
10.4 Amendment No. 1, dated as of May 31, 1999, by and
between Novartis Pharma AG and the Company.
10.5* Amendment No. 2, dated as of April 13, 1999, by and
between Novartis Pharma AG and the Company.
23 Independent Auditors' Consent of KPMG LLP.
27 Financial Data Schedule.
99.1 The audited financial statements of Cadus
Pharmaceutical Corporation as of December 31, 1998
and 1997 for each of the years in the three-year
period ended December 31, 1998.
99.2 Unaudited Pro Forma Condensed Combined Balance Sheet
and Statements of Operations of the Company.
</TABLE>
___________________
+ The Schedules to the Asset Purchase Agreement have
been omitted pursuant to Item 601(b)(2) of Regulation
S-K under the Securities Exchange Act of 1934, as
amended. The omitted schedules from this filing will
be provided upon request.
7
<PAGE> 8
* Portions of this exhibit have been redacted and are
the subject of a confidential treatment request filed
with the Secretary of the Securities and Exchange
Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(1) Included as an exhibit to the Company's quarterly
report on Form 10-Q, filed on May 14, 1999, and
incorporated herein by reference.
(2) Included as an exhibit to the Company's current
report on Form 8-K, filed on January 8, 1999, and
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on June 28,
1999 with the Securities and Exchange Commission via EDGAR,
pertaining to the adoption of a new Shareholders Rights Plan,
redemption of rights under the Company's old Shareholders
Rights Plan and termination of the Company's old Shareholders
Rights Plan by the Board of Directors. The earliest event
covered by the report occurred on June 23, 1999.
8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
----------------------------------------------
(Registrant)
Date: October 15, 1999 By: /s/ Robert L. Van Nostrand
------------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1+* Asset Purchase Agreement, dated July 30, 1999, by and between
Cadus Pharmaceutical Corporation and the Company.
2.2 OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan for
Former Employees of Cadus Pharmaceutical Corporation.
3.1 Certificate of Incorporation, as amended.(1)
3.2 Amended and Restated By-Laws.(2)
10.1* Collaborative Research Agreement, dated as of April 23, 1999,
by and among Pfizer Inc., the Company and Anaderm Research
Corp.
10.2* Anaderm Research Corp. Amended and Restated Stockholders'
Agreement, dated April 23, 1999.
10.3* Development Agreement, dated as of April 1, 1999, by and
between Pfizer Inc. and the Company.
10.4 Amendment No. 1, dated as of May 31, 1999, by and between
Novartis Pharma AG and the Company.
10.5* Amendment No. 2, dated as of April 13, 1999, by and between
Novartis Pharma AG and the Company.
23 Independent Auditors' Consent of KPMG LLP.
27 Financial Data Schedule.
99.1 The audited financial statements of Cadus Pharmaceutical
Corporation as of December 31, 1998 and 1997 for each of
the years in the three-year period ended December 31, 1998.
99.2 Unaudited Pro Forma Condensed Combined Balance Sheet and
Statements of Income of the Company.
</TABLE>
_________________
+ The Schedules to the Asset Purchase Agreement have been omitted
pursuant to Item 601(b)(2) of Regulation S-K under the Securities
Exchange Act of 1934, as amended. The omitted schedules from this
filing will be provided upon request.
10
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* Portions of this exhibit have been redacted and are the subject of a
confidential treatment request filed with the Secretary of the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(1) Included as an exhibit to the Company's quarterly report on Form 10-Q,
filed on May 14, 1999, and incorporated herein by reference.
(2) Included as an exhibit to the Company's current report on Form 8-K,
filed on January 8, 1999, and incorporated herein by reference.
11
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INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the registration statements on Forms
S-3 (No. 333-12593 and No. 333-2451) and on Forms S-8 (No. 333-06861, No.
33-64713, No. 33-60182, No. 33-38443, No. 33-8980 an No.333-39509) of OSI
Pharmaceuticals, Inc. of our report dated March 29, 1999 except as to Note 16(b)
which is as of July 30, 1999, relating to the balance sheets of Cadus
Pharmaceutical Corporation as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the Form 10-Q/A of OSI Pharmaceuticals, Inc. dated October 15, 1999.
/s/ KPMG LLP
Melville, New York
October 15, 1999
<PAGE> 1
Exhibit 99.1
CADUS PHARMACEUTICAL CORPORATION
Index
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets - December 31, 1998 and 1997 F-3
Statements of Operations - For the years ended
December 31, 1998, 1997 and 1996. F-4
Statement of Stockholders' Equity - For the years
ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows - For the years ended
December 31, 1998, 1997 and 1996. F-6
Notes to Financial Statements F-7
</TABLE>
F-1
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Independent Auditors' Report
The Board of Directors and Stockholders
Cadus Pharmaceutical Corporation:
We have audited the accompanying balance sheets of Cadus Pharmaceutical
Corporation (the Company) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cadus Pharmaceutical
Corporation as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
March 29, 1999, except as to
note 16(b) which is as of
July 30, 1999
F-2
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Cadus Pharmaceutical Corporation
Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,975,528 $ 36,761,516
Restricted cash (note 5) 286,000 -
Prepaid and other current assets 298,319 405,597
------------ ------------
Total current assets 11,559,847 37,167,113
Restricted cash noncurrent (note 3) 18,500,000 -
Fixed assets, net of accumulated depreciation and amortization of $2,254,840
at December 31, 1998, $2,582,661 at December 31, 1997 (note 4) 2,792,268 2,646,936
Deferred tax asset, less valuation allowance of $19,582,000 at December 31, 1998
and $7,204,000 at December 31, 1997 (note 7) - -
Investments in other ventures (note 6) 2,334,081 1,478,229
Other assets, net (note 2) 1,400,870 948,912
------------ ------------
Total assets $ 36,587,066 $ 42,241,190
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 217,414 $ 892,636
Accrued expenses and other current liabilities (note 12) 1,730,021 604,146
Deferred revenue (notes 8 and 13) 150,584 94,190
Note payable to partnership-current portion - 150,000
------------ ------------
Total current liabilities 2,098,019 1,740,972
Reserve for litigation damages (note 3) 18,500,000 -
------------ ------------
Total liabilities 20,598,019 1,740,972
Commitments and contingencies (notes 1, 3 and 13)
Stockholders' equity (notes 8, 10 and 11):
Common stock, $.01 par value. Authorized 35,000,000 shares at
December 31, 1998 and 1997; issued 13,210,607 shares at December 31, 1998
and 12,500,156 shares at December 31, 1997; outstanding 13,068,940 shares
at December 31, 1998 and 12,358,489 shares at December 31, 1997 132,106 125,001
Additional paid-in capital 59,689,446 54,517,519
Accumulated deficit (note 1) (43,532,430) (13,842,227)
Treasury stock, 141,667 shares of common stock at December 31, 1998 and 1997 (300,075) (300,075)
------------ ------------
Total stockholders' equity 15,989,047 40,500,218
------------ ------------
Total liabilities and stockholders' equity $ 36,587,066 $ 42,241,190
============ ============
</TABLE>
See accompanying notes to financial statements
F-3
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Cadus Pharmaceutical Corporation
Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues, principally from
related parties (note 8) $ 12,576,469 $ 9,013,113 $ 6,500,000
------------ ------------ ------------
Costs and expenses:
Research and development costs 15,388,991 11,561,213 8,282,507
General and administrative expenses 8,977,408 4,091,866 2,315,042
------------ ------------ ------------
Total costs and expenses 24,366,399 15,653,079 10,597,549
------------ ------------ ------------
Operating loss (11,789,930) (6,639,966) (4,097,549)
------------ ------------ ------------
Other income and (expenses):
Interest income 1,844,177 2,079,058 1,829,820
Interest expense (10,500) (17,865) (110,416)
Loss of equity in other ventures, net (note 6) (1,144,148) (832,431) -
Reserve for litigation damages (note 3) (18,500,000) - -
Gain on sale of equipment 16,368 3,281 -
------------ ------------ ------------
Total other income and (expenses) (17,794,103) 1,232,043 1,719,404
Loss before income taxes (29,584,033) (5,407,923) (2,378,145)
State and local taxes (note 7) 106,170 2,975 62,580
------------ ------------ ------------
Net loss $(29,690,203) $ (5,410,898) $ (2,440,725)
------------ ------------ ------------
Basic and diluted net loss per share (note 2) $ (2.32) $ (0.44) $ (0.39)
============ ============ ============
Shares used in calculation of basic and diluted
net loss per share (note 2) 12,811,525 12,225,463 6,280,917
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 5
Cadus Pharmaceutical Corporation
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Stock, Series A Preferred Stock, Series B
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 14,879,651 $ 14,880 7,321,429 $ 7,321
Issuance of common stock for cash in connection with
exercise of options
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996
Conversion of preferred stock into common stock in
connection with the initial public offering in July 1996 (14,879,651) (14,880) (7,321,429) (7,321)
Issuance of common stock for cash at $7.00 per share, net of
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996
----------- ----------- ----------- -----------
Balance at December 31, 1996 - - - -
Issuance of common stock for cash in connection with
exercise of options
Net loss for year ended December 31, 1997
----------- ----------- ----------- -----------
Balance at December 31, 1997 - - - -
Issuance of common stock for cash in connection with
exercise of options
Issuance of restricted common stock in connection with
Stock Purchase Agreement with SmithKline Beecham
Net loss for year ended December 31, 1998
----------- ----------- ----------- -----------
Balance at December 31, 1998 - $ 0 - $ 0
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- paid-in
Shares Amount capital
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1996 1,323,342 $ 14,650 $ 33,976,940
Issuance of common stock for cash in connection with
exercise of options 23,877 239 36,704
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 2,750,000 27,500 17,149,124
Conversion of preferred stock into common stock in
connection with the initial public offering in July 1996 7,551,514 75,515 (53,314)
Issuance of common stock for cash at $7.00 per share, net of 412,500 4,125 2,681,250
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996
------------ ------------ ------------
Balance at December 31, 1996 12,061,233 122,029 53,790,704
Issuance of common stock for cash in connection with
exercise of options 297,256 2,972 726,815
Net loss for year ended December 31, 1997
------------ ------------ ------------
Balance at December 31, 1997 12,358,489 125,001 54,517,519
Issuance of common stock for cash in connection with
exercise of options 49,489 495 178,537
Issuance of restricted common stock in connection with
Stock Purchase Agreement with SmithKline Beecham 660,962 6,610 4,993,390
------------ ------------ ------------
Net loss for year ended December 31, 1998
Balance at December 31, 1998 13,068,940 $ 132,106 $ 59,689,446
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Treasury Stock
Deficit Shares Amount Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ (5,990,604) (141,667) $ (300,075) $ 27,723,112
Issuance of common stock for cash in connection with
exercise of options 36,943
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 17,176,624
Conversion of preferred stock into common stock in
connection with the initial public offering in July 1996 -
Issuance of common stock for cash at $7.00 per share, net of 2,685,375
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996 (2,440,725) (2,440,725)
------------ ------------ ------------ ------------
Balance at December 31, 1996 (8,431,329) (141,667) (300,075) 45,181,329
Issuance of common stock for cash in connection with
exercise of options 729,787
Net loss for year ended December 31, 1997 (5,410,898) (5,410,898)
------------ ------------ ------------ ------------
Balance at December 31, 1997 (13,842,227) (141,667) (300,075) 40,500,218
Issuance of common stock for cash in connection with
exercise of options 179,032
Issuance of restricted common stock in connection with
Stock Purchase Agreement with SmithKline Beecham 5,000,000
Net loss for year ended December 31, 1998 (29,690,203) (29,690,203)
------------ ------------ ------------ ------------
Balance at December 31, 1998 $(43,532,430) (141,667) $ (300,075) $ 15,989,047
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 6
Cadus Pharmaceutical Corporation
Statements of Cash Flow
<TABLE>
<CAPTION>
For the Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(29,690,203) $ (5,410,898) $ (2,440,725)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 992,224 1,328,532 837,984
Loss of equity in other ventures 1,144,148 832,431 -
Other non-cash gain (16,368) (94,190) -
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets 107,278 (142,545) (186,242)
Increase in other assets (53,171) (16,645) (64,701)
(Decrease) increase in deferred revenue - (909,091) 1,000,000
(Decrease) increase in accounts payable (675,222) 436,842 301,331
Increase in accrued expenses and other current liabilities 1,125,875 133,486 49,505
Increase in reserve for litigation damages 18,500,000 - -
------------ ------------ ------------
Net cash used in operating activities (8,565,439) (3,842,078) (502,848)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (3,450,130) (1,696,861) (1,574,678)
Sale and leaseback of fixed assets 2,463,888 820,384 -
(Increase) decrease in restricted cash (18,786,000) 118,000 2,380,000
Repayment of stockholder's loan - 5,974 7,762
Investments in other ventures (2,150,000) (2,000,000) (160,660)
Capitalized patent costs (477,339) (497,292) (181,375)
------------ ------------ ------------
Net cash (used in) provided by investing activities (22,399,581) (3,249,795) 471,049
------------ ------------ ------------
Cash flows from financing activities:
Repayments of bank line of credit - - (2,380,000)
Payments on bank loans - (29,075) (17,386)
Net proceeds from issuance of common stock in public offering - - 19,861,999
Proceeds from issuance of common stock upon exercise of stock options 179,032 729,787 36,943
Proceeds from issuance of restricted common stock 5,000,000 - -
------------ ------------ ------------
Net cash provided by financing activities 5,179,032 700,712 17,501,556
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (25,785,988) (6,391,161) 17,469,757
Cash and cash equivalents at beginning of period 36,761,516 43,152,677 25,682,920
------------ ------------ ------------
Cash and cash equivalents at end of period $ 10,975,528 $ 36,761,516 $ 43,152,677
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 7
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization and Basis of Preparation
Cadus Pharmaceutical Corporation (the "Company") was incorporated on
January 23, 1992, under the laws of the State of Delaware. The Company is
a biotechnology Company engaged in genomics research and the discovery of
novel small molecule therapeutics.
The Company has accumulated a loss of $43.5 million from January 23,
1992, (date of inception) to December 31, 1998. Management intends to
continue research toward the development of commercial products in order
to generate future revenues from license fees, royalties, direct sales
and performance of contract research. The Company has financed its
operations through the sale of common stock in the public market, the
sale of convertible preferred stock and through revenues resulting from
research funding provided by its collaborative partners (note 8).
The Company is at an early stage of development and therefore faces
certain risks and uncertainties which are present in an emerging
biotechnology company. The Company's yeast-based and signal transduction
technologies are novel as drug discovery methods and have not yet been
shown to be successful in the development of any commercialized drug. The
Company has not completed development of any drugs and does not expect
that any drugs resulting from its and its collaborative partners'
research and development efforts will be commercially available for a
significant number of years, if at all. The Company is relying on its
collaborative partners to fund a substantial portion of its research
operations over the next several years. Through December 31, 1998, the
Company had entered into three collaborative arrangements, however there
can be no assurance that the Company will be able to establish additional
collaborative arrangements, or that these contracts will continue to be
renewed, or that any renewal will be made on terms favorable to the
Company. SmithKline Beecham and Solvay Pharmaceuticals may terminate
their respective collaboration agreements for nonperformance by the
Company under certain circumstances, which termination would result in
the Company losing its research funding from each of them. The
collaboration arrangement with Bristol-Myers Squibb will expire in July
1999. The loss of research funding from SmithKline Beecham or Solvay
Pharmaceuticals, or failure by Solvay Pharmaceuticals or SmithKline
Beecham to provide research funding to the Company, could have a material
adverse effect on the Company's business, financial condition and results
of operations.
In addition, the Company faces risks and uncertainties regarding the
future profitability of the Company, ability to obtain additional
funding, protection of patents and property rights, uncertainties
regarding the Company's technologies including risks and uncertainties
relating to the Company's development and commercial testing of
alternative readout methodologies to replace that found to infringe a
patent of SIBIA Neurosciences, Inc. ("SIBIA") (see note 3), risks and
uncertainties relating to the Company's ongoing litigation with SIBIA
including uncertainties relating to the outcome of appeals and the
re-examination of SIBIA's patent at issue in the litigation, competition
and technological change, government regulations including the need for
product approvals and the changing health care marketplace, and
attracting and retaining key officers, employees and consultants.
F-7
<PAGE> 8
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(2) Significant Accounting Policies
(a) Development Stage Enterprise
Through December 31, 1996, the Company reported as a development
stage enterprise in accordance with the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises". Management believes it has established major
scientific and research collaborations and that these
collaborations have generated significant revenues. Therefore,
beginning with the year ended December 31, 1997, the Company no
longer reports as a development stage enterprise.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash
equivalents. Included in restricted and unrestricted cash, at
December 31, 1998 and 1997, there was cash equivalents of
$13,937,939 and $36,571,433, respectively.
(c) Fixed Assets
Fixed assets are stated at cost. Depreciation of equipment and
furniture and fixtures is calculated using the straight-line
method over estimated useful lives of five to seven years.
Leasehold improvements are amortized on a straight-line basis over
the lesser of the estimated useful lives of the improvements or
the remaining term of the lease.
(d) Other Assets, Net
Other assets include capitalized patent costs that are amortized
on a straight-line basis over fifteen years. At December 31, 1998
and 1997, accumulated amortization is $156,958 and $78,406,
respectively.
(e) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
F-8
<PAGE> 9
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(f) Research and Development
Research and development costs are expensed as incurred and
include direct costs of research scientists and supplies and an
allocation of shared facilities, services and overhead.
(g) Revenue Recognition
The Company has entered into research agreements that provide for
the payment of nonrefundable fees during the term of the research
programs. In addition, the agreements provide for payment of fees
when certain milestone events have occurred. These fees are
reflected as revenue when earned, as related costs are incurred or
when milestone events have occurred.
Revenue recognized in the accompanying statements of operations is
not subject to repayment. Revenue received that is related to
future performance under such contracts is deferred and recognized
as revenue when earned.
(h) Net Loss Per Share
All common share data has been restated to give effect to a
one-for-three reverse stock split effected on July 18, 1996 (see
note 10).
At December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per
Share. Basic net loss per share as of December 31, 1998 and 1997
is computed by dividing the net loss by the weighted average
number of common shares outstanding. Diluted net loss per share is
the same as basic net loss per share since the inclusion of
potential common stock equivalents (stock options and warrants) in
the computation would be anti-dilutive.
(i) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(j) Fair Value of Financial Instruments
For cash and accounts payable, the carrying amount approximates
the fair value because of the short maturities of those
instruments.
F-9
<PAGE> 10
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(k) Stock-Based Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation" establishes
a fair value based method for accounting for stock-based
compensation plans and for the measurement basis of transactions
in which an entity acquires goods or services from non-employees
in exchange for equity instruments. SFAS No. 123 requires that
reporting entities either elect expense recognition or its
disclosure-only alternative for stock-based employee compensation.
During 1996, the Company adopted SFAS No. 123 and has elected to
continue measuring stock-based employee compensation cost in
accordance with the intrinsic value based method of Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock
Issued to Employees". Therefore, the Company has included in the
notes to the financial statements pro forma net income and pro
forma earnings per share using the fair value based method for the
year ended December 31, 1998 with comparable disclosures for the
years ended December 31, 1997 and 1996.
(3) Patent Litigation
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") commenced a patent
infringement action against the Company alleging infringement by the
Company of a patent concerning the use of cells, engineered to express
any type of cell surface receptor and a reporter gene, used to report
results in the screening of compounds against target assays and seeking
injunctive relief and monetary damages. After trial, on December 18,
1998, the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. On January 29, 1999, the United States District Court
granted SIBIA's request for injunctive relief that precludes the Company
from using the method claimed in SIBIA's patent. On February 26, 1999,
the United States District Court denied the Company's motions to set
aside the jury verdict to grant a new trial and to reduce or set aside
the $18.0 million damages award by the jury. The Company has appealed the
judgement. The appeal will be heard by the Court of Appeals for the
Federal Circuit in Washington, D.C. In order to stay execution pending
appeal of the $18.0 million judgement obtained by SIBIA, in March 1999,
the Company deposited $18.5 million in escrow to secure payment of the
judgement in the event the Company were to lose the appeal. Such $18.5
million was classified, as of December 31, 1998, as "restricted cash
noncurrent" and the Company's "cash and cash equivalents" was reduced by
$18.5 million. The Company recorded a reserve for litigation damages of
$18.5 million in the accompanying statement of operations for the year
ended December 31, 1998.
In January 1999, the U.S. Patent and Trademark Office granted the
Company's request to re-examine the patent issued to SIBIA that was the
subject of the litigation. The re-examination by the Patent Office is
independent of the litigation and a final decision by the Patent Office
that SIBIA's patent is invalid would take precedence over the jury
verdict. There is no evidence that the patent office will find SIBIA's
patent to be invalid.
F-10
<PAGE> 11
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(4) Fixed Assets
Fixed assets, at cost, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Equipment $3,873,323 $4,196,654
Furniture and fixtures 294,150 253,008
Leasehold improvements 879,635 779,935
---------- ----------
5,047,108 5,229,597
Less accumulated depreciation
And amortization 2,254,840 2,582,661
---------- ----------
$2,792,268 $2,646,936
========== ==========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was approximately $914,000, $1,283,000 and $839,000,
respectively.
(5) Related Party Transactions
During 1998, the Company loaned $15,000 to Dr. Charles Woler, the Chief
Executive Officer of the Company. The loan bears interest at 5.5% per
annum. Principal and interest are repayable in monthly installments of
$453 over three years. At December 31, 1998, the outstanding balance of
the loan was $13,452.
In September 1998, Dr. James Broach, a director of the Company, entered
into a five month employment arrangement with the Company pursuant to
which he worked full time at the Company and was compensated at the rate
of $20,000 per month. The Company also granted Dr. Broach an option to
purchase 50,000 shares of common stock at an exercise price of $2.75 per
share. The option vests in increments of 10,000 or 20,000 shares upon the
achievement of specific milestones. In connection with the employment
arrangement, the Company guaranteed the payment of a $286,000 loan made
to Dr. Broach by a third-party and secured its guarantee obligation with
cash collateral of $286,000 which is included in restricted cash on the
balance sheet. Dr. Broach indemnified the Company from any liabilities
arising from its guarantee and pledged securities owned by him to secure
his indemnification obligation.
See note 6 for further discussion of transactions with related parties.
(6) Investments in Other Ventures
In December 1996, the Company issued a $150,000 promissory note bearing
interest at 7% per annum in exchange for a 42% limited partnership
interest in Laurel Partners Limited Partnership ("Laurel"), a limited
partnership of which a shareholder of the Company is the general partner.
An interest payment of $10,500 was accrued at December 31, 1997 and paid
in January 1998. The principal amount and interest accrued thereon was
paid in
F-11
<PAGE> 12
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
December 1998. In addition, the Company purchased for $160,660 in cash, a
47% limited partnership interest in Laurel from Tortoise Corporation, a
corporation wholly-owned by the shareholder. Laurel's purpose is to
invest, directly or indirectly, in securities of biotechnology companies.
The Company has the right to require the shareholder to match any future
investment made by the Company in Laurel up to an aggregate investment on
the part of the shareholder of $5.0 million. This right expires on the
earlier of December 31, 1999 or such time that neither the shareholder
nor one of his affiliates is the general partner of Laurel. The Company
is not required to make any additional investment in Laurel. The
investment is accounted for under the equity method with the recognition
of losses limited to the Company's capital contributions. For the years
ended December 31, 1998 and 1997, the Company recognized gains of $7,968
and losses of $173,964, respectively, related to the investment. The
remaining investment in Laurel of $144,664 is included in investments in
other ventures on the balance sheet.
In May 1997, the Company purchased $2.0 million of convertible preferred
stock in Axiom Biotechnologies Inc. ("Axiom"), representing approximately
26% of the outstanding shares of Axiom on an as converted basis. As part
of the arrangement, Axiom agreed to deliver and license to the Company
its first High Throughput Pharmacology System (HT-PS(TM)). The Company
purchased an additional $2.0 million of convertible preferred stock in
Axiom on June 5, 1998, after the Company received and accepted Axiom's
HT-PS(TM). The Company also made a payment to Axiom for the HT-PS(TM)
which is included in fixed assets in the accompanying balance sheet at
December 31, 1998. The additional investment increased the Company's
equity interest in Axiom to approximately 30% of Axiom's outstanding
shares on an as converted basis, after taking into account an investment
in Axiom by JAFCO Co., Ltd., ("JAFCO"), an affiliate of the Nomura Group.
The Company's investment is accounted for under the equity method with
the Company recognizing 100% of Axiom's net losses prior to the JAFCO
investment and 50% after such investment. Such percentage represents the
extent to which the Company is deemed to be funding Axiom's losses. For
the years ended December 31, 1998 and 1997, the Company recognized
$1,152,116 and $658,467, respectively, in losses generated by Axiom. The
remaining investment in Axiom of $2,189,417 is included in investments in
other ventures on the balance sheet.
(7) Income Taxes
Deferred tax assets of approximately $19,582,000 and $7,204,000 at
December 31, 1998 and 1997, respectively, relate principally to tax net
operating loss carryforwards of $21,459,000 and $13,933,000 and research
credit carryforwards of $2,111,000 and $1,212,000 at December 31, 1998
and 1997, respectively and also to the current litigation reserve
pending of $18.5 million. 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
$12,378,000 and $3,417,000 during the periods ended December 31, 1998 and
1997, respectively.
The Company's net operating loss carryforwards and research and
development tax credit carryforwards noted above expire in various years
from 2008 to 2018. The Company's ability to utilize such net operating
loss and research and development tax credit
F-12
<PAGE> 13
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
carryforwards is subject to certain limitations due to ownership changes,
as defined by rules enacted with the Tax Reform Act of 1986.
The Company is subject to New York State tax on capital.
(8) Research Collaboration and License Agreements
Since July 1994, the Company has been a party to a Research Collaboration
and License Agreement with Bristol-Myers Squibb Company ("BMS") pursuant
to which BMS agreed to provide research funding to the Company during the
term of the research collaboration. The research collaboration expires in
July 1999. In addition, BMS is obligated to make payments to the Company
upon the achievement of certain scientific and commercial milestones and
to pay royalties on sales of products developed under the agreement.
In July 1996, BMS purchased $2.5 million of the Company's common stock in
the Company's initial public offering.
Since November 1995, the Company has been a party to a Research
Collaboration and License Agreement with Physica B.V., a subsidiary of
Solvay Pharmaceuticals B.V. ("Solvay") pursuant to which Solvay agreed to
provide research funding to the Company during the term of the research
collaboration. The research collaboration expires in November 2000 unless
extended at the option of Solvay. In addition, Solvay is obligated to
make payments to the Company upon the achievement of certain drug
development milestones and to pay royalties on sales of products
developed under the agreement. The Company has reserved the right to use
certain hybrid yeast cells that are part of the research program for its
own benefit in the discovery of drugs relating to cancer, autoimmune,
allergic and inflammatory diseases, with certain specific exclusions. The
Company is required to make payments to Solvay upon the achievement by
the Company of certain drug development milestones and to pay Solvay
royalties on the sale of such drugs.
In July 1996, Solvay purchased $5.0 million of the Company's common stock
in the Company's initial public offering.
Both BMS and Solvay had purchased convertible preferred stock of the
Company. See note 10 for discussion of the conversion of the convertible
preferred stock to common stock.
In February 1997, the Company entered into a drug discovery collaboration
and license agreement with SmithKline Beecham p.l.c. and SmithKline
Beecham Corporation ("SmithKline Beecham"). During the term of the
research collaboration, which expires in February 2002, the Company will
seek to identify ligands and to elucidate the function of orphan G
protein-coupled receptors included within the collaboration and create
high-throughput screens to discover small molecular agonists and
antagonists to these receptors.
During the term of the collaboration, SmithKline Beecham is required to
provide the Company with research funding and certain other payments. In
February 1998, SmithKline Beecham paid the Company a one-time $2.0
million technology development fee.
F-13
<PAGE> 14
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
SmithKline Beecham is also required to make payments to the Company upon
the achievement of certain research milestones and upon the achievement
by SmithKline Beecham of certain drug development milestones. In January
1999, the Company achieved its first research milestone in the
collaboration, and received a $1.0 million dollar payment therefor (see
footnote 16). SmithKline Beecham is also required to pay the Company
royalties on the sale of drugs developed through the use of the Company's
drug discovery technologies. The Company has co-promotion rights in North
America for certain products that may result from the collaboration and
rights to certain potential products that SmithKline Beecham may choose
not to develop.
SmithKline Beecham has the right to extend the term of the collaboration
for between two and five years by notice to the Company given prior to
February 25, 2001. SmithKline Beecham has the right to terminate the
research collaboration (i) after August 25, 1999, if the Company fails to
meet certain scientific objectives in connection with the conduct of the
research collaboration or (ii) if the Company fails to perform its
obligations in the conduct of the research collaboration in any material
respect and does not cure such failure within a period of 60 days after
receiving notice thereof. In the event of such termination, SmithKline
Beecham has no further obligation to provide the Company with funding for
the research collaboration.
In February 1997, the Company and SmithKline Beecham Corporation entered
into a stock purchase agreement pursuant to which the Company has the
option to sell to SmithKline Beecham Corporation (i) shares of the
Company's common stock having a then fair market value of $5.0 million
during a 90-day period commencing on February 25, 1998 and (ii) shares of
the Company's common stock having a then fair market value of $5.0
million, during a 90-day period commencing on the date certain scientific
objectives are achieved (subject to the Company achieving such objectives
prior to the August 25, 1999 and meeting certain financial requirements).
In May 1998, the Company exercised its first option and sold 660,962
shares of its common stock to SmithKline Beecham p.l.c. and SmithKline
Beecham Corporation for approximately $7.56 per share or an aggregate
consideration of $5.0 million. In addition, SmithKline Beecham
Corporation has the right, at its option, to purchase up to $5.0 million
worth of shares of the Company's common stock at 150% of the then fair
market value in lieu of making certain research milestone payments. The
Company granted SmithKline Beecham Corporation certain registration
rights with respect to shares of the Company's common stock which
SmithKline Beecham Corporation may purchase pursuant to the stock
purchase agreement.
For the year ended December 31, 1998, the Company received and recognized
$10.6 million in research revenue and the one-time $2.0 million
technology development fee from SmithKline Beecham. For the years ended
December 31, 1997 and 1996 the Company recognized $8.8 million and $6.5
million, respectively, in research revenue.
(9) Sponsored Research and License Agreements
In January 1998 and January 1999, the Company entered into sponsored
research agreements with Massachusetts Institute of Technology ("M.I.T.")
pursuant to which M.I.T. will use its expertise in micro-robotics to
co-develop the LivingChip(TM), a novel drug
F-14
<PAGE> 15
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
discovery screening tool that would miniaturize and automate the
Company's proprietary hybrid yeast cell technology. If developed, the
LivingChip(TM) would ultimately accommodate at least 100,000 yeast-based
drug discovery assays on a single CD-sized synthetic disc and would
permit the testing of thousands of compounds on multiple assays at the
individual scientist's lab bench. The Company provided M.I.T. with full
research funding for 1998 and partial funding for 1999 and has the option
to extend the arrangement through the remainder of 1999. The Company also
entered into a license agreement with M.I.T. pursuant to which the
Company obtained exclusive worldwide rights, for use in pharmaceutical,
animal health and agricultural businesses, to the technology developed
under the sponsored research arrangement. In order to maintain its
exclusive license, the Company must provide M.I.T. with specified levels
of research funding in 1998 and 1999 and make a minimum level of
expenditures thereafter to commercialize the technology until the
technology is commercialized. The Company is required to pay M.I.T. an
annual license fee, royalties on the sale or lease of LivingChip(TM)
systems, royalties on the sale of therapeutics and diagnostics developed
using the LivingChip(TM), royalties on services rendered based on the
LivingChip(TM), and an annual sublicense fee for each sublicense of the
LivingChip(TM).
The Company has entered into several other license and sponsored research
agreements with various third parties. Generally, the agreements provide
that the Company will make research payments and will pay license fees
and/or maintenance payments, in return for the use of technology and
information and the right to manufacture, use and sell future products.
These agreements provide for payments based on the completion of
milestone events, as well as royalty payments based upon a percentage of
product or assay sales. License fees and maintenance payments, including
payments made to M.I.T., for the years ended December 31, 1998, 1997 and
1996, amounted to approximately $2.0 million, $590,000 and $355,000,
respectively.
(10) Equity Transactions
In July 1996, the Company effected a one-for-three reverse common stock
split and changed the par value of the common stock to $.01 from $.001.
All common stock and option data have been restated to give effect to
this reverse stock split and change in par value for all periods
presented.
In July 1996, the Company completed an initial public offering of
2,750,000 shares of common stock at $7.00 per share. The Company received
proceeds, net of underwriting discounts, commissions and other initial
public offering expenses of $17,176,624. Following the initial public
offering, all outstanding shares of the Series A and Series B preferred
stock were converted into an aggregate of 7,551,514 shares of common
stock. Upon conversion, the entire class of convertible preferred stock
of the Company was canceled and withdrawn from the authorized capital
stock of the Company. As a result, upon completion of the offering, the
Company's authorized capital consisted of 35,000,000 shares of common
stock.
In August 1996, the Company sold an additional 412,500 shares of common
stock at $7.00 per share pursuant to the exercise by the underwriters of
an over-allotment option granted
F-15
<PAGE> 16
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
to them. The Company received proceeds, net of underwriting discounts and
commissions, of $2,685,375.
In May 1998, the Company sold 660,962 shares of its common stock to
SmithKline Beecham p.l.c. and SmithKline Beecham Corporation for
approximately $7.56 per share or an aggregate consideration of $5.0
million.
(11) Stock Options
The 1993 Stock Option Plan ("the 1993 Plan") was adopted in January 1993.
The 1993 Plan provides for the grant of options to reward executives,
consultants and employees in order to foster in such personnel an
increased personal interest in the future growth and prosperity of the
Company. The options granted under the 1993 Plan may be either incentive
stock options or nonqualified options. An aggregate of 666,667 common
shares were reserved for issuance under the 1993 Plan.
Options granted under the 1993 Plan expire no later than ten years from
the date of grant. The option price is required to be at least 100% and
85% of the fair market value on the date of grant as determined by the
Board of Directors for incentive stock options and nonqualified options,
respectively. The options generally become exercisable according to a
schedule of vesting as determined by the Compensation Committee of the
Board of Directors. The schedule prescribes the date or dates on which
the options become exercisable, and may provide that the option rights
accrue or become exercisable in installments over a period of months or
years.
Effective May 10, 1996, the 1993 Plan was replaced by the 1996 Incentive
Plan ("the 1996 Plan") with respect to all future awards to the Company's
employees and consultants. However, awards made under the 1993 Plan will
continue to be administered in accordance with the 1993 Plan.
F-16
<PAGE> 17
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Activity under the 1993 Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Balance at January 1, 1996 651,693 $1.67
1996 activity:
Granted - -
Exercised (23,877) 1.55
Canceled (10,091) 2.91
--------
Balance at December 31, 1996 617,725 1.65
1997 activity:
Granted - -
Exercised (140,796) 1.65
Canceled (2,569) 2.94
--------
Balance at December 31, 1997 474,360 1.65
1998 activity:
Granted - -
Exercised (18,813) 1.48
Canceled (236) 3.00
--------
Balance at December 31, 1998 455,311 $1.65
========
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.37 to $3.51 and
5 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was
432,383 and 422,553, respectively and the weighted-average exercise price
of those options was $1.62 and $1.73, respectively.
The Company entered into stock option agreements not pursuant to any plan
with certain directors, employees, founders and consultants. These
options generally become exercisable according to a schedule of vesting
as determined by the Compensation Committee of the Board of Directors.
The options become exercisable in installments over a period of months or
years. As of December 31, 1998, an aggregate of 597,257 common shares was
reserved for issuance pursuant to such stock option agreements.
In November 1996, the Compensation Committee granted to certain directors
then in office an option to purchase 12,000 shares of common stock at an
exercise price of $6.75 per share. Each stock option grant is exercisable
in four cumulative annual installments of 3,000 shares commencing in
November 1997 and expires in November 2006.
F-17
<PAGE> 18
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Activity for all of the above grants not issued pursuant to any plan is
as follows:
<TABLE>
<CAPTION>
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Balance at January 1, 1996 646,301 $ 2.29
1996 activity:
Granted 120,000 6.75
Exercised - -
Canceled (25,334) 5.09
--------
Balance at December 31, 1996 740,967 2.92
1997 activity:
Granted - -
Exercised (115,647) 1.96
Canceled (14,520) 6.20
--------
Balance at December 31, 1997 610,800 3.02
1998 activity:
Granted - -
Exercised - -
Canceled (13,543) 2.84
--------
Balance at December 31, 1998 597,257 $ 3.02
========
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 to $6.75 and
6.5 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was
427,704 and 295,684, respectively and the weighted-average exercise
price of those options was $2.85 and $2.82, respectively.
The 1996 Plan was adopted in May 1996. The options granted under the
1996 Plan may be either incentive stock options or nonqualified options.
In December 1996, the maximum number of shares of common stock that may
be the subject of awards under the 1996 Incentive Plan was increased
from 333,334 to 833,334 (plus any shares that are the subject of
canceled or forfeited awards) by the Board of Directors and such
increase was approved by the stockholders of the Company in June 1997.
In December 1997, the maximum number of shares of common stock that may
be the subject of awards under the 1996 Incentive Plan was increased to
1,833,334 (plus any shares that are the subject of canceled or forfeited
awards) by the Board of Directors and approved by the stockholders of
the Company in June 1998.
F-18
<PAGE> 19
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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 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,
and may provide that the option rights accrue or become exercisable in
installments over a period of months or years.
Activity under the 1996 Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Balance at January 1, 1996 - $ -
1996 activity:
Granted 369,864 6.58
Exercised - -
Canceled - -
---------
Balance at December 31, 1996 369,864 6.58
1997 activity:
Granted 671,250 11.28
Exercised (40,813) 6.62
Canceled (344,895) 14.60
---------
Balance at December 31, 1997 655,406 7.17
1998 activity:
Granted 941,145 3.13
Exercised (17,133) 6.57
Canceled (60,178) 6.68
---------
Balance at December 31, 1998 1,519,240 $ 4.70
=========
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.69 to $14.00 and
9.3 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was
278,751 and 137,216, respectively, and the weighted average exercise
price of those options was $6.40 and $6.72, respectively.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial
F-19
<PAGE> 20
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
statements. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at the grant date under
SFAS No. 123, net loss and loss per share would have been reduced to the
pro forma amounts indicated in the table below (in thousands except per
share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss - as reported $(29,690) $ (5,411) $ (2,441)
Net loss - pro forma $(31,314) $ (6,546) $ (3,217)
Loss per share - as reported $ (2.32) $ (.44) $ (.39)
Loss per share - pro forma $ (2.44) $ (.54) $ (.51)
</TABLE>
Pro forma net loss reflects only options granted since 1995. Therefore,
the full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995
is not considered.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility .88 to .99 0.79 to .99 .90
Risk-free interest rate 4.46% to 5.72% 5.65% to 6.36% 6.00% to 6.66%
Expected life of options 8 years 6 years 6 years
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1998, 1997 and 1996 was $2.67 per share, $8.00
per share and $5.02 per share, respectively.
(12) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accrued legal costs $1,175,000 $ 170,000
Accrued 401(k) matching
contributions 90,000 -
Accrued compensation 197,056 254,649
Other accrued expenses
and liabilities 267,965 179,497
---------- ----------
Total $1,730,021 $ 604,146
========== ==========
</TABLE>
F-20
<PAGE> 21
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(13) Commitments and Contingencies
Lease Commitments
In October 1994, the Company entered into a sublease agreement with Union
Carbide Corporation to sublease laboratory and office space in Tarrytown,
New York. The term of this agreement is for a period of approximately
three years commencing on May 15, 1995 and expiring on December 30, 1997.
Pursuant to this agreement, the Company received the first four months
rent free, which was amortized through December 30, 1997 so as to produce
a level amount of rent expense over the life of the lease. The
unamortized portion was included in accrued expenses and other current
liabilities in the accompanying balance sheet.
During 1997, the Company exercised its option to lease these facilities
directly from the landlord for a five-year period commencing January 1,
1998. Upon the signing of the lease, the landlord paid the Company
$140,000 which is included in accrued expenses and is being amortized
over the life of the lease. From October 1, 1997 through December 31,
1998, the Company temporarily leased approximately 7,000 square feet from
the landlord. The Company leased an additional 18,528 square feet of
contiguous space during 1998 under the same terms as the original lease
with the landlord. The Company also has an option to renew such lease for
a five-year period commencing on January 1, 2003.
In November 1994, the Company entered into an agreement to sublease
laboratory and office space, in Lakewood, Colorado, from Colorado
Bio/Medical Venture Center ("CBVC") for a period of 21 months ending on
July 9, 1996. In March 1996, the Company extended the sublease agreement
for eight additional months, therefore extending the lease expiration
date to March 9, 1997 at which time the Company became a month-to-month
tenant. The Company relocated its Lakewood, Colorado operations to New
York and terminated its lease with CBVC on December 31, 1997. The
approximate cost of the relocation was $349,000.
Future minimum lease payments for each of the five years subsequent to
December 31, 1998 and thereafter are $898,249 per year from 1999 through
the year ended December 31, 2002.
Rent expense, excluding utility and operating costs, for the years ended
December 31, 1998, 1997 and 1996 amounted to approximately $728,407,
$759,800 and $620,600, respectively.
Equipment Lease Line of Credit
In November 1997, the Company signed a $3.5 million Master Lease
Agreement ("Master Lease") with General Electric Capital Corporation
("GECC"). Under the agreement, the Company purchases equipment and then
enters into a sale-leaseback arrangement with GECC whereby the Company
sells the equipment to GECC and then leases back the equipment for a
period of 37 months. The lease arrangements are considered operating
leases for financial reporting purposes. Any gains recognized on the
difference between
F-21
<PAGE> 22
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
the equipment's book value and sale price are booked to deferred revenue
and recognized over the life of the lease.
Pursuant to its Master Lease with GECC, the Company must maintain
unrestricted cash, cash equivalents and investment grade securities (the
"Cash Equivalents") of at least $10,000,000. In March 1999, the Company
ceased to maintain Cash Equivalents of at least $10,000,000. Under the
Master Lease, by April 15, 1999, the Company must notify GECC of the
amount of Cash Equivalents of the Company and that the Company is not in
compliance with the Master Lease. GECC may then require the Company to
deliver to GECC within fifteen (15) days an irrevocable standby letter of
credit (the "Letter of Credit") in the amount of the "stipulated loss
value" of the equipment covered by the Master Lease (the "Equipment"),
which amount is currently $3.1 million to secure the Company's
obligations under the Master Lease. In order to obtain the Letter of
Credit, the Company would most likely have to provide to the issuer
thereof cash collateral in the amount of the Letter of Credit. If the
Letter of Credit is not delivered, the Company will be in default under
the Master Lease. If the Company does not cure such default with in
thirty (30) days after written notice thereof from GECC, GECC may require
the Company at its own cost and expense, to return the Equipment and to
pay to GECC the stipulated loss value of the Equipment as liquidated
damages and any rentals or other sums then due. GECC is not required to
mitigate damages.
The Company has made the following drawdowns against the Master Lease:
<TABLE>
<CAPTION>
Monthly
Lease Gain
Date Amount Payment Deferred
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Round #1 November 1997 $ 600,871 $ 13,650 $ 80,936
Round #2 December 1997 219,158 4,926 16,535
Round #3 March 1998 704,478 15,890 37,974
Round #4 July 1998 611,431 13,766 21,864
Round #5 October 1998 748,434 15,985 34,519
Round #6 December 1998 379,364 8,080 8,002
---------- ---------- ----------
Totals $3,263,736 $ 72,297 $ 199,830
========== ========== ==========
</TABLE>
The gains totaling $199,830 relating to the sale of the equipment to GE
Capital were credited to deferred revenue on the balance sheet and are
being amortized over the life of the individual leases. At December 31,
1998 and 1997, $45,965 and $3,281, respectively, of the deferred gain was
recognized as gain on sale of equipment in the accompanying statement of
operations.
Future minimum lease payments for each of the three years subsequent to
December 31, 1998 are $867,569, $861,730 and $439,850, respectively.
F-22
<PAGE> 23
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Consulting Agreements
The Company has entered into various consulting agreements. These
agreements generally require the Company to pay consulting fees on a
quarterly or per diem basis. These agreements are generally terminable at
the Company's or the consultant's option.
(14) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash payment for:
Interest $ 21,000 $ 7,365 $110,416
Income taxes $ 89,170 $ 28,541 $ 45,475
</TABLE>
(15) Employee Benefits
The Company has a 401(k) savings plan in which all of its permanent
employees are eligible to participate. Annually, the Company's
Compensation Committee determines the amount the Company will match of
the participants' contributions. In 1998, the Compensation Committee
elected to match 25% of the participant's contribution up to a maximum of
$2,500. In 1997, the Compensation Committee elected to match 25% of the
participant's contribution up to a maximum of $3,500. In 1996, the
Compensation Committee elected to match 50%, of the participant's
contribution up to a maximum of 6% of the participant's salary. The total
Company contribution for the years ended December 31, 1998, 1997 and 1996
were $89,976, $74,646 and $37,856, respectively. No matching
contributions were made by the Company prior to December 31, 1996.
(16) Subsequent Events
(a) SmithKline Beecham Milestone
In January 1999, the Company achieved a research milestone in its
collaboration with SmithKline Beecham Corporation. The milestone involved
the identification, during 1998, of ligands for orphan G-Protein coupled
receptors identified from the human genome. The Company received a $1.0
million payment for achieving the milestone, which payment was recorded
as revenue in January 1999.
(b) Asset Purchase Agreement with OSI Pharmaceuticals, Inc. and Cessation
of Drug Discovery Operations and Research Efforts
On July 30, 1999, the Company sold to OSI Pharmaceuticals, Inc. ("OSI"),
pursuant to an asset purchase agreement, its drug discovery programs
focused on G-protein-coupled receptors, its directed library of
approximately 150,000 small molecule compounds specifically designed for
drug discovery in the G-protein-coupled receptor arena, its collaboration
with Solvay Pharmaceuticals B.V. ("Solvay Pharmaceuticals"), its lease to
its research facility in Tarrytown, New York together with the furniture
and fixtures and its lease to equipment in the facility, and its
inventory of laboratory supplies. Pursuant to such sale transaction, OSI
assumed the Company's lease to the Company's research facility in
Tarrytown, New York, the Company's equipment lease with General Electric
Capital Corporation ("GECC") and the Company's research collaboration and
license agreement with Solvay Pharmaceuticals. OSI also hired more than
45 of the Company's scientific and administrative personnel. As
consideration for the sale, the Company received approximately $1,500,000
in cash and OSI assumed certain liabilities of the Company relating to
employees hired by OSI aggregating approximately $150,000. In addition,
the Company would be entitled to royalties and up to $3.0 million in
milestone payments on the first product derived from compounds sold to
OSI or from the collaboration with Solvay Pharmaceuticals. The Company
licensed to OSI on a non-exclusive basis certain technology solely to
enable OSI to fulfill its obligations under the collaboration with Solvay
Pharmaceuticals. The Company also licensed to OSI on a non-exclusive
basis certain proprietary software and technology relating to chemical
resins in order to enable OSI to fully benefit from the compounds it
acquired from the Company.
The Company is retaining ownership of all its other assets, including its
core yeast technology for developing drug discovery assays, its
collection of over 25,000 proprietary yeast strains, human and mammalian
cell lines, and genetic engineering tools, its program to identify and
isolate human orphan G protein-coupled receptors and elucidate their
function, its proprietary software, its genomics databases related to
G-protein-coupled receptors, the LivingChip program, all assays and
technologies reverting to it from its collaboration with Bristol-Myers
Squibb Company, a 30% equity position in Axiom Biotechnologies Inc., the
Company's current cash and cash equivalents, and the approximately $18.7
million being held in escrow pending appeal of the verdict in favor of
SIBIA.
The Company ceased its drug discovery operations and research efforts for
collaborators as a result of the transaction. Pursuant to a research
agreement, OSI will assist the Company in winding up its research efforts
on behalf of SmithKline Beecham Corporation and SmithKline Beecham p.l.c.
Consequently, the Company has terminated all employees who were not hired
by OSI, except for four employees who will work for the Company through
August 31, 1999 and two officers.
F-23
<PAGE> 1
Exhibit 99.2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Historical ------------------------------
---------------------- Assets Not
OSI Cadus Acquired and Pro Forma
June 30, June 30, Liabilities Other June 30,
Assets 1999 1999 Not Assumed (1) Adjustments 1999
--------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 10,498 6,978 (6,978) (2,274)(2) 8,224
Restricted cash -- 296 (296) -
Short-term investments 10,590 -- 10,590
Receivables, including trade receivables 2,301 -- 2,301
Interest receivables 142 -- 142
Grants receivable 235 -- 235
Prepaid expenses and other current assets 890 215 (141) 964
----------------------------------------------------------------------
Total current assets 24,656 7,489 (7,415) (2,274) 22,456
----------------------------------------------------------------------
Restricted cash - noncurrent -- 18,641 (18,641) -
Property, equipment and leasehold improvements -- net 7,500 2,439 (144) (1,265)(6) 8,530
Compound library assets -- net 4,314 -- 1,000 (3) 4,764
(550)(6)
Investments in other ventures -- 1,653 (1,653) -
Intangible assets -- net -- -- 225 (4) 6,728
(125)(6)
Other assets -- net 1,351 1,437 (1,217) (120)(6) 1,451
----------------------------------------------------------------------
Total assets $ 44,449 31,659 (29,070) (3,109) 43,929
======================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,606 1,484 (1,334) 3,756
Unearned revenue -- current 982 -- 982
Loans payable -- current 167 304 (304) 167
----------------------------------------------------------------------
Total current liabilities 4,755 1,788 (1,638) 4,905
----------------------------------------------------------------------
Unearned revenue -- long term 429 -- 429
Loans payable -- long term 319 -- 319
Deferred acquisition costs 701 -- 701
Accrued postretirement benefits cost 1,499 -- 1,499
Reserve for litigation damages -- 18,641 (18,641) -
Stockholders' equity:
Preferred Stock -- -- --
Common stock 224 132 (132) 224
Additional paid-in capital 105,050 59,689 (59,689) 105,050
Accumulated deficit (62,203) (48,291) 48,291 (670)(5) (62,873)
Accumulated other comprehensive loss (267) -- (267)
Treasury stock (6,058) (300) 300 (6,058)
----------------------------------------------------------------------
Total stockholders' equity 36,746 11,230 (11,230) (670) 36,076
----------------------------------------------------------------------
Total liabilities and stockholders' equity $ 44,449 31,659 (31,509) (670) 43,929
======================================================================
</TABLE>
<PAGE> 2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Statement of Operations
For the nine months ended June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Historical ----------------------------
-------------------- Revenue and
OSI Cadus Expenses of Pro Forma
June 30, June 30, Activities Other June 30,
1999 1999 Not Assumed (7) Adjustments 1999
-------- -------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaborative program revenues $ 12,600 7,704 (5,679) 14,625
Other research revenue 814 -- 814
License revenue 2,171 -- 2,171
Sales 916 -- 916
--------------------------------------------------------------------
16,501 7,704 (5,679) 18,526
--------------------------------------------------------------------
Expenses:
Research and development costs 14,766 11,588 (5,727) 70 (8) 20,697
Production and service costs 1,239 -- 1,239
Selling, general and administrative 6,364 5,702 (5,157) 6,909
Amortization of intangibles 1,096 -- 30 (8) 1,126
--------------------------------------------------------------------
23,465 17,290 (10,884) 100 29,971
--------------------------------------------------------------------
Loss from operations (6,964) (9,586) 5,205 (100) (11,445)
Other income (expense):
Net investment income 658 811 (811) (85)(9) 573
Loss of equity in other ventures - (974) 974 -
Reserve for litigation damages - (18,500) 18,500 -
Other expense -- net (54) 45 (45) (54)
--------------------------------------------------------------------
Net loss $ (6,360) (28,204) 23,823 (185) (10,926)
====================================================================
Weighted average number of shares of
common stock outstanding 21,430 21,430
======== ========
Basic and diluted loss per weighted average
share of common stock outstanding $ (0.30) (0.51)
======== ========
</TABLE>
<PAGE> 3
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Historical ----------------------------
-------------------- Revenue and
OSI Cadus Expenses of Pro Forma
Sept 30, Dec. 31, Activities Other Sept 30,
1998 1998 Not Assumed (7) Adjustments 1998
-------- -------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaborative program revenues $ 16,166 12,576 (9,876) 18,866
Other research revenue 1,429 - 1,429
License revenue 752 - 752
Sales 1,121 - 1,121
--------------------------------------------------------------------
19,468 12,576 (9,876) 22,168
--------------------------------------------------------------------
Expenses:
Research and development costs 20,350 15,389 (7,565) 28,264
90 (8)
Production and service costs 955 - 955
Selling, general and administrative 8,077 8,977 (8,078) 8,976
Amortization of intangibles 1,461 - 40 (8) 1,501
--------------------------------------------------------------------
30,843 24,366 (15,643) 130 39,696
--------------------------------------------------------------------
--------------------------------------------------------------------
Loss from operations (11,375) (11,790) 5,767 (130) (17,528)
--------------------------------------------------------------------
Other income (expense):
Net investment income 1,468 1,834 (1,834) (115)(9) 1,353
Loss of equity in other ventures - (1,144) 1,144 -
Reserve for litigation damages - (18,500) 18,500 -
Other expense - net (277) (90) 90 (277)
--------------------------------------------------------------------
Net loss $(10,184) (29,690) 23,667 (245) (16,452)
====================================================================
Weighted average number of shares of
common stock outstanding 21,373 21,373
======== ========
Basic and diluted loss per weighted average
share of common stock outstanding $ (0.48) (0.77)
======== ========
</TABLE>
<PAGE> 4
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) Book values of assets not acquired and liabilities not assumed by OSI
Pharmaceuticals, Inc. ("OSI") from Cadus Pharmaceutical Corporation
("Cadus") in accordance with the Asset Purchase Agreement dated July 30,
1999 by and between OSI and Cadus (the "Agreement"). The book values of the
assets acquired and the liabilities assumed by OSI from Cadus are
summarized as follows:
<TABLE>
<S> <C>
Fixed assets $ 2,295
Prepaid expenses 74
Patent costs 220
--------
$ 2,589
========
Employee benefits liability $ 150
========
</TABLE>
(2) Cash paid by OSI in connection with the Agreement summarized as follows:
<TABLE>
<S> <C>
Purchase price to Cadus $ 1,574
Professional fees 700
--------
$ 2,274
========
</TABLE>
In addition, OSI assumed $150 of certain employee-related liabilities
resulting in a total acquisition cost of $2,424.
(3) Allocation of the purchase price to compound library acquired by OSI (see
note 5 regarding valuation study).
(4) Allocation of the purchase price to the assembled workforce intangible
(see note 5 regarding valuation study).
(5) Represents an estimated charge of $670 for acquired in-process research and
development costs, net of negative goodwill allocation (see note 6). No tax
benefit has been reflected in connection with this charge in recognition of
the uncertainty that any such tax benefits will be realized by OSI based on
its history of operating losses since OSI's inception. OSI has engaged a
professional services firm to conduct a valuation study of the assets
acquired under the Agreement, including a determination of acquired
in-process research and development costs. This valuation has not yet been
completed. As a result, the allocation of the purchase price is subject to
change upon completion of the valuation study, including the estimated
amount of acquired in-process research and development costs.
The estimated charge of $670 for acquired in-process research and
development costs has been reflected as a reduction of stockholders' equity
in the pro forma condensed combined balance sheet as of June 30, 1999.
<PAGE> 5
This same charge has been excluded from the pro forma condensed combined
statement of operations for the year ended September 30, 1998 since the
charge is non-recurring and directly related to the Agreement.
(6) Allocation of negative goodwill to reduce noncurrent financial assets on a
pro rata basis. The determination of negative goodwill and the allocation
to noncurrent financial assets are summarized as follows:
Summary of fair value of assets acquired:
<TABLE>
<S> <C>
Fixed assets $ 2,295
Patents 220
Prepaid expenses 74
Assembled work force 225
Compound library 1,000
In-process research and development costs 1,500
-------
Total fair value of assets acquired 5,314
Purchase price 2,424
-------
Negative goodwill $ 2,890
=======
</TABLE>
Pro rata allocation of negative goodwill:
<TABLE>
<S> <C>
Fixed assets $ 1,265
Patents 120
Assembled work force 125
Compound library 550
In-process research and development costs 830
-------
Negative goodwill $ 2,890
=======
</TABLE>
Summary of fair value of assets acquired, net of the allocation of
negative goodwill:
<TABLE>
<S> <C>
Fixed assets $ 1,030
Patents 100
Prepaid expenses 74
Assembled work force 100
Compound library 450
In-process research and development costs 670
-------
Fair value of assets acquired, net $ 2,424
=======
</TABLE>
<PAGE> 6
(7) Revenues and expenses of activities not assumed by OSI. In accordance with
the Agreement, OSI assumed the operations of Cadus' facility, including
lease obligations for the facility and certain research equipment, 47
research employees and the research program with Solvay Pharmaceuticals
B.V. The determination of the pro forma employee-related expenses is based
on the ratio of research employees hired by OSI to the total number of
Cadus research employees during the pro forma periods. Other research
costs and administrative expenses were estimated based on the operating
activities assumed by OSI as a result of the Agreement. No provision for
income taxes has been made based on the history of the operating losses of
both OSI and Cadus since their inceptions. A summary of revenue and
expenses activity acquired by OSI is as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
Sept. 30, 1998 Jun. 30, 1999
-------------- -----------------
<S> <C> <C>
Research revenue (Solvay) 2,700 2,025
Research costs (47 employees)
including payroll
and direct research costs (7,824) (5,861)
Administrative expenses (899) (545)
------ ------
Net loss (6,023) (4,381)
====== ======
</TABLE>
(8) Represents the amortization expense of the compound library (recorded in
research and development costs), patents and workforce intangibles
(recorded in amortization of intangibles) acquired under the Agreement
based on the straight-line method over five years.
(9) Represents the reduction of investment income based on the total payments
of $2,274 assuming an average rate of return of 5% per annum based on
OSI's historical investment performance.
