AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-4441
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CADUS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 8731 13-3660391
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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777 OLD SAW MILL RIVER ROAD, TARRYTOWN, NY 10591-6705
(914) 345-3344
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JEREMY M. LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER CADUS PHARMACEUTICAL CORPORATION
777 OLD SAW MILL RIVER ROAD, TARRYTOWN, NY 10591-6705 (914) 345-3344
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies of all communications regarding this
Registration Statement should be sent to:
SALOMON R. SASSOON, ESQ. LESLIE E. DAVIS, ESQ.
MORRISON COHEN SINGER & WEINSTEIN, LLP TESTA, HURWITZ & THIBEAULT, LLP
750 LEXINGTON AVENUE, 125 HIGH STREET,
NEW YORK, NEW YORK 10022 BOSTON, MA 02110
(212) 735-8600 (telephone) (617) 248-7000 (telephone)
(212) 735-8708 (facsimile) (617) 248-7100 (facsimile)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CADUS PHARMACEUTICAL CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS OF FORM S-1 AND
FORM OF PROSPECTUS PURSUANT TO REGULATION S-K, Item 501(b)
<TABLE>
<CAPTION>
ITEM NO. LOCATION IN PROSPECTUS
- -------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus .............. Facing Page, Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus ....................................... Inside Front Cover Page,
Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges ........................ Prospectus Summary; Risk Factors
4. Use of Proceeds ..................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price ..................... Outside Front Cover Page;
Risk Factors; Underwriting
6. Dilution ............................................ Risk Factors; Dilution
7. Selling Security Holders ............................ Not Applicable
8. Plan of Distribution ................................ Outside Cover Page; Underwriting
9. Description of Securities to be Registered .......... Outside Cover Page; Prospectus Summary;
Risk Factors; Dividend Policy; Capitalization;
Description of Capital Stock;
Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel ............. Experts
11. Information with Respect to the Registrant ......... Outside Cover Page; Prospectus Summary;
Risk Factors; The Company; Dividend
Policy; Dilution; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ..... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 3, 1996
PROSPECTUS
2,750,000 Shares
CADUS PHARMACEUTICAL CORPORATION [LOGO]
COMMON STOCK
All of the 2,750,000 shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $10.50 and $12.50 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "KDUS."
Bristol-Myers Squibb Company and Solvay Duphar B.V., two of the Company's
collaborative partners, have indicated their interest in purchasing $2.5 million
and $5.0 million, respectively, of shares of Common Stock in this offering.
----------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- --------------------------------------------------------------------------------
Per Share ......... $ $ $
Total (3) ......... $ $ $
================================================================================
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $570,000.
(3) The Company has granted the Und purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996, at the office of the agent of Hambrecht & Quist
LLC in New York, New York.
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
GENESIS MERCHANT GROUP
SECURITIES
, 1996
<PAGE>
[Graphical Representation of SSCL]
Cadus exploits similarities between the yeast and human genome to identify
new drug discovery targets. One of Cadus' proprietary technologies, the Self
Selecting Combinatorial Library (SSCL) technology described below, provides a
systematic means to identify the ligand that activates an identified human cell
surface receptor of unknown function (an "orphan receptor"). Once the ligand has
been identified, the biological function of the orphan receptor can be
determined, a necessary prerequisite to a drug discovery program focused on that
receptor.
Self Selecting Combinatorial Library (SSCL)
STEP ONE
Human orphan receptor gene inserted into genome of yeast strain.
STEP TWO
Each cell in strain now expresses the human orphan receptor on the cell surface.
STEP THREE
Millions of different peptide genes are inserted into a yeast strain. Each yeast
cell now produces a single different peptide ligand.
STEP FOUR
The yeast cell that produces a peptide ligand that binds to the human orphan
receptor will replicate continuously, creating an autocrine system.
STEP FIVE
The resulting peptide ligand is then isolated, purified and analyzed.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------
APEX(trademark) and SSCL(trademark) are trademarks of the Company.
Tradenames and trademarks of other companies appearing in this Prospectus are
the property of their respective holders.
2
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. For explanations of the technical terms and processes used
or discussed in the following summary, see "Business".
THE COMPANY
Cadus Pharmaceutical Corporation is engaged in the discovery of novel small
molecule therapeutics that act on targets in human cell signaling pathways. The
Company has developed proprietary drug discovery technologies based on
genetically engineered yeast cells. Cadus uses these and other proprietary
technologies to identify human cell surface receptors and other molecular
targets, to elucidate the function of such targets and to identify lead
compounds that act on such targets. The Company conducts drug discovery programs
both independently and with its collaborative partners, Bristol-Myers Squibb
Company ("Bristol-Myers Squibb") and Solvay Duphar B.V. ("Solvay Duphar").
The Company has not completed development of any products and does not expect
any products that it may develop to be commercially available for many years,
if at all. The Company has not generated any revenues from products or services
and does not expect to do so in the foreseeable future.
Cadus is a leader in the development of proprietary technologies that
exploit the similarities between yeast and human genes to elucidate gene
function and cell signaling pathways. The Company has developed four proprietary
drug discovery technologies. Two of these technologies are used to identify
small molecules that act as agonists or antagonists to cell surface receptors
and other targets in the signal transduction pathway: (i) a hybrid yeast cell
technology that expresses a functioning human receptor and a portion of its
signaling pathway in a yeast cell and (ii) the Autocrine Peptide Expression
("APEX") system that expresses a known human ligand in a hybrid yeast cell as
well as the receptor that is activated by that ligand. The other two
technologies are used to identify and characterize receptors whose ligand and
hence function are not known (which are called orphan receptors), ligands and
key signaling molecules: (i) the Company's Self Selecting Combinatorial Library
("SSCL") technology, which is used to identify a ligand that activates a
targeted orphan receptor and (ii) the Company's signal transduction
technologies, which are used to determine potential molecular targets in the
human cell signaling pathway and to assist in the determination of a receptor's
biological function.
Cadus has focused its research to date on discovering G protein-coupled
receptors, their ligands and resulting cell signaling pathways. G
protein-coupled receptors are involved in the majority of basic cell functions
and are therefore potential targets in the treatment of common human diseases.
The importance of G protein-coupled receptors is demonstrated by the fact that
more than 60% of all commercially available prescription drugs (including the
anti-ulcer agents Zantac and Tagamet and the cardiac drugs Tenormin and
Lopressor) work by interacting with G protein-coupled receptors. There are an
estimated 2,000 to 5,000 G protein-coupled receptors in the human genome. The
function of approximately 100 of these G protein-coupled receptors has been
identified. This knowledge has been used to help identify the sequences of an
additional 100 orphan G protein-coupled receptors. Although the Company believes
that orphan receptors are likely to prove therapeutically important, a receptor
cannot become the subject of a systematic drug discovery program until its
function has been determined. Traditional methods used to determine the function
of an orphan receptor are time consuming and expensive. The Company believes
that its technologies will enable it to determine the function of many orphan
receptors rapidly and cost-effectively.
The Company's technologies can also be applied to other receptors and their
related signaling pathways. For this reason, the Company is pursuing selected
targets such as cytokine receptors and multisubunit immune recognition
receptors. These receptors and their signaling pathways are involved in cell
growth, in the release of biologically active substances such as histamines and
in the regulation of the immune system.
The Company's proprietary drug discovery programs are focused on allergic
inflammation, acute inflammation and cancer. The Company's collaboration with
Bristol-Myers Squibb is focused on cardiovascular disease, acute inflammation,
central nervous system disorders, obesity and diabetes. To date, this
collaboration has resulted in the identification of potential lead compounds in
the area of central nervous system disorders and ligands to an orphan receptor.
The Company's collaboration with Solvay Duphar is also focused on cardiovascular
disease and central nervous system disorders, as well as gynecological diseases
and gastrointestinal disorders. Through March 31, 1996, the Company had received
an aggregate of approximately $34.9 million in research funding and equity
investments (including a $5.0 million equity investment made as a result of the
achievement of a research milestone in 1995) from its collaborative partners.
The Company was incorporated in Delaware in January 1992. The Company's
corporate headquarters and principal research facilities are located at 777 Old
Saw Mill River Road, Tarrytown, New York 10591, and its telephone number is
(914) 345-3344.
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3
<PAGE>
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THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company ................ 2,750,000 Shares
Common Stock to be outstanding after the offering .. 11,482,052 Shares(1)
Use of Proceeds .................................... Research and development, working capital
and general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol ............. KDUS
</TABLE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk.
See "Risk Factors" beginning on page 5.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY JANUARY
23, 1992 THREE MONTHS 23, 1992
YEAR ENDED DECEMBER 31, (DATE OF ENDED MARCH 31, (DATE OF
----------------------------- INCEPTION) TO ---------------- INCEPTION) TO
1995 1994 1993 DECEMBER 31, 1992 1996 1995 MARCH 31, 1996
-------- -------- -------- ----------------- ------ -------- ----------------
STATEMENT OF OPERATIONS DATA: -------------(Unaudited)-------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 4,418 $ 1,355 $ -- $ -- $1,625 $1,000 $ 7,397
Operating costs and expenses:
Research and development 5,383 2,246 1,645 753 1,654 1,040 11,683
General and administrative 1,376 937 550 214 318 317 3,394
------- ------- ------- ----- ------ ------ -------
Total operating costs and expenses 6,759 3,183 2,195 967 1,972 1,357 15,077
Operating loss (2,341) (1,828) (2,195) (967) (347) (357) (7,680)
Net loss(2) $(1,482) $(1,393) $(2,148) $(967) $ (43) $ (155) $(6,034)
======= ======= ======= ===== ====== ====== =======
Pro forma net loss per share(3) $ (0.16) $ 0.00
======= ======
Pro forma weighted average shares
outstanding(3) 9,043,609 8,987,992
</TABLE>
MARCH 31, 1996
---------------------------------
ACTUAL AS ADJUSTED(4)
------ --------------
(Unaudited)
BALANCE SHEET DATA:
Cash and cash equivalents(5) ......... $25,086 $53,928
Total assets ......................... 30,585 59,427
Short term debt ...................... 2,397 2,397
Loans payable to bank ................ 25 25
Accumulated deficit .................. (6,034) (6,034)
Total stockholders' equity ........... 27,691 56,533
(1) Gives effect to the automatic conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock upon the closing of this
offering. Excludes 1,289,035 shares of Common Stock issuable upon the
exercise of stock options outstanding as of March 31, 1996, of which
options to purchase 505,756 shares of Common Stock are exercisable. See
"Capitalization" and "Management-Incentive Plans."
(2) The net loss of $1.4 million for the year ended December 31, 1994 includes
an extraordinary gain of approximately $159,000 from the early
extinguishment of a debt obligation.
(3) Computed on the basis described for pro forma net loss per share in Note 2
of Notes to Financial Statements.
(4) Adjusted to reflect the sale of the 2,750,000 shares of Common Stock
offered hereby at an assumed initial offering price of $11.50 per share,
and the receipt of the estimated net proceeds therefrom. See "Use of
Proceeds."
(5) Does not include restricted cash of $2.5 million.
(6) The Company has not paid any dividends since its inception and does not
anticipate paying any dividends on its Common Stock in the foreseeable
future.
Except as otherwise specified, all information in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) reflects a
one-for-three reverse stock split of the Company's Common Stock to be effected
immediately prior to closing of this offering; and (iii) reflects, upon the
closing of this offering, the automatic conversion of all outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 7,400,376 shares
of Common Stock. See "Description of Capital Stock," "Underwriting" and Note 15
of Notes to Financial Statements.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS
An investment in the shares of Common Stock being offered by this
Prospectus involves a high degree of risk. Accordingly, prospective investors
should consider carefully the following risk factors, as well as all other
information contained in this Prospectus, before purchasing the shares of Common
Stock offered hereby.
EARLY STAGE OF DEVELOPMENT; ABSENCE OF DEVELOPED PRODUCTS
The Company is at an early stage of development and has not completed
development of any products. The Company does not expect that any products
resulting from its research and development efforts will be commercially
available for a significant number of years, if at all. All of the Company's
potential products will require significant research and development and are
subject to numerous risks. Potential products that appear to be promising at
early stages of development may not reach the market for a number of reasons.
Furthermore, potential products may be found ineffective or cause harmful side
effects during preclinical testing or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's or its collaborative partners' product development
efforts will be successfully completed, that required regulatory approvals will
be obtained or that any products, if introduced, will be successfully marketed
or achieve customer acceptance.
TECHNOLOGICAL UNCERTAINTIES
The scientific understanding of yeast genes and yeast cells is at an early
stage. Yeast-based drug discovery has not yet been shown to be successful in the
development of any commercialized drug. There can be no assurance that these
technologies will enable the Company to successfully identify and characterize
receptors, ligands or signaling molecules and understand their roles in disease.
The human genome is not fully represented by the yeast genome, which may inhibit
the Company's ability to use its yeast-based technologies to discover drugs for
those diseases linked to a human gene that has no counterpart in the yeast
genome. There also can be no assurance that the Company's technologies will
result in lead compounds that will be safe and efficacious. Development of new
pharmaceutical products is highly uncertain, and no assurance can be given that
the Company's drug discovery technologies will result in any commercially
successful products.
DEPENDENCE ON COLLABORATIVE PARTNERS
The Company depends on collaborations with pharmaceutical companies for
access to research, drug development, manufacturing, marketing and financial
resources for its drug development programs. To date, the Company has entered
into two such arrangements, one with Bristol-Myers Squibb and the other with
Solvay Duphar. There can be no assurance that the Company will be able to
establish additional collaborative arrangements, that any such arrangements will
be on terms favorable to the Company, or that current or future collaborations
will ultimately be successful in discovering any potential products. To the
extent that the Company chooses not to or is unable to continue its current
collaborations or establish new arrangements, it would require substantially
greater capital to undertake research, preclinical and clinical development, and
manufacturing and marketing of products at its own expense, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Under their collaborative agreements with the Company, Bristol-Myers Squibb
and Solvay Duphar have the right, but not the obligation, to conduct preclinical
testing and clinical trials of compounds developed by them through the use of
the Company's technologies, to seek regulatory approvals and to manufacture and
commercialize any resulting drug candidates. As a result, the Company's receipt
of revenues from drug development milestones or royalties on sales under the
collaborative agreements is dependent upon the activities and the development,
manufacturing and marketing resources of its collaborative partners. The
collaborative agreements allow the Company's collaborative partners significant
discretion in electing whether or not to pursue any of these activities. The
Company cannot control the amount and timing of resources to be dedicated by the
collaborative partners to their respective collaborations with the Company.
There can be no assurance that such partners will pursue the development and
commercialization of such compounds as expected, that any such development or
commercialization would be successful or that the Company will derive any
additional revenue from such arrangements. While the Company's collaborative
arrangements with Bristol-Myers Squibb and Solvay Duphar provide that the
Company will receive milestone payments and royalties with respect to drugs
developed from
5
<PAGE>
compounds identified or confirmed using the Company's technologies, there can be
no assurance that disputes will not arise over whether or not specific compounds
were identified or confirmed using the Company's technologies and are,
therefore, covered by such royalty and milestone provisions. Furthermore, there
can be no assurance that Bristol-Myers Squibb, Solvay Duphar or any other
potential future collaborator will not pursue alternative technologies in
preference to those being developed in collaboration with the Company. In
addition, there can be no assurance that the Company's collaborators will make
milestone payments to the Company or that they will develop and market any
products that may result under the agreements. Moreover, there can be no
assurance that the interests of the Company will continue to coincide with those
of its collaborative partners, that some of the Company's collaborative partners
will not develop independently or with third parties drugs that could compete
with drugs of the types covered by the collaborations, or that disagreements
over rights or technology or other proprietary interests will not occur.
Disagreements between the Company and its collaborative partners could lead to
delays in collaborative research or in the development or commercialization of
certain product candidates, or could require or result in litigation or
arbitration, which could be time consuming and expensive. Any of these factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is relying on its collaborative partners to fund a substantial
portion of its research operations over the next several years. The initial term
of the research provisions of the contracts between the Company and each of
Bristol-Myers Squibb and Solvay Duphar expire in July 1997 and December 2000,
respectively. Bristol-Myers Squibb can extend the term of its collaboration for
two years and Solvay Duphar can extend the term of its collaboration from two to
five years. There can be no assurance that these contracts will be extended or
renewed, or that any renewal will be made on terms favorable to the Company.
Moreover, commencing in July 1998, the research provisions of the Solvay Duphar
Agreement may be terminated for nonperformance under certain circumstances,
which termination would result in the Company losing its research funding from
Solvay Duphar. The termination or expiration of the research provisions of
either of such contracts, or the failure by Bristol-Myers Squibb or Solvay
Duphar to provide research funding to the Company, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Collaborative Arrangements."
HISTORY OF OPERATING LOSSES
The Company has incurred net losses every year since its inception in
January 1992. At March 31, 1996, the Company had an accumulated deficit of
approximately $6.0 million. The Company's losses have resulted principally from
costs incurred in connection with research and development activities and from
general and administrative costs associated with the Company's operations. The
Company expects to incur additional operating losses over the next several years
and expects cumulative losses to increase substantially as the Company's
research and development efforts are expanded and preclinical testing is
commenced.
QUARTERLY FLUCTUATIONS
The Company expects that losses will fluctuate from quarter to quarter and
that such fluctuations may be substantial.
UNCERTAINTY OF FUTURE PROFITABILITY
The Company has no products or services available for sale, and no revenues
have been generated from the commercialization by the Company or any of its
collaborative partners of products or services. In addition, the Company does
not anticipate that it will generate revenues from products or services in the
foreseeable future. To date, all of the Company's revenues have resulted from
research funding by its collaborative partners. The Company's ability to
generate significant revenues and become profitable is dependent in large part
on the ability of the Company to enter into additional collaborative
arrangements. The Company's product revenues and profitability is also dependent
on the Company, alone or with others, successfully completing the development of
drug candidates, obtaining the required regulatory approvals and manufacturing
and marketing any potential products. There can be no assurance that the Company
will ever achieve product revenues or profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on the Company, its licensors and
its licensees, successfully obtaining patent protection for the technologies
owned by or licensed to the Company and for the compounds and other products, if
any, resulting from the application of such technologies, preserving their
respective trade secrets, preventing third parties from infringing upon their
respective proprietary rights, and operating without infringing on the
proprietary rights of others, both in the United States and in other countries.
6
<PAGE>
Patent matters in biotechnology, and in particular with respect to drug
discovery technologies, are highly uncertain and involve complex legal and
factual questions. Accordingly, the breadth and validity of claims allowed in
biotechnology and pharmaceutical patents cannot be accurately predicted. As of
June 30, 1996, the Company was the exclusive worldwide licensee of two issued
U.S. patents and a field exclusive worldwide licensee of another issued U.S.
patent. In addition, as of such date, the Company had filed or held exclusive
licenses or field exclusive licenses to 47 U.S. patent applications, as well as
related foreign patent applications. There can be no assurance that the Company
will develop technology that is patentable, that patents will issue from any of
the pending applications, or that claims allowed will be sufficient to protect
the Company's technologies. There can be no assurance that the Company or its
collaborative partners will be able to obtain patent protection for
pharmaceutical products discovered using the Company's technologies.
Furthermore, there can be no assurance that any patents issued to the Company or
its collaborative partners, or for which the Company has license rights, will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company. There can be no assurance that the Company's issued or licensed patents
would be held valid by a court of competent jurisdiction. An assertion of
coinventorship has been made by a third party with respect to one of the patents
relating to a signal transduction protein exclusively licensed by the Company.
There can be no assurance that the Company will retain exclusive rights under
the patent or that the scope and validity of this patent or related patent
applications will not be adversely affected by the assertion.
A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have been issued patents, may have filed patent
applications or may obtain additional patents and proprietary rights for drug
discovery technologies similar to those of the Company. The commercial success
of the Company will depend in part on the Company not infringing patents issued
to competitors. The Company cannot determine with certainty whether any existing
third party patents or the issuance of any third party patents would require the
Company to alter its technologies, obtain licenses or cease certain activities.
If any licenses are required, there can be no assurance that the Company will be
able to obtain any such license on commercially favorable terms, if at all, and
if these licenses are not obtained, the Company might be prevented from using
certain of its technologies. The Company's failure to obtain a license to any
technology that it may require to continue its drug discovery efforts may have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is presently seeking to obtain licenses from
several different third parties. There can be no assurance that any of these
licenses will be obtained or, if obtained, will be on terms favorable to the
Company. Failure to obtain these licenses may require the Company to utilize
alternative technologies and/or to defend against infringement litigation, each
of which could result in substantial costs to and diversion of resources by the
Company.
The patent holder of an aspect of drug screening techniques that is widely
used by many companies in the biotechnology industry has recently threatened
litigation against the Company. While the Company is currently seeking a license
to the patent, there can be no assurance that such license will be obtained at
all or, if obtained, will be obtained on terms favorable to the Company.
Moreover, there can be no assurance that the patent holder will not begin legal
proceedings against the Company. In such a proceeding, the relief sought could
include injunctive relief that, if granted, could delay certain aspects of the
drug discovery and development efforts of the Company and its collaborative
partners, and monetary damages that, if awarded, could have a material adverse
effect on the business, financial condition and results of operations of the
Company. The costs of and the diversion of Company resources associated with
infringement litigation could have a material adverse effect on the business,
financial condition and results of operations of the Company.
Litigation, which could result in substantial costs to the Company, may be
necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third party proprietary rights. Some of the
Company's competitors have, or are affiliated with companies having,
substantially greater resources than the Company, and such competitors may be
able to sustain the costs of complex patent litigation to a greater degree and
for longer periods of time than the Company. Uncertainties resulting from the
initiation and continuation of any patent or related litigation could have a
material adverse effect on the Company. An adverse outcome in connection with an
infringement proceeding brought by a third party could subject the Company to
significant liabilities, require disputed rights to be licensed from third
parties or require the Company to cease using the disputed technology, any of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. If competitors of the Company prepare and
file patent applications in the United States that claim technology also claimed
by the Company, the Company may have to participate in interference proceedings
declared by the Patent and Trademark Office to determine priority of invention,
which
7
<PAGE>
could result in substantial costs to the Company, even if the eventual outcome
is favorable to the Company. The Company is aware of a U.S. patent application
related to certain receptors in yeast cells filed more than three years after
one of the patents licensed by the Company. There can be no assurance that an
interference will not be declared between such U.S. patent application and the
patent and related earlier filed patent applications licensed by the Company.
The Company also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. The
Company attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its collaborative partners, employees,
consultants and certain contractors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. To the extent that the
Company or its consultants or research collaborators use intellectual property
owned by others in their work for the Company, disputes may also arise as to the
rights in related or resulting know-how and inventions, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Patents, Proprietary Technology and Trade
Secrets."
INTENSE COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
Competition in the pharmaceutical and biotechnology industry is intense.
The Company competes with the research departments of pharmaceutical companies,
biotechnology companies and research and academic institutions. The Company's
technology platform consists principally of genetically engineered yeast cells
and certain signal transduction technologies, which it utilizes to determine the
biological function of orphan receptors and signaling molecules. The Company is
aware of other companies, such as American Home Products Corporation and Glaxo
Wellcome, Plc, that may use yeast as a drug discovery medium. Other companies,
such as Merck & Co., Inc. and SmithKline Beecham, Plc, may be engaged in efforts
to determine the biological function of orphan receptors, and other companies
such as Sandoz Ltd. and Pfizer Inc. may be engaged in research and development
efforts relating to signal transduction. In addition, there are several smaller
companies pursuing these areas of research. Furthermore, many companies have
potential drugs in various stages of development to treat asthma and small-cell
lung carcinoma, two diseases targeted by the Company in its proprietary research
programs. Many of the Company's competitors have greater financial and human
resources, and more experience in research and development, preclinical and
clinical testing, obtaining regulatory approvals, manufacturing and marketing
than the Company. There can be no assurance that competitors of the Company will
not develop competing drug discovery technologies or drugs that are more
effective than those developed by the Company and its collaborative partners or
obtain regulatory approvals of their drugs more rapidly than the Company and its
collaborative partners, thereby rendering the Company's and its collaborative
partners' drug discovery technologies and/or drugs obsolete or noncompetitive.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its collaborative partners' ability to use the Company's drug
discovery technologies or commercialize drugs, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that some of the Company's
collaborative partners will not develop, independently or with third parties,
products that could compete with drugs of the types covered by the collaboration
or otherwise being developed by the Company. Furthermore, there is intense
competition for access to libraries of compounds to use for screening and any
inability of the Company to maintain access to sufficiently broad libraries of
compounds for screening potential targets would have a material adverse effect
on the Company's business, financial condition and results of operations.
Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. The Company expects the technologies associated with the
Company's research and development will continue to develop rapidly, and the
Company's future success will depend in large part on its ability to maintain a
competitive position with respect to these technologies. Rapid technological
development by the Company or others may result in compounds, products or
processes becoming obsolete before the Company recovers any expenses it incurs
in connection with developing such products. There can be no assurance that
yeast-based drug discovery will be viable or that it will achieve market
acceptance or that it will not be superseded by other drug discovery techniques.
See "Business--Competition."
8
<PAGE>
GOVERNMENT REGULATION
The preclinical testing and clinical trials of compounds developed through
the use of the Company's technologies and the manufacturing and marketing of any
drugs that may result are subject to regulation by numerous Federal, state and
local governmental authorities in the United States, the principal one of which
is the United States Food and Drug Administration ("FDA"), and by similar
agencies in other countries in which drugs developed through the use of the
Company's technologies may be tested and marketed. Any compound developed by the
Company or its collaborative partners must receive regulatory approval before it
may be marketed as a drug in a particular country. The regulatory process, which
includes preclinical testing and clinical trials of each compound in order to
establish its safety and efficacy, can take many years and requires the
expenditure of substantial resources. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory agency approval. In addition, delays or
rejections may be encountered during the period of drug development, including
delays during the period of review of any application. Delays in obtaining
regulatory approvals could adversely affect the marketing of any drugs developed
by the Company or its collaborative partners, impose costly procedures upon the
Company's and its collaborative partners' activities, diminish any competitive
advantages that the Company or its collaborative partners may attain and
adversely affect the Company's ability to receive royalties. There can be no
assurance that regulatory approvals will be obtained for any compounds developed
by, or in collaboration with, the Company. Moreover, even if regulatory approval
for a compound is granted, such approval may entail limitations on the indicated
uses for which it may be marketed. Further, approved drugs and their
manufacturers are subject to continual review, and discovery of previously
unknown problems with a drug or its manufacturer may result in restrictions on
such drug or manufacturer, including withdrawal of the drug from the market.
Regulatory approval of prices is required in many countries and may be required
for the marketing of any drug developed by the Company or its collaborative
partners. The Company's inability to obtain regulatory approvals in the United
States and foreign markets would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Government Regulation."
FUTURE CAPITAL NEEDS
The Company may be required to raise additional capital over a period of
several years in order to conduct its operations. Such capital may be raised
through additional public or private financings, as well as collaborative
arrangements, borrowings and other available sources. The Company depends upon
its collaborative partners for research funding. As of March 31, 1996, the
Company had received approximately $6.4 million in research funding from
Bristol-Myers Squibb and approximately $1.0 million from Solvay Duphar. There
can be no assurance that the Company will continue to receive funding under the
existing collaborative arrangements. There can be no assurance that the
Company's existing or potential future collaborative arrangements will be
adequate to fund the Company's operating expenses. The Company's capital
requirements depend on numerous factors, including the ability of the Company to
enter into additional collaborative arrangements, competing technological and
market developments, changes in the Company's existing collaborative
relationships, the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights, the purchase of additional
capital equipment, the progress of the Company's drug discovery programs and the
progress of the Company's collaborative partners' milestone and royalty
producing activities. The Company may require substantial funds to conduct the
research and development and the preclinical studies and clinical trials for its
potential products. To the extent that additional capital is raised through the
sale of equity or convertible debt securities, the issuance of such securities
could result in dilution to the Company's existing stockholders.
UNCERTAINTY OF ACCESS TO CAPITAL
There can be no assurance that additional funding, if necessary, will be
available on favorable terms, if at all. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds through entering into arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets that the Company
would not otherwise relinquish, which would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NEED TO ATTRACT AND RETAIN KEY OFFICERS, EMPLOYEES AND CONSULTANTS
The Company is highly dependent on the principal members of its scientific
and management staff. The loss of one or more members of the Company's
scientific or management staff could significantly delay or prevent the
9
<PAGE>
achievement of research, development or business objectives. The Company
maintains a $1.0 million key person life insurance policy on the life of each of
Jeremy M. Levin and James R. Broach. Certain key members of the Company's
scientific staff, including James R. Broach, John C. Cambier and Gary L.
Johnson, are consultants who devote a majority of their professional time to
activities unrelated to the Company. In addition, the Company relies
on consultants and advisors, including the members of its Scientific Advisory
Board, to assist the Company in formulating its research and development
strategy. Retaining and attracting qualified personnel, consultants and advisors
is critical to the Company's success. In order to pursue its collaborative
relationships, product development and marketing plans, the Company will be
required to hire additional qualified scientific personnel to perform research
and development, as well as personnel with expertise in clinical testing,
government regulation, manufacturing, and marketing. These requirements are also
expected to demand the addition of management personnel and the development of
additional expertise by existing management personnel. The Company faces
competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. There can
be no assurance that the Company will be able to attract and retain such
individuals on acceptable terms, if at all, and the failure to do so would have
a material adverse effect on the Company's business, including its ability to
conclude collaborations with additional corporate partners.
RELIANCE ON THIRD PARTIES FOR CONDUCT OF CLINICAL TRIALS AND MANUFACTURING
The Company has no preclinical or clinical development expertise and
intends to rely on its collaborative partners and third party clinical research
organizations to design and conduct most of such activities, if required. In
addition, the Company has no manufacturing facilities and intends to rely on its
collaborative partners and contract manufacturers to produce the materials for
preclinical and clinical development purposes. If the Company were unable to
contract for these services on acceptable terms, or if it should encounter
delays or difficulties in its relationships with such providers, the Company's
product development would be delayed, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Moreover, contract manufacturers that the Company may use must adhere to Good
Manufacturing Practices ("GMP") regulations enforced by the FDA through its
facilities inspection program. If their facilities cannot pass a pre-approval
plant inspection, the Company's products will not be granted FDA approval.
EXPOSURE TO PRODUCT LIABILITY CLAIMS; LIMITED AVAILABILITY OF INSURANCE
The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
therapeutic products. The Company currently has no clinical trial liability
insurance and there can be no assurance that it will be able to obtain and
maintain such insurance for any of its clinical trials if its drug discovery
efforts are successful. In addition, there can be no assurance that the Company
will be able to obtain or maintain product liability insurance in the future on
acceptable terms or with adequate coverage against potential liabilities. A
successful product liability claim or series of claims brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.
UNCERTAINTIES RELATED TO PHARMACEUTICAL PRICING AND THIRD PARTY REIMBURSEMENT
The Company's and its collaborative partners' realization of revenues and
income with respect to drugs, if any, developed through the use of the Company's
technologies will depend, in part, upon the extent to which reimbursement for
the cost of such drugs will be available from third party payors, such as
government health administration authorities, private health care insurers,
health maintenance organizations, pharmacy benefits management companies and
other organizations. Third party payors are increasingly challenging the prices
charged for pharmaceutical products. Significant uncertainty exists as to the
reimbursement status of newly approved pharmaceutical products. There can be no
assurance that third party reimbursement will be available or sufficient for any
drugs developed through the use of the Company's technologies. The inability to
maintain price levels for such drugs could adversely affect the Company's
business, financial condition and results of operations. Furthermore, in certain
foreign markets, pricing or profitability of prescription pharmaceuticals is
subject to governmental control. In the United States there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement similar governmental control.
10
<PAGE>
HAZARDOUS MATERIALS
As with many biotechnology and pharmaceutical companies, the Company's
research and development involves the controlled use of hazardous materials,
chemicals and various radioactive compounds. The Company is subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. The risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops manufacturing capacity.
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT; CONCENTRATION OF STOCK
OWNERSHIP
Upon completion of this offering, four existing stockholders of the Company
will beneficially own approximately 56.9% of the outstanding shares of Common
Stock (approximately 54.9% if the Underwriters' over-allotment option is
exercised in full). As a result, these stockholders, acting together, will be
able to control most matters requiring approval by the stockholders of the
Company, including the election of directors, the adoption of charter
amendments, and the approval of mergers and other extraordinary corporate
transactions. Furthermore, seven out of the twelve current directors were
designated by Carl C. Icahn. In addition, as ofMarch 31, 1996, the management
and scientific officers of the Company owned stock options to purchase an
aggregate of 973,410 shares of Common Stock, of which options to purchase
394,995 shares were exercisable at such time. Such a concentration of ownership
may have the effect of delaying or preventing a change in control of the
Company, including transactions in which stockholders might otherwise receive a
premium for their shares over then current market prices. See "Principal
Stockholders" and "Underwriting."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
The Company's management will have broad discretion to allocate proceeds of
this offering to uses that it believes are appropriate. There can be no
assurance that the proceeds of this offering can or will be invested to yield a
positive return. See "Use of Proceeds".
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE
Future sales of substantial amounts of the Company's Common Stock in the
public market following this offering could adversely affect the market price of
the Common Stock. Upon completion of this offering, the Company will have
11,482,052 shares of Common Stock outstanding (including shares to be issued
upon conversion of the Convertible Preferred Stock upon completion of this
offering), assuming no exercise of the underwriters' over-allotment option or
currently outstanding options. All of the shares being sold pursuant to this
offering (plus any additional shares sold upon exercise of the Underwriters'
over-allotment option) will be freely transferable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), unless they are held
by "affiliates" of the Company as that term is used under the Securities Act and
the regulations promulgated thereunder. The remaining 8,732,052 shares of Common
Stock that will be outstanding upon completion of the offering (the "Restricted
Shares") will be held by officers, directors, employees, consultants and other
stockholders of the Company. The Restricted Shares were sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act
and are "restricted securities" under the Securities Act. In addition to the
shares of Common Stock offered hereby, up to 475,004 of the Restricted Shares
may currently be eligible for sale in the public market pursuant to Rule 144(k)
under the Securities Act (of which at least 398,335 shares are subject to the
agreements not to sell described below). Beginning 90 days after the effective
date of this offering (the "Effective Date"), at least 5,176,500 additional
shares of Common Stock (including approximately 579,913 shares issuable upon the
exercise of vested options) will become eligible for sale in the public market
pursuant to Rule 144 and Rule 701 under the Securities Act (of which at least
5,014,414 shares are subject to the agreements not to sell described below).
Stockholders of the Company, holding in the aggregate at least 8,623,714
Restricted Shares, have agreed, subject to certain limited exceptions, not to
sell or otherwise dispose of any of the shares held by them for a period of 180
days after the Effective Date without the prior written consent of Hambrecht &
Quist LLC. At the end of such 180-day period, at least 6,896,412 shares of
Common Stock (including approximately 662,094 shares issuable upon exercise of
vested options) will be eligible for immediate resale, subject to compliance
with Rule 144 and Rule 701. The remainder of the approximately 8,732,052 shares
of Common Stock held by existing stockholders will become eligible for sale at
various times over a period of less than two years and could be sold earlier if
the holders exercise any available registration rights. The holders of 7,400,376
Restricted Shares have the right in certain circumstances to require the Company
to register their shares under the Securities Act for resale to the public. If
such holders, by exercising their demand registration rights, cause a
11
<PAGE>
large number of shares to be registered and sold in the public market, such
sales could have an adverse effect on the market price for the Company's Common
Stock. If the Company were required to include in a Company initiated
registration shares held by such holders pursuant to the exercise of their
piggyback registration rights, such sales might have an adverse effect on the
Company's ability to raise needed capital. In addition, the Company expects to
file a registration statement on Form S-8 after the expiration of 180 days
following the Effective Date registering a total of approximately 1,300,000
shares of Common Stock subject to outstanding stock options or reserved for
issuance under the Company's stock option plans. See "Management--Incentive
Plans," "Shares Eligible for Future Sale--Registration Rights" and
"Underwriting."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial offering
price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which the
Common Stock of the Company will trade after this offering.
POSSIBLE VOLATILITY OF STOCK PRICE
The market prices for securities of biotechnology companies have been
highly volatile and the market has experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Announcements of technological innovations or new commercial products
by the Company or its competitors, developments concerning proprietary rights,
including patents and litigation matters, publicity regarding actual or
potential results with respect to products or compounds under development by the
Company or its collaborative partners, regulatory developments in both the
United States and foreign countries, changes in reimbursement policies,
developments in the Company's relationship with current or future collaborative
partners, if any, public concern as to the safety and efficacy of drugs
developed by the Company, its collaborative partners and its competitors, public
concern as to the efficacy of new technologies, general market conditions, as
well as quarterly fluctuations in the Company's revenues, if any, and financial
results and other factors, may have a significant effect on the market price of
the Common Stock. In particular, the realization of any of the risks described
in these "Risk Factors" could have an adverse effect on the market price of the
Company's Common Stock. See "Underwriting."
ANTI-TAKEOVER EFFECT OF DELAWARE CORPORATE LAW
Certain provisions of the Delaware corporate law may have the effect of
deterring hostile takeovers or delaying or preventing changes in the control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over the then current market
prices. See "Description of Capital Stock--Delaware Takeover Statute."
DILUTION
The initial public offering price will be substantially higher than the
book value per share of Common Stock. Purchasers of the shares of Common Stock
offered hereby will therefore experience immediate and substantial dilution in
the net tangible book value of their investment from the initial offering price.
Additional dilution will occur upon exercise of outstanding options. See
"Dilution" and "Shares Eligible for Future Sale."
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. See "Dividend Policy."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $11.50 per share, are estimated to be $28,841,250 ($33,252,938
if the Underwriters exercise their over-allotment option in full), after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The principal purposes of this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock
which will facilitate future access by the Company to public equity markets as
well as create liquidity for its existing shareholders. The Company intends to
use the net proceeds for research and development, working capital and general
corporate purposes. The Company expects to expand its proprietary research, drug
discovery and drug development activities, including the further development of
its yeast-based and signal transduction platform technologies, its genomics
activities and its proprietary product development programs in cancer and
inflammation. The Company also expects to spend funds to recruit and employ
additional scientific and technical staff and to add capability in the area of
pre-clinical testing. Further, the Company plans to expand its facilities to
accommodate these additional staff, as well as to support additional activities
with collaborative partners. The Company also may spend funds on clinical
development activities for its proprietary product candidates, if any. The
Company may use a portion of its available cash to acquire technologies or
products under its strategy to continue to broaden its platform technologies.
The Company may use a portion of its available cash to acquire or invest in
companies complementary to its business. The Company is not currently in any
negotiations with respect to any such acquisitions or investments. Pending
application as described above, the Company intends to invest the net proceeds
of this offering in investment-grade, interest bearing securities.
The amount and timing of the Company's actual expenditures for the purposes
described above will depend upon a number of factors, including the Company's
ability to enter into additional collaborative or licensing arrangements focused
on its drug discovery programs, as well as the timing of and terms governing
such arrangements. In addition, the Company's research and development
expenditures will vary as programs are expanded or abandoned and as a result of
variability in funding from its collaborative partners.
The Company's management will have broad discretion to allocate proceeds of
this offering to uses that it believes appropriate. There can be no assurance
that the proceeds of this offering can or will be invested to yield a positive
return.
The Company believes that the net proceeds from this offering, together
with its existing resources, will be sufficient to satisfy its capital needs
through the end of 1999. Companies in the biotechnology industry generally
expend significant capital resources in product research and development. The
Company expects that additional equity or debt financings will be required to
fund its operations.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company,
giving effect to the conversion of all outstanding Convertible Preferred Stock
into Common Stock at the closing of this offering; and (iii) the capitalization
of the Company on an as adjusted basis to reflect the issuance and sale by the
Company of 2,750,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $11.50 per share.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Bank loans and line of credit (1) ............................................... $ 2,422 $ 2,422 $ 2,422
-------- -------- --------
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value; 22,201,080 shares authorized,
22,201,080 shares issued and outstanding, actual; no shares issued and
outstanding,
pro forma and as adjusted .................................................... 22 -- --
Common Stock, $0.01 par value; 35,000,000 shares authorized; 1,473,343 shares
issued and 1,331,676 shares outstanding, actual; 8,873,719 shares issued and
8,732,052 outstanding, pro forma; 11,623,719 shares
issued and 11,482,052 outstanding, as adjusted (2) ............................ 15 89 117
Additional paid-in capital ..................................................... 33,988 33,936 62,750
Accumulated deficit ............................................................ (6,034) (6,034) (6,034)
Treasury stock, at cost (141,667 shares) ....................................... (300) (300) (300)
-------- -------- --------
Total stockholders' equity ................................................... 27,691 27,691 56,533
-------- -------- --------
Total capitalization ....................................................... $ 30,113 $ 30,113 $ 58,955
======== ======== ========
</TABLE>
- ----------
(1) As of March 31, 1996, the current portion of the debt included herein
totaled $2,397,459.
(2) Excludes 1,289,035 shares of Common Stock issuable upon the exercise of
stock options outstanding at March 31, 1996, at a weighted average exercise
price of $1.98, of which options to purchase 505,756 shares were
immediately exercisable on such date.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock at March 31,
1996, was approximately $27,452,000, or $3.14 per share. Pro forma net tangible
book value per share represents the amount of total tangible assets of the
Company less total liabilities, divided by 8,732,052, the number of shares of
Common Stock outstanding as of March 31, 1996, after giving effect to the
conversion of all outstanding shares of Convertible Preferred Stock into an
aggregate of 7,400,376 shares of Common Stock upon completion of this offering.
After giving effect to the sale of the 2,750,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.50 per share and after
deducting the underwriting discounts and estimated offering expenses, the
adjusted pro forma net tangible book value of the Company at March 31, 1996,
would have been $56,294,000 or $4.90 per share of Common Stock. This represents
an immediate increase in pro forma net tangible book value per share of $1.76 to
existing stockholders and an immediate dilution per share of $6.60 to new
investors purchasing shares in this offering. The following table illustrates
the per share dilution described above:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share ........................... $ 11.50
Pro forma net tangible book value per share at March 31, 1996 ........... $3.14
Increase attributable to new investors .................................. 1.76
----
Adjusted pro forma net tangible book value per share after this Offering .. 4.90
-------
Dilution to new investors ................................................. $ 6.60
=======
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total cash
consideration paid for such shares and the average consideration paid per share
by the existing stockholders and by investors purchasing shares offered by the
Company hereby. The following computations are based on an assumed initial
public offering price of $11.50 per share before deduction of the underwriting
discount and estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
------------------- ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ................ 8,732,052 76.0% $34,453,115 52.1% $3.95
New investors ........................ 2,750,000 24.0 31,625,000 47.9 11.50
---------- ----- ----------- -----
Total ............................... 11,482,052 100.0% $66,078,115 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables exclude 1,289,035 shares of Common Stock reserved as
of March 31, 1996, for issuance upon the exercise of options outstanding as of
such date at a weighted average price per share of $1.98. At March 31, 1996,
options to purchase 505,756 shares of Common Stock were exercisable. To the
extent that options granted in the future become vested and are exercised, there
could be further dilution to new stockholders. See "Capitalization," "Management
- -- Incentive Plans," and "Underwriting."
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1995, 1994,
1993 and 1992, and for each of the years in the three-year period ended December
31, 1995, and for the period from January 23, 1992 (date of inception) to
December 31, 1992, are derived from the financial statements of the Company,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The financial statements as of
December 31, 1995 and 1994, and for each of the years in the three-year period
ended December 31, 1995, and the report thereon, are included elsewhere in this
Prospectus. The balance sheet data as of March 31, 1996 and the statement of
operations data for the three months ended March 31, 1996 and 1995 are derived
from unaudited financial statements included elsewhere in this Prospectus. The
unaudited financial statements include all adjustments that the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the three months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. The selected financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements and related notes thereto included elsewhere in this Prospectus. The
historical results are not necessarily indicative of the results of operations
to be expected in the future.
<TABLE>
<CAPTION>
JANUARY 23, JANUARY 23,
1992 THREE MONTHS 1992
(DATE OF ENDED (DATE OF
YEAR ENDED DECEMBER 31, INCEPTION) TO MARCH 31, INCEPTION) TO
------------------------------- DECEMBER 31, ----------------- MARCH 31,
1995 1994 1993 1992 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................... $ 4,418 $ 1,355 $ -- $ -- $ 1,625 $ 1,000 $ 7,397
Operating costs and expenses:
Research and development ................. 5,383 2,246 1,645 753 1,654 1,040 11,683
General and administrative ............... 1,376 937 550 214 318 317 3,394
------- ------- -------- ------ ------- ------- -------
Total operating costs and
expenses ................................. 6,759 3,183 2,195 967 1,972 1,357 15,077
Operating loss ............................. (2,341) (1,828) (2,195) (967) (347) (357) (7,680)
Net loss (1) ............................... $(1,482) $(1,393) $ (2,148) $ (967) $ (43) $ (155) $(6,034)
======= ======= ======== ====== ======= ======= =======
Pro forma net loss per share (2) ........... $ (0.16) $ 0.00
======= =======
Pro forma weighted average
shares outstanding (2) ................... 9,043,609 8,987,992
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------- ---------
1995 1994 1993 1992 1996
---- ---- ---- ---- ----
(in thousands) (Unaudited)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents (3) ..................... $ 25,683 $ 14,406 $ 3,568 $ 4 $ 25,086
Total assets ...................................... 30,725 15,740 3,962 113 30,585
Short-term debt ................................... 2,397 203 6 -- 2,397
Loans payable to bank ............................. 29 46 12 -- 25
Convertible Preferred Stock ....................... 22 18 15 -- 22
Deficit accumulated during the development stage .. (5,991) (4,508) (3,115) (967) (6,034)
Stockholders' equity (deficit) .................... 27,723 14,534 3,491 (963) 27,691
</TABLE>
- ----------
(1) The net loss of $1.4 million for the year ended December 31, 1994 includes
an extraordinary gain of approximately $159,000 from the early
extinguishment of a debt obligation.
(2) Computed as described in Note 2 of Notes to Financial Statements.
(3) Does not include restricted cash of $2.5 million at March 31, 1996 and
December 31, 1995, and $305,000 at December 31, 1994.
(4) The Company has not paid any dividends since its inception and does not
anticipate paying any dividends on its Common Stock in the foreseeable
future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in 1992 and has devoted substantially all of
its resources to the development and application of novel yeast-based and signal
transduction drug discovery technologies. The Company has financed its
operations primarily through the sale of Convertible Preferred Stock. To date,
all of the Company's revenues have resulted from research funding provided by
its collaborative partners. As of March 31, 1996, the Company had total
stockholders' equity of approximately $27.7 million.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $1.5 million during the year ended
December 31, 1995. At March 31, 1996, the Company had an accumulated
deficit of approximately $6.0 million. The Company's losses have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's revenues and interest income. The Company expects to
incur substantial additional operating losses over the next several years as a
result of increases in its expenses for research and product development.
The Company entered into research collaborations with Bristol-Myers Squibb
and Solvay Duphar in July, 1994 and November, 1995, respectively. These
collaborations have provided the Company with equity investments aggregating
$27.5 million and research funding of $7.4 million through March 31, 1996. The
$7.4 million of research funding was utilized to fund through March 31, 1996
the research projects undertaken with Bristol-Myers Squibb and Solvay Duphar in
accordance with the respective collaboration agreements. In addition, the
Company is entitled to payments upon the achievement of certain milestones and
royalties based upon the net sales of any drugs developed from compounds
identified or confirmed using the Company's technologies.
The Company currently receives research funding under each of these
agreements. Research funding is received quarterly based on predetermined
funding requirements and is recognized as revenue when earned as a result of
work completed. The Company does not expect to receive significant milestone
payments or any royalties for a number of years, if at all. See "Risk
Factors-Dependence on Collaborative Partners", "-History of Operating Losses;
Quarterly Fluctuations; Uncertainty of Future Profitability" and "-Government
Regulation."
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and March 31, 1995
Revenues
Revenues for the three months ended March 31, 1996 increased to $1.6
million from $1.0 million for the same period in 1995. This increase was
attributable to the inclusion in 1996 of research funding from Solvay Duphar.
Operating Expenses
The Company's research and development expenses for the three months ended
March 31, 1996 increased to $1.7 million from $1.0 million for the same period
in 1995. This increase was attributable primarily to an increase in staffing
related to implementation of the research collaboration with Solvay Duphar, as
well as expenses in connection with licenses from third parties.
General and administrative expenses for the three months ended March 31,
1996 increased to $318,000 from $317,000 for the same period in 1995.
Interest Income
Net interest income for the three months ended March 31, 1996 increased to
$321,000 from $209,000 for the same period in 1995. This increase related
primarily to interest earned on the net proceeds from the sale of Series B
Convertible Preferred Stock ("Series B Preferred Stock") in September 1995 and
November 1995, net of interest expense on a line of credit and bank loans.
Net Loss
The net loss for the three months ended March 31, 1996 decreased to $43,000
from $155,000 for the same period in 1995. The decrease can be attributed to the
increase in interest earned on the net proceeds from the sale of Series B
Preferred Stock in September 1995 and November 1995.
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<PAGE>
Fiscal Years Ended December 31, 1995 and 1994
Revenues
Revenues for 1995 increased to $4.4 million from $1.4 million in 1994. This
increase was attributable to receipt in 1995 of a full year of research funding
from Bristol-Myers Squibb and the commencement in November 1995 of research
funding from Solvay Duphar.
Operating Expenses
The Company's research and development expenses for 1995 increased to $5.4
million from $2.2 million in 1994. This increase was attributable primarily to
an increase in staffing and laboratory supplies related to implementation of the
research collaborations with Bristol-Myers Squibb and Solvay Duphar, and, to a
lesser extent, to expenses related to facilities and equipment as a result of
the Company's move to expanded facilities in December 1994.
General and administrative expenses for 1995 increased to $1.4 million from
$937,000 in 1994. This increase resulted primarily from an increase in staffing
and facilities expenses related to the Company's expansion of its operations in
conjunction with its relocation to its new facilities.
Interest Income
Net interest income for 1995 increased to $903,000 from $314,000 in 1994.
This increase related primarily to interest earned on the net proceeds from the
sale of Series B Preferred Stock in July 1994, September 1995 and November 1995,
net of interest expense on a line of credit and bank loans.
Net Loss
The net loss for 1995 increased to $1.5 million from $1.4 million in 1994.
The 1994 loss of $1.4 million was net of an extraordinary gain from the early
extinguishment of a debt obligation.
Fiscal Years Ended December 31, 1994 and 1993
Revenues
Revenues in 1994 increased to $1.4 million from $0 in 1993. This increase
was due to the commencement in June 1994 of research funding from Bristol-Myers
Squibb.
Operating Expenses
The Company's 1994 research and development expenses increased to $2.2
million from $1.6 million in 1993. This was primarily attributable to an
increase in staffing and laboratory supplies in conjunction with the
implementation of the research collaboration with Bristol-Myers Squibb, as well
as to increased expenditures in connection with licenses from third parties and
the sponsorship of research at academic institutions.
General and administrative expenses in 1994 increased to $937,000 from
$550,000 in 1993. This increase was due primarily to an increase in corporate
development staffing and activities.
Interest Income
Net interest income in 1994 increased to $314,000 from $48,000 in 1993.
This increase was primarily attributable to interest earned on the net proceeds
from the sale of Series B Preferred Stock in July 1994.
Net Loss
The net loss in 1994 decreased to $1.4 million from $2.1 million in 1993.
The 1994 results were net of an extraordinary gain of $159,000 resulting from
the early extinguishment of a debt obligation.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through the sale
of Convertible Preferred Stock and from research funding from its collaborative
partners. Through March 31, 1996, the Company had sold
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<PAGE>
Convertible Preferred Stock for $31.9 million in cash and $2.0 million in
satisfaction of indebtedness. In addition, the Company had received $7.4 million
in revenues for research funding.
The Company also has established a $2.5 million secured line of credit with
a bank, of which borrowings of $2.4 million were outstanding as of March 31,
1996. All obligations of the Company with respect to this line of credit are
secured pursuant to a security agreement granting the bank a first and prior
security interest in the Company's negotiable certificates of deposit held by
the bank. Such certificates of deposit have been recorded in the balance sheet
as "Restricted Cash." The right to borrow additional amounts under the line of
credit expired on June 30, 1996. The $2.4 million outstanding at June 30,
1996 is payable on demand.
As of March 31, 1996, the Company had cash and cash equivalents of $25.1
million and restricted cash of $2.5 million.
The Company has invested $3.1 million in property and equipment, including
purchases amounting to $198,000 in the three months ended March 31, 1996, $1.9
million in 1995, $605,000 in 1994 and $249,000 in 1993. The Company expects
capital expenditures to increase over the next several years as it expands
facilities to support the planned expansion of research and development efforts.
The Company leases laboratory and office facilities in Tarrytown, New York
and Lakewood, Colorado under agreements expiring December 30, 1997 and March 9,
1997, respectively. The aggregate minimum annual payment under the leases is
$684,000.
The Company intends to increase its expenditures substantially over the
next several years to enhance its technologies and pursue internal proprietary
drug discovery programs. The Company believes that its existing capital
resources, together with the net proceeds from this offering, interest income
and future payments due under its research collaborations, will be sufficient to
support its current and projected funding requirements through the end of 1999.
The Company's capital requirements may vary as a result of a number of factors,
including the progress of its drug discovery programs, competitive and
technological developments, the continuation of its existing collaborative
agreements and the establishment of additional collaborative agreements, and the
progress of the development efforts of the Company's corporate partners. The
Company expects that it will require significant additional financing in the
future, which it may seek to raise through public or private equity offerings,
debt financings or additional corporate partnerships. No assurance can be given
that such additional financing will be available when needed or that, if
available, such financing will be obtained on terms favorable to the Company. To
the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to the Company's stockholders.
At December 31, 1995, the Company had tax net operating loss carryforwards
of approximately $5.4 million and research and development credit carryforwards
of approximately $431,000 which expire in years 2007 through 2011. The Company's
ability to utilize such net operating loss and research and development credit
carryforwards is subject to certain limitations due to ownership changes as
defined by rules enacted with the Tax Reform Act of 1986.
Recently issued accounting standards may affect the Company's Financial
Statements in the future. See Note 14 of Notes to Financial Statements.
19
<PAGE>
BUSINESS
Cadus Pharmaceutical Corporation is engaged in the discovery of novel small
molecule therapeutics that act on targets in human cell signaling pathways. The
Company has developed proprietary drug discovery technologies based on
genetically engineered yeast cells. Cadus uses these and other proprietary
technologies to identify human cell surface receptors and other molecular
targets, to elucidate the function of such targets and to identify lead
compounds that act on such targets. The Company conducts drug discovery programs
both independently and with its collaborative partners, Bristol-Myers Squibb
Company ("Bristol-Myers Squibb") and Solvay Duphar B.V. ("Solvay Duphar").
Cadus is a leader in the development of proprietary technologies that
exploit the similarities between yeast and human genes to elucidate gene
function and cell signaling pathways. The Company has developed four proprietary
drug discovery technologies. Two of these technologies are used to identify
small molecules that act as agonists or antagonists to cell surface receptors
and other targets in the signal transduction pathway: (i) a hybrid yeast cell
technology that expresses a functioning human receptor and a portion of its
signaling pathway in a yeast cell and (ii) the Autocrine Peptide Expression
("APEX") system that expresses a known human ligand in a hybrid yeast cell as
well as the receptor that is activated by that ligand. The other two
technologies are used to identify and characterize receptors whose ligand and
hence function are not known (which are called orphan receptors), ligands and
key signaling molecules: (i) the Company's Self Selecting Combinatorial Library
("SSCL") technology, which is used to identify a ligand that activates a
targeted orphan receptor and (ii) the Company's signal transduction
technologies, which are used to determine potential molecular targets in the
human cell signaling pathway and to assist in the determination of a receptor's
biological function.
BACKGROUND
The human body is comprised primarily of specialized cells that perform
different physiological functions and that are organized into organs and
tissues. All human cells contain DNA, which is arranged in a series of subunits
known as genes. It is estimated that there are approximately 100,000 genes in
the human genome. Genes are responsible for the production of proteins. Proteins
such as hormones, enzymes and receptors are responsible for managing most of the
physiological functions of humans, including regulating the body's immune
system. Thus, genes are the indirect control center for all physiological
functions. Over the last few decades, there has been a growing recognition that
many major diseases have a genetic basis. It is now well established that genes
play an important role in cancer, cardiovascular disease, psychiatric disorders,
obesity, and metabolic diseases. Significant resources are being focused on
genomics research based on the belief that the sequence and function of a gene,
and the protein that gene expresses, will lead to an understanding of that
gene's role in the functioning and malfunctioning of cells. This understanding
is expected in turn to lead to therapeutic and diagnostic applications focused
on molecular targets associated with the gene and the protein it expresses.
Cell surface receptors are an important class of proteins involved in
cellular functioning because they are the primary mediators of cell to cell
communication.Their location on the cell surface also makes them the most
accessible targets for drug discovery. Cellular communication occurs when one
cell releases a chemical messenger, called a "ligand," which communicates with
another cell by binding to and activating the receptor on the exterior of the
second cell. Typically, a ligand binds only with one specific receptor. This
binding event activates the receptor triggering the transmission of a message
through a cascade of signaling molecules from the exterior to the interior of
the cell. This process is called signal transduction. When the signal is
transmitted into the interior of the cell, it may, among other things, activate
or suppress specific genes that switch on or switch off specific biological
functions of the cell. The biological response of the cell, such as the
secretion of a protein, depends primarily on the specific ligand and receptor
involved in the communication.
20
<PAGE>
[GRAPHICAL REPRESENTATION OF CELL MEMBRANE]
DIAGRAM: SIGNAL TRANSDUCTION IS THE PROCESS BY WHICH A SIGNAL IS
TRANSMITTED FROM THE EXTERIOR OF THE CELL TO ITS INTERIOR, CAUSING THAT
CELL TO CHANGE ITS BIOLOGICAL BEHAVIOR. LIGAND-RECEPTOR BINDING LEADS TO A
SIGNAL BEING TRANSMITTED TO THE INTERIOR OF THE CELL VIA A CASCADE OF
SIGNALING MOLECULES. THE SIGNAL CAN CAUSE A DIRECT BIOLOGICAL RESPONSE BY
THE CELL WITHOUT ACTIVATING THE CELL'S GENES OR CAN ACTIVATE OR DEACTIVATE
GENES IN THE NUCLEUS, WHICH IN TURN TRIGGER A BIOLOGICAL RESPONSE.
Many diseases, such as cancer, stem from the malfunctioning of cellular
communication. Efforts to treat a particular disease often concentrate on
developing drugs that interact with the receptor or signaling pathway believed
to be associated with the malfunction. These drugs work by inhibiting or
enhancing the transmission of a signal through the cascade of signaling
molecules triggered by the receptor. Drugs that inhibit signal transduction by
blocking a receptor or the intracellular proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal transduction by
stimulating a receptor or associated intracellular proteins are called agonists.
Human cells carry many different types of receptors. Receptors are
classified into groups based upon similarities in their chemistry and structure.
Some of the major receptor groups involved in signal transduction are: G
protein-coupled receptors, cytokine receptors, tyrosine kinase coupled receptors
and multisubunit immune recognition receptors. G protein-coupled receptors,
which are located on the surface of the cell, constitute the largest group of
receptors. In humans, G protein-coupled receptors are involved in many of the
body's most basic functions, including heartbeat, sight, sense of smell,
cognition and behavior and also mediate most of the body's basic responses such
as secretion from glands, contractility of blood vessels, movement of cells,
growth and cell death. Tyrosine kinase coupled receptors are involved in cell
growth and differentiation. Multisubunit immune recognition receptors activate
the body's immune defense system.
There are an estimated 2,000 to 5,000 genes encoding G protein-coupled
receptors in the human genome. The sequences and functions of approximately 100
of these genes have been identified. This knowledge has been used to help
identify the sequence of an additional approximately 100 genes encoding orphan G
protein-coupled receptors. As a result of the sequences being identified as part
of the Human Genome Project, it is expected that all remaining G protein-coupled
receptor genes will be sequenced over the next few years. Even after the gene
sequence of an orphan receptor has been identified, it generally cannot become
the subject of drug discovery efforts until its biological function is
determined and its role in disease processes identified.
The importance of G protein-coupled receptors is demonstrated by the fact
that more than 60% of all commercially available prescription drugs work by
interacting with G protein-coupled receptors. These drugs include the anti-ulcer
agents Zantac and Tagamet, as well as the cardiac drugs Tenormin and Lopressor.
Many of these drugs were developed through the application of time consuming and
expensive trial and error methods without an understanding of the chemistry and
structure of the G protein-coupled receptors with which they
21
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interact. More efficient drug discovery methods are available once the gene
sequence, biological function and role in disease processes of a G
protein-coupled receptor have been determined. The Company believes that the
identification of the gene sequences and functions of the remaining receptors
will yield a substantial number of potential drug discovery targets.
Traditional Drug Discovery
Drug discovery consists of three key elements: (i) the target, such as a
receptor, on which the drug will act, (ii) the potential drug candidates, which
include organic chemicals, proteins or peptides, and (iii) the assays or tests
to screen these compounds to determine their effect on the target.
Historically, drug discovery has been an inefficient and expensive process.
Traditional drug discovery has been hampered by the limited number of known
targets and a reliance on in vitro assays as a format in which to test
compounds. Until scientists began to define the molecular structure of receptors
and ligands, there was no simple method to determine the function of such
molecules in the cell and, therefore, their utility as drug discovery targets.
Even when the target's molecular structure is known, incorporating that target
effectively into an in vitro assay can be difficult. For example, all known G
protein-coupled receptors are woven through the cell membrane seven times in a
very complex, looped structure that cannot be maintained when the isolated
protein is put into an in vitro assay format. If an assay does not accurately
replicate the structure of a target receptor, the compounds identified in the
assay may not function as expected when applied to the target receptor on a
living cell. Furthermore, receptors, signal transduction proteins and other
molecular targets for therapeutic intervention do not exist in isolation in the
cell. Their functional activity results from a complex interrelationship with
numerous other molecules within the cell. Consequently, traditional drug
screening assays often identify compounds as potential drug candidates which,
when tested in living cells, prove to have no useful activity or are even toxic.
A variety of methods have been developed to address these problems, including
using living cells in assays. However, most live cell assays are slow, complex
and expensive to maintain.
In recent years, scientific advances have created new and improved tools
for drug discovery. For example, molecular biology is identifying a growing
number of targets and their gene sequences. Cells have been genetically
engineered to produce assays that more effectively replicate the physiological
environment of a living organism. Robotics have enabled the creation of
high-throughput screening systems. Combinatorial chemistry has enhanced the
ability to optimize lead compounds by improving their pharmacological
characteristics. However, due to the complexity of G protein-coupled receptors
and limited knowledge of their gene sequences and function, these advances do
not offer a comprehensive, rapid and cost effective approach to the
identification of drug discovery candidates targeted at G protein-coupled
receptors.
Yeast
Yeast is a single-celled microorganism that is commonly used to make bread,
beer and wine. In the 1980's, scientists discovered structural and functional
similarities between yeast cells and human cells. Both yeast and human cells
consist of a membrane, an intracellular region and a nucleus containing genes.
Basic cellular processes, including metabolism, cell division, DNA and RNA
synthesis and signal transduction, are the same in both human and yeast cells.
Yeast also have signal transduction pathways that function similarly to human
cell pathways. More than 40 percent of all human gene classes have functional
equivalents in yeast. The genes in yeast express proteins, including
cell-surface receptors such as G protein-coupled receptors and signaling
molecules such as protein kinases, that are similar to human proteins.
The Company believes that yeast cells have several important
characteristics that are useful in drug discovery.
o The strong correlation between human and yeast gene classes enables the
evaluation of the biological function of human proteins, including
receptors and signaling molecules, of unknown function. Proteins with
comparable gene sequences frequently carry out similar functions. This fact
can be used to determine the function of a human gene by genetically
engineering a yeast cell to replace a yeast gene coding for a known
function with the human gene suspected of having a comparable function. If
the yeast cell retains its normal function, it suggests that the human gene
and its protein have a biological function similar to that of their yeast
counterparts. Consequently, genetically-engineered yeast cells can
replicate human gene function and provide a biologically
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<PAGE>
relevant context for evaluating interactions between receptors and their
related signaling pathways.
o Recently, the yeast genome has been fully sequenced. This knowledge will
enable full analysis of the correlation between yeast and human gene
structure and may aid in the definition of human gene functions.
o While the yeast signaling mechanism bears many similarities to the human
signaling mechanism, the yeast intracellular environment is less complex,
thus eliminating much of the ancillary and redundant intracellular
signaling pathways that exist in human cells.
o Yeast have the ability to absorb DNA fragments and incorporate them into
their genome. As a result, their genetic structure can be easily
manipulated using common genetic engineering techniques.
o Yeast cells replicate rapidly. Speed of replication is particularly
important because creating a new yeast strain that successfully
incorporates new genetic material and adapts to new conditions may take
several generations and the strain that so adapts is identifiable by
growth. In addition, because a yeast cell reproduces itself every two
hours, compared with 24 to 48 hours for mammalian cells, a drug screening
process using yeast can be developed and evaluated much faster than one
using human cell assays.
o Yeast can be easily and inexpensively grown in the laboratory using
standard microbiological techniques and, as a consequence, can readily be
used in automated screening systems.
o Yeast are resistant both to the solvents often needed to dissolve
potentially active compounds and the toxins often found in natural
products. Consequently, hybrid yeast cells can be used to screen libraries
of synthetic compounds, combinatorial chemicals or natural products.
CADUS' DRUG DISCOVERY AND DEVELOPMENT STRATEGY
The Company's goal is to discover and develop novel small molecule drugs
targeted to receptors and signaling molecules. The following are the key
elements of the Company's strategy:
o Develop Proprietary Yeast-Based Drug Discovery Technologies. The Company
manipulates the yeast genome by inserting human genes into yeast cells to
create hybrid yeast strains as a novel drug discovery platform.
o Identify Novel Orphan Receptor Targets. The Company uses its proprietary
yeast-based and signal transduction technologies to determine the
biological function of orphan receptors in human cells and to determine
whether they are appropriate drug discovery targets.
o Identify Novel Targets in Signal Transduction Pathways. The Company uses
its proprietary signal transduction technologies to identify new signaling
molecules in signal transduction pathways and to determine whether they are
appropriate drug discovery targets.
o Conduct Proprietary Drug Discovery and Development Programs. The Company
conducts proprietary drug discovery programs to identify novel targets and
lead compounds. The Company intends to develop selected lead compounds
through the preclinical testing stage.
o Collaborate with Pharmaceutical Companies. The Company collaborates with
pharmaceutical companies in order to combine its drug discovery
capabilities with its collaborators' research, drug development,
manufacturing, marketing and financial resources. The Company is currently
engaged in collaborations with Bristol-Myers Squibb and Solvay Duphar.
CADUS' DRUG DISCOVERY PLATFORM
The Company has developed a novel platform for drug discovery that
addresses many of the limitations of traditional drug discovery methods. This
platform consists of four proprietary drug discovery technologies: two that are
used to screen for compounds that act as agonists or antagonists to cell surface
receptors and other molecules in the signal transduction pathway, and two that
are used to identify and characterize orphan receptors, ligands and key
signaling molecules.
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Hybrid Yeast Cells
The Company has developed a proprietary technology to insert human genes
into yeast cells to create hybrid yeast cells. Initially, the Company has
focused its hybrid yeast cell technology primarily on G protein-coupled
receptors. The Company's scientists typically create hybrid yeast cells by
replacing yeast G protein-coupled receptor genes and certain signaling molecules
with their human equivalents. As a result, these hybrid yeast cells express a
human G protein-coupled receptor and a portion of its signaling pathway. The
Company uses these hybrid yeast cells to identify those compounds that act as
agonists or antagonists to that receptor or a molecule that is in its signaling
pathway. The Company has also created hybrid yeast cells using other classes of
human cell-surface receptors that have a functional equivalent in yeast. Because
different yeast strains accept particular human proteins more readily than
others, the Company has designed and developed tens of thousands of genetically
different yeast strains that are used to build novel hybrid yeast cells.
The Company believes that hybrid yeast cells are highly effective for
screening compounds. Hybrid yeast cells can be used to measure the biological
activity of the human signaling pathway in which intervention is desired. In
addition, hybrid yeast cells contain a single human receptor which connects to a
defined signaling pathway. Accordingly, a specific change in cell behavior, such
as replication, is easily monitored and can be attributed to the compound being
tested. Also, because the Company is able to insert different human genes into
yeast, hybrid yeast cells enable the Company to identify compounds that act at
virtually any site in the human cell signaling pathway. These sites include the
ligand binding site on the receptor, as well as other sites on the receptor, and
the protein components of individual signaling pathways. Moreover, because yeast
are resistant to solvents and toxins often used to dissolve test compounds,
hybrid yeast cells can be used to screen synthetic organic libraries,
combinatorial libraries and natural product libraries. Finally, the Company uses
hybrid yeast cells to perform inexpensive high throughput screening of compound
libraries.
Autocrine Peptide Expression System (APEX)
The Company has extended its hybrid yeast cell technology to develop a
novel drug screening technology. Biological signaling frequently involves the
concerted behavior of at least two cells: one that sends the signal and a second
that receives and responds to that signal. The Company's scientists have
converted this natural multi-cell process into a single cell process by
inserting into a hybrid yeast cell both the gene for a human G protein-coupled
receptor and the gene for the ligand that naturally binds to the receptor being
expressed by the same hybrid yeast cell. As a result, the Company's scientists
have made the cell self-stimulating, or "autocrine," in that it both sends a
signal through production and secretion of a ligand and responds, by
replication, to that same signal through the receptor. The Company believes that
the autocrine nature of the APEX system makes it an effective tool for the
identification of compounds that act as agonists or antagonists with respect to
that receptor or a molecular target in its signaling pathway. As a result, drug
screening may be conducted in an accelerated, cost effective process as compared
to conventional screening techniques.
Self Selecting Combinatorial Library Technology (SSCL)
The Company has developed and is using a systematic approach to determine
the biological function of orphan receptors and demonstrate their value as drug
discovery targets. The critical first step in this approach is to identify a
ligand that activates the orphan receptor. The Company accomplishes this by
using its proprietary SSCL technology. The SSCL technology involves the creation
of a library of peptides encoded in DNA, called a combinatorial peptide
expression library. This library is inserted into a strain of hybrid yeast
cells. All of the cells in this strain express the same orphan receptor. As a
result, each of the millions of yeast cells in the strain incorporates a
different peptide encoded in DNA, resulting in the expression or production of a
different peptide by each yeast cell. This peptide is then secreted through the
cell membrane. Most of the secreted peptides have no effect on the orphan
receptor and the hybrid yeast cells producing these peptides do not replicate.
The Company estimates that one in a million hybrid yeast cells generates a
peptide ligand that activates the orphan receptor. These particular hybrid yeast
cells replicate and, therefore, are readily identified. Thus, the SSCL
technology uses self selection to identify the ligand that binds to the targeted
orphan receptor. The sequence of the peptide ligand can then be rapidly
identified and undergo further evaluation. The Company's combinatorial peptide
expression libraries contain approximately one hundred million peptides. One to
ten million peptides can be tested in a matter of hours. The Company has used
its SSCL technology to successfully identify ligands to orphan receptors in less
than a week, significantly accelerating traditional drug discovery efforts.
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Once the Company has identified a ligand that activates an orphan receptor,
the Company uses a number of different approaches to determine the biological
significance of the orphan receptor. These include testing the ligand on human
cells, in animals and on human tissue. In addition, the Company uses its signal
transduction technologies to determine the human cell signaling pathway that is
linked to the orphan receptor in order to thereby determine whether to focus
drug discovery efforts at the receptor or in the signaling pathway.
Signal Transduction Technologies
The Company has developed signal transduction technologies, based on
genetically engineered human cells, to complement its yeast-based technologies.
The Company uses these signal transduction technologies to dissect human cell
signaling pathways from the receptor to the interior of the cell. As a result,
the Company can confirm the effectiveness of compounds identified through the
use of hybrid yeast cells and ligands identified by the SSCL technology and
determine where and how compounds and ligands modulate the signaling pathway.
Potential sites of action by a compound include the receptor itself or molecules
downstream in the receptor's signal transduction pathway. Accordingly, each
molecule in the signaling pathway may be a potential target for drug discovery.
Traditional drug discovery has resulted in several successful drugs that are now
known to target such molecules in the signaling pathway, including the
immunosuppressants Cyclosporin A and FK506. For this reason, the Company is
pursuing such molecules as potential targets for drug discovery. The Company's
scientists have used the Company's signal transduction technologies to develop
proprietary assays to identify antagonists of specific molecular targets, as
well as to identify new molecular targets in the signaling pathway. The Company
also uses its yeast-based and human cell-based technologies to determine the
function of such newly identified signaling molecules.
The Company's scientists have used the Company's signal transduction
technologies to discover, sequence and characterize a series of related MEKK
enzymes that are part of the inflammatory signaling pathway in human white blood
cells. MEKK enzymes regulate the synthesis and secretion from white blood cells
of cytokines, some of which are inflammation inducing proteins. MEKK enzymes
have also been shown to play a central role in regulating cell growth and cell
death in a variety of cell types, including cancer. The Company is the exclusive
worldwide licensee of a patent on a MEKK enzyme. The Company believes that MEKK
enzymes are important targets for drug discovery.
Other Drug Discovery Technologies
Information technology is an important tool in the Company's drug discovery
strategy. The gene sequence of the entire yeast genome and large portions of the
human genome are available on public databases. The Company uses a variety of
software in combination with its extensive knowledge of the structure of G
protein-coupled and other receptors to search these databases for previously
unrecognized human receptors that represent potential drug discovery targets and
for correspondences between gene sequences in the human and yeast genomes. The
Company believes that this use of information technology will result in more
focused and productive drug discovery programs.
The Company uses a variety of other drug discovery tools, such as high
throughput screening and combinatorial chemistry. High throughput screening is
the practice of rapidly testing thousands of compounds against a target assay by
using computer controlled robotics. Cadus has developed a proprietary laboratory
information system to handle the vast quantity of data generated. Combinatorial
chemistry techniques optimize a compound's pharmacological characteristics once
it has been identified as a drug candidate. Optimization involves improving the
potency, stability, bioavailability and toxicity characteristics of a lead
compound by synthesizing new compound analogs.
The Company's drug discovery strategy includes the screening of compound
libraries. Access to large libraries of diverse compounds is, therefore, an
important aspect of the Company's drug discovery efforts. The Company assembles
combinatorial chemical libraries from readily available and inexpensive chemical
building blocks. In addition, the Company has acquired its own synthetic organic
compound library. The Company also has access to the compound libraries of
Bristol-Myers Squibb and Solvay Duphar and the combinatorial libraries of
Houghten Pharmaceuticals, Inc. ("Houghten").
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CADUS' PROPRIETARY DRUG DISCOVERY PROGRAM
The Company is conducting proprietary drug discovery programs to identify
novel targets and lead compounds. The Company has directed these efforts to G
protein-coupled receptors, G proteins, tyrosine kinase coupled receptors,
multisubunit immune recognition receptors, cytokine receptors, phosphotyrosine
phosphatases and certain other intracellular signaling molecules, including MEKK
enzymes, as potential targets for a variety of therapeutic areas. These
therapeutic areas are allergic inflammation, acute inflammation and cancer, with
a specific focus on allergic asthma and small-cell lung carcinoma. There can be
no assurance that the Company's drug discovery efforts will lead to the
discovery of lead compounds in these therapeutic areas.
Allergic Inflammation. Approximately 20% of the population of the United
States suffers from time to time from some form of allergic inflammation. The
best known form of allergic inflammation is asthma. Approximately 14 million
people each year suffer from asthma in the United States. Asthma and other
allergic responses result from a complex series of physiological events
involving signaling by chemokine, IgE and cytokine receptors, with IgE receptor
signaling initiating the allergic response. Chemokine receptors are G
protein-coupled receptors. IgE receptors and cytokine receptors are coupled to
specific tyrosine kinases, which are proteins in the signaling cascade.
The Company has used its signal transduction technologies to define a small
molecule agonist which stimulates an enzyme that blocks IgE receptor signaling.
This prevents the release of histamine and other substances which cause allergic
inflammation. The Company is currently optimizing an analog of this compound
to improve its pharmaceutical characteristics, although no assurance can be
given that such efforts will result in a product candidate.
SCLC. Approximately 20% of all lung cancer is small-cell lung carcinoma
("SCLC"), and approximately 35,000 people each year are diagnosed with this
disease in the United States. The disease is characterized by rapid tumor growth
and metastasis, and the mean survival of untreated patients is only two to three
months. SCLC generally cannot be surgically removed and chemotherapy has not
been effective. Certain G protein-coupled receptors stimulate SCLC growth. Based
on this knowledge, the Company has used its signal transduction technologies and
identified peptides that selectively cause the death of SCLC cells in vitro. The
Company is using its hybrid yeast cells and other technologies in efforts to
identify small molecules that mimic the action of SCLC-death promoting peptides
and believes this approach, if successful, may lead to a novel therapeutic for
SCLC.
Houghten Joint Discovery Program. In January 1995, the Company and Houghten
commenced a joint discovery effort, with acute inflammation as the initial
therapeutic focus for the collaboration. Houghten provides combinatorial
libraries to the Company and the Company screens such combinatorial libraries
against hybrid yeast cells for the purpose of identifying candidates for drug
development. Houghten and the Company may jointly develop or sell or license any
such compounds identified by the Company as candidates for drug development to
corporate partners of the Company or others. Either Houghten or the Company may
develop any such compound on its own if the other party elects not to pursue
joint development.
COLLABORATIVE ARRANGEMENTS
As a key part of its business strategy, the Company pursues collaborations
with pharmaceutical companies to combine the Company's drug discovery
capabilities with the collaborators' research, drug development, manufacturing,
marketing and financial resources. The Company has existing collaborative
arrangements with two pharmaceutical companies and is currently in discussions
with several other pharmaceutical companies regarding potential collaborations.
The Company structures its collaborations around specific targets, such as
receptors and signaling molecules, rather than in specific therapeutic areas.
This approach enables the Company to broadly exploit its drug discovery
technologies, while retaining maximum flexibility in pursuing additional
collaborations. There can be no assurance, however, that the current
collaborations will result in the development of drugs, any new collaboration
will be established or, if a collaboration is established, it will be on terms
favorable to the Company. Failure either to maintain its existing, or enter into
any new, collaborations could limit the scope of the Company's drug discovery
and development activities, particularly if alternative sources of funding are
unavailable. Such failure could have a material adverse effect on the Company's
business, financial condition and results of operations.
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The Company's existing collaborations are as follows:
The Bristol-Myers Squibb Collaboration
In July 1994, the Company and Bristol-Myers Squibb entered into a
three-year drug discovery collaboration. Currently, the collaboration focuses on
certain G protein-coupled receptors whose functions are known, certain orphan
receptors and certain other molecular targets as targets for drug discovery in a
variety of therapeutic areas. These therapeutic areas include cardiovascular
disease, acute inflammation, central nervous system disorders, obesity and
diabetes. Bristol-Myers Squibb's use of the Company's yeast-based technologies
has resulted in the identification of potential lead compounds in the area of
central nervous system disorders. The collaboration has also resulted in the
identification of a ligand for an orphan receptor that acts on human cells in
vitro and that has been delivered to Bristol-Myers Squibb for further evaluation
in animal models.
During the term of the research program, Bristol-Myers Squibb is required
to provide the Company with research funding of up to $4.0 million each year.
From July 1994 through March 31, 1996, Bristol-Myers Squibb paid the Company
approximately $6.4 million in research funding. Bristol-Myers Squibb is required
to make payments to the Company upon the achievement by Bristol-Myers Squibb of
certain drug development milestones and to pay the Company royalties on the sale
of any drugs developed as a result of the research program or through the use of
the Company's drug discovery technologies. The research program expires in July
1997 and it cannot be terminated by Bristol-Myers Squibb unless the Company
breaches a material obligation and does not cure such breach for a period of 60
days after receiving notice. The research program may be extended by
Bristol-Myers Squibb, on essentially the same terms adjusted for inflation, for
an additional two years by notice to the Company given prior to February 1997.
Bristol-Myers Squibb purchased $12.5 million of the Company's Series B
Preferred Stock in July 1994 and an additional $5.0 million of such Series B
Preferred Stock in September 1995 upon the Company achieving a research
milestone. In connection with its sale of Series B Preferred Stock to
Bristol-Myers Squibb, the Company granted to Bristol-Myers Squibb certain
registration rights with respect to the shares of Common Stock issuable upon the
conversion of the shares of Series B Preferred Stock owned by it.
The Solvay Duphar Collaboration
In November 1995, the Company and Solvay Duphar (an indirect wholly-owned
subsidiary of Solvay S.A.) entered into a drug discovery collaboration. The
collaboration focuses on certain G protein-coupled receptors whose functions are
known, certain orphan receptors and certain other molecular targets as targets
for drug discovery in a variety of therapeutic areas. These therapeutic areas
include cardiovascular disease, central nervous system disorders, gynecological
diseases and gastrointestinal indications. The Company is in the initial phase
of this collaboration and is cloning, identifying and confirming targets related
to these therapeutic areas.
During the term of the research program, which expires in December 2000,
Solvay Duphar is required to provide the Company with research funding of up to
$2.5 million each year, adjusted for inflation. Solvay Duphar has an option to
increase its funding commitment up to $3.8 million, commencing in 1997. Such
option must be exercised prior to October 1996. From November 1995 through March
31, 1996, Solvay Duphar paid the Company approximately $1.0 million in research
funding. Solvay Duphar is required to make payments to the Company upon the
achievement by Solvay Duphar of certain drug development milestones and to pay
the Company royalties on the sale of drugs developed through the use of the
Company's drug discovery technologies.
The term of the research program may be extended by Solvay Duphar for
between two and five years by notice to the Company given at least two years
(and in some circumstances at least 18 months) prior to January, 2001. Solvay
Duphar has the right under certain circumstances to terminate the program after
July 1998, if the Company fails to meet certain minimum performance objectives
in connection with the conduct of the research program. In the event of such
termination, Solvay Duphar has no further obligation to provide the Company with
funding for the research program. There can be no assurance that the Company
will be able to meet the minimum performance objectives or that the
collaboration with Solvay Duphar will be extended or if extended, that such
collaboration will result in the development of any drugs.
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
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certain specific exclusions. The Company is required to make payments to Solvay
Duphar upon the achievement by the Company of certain drug development
milestones and to pay Solvay Duphar royalties on the sale of such drugs.
In November 1995, Physica B.V., an indirect wholly-owned subsidiary of
Solvay S.A. (the "Solvay Subsidiary"), purchased $10.0 million of the Company's
Series B Preferred Stock. In connection with its sale of Series B Preferred
Stock to the Solvay Subsidiary, the Company granted to the Solvay Subsidiary
certain registration rights with respect to the shares of Common Stock issuable
upon the conversion of the shares of Series B Preferred Stock owned by it.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
The Company believes that patents and other proprietary rights are
important to the development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. As of June 30,
1996, the Company was the exclusive worldwide licensee of two issued U.S.
patents and a field exclusive worldwide licensee of another issued U.S. patent.
In addition, as of such date, the Company had filed or held exclusive or field
exclusive licenses to 47 U.S. patent applications, as well as related foreign
patent applications.
The Company seeks to protect its proprietary technology at every stage of
development. The Company files patent applications which claim inventions
arising from each of the various aspects of the Company's drug discovery and
development process including: gene sequences encoding novel targets and
ligands, amino acid sequences of protein targets, methods of treating a disease
based on the Company's knowledge of how signaling molecules interact with one
another and how this causes an abnormal condition, and specific chemical
compositions that may be useful as therapeutics, as well as novel methods of
manufacture. In addition, the Company files patent applications claiming its
proprietary methodologies, such as drug discovery techniques, unless it believes
that keeping an invention a trade secret is preferable. This approach may give
the Company multiple opportunities of proprietary protection.
The Company has obtained from Duke University an exclusive worldwide
license to an issued U.S. patent and U.S. and international patent applications
covering hybrid yeast cell technologies. In consideration for such license, the
Company pays a minimum annual royalty and is required to make payments upon the
achievement by the Company of certain drug development milestones and to pay
royalties (net of minimum royalties) on the sale of drugs by the Company which
were initially identified by the Company through the use of the licensed
technology. In lieu of milestones and royalty payments on sales of drugs by
sublicensees initially identified by sublicensees through the use of the
licensed technology, the Company pays an annual fee (net of the minimum annual
royalty) for each sublicense granted by it to such technology. This patent and
these patent applications are directed to hybrid yeast cells engineered to
express human G protein-coupled receptors and to methods of their use.
The Company has also filed patent applications based on inventions by
Cadus' scientists directed to hybrid yeast cells and yeast cells engineered to
produce both peptide libraries and human proteins that can function in certain
signal transduction pathways of the engineered yeast cell. These applications
seek to protect aspects of the APEX and SSCL technologies. The Company has also
filed patent applications directed to methods, constructs and reagents,
including engineered cells, for discovering ligands to orphan receptors.
Peptides, and mimetics thereof, which have been discovered using the SSCL
technology are also covered in these patent applications both as compositions
and for their therapeutic use.
The Company is the exclusive worldwide licensee of an issued U.S. patent
relating to an MEKK enzyme and U.S. and international patent applications in the
field of signal transduction in human cells from National Jewish Center for
Immunology and Respiratory Medicine. In consideration for such license, the
Company pays an annual maintenance fee and is required to make payments upon the
achievement by the Company of certain drug development milestones and to pay
royalties (net of annual fees and milestone payments) on the sale of drugs by
the Company whose utility was identified by the Company through the use of the
licensed technology. In lieu of milestone and royalty payments on sales of drugs
by sublicensees initially identified by sublicensees through the use of the
licensed technology, the Company pays an annual fee (net of the annual
maintenance fee) for each sublicense in effect. Certain of these patent
applications are directed to novel genes and gene products and methods of their
use, including as therapeutic targets in drug screening assays. Certain other
patent applications
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are directed to certain small molecule agents and their uses in modulating
cellular signal transduction, particularly as therapeutic agents.
The Company has granted certain rights under several of its patents and
patent applications relating to its yeast-based technologies to Bristol-Myers
Squibb and Solvay Duphar.
In addition to patent protection, the Company relies upon trade secrets,
proprietary know-how and technological advances to develop and maintain its
competitive position. To maintain the confidentiality of its trade secrets and
proprietary information, the Company requires its employees, consultants and
collaborative partners to execute confidentiality agreements upon the
commencement of their relationships with the Company. In the case of employees
and consultants, the agreements also provide that all inventions resulting from
work performed by them while in the employ of the Company will be the exclusive
property of the Company.
Patent law as it relates to inventions in the biotechnology field is still
evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, no predictions can be made
regarding the breadth or enforceability of claims allowed in the patents that
have been issued to the Company or its licensors or in patents that may be
issued to the Company or its licensors in the future. Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign counterparts or
as may be subsequently interpreted by courts inside or outside the United
States, will be sufficiently broad to protect the Company's proprietary rights,
will be commercially valuable or will provide competitive advantages to the
Company and its present or future collaborative partners or licensees. Further,
there can be no assurance that patents will be granted with respect to any of
the Company's pending patent applications or with respect to any patent
applications filed by the Company in the future. There can be no assurance that
any of the Company's issued or licensed patents would ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful.
The field of gene discovery has become intensely competitive. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents covering their
gene discoveries. Some of these applications or patents may be competitive with
the Company's applications or conflict in certain respects with claims made
under the Company's applications. Moreover, because patent applications in the
United States are maintained in secrecy until patents issue, because patent
applications in certain other countries generally are not published until more
than eighteen months after they are filed and because publication of
technological developments in the scientific or patent literature often lags
behind the date of such developments, the Company cannot be certain that it was
the first to invent the subject matter covered by its patents or patent
applications or that it was the first to file patent applications for such
inventions. If an issue regarding priority of inventions were to arise with
respect to any of the patents or patent applications of the Company or its
licensors, the Company might have to participate in litigation or interference
proceedings declared by the United States Patent and Trademark Office or similar
agencies in other countries to determine priority of invention. Any such
participation could result in substantial cost to the Company, even if the
eventual outcome were favorable to the Company.
In some cases, litigation or other proceedings may be necessary to defend
against or assert claims of infringement, to enforce patents issued to the
Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial costs to and diversion of resources by the Company. An
adverse outcome in any such litigation or proceeding could subject the Company
to significant liabilities, require the Company to cease using the subject
technology or require the Company to license the subject technology from the
third party, all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such license on commercially favorable terms, if at all, and if these licenses
are not obtained, the Company might be prevented from using certain of its
technologies. The Company's failure to obtain a license to any technology that
it may require to continue its drug discovery efforts may have a material
adverse effect on the Company's business, financial condition and results of
operations.
The patent holder of an aspect of drug screening techniques that is widely
used by many companies in the biotechnology industry has recently threatened
litigation against the Company. The Company believes, based on
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advice of counsel, that none of its operations infringes any valid claim of the
patent. The Company also believes that if its operations were found to infringe
any valid claim of the patent, the Company has adequate technical alternatives
that would not infringe this patent. While the Company is currently seeking a
license to the patent, there can be no assurance that such license will be
obtained at all or, if obtained, will be obtained on terms favorable to the
Company. Moreover, there can be no assurance that the patent holder will not
begin legal proceedings against the Company. In such a proceeding, the relief
sought could include injunctive relief that, if granted, could delay certain
aspects of the drug discovery and development efforts of the Company and its
collaborative partners, and monetary damages that, if awarded, could have a
material adverse effect on the business, financial condition and results of
operations of the Company. The costs of and the diversion of Company resources
associated with infringement litigation could have a material adverse effect on
the business, financial condition and results of operations of the Company.
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive.
Many companies, including large, multinational biotechnology and pharmaceutical
companies, are actively engaged in drug discovery similar to that of the
Company. The Company's technology platform consists principally of genetically
engineered yeast cells and certain signal transduction technologies, which it
utilizes to determine the biological function of orphan receptors and signaling
molecules. The Company is aware of other companies, such as American Home
Products Corporation and Glaxo Wellcome, Plc, that may use yeast as a drug
discovery medium, other companies, such as Merck & Co., Inc. and SmithKline
Beecham, Plc, that may be engaged in efforts to determine the biological
function of orphan receptors, and other companies such as Sandoz Ltd. and Pfizer
Inc. that may be engaged in research and development efforts relating to signal
transduction. In addition, there are several smaller companies pursuing these
areas of research. Furthermore, many companies have potential drugs in various
stages of development to treat asthma and small-cell lung carcinoma, two
diseases targeted by the Company in its proprietary research programs. Many of
the Company's competitors have greater financial and human resources, and more
experience in research and development, preclinical and clinical testing,
obtaining regulatory approvals, manufacturing and marketing than the Company.
There can be no assurance that competitors of the Company will not develop
competing drug discovery technologies or drugs that are more effective than
those developed by the Company and its collaborative partners or obtain
regulatory approvals of their drugs more rapidly than the Company and its
collaborative partners, thereby rendering the Company's and its collaborative
partners' drug discovery technologies and/or drugs obsolete or noncompetitive.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its collaborative partners' ability to use the Company's drug
discovery technologies or commercialize drugs, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that some of the Company's
collaborative partners will not develop independently or with third parties
drugs that could compete with drugs of the types covered by the collaboration or
otherwise being developed by the Company. Furthermore, there is intense
competition for access to libraries of compounds to use for screening and any
inability of the Company to maintain access to sufficiently broad libraries of
compounds for screening potential targets would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company also expects to encounter significant competition with respect
to any drugs that may be developed using its technologies. Companies that
complete clinical trials, obtain required regulatory approvals and commence
commercial sales of their drugs before their competitors may achieve a
significant competitive advantage. In order to compete successfully, the
Company's goal is to obtain patent protection for its gene discoveries and drug
discovery technologies and to make these technologies available to
pharmaceutical companies through collaborative and licensing arrangements for
use in discovering drugs. There can be no assurance, however, that the Company
will obtain patents covering its technologies that protect it against
competitors. Moreover, there can be no assurance that the Company's competitors
will not succeed in developing technologies that circumvent the Company's
technologies or that such competitors will not succeed in developing
technologies and drugs that are more effective than those developed by the
Company and its collaborative partners or that would render technology or drugs
of the Company and its collaborators less competitive or obsolete.
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GOVERNMENT REGULATION
The development, manufacturing and marketing of drugs developed through the
use of the Company's technologies are subject to regulation by numerous
governmental agencies in the United States and in other countries. To date, none
of the Company's technologies has resulted in any clinical drug candidates. The
FDA and comparable regulatory agencies in other countries impose mandatory
procedures and standards for the conduct of certain preclinical testing and
clinical trials and the production and marketing of drugs for human therapeutic
use. Product development and approval of a new drug are likely to take a number
of years and involve the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include:(i) preclinical studies; (ii) the submission to the FDA of
a request for authorization to conduct clinical trials on
an investigational new drug (an "IND"); (iii) adequate and well-controlled
clinical trials to establish the safety and
efficacy of the drug for its intended use; (iv) submission to the FDA of a
new drug application (an "NDA"); and (v) review and approval of the NDA by the
FDA before the drug may be shipped or sold commercially.
In the United States, preclinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
Clinical trials, which involve the administration of the investigational
drug to healthy volunteers or to patients under the supervision of a qualified
principal investigator, are typically conducted in three sequential phases,
although the phases may overlap with one another. Clinical trials must be
conducted in accordance with Good Clinical Practices under protocols that detail
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND. Further, each clinical study must be conducted under the
auspices of an independent Institutional Review Board (the "IRB") at the
institution where the study will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution. Compounds must be formulated according to the
FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company, its collaborative partners
or the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even assuming that clinical trials are completed and that an NDA
is submitted to the FDA, there can be no assurance that the NDA will be reviewed
by the FDA in a timely manner or that once reviewed, the NDA will be approved.
The approval process is affected by a number of factors, including the severity
of the targeted indications, the availability of alternative treatments and the
risks and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the
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investigational drug. Even if initial FDA approval is obtained, further studies,
including post-market studies, may be required in order to provide additional
data on safety and will be required in order to gain approval for the use of a
product as a treatment for clinical indications other than those for which the
product was initially tested. The FDA will also require post-market reporting
and may require surveillance programs to monitor the side effects of the drug.
Results of post-marketing programs may limit or expand the further marketing of
the drug. Further, if there are any modifications to the drug, including changes
in indication, manufacturing process or labeling, an NDA supplement may be
required to be submitted to the FDA.
Each manufacturing establishment for new drugs is also required to receive
some form of approval by the FDA. Among the conditions for such approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
There can be no assurance that the regulatory framework described above
will not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. The Company has no preclinical or
clinical development expertise and intends to rely on its collaborative partners
and third party clinical research organizations to design and conduct most of
such activities if required. Moreover, because the Company's present
collaborative partners are, and it is expected that the Company's future
collaborative partners will be, responsible for preclinical testing, clinical
trials, regulatory approvals, manufacturing and commercialization of drugs, the
ability to obtain and the timing of regulatory approvals are not within the
control of the Company.
Prior to the commencement of marketing a product in other countries,
regulatory approval in such countries is required, whether or not FDA approval
has been obtained for such product. The requirements governing the conduct of
clinical trials and product approvals vary widely from country to country, and
the time required for approval may be longer or shorter than the time required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general, each country has its own procedures and
requirements.
The Company is also subject to regulation under other Federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by Federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
MANUFACTURING
The Company has no manufacturing facilities and intends to rely on its
collaborative partners and contract manufacturers to produce the materials
required for preclinical and clinical development purposes. If the Company were
unable to contract for these services on acceptable terms, or if it should
encounter delays or difficulties in its relationships with such providers, the
Company's product development would be delayed, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SCIENTIFIC CONSULTANTS
The Company has consulting arrangements with a number of leading academic
scientists. The consultants routinely attend project meetings and are available
to the scientific staff and management of the Company. Most of the Company's
consultants are paid for their services on a per diem basis and are reimbursed
for their travel expenses and other expenses incurred at the request of the
Company pursuant to the terms of their consulting arrangements with the Company.
Certain other consultants are paid fixed fees for their services on a monthly or
quarterly basis. Several of the Company's consultants serve on the Company's
Scientific Advisory Board. None of the consultants is an employee of the
Company. Most of the consultants have other commitments to, or consulting or
advisory contracts with, their employers and other institutions.
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<PAGE>
The Company is highly dependent on three consultants, Dr. James R. Broach,
Dr. John C. Cambier and Dr. Gary L. Johnson, in the conduct of its research
programs. Dr. Broach is the Director of Research, Dr. Cambier is the Director of
Immunology and Dr. Johnson is the Director of Cell Biology at the Company. In
December 1995, the Company granted Dr. Broach an option outside of its 1993
Stock Option Plan, as amended (the "1993 Stock Option Plan"), to purchase
141,667 shares of Common Stock. Such option will vest upon completion of this
offering. In November 1994, the Company granted to each of Dr. Cambier and Dr.
Johnson an option, outside of the 1993 Stock Option Plan, to purchase 166,667
shares of Common Stock. Each such option vests in equal annual installments of
41,667 shares over four years commencing March 11, 1996. The consulting
agreement with Dr. Broach contains an exclusivity provision that restricts him
from providing service to a competitor of the Company, without the Company's
consent. The consulting agreements with Drs. Cambier and Johnson contain
exclusivity provisions that restrict them from providing service to any
pharmaceutical or other biotechnology company, without the Company's consent.
SCIENTIFIC ADVISORY BOARD
The Company has assembled a Scientific Advisory Board (the "SAB") presently
comprised of five individuals (the "Scientific Advisors") who are leaders in the
fields of drug discovery, molecular biology, yeast biology, immunology, oncology
and pharmacology.
Members of the SAB review the Company's research, development and operating
activities and are available for consultation with the Company's management and
staff relating to their respective areas of expertise. The SAB holds regular
meetings. Several of the individual Scientific Advisors meet more frequently, on
an individual basis, with the Company's management and staff to discuss the
Company's ongoing research and development projects. The Scientific Advisors are
reimbursed for their expenses in connection with their service. In addition, the
Scientific Advisors own Common Stock or hold options to purchase Common Stock.
The Scientific Advisors are expected to devote only a small portion of their
time to the business of the Company.
The Scientific Advisors are all employed by entities other than the
Company. Each Scientific Advisor has entered into a consulting agreement with
the Company that contains confidentiality and non-disclosure provisions that
prohibit the disclosure of confidential information to anyone outside the
Company. Such consulting agreement also provides that all inventions,
discoveries or other intellectual property that come to the attention of or are
discovered by the Scientific Advisor while performing services under a
consulting agreement with the Company will be assigned to the Company. The
current members of the SAB are as follows:
Thomas F. Deuel, M.D., Chairman of the Scientific Advisory Board, is the
Director of the Division of Growth Regulation at Beth Israel Hospital and
Professor of Medicine at Harvard University. He is widely known for his work in
cell growth and development and is an international expert on the biology of
platelet derived growth factor and transforming growth factor beta. He conducted
post-doctoral training at Harvard Medical School and the NIH and completed his
M.D. at Columbia University's College of Physicians and Surgeons.
Norman R. Klinman, M.D., Ph.D. is a member of the Department of Immunology
in the Research Institute of Scripps Clinic and an Adjunct Professor in the
Department of Biology of the University of California at San Diego. Previously
he served as Professor of Pathology and Microbiology in the School of Medicine
at the University of Pennsylvania. He is widely known for his work on
immunoregulation, humoral immunity and B cell maturation, and repertoire
expression. Dr. Klinman has had numerous editorial appointments. He received his
Ph.D. from the University of Pennsylvania and his M.D. from Jefferson Medical
College.
Arnold J. Levine, Ph.D., a scientific founder of the Company, is Chairman
and Weiss Professor in Life Sciences of the Department of Molecular Biology at
Princeton University. Dr. Levine, a member of the National Academy of Sciences
and the Institute of Medicine, is a world-renowned expert in the biology of
tumor suppressor genes and oncogenes. He is noted for his fundamental research
on the function of the p53 gene, implicated in a wide variety of human cancers.
Dr. Levine is the recipient of many honors, including the Bristol-Myers Squibb
Award for Distinguished Achievement in Cancer Research, and is a member of a
number of scientific advisory boards including the Memorial Sloan Kettering
Cancer Center and the Howard Hughes Medical Institute. He received his Ph.D.
from the University of Pennsylvania.
Elliot M. Ross, Ph.D. is a Professor of Pharmacology at the University of
Texas Southwestern Medical Center. Dr. Ross' research focuses on G
protein-mediated signal transduction, where he is best known for direct
33
<PAGE>
biochemical studies of the mechanisms whereby receptors regulate G protein
activation. His other interests include the structure of G protein-coupled
receptors, the action of GTPase-activating proteins in G protein signaling
pathways and the impact of the membrane environment on regulatory interactions
among proteins. He received his Ph.D. in Biochemistry from Cornell University.
Jeremy W. Thorner, Ph.D. holds the William V. Power Endowed Chair in
Biology and is a Professor in the Department of Molecular and Cell Biology at
the University of California at Berkeley. He is coauthor, with R.J. Lefkowitz,
of the seminal paper published in Science in 1990 that forms the basis of the
initial yeast-related drug discovery technology within the Company. His research
interests include the structure and function of peptide ligands, receptors and
other components of signal transduction pathways and their role in the biology
of saccharomyces cerevisiae (bakers yeast). Dr. Thorner is the Program Director
for an NIH Training Grant in Cellular and Molecular Science. He conducted
post-doctoral research at Stanford University School of Medicine and received
his Ph.D. in Biochemistry from Harvard University.
EMPLOYEES
As of April 30, 1996, the Company had 62 full-time employees, 26 of whom
hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 51 are engaged
directly in scientific research and 11 are engaged in general and administrative
functions. The Company's scientific staff members have diversified experience
and expertise in a wide variety of disciplines, including molecular and cell
biology, biochemistry, molecular pharmacology and chemistry.
All employees have entered into agreements with the Company pursuant to
which they are prohibited from disclosing to third parties the Company's
proprietary information and they are obligated to assign to the Company all
rights to inventions made by them during their employment with the Company. See
"-Patents, Proprietary Technology and Trade Secrets."
The Company's employees are not covered by a collective bargaining
agreement, and the Company believes that its relationship with its employees is
good.
FACILITIES
The Company currently subleases approximately 25,776 square feet of
laboratory and office space at 777 Old Saw Mill River Road in Tarrytown, New
York, under an agreement expiring at the end of December 1997. The Company has
the option to lease such facilities for a five year period commencing January 1,
1998, and a further option to renew such lease for a five year period commencing
January 1, 2003. The Company also subleases 3,524 square feet of laboratory and
office facilities at the Colorado Bio/Medical Venture Center in Lakewood,
Colorado, under an agreement expiring on March 9, 1997. The Company plans to
expand its facilities to accommodate additional staff and increased research
activities as it expands its proprietary research, drug discovery and drug
development activities and its activities with collaborative partners. See "Use
of Proceeds."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information with respect to the executive officers, directors, key
employees and consultants of the Company as of May 15, 1996 is set forth below:
NAME AGE POSITION
- ---- --- --------
Jeremy M. Levin, D.Phil., MB.BCHIR ...... 42 Chief Executive Officer,
President and Chairman of
the Board of Directors
David R. Webb, Ph.D. .................... 51 Vice President of Research
and Chief Scientific Officer
Philip N. Sussman ....................... 44 Vice President of Corporate
Development
James R. Broach, Ph.D. .................. 48 Director of Research
John C. Cambier, Ph.D. .................. 48 Director of Immunology
Gary L. Johnson, Ph.D. .................. 46 Director of Cell Biology
Arlindo L. Castelhano, Ph.D. ............ 43 Director of Chemistry
Algis Anilionis, Ph.D. .................. 45 Director of Intellectual
Property
James S. Rielly ......................... 33 Director of Finance,
Controller, Treasurer
and Secretary
Carl C. Icahn ........................... 60 Director
Theodore Altman ......................... 54 Director
Harold First (1)(2) ..................... 60 Director
Peter S. Liebert, M.D. .................. 60 Director
Robert J. Mitchell(2) ................... 49 Director
Lawrence D. Muschek, Ph.D. .............. 53 Director
Mark H. Rachesky, M.D. .................. 37 Director
William A. Scott, Ph.D. ................. 56 Director
Thomas E. Shenk, Ph.D. (1) .............. 49 Director
Samuel D. Waksal, Ph.D. (2) ............. 48 Director
Jack G. Wasserman (1) ................... 59 Director
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Jeremy M. Levin, D.Phil., MB.BCHIR, Chief Executive Officer, President and
Chairman of the Board of Directors, joined the Company in December 1992 as its
Chief Executive Officer and became a Director in January 1993. In May 1995, Dr.
Levin became a Co-Chairman of the Board of Directors and in May 1996, Dr. Levin
became Chairman of the Board of Directors of the Company. From December 1990 to
December 1992, Dr. Levin was Vice President of Corporate Development for Genzyme
Corp.'s majority-owned subsidiary, IG Laboratories, Inc., a public laboratory
testing company. Prior to that Dr. Levin served in a number of positions at
biotechnology companies and at major teaching hospitals in Europe. Dr. Levin is
a member of the Board of Directors of Xenometrix, Inc., a public biotechnology
company, and Takhus, Inc., a private biotechnology company. Dr. Levin holds a
D.Phil. in Molecular Biology from the University of Oxford and an MB. BCHIR from
University of Cambridge.
David R. Webb, Ph.D., Vice President of Research and Chief Scientific
Officer, joined the Company in such capacities in July 1995. From January 1987
to July 1995, Dr. Webb was a Distinguished Scientist at Syntex Inc., a public
pharmaceutical company, in the Department of Molecular Immunology. From April
1990 to January 1995, Dr. Webb was also Director of Syntex Inc.'s Institute of
Immunology and Biological Sciences. Prior to that Dr. Webb was a member of the
Department of Cell Biology at the Roche Institute of Molecular Biology. From
January 1989 to the present, Dr. Webb has also been a Consulting Professor of
Cancer Biology at Stanford University. Dr. Webb holds a Ph.D. in Microbiology
from Rutgers University, an M.A. and a B.A. in Biology from California State
University at Fullerton.
35
<PAGE>
Philip N. Sussman, Vice President of Corporate Development, joined the
Company in such capacity in September 1993. From December 1990 to September
1993, Mr. Sussman was Director of Strategy and Business Development for the
Pharmaceuticals Division of Ciba-Geigy Corporation, a public pharmaceutical
company. Mr. Sussman holds an S.M. from the Sloan School of Management at the
Massachusetts Institute of Technology and a B.S. from the State University of
New York at Stony Brook.
James R. Broach, Ph.D., a scientific founder of the Company and inventor of
the Company's yeast-based drug discovery technology, has been Director of
Research of the Company since its inception. He is and has been since 1984 a
Professor at Princeton University in the Department of Molecular Biology. In
1984, Dr. Broach and his collaborators were the first ones to demonstrate that
human genes could be successfully implanted into yeast cells. He received his
Ph.D. in Biochemistry from University of California at Berkeley and his B.S.
from Yale University.
John C. Cambier, Ph.D., inventor of certain of the Company's signal
transduction technologies, has been Director of Immunology of the Company since
November 1994. He is Chief of the Division of Basic Sciences in the Department
of Pediatrics at the National Jewish Center for Immunology and Respiratory
Medicine. Dr. Cambier is also Professor of Immunology at the University of
Colorado Health Sciences Center. He is internationally known for his work on
transmembrane signal transduction, especially antigen and immunoglobulin Fc
receptors. Dr. Cambier conducted his postdoctoral training at the University of
Texas Southwestern Medical School, completed his Ph.D. in Immunology and
Virology at the University of Iowa, and received his B.S. from Southwest
Missouri State University.
Gary L. Johnson, Ph.D., inventor of certain of the Company's signal
transduction technologies, has been Director of Cell Biology of the Company
since November 1994. He is Director of the Program in Molecular Signal
Transduction at the National Jewish Center for Immunology and Respiratory
Medicine. He is also Professor of Pharmacology at the University of Colorado
School of Medicine and a Senior Member of its Cancer Center where he serves on
the executive board. Dr. Johnson's research focuses on receptor activation of G
proteins and the integration of signal transduction pathways regulated by G
proteins and tyrosine kinases. He received his Ph.D. in Pharmacology from the
University of Colorado and his B.S. from California State University.
Arlindo L. Castelhano, Ph.D. has been Director of Chemistry of the Company
since September 1995. He was a scientist at Syntex Inc., a public pharmaceutical
company, from 1982 to 1995 and served as Principal Scientist from 1993 to 1995.
He received his Ph.D. in Chemistry from McMaster University and his B.A. from
University of Toronto.
Algis Anilionis, Ph.D. has been Director of Intellectual Property of the
Company since November 1994. He was Patent Manager at Oncogene Science Inc., a
public biotechnology company, from 1991 to 1994 and Manager of Molecular Biology
and Genetics Research at Praxis Biologics, Inc. (now known as Lederle/Praxis, a
division of American Home Products), a public vaccine manufacturer and research
and development company, from 1986 to 1991. Dr. Anilionis has nine issued U.S.
patents and four granted European patents. He is a registered Patent Agent. He
received his Ph.D. in Molecular Biology from Edinburgh University and a B.A.
Hons. degree from University of Oxford.
James S. Rielly, Director of Finance, Controller, Treasurer and Secretary,
joined the Company in September 1992 as its Controller, became its Treasurer and
Secretary in September 1993 and became its Director of Finance in February 1996.
From November 1989 to September 1992, Mr. Rielly was the Controller and
Treasurer of Baring Brothers & Co., Inc., an investment banking firm. Mr. Rielly
is a certified public accountant and holds a B.S.B.A. from Bucknell University.
Carl C. Icahn became a director of the Company in July 1993. He was a
Co-Chairman of the Board of Directors from May 1995 to May 1996. Mr. Icahn has
been Chairman of the Board and Chief Executive Officer of ACF Industries Inc., a
privately-held railcar leasing and manufacturing company, since 1984, ACF
Industries Holding Corp., a privately-held holding company for ACF Industries
Inc. since August 1993, and, since 1968, Icahn & Co., Inc., a registered
broker-dealer and until 1995 a member firm of the New York Stock Exchange, Inc.
Since November 1990, Mr. Icahn has been Chief Executive Officer and Chairman of
the Board of American Property Investors, Inc., the general partner of American
Real Estate Partners, L.P., a public limited partnership that invests in real
estate. Since 1990, Mr. Icahn has been Chief Executive Officer and Chairman of
the Board of Starfire Holding Corporation, a privately-held holding company.
From 1990 to January 1993, Mr. Icahn was Chief Executive Officer and Chairman of
the Board of Trans World Airlines, Inc., a public airline company. Mr. Icahn
also serves as a Director of Culligan Water Technologies, Inc., a public water
purification company and Samsonite Corp., a public luggage manufacturing
company. Mr. Icahn was the Chief Executive Officer and Chairman of the Board of
Trans World Airlines, Inc. when it filed for reorganization under Chapter 11 of
the United States Bankruptcy Code, as amended, in January 1992. Mr. Icahn
received his B.A. from Princeton University.
36
<PAGE>
Theodore Altman became a director of the Company in May 1996. For the past
five years, Mr. Altman has been a senior partner in the law firm of Gordon
Altman Butowsky Weitzen Shalov & Wein, concentrating his areas of practice in
securities law and litigation. Mr. Altman received a B.A. from Bucknell
University and an LL.B. from New York University.
Harold First became a director of the Company in April 1995. Mr. First has
been since January 1993 an independent financial consultant. From December 1990
through January 1993, Mr. First served as Chief Financial Officer of Icahn
Holding Corp, a privately-held investment holding company, and related entities.
He has been a director of Trump Taj Mahal Realty Corp., a privately-held, real
estate company, since October 1991; a member of the Supervisory Board of
Directors of Memorex Telex N.V., a public technology company, since February
1992; and a director of Tel-Save Holdings, Inc., a public long-distance
telephone service company, since September 1995. Mr. First was a director of
Trans World Airlines, Inc., a public airline company, from December 1990 through
January 1993; a director of ACF Industries, Inc., a privately-held railcar
leasing and manufacturing company, from February 1991 through December 1992; and
Vice Chairman of the Board of Directors of American Property Investors, Inc.,
the general partner of American Real Estate Partners, L.P., a public limited
partnership that invests in real estate from March 1991 through December 1992.
Mr. First was a director of Trans World Airlines, Inc. when it filed for
reorganization under Chapter 11 of the United States Bankruptcy Code, as
amended, in January 1992. He is a certified public accountant and holds a B.S.
from Brooklyn College.
Peter S. Liebert, M.D. became a director of the Company in April 1995. Dr.
Liebert has been a pediatric surgeon in private practice since 1968 and is
affiliated with Babies Hospital of Columbia Presbyterian. He is also Clinical
Associate Professor of Surgery, College of Physicians and Surgeons, Columbia
University. Dr. Liebert holds an M.D. from Harvard University Medical School and
a B.A. from Princeton University.
Robert J. Mitchell became a director of the Company in May 1996. Mr.
Mitchell has been Senior Vice President-Finance of ACF Industries Inc. since
March 1995 and was Treasurer of ACF Industries Inc. from December 1984 to March
1995. Mr. Mitchell has also served as President and Treasurer of ACF Industries
Holdings Inc. since August 1993 and as Vice President, Liaison Officer of Icahn
& Co., Inc. since November 1984. From 1987 to January 1993, Mr. Mitchell served
as Treasurer of Trans World Airlines, Inc. and was the Treasurer of Trans World
Airlines, Inc. when it filed for reorganization under Chapter 11 of the United
States Bankruptcy Code, as amended, in January 1992.
Lawrence D. Muschek, Ph.D. became a director of the Company in February
1996. Dr. Muschek has been the Senior Vice President for Research and
Development of the Human Health Division of Solvay S.A., a public Belgium
chemical pharmaceutical company since 1994 and has worldwide responsibilities
for research and development for Solvay S.A. From April 1990 to January 1994,
Dr. Muschek served as the Senior Vice President for Research and Development of
Solvay Pharmaceuticals, Inc., a public U.S. pharmaceutical subsidiary of Solvay
S.A. Prior to joining Solvay Pharmaceuticals, Inc., Dr. Muschek spent 18 years
in pharmaceutical research and development at Johnson & Johnson., a public
manufacturer of health care products. Dr. Muschek conducted post-doctoral
research in Pharmacology at Michigan State University and holds a Ph.D. in
Biochemistry from Michigan State University and a B.Sc. from The Philadelphia
College of Pharmacy and Science.
Mark H. Rachesky, M.D. became a director of the Company in July 1993. Since
June 1996, Dr. Rachesky has been the President of MHR Advisors LLC, the sole
general partner of an investment partnership. In February 1990, Dr. Rachesky
became senior investment advisor to Carl C. Icahn and from shortly thereafter to
June 1996, acted as his chief investment officer. From May 1990 to June 1996,
Dr. Rachesky was the sole Managing Director of Starfire Holding Corp., which is
responsible for substantially all of Mr. Icahn's investment activities. Dr.
Rachesky has been a director of Samsonite Corp., a public luggage manufacturing
company, since June 1993 and a director of Culligan Water Technologies, Inc., a
public water purification company, since its spin-off from Samsonite Corp. in
December 1995. From November 1990 to June 1996, Dr. Rachesky served as a
director and officer of American Property Investors, Inc., the general partner
of American Real Estate Partners, L.P., a public limited partnership that
invests in real estate. From June 1987 to February 1990, Dr. Rachesky was
employed by an affiliate of the Robert M. Bass Group, Inc., a privately-held
financial company. Dr. Rachesky received an M.D. and an M.B.A. from Stanford
University and his B.S. from the University of Pennsylvania.
William A. Scott, Ph.D. became a director of the Company in July 1994. Dr.
Scott has been Senior Vice President of Exploratory and Drug Discovery Research
at Bristol-Myers Squibb's Pharmaceutical Research Institute since March 1991.
From March 1990 to March 1991, Dr. Scott was Senior Vice President of Drug
Discovery Research at Bristol-Myers Squibb's Pharmaceutical Research Institute.
From September 1983 to March 1990, he held a number of senior positions at The
Squibb Institute for Medical Research. Dr. Scott has been since 1983 an Adjunct
Professor at The Rockefeller University and was the Associate Dean at the
Rockefeller University from 1979 to 1982. Dr. Scott conducted post-doctoral
research at The Rockefeller University and holds a Ph.D. in Biochemistry from
California Institute of Technology and a B.S. from the University of Illinois.
37
<PAGE>
Thomas E. Shenk, Ph.D., a scientific founder of the Company, has been a
director of the Company since its inception. In 1996 he was elected to the U.S.
National Academy of Science. Dr. Shenk has been a Professor of Molecular Biology
at Princeton University since 1984. He is currently endowed Professor of
Molecular Biology at Princeton University, an American Cancer Society Professor
and Investigator for the Howard Hughes Medical Institute. He also serves as a
Director of Somatix Therapy Corporation, a public biotechnology company. Dr.
Shenk conducted post-doctoral research at Stanford University and holds a Ph.D.
in Virology from Rutgers University and received his B.S. from the University of
Detroit.
Samuel D. Waksal, Ph.D., a founder of the Company, has been a director of
the Company since its inception and was a Co-Chairman of the Board of Directors
from May 1995 to May 1996. Dr. Waksal was Chief Executive Officer of the Company
from June 1992 to December 1992 and was its Chairman of the Board of Directors
from June 1992 to May 1995. Dr. Waksal has been the Chief Executive Officer and
a director of ImClone Systems Incorporated, a public biotechnology company,
since 1985. Dr. Waksal is a member of the Board of Directors of Somatix Therapy
Corporation, a public biotechnology company. Dr. Waksal received his Ph.D. in
Immunology from Ohio State University College of Medicine.
Jack G. Wasserman became a director of the Company in May 1996. For the
past five years, Mr. Wasserman has been a senior partner in Wasserman, Schneider
& Babb, a New York law firm which concentrates its practice in legal matters
relating to international trade. Mr. Wasserman is a director of American
Property Investors, Inc., the general partner of American Real Estate Partners,
L.P., a public limited partnership. Mr. Wasserman received a B.A. from Adelphi
University, a J.D. from Georgetown University and a Diploma from the Johns
Hopkins University School of Advanced International Studies.
Directors are elected by the stockholders of the Company at each annual
meeting of stockholders and serve until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
removal or resignation. A Voting Agreement among the Company, High River Limited
Partnership, Carl C. Icahn, The Global Health Sciences Fund, Bristol-Myers
Squibb and the Solvay Subsidiary requires the signatories thereto (other than
Bristol-Myers Squibb) to vote their shares for a Board of Directors comprised of
the following: up to a majority designated by High River Limited Partnership
(presently Messrs. Altman, First, Icahn, Mitchell and Wasserman and Drs. Liebert
and Rachesky); the Chief Executive Officer of the Company (presently, Dr.
Levin); an individual (presently undesignated) designated by The Global Health
Sciences Fund; an individual (presently Dr. Scott) designated by Bristol-Myers
Squibb; an individual (presently Dr. Muschek) designated by the Solvay
Subsidiary; and an individual (presently Dr. Shenk) designated by certain
founders of the Company. The number of directors comprising the entire Board of
Directors has been fixed at twelve by resolution of the Board of Directors. The
Voting Agreement will terminate upon the closing of this offering.
Dr. Rachesky has agreed to tender his resignation as a director of the
Company if so requested by Mr. Icahn.
ImClone Systems Incorporated ("ImClone") has agreed with High River Limited
Partnership to vote all shares of Common Stock it acquires from High River
Limited Partnership pursuant to the option to acquire 1,079,395 shares of Common
Stock granted to it by High River Limited Partnership as directed by High River
Limited Partnership.
The Board of Directors has (i) a Compensation Committee, consisting of
Messrs. First and Wasserman and Dr. Shenk, which makes recommendations regarding
salaries and incentive compensation for employees of and consultants to the
Company and which administers the 1993 Stock Option Plan and the 1996 Incentive
Plan and (ii) an Audit Committee, consisting of Messrs. First and Mitchell and
Dr. Waksal, which oversees actions taken by the Company's independent auditors
and reviews the Company's internal accounting controls.
In September 1995, the Board of Directors granted to each director then in
office a 30-day option to purchase 8,334 shares of Common Stock at an exercise
price of $2.25 per share. In October 1995, each of Harold First, Carl C. Icahn,
Peter S. Liebert, Mark H. Rachesky, Thomas E. Shenk and Samuel D. Waksal
exercised his option and purchased 8,334 shares of Common Stock at $2.25 per
share. To date, directors have not received any other compensation for serving
on the Board of Directors and have not been reimbursed for expenses incurred by
them in attending meetings of the Board of Directors or any committee thereof.
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<PAGE>
EXECUTIVE COMPENSATION
The following tables set forth certain information concerning the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal year ended December 31, 1995, by its Chief
Executive Officer and each of the Company's other executive officers whose total
salary and bonus exceeded $100,000 during such fiscal year (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) ($)
- --------------------------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Jeremy M. Levin ................................. $175,260 $65,000 -- $ 12,842(1)
President and Chief Executive Officer
Philip N. Sussman ............................... 110,260 70,000 33,333 12,563(2)
Vice President of Corporate Development
David R. Webb ................................... 94,868(3) 30,000 66,666 128,021(4)
Vice President of Research and
Chief Scientific Officer
</TABLE>
- ----------
(1) All Other Compensation includes: (i) $11,725 in health care premiums and
reimbursements paid by the Company and (ii) $1,117 in short-term and
long-term disability premiums and life insurance premiums paid by the
Company.
(2) All Other Compensation includes: (i) $11,725 in health care premiums and
reimbursements paid by the Company and (ii) $838 in short-term and
long-term disability premiums and life insurance premiums paid by the
Company.
(3) Dr. Webb joined the Company in June 1995 and receives a salary at the rate
of $175,000 per annum.
(4) All Other Compensation includes: (i) $121,754 of relocation expenses, (ii)
$5,880 in healthcare premiums and reimbursements paid by the Company and
(iii) $387 in short term and long-term disability premiums and life
insurance premiums paid by the Company.
EMPLOYMENT AGREEMENTS
Dr. Jeremy M. Levin
Dr. Levin is employed as Chief Executive Officer under a two-year
employment agreement with the Company entered into effective as of December 12,
1995. Pursuant to his agreement, Dr. Levin receives a minimum annual base salary
of $225,000, is guaranteed an annual bonus equal to 20% of his base salary, and
is eligible to receive an additional annual bonus at the discretion of the
Compensation Committee of the Board of Directors. If the Company terminates Dr.
Levin's employment without "cause," as defined in his agreement, or if the
Company fails to renew his agreement upon terms acceptable to him and Dr. Levin
terminates his employment with the Company after December 12, 1997, the Company
will pay to Dr. Levin a lump sum severance payment equal to one year's base
salary then in effect and guaranteed bonus and all unvested stock options issued
to him will immediately vest as of the date of termination. If Dr. Levin's
employment with the Company is terminated under certain circumstances in
connection with a "change in control" (as defined in the employment agreement),
the Company will pay to Dr. Levin a lump sum severance payment equal to one
year's base salary then in effect and guaranteed bonus and all unvested stock
options issued to him will immediately vest as of the date of termination.
39
<PAGE>
Philip N. Sussman
Mr. Sussman is an employee at will but has a severance agreement with the
Company which provides that if he is terminated without cause (i) the Company
will continue to pay him his then salary and provide him with medical benefits
until the earlier of twelve months from the date of termination or his
commencement of comparable new employment with another company and (ii) all
unvested stock options issued to him will immediately vest as of the date of
termination.
Dr. David R. Webb
Dr. Webb is an employee at will but has a severance agreement with the
Company which provides that if he is terminated without cause he will receive
severance equal to (i) one year's salary if such termination is within twelve
months of commencement, (ii) 9 months' salary if such termination is after 12
months but before the 25th month after commencement, (iii) 6 months' salary if
such termination is after 24 months but before the 37th month after
commencement, or (iv) whatever is deemed appropriate for other officers of the
Company at the time of termination if such termination is more than 36 months
after commencement.
OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1995 by the Company to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS ($)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------
NAME GRANTED(#) IN FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---- ------------------------- --------- -------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Jeremy M. Levin ............. -- -- -- -- -- --
Philip N. Sussman ........... 33,333 13.01 3.60 12/19/05 75,468 191,253
David R. Webb ............... 66,666 26.03 2.25 5/5/05 94,334 239,062
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning each exercise
of stock options during the fiscal year ended December 31, 1995, by the Named
Executive Officers and unexercised stock options held by the Named Executive
Officers as of the end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(1)
ACQUIRED ON AGGREGATE VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeremy M. Levin ....... -- -- 281,159 33,912 $435,497 $50,868
Philip N. Sussman ..... -- -- 16,667 50,001 27,150 27,150
David R. Webb ......... -- -- -- 66,667 -- 50,000
</TABLE>
- ----------
(1) Based on the deemed fair market value of the Common Stock at December 31,
1995 ($3.00 per share as determined by the Board of Directors) less the
exercise price per share.
40
<PAGE>
INCENTIVE PLANS
1993 Stock Option Plan
The 1993 Stock Option Plan provides for the grant of options to purchase
shares of Common Stock to officers, employees and consultants of the Company.
The maximum number of shares of Common Stock that may be issued pursuant to the
1993 Stock Option Plan is 666,667 (plus any shares that are the subject of
canceled or forfeited awards). Effective as of May 10, 1996, the 1993 Stock
Option Plan was replaced by the 1996 Incentive Planwith respect to all future
awards to the Company's employees and consultants. See "-- 1996 Incentive Plan."
The 1993 Stock Option Plan was adopted by the Board of Directors on January
13, 1993 and approved by the stockholders of the Company in April, 1993. The
1993 Stock Option Plan was amended by the Board of Directors on July 28, 1993 in
order to increase the number of shares of Common Stock covered thereby to its
current level, which amendment was approved by the stockholders of the Company
as of July 28, 1993.
The 1993 Stock Option Plan is currently administered by the Compensation
Committee which is presently comprised of Harold First, Thomas E. Shenk and Jack
G. Wasserman. The Compensation Committee determines which of the Company's
officers, employees and consultants will be granted options, the time or times
when grants will be made, whether options to be granted will be options intended
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") or non-qualified stock options,
the terms governing the grants, the exercise date of any options and the number
of shares for which options are to be granted. Directors who are neither
employees of nor consultants to the Company and members of the Compensation
Committee are not eligible to receive awards under the 1993 Stock Option Plan.
In addition, incentive stock options may be granted only to officers and
employees.
Under the 1993 Stock Option Plan, the Compensation Committee may establish
with respect to each option granted such vesting provisions as it determines to
be appropriate or advisable. In general, options granted under the 1993 Stock
Option Plan have a ten-year term, and such options vest or have vested over
four-year periods at various rates. Unexercised options automatically terminate
upon the termination of the holder's relationship with the Company. However, the
Compensation Committee may accelerate a vesting schedule and/or extend the time
for exercise of all or any part of an option in the event of the termination of
the holder's relationship with the Company. In addition, the 1993 Stock Option
Plan includes a provision authorizing the Compensation Committee to adjust the
number of shares of Common Stock available for grant, the number of shares of
Common Stock subject to outstanding awards thereunder and the per share exercise
price thereof in the event of any stock dividend, stock split, recapitalization,
merger or certain other events. The Compensation Committee may terminate the
1993 Stock Option Plan at any time but any such termination will not adversely
affect options previously granted.
The exercise price of options granted and the purchase price of shares sold
under the 1993 Stock Option Plan are determined by the Compensation Committee,
but may not, (i) in the case of incentive stock options, be less than the fair
market value of the Common Stock on the date of grant (or, in the case of
incentive stock options granted to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, 110% of such fair market value), or (ii) in the case of non-qualified
stock options, be less than 85% of the fair market value of the Common Stock on
the date of grant, as determined by the Compensation Committee.
Options granted under the 1993 Stock Option Plan are nontransferable except
by will or the laws of descent and distribution.
During 1995, stock options to purchase an aggregate of 84,337 shares of
Common Stock at an exercise price of $2.25 per share and an aggregate of 40,523
shares of Common Stock at an exercise price of $3.00 per share were granted
under the 1993 Stock Option Plan to officers, employees and consultants of the
Company. As of April 30, 1996, all of such stock options were outstanding, of
which options to purchase 6,864 shares were exercisable at such time.
As of April 30, 1996, an aggregate of 642,734 shares of Common Stock were
subject to outstanding stock options granted under the 1993 Stock Option Plan.
As of April 30, 1996, options to purchase 427,005 shares were exercisable at
prices ranging from $1.37 to $3.51 per share.
41
<PAGE>
Stock Option Agreements
In addition to stock options granted under the 1993 Stock Option Plan, the
Company has also granted non-qualified stock options to directors, officers,
employees and consultants of the Company by means of stock option agreements.
During 1995, stock options to purchase an aggregate of 141,667 shares of Common
Stock at an exercise price of $2.57 per share and an aggregate of 171,300 shares
of Common Stock at an exercise price of $3.60 per share were granted pursuant to
stock option agreements to officers, employees and consultants of the Company.
As of April 30, 1996, all of such stock options were outstanding and none of
such options were exercisable. As of April 30, 1996, an aggregate of 646,301
shares of Common Stock were subject to outstanding stock options granted under
stock option agreements. As of April 30, 1996 options to purchase 83,334 shares
under such option agreements were exercisable at $1.50 per share.
1996 Incentive Plan
The Company's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company in May
1996. The 1996 Incentive Plan replaced the 1993 Stock Option Plan, effective as
of May 10, 1996, with respect to all future awards by the Company to its
employees and consultants. However, while all future awards will be made under
the 1996 Incentive Plan, awards made under the 1993 Stock Option Plan will
continue to be administered in accordance with the 1993 Stock Option Plan. See
"Incentive Plans -- 1993 Stock Option Plan." The maximum number of shares of
Common Stock that may be the subject of awards under the 1996 Incentive Plan is
333,334 (plus any shares that are the subject of canceled or forfeited awards).
The 1996 Incentive Plan is administered by the Compensation Committee,
which has the power and authority under the 1996 Incentive Plan to determine
which of the Company's employees and consultants will receive awards, the time
or times at which awards will be made, the nature and amount of the awards, the
exercise or purchase price, if any, of such awards, and such other terms and
conditions applicable to awards as it determines to be appropriate or advisable.
Options granted under the 1996 Incentive Plan may be either non-qualified
stock options or options intended to qualify as incentive stock options under
Section 422 of the Code. The term of incentive stock options granted under the
1996 Incentive Plan cannot extend beyond ten years from the date of grant (or
five years in the case of a holder of more than 10% of the total combined voting
power of all classes of stock of the Company on the date of grant).
Shares of Common Stock may either be awarded or sold under the 1996
Incentive Plan and may be issued or sold with or without vesting and other
restrictions, as determined by the Compensation Committee.
Under the 1996 Incentive Plan, the Compensation Committee may establish
with respect to each option or shares awarded or sold such vesting provisions as
it determines to be appropriate or advisable. Unvested options will
automatically terminate within a specified period of time following the
termination of the holder's relationship with the Company and in no event beyond
the expiration of the term. The Company may either repurchase unvested shares of
Common Stock at their original purchase price upon the termination of the
holder's relationship with the Company or cause the forfeiture of such shares,
as determined by the Compensation Committee. All options granted and shares sold
under the 1996 Incentive Plan to employees of the Company may, in the discretion
of the Compensation Committee, become fully vested upon the occurrence of
certain corporate transactions if the holders thereof are terminated in
connection therewith.
The exercise price of options granted and the purchase price of shares sold
under the 1996 Incentive Plan are determined by the Compensation Committee, but
may not, in the case of incentive stock options, be less than the fair market
value of the Common Stock on the date of grant (or, in the case of incentive
stock options granted to a holder of more than 10% of the total combined voting
power of all classes of stock of the Company on the date of grant, 110% of such
fair market value), as determined by the Compensation Committee.
The Compensation Committee may also grant, in combination with
non-qualified stock options and incentive stock options, stock appreciation
rights ("Tandem SARs"), or may grant Tandem SARs as an addition to outstanding
non-qualified stock options. A Tandem SAR permits the participant, in lieu of
exercising the corresponding option, to elect to receive any appreciation in the
value of the shares subject to such option directly from the Company in shares
of Common Stock. The amount payable by the Company upon the exercise of a Tandem
SAR is measured by the difference between the market value of such shares at the
time of exercise and the option exercise price. Generally, Tandem SARs may be
exercised at any time after the underlying option vests. Upon the exercise of a
42
<PAGE>
Tandem SAR, the corresponding portion of the related option must be surrendered
and cannot thereafter be exercised. Conversely, upon exercise of an option to
which a Tandem SAR is attached, the Tandem SAR may no longer be exercised to the
extent that the corresponding option has been exercised. Nontandem stock
appreciation rights ("Nontandem SARs") may also be awarded by the Compensation
Committee. A Nontandem SAR permits the participant to elect to receive from the
Company that number of shares of Common Stock having an aggregate market value
equal to the excess of the market value of the shares covered by the Nontandem
SAR on the date of exercise over the aggregate base price of such shares as
determined by the Compensation Committee. With respect to both Tandem and
Nontandem SARs, the Compensation Committee may determine to cause the Company to
settle its obligations arising out of the exercise of such rights in cash or a
combination of cash and shares, in lieu of issuing shares only.
Under the 1996 Incentive Plan, the Compensation Committee may also award
tax offset payments to assist employees in paying income taxes incurred as a
result of their participation in the 1996 Incentive Plan. The amount of the tax
offset payments will be determined by applying a percentage established from
time to time by the Compensation Committee to all or a portion of the taxable
income recognizable by the employee upon: (i) the exercise of a non-qualified
stock option or an SAR; (ii) the disposition of shares received upon exercise of
an incentive stock option; (iii) the lapse of restrictions on Restricted Shares;
or (iv) the award of unrestricted shares.
The number and class of shares available under the 1996 Incentive Plan may
be adjusted by the Compensation Committee to prevent dilution or enlargement of
rights in the event of various changes in the capitalization of the Company. At
the time of grant of any award, the Compensation Committee may provide that the
number and class of shares issuable in connection with such award be adjusted in
certain circumstances to prevent dilution or enlargement of rights.
The Board of Directors may suspend, amend, modify or terminate the 1996
Incentive Plan. However, the Company's stockholders must approve any amendment
that would (i) materially increase the aggregate number of shares issuable under
the 1996 Incentive Plan, (ii) materially increase the benefits accruing to
employees under the 1996 Incentive Plan or (iii) materially modify the
requirements for eligibility to participate in the 1996 Incentive Plan. Awards
made prior to the termination of the 1996 Incentive Plan shall continue in
accordance with their terms following such termination. No amendment, suspension
or termination of the 1996 Incentive Plan shall adversely affect the rights of
an employee or consultant in awards previously granted without such employee's
or consultant's consent.
Since the adoption of the 1996 Incentive Plan on May 10, 1996, no stock
options were granted under the 1996 Incentive Plan.
401(K) PLAN
In November, 1993, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering the Company's employees. Generally,
employees may elect to contribute to the 401(k) Plan, through payroll
deductions, up to 20% of their compensation for services rendered in any year,
not to exceed a statutorily prescribed annual limit. The trustee under the
401(k) Plan, at the direction of each participant, invests the assets of the
401(k) Plan in any of seven investment options. The 401(k) Plan is intended to
qualify under Section 401 of the Code so that contributions by employees to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn. The Company has not made matching contributions to
participants under the 40l(k) Plan.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 15, 1996, on a pro forma basis to
reflect the automatic conversion of all outstanding shares of Convertible
Preferred Stock into Common Stock upon the closing of this offering, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, with
respect to (i) each person known by the Company to be the beneficial owner of
more than 5% of the Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers and (iv) all directors and officers as a
group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
AMOUNT AND NATURE OF PERCENTAGES OF TOTAL(2)
BENEFICIAL -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP BEFORE OFFERING AFTER OFFERING
--------------------------------------- -------------------- --------------- --------------
<S> <C> <C> <C>
Carl C. Icahn ..............................
114 West 47th Street 3,361,216(3) 38.49% 29.27%
New York, New York 10036
Bristol-Myers Squibb Company ............... 1,607,143 18.41% 14.00%
P.O. Box 4000
Route 206 and Province Line Road
Princeton, New Jersey 08543-4000
Physica B.V.(4) ............................ 833,334 9.54% 7.26%
C.J. van Houtenlaan 36
1381 CP Weesp
The Netherlands
The Global Health Sciences Fund ............ 729,395(5) 8.35% 6.35%
c/o INVESCO Trust Company
7800 East Union Ave, Suite 800
Denver, Colorado 80237
ImClone Systems Incorporated ............... 1,079,395(6) 11.01% 8.60%
180 Varick Street
New York, New York 10014
Jeremy M. Levin, D. Phil., MB. BCHIR ....... 281,159(7) 3.12% 2.39%
Philip N. Sussman .......................... 16,667(8) * *
David R. Webb, Ph.D. ....................... 16,667(9) * *
Theodore Altman ............................ -- * *
Harold First ............................... 8,334 * *
Peter S. Liebert, M.D. ..................... 8,334 * *
Robert J. Mitchell ......................... -- * *
Lawrence D. Muschek, Ph.D. ................. 833,334(10) 9.54% 7.26%
Mark H. Rachesky, M.D. ..................... 190,683 2.18% 1.66%
William A Scott, Ph.D. ..................... 1,607,143(11) 18.41% 14.00%
Thomas E. Shenk, Ph.D. ..................... 175,001(12) 2.00% 1.53%
Samuel D. Waksal, Ph.D. .................... 1,087,729(13) 11.09% 8.66%
Jack G. Wasserman .......................... -- * *
All executive officers and directors as a .. 7,591,267(14) 74.93% 58.93%
group (15 persons)
</TABLE>
- ----------
* Less than one percent.
44
<PAGE>
(1) Except as otherwise indicated above, the address of each stockholder
identified above is c/o the Company, 777 Old Saw Mill River Road,
Tarrytown, NY 10591-6705. Except as indicated in the other footnotes to
this table, the persons named in this table have sole voting and investment
power with respect to all shares of Common Stock.
(2) Share ownership in the case of each person listed above includes shares
issuable upon the exercise of options held by such person as of May 15,
1996, that may be exercised within 60 days after such date for purposes of
computing the percentage of Common Stock owned by such person, but not for
purposes of computing the percentage of Common Stock owned by any other
person.
(3) Includes 2,258,790 shares of Common Stock held by High River Limited
Partnership (including the 1,079,395 shares of Common Stock owned by High
River Limited Partnership that ImClone has the right to acquire). Mr. Icahn
is the sole shareholder of the sole general partner of High River Limited
Partnership.
(4) Physica B.V. is referred to in this Prospectus as the Solvay Subsidiary.
(5) Consists of 729,395 shares of Common Stock held by The Global Health
Sciences Fund. INVESCO Trust Company acts as the investment adviser to The
Global Health Sciences Fund and therefore may be deemed to share beneficial
ownership of these shares.
(6) Consists of 1,079,395 shares of Common Stock which ImClone currently has
the right to acquire from High River Limited Partnership, upon exercise of
an option granted to it by High River Limited Partnership.
(7) Consists of 281,159 shares of Common Stock which Dr. Levin currently has
the right to acquire upon the exercise of stock options. See
"Management--Incentive Plans."
(8) Consists of 16,667 shares of Common Stock which Mr. Sussman currently has
the right to acquire upon the exercise of a stock option. See
"Management--Incentive Plans."
(9) Consists of 16,667 shares of Common Stock which Dr. Webb currently has the
right to acquire upon the exercise of a stock option. See
"Management--Incentive Plans."
(10) Consists of 833,334 shares of Common Stock held by Physica B.V., an
indirect wholly owned subsidiary of Solvay S.A. Dr. Muschek is the Senior
Vice President for Research and Development of the Human Health Division of
Solvay S.A. Dr. Muschek may be deemed the beneficial owner of the 833,334
shares of Common Stock held by Physica B.V., but disclaims such beneficial
ownership.
(11) Consists of 1,607,143 shares of Common Stock held by Bristol-Myers Squibb.
Dr. Scott is Senior Vice President of Exploratory and Drug Discovery
Research at Bristol-Myers Squibb's Pharmaceutical Research Institute. Dr.
Scott may be deemed the beneficial owner of the 1,607,143 shares of Common
Stock held by Bristol-Myers Squibb, but disclaims such beneficial
ownership.
(12) Consists of (a) 91,667 shares of Common Stock held by Dr. Shenk, a director
of the Company, and (b) 83,334 shares of Common Stock held by Susan Shenk,
Dr. Shenk's wife.
(13) Consists of (a) 8,334 shares of Common Stock held by Dr. Waksal, and (b)
1,079,395 shares of Common Stock which ImClone has the right to acquire.
Dr. Waksal is the Chief Executive Officer and a director of ImClone. Dr.
Waksal may be deemed the beneficial owner of the 1,079,395 shares which
ImClone has the right to acquire, but disclaims such beneficial ownership.
(14) Includes (a) 319,493 shares of Common Stock issuable upon exercise of
options, (b) 1,607,143 shares of Common Stock held by Bristol-Myers Squibb,
(c) 833,334 shares of Common Stock held by Physica B.V., and (d) 1,079,395
shares of Common Stock owned by High River Limited Partnership that ImClone
has the right to acquire. See footnotes (3), (6), (7), (8), (9), (10), (11)
and (13).
45
<PAGE>
CERTAIN TRANSACTIONS
In July 1992, founders of the Company purchased an aggregate of 1,400,005
shares of the Company's Common Stock at a price of $.003 share. Dr. Shenk, a
director of the Company, and his wife purchased an aggregate of 166,668 of such
shares of Common Stock. ImClone, whose Chief Executive Officer, Dr. Waksal, is a
director of the Company, purchased 700,000 of such shares of Common Stock. Dr.
Broach, a consultant to the Company and a member of the SAB, and members of his
family purchased an aggregate of 166,669 of such shares of Common Stock. Drs.
Dana Fowlkes and Jeffry Stock, former members of the SAB, each purchased 166,667
of such shares of Common Stock. Dr. Arnold Levine, a member of the SAB,
purchased 33,334 of such shares of Common Stock.
In July 1993, the Company issued and sold an aggregate of 14,879,651 shares
of Series A Convertible Preferred Stock, $.001 par value (the "Series A
Preferred Stock), at $0.457 per share, to a group of 34 new and existing
investors as part of a private financing. The shares were sold for an aggregate
consideration of $6,800,000. An affiliate of Carl C. Icahn, a director of the
Company, purchased 3,282,276 of such shares of Series A Preferred Stock. Two
daughters of Samuel D. Waksal, a director of the Company, purchased an aggregate
of 328,228 of such shares of Series A Preferred Stock. ImClone purchased
4,376,368 of such shares of Series A Preferred Stock through the cancellation of
$2,000,000 of debt owed to it by the Company. The Global Health Sciences Fund
purchased 2,188,184 of such shares of Series A Preferred Stock.
In July 1994, the Company entered into a research collaboration with
Bristol-Myers Squibb. In connection with such collaboration, the Company issued
and sold 3,571,429 shares of Series B Preferred Stock at $3.50 per share to
Bristol-Myers Squibb. In August and September 1995, the Company issued and sold
an aggregate of 1,250,000 shares of Series B Preferred Stock at $4.00 per share
to Bristol-Myers Squibb, when Bristol-Myers Squibb became obligated to purchase
such shares upon the Company's achievement of a research milestone.
Bristol-Myers Squibb became a beneficial owner of more than five percent of the
shares of Common Stock to be outstanding upon completion of this offering when
it purchased the 3,571,429 shares of Series B Preferred Stock in July 1994.
During the period from July 1994 through December 1994 and for the fiscal year
ended December 31, 1995, Bristol-Myers Squibb provided research funding to the
Company in an amount which constituted in excess of five percent of the
Company's gross revenues for each of such periods. In connection with its sale
of Series B Preferred Stock to Bristol-Myers Squibb, the Company granted to
Bristol-Myers Squibb certain registration rights with respect to the shares of
Common Stock issuable upon the conversion of the shares of Series B Preferred
Stock owned by it. See "Business -- Collaborative Arrangements -- The
Bristol-Myers Squibb Collaboration." Dr. Scott, a director of the Company, is
the Senior Vice President of Exploratory and Drug Discovery Research at
Bristol-Myers Squibb's Pharmaceutical Research Institute.
In September 1995, the Board of Directors granted to each director then in
office a 30-day option to purchase 8,334 shares of Common Stock at an exercise
price of $2.25 per share. In October 1995, each of Harold First, Carl C. Icahn,
Peter S. Liebert, Mark H. Rachesky, Thomas E. Shenk and Samuel D. Waksal
exercised his option and purchased 8,334 shares of Common Stock at $2.25 per
share.
In November 1995, the Company entered into a research collaboration with
Solvay Duphar. In connection with such collaboration, the Company issued and
sold an aggregate of 2,500,000 shares of Series B Preferred Stock at $4.00 per
share to the Solvay Subsidiary, which then became a beneficial owner of more
than five percent of the shares of Common Stock to be outstanding upon
completion of this offering. During the period from November 1995 through
December 1995, Solvay Duphar provided research funding to the Company in an
amount which constituted in excess of five percent of the Company's gross
revenues for fiscal year 1995. In connection with its sale of Series B Preferred
Stock to the Solvay Subsidiary, the Company granted to the Solvay Subsidiary
registration rights with respect to the shares of Common Stock issuable upon the
conversion of the shares of Series B Preferred Stock owned by it. See "Business
- -- Collaborative Arrangements -- the Solvay Duphar Collaboration." Dr. Muschek,
a director of the Company, is Senior Vice President for Research and Development
of the Human Health Division of Solvay S.A.
In December 1994, the Company prepaid in full a $408,648 debt to ImClone
with a payment of $250,000.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this offering, the authorized capital stock of the
Company will consist of 35,000,000 shares of Common Stock, par value $0.01 per
share.
COMMON STOCK
As of April 30, 1996, there were 8,732,052 shares of Common Stock
outstanding (assuming the conversion of all outstanding shares of Convertible
Preferred Stock into Common Stock) and held of record by 55 stockholders. As of
April 30, 1996, options to purchase an aggregate of 1,289,035 shares of Common
Stock were also outstanding. See "Management--Incentive Plans."
Holders of Common Stock are entitled to receive such dividends as may from
time to time be declared by the Board of Directors of the Company out of funds
legally available therefor. Holders of Common Stock are entitled to one vote per
share on all matters on which the holders of Common Stock are entitled to vote
and do not have any cumulative voting rights. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby when issued will be, fully paid and nonassessable.
At present, there is no established trading market for the Common Stock.
Upon completion of this offering, the Common Stock will be approved for listing
on the Nasdaq National Market under the symbol "KDUS."
DELAWARE TAKEOVER STATUTE
Section 203 of the Delaware General Corporation Law (the "DGCL") prevents
an "interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging in
a "business combination" (as defined in Section 203, generally, to include
mergers or consolidations between a Delaware corporation and an "interested
stockholder," transactions with an "interested stockholder" involving the assets
or stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock) with a
publicly-held Delaware corporation for three years following the date such
person became an interested stockholder unless (i) before such person became an
interested stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination, (ii) upon consummation of the transaction
that resulted in the interested stockholder's becoming an interested
stockholder, the interested stockholder owns at least 85% of the voting stock of
the corporation outstanding at the time the transaction commenced (excluding
voting stock held by directors who are also officers of the corporation and by
employee benefit plans that do not provide employees with the right to determine
confidentially whether shares held by the plan will be voted or tendered in a
tender or exchange offer) or (iii) following the transaction in which such
person became an interested stockholder, the business combination is approved by
the board of directors of the corporation and ratified at a meeting of
stockholders by the affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
CHARTER AND BY-LAW PROVISIONS
The Certificate of Incorporation of the Company, as amended, contains
provisions which eliminate the personal liability of directors for monetary
damages resulting from breaches of their fiduciary duty other than liability for
breaches of the duty of loyalty to the Company or its stockholders, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the DGCL or any transaction
from which the director derived an improper personal benefit. The Certificate of
Incorporation of the Company, as amended, and the By-Laws, as amended, contain
provisions requiring the indemnification of the Company's directors and officers
to the fullest extent permitted by Section 145 of the DGCL, including
circumstances in which indemnification is otherwise discretionary. The Company
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Herman Group,
Inc.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
11,482,052 shares of Common Stock (including shares to be issued upon conversion
of the Convertible Preferred Stock upon completion of this offering), assuming
no exercise of the Underwriters' over-allotment option or currently outstanding
options. All of the shares sold in this offering (plus any additional shares
sold upon exercise of the Underwriters' over-allotment option) will be freely
transferable as of the date of this Prospectus by persons other than
"affiliates" of the Company without restriction or further registration under
the Securities Act. The remaining 8,732,052 shares of Common Stock to be
outstanding (the "Restricted Shares") are held by officers, directors,
employees, consultants and other stockholders of the Company. The Restricted
Shares were sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act, are "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be sold in the absence
of registration under the Securities Act unless an exemption from registration
is available including an exemption contained in Rule 144 or Rule 701 under the
Securities Act. In addition to the shares of Common Stock offered hereby, up to
475,004 of the Restricted Shares may currently be eligible for sale in the
public market pursuant to Rule 144(k) under the Securities Act (of which at
least 398,335 shares are subject to the lock-up agreements described below).
Beginning 90 days after the Effective Date, at least 5,176,500 additional
shares of Common Stock (including 579,913 shares of Common Stock issuable
pursuant to the exercise of vested options) will be or will become eligible for
sale in the public market, subject to the provisions of Rule 144 or Rule 701 (of
which at least 5,014,414 shares are subject to the agreements not to sell
described below). The officers, directors, employees, consultants and certain
stockholders of the Company, who together hold at least 8,623,714 Restricted
Shares, have agreed not to sell or otherwise dispose of their shares without the
prior written consent of Hambrecht & Quist LLC, subject to certain limited
exceptions, for a period of 180 days from the Effective Date. At the end of such
180-day period, at least 6,896,412 shares of Common Stock (including
approximately 662,094 shares issuable upon exercise of vested options) will be
eligible for immediate resale, subject to compliance with Rule 144 and Rule 701.
The remainder of the shares held by existing stockholders will become eligible
for sale at various times thereafter, subject to the provisions of Rule 144 or
Rule 701.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including any person who may be deemed an
"affiliate" of the Company, is entitled to sell within any three-month period a
number of restricted securities that does not exceed the greater of 1% of the
then outstanding shares of Common Stock and the average weekly trading volume in
the over-the-counter market during the four calendar weeks preceding such sale,
provided that at least two years have elapsed since such shares were acquired
from the Company and certain manner of sale, notice requirements and
requirements as to the availability of current public information about the
Company are satisfied. Any person who is deemed to be an affiliate of the
Company must comply with the provisions of Rule 144 (other than the two-year
holding period requirement) in order to sell shares of Common Stock which are
not restricted securities (such as shares acquired by affiliates in this
offering). In addition, under Rule 144(k), a person who is not an affiliate of
the Company, and who has not been an affiliate of the Company at any time during
the 90 days preceding any sale, is entitled to sell such shares without regard
to the foregoing limitations, provided at least three years have elapsed since
the shares were acquired from the Company.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of Common Stock originally purchased from the Company, or issuable
upon the exercise of options originally granted by the Company, by its
employees, directors, officers, consultants or advisers before the date the
Company becomes subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such persons.
Securities issued in reliance on Rule 701 are deemed to be restricted securities
within the meaning of Rule 144 and, beginning 90 days after the Effective Date
(unless subject to the lock-up agreements described above), may be sold by
persons other than affiliates without having to comply with the
public-information, holding-period, volume limitation or notice provisions of
Rule 144 and by affiliates without having to comply with the two-year minimum
holding-period provision ofRule 144.
The Company intends to file a registration statement on Form S-8 under the
Securities Act after the expiration of 180 days following the Effective Date
registering approximately 1,300,000 shares of Common Stock subject to
outstanding stock options or reserved for issuance under the Company's stock
option plans. Such
48
<PAGE>
registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will be
available for sale in the open market, subject to vesting conditions contained
in the option agreements to which they are subject and, in certain cases, to the
lock-up agreements referred to above. At April 30, 1996, options to purchase
642,734 shares of Common Stock were outstanding under the 1993 Stock Option
Plan, of which 427,005 were exercisable at such time. At April 30, 1996, no
options were outstanding under the 1996 Incentive Plan. In addition, at April
30, 1996, options to purchase 646,301 shares of Common Stock were outstanding
under stock option agreements with officers, employees and consultants, of which
83,334 were exercisable at such time.
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made as to the effect, if any, that public sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market, or the perception that such sales could
occur, could have an adverse impact on the market price.
REGISTRATION RIGHTS
The holders of an aggregate of 7,400,376 shares of Common Stock (including
shares to be issued upon the conversion of all outstanding shares of Convertible
Preferred Stock upon completion of this offering) have certain registration
rights under agreements among such holders and the Company which will continue
to apply to the shares of Common Stock into which any such shares will be
converted upon completion of this offering.
Subject to certain conditions, the holders of 20% or more of the aggregate
of the shares of Common Stock issued or issuable upon the conversion of the
Series A Preferred Stock (the "Series A Holders") may request that the Company
file a registration statement under the Securities Act covering their shares. In
addition, subject to certain conditions, Bristol-Myers Squibb and the Solvay
Subsidiary may each make the same request of the Company. Upon its receipt of
any such request, the Company generally will be required to use its best efforts
to effect the registration of the shares owned by all persons who have
registration rights and who request inclusion of their shares in such
registration. The Company is not required to effect any registration requested
by the Series A Holders if it has effected a registration statement requested by
the Series A Holders within the previous twelve months, or any registration
(other than on Form S-3 or any successor form relating to secondary offerings)
within six months prior to such request. The Company is only obligated to effect
two registrations requested by the Series A Holders, except that the two Series
A Holders that purchased more than $1,000,000 worth of Series A Preferred Stock
have the right to request one additional registration and, in certain instances,
a second additional registration. The Company is not required to effect any
registration requested by Bristol-Myers Squibb or the Solvay Subsidiary if it
has effected two registration statements requested by Bristol-Myers Squibb or
the Solvay Subsidiary, as the case may be, a registration statement requested by
Bristol-Myers Squibb or the Solvay Subsidiary, as the case may be, within the
previous twelve months, or any registration (other than on Form S-3 or any
successor form relating to secondary offerings) within six months prior to such
request. The Company is generally obligated to bear the expenses, other than
underwriting discounts and sales commissions, of all such registrations.
The stockholders who are parties to such agreements also have certain
piggyback registration rights. Accordingly, if the Company proposes to register
any of its securities, either for its own account or for the account of other
stockholders, with certain exceptions, the Company is required to so notify such
stockholders and to include in such registration all of the shares of Common
Stock requested to be included by them, subject to rejection of such shares
under certain circumstances by an underwriter. The Company has so notified such
stockholders and none of them has exercised its registration rights with respect
to this offering.
Each of Dr. John C. Cambier and Dr. Gary L. Johnson is the holder of an
option to purchase 166,667 shares of Common Stock. As of April 30, 1996, each of
such options was exercisable with respect to 41,667 shares. The Company has
agreed that if it grants registration rights to its scientific founders or to
any of its officers, it will grant the same registration rights to Drs. Cambier
and Johnson. The Company has not granted registration rights to its scientific
founders or its officers. The Company has also agreed to include in any
registration statement on Form S-8 that it files, on a pro rata basis with
securities owned by or securities subject to options owned by employees of the
Company, any such shares if they are then registrable on Form S-8.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement,
the Underwriters named below through their Representatives, Hambrecht & Quist
LLC, Montgomery Securities and Genesis Merchant Group Securities, have severally
agreed to purchase from the Company the following respective number of shares of
Common Stock:
NUMBER OF
NAME SHARES
- ---- ------
Hambrecht & Quist LLC .......................................
Montgomery Securities .......................................
Genesis Merchant Group Securities ...........................
---------
Total ..................................................... 2,750,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $_______ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $_______ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 412,500
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The officers, directors, consultants and certain stockholders of the
Company who will own an aggregate of 8,623,714 shares of Common Stock after the
offering have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them during
the 180 day period following the date of this Prospectus. The Company has agreed
that it will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180 day period following the
date of this Prospectus, except that the Company may issue shares upon the
exercise of options granted prior to the date hereof and may grant
50
<PAGE>
additional options under its stock option plans, provided that without the prior
written consent of Hambrecht & Quist LLC, such additional options shall not be
exercisable during such period.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to accounts over which they exercise discretionary authority.
Prior to the offering there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuation of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operation, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain legal
matters will be passed upon for the Company by Morrison Cohen Singer &
Weinstein, LLP, New York, New York. Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts, has acted as counsel for the Underwriters in connection with this
offering.
EXPERTS
The financial statements of Cadus Pharmaceutical Corporation (a development
stage corporation) as of December 31, 1995 and 1994, and for each of the years
in the three-year period ended December 31, 1995, and for the period from
January 23, 1992 (date of inception) to December 31, 1995, have been included
herein and in the Registration Statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The statements in this Prospectus relating to patents under the captions
"Risk Factors -- Uncertainty of Protection of Patents and Proprietary Rights"
and "Business -- Patents, Proprietary Technology and Trade Secrets" and other
references herein concerning patents have been examined by and passed upon for
the Company by LaHive & Cockfield, and are included in reliance upon such
examination and upon the authority of such counsel as experts on patents.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is hereby made to the Registration Statement and such exhibits
and schedules filed as a part thereof, which may be inspected, without charge,
at the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048 and its Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of all or any portion of the Registration Statement may be
obtained from the Public Reference Section of the Commission, upon payment of
prescribed fees. This Prospectus contains summaries of the material terms of
certain contracts or other documents filed as exhibits to the Registration
Statement. Such summaries are qualified in all respects by reference to the
copies of such contracts or other documents filed as exhibits to the
Registration Statement.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
51
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report ................................. F-2
Balance Sheets ............................................... F-3
Statements of Operations ..................................... F-4
Statements of Stockholders' Equity ........................... F-5
Statements of Cash Flows ..................................... F-6
Notes to Financial Statements ................................ F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cadus Pharmaceutical Corporation:
We have audited the accompanying balance sheets of Cadus Pharmaceutical
Corporation (a development stage corporation) as of December 31, 1995 and 1994,
and the related statements of operations, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1995 and the
period from January 23, 1992 (date of inception) to December 31, 1995. 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 (a development stage corporation) as of December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1995 and the period from January 23,
1992 (date of inception) to December 31, 1995 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 29, 1996,
except as to note 15,
which is as of May 10, 1996
F-2
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, MARCH 31,
------------------- MARCH 31, 1996
1995 1994 1996 (NOTE 15)
---- ---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $25,682,920 $14,405,678 $25,085,978
Restricted cash (note 5) ............................................. 2,380,000 187,000 2,380,000
Prepaid and other current assets ..................................... 76,810 87,137 405,932
----------- ----------- -----------
Total current assets .............................................. 28,139,730 14,679,815 27,871,910
Restricted cash (note 5) .............................................. 118,000 118,000 118,000
Fixed assets, net of accumulated depreciation and
amortization of $649,016 at December 31, 1995, $144,257
at December 31, 1994 and $825,501 at March 31, 1996 (note 3) ......... 2,219,851 846,318 2,241,323
Deferred tax asset, less valuation allowance of $2,621,000
at December 31, 1995, $2,033,000 at December 31, 1994 and
$2,638,000 at March 31, 1996 (note 6) ................................ -- -- --
Due from stockholder (note 4) ......................................... 13,736 21,499 11,796
Other assets, net (note 2) ............................................ 233,874 73,980 342,011
----------- ----------- -----------
Total assets ...................................................... $30,725,191 $15,739,612 $30,585,040
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue (note 7) ............................................ $ -- $ 645,381 $ --
Accounts payable ..................................................... 154,463 257,058 211,928
Accrued expenses and other current liabilities (note 10) ............. 421,155 54,166 259,493
Line of credit and loans payable to bank-current portion (note 5) .... 2,397,459 203,403 2,397,459
Total current liabilities ......................................... 2,973,077 1,160,008 2,868,880
Loans payable to bank (note 5) ........................................ 29,002 45,999 24,790
----------- ----------- -----------
Total liabilities ................................................. 3,002,079 1,206,007 2,893,670
=========== =========== ===========
Commitments and contingencies (note 11)
Stockholders' equity (notes 7 and 8):
Preferred Stock, $.001 par value. Authorized 22,201,080 shares at
December 31, 1995 and March 31, 1996, issuable in series.
Convertible Preferred Stock, Series A. 14,879,651 shares designated;
issued and outstanding at December 31, 1995 and 1994 and March 31, 1996,
14,879,651 shares (preference in liquidation, $6,800,000); no shares
authorized, issued and outstanding on a pro forma basis ........... 14,880 14,880 14,880 $ --
Convertible Preferred Stock, Series B. 7,321,429 shares designated;
issued and outstanding at December 31, 1995 and March 31, 1996, 7,321,429
shares, (preference in liquidation, $27,500,000); at December 31, 1994,
3,571,429 shares; no shares authorized, issued and outstanding on a
pro forma basis ................................................... 7,321 3,571 7,321 --
Common stock, $.01 par value. Authorized 35,000,000 shares at December 31,
1995 and March 31, 1996; issued 1,465,009 shares at December 31, 1995,
1,405,005 shares at December 31, 1994 and 1,473,343 shares at March 31,
1996; outstanding 1,323,342 shares at December 31, 1995, 1,380,005 shares
at December 31, 1994 and 1,331,676 shares at March 31, 1996;
issued 8,873,719 shares and outstanding 8,732,052 shares on a pro
forma basis ......................................................... 14,650 14,050 14,733 88,737
Additional paid-in capital ........................................... 33,976,940 19,009,293 33,988,282 33,936,479
Deficit accumulated during the development stage (note 1) ............ (5,990,604) (4,508,114) (6,033,771) (6,033,771)
Treasury stock, 141,667 shares of common stock at December 31, 1995
and March 31, 1996, 25,000 shares of common stock at December 31, 1994,
at cost; 141,667 shares of common stock on a pro forma basis ........ (300,075) (75) (300,075) (300,075)
----------- ----------- ----------- -----------
Total stockholders' equity ........................................ 27,723,112 14,533,605 27,691,370 $27,691,370
=========== =========== =========== ===========
Total liabilities and stockholders' equity ........................ $30,725,191 $15,739,612 $30,585,040
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 23, JANUARY 23,
1992 1992
(DATE OF THREE MONTHS (DATE OF
INCEPTION) TO ENDED MARCH 31, INCEPTION) TO
DECEMBER 31, ----------------- MARCH 31,
1995 1994 1993 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, principally
from related parties
(notes 2 and 7) .............. $ 4,417,809 $(1,354,619 $ -- $ 5,772,428 $1,625,001 $1,000,000 $ 7,397,429
----------- ----------- ----------- ----------- ---------- --------- -----------
Costs and expenses:
Research and development
costs ....................... 5,383,285 2,246,207 1,645,552 10,028,522 1,654,391 1,040,375 11,682,913
General and administrative
expenses .................... 1,376,126 936,762 549,571 3,076,390 317,677 317,165 3,394,067
----------- ----------- ----------- ----------- ---------- --------- -----------
Total costs and expenses ... 6,759,411 3,182,969 2,195,123 13,104,912 1,972,068 1,357,540 15,076,980
----------- ----------- ----------- ----------- ---------- --------- -----------
Operating loss ................ (2,341,602) (1,828,350) (2,195,123) (7,332,484) (347,067) (357,540) (7,679,551)
----------- ----------- ----------- ----------- ---------- --------- -----------
Interest income ............... 980,567 318,868 48,038 1,347,473 359,335 215,511 1,706,808
Interest expense .............. 77,866 5,063 -- 82,929 37,855 6,328 120,784
----------- ----------- ----------- ----------- ---------- --------- -----------
Interest income, net ....... 902,701 313,805 48,038 1,264,544 321,480 209,183 1,586,024
----------- ----------- ----------- ----------- ---------- --------- -----------
Loss before income taxes
and extraordinary item ....... (1,438,901) (1,514,545) (2,147,085) (6,067,940) (25,587) (148,357) (6,093,527)
State and local taxes (note 6) 43,589 36,994 729 81,312 17,580 6,470 98,892
----------- ----------- ----------- ----------- ---------- --------- -----------
Loss before extraordinary item (1,482,490) (1,551,539) (2,147,814) (6,149,252) (43,167) (154,827) (6,192,419)
Extraordinary gain from early
extinguishment of debt
(note 4) ..................... -- 158,648 -- 158,648 -- -- 158,648
----------- ----------- ----------- ----------- ---------- --------- -----------
Net loss ...................... $(1,482,490) $(1,392,891) $(2,147,814) $(5,990,604) $ (43,167) $(154,827) $(6,033,771)
=========== =========== =========== =========== ========== ========= ===========
Pro forma net loss per share
(unaudited--note 2) .......... $ (0.16) $ 0.00
=========== ==========
Shares used in calculation of
pro forma net loss per share
(unaudited--note 2) .......... 9,043,609 8,987,992
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK, PREFERRED STOCK, ADDITIONAL DURING THE
SERIES A SERIES B COMMON STOCK PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE
---------- ------- --------- ------- --------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares issued from January 23, 1992
(date of inception) to December 31,
1992 at $.01 per share in connection
with initial offering .................... 1,400,005 $14,000 $ (9,800)
Net loss for period January 23, 1992 to
December 31, 1992 ........................ $ (967,409)
---------- ------- --------- ------- --------- ------- ----------- -----------
Balance at December 31, 1992 .............. 1,400,005 14,000 (9,800) (967,409)
Repurchase of stock from founder for cash . (25,000)
Issuance of common stock for cash in
connection with exercise of options ...... 1,667 17 2,483
Issuance of Convertible Preferred Stock,
Series A for cash, net of issuance
costs of $200,299 in July 1993 ........... 14,879,651 $14,880 6,584,821
Net loss for year ended December 31, 1993 . (2,147,814)
---------- ------- --------- ------- --------- ------- ----------- -----------
Balance at December 31, 1993 .............. 14,879,651 14,880 1,376,672 14,017 6,577,504 (3,115,223)
Issuance of Convertible Preferred Stock,
Series B for cash, net of issuance
costs of $72,742, in connection with
corporate partnering transaction in
July 1994 ................................ 3,571,429 $ 3,571 12,423,687
Issuance of common stock for cash in
connection with exercise of options 3,333 33 8,102
Net loss for year ended December 31, 1994 . (1,392,891)
---------- ------- --------- ------- --------- ------- ----------- -----------
Balance at December 31, 1994 .............. 14,879,651 14,880 3,571,429 3,571 1,380,005 14,050 19,009,293 (4,508,114)
Issuance of Convertible Preferred Stock,
Series B for cash, in connection with
achievement of scientific milestone ...... 1,250,000 1,250 4,998,750
Issuance of Convertible Preferred Stock,
Series B for cash, net of issuance
costs of $154,858, in connection with
corporate partnering transaction in
November 1995 ............................ 2,500,000 2,500 9,842,642
Issuance of common stock for cash in
connection with exercise of options ...... 60,004 600 126,255
Repurchase of stock from founder for cash . (116,667)
Net loss for year ended December 31, 1995 . (1,482,490)
---------- ------- --------- ------- --------- ------- ----------- -----------
Balance at December 31, 1995 .............. 14,879,651 14,880 7,321,429 7,321 1,323,342 14,650 33,976,940 (5,990,604)
Issuance of common stock for cash in
connection with exercise of options
(Unaudited) .............................. 8,334 83 11,342
Net loss for three months ended March 31, .
1996 (Unaudited) (43,167)
---------- ------- --------- ------- --------- ------- ----------- -----------
Balance at March 31, 1996 (Unaudited) ..... 14,879,651 $14,880 7,321,429 $ 7,321 1,331,676 $14,733 $33,988,282 $(6,033,771)
========== ======= ========= ======= ========= ======= =========== ==========
</TABLE>
TREASURY STOCK
SHARES AMOUNT TOTAL
-------- --------- -----------
Shares issued from January 23, 1992
(date of inception) to December 31,
1992 at $.01 per share in connection
with initial offering .................... $ 4,200
Net loss for period January 23, 1992 to
December 31, 1992 ........................ (967,409)
-------- --------- -----------
Balance at December 31, 1992 .............. (963,209)
Repurchase of stock from founder for cash . (25,000) $ (75) (75)
Issuance of common stock for cash in
connection with exercise of options ...... 2,500
Issuance of Convertible Preferred Stock,
Series A for cash, net of issuance
costs of $200,299 in July 1993 ........... 6,599,701
Net loss for year ended December 31, 1993 . (2,147,814)
-------- --------- -----------
Balance at December 31, 1993 .............. (25,000) (75) 3,491,103
Issuance of Convertible Preferred Stock,
Series B for cash, net of issuance
costs of $72,742, in connection with
corporate partnering transaction in
July 1994 ................................ 12,427,258
Issuance of common stock for cash in
connection with exercise of options 8,135
Net loss for year ended December 31, 1994 . (1,392,891)
-------- --------- -----------
Balance at December 31, 1994 .............. (25,000) (75) 14,533,605
Issuance of Convertible Preferred Stock,
Series B for cash, in connection with
achievement of scientific milestone ...... 5,000,000
Issuance of Convertible Preferred Stock,
Series B for cash, net of issuance
costs of $154,858, in connection with
corporate partnering transaction in
November 1995 ............................ 9,845,142
Issuance of common stock for cash in
connection with exercise of options ...... 126,855
Repurchase of stock from founder for cash . (116,667) (300,000) (300,000)
Net loss for year ended December 31, 1995 . (1,482,490)
-------- --------- -----------
Balance at December 31, 1995 .............. (141,667) (300,075) 27,723,112
Issuance of common stock for cash in
connection with exercise of options
(Unaudited) .............................. 11,425
Net loss for three months ended March 31, .
1996 (Unaudited) (43,167)
-------- --------- -----------
Balance at March 31, 1996 (Unaudited) ..... (141,667) $(300,075) $27,691,370
======== ========= ===========
See accompanying notes to financial statements.
F-5
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Statements of Cash Flows
<TABLE>
<CAPTION>
January 23,
1992
(date of
inception)
to December 31,
1995 1994 1993 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................. $ (1,482,490)$ (1,392,891)$ (2,147,814) $(5,990,604)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization .......... 544,855 103,428 94,123 745,218
Loss on trade in of equipment .......... 2,658 -- -- 2,658
Extraordinary gain from early
extinguishment of debt ................ -- (158,648) -- (158,648)
Changes in assets and liabilities:
Decrease (increase) in prepaid and
other current assets ................. 10,327 (69,717) (17,420) (76,810)
Decrease (increase) in other assets ... 5,088 ( 6,794) ( 3,299) ( 5,005)
(Decrease) increase in deferred
revenue ............................. (645,381) 645,381 -- --
(Decrease) Increase in accounts
payable.............................. (102,595) 238,850 (1,000) 154,463
Increase (decrease) in accrued
expenses and other current
liabilities.......................... 366,989 28,266 (3,514) 421,155
----------- ----------- ----------- -----------
Net cash used in operating
activities ......................... (1,300,549) (612,125) (2,078,924) (4,907,573)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets .............. (1,893,858) (605,096) (249,274) (2,859,298)
Increase in restricted cash .............. (2,193,000) (287,000) (18,000) (2,498,000)
Stockholder borrowing..................... 7,763 (1,626) (19,873) (13,736)
Patent Costs ............................. (192,170) (16,552) (53,576) (262,298)
----------- ----------- ----------- -----------
Net cash used in investing
activities ........................... (4,271,265) (910,274) (340,723) (5,633,332)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from bank line of credit ........ 2,193,000 187,000 -- 2,380,000
Payments on bank loan .................... (15,941) (12,598) -- (28,539)
(Payment to) proceeds from stockholder ... -- (250,000) 1,381,454 2,158,648
Proceeds from issuance of common stock
and exercise of stock options ........... 126,855 8,135 2,500 141,690
Net proceeds from issuance of convertible
preferred stock ......................... 14,845,142 12,427,258 4,599,701 31,872,101
Purchase of treasury stock ............... (300,000) -- (75) (300,075)
----------- ----------- ----------- -----------
Net cash provided by financing
activities ........................... 16,849,056 12,359,795 5,983,580 36,223,825
----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ..................... 11,277,242 10,837,396 3,563,933 25,682,920
Cash and cash equivalents at beginning
of period ................................ 14,405,678 3,568,282 4,349 --
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $25,682,920 $14,405,678 $ 3,568,282 $25,682,920
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
January 23,
Three Months 1992
Ended (date of
March 31, inception)
------------------ to March 31,
1996 1995 1996
---- ---- ----
----------(Unaudited)------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................. $ (43,167) $ (154,827)$ (6,033,771)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization .......... 157,198 57,900 902,416
Loss on trade in of equipment .......... -- -- 2,658
Extraordinary gain from early
extinguishment of debt ................ -- -- (158,648)
Changes in assets and liabilities:
Decrease (increase) in prepaid and
other current assets ................. (329,122) (56,792) (405,932)
Decrease (increase) in other assets ... (97,895) (30,435) (102,900)
(Decrease) increase in deferred
revenue .............................. -- (493,751) --
(Decrease) increase in accounts
payable .............................. 57,465 292,149 211,928
Increase (decrease) in accrued
expenses and other current
liabilities ......................... (161,662) (39,932) 259,493
----------- ----------- -----------
Net cash used in operating
activities .......................... (417,183) (425,688) (5,324,756)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets .............. (197,957) (892,807) (3,057,255)
Increase in restricted cash .............. -- (640,000) (2,498,000)
Stockholder borrowing .................... 1,940 1,941 (11,796)
Patent costs ............................. 9,045 (5,304) (253,253)
----------- ----------- -----------
Net cash used in investing
activities ........................... (186,972) (1,536,170) (5,820,304)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from bank line of credit ........ -- 640,000 2,380,000
Payments on bank loan .................... (4,212) (3,879) (32,751)
(Payment to) proceeds from stockholder ... -- -- 2,158,648
Proceeds from issuance of common stock
and exercise of stock options ........... 11,425 -- 153,115
Net proceeds from issuance of convertible
preferred stock ......................... -- -- 31,872,101
Purchase of treasury stock ............... -- -- (300,075)
----------- ----------- -----------
Net cash provided by financing
activities ........................... 7,213 636,121 36,231,038
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ..................... (596,942) (1,325,737) 25,085,978
Cash and cash equivalents at beginning
of period ................................ 25,682,920 14,405,678 --
----------- ----------- -----------
Cash and cash equivalents at end of period $25,085,978 $13,079,941 $25,085,978
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(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 focused
on the development and application of novel yeast-based and signal transduction
drug discovery technologies.
The Company has accumulated a loss of $6,033,771 from January 23, 1992
(date of inception) to March 31, 1996. 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
convertible preferred stock and through revenues resulting from research funding
provided by its collaborative partners (note 7).
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Development Stage Enterprise
The efforts of the Company since inception have been devoted to research
and development and raising capital. Accordingly, the financial statements are
presented under the guidelines stipulated by the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting
and Reporting by Development Stage Enterprises."
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents. At
March 31, 1996, December 31, 1995 and 1994, cash equivalents consist of
$24,849,377, $25,324,631 and $14,353,359, 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, net" include capitalized patent costs which are amortized on
a straight-line basis over fifteen years. At March 31, 1996, December 31, 1995
and 1994, accumulated amortization is $14,142, $33,429 and $6,237, respectively.
(e) Income Taxes
The Company accounts for income taxes in accordance with the principles set
forth in SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires that
the Company recognize deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. 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. Under SFAS
No. 109, 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-7
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(f) Research and Development
Research and development costs are expensed as incurred and include direct
costs of research scientists and equipment and an allocation of shared
facilities and services.
(g) Revenue Recognition
The Company has entered into research agreements which provide for the
payment of nonrefundable fees during the term of the research programs. In
addition, the agreements provide for payment of fees when both parties concur
that certain milestone events have occurred. These fees are reflected as revenue
when earned as related costs are incurred or when agreement is reached that
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) Pro Forma Net Loss Per Share (Unaudited)
All common share data has been restated to give effect to a one-for-three
reverse stock split to be effected immediately prior to closing of the proposed
initial public offering (see note 15). Except as noted below, pro forma net loss
per share is computed using the weighted average number of shares of common
stock outstanding. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, the Series B Convertible Preferred Stock (using the
if-converted method) and stock options (using the treasury stock method and the
anticipated initial public offering price) issued at prices substantially below
the anticipated public offering price during the 12-month period prior to the
proposed offering have been included in the calculation as if they were
outstanding for all periods presented. Furthermore, common equivalent shares
from convertible preferred stock issued prior to the 12-month period preceding
the proposed offering that will convert upon the completion of the Company's
proposed initial public offering are included in the calculation (using the
if-converted method) from the original date of issuance. Common equivalent
shares from stock options issued prior to the 12-month period preceding the
proposed offering are excluded from the computation as their effect is
anti-dilutive. Historical earnings per share have not been presented because
such amounts are not meaningful due to the significant change in the Company's
capital structure that will occur in connection with the Company's proposed
initial public offering.
(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, due from stockholder, accounts payable and accrued expenses and
line of credit, the carrying amount approximates the fair value because of the
short maturities of those instruments.
For loans payable to bank the difference between the carrying value and
fair value is not material.
F-8
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(k) Unaudited Interim Financial Information
The financial information at March 31, 1996 and for the three-month periods
ended March 31, 1996 and 1995 and for the period from January 23, 1992 (date of
inception) to March 31, 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results for the three-month
period ended March 31, 1996 are not necessarily indicative of results that may
be expected for the year ending December 31, 1996.
(3) FIXED ASSETS
Fixed assets, at cost, are summarized as follows:
DECEMBER 31,
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1994 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Equipment ........................................................... $2,123,959 $964,928 $2,318,334
Furniture and fixtures .............................................. 167,875 25,647 168,240
Leasehold improvements .............................................. 577,033 -- 580,250
---------- -------- ----------
2,868,867 990,575 3,066,824
Less accumulated depreciation and amortization ...................... 649,016 144,257 825,501
---------- -------- ----------
$2,219,851 $846,318 $2,241,323
========== ======== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993,
and the period from January 23, 1992 (date of inception) to December 31, 1995
amounted to approximately $517,700, $99,200, $92,100 and $711,800, respectively.
(4) DUE FROM STOCKHOLDER AND RELATED PARTY TRANSACTIONS
A stockholder of the Company funded the Company's operations until the
Company was able to support its own activities. At the closing of the
convertible preferred stock offering in July 1993, $2 million in debt to such
stockholder was cancelled as consideration for the issuance of 4,376,368 shares
of Series A Convertible Preferred Stock (the "Series A Preferred Stock") (note
7). The remaining debt of $408,648 continued interest free until December 1994
when such debt was repaid for $250,000. As a result of this early extinguishment
of indebtedness, the Company recorded an extraordinary gain of $158,648 in the
1994 statement of operations.
In addition, this stockholder and certain of its directors and executive
officers (who were also directors and officers of the Company) provided certain
services to the Company for the period ended December 31, 1992 and for the first
three months in the year ended December 31, 1993. These services included
purchase ordering, bookkeeping and legal counsel, and have been provided to the
Company at no cost, other than direct expense reimbursement.
A founder of the Company entered into an agreement pursuant to which he was
entitled to borrow up to $25,000, drawn at a maximum rate of $5,000 per month,
beginning April 1993. Interest accrues on outstanding borrowings at 8% per
annum. The outstanding balance was $11,796 at March 31, 1996, $13,736 at
December 31, 1995 and $21,499 at December 31, 1994. The loan is currently being
repaid at $646 per month. The loan is secured by 13,334 shares of the founder's
common stock in the Company.
See note 7 for further discussion of transactions with related parties.
F-9
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(5) LINE OF CREDIT AND LOANS PAYABLE TO BANK
The Company obtained an $18,000 loan from a bank for the purchase of
equipment in December 1993. The loan bears interest at the rate of 9.50% per
annum. Principal and interest payments of approximately $560 per month commenced
in January 1994 and continue for a period of 36 months. As of March 31, 1996,
December 31, 1995 and 1994, the balance of this loan was $5,349, $6,866 and
$12,555, respectively. The loan is secured by cash on deposit with such bank,
which is reflected as restricted cash in the accompanying balance sheet.
The Company obtained a $57,000 loan from a bank for the purchase of
equipment in March 1994. The loan bears interest at the rate of 8% per annum.
Principal and interest payments of approximately $1,156 per month commenced in
April 1994 and continue for a period of 60 months. As of March 31, 1996,
December 31, 1995 and 1994, the balance of this loan was $36,900, $39,595 and
$49,847, respectively. The loan is secured by a certificate of deposit with such
bank, which is reflected as restricted cash in the accompanying balance sheet.
In September 1994, the Company obtained a $1,500,000 secured line of credit
with the Bank of New York. In June 1995, the Company increased this secured line
of credit from $1,500,000 to $2,500,000. Advances under the line of credit bear
interest at a rate of 1% above the rate earned on the collateral. All
obligations of the Company with respect to this line of credit are secured
pursuant to a security agreement granting the bank a first and prior security
interest in the Company's negotiable certificates of deposit held by the bank.
The right to borrow additional amounts under the line of credit expires on June
30, 1996. The amounts outstanding are payable on demand.
Advances under this line of credit at March 31, 1996, December 31, 1995 and
1994 totaled $2,380,000, $2,380,000 and $187,000, respectively. The advances are
secured by certificates of deposit with varying maturities which are reflected
as restricted cash in the accompanying balance sheet.
The aggregate maturities of the line of credit and loans payable to the
bank for each of the five years subsequent to December 31, 1995 are as follows:
1996, $2,397,459; 1997, $11,787; 1998, $12,766; 1999, $4,449; 2000, $0.
(6) INCOME TAXES
Deferred tax assets of approximately $2,638,000, $2,621,000 and $2,033,000
at March 31, 1996, December 31, 1995 and 1994, respectively, relate principally
to tax net operating loss carryforwards of $5,434,000, $5,391,000 and $4,333,500
and research credit carryforwards of $431,400, $431,400 and $290,400 at March
31, 1996, December 31, 1995 and 1994, respectively. An offsetting valuation
allowance has been established for the full amount of the deferred tax assets to
reduce such assets to zero, as a result of the significant uncertainty regarding
their ultimate realization. The aggregate valuation allowance increased $17,000,
$588,000 and $455,000 during the periods ended March 31, 1996, December 31, 1995
and 1994, respectively.
The Company's net operating loss carryforwards and research and development
tax credit carryforwards noted above expire in various years from 2007 to 2011.
The Company's ability to utilize such net operating loss and research and
development tax credit carryforwards is subject to certain limitations due to
ownership changes, as defined by rules enacted with the Tax Reform Act of 1986.
The Company is subject to New York State and City tax on capital.
(7) PREFERRED STOCK PURCHASE AND RESEARCH COLLABORATION AND LICENSE AGREEMENTS
In September 1995, the Company increased its authorized capitalization to
7,321,429 shares of Series B Convertible Preferred Stock ("Series B Preferred
Stock"), par value $.001 per share, and 35,000,000 shares of Common Stock, par
value $.01 per share. The authorized capitalization of the Series A Preferred
Stock was
F-10
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(7) PREFERRED STOCK PURCHASE AND RESEARCH COLLABORATION AND LICENSE
AGREEMENTS--(CONTINUED)
14,879,651 shares at December 31, 1995. As of December 31, 1995, the Company had
reserved 4,959,899 shares of Common Stock for the conversion of the Series A
Preferred Stock and 2,440,477 shares of Common Stock for the conversion of the
Series B Preferred Stock.
On July 30, 1993, the Company issued 14,879,651 shares of Series A
Preferred Stock, $.001 par value, at a purchase price of $.457 per share for
aggregate consideration of $4,800,000 in cash and $2,000,000 in satisfaction of
indebtedness to a stockholder, before issuance costs of approximately $200,000.
On July 26, 1994, the Company entered into a Preferred Stock Purchase
Agreement with Bristol-Myers Squibb Company ("BMS") and issued 3,571,429 shares
of Series B Preferred Stock to BMS at a purchase price of $3.50 per share for
aggregate consideration of $12,500,000, before issuance costs of approximately
$73,000.
In accordance with a related Research Collaboration and License Agreement,
BMS has agreed to provide funding to the Company for the conduct of research
programs in the amount of up to $4,000,000 each year during the term of the
research programs. For the year ended December 31, 1995, the Company received
$3,354,619 in cash and recorded revenue of $4,000,000 pursuant to this
agreement. For the year ended December 31, 1994, the Company received $2,000,000
pursuant to this agreement and recorded revenue of $1,354,619 and deferred
revenue of $645,381. In August and September 1995, the Company issued an
aggregate of 1,250,000 shares of Series B Preferred Stock at $4.00 per share for
$5,000,000 in cash to BMS upon the Company's achievement of a research
milestone. 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 November 1995, the Company entered into a Preferred Stock Purchase
Agreement with Physica B.V., a subsidiary of Solvay Duphar B.V. ("Solvay
Duphar"), and issued 2,500,000 shares of Series B Preferred Stock at a purchase
price of $4.00 per share for aggregate consideration of $10,000,000 before
issuance costs of approximately $155,000.
In accordance with a related Research Collaboration and License Agreement,
Solvay Duphar will provide funding to the Company for the conduct of research
programs in an amount of up to $2,500,000 each year, adjusted for inflation,
during the term of the research programs. For the year ended December 31, 1995,
the Company received and recorded revenue of $417,809 pursuant to this
agreement. In addition, Solvay 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. No such payments
were received during 1995. 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 Duphar upon the achievement by the Company of certain drug
development milestones and to pay Solvay Duphar royalties on the sale of such
drugs.
The holders of Series A and Series B Preferred Stock are entitled to
receive non-cumulative cash dividends on the same basis as dividends declared on
the common stock. Holders also have one vote per share of stock, and can request
that their shares be registered at any time after the earlier of an initial
public offering or three years after the closing of the respective Preferred
Stock Purchase Agreement, if certain conditions are met.
The holders of Series A and Series B Preferred Stock have the right to
convert such shares into Common Stock; the current conversion rate (assuming the
consummation of the one-for-three reverse stock split of the Company's Common
Stock to be effected immediately prior to closing of this offering) is three
shares of Series A or Series B Preferred Stock are convertible into one share of
Common Stock. Should the Company file a public offering for its Common Stock at
any price in excess of $4.14 per share, resulting in aggregate proceeds to the
Company of at least $7,500,000, the Series A and Series B Preferred Stock will
automatically convert to Common Stock at the then applicable conversion rate.
The conversion price is subject to certain anti-dilution provisions.
F-11
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(8) STOCK OPTIONS
The 1993 Stock Option Plan ("Plan") was adopted in January 1993. The 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 this
Plan may be either incentive stock options or nonqualified options. An aggregate
of 666,667 common shares were reserved for issuance under this Plan.
Options granted under this Plan expire no later than ten years from the
date of grant. The option price is required to be at least 100% and 85% of the
fair market value on the date of grant as determined by the Board of Directors
for incentive stock options and nonqualified options, respectively. The options
generally become exercisable according to a schedule of vesting as determined by
the Compensation Committee of the Board of Directors. The schedule prescribes
the date or dates on which the options become exercisable, and may provide that
the option rights accrue or become exercisable in installments over a period of
months or years.
Activity under the Plan through March 31, 1996 is as follows:
OPTIONS OUTSTANDING
--------------------------
NUMBER OPTION
OF PRICE RANGE
SHARES PER SHARE
------- -----------
Balance at December 31, 1992 ............ -- $ --
1993 activity:
Granted ................................. 453,346 1.37-3.51
Exercised ............................... (1,667) 1.50
Cancelled ............................... (5,000) 1.50
------- ---------
Balance at December 31, 1993 ............ 446,679 1.37-3.51
------- ---------
1994 activity:
Granted ................................. 115,490 1.50
Exercised ............................... (3,334) 1.37-3.51
Cancelled ............................... (10,334) 1.37-3.51
------- ---------
Balance at December 31, 1994 ............ 548,501 1.37-3.51
------- ---------
1995 activity:
Granted ................................. 124,860 2.25-3.00
Exercised ............................... (10,000) 1.37-1.50
Cancelled ............................... (11,668) 1.37-1.50
------- ---------
Balance at December 31, 1995 ............ 651,693 1.37-3.51
------- ---------
1996 activity (unaudited):
Granted ................................. -- --
Exercised ............................... (8,334) 1.37
Cancelled ............................... (625) --
------- ---------
Balance at March 31, 1996 (unaudited) ... 642,734 $1.37-3.51
======= =========
At March 31, 1996 and December 31, 1995, options pursuant to the Plan to
purchase 422,422 and 426,159 shares, respectively, were exercisable.
F-12
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(8) STOCK OPTIONS--(CONTINUED)
The Company entered into stock option agreements not pursuant to the Plan
with certain 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, 1995, an
aggregate of 475,001 shares of common stock were reserved for issuance pursuant
to stock option agreements.
In September 1995, the Board of Directors granted to each director then in
office a 30-day option to purchase 8,334 shares of Common Stock at an exercise
price of $2.25 per share. In October 1995, six directors exercised their options
and purchased 8,334 shares each of Common Stock at $2.25 per share.
Activity for all of the above grants through March 31, 1996 is as follows:
OPTIONS OUTSTANDING
--------------------------
NUMBER OPTION
OF PRICE RANGE
SHARES PER SHARE
------- ----------
Balance at December 31, 1993 ............ -- $ --
1994 activity:
Granted ................................. 333,334 1.50
Exercised ............................... -- --
Cancelled ............................... -- --
------- ---------
Balance at December 31, 1994 ............ 333,334 1.50
------- ---------
1995 activity:
Granted ................................. 379,639 2.25-3.60
Exercised ............................... (50,004) 2.25
Cancelled ............................... (16,668) --
------- ---------
Balance at December 31, 1995 ............ 646,301 1.50-3.60
------- ---------
1996 activity (unaudited):
Granted ................................. -- --
Exercised ............................... -- --
Cancelled ............................... -- --
------- ---------
Balance at March 31, 1996 ............... 646,301 $1.50-3.60
======= =========
At March 31, 1996 and December 31, 1995, options to purchase 83,334 and no
shares, respectively, under such stock option agreements were exercisable.
F-13
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(9) LICENSE AND SPONSORED RESEARCH AGREEMENTS
The Company has entered into several agreements with third parties as part
of its program to develop novel classes of therapeutics that target cellular
signal transduction pathways. 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 for the years ended December 31, 1995, 1994 and 1993, and the period
from January 23, 1992 (date of inception) to December 31, 1995 amounted to
approximately $250,000, $236,000, $57,000 and $593,000, respectively.
(10) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include the following:
DECEMBER 31,
------------------- MARCH 31,
1995 1994 1996
-------- -------- --------
(UNAUDITED)
Accrued rent .................................. $130,845 $ -- $114,489
Accrued bonuses ............................... 100,000 -- --
Other accrued expenses and current liabilities 190,310 54,166 145,004
-------- -------- --------
$421,155 $ 54,166 $259,493
======== ======== ========
(11) COMMITMENTS AND CONTINGENCIES
Lease Commitments
In October 1994, the Company entered into a sublease agreement with Union
Carbide Corporation to sublease approximately 18,400 rentable square feet of
laboratory/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 is being amortized so as to produce a
level amount of rent expense over the life of the lease. The unamortized portion
has been included in accounts payable and accrued expenses in the accompanying
balance sheet. In addition, the Company delivered an irrevocable letter of
credit to Union Carbide in the amount of $40,000 as security for the Company's
performance of its obligations under this lease. The letter of credit is secured
by a one-year certificate of deposit, which is reflected as restricted cash in
the accompanying balance sheet. The Company has the option to lease these
facilities directly from the landlord for a five-year period commencing January
1, 1998 and a further option to renew such lease for a five-year period
commencing on January 1, 2003.
In October 1994, the Company entered into an agreement to sublease
approximately 4,567 rentable square feet of laboratory/office space on a
month-to-month basis in Tarrytown, New York. In December 1994, the Company
entered into an agreement to lease approximately 3,299 rentable square feet of
office space and approximately 1,265 square feet of storage space in Tarrytown,
New York. On May 15, 1995, each of these agreements terminated with the
exception of the agreement for storage space which expires in December 1997.
F-14
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(11) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
In November 1994, the Company entered into an agreement to sublease 2,989
square feet of laboratory/office space, in Lakewood, Colorado, from Colorado
Biomedical Venture Center, Inc. ("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.
Future minimum lease payments are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1996 .............................. $ 575,782
1997 .............................. 539,867
----------
$1,115,649
==========
Until October 1994, the Company did not have a long-term rental agreement.
Rent expense for the years ended December 31, 1995, 1994 and 1993, and the
period from January 23, 1992 (date of inception) to December 31, 1995 amounted
to approximately $434,600, $100,500, $72,000 and $614,300, respectively.
In May 1996, the Company amended its sublease agreement with Union Carbide
Corporation and the landlord to sublease an additional 7,376 square feet of
laboratory/office space in Tarrytown, New York and agreed to sublease an
additional 535 square feet under its sublease with CBVC. Future minimum lease
payments for the years ending December 31, 1996 and 1997 of $107,945 and
$208,066, respectively, relating to these amendments are not included in the
amounts enumerated above.
Employment Agreements
The Company entered into a two-year employment agreement with its Chief
Executive Officer effective as of December 12, 1995. Pursuant to this agreement,
the Chief Executive Officer receives a minimum annual base salary of $225,000,
is guaranteed an annual bonus equal to 20% of his base salary, and is eligible
to receive an additional annual bonus at the discretion of the Compensation
Committee of the Board of Directors. The Chief Executive Officer and certain
other officers are entitled to termination benefits under certain circumstances.
Consulting Agreements
The Company has entered into various consulting agreements, the terms of
which do not exceed four years. 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.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM ENDED PERIOD FROM
JANUARY 23, 1992 MARCH 31, JANUARY 23, 1992
(DATE OF INCEPTION) TO ---------------- (DATE OF INCEPTION) TO
1995 1994 1993 DECEMBER 31, 1995 1996 1995 MARCH 31, 1996
------- ------- ---- --------------------- ------- ------ ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash payments for:
Interest ............. $77,866 $ 5,063 $ -- $82,929 $37,855 $6,328 $120,784
======= ======= ==== ======= ======= ====== ========
Income taxes ......... $21,694 $36,994 $729 $81,312 $17,580 $6,470 $ 98,892
======= ======= ==== ======= ======= ====== ========
</TABLE>
In 1993, in connection with the issuance of the Series A Preferred Stock,
$2 million in debt to a stockholder was canceled as consideration for issuance
of 4,376,368 shares of Series A Preferred Stock. The remaining debt of
F-15
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
$408,648 was converted into a long-term note payable at that time. In December
1994, such debt was settled in full for a cash payment of $250,000.
In 1994 and 1993, the Company obtained financing of $57,000 and $18,000,
respectively, for the purchase of equipment.
(13) RISKS AND UNCERTAINTIES
The Company is at an early stage of development and therefore faces certain
risks and uncertainties which are present in a young 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 dependent on its collaborative partners to fund a substantial portion of its
activities over the next several years. To date, the Company has entered into
two collaborative arrangements, however there can be no assurance that the
Company will be able to establish additional collaborative arrangements, or that
these contracts will be renewed, or that any renewal will be made on terms as
favorable to the Company as those contained in the existing contracts.
Commencing in July 1998, the research provisions of the Solvay Duphar contract
may be terminated for nonperformance under certain circumstances, which
termination would result in the Company losing its research funding from such
collaborative partner. The termination or expiration of the research provisions
of these contracts, or failure by BMS or Solvay Duphar to provide research
funding to the Company in breach of its obligations under its contract, could
have a material adverse effect on the Company.
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, 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.
(14) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" was issued which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain intangibles to be disposed of. SFAS
No. 121 requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. SFAS No. 121 must be implemented by the Company no later than the
year ended December 31, 1996. The adoption of SFAS No. 121 is not expected to
have material impact on the Company's financial position or operating results.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued which establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, SFAS No. 123 permits the Company to
continue to measure compensation costs for its stock option plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". If the Company
elects to remain with its current accounting, in 1996 the Company must make pro
forma disclosures of 1995 and 1996 net income (loss) and earnings (loss) per
share as if the fair value based method of accounting had been applied. The
Company has not yet determined the valuation method it will employ or the effect
on operating results of implementing SFAS No. 123. In addition, SFAS No. 123
requires that transactions whereby the Company issues its equity instruments to
acquire goods or services from nonemployees entered into after December 15, 1995
must be accounted for based on the fair value
F-16
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 AND MARCH 31, 1996
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured.
(15) SUBSEQUENT EVENTS
Proposed Public Offering of Common Stock
On May 10, 1996, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for an
initial public offering of the Company's Common Stock. If the offering is
consummated under the terms presently anticipated, all outstanding shares of the
Series A and Series B Preferred Stock will be converted into an aggregate of
7,400,376 shares of Common Stock, and the entire class of Convertible Preferred
Stock of the Company will be canceled and withdrawn from the authorized capital
stock of the Company. As a result, upon completion of the offering, the
Company's authorized capital stock will consist of 35,000,000 shares of Common
Stock.
Reverse Stock Split
On May 10, 1996, the Board of Directors authorized a one-for-three reverse
Common Stock split and changed the par value of the Common Stock to $.01 from
$.001 which will be effected immediately prior to closing of the proposed
initial public offering. All Common Stock data have been restated to give effect
to this reverse stock split and change in par value for all periods presented.
F-17
<PAGE>
DRUG DISCOVERY PROCESS
[GRAPHIC REPRESENTATION OF DRUG DISCOVERY PROCESS]
GENE IDENTIFICATION
Informatics
Cloning
Sequencing
Orphan receptors
GENE FUNCTION
Yeast genetics
Human genetics
Self Selecting Combinatorial
Library (SSCL)
Ligand identification
TARGET VALIDATION
Signal transduction
technology
BIOASSAY & SCREENING
Yeast systems
Mammalian cell systems
Cell free systems
Animal models
Robotics
CHEMISTRY
Automated synthesis
Combinatorial chemistry
Rational drug design
Medicinal chemistry
THERAPEUTIC PROGRAM AREAS
Inflammation
Immunology
Cancer
Cardiovascular
Central Nervous System
Gastroenterology
Endocrinology
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 5
Use of Proceeds ........................................................... 13
Dividend Policy ........................................................... 13
Capitalization ............................................................ 14
Dilution .................................................................. 15
Selected Financial Data ................................................... 16
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................................................... 17
Business .................................................................. 20
Management ................................................................ 35
Principal Stockholders .................................................... 44
Certain Transactions ...................................................... 46
Description of Capital Stock .............................................. 47
Shares Eligible for Future Sale ........................................... 48
Underwriting .............................................................. 50
Legal Matters ............................................................. 51
Experts ................................................................... 51
Additional Information .................................................... 51
Index to Financial Statements ............................................. F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
<PAGE>
================================================================================
2,750,000 SHARES
[LOGO]
CADUS
PHARMACEUTICAL
CORPORATION
COMMON STOCK
----------
PROSPECTUS
----------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
GENESIS MERCHANT GROUP
SECURITIES
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee and the National Association of Securities Dealers, Inc. filing fee.
PAYABLE BY
REGISTRANT
----------
SEC registration fee .......................................... $ 13,631
National Association of Securities Dealers, Inc. filing fee ... 4,453
Blue Sky fees and expenses .................................... 15,000
Nasdaq listing fee ............................................ 46,205
Accounting fees and expenses .................................. 100,000
Legal fees and expenses ....................................... 225,000
Printing and engraving expenses ............................... 75,000
Registrar and Transfer Agent's fees ........................... 1,000
Miscellaneous fees and expenses ............................... 89,711
--------
Total ....................................................... $570,000
========
ITEM 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article Twelfth of the
Registrant's Certificate of Incorporation, as amended, and Section 6.4 of the
Registrant's By-Laws provides for indemnification to the fullest extent
authorized by the Delaware General Corporation Law. The Registrant has also
entered into agreements with each of its directors that provide forthe
indemnification of and the advancement of expenses to such persons to the
greatest extent permitted by Delaware law.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant where
indemnification will be required or permitted. The Registrant is not aware of
any threatened litigation or proceeding that may result in a claim for
indemnification by any director, officer, employee or other agent.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant and its directors and officers for certain
liabilities, including liabilities arising under the Act.
ITEM 15. Recent Sales of Unregistered Securities
Within the past three years, the Registrant has sold and issued the
following securities that were not registered under the Act:
(1) On July 30, 1993, the Registrant issued an aggregate of 14,879,651
shares of its Series A Preferred Stock to investors at a price of $0.457
per share for an aggregate consideration of $6,800,000.50.
(2) On July 26, 1994, the Registrant issued 3,571,429 shares of its
Series B Preferred Stock to Bristol-Myers at a price of $3.50 per share for
an aggregate consideration of $12,500,001.00.
(3) In August 1995 and September 1995, the Registrant issued an
aggregate of 1,250,000 shares of its Series B Preferred Stock at a price of
$4.00 per share to Bristol-Myers for an aggregate consideration of
$5,000,000.00.
(4) In September 1995, the Board of Directors granted to each director
then in office a 30-day option to purchase 8,334 shares of Common Stock at
an exercise price of $2.25 per share. In October 1995, six directors
II-1
<PAGE>
exercised their options and purchased an aggregate of 50,000 shares of
Common Stock at $2.25per share.
(5) On November 1, 1995, the Registrant issued 2,500,000 shares of its
Series B Preferred Stock at a price of $4.00 per share to Physica B.V. for
an aggregate consideration of $10,000,000.00.
(6) At April 30, 1996, options to acquire 23,335 shares of the
Registrant's Common Stock had been exercised pursuant to the Registrant's
1993 Stock Option Plan. The exercise price of such options ranged from
$1.371 to $3.51.
The sale and issuance of securities in the transactions described above in
paragraphs (1) through (5) were deemed to be exempt from registration under the
Act by virtue of Section 4(2) thereof or Regulation D thereunder as transactions
not involving any public offering. The purchasers of the above-described shares
represented their intention to acquire the shares for investment only and not
with a view to the distribution thereof. Appropriate legends were affixed to the
certificates representing securities issued in such transactions. Similar
representations of investment intent were obtained and similar legends imposed
in connection with any subsequent sales of any such securities. All purchasers
had adequate access, through employment or other relationships, to information
about the Registrant. No registration was required with respect to the grants of
the options described above in paragraph (6) (and other options granted under
the Registrant's 1993 Stock Option Plan, 1996 Incentive Plan or otherwise)
because no sale under Section 2(3) of the Act was involved; however, sales
pursuant to the exercise of options granted under the 1993 Stock Option Plan,
including all sales described above in paragraph (6), were deemed to be exempt
from registration under the Act by virtue of Rule 701 thereunder (note that no
shares have yet been issued pursuant to the exercise of options granted under
the 1996 Incentive Plan.)
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1.1 Form of Underwriting Agreement.
3.1# Certificate of Incorporation of Cadus Pharmaceutical Corporation,
as amended.
3.2# Proposed Certificate of Amendment of Certificate of Incorporation of
Cadus Pharmaceutical Corporation, as amended.
3.3# Proposed Restated Certificate of Incorporation of Cadus
Pharmaceutical Corporation.
3.4# By-laws of Cadus Pharmaceutical Corporation, as amended.
4.1 Specimen of Common Stock Certificate of Cadus Pharmaceutical
Corporation.
5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP.
10.1# Form of Indemnification Agreement entered into between Cadus
Pharmaceutical Corporation and its directors and officers.
10.2# 1993 Cadus Pharmaceutical Corporation Stock Option Plan.
10.3# 1996 Cadus Pharmaceutical Corporation Incentive Plan.
10.4# Form of Agreement Regarding Assignment of Inventions,
Confidentiality and Non-Competition.
10.5# The 401(k) Plan of Cadus Pharmaceutical Corporation.
10.6# Employment Agreement between Jeremy M. Levin and Cadus
Pharmaceutical Corporation dated December 12, 1995.
10.7# Preferred Stock Purchase Agreement dated as of July 30, 1993 between
Cadus Pharmaceutical Corporation and the purchasers of Series A
Preferred Stock (exhibits have been omitted and Cadus Pharmaceutical
Corporation agrees to furnish copies thereof to the Commission upon
its request), together with the First and Second Amendments thereto
dated as of July 26, 1994 and October 31, 1995, respectively.
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.8# Preferred Stock Purchase Agreement dated as of July 26, 1994 between
Cadus Pharmaceutical Corporation and Bristol-Myers Squibb Company
("Bristol-Myers") concerning Series B Preferred Stock (exhibits have
been omitted and Cadus Pharmaceutical Corporation agrees to furnish
copies thereof to the Securities and Exchange Commission upon its
request), together with the First Amendment thereto dated as of
October 31, 1995.
10.9#(+) Preferred Stock Purchase Agreement dated as of November 1, 1995
between Cadus Pharmaceutical Corporation and Physica B.V. concerning
Series B Preferred Stock (exhibits have been omitted and Cadus
Pharmaceutical Corporation agrees to furnish copies thereof to the
Securities and Exchange Commission upon its request).
10.10#(+) Research Collaboration and License Agreement, dated as of July 26,
1994, between Cadus Pharmaceutical Corporation and Bristol-Myers.
10.11#(+) Screening and Option Agreement, dated as of July 26, 1994, between
Cadus Pharmaceutical Corporation and Bristol-Myers.
10.12#(+) Research Collaboration and License Agreement, dated as of November
1, 1995, between Cadus Pharmaceutical Corporation and Solvay Duphar
B.V.
10.13# Voting Agreement, dated as of April 26, 1995, among Cadus
Pharmaceutical Corporation and certain stockholders, together with
the First Amendment thereto dated as of November 1, 1995.
10.14# Co-Sale Agreement, dated as of July 30, 1993, among Cadus
Pharmaceutical Corporation and certain stockholders.
10.15# Sublease Agreement, dated as of October 19, 1994, between Cadus
Pharmaceutical Corporation and Union Carbide Corporation.
10.16# Lease, dated as of June 20, 1995, between Cadus Pharmaceutical
Corporation and Keren Limited Partnership.
10.17# Letter, dated September 28, 1994 from The Bank of New York to Cadus
Pharmaceutical Corporation confirming a $1,500,000 secured line of
credit; Promissory Note, dated January 9, 1995, issued by Cadus
Pharmaceutical Corporation to The Bank of New York in the amount of
$1,500,000 and a letter dated June 22, 1995 from The Bank of New
York to Cadus Pharmaceutical Corporation increasing the secured line
of credit to $2,500,000.
10.18#(+) Consulting Agreement between Cadus Pharmaceutical Corporation and
James R. Broach, dated February 1, 1994.
10.19#(+) Amended and Restated License Agreement between Cadus Pharmaceutical
Corporation and Duke University, dated May 10, 1994.
10.20#(+) License Agreement between Cadus Pharmaceutical Corporation and
National Jewish Center for Immunology and Respiratory Medicine dated
November 1, 1994.
10.21#(+) Stock Option Agreement, dated as of November 1, 1994, between Cadus
Pharmaceutical Corporation and John C. Cambier.
10.22#(+) Stock Option Agreement, dated as of November 1, 1994, between Cadus
Pharmaceutical Corporation and Gary L. Johnson.
10.23#(+) Consulting Agreement, dated as of November 1, 1994, between Cadus
Pharmaceutical Corporation and John C. Cambier.
10.24#(+) Consulting Agreement, dated as of November 1, 1994, between Cadus
Pharmaceutical Corporation and Gary L. Johnson.
10.25#(+) Research Collaboration Agreement, dated as of January 9, 1995,
between Cadus Pharmaceutical Corporation and Houghten
Pharmaceuticals, Inc., together with the Amendment thereto dated as
of March 1996.
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.26#(+) Stock Option Agreement, dated as of December 18, 1995, between
Cadus Pharmaceutical Corporation and James R. Broach.
10.27# Waiver, dated May 17, 1996, of Section 1.05 of the Preferred Stock
Purchase Agreement dated as of July 26, 1994 between Cadus
Pharmaceutical Corporation and Bristol-Myers Squibb Company, as
amended by the First Amendment thereto dated as of October 31, 1995.
10.28# Waiver, dated May 17, 1996, of Section 1.04 of the Preferred Stock
Purchase Agreement dated as of November 1, 1995 between Cadus
Pharmaceutical Corporation and Physica B.V.
11 Computation of Pro Forma Net Loss per Share
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Morrison Cohen Singer & Weinstein, LLP (included in
Exhibit 5.1).
23.3 Consent of LaHive & Cockfield.
24# Powers of Attorney of the Board of Directors.
27# Financial Data Schedule
- ----------
# Previously filed.
(+) The Registrant has requested confidential treatment of certain portions of
these agreements.
ITEM 17. Undertakings
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on July 3, 1996.
CADUS PHARMACEUTICAL CORPORATION
BY /s/ JEREMY M. LEVIN
-------------------------------------
JEREMY M. LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ JEREMY M. LEVIN
- ------------------------ President and Chief Executive July 3, 1996
JEREMY M. LEVIN Officer (Principal Executive
Officer) and Chairman of
the Board of Directors
/s/ JAMES S. RIELLY
- ------------------------ Director of Finance, Controller, July 3, 1996
JAMES S. RIELLY Treasurer and Secretary (Principal
Financial and Accounting Officer)
- ------------------------ Director July , 1996
CARL C. ICAHN
- ------------------------ Director July , 1996
THEODORE ALTMAN
*
- ------------------------ Director July 3, 1996
HAROLD FIRST
*
- ------------------------ Director July 3, 1996
PETER LIEBERT
*
- ------------------------ Director July 3, 1996
ROBERT MITCHELL
*
- ------------------------ Director July 3, 1996
LAWRENCE MUSCHEK
- ------------------------ Director July , 1996
MARK H. RACHESKY
*
- ------------------------ Director July 3, 1996
WILLIAM A. SCOTT
*
- ------------------------ Director July 3, 1996
THOMAS E. SHENK
*
- ------------------------ Director July 3, 1996
SAMUEL D. WAKSAL
*
- ------------------------ Director July 3, 1996
JACK G. WASSERMAN
- ----------
*By /s/ JEREMY M. LEVIN
------------------------------
JEREMY M. LEVIN
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
1.1 Form of Underwriting Agreement.
3.1# Certificate of Incorporation of Cadus Pharmaceutical
Corporation, as amended.
3.2# Proposed Certificate of Amendment of Certificate of
Incorporation of Cadus Pharmaceutical Corporation, as
amended.
3.3# Proposed Restated Certificate of Incorporation of Cadus
Pharmaceutical Corporation.
3.4# By-laws of Cadus Pharmaceutical Corporation, as amended.
4.1 Specimen of Common Stock Certificate of Cadus
Pharmaceutical Corporation.
5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP.
10.1# Form of Indemnification Agreement entered into between
Cadus Pharmaceutical Corporation and its directors and
officers.
10.2# 1993 Cadus Pharmaceutical Corporation Stock Option Plan.
10.3# 1996 Cadus Pharmaceutical Corporation Incentive Plan.
10.4# Form of Agreement Regarding Assignment of Inventions,
Confidentiality and Non-Competition.
10.5# The 401(k) Plan of Cadus Pharmaceutical Corporation.
10.6# Employment Agreement between Jeremy M. Levin and Cadus
Pharmaceutical Corporation dated December 12, 1995.
10.7# Preferred Stock Purchase Agreement dated as of July 30,
1993 between Cadus Pharmaceutical Corporation and the
purchasers of Series A Preferred Stock (exhibits have been
omitted and Cadus Pharmaceutical Corporation agrees to
furnish copies thereof to the Commission upon its
request), together with the First and Second Amendments
thereto dated as of July 26, 1994 and October 31, 1995,
respectively.
10.8# Preferred Stock Purchase Agreement dated as of July 26,
1994 between Cadus Pharmaceutical Corporation and
Bristol-Myers Squibb Company ("Bristol-Myers") concerning
Series B Preferred Stock (exhibits have been omitted and
Cadus Pharmaceutical Corporation agrees to furnish copies
thereof to the Securities and Exchange Commission upon its
request), together with the First Amendment thereto dated
as of October 31, 1995.
10.9#(+) Preferred Stock Purchase Agreement dated as of November 1,
1995 between Cadus Pharmaceutical Corporation and Physica
B.V. concerning Series B Preferred Stock (exhibits have
been omitted and Cadus Pharmaceutical Corporation agrees
to furnish copies thereof to the Securities and Exchange
Commission upon its request).
10.10#(+) Research Collaboration and License Agreement, dated as of
July 26, 1994, between Cadus Pharmaceutical Corporation
and Bristol-Myers.
10.11#(+) Screening and Option Agreement, dated as of July 26, 1994,
between Cadus Pharmaceutical Corporation and
Bristol-Myers.
10.12#(+) Research Collaboration and License Agreement, dated as of
November 1, 1995, between Cadus Pharmaceutical Corporation
and Solvay Duphar B.V.
10.13# Voting Agreement, dated as of April 26, 1995, among Cadus
Pharmaceutical Corporation and certain stockholders,
together with the First Amendment thereto dated as of
November 1, 1995.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
10.14# Co-Sale Agreement, dated as of July 30, 1993, among Cadus
Pharmaceutical Corporation andcertain stockholders.
10.15# Sublease Agreement, dated as of October 19, 1994, between
Cadus Pharmaceutical Corporation and Union Carbide
Corporation.
10.16# Lease, dated as of June 20, 1995, between Cadus
Pharmaceutical Corporation and Keren Limited Partnership.
10.17# Letter, dated September 28, 1994 from The Bank of New York
to Cadus Pharmaceutical Corporation confirming a
$1,500,000 secured line of credit; Promissory Note, dated
January 9, 1995, issued by Cadus Pharmaceutical
Corporation to The Bank of New York in the amount of
$1,500,000 and a letter dated June 22, 1995 from The Bank
of New York to Cadus Pharmaceutical Corporation increasing
the secured line of credit to $2,500,000.
10.18#(+) Consulting Agreement between Cadus Pharmaceutical
Corporation and James R. Broach, dated February 1, 1994.
10.19#(+) Amended and Restated License Agreement between Cadus
Pharmaceutical Corporation and Duke University, dated May
10, 1994.
10.20#(+) License Agreement between Cadus Pharmaceutical Corporation
and National Jewish Center for Immunology and Respiratory
Medicine dated November 1, 1994.
10.21#(+) Stock Option Agreement, dated as of November 1, 1994,
between Cadus Pharmaceutical Corporation and John C.
Cambier.
10.22#(+) Stock Option Agreement, dated as of November 1, 1994,
between Cadus Pharmaceutical Corporation and Gary L.
Johnson.
10.23#(+) Consulting Agreement, dated as of November 1, 1994,
between Cadus Pharmaceutical Corporation and John C.
Cambier.
10.24#(+) Consulting Agreement, dated as of November 1, 1994,
between Cadus Pharmaceutical Corporation and Gary L.
Johnson.
10.25#(+) Research Collaboration Agreement, dated as of January 9,
1995, between Cadus Pharmaceutical Corporation and
Houghten Pharmaceuticals, Inc., together with the
Amendment thereto dated as of March 1996.
10.26#(+) Stock Option Agreement, dated as of December 18, 1995,
between Cadus Pharmaceutical Corporation and James R.
Broach.
10.27# Waiver, dated May 17, 1996, of Section 1.05 of the
Preferred Stock Purchase Agreement dated as of July 26,
1994 between Cadus Pharmaceutical Corporation and
Bristol-Myers Squibb Company, as amended by the First
Amendment thereto dated as of October 31, 1995.
10.28# Waiver, dated May 17, 1996, of Section 1.04 of the
Preferred Stock Purchase Agreement dated as of November 1,
1995 between Cadus Pharmaceutical Corporation and Physica
B.V.
11 Computation of Pro Forma Net Loss per Share
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Morrison Cohen Singer & Weinstein, LLP (included in
Exhibit 5.1).
23.3 Consent of LaHive & Cockfield.
24# Powers of Attorney of the Board of Directors.
27# Financial Data Schedule
- ----------
# Previously filed.
(+) The Registrant has requested confidential treatment of certain portions of
these agreements.
CADUS PHARMACEUTICAL CORPORATION
2,750,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
________ __, 1996
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES
GENESIS MERCHANT GROUP SECURITIES
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Cadus Pharmaceutical Corporation, a Delaware corporation (herein called the
Company), proposes to issue and sell 2,750,000 shares of its authorized but
unissued Common Stock, $.01 par value (herein called the Common Stock) (said
shares of Common Stock being herein called the Underwritten Stock). The Company
also proposes to grant to the Underwriters (as hereinafter defined) an option to
purchase up to 412,500 additional shares of Common Stock (herein called the
Option Stock and with the Underwritten Stock herein collectively called the
Stock). The Common Stock is more fully described in the Registration Statement
and the Prospectus hereinafter mentioned.
The Company hereby confirms its agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-4441), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the
- --------
1 Plus an option to purchase from the Company up to 412,500 additional shares to
cover over-allotments.
<PAGE>
Commission) heretofore filed by the Company with the Commission have been
delivered to you and are identical to the electronically transmitted copies
thereof filed with the Commission pursuant to the Commission's Electronic Data
Gathering, Analysis and Retrieval System (herein called EDGAR), except to the
extent permitted by Regulation S-T.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective. For the
purposes of this Agreement, all references to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement to any of
the foregoing shall be deemed to include the copy filed with the Commission
pursuant to EDGAR.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants as follows:
(a) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus and as being conducted, and is duly qualified
as a foreign corporation and in good standing in all jurisdictions in which
the character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary (except where the failure to
be so qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company).
-2-
<PAGE>
(b) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change, or any development for which the Company has a reasonable
basis to believe may result in a prospective material adverse change, in
the business, properties, financial condition or results of operations of
the Company, whether or not arising from transactions in the ordinary
course of business, other than as set forth in the Registration Statement
and the Prospectus, and since such dates, except in the ordinary course of
business, the Company has not entered into any material transaction not
referred to in the Registration Statement and the Prospectus.
(c) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply as to form, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder. On the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; on the Effective Date, the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Prospectus, and any amendments or supplements thereto, delivered to you
for use in connection with the offering of the Stock is identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T;
provided, however, that none of the representations and warranties in this
subparagraph (c) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters expressly for use in the
Registration Statement or the Prospectus.
(d) The Stock is duly and validly authorized, will be, when issued and
sold to the Underwriters as provided herein, duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and
sale of the Stock as contemplated herein.
(e) The Stock has been duly authorized for listing on The Nasdaq Stock
Market, subject to official notice of issuance.
(f) The Company owns, or possesses adequate rights to use and
sublicense, all patents, patent rights, inventions, trade secrets,
licenses, know-how, proprietary techniques, including processes,
trademarks, service marks, trade names, copyrights and other intellectual
property described or referred to in the Registration Statement and the
Prospectus as owned or used by it or, except as set forth in the
Prospectus, which are necessary for the conduct of its business as now
conducted and as described in the Registration Statement and the
Prospectus. All such patents, patent rights, licenses, trademarks, service
marks and copyrights are (i) valid and enforceable and (ii) not
-3-
<PAGE>
being infringed by any third parties which infringement could, whether
singly or in the aggregate, materially and adversely affect the business,
properties, operations, condition (financial or otherwise), results of
operations, income or business prospects of the Company, as presently being
conducted or as proposed to be conducted in the Prospectus. Except as set
forth in the Prospectus, the Company has no knowledge of, nor has it
received any notice of, infringement of or conflict with asserted rights of
others with respect to any patents, patent rights, inventions, trade
secrets, licenses, know-how, proprietary techniques, including processes
and substances, trademarks, service marks, trade names, copyrights or other
intellectual property which, singly or in the aggregate, is, or is
reasonably likely to be, the subject of an unfavorable decision, ruling or
finding that could have a material adverse affect the business, properties,
financial condition or results of operations of the Company.
(g) The capitalization of the Company is, and upon consummation of the
transactions contemplated hereby will be, as set forth in the Prospectus
under the caption "Capitalization" plus such additional number of shares as
have been issued after March 31, 1996 and prior to the Closing Date
pursuant to the exercise of options granted under the Company's 1993 Stock
Option Plan, 1996 Incentive Plan and the nonstatutory options to purchase
up to 1,289,035 shares of Common Stock granted by the Company prior to the
date hereof (herein called the Options); the Company has no subsidiaries;
on the Closing Date the capital stock of the Company will conform to the
description thereof in the Registration Statement under the caption
"Description of Capital Stock"; on the Closing Date and there are no
outstanding options, warrants or other rights granted to or by the Company
to purchase shares of Common Stock or other securities of the Company, or
any subsidiary, other than as described in the Prospectus, and, to the best
knowledge of the Company, no such option, warrant or other right has been
granted to any person, the exercise of which would cause such person to own
more than five percent of the Common Stock outstanding immediately after
the offering other than as described in the Prospectus. No person or entity
holds a right to require or participate in a registration under the
Securities Act of shares of Common Stock of the Company which right has not
been waived by the holder thereof as of the date hereof with respect to the
registration of shares pursuant to the Registration Statement, and except
as set forth in the Prospectus, no person holds a right to require
registration under the Securities Act of shares of Common Stock of the
Company at any other time. No person or entity has a right of first refusal
or participation with respect to the sale of shares of the Stock by the
Company which right has not been waived by the holder thereof as of the
date hereof.
(h) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement, present
fairly the financial position, results of operations and cash flows of the
Company at the indicated dates and for the indicated periods. Such
financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved, and all adjustments necessary for a fair presentation of results
for such periods have been made. The summary financial and other data
included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the financial
statements presented therein.
-4-
<PAGE>
(i) KPMG Peat Marwick, LLP, which has certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Securities
Act and the Rules and Regulations thereunder.
(j) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
(k) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs in such a manner to
ensure that the Company was not and is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(l) There are no legal or governmental proceedings pending to which
the Company is a party or to which any property or assets of the Company is
the subject which, if determined adversely to the Company, might have a
material adverse effect on the business, properties, financial conditions
or results of operations of the Company; and to the best of the Company's
knowledge, except as set forth in the Prospectus, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
2,750,000 shares of the Underwritten Stock to the several Underwriters and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $____ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
-5-
<PAGE>
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of the shares of the Stock which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase the Option Stock
at the same price per share as the Underwriters shall pay for the Underwritten
Stock. The maximum aggregate number of shares of Option Stock to be sold by the
Company is 412,500. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
-6-
<PAGE>
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New
York, NY 10022, at 7:00 a.m., San Francisco time, on the third business day
after the date of this Agreement, or at such time on such other day, not later
than seven full business days after such third business day, as shall be agreed
upon in writing by the Company and you. The date and hour of such delivery and
payment (which may be postponed as provided in Section 3(b) hereof) are herein
called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Morrison Cohen Singer &
Weinstein, LLP, 750 Lexington Avenue, New York, NY, 10022 at 7:00 a.m., San
Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order by a certified or official bank check or checks in next day
funds (and the Company agrees not to deposit any such check in the bank on which
drawn until the day following the date of its delivery to the Company). Such
payment shall be made upon delivery of certificates for the Stock to you for the
respective accounts of the several Underwriters against receipt therefor signed
by you. Certificates for the Stock to be delivered to you shall be registered in
such name or names and shall be in such denominations as you may request at
least one business day before the Closing Date, in the case of Underwritten
Stock, and at least one business day prior to the purchase thereof, in the case
of the Option Stock. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of Lewco
Securities Corporation, 2 Broadway, New York, New York 10004 on the business day
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prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New
York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as
follows:
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you four
signed copies of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act. The
Registration
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Statement, the Prospectus and any amendments or supplements thereto furnished to
you will be identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act). If applicable, any such document furnished
to you will be identical to the electronically transmitted copy thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
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(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its stockholders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
all costs and expenses incident to (i) the preparation, printing and filing with
the Commission and the National Association of Securities Dealers, Inc. ("NASD")
of the Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus
and of the several documents required by paragraph (c) of this Section 6 to be
so furnished, (iii) the printing of this Agreement and related documents
delivered to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees up to a maximum of $20,000 and disbursements and cost of printing memoranda
for the Underwriters) paid by or for the account of the Underwriters or their
counsel in qualifying the Stock under state securities or blue sky laws and in
the review of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, for a
period of 180 days following the date of the Prospectus, (i) sell, offer,
contract to sell, make any short sale, pledge, transfer or otherwise dispose of,
directly or indirectly, any shares of Common Stock (including any stock
appreciation right or similar right with an exercise or conversion privilege at
a price related to, or derived from, the market price of the Common Stock) or
any securities convertible into or exchangeable or exercisable for shares of
Common Stock or (ii) engage in any hedging transaction with respect to any
shares of Common Stock that may have an impact on the market price of the Common
Stock, whether any such transaction is to be settled by delivery of Common Stock
or such other securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the exercise of
the Options and any other options granted under the stock option plans of the
Company and (C) options to purchase Common Stock granted under the Option Plans.
In addition, the Company agrees that it will not file a Registration Statement
on Form S-8 with respect to shares issued pursuant to stock options until the
expiration of 180 days following the date of the Prospectus.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
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supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(m) The Company will in the future conduct its affairs in such a manner to
ensure that the Company will not be an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, and the rules and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (herein called
the Exchange Act), or the common law or otherwise, and the Company agrees to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary
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Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the Company
with paragraph (c) of Section 6 hereof. The indemnity agreements of the Company
contained in this paragraph (a) and the representations and warranties of the
Company contained in Section 2 hereof shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise and to reimburse each of them for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b) of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or notification to the
party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or
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proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the, legal and
other expenses incurred in connection with the conduct of the defense as
referred to in clause (i) of the proviso to the preceding sentence and (B) the
indemnifying party or parties shall bear such other expenses as it or they have
authorized to be incurred by the indemnified party or parties. If, within a
reasonable time after receipt of the Notice, no Notice of Defense has been
given, the indemnifying party or parties shall be responsible for any legal or
other expenses incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b) of
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in
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respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Stock received by the Company and
the total underwriting discount received by the Underwriters, as set forth in
the table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by each indemnifying party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section-7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
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8. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in hostilities or an escalation of
major hostilities by the United States or the declaration of war or a national
emergency by the United States on or after the date hereof, (ii) any outbreak of
hostilities or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, calamity,
crisis or change in economic or political conditions in the financial markets of
the United States would, in the Underwriters' reasonable judgment, make the
offering or delivery of the Stock impracticable, (iii) suspension of trading in
securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, or The
Nasdaq Stock Market or limitations on prices (other than limitations on hours or
numbers of days of trading) for securities on either such exchange or system,
(iv) the enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of, or commencement of any proceeding
or investigation by, any court, legislative body, agency or other governmental
authority which in the Underwriters' reasonable opinion materially and adversely
affects or will materially or adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by either federal or New York
State authorities or (vi) the taking of any action by any federal, state or
local government or agency in respect of its monetary or fiscal affairs which in
the Underwriters' reasonable opinion has a material adverse effect on the
securities markets in the United States. If this Agreement shall be terminated
pursuant to this Section 8, there shall be no liability of the Company to the
Underwriters and no liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all actual, accountable,
out-of-pocket costs and expenses incident to the performance of the obligations
of the Company under this Agreement, including all actual, accountable,
out-of-pocket costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all their respective obligations to be performed
hereunder at or prior to the Closing Date or any later date on which Option
Stock is to be purchased, as the case may be, and to the following further
conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and the
validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters.
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(c) You shall have received from Morrison Cohen Singer & Weinstein L.L.P.,
counsel for the Company, an opinion, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex A hereto, and if Option
Stock is purchased at any date after the Closing Date, additional opinions from
such counsel, addressed to the Underwriters and dated such later date,
confirming that the statements expressed as of the Closing Date in such opinion
remain valid as of such later date.
(d) You shall have received from Lahive & Cockfield, patent counsel for the
Company, an opinion, addressed to the Underwriters and dated the Closing Date,
to the effect that they serve a patent counsel to the Company with respect to
the issued patents, pending and contemplated patent applications, trade secrets
and the proprietary technology that the Company owns or has rights to, and
covering the matters set forth in Annex B hereto, and if Option Stock is
purchased at any date after the Closing Date, additional opinions from such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date, in such opinion remain
valid as of such later date.
(e) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct in all material respects and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not misleading,
(ii) since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business, the Company has not entered into any
material transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein,
(iv) the Company has no material contingent obligations which are not disclosed
in the Registration Statement and the Prospectus, (v) there are no pending or
known threatened legal proceedings to which the Company is a party or of which
property of the Company is the subject which are material and which are not
disclosed in the Registration Statement and the Prospectus, (vi) there are no
franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as required,
(vii) the representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later date on
which Option Stock is to be purchased, as the case may be, and (viii) there has
not been any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably foreseeable
that would render it impracticable in your reasonable judgment to make a public
offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies such as the Company in particular)
or financial or economic conditions which render it inadvisable to proceed.
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(f) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the Chief Executive Officer,
President and the Chief Financial Officer of the Company, stating that the
respective signers of said certificate have carefully examined the Registration
Statement in the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (e) of this
Section 9 are true and correct.
(g) You shall have received from KPMG Peat Marwick, LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(h) You shall have received from KPMG Peat Marwick, LLP a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as at March 31, 1996, did not disclose any
weakness in internal controls that they considered to be material weaknesses.
(i) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.
(j) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by The Nasdaq Stock Market
upon official notice of issuance.
(k) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than one percent of the
outstanding Common Stock, agreements, in form reasonably satisfactory to
Hambrecht & Quist LLC, stating that without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 180 days after the date of the Prospectus, (i) sell, offer,
contract to
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<PAGE>
sell, make any short sale, pledge, transfer or otherwise dispose of, directly or
indirectly, any shares of Common Stock (including any stock appreciation right
or similar right with an exercise or conversion privilege at a price related to,
or derived from, the market price of the Common Stock) or any securities
convertible into or exchangeable or exercisable for shares of Common Stock owned
directly by the undersigned or with respect to which the undersigned has the
power of disposition (including, without limitation, shares of Common Stock
which the undersigned may be deemed to beneficially own in accordance with the
rules and regulations promulgated under the Securities and Exchange Act of 1934,
as amended), or (ii) engage in any hedging transaction with respect to any
shares of Common Stock that may have an impact on the market price of the Common
Stock, whether any such transaction is to be settled by delivery of Common Stock
or such other securities, in cash or otherwise. In addition, you shall have
received from Morrison Cohen Singer & Weinstein L.L.P., counsel to the Company,
evidence satisfactory to you, that all other beneficial owners of Series A
Convertible Preferred Stock have been notified that the Company has exercised
its lock-up option with respect to such shares.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Testa, Hurwitz & Thibeault, LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all actual, accountable,
out-of-pocket costs and expenses incident to the performance of the obligations
of the Company under this Agreement, including all actual, accountable,
out-of-pocket costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
actual, accountable, out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination
-18-
<PAGE>
shall be without liability of the Company to the Underwriters and without
liability of the Underwriters to the Company; provided, however, that in the
event of any such termination the Company agrees to indemnify and hold harmless
the Underwriters from all actual, accountable, out-of-pocket costs and expenses
incident to the performance of the obligations of the Company under this
Agreement including all actual, accountable, out-of-pocket costs and expenses
referred to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to
the benefit of the Company and the several Underwriters and, with respect to the
provisions of Section 7 hereof, the several parties (in addition to the Company
and the several Underwriters) indemnified under the provisions of said Section
7, and their respective personal representatives, successors and assigns.
Nothing in this Agreement is intended or shall be construed to give to any other
person, firm or corporation any legal or equitable remedy or claim under or in
respect of this Agreement or any provision herein contained. The term
"successors and assigns" as herein used shall not include any purchaser, as such
purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telecopied or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telecopied or delivered to it at its office, 777 Old Saw Mill River Road,
Tarrytown, NY 10591, Attention: Chief Executive Officer. All notices given by
telecopy shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraphs
(k) and (l) of Section 6 hereof shall be of no further force or effect.
-19-
<PAGE>
This Agreement may be executed in two counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
-20-
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very Truly Yours,
CADUS PHARMACEUTICAL CORPORATION
By:_________________________________________
Jeremy M. Levin, M.D., Ph.D.
President and Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES
GENESIS MERCHANT GROUP SECURITIES
By Hambrecht & Quist LLC
By:____________________________
Managing Director
Acting on behalf of the several
Underwriters, including themselves,
named in Schedule I hereto.
-21-
<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES OF
UNDERWRITTEN STOCK
UNDERWRITERS TO BE PURCHASED
------------ ------------------
Hambrecht & Quist LLC.....................................
Montgomery Securities.....................................
Genesis Merchant Group Securities.........................
---------
Total................................................. 2,750,000
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of
Counsel for the Company
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware and is duly
qualified to do business and is in good standing as a foreign corporation in New
York and Colorado. The Company has all corporate power and authority necessary
to own or hold its properties and conduct the business in which it is presently
engaged.
2. Upon the filing of its Amended and Restated Certificate of Incorporation
(the "Restated Certificate") with the Delaware Secretary of State, the Company's
authorized capitalization will consist of 35,000,000 shares of Common Stock,
$.01 par value per share. We have been advised by National Corporate Research
Ltd. that the Restated Certificate has been filed with the Delaware Secretary of
State. All of the issued and outstanding shares of capital stock of the Company
have been, and the shares of the Stock being delivered on the date hereof, upon
issuance and delivery and payment therefor in the manner described in the
Underwriting Agreement, will be, duly and validly authorized and issued, fully
paid and non-assessable with no personal liability attaching to the ownership
thereof. The statements made in the Prospectus under the caption "Description of
Capital Stock," insofar as they purport to constitute summaries of the terms of
the Company's capital stock (including the Stock), constitute accurate summaries
of the terms of such capital stock in all material respects and fairly present
in all material respects the information called for with respect thereto by Item
202 of Regulation S-K.
3. Upon the consummation of the initial public offering, there will be no
preemptive or other rights to subscribe for or to purchase any shares of the
Stock pursuant to the Company's charter or by-laws or any agreement or other
instrument known to us. Except as described in the Prospectus and as provided in
the Company charter and by-laws, there are no restrictions upon the voting or
transfer of any shares of the Common Stock pursuant to any agreement or other
instrument known to us.
4. To our knowledge, and except as set forth in the Prospectus, there are
no legal or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or to which any property or assets of the Company or any
of its subsidiaries is subject which, if determined adversely to the Company or
any of its subsidiaries, are reasonably likely to have a material adverse effect
on the business or prospects of the Company and its subsidiaries taken as a
whole; and, to our knowledge, except as set forth in the Prospectus, no such
proceedings are threatened by governmental authorities or by others.
5. The Registration Statement was declared effective under the Securities
Act and, to our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that purpose is
pending or threatened by the Commission.
<PAGE>
6. The Registration Statement and the Prospectus and any further amendments
or supplements thereto made by the Company prior to the date hereof (other than
the financial statements, financial and statistical information, pro forma
financial information and related schedules and notes thereto, as to which we
express no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations. In passing
upon the form of such documents, we have not independently verified and are not
passing upon, and have assumed the correctness and completeness of, the
statements made therein.
7. To our knowledge, there are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and Regulations
which have not been described or filed as exhibits to the Registration
Statement.
8. The Company has full right, power, and authority to execute and deliver
the Underwriting Agreement and to perform its obligations thereunder; and all
corporate action required to be taken for the due and proper authorization,
issuance, sale and delivery of the Common Stock to be sold by the Company under
the Underwriting Agreement and the consummation of the transactions contemplated
thereby to be effected by the Company have been duly and validly taken by the
Company.
9. The Underwriting Agreement has been duly authorized, executed, and
delivered by the Company.
10. The issuance and sale of the shares of Stock being delivered on the
date hereof by the Company, the compliance by the Company with all of the
provisions of the Underwriting Agreement and the consummation of the
transactions contemplated thereby will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute a default, an
event of default, or an event which, with notice or lapse of time or both, would
constitute a default or event of default under, any indenture, mortgage, deed of
trust, loan agreement, or other agreement or instrument filed as an exhibit to
the Registration Statement, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any material statute,
order, rule or regulation or, to our knowledge, any judgment, order or
decree of any court or governmental agency or body having jurisdiction over the
Company or any of its properties or assets, except for such conflicts, breaches,
violations and defaults as are not reasonably likely, individually or in the
aggregate, to have (a) a material adverse effect on the business or prospects of
the Company; or (b) any adverse effect on the consummation of the transactions
contemplated by the Underwriting Agreement. Except for the registration of the
Stock under the Securities Act, and such consents, approvals, authorizations,
registrations, or qualifications as may be required under the Exchange Act and
applicable state or foreign securities laws in connection with the purchase and
distribution of the Stock by the underwriters thereof, no consent, approval,
authorization or order of, or filing or registration with, any such court or
governmental agency or body is required for the issuance and sale of the shares
of Stock being delivered on the date hereof by the Company,
-2-
<PAGE>
the compliance by the Company with all of the provisions of the Underwriting
Agreement or the consummation of the transactions contemplated thereby.
11. To our knowledge, except as described under the caption "Shares
Eligible for Future Sale -- Registration Rights" in the Preliminary Prospectus
there are no contracts, agreements or understandings in effect on the date
hereof between the Company and any person granting such person the right to
require the Company to file a registration statement under the Securities Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Securities Act. To our knowledge, upon the consummation of the initial
public offering, no person or entity will have a right of first refusal or
participation with respect to the sale of shares of the Stock by the Company.
12. The Stock issued and sold by the Company will be duly authorized for
listing on the Nasdaq National Market upon official notice of issuance of the
shares by the Company to the Nasdaq Stock Market.
In connection with the preparation of the Registration Statement and the
Prospectus, we have participated in conferences with officers and
representatives of the Company and the independent accountants of the Company,
at which conferences we have made inquiries of such persons and others and
discussed the contents of the Registration Statement and the Prospectus. While
the limitations inherent in the independent verification of factual matters and
the character of determinations involved in the registration process are such
that we are not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (except as specifically stated
elsewhere in this opinion), nothing has come to our attention which has caused
us to believe that the Registration Statement, as of its effective date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading (except that we express no view or opinion
with respect to the financial statements and schedules or other financial and
statistical data included in the Registration Statement), and nothing has come
to our attention which has caused us to believe that the Prospectus, as of its
date and as of the Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (except that we express no view or opinion with respect to the
financial statements and schedules or other financial and statistical data
included in the Prospectus).
----------------------------
In rendering the foregoing opinion we may rely as to questions of law not
involving the laws of the United States, the State of New York and the State of
Delaware upon opinions of local counsel satisfactory in form and scope to
counsel for the Underwriters. We are not, however, rendering any opinion with
respect to those matters which are the subject of the legal opinion being
rendered by the Company's patent counsel. Copies of any
-3-
<PAGE>
opinions so relied upon shall be delivered to the Representatives and to counsel
for the Underwriters and the foregoing opinion shall also state that counsel
knows of no reason the Underwriters are not entitled to rely upon the opinions
of such local counsel. In addition, we may state that as to various questions of
fact material to our opinion, we have relied upon the representations made in or
pursuant to the Underwriting Agreement and upon certificates of officers of the
Company.
-4-
<PAGE>
ANNEX B
Matters to be Covered in the Opinion of
Patent Counsel for the Company
1. We are unaware of any facts that would preclude the Company from having
clear title to the Company's patents and patent applications referred to or
described in the Prospectus, except as described in the Prospectus. To the best
of our knowledge, we and the Company have complied with the required duty of
candor and good faith in dealing with the Patent and Trademark Office, including
the duty to disclose to the Office all information believed to be material to
the patentability of each issued U.S. patent or pending application. We have no
knowledge of any facts that would form the basis for a belief that the Company
lacks or will be unable to obtain any rights or licenses to use all patents and
know-how necessary to conduct the business now conducted or proposed to be
conducted by the Company as described in the Prospectus, except as described in
the Prospectus. We have no knowledge of any facts that would form a basis for a
belief that any of the patents or applications owned or licensed by the Company
are unenforceable or invalid, or would be unenforceable or invalid if issued as
patents, except as described in the Prospectus. We have no knowledge of any
patent applications of third parties, that, if issued, would limit or prohibit
the business now conducted or proposed to be conducted by the Company as
described in the Prospectus, except as described therein. We know of no pending
or threatened action, suit, proceeding or claim by others that the Company is
infringing any patent that could result in any material adverse effect on the
Company, except as described in the Prospectus;
2. There are no legal or governmental proceedings pending relating to
patent rights, other than review by the Patent and Trademark Office of pending
applications for patents, including appeal and reissue proceedings, and, to the
best of our knowledge, no such proceedings are threatened or contemplated by
governmental authorities or others; and
3. To the best of our knowledge, there are no contracts or other documents
material to the Company's patents or proprietary information other than those
described in the Prospectus.
Although we have not verified the accuracy or completeness of the
statements contained in the Prospectus relating to intellectual property,
nothing has come to our attention that causes us to believe that, at the time
the Registration Statement became effective, or at the Closing Date, the
Prospectus, under the captions "Risk Factors -- Uncertainty of Protection of
Patents and Proprietary Rights" and "Business -- Patents, Proprietary Technology
and Trade Secret," contained any untrue statement of a material fact, or omitted
to state any material fact necessary to make the statements therein not
misleading.
In rendering this advice, we have relied as to matters of fact, to the
extent we have deemed proper, upon certificates and representations of the
Company's officers and management.
Number CAD [CADUS LOGO] ______ Shares
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN DALLAS, TEXAS AND NEW YORK, NEW YORK
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 127639 10 2
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
PAR VALUE $.01 PER SHARE
of CADUS PHARMACEUTICAL CORPORATION (herein called the "Corporation"),
transferable only on the books of the Corporation by the holder hereof in
person, or by duly authorized attorney, upon the surrender of this certificate
properly endorsed or assigned for transfer. This Certificate is not valid until
countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
/s/ JAMES S. RIELLY /s/ JEREMY LEVIN
--------------- ---------------
Secretary President & CEO
Countersigned and Registered:
THE HERMAN GROUP, INC.
(Dallas, TX)
Transfer Agent and Registrar
By:
Authorized Signature
[CADUS CORPORATE SEAL]
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common
TEN ENT--as tenants by the entireties
JT TEN --as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT--____________ Custodian __________
(Cust) (Minor)
Under Uniform Gifts to Minors
Act _________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
__________________________________________________________________________Shares
of the capital stock represented by the within Certificate,
and do hereby irrevocably constitute and appoint
________________________________________________________________________Attorney
to trasfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated -------------------------
NOTICE
THE SIGNATURE TO THIS X
ASSIGNMENT MUST CORRESPOND -------------------------------------
WITH THE NAME AS WRITTEN (SIGNATURE)
UPON THE FACE OF THE
CERTIFICATE IN EVERY X
PARTICULAR, WITHOUT -------------------------------------
ALTERATION OR ENLARGEMENT (SIGNATURE)
OR ANY CHANGE WHATEVER.
The signatures should be guaranteed by an eligible guarantor institution (banks,
stockbrokers, savings and loan associations and credit unions with membership
in an approved signature guaranteed medallion program) pursuant to S.E.C. Rule
17Ad-15.
- --------------------------------------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
- --------------------------------------------------------------------------------
[Morrison Cohen Singer & Weinstein, LLP]
July 3, 1996
Board of Directors
Cadus Pharmaceutical Corporation
777 Old Saw Mill River Road
Tarrytown, New York 10591-6705
Gentlemen:
We have acted as counsel to Cadus Pharmaceutical Corporation (the
"Company"), a Delaware corporation, in connection with the preparation of a
Registration Statement on Form S-1 (File No. 333-4441) (as amended, the
"Registration Statement") relating to the offer and sale of up to 3,162,500
shares (the "Shares") of the common stock of the Company, par value $.01 per
share, including 412,500 shares of common stock which are subject to the
underwriters' over-allotment option.
In so acting, we have examined copies of such records of the Company and
such other certificates and documents as we have deemed relevant and necessary
for the opinions hereinafter set forth. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity to authentic originals of all documents
submitted to us as certified or reproduced copies. We have also assumed the
legal capacities of all persons executing such documents and the truth and
correctness of any representations or warranties contained therein. As to
various questions of fact material to such opinions, we have relied upon
certificates of officers of the Company.
Based on the foregoing, we are of the opinion that the Shares, when issued
and sold as contemplated in the Registration Statement, will be validly and
legally issued and fully paid and nonassessable.
This opinion is limited to the laws of the State of New York, the General
Corporation Law of the State of Delaware and the federal laws of the United
States, and we do not hold ourselves out as experts in the laws of any other
jurisdiction.
We consent to being named in the Registration Statement and related
Prospectus as counsel who are passing upon the legality of the Shares for the
Company and to the reference to our name
<PAGE>
under the caption "Legal Matters" in such Prospectus. We also consent to your
filing copies of this opinion as an exhibit to the Registration Statement or any
amendment thereto.
Very truly yours,
Morrison Cohen Singer & Weinstein, LLP
Exhibit 11
Cadus Pharmaceutical Corporation
(A development stage enterprise corporation)
Computation of Pro Forma Net
Loss per Share (unaudited)
------------------------------
Three Months
Year Ended Ended
December 31, March 31,
1995 1996
----------- ---------
Net loss $(1,482,490) $ (43,167)
=========== ==========
Weighted average number of shares of
common stock outstanding during the
periods after giving effect to the one-for-
three reverse stock split 1,382,139 1,326,522
Common equivalent shares from stock options
issued during the 12-month period prior to the
proposed offering using the treasury
stock method 261,094 261,094
Conversion of Series A Convertible Preferred
Stock using the if-converted method 4,959,901 4,959,901
Conversion of Series B Convertible Preferred
Stock using the if-converted method 2,440,475 2,440,475
----------- ----------
Shares used in calculation of pro forma
net loss per share 9,043,609 8,987,992
=========== ==========
Pro forma net loss per share $ (O.16) $ 0.00
=========== ==========
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cadus Pharmaceutical Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
New York, New York
July 3, 1996
EXHIBIT 23.3
[LETTERHEAD LAHIVE & COCKFIELD]
July 3, 1996
The Board of Directors
Cadus Pharmaceutical Corporation
777 Old Saw Mill River Road
Tarrytown, NY 10591-6705
Re: Registration Statement on Form S-1
Dear Sirs:
We hereby consent to the reference to our firm under the caption "Experts"
in the prospectus which is a part of Cadus Pharmaceutical Corporation's
Registration Statement on Form S-1 as amended by Pre-effective Amendment No. 2.
Very truly yours
/s/ LAHIVE & COCKFIELD
-------------------------
LaHive & Cockfield
