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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended ....................................December 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________to_____________________.
Commission File Number 0-28674
CADUS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3660391
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Old Saw Mill River Road
Tarrytown, New York 10591-6705
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (914) 345-3344
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X No: ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of Common Stock held by non-affiliates of the
Company, computed by reference to the closing price on March 21, 1997 was
$51,421,655.
Number of shares outstanding of each class of Common Stock, as of March 21,
1997: 12,121,787 shares.
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PART I
Item 1. Business.
General
Cadus Pharmaceutical Corporation ("Cadus" or the "Company") was
incorporated under the laws of the State of Delaware in January 1992. Cadus is
engaged in the identification of genomic targets in human cell signaling
pathways, the elucidation of their function and the discovery of novel small
molecule therapeutics that act on such targets. The Company is using proprietary
drug discovery technologies based on genetically engineered yeast cells to
simultaneously discover the function of specific genes and create high
throughput screens for the discovery of chemical compounds that act on the
products of such genes. The Company believes that its proprietary technologies
enable it and its collaborative partners to initiate drug discovery against
certain new targets that cannot initially become the subject of drug discovery
using conventional techniques and generally to accelerate and reduce the cost of
the drug discovery process. The Company has research collaborations with
Bristol-Myers Squibb Company ("Bristol-Myers Squibb"), Solvay Duphar B.V.
("Solvay Duphar") and SmithKline Beecham p.l.c. ("SmithKline Beecham").
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 several
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. Two other
technologies are used to identify and characterize receptors whose ligand and
hence function are not known (which are called orphan receptors), as well as
related ligands and key signaling molecules: (i) the Company's Self Selecting
Combinatorial Library ("SSCL") technologies, which are 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. The Company has also developed proprietary
software algorithms that it uses to identify potential new targets from data
generated by the Human Genome Project. The Company uses other complementary
technologies, including in-house combinatorial chemistry libraries, high
throughput screening, medicinal chemistry, pharmacology and mammalian cell
biology.
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
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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.
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
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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 G protein-coupled receptors in the
human genome. 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 known 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
interact. More efficient drug discovery methods are available once the gene
sequence, biological function and role in disease processes of a G
protein-coupled receptor have been determined.
The sequences and functions of approximately 100 human G protein-coupled
receptors have been identified. This knowledge has also been used to help
identify the sequence of approximately 100 orphan G protein-coupled receptors.
The Company believes that the identification of the gene sequences and functions
of the remaining G protein-coupled receptors will yield a substantial number of
potential drug discovery targets. Scientists working on the Human Genome Project
have sequenced portions of thousands of genes and have published such sequences
or placed them in public databases. Although the Human Genome Project has
produced and made publicly available an ever increasing volume of raw DNA
sequences (including sequence fragments that may represent portions of human G
protein-coupled receptors), such data cannot be used in drug discovery until (i)
a DNA sequence is recognized to comprise a portion of a G protein-coupled
receptor (ii) the full DNA sequence of the G protein-coupled receptor is
identified, (iii) the function of the G protein-coupled receptor is elucidated,
and (iv) agonists and antagonists for the G protein-coupled receptor are
identified.
Traditional Drug Discovery
Drug discovery consists of three key elements: (i) the target, such as a
receptor, on which the drug will act, (ii) the potential drug candidates, which
include organic chemicals, proteins or peptides, and (iii) the assays or tests
to screen these compounds to determine their effect on the target.
Historically, drug discovery has been an inefficient and expensive process.
Traditional drug discovery has been hampered by the limited number of known
targets and a reliance on in vitro assays as a format in which to test
compounds. Until scientists began to define the molecular structure of receptors
and ligands, there was no simple method to determine the function of such
molecules in the cell and, therefore, their utility as drug discovery targets.
Even when the target's molecular structure is known, incorporating that target
effectively into an in vitro assay can be difficult. For example, all known G
protein-coupled receptors are woven through the cell membrane seven times in a
very complex, looped structure that cannot be maintained when the isolated
protein is put into an in vitro assay format. If an assay does not accurately
replicate the structure of a target
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receptor, the compounds identified in the assay may not function as expected
when applied to the target receptor on a living cell. Furthermore, receptors,
signal transduction proteins and other molecular targets for therapeutic
intervention do not exist in isolation in the cell. Their functional activity
results from a complex interrelationship with numerous other molecules within
the cell. Consequently, traditional drug screening assays often identify
compounds as potential drug candidates which, when tested in living cells, prove
to have no useful activity or are even toxic. A variety of methods have been
developed to address these problems, including using living cells in assays.
However, most live cell assays are slow, complex and expensive to maintain.
In recent years, scientific advances have created new and improved tools
for drug discovery. For example, molecular biology is identifying a growing
number of targets and their gene sequences. There have been significant
developments in turning these gene sequences into drug discovery candidates.
Cells have been genetically engineered to produce assays that more effectively
replicate the physiological environment of a living organism. Robotics have
enabled the creation of high-throughput screening systems. Combinatorial
chemistry has enhanced the ability to optimize lead compounds by improving their
pharmacological characteristics. However, due to the complexity of G
protein-coupled receptors and limited knowledge of their gene sequences and
function, these advances do not offer a comprehensive, rapid and cost effective
approach to the identification of drug discovery candidates targeted at G
protein-coupled receptors.
Yeast
The Company has deveoped technologies based on yeast that are useful in
identifying drug discovery candidates targeted at G protein-coupled receptors.
Yeast is a single-celled microorganism that is commonly used to make bread, beer
and wine. In the 1980's, scientists discovered structural and functional
similarities between yeast cells and human cells. Both yeast and human cells
consist of a membrane, an intracellular region and a nucleus containing genes.
Basic cellular processes, including metabolism, cell division, DNA and RNA
synthesis and signal transduction, are the same in both human and yeast cells.
Yeast also have signal transduction pathways that function similarly to human
cell pathways. More than 40 percent of all human gene classes have functional
equivalents in yeast. The genes in yeast express proteins, including
cell-surface receptors such as G protein-coupled receptors and signaling
molecules such as protein kinases, that are similar to human proteins.
The Company believes that yeast cells have several important
characteristics that are useful in drug discovery.
o The strong correlation between human and yeast gene classes enables
the evaluation of the biological function of human proteins, including
receptors and signaling molecules, of unknown function. Proteins with
comparable gene sequences frequently carry out similar functions. This
fact can be used to determine the function of a human gene by
genetically engineering a yeast cell to replace a yeast gene coding
for a known function with the human gene suspected of having a
comparable
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function. If the yeast cell retains its normal function, it suggests
that the human gene and its protein have a biological function similar
to that of their yeast counterparts. Consequently, genetically
engineered yeast cells can replicate human gene function and provide a
biologically relevant context for evaluating interactions between
receptors and their related signaling pathways.
o In 1996, the yeast genome was fully sequenced. This knowledge has
facilitated analysis of the correlation between yeast and human gene
structure and aids in the definition of human gene functions.
o While the yeast signaling mechanism bears many similarities to the
human signaling mechanism, the yeast intracellular environment is less
complex, thus eliminating much of the ancillary and redundant
intracellular signaling pathways that exist in human cells.
o Yeast have the ability to absorb DNA fragments and incorporate them
into their genome. As a result, their genetic structure can be easily
manipulated using common genetic engineering techniques.
o Yeast cells replicate rapidly. Speed of replication is particularly
important because creating a new yeast strain that successfully
incorporates new genetic material and adapts to new conditions may
take several generations and the strain that so adapts is identifiable
by growth. In addition, because a yeast cell reproduces itself every
two hours, compared with 24 to 48 hours for mammalian cells, a drug
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:
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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 proprietary
software algorithms to search genomic databases and identify fragments
of new likely G protein-coupled receptors which it then clones and
fully sequences.
o Elucidate the Function of Orphan Receptors. 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 Expand Its Genomics Database. The Company enters into its genomics
database fragments of new likely G protein-coupled receptors which it
identifies and full-length sequences of G protein-coupled receptors
which it fully sequences or otherwise obtains. The Company utilizes
the data in this database in its internal and collaborative drug
discovery programs.
o Conduct Proprietary Drug Discovery and Development Programs. The
Company conducts proprietary drug discovery programs to identify lead
compounds. The Company uses its combinatorial chemistry capability and
other technologies 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, Solvay
Duphar and SmithKline Beecham.
o Improve Proprietary Technologies and Acquire Complementary
Technologies. The Company expends significant resources on research to
improve the rapidity and efficiency of its proprietary technologies.
The Company also seeks to acquire companies and technologies that will
complement its proprietary technologies.
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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 several proprietary drug discovery technologies including
tools used to screen for compounds that act as agonists or antagonists to cell
surface receptors and other molecules in the signal transduction pathway and
tools used to identify and characterize orphan receptors, ligands and key
signaling molecules.
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.
The Company has developed a biological database that catalogues the
Company's collection of proprietary cells, cell lines, yeast strains and
reagents. This database currently has approximately 15,000 entries, that include
the phenotype and the genotype of the cell or yeast strain and its storage site.
The Company's scientists select from this database strains or cells for their
research that, based on their prior experience, will most readily incorporate a
particular receptor, enabling the Company's scientists to more rapidly construct
assays and hybrid yeast cell strains. The Company's biological database grows by
approximately 1,000 new entries per quarter. The Company believes that its
collection of cells, yeast strains and reagents in its biological database is
unique.
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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 human G protein-coupled receptor and
the gene that causes the yeast cell to produce the ligand that naturally binds
to the receptor being expressed by the same hybrid yeast cell. As a result, the
Company's scientists 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
that all express the same orphan receptor. Each of the millions of yeast cells
in the strain incorporates a different peptide encoded in DNA, resulting in a
library of yeast cells which all express the same orphan receptor but are each
programmed to secrete a different peptide. Most of the secreted peptides have no
effect on the orphan receptor and the hybrid yeast cells producing these
peptides do not replicate. The Company estimates that one in a million hybrid
yeast cells generates a peptide ligand that activates the orphan receptor. These
particular hybrid yeast cells replicate and, therefore, are readily identified.
Thus, the SSCL 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.
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.
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The strains of hybrid yeast cells constructed for the SSCL can
simultaneously be used as screens for large libraries of chemical compounds.
This capability enables the Company to seek to identify a peptide ligand to an
orphan receptor while simultaneously creating a high throughput screen for small
molecule agonists and antagonists to that receptor.
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.
Bioinformatics for Target Identification
The Company has developed proprietary software algorithms that it uses,
together with its extensive knowledge of the structure of G protein-coupled and
other receptors, to rapidly search through the data generated by the Human
Genome Project for DNA sequences that are likely to be those of G
protein-coupled receptors. The Company has identified hundreds of partial gene
sequences which are likely to be portions of G protein-coupled receptors. The
Company is using such information to seek to fully sequence orphan G
protein-coupled receptors.
The Company has created a genomic database that consists of many partial
and some full-length sequences of human G protein-coupled receptors. The
Company's scientists use computers
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to compare rapidly the human G protein-coupled receptors in this genomic
database with the strains of yeast cells in its biological database to determine
which human G protein-coupled receptor will most readily be incorporated into
which yeast cell. By performing such a computerized "best fit" analysis, the
Company's scientists have accelerated the process of developing new strains of
hybrid yeast cells.
Other Drug Discovery Technologies
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 has developed its own
in-house array of compounds and routinely augments this compound library through
solid or liquid phase automated compound synthesis.
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").
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
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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 and small molecules 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 three 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. In addition, the Company structures its collaborations so that
while each collaborator has exclusive rights to particular molecular targets,
the reagents, yeast strains and cell lines (without the molecular target)
created as part of a collaboration are available to the Company and its other
collaborators. This structure enables the Company to grant exclusivity to
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particular targets while retaining rights to improvements to its core
technologies for use in its internal programs and collaborations with others.
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.
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. In January 1997, Bristol-Myers Squibb
exercised its option to extend the collaboration for an additional two years. In
addition, Bristol-Myers Squibb expanded the collaboration to include certain
targets proprietary to the Company. 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 areas of
central nervous system and inflammatory disorders. These lead compounds are
directed at sleep disorders and both acute and chronic inflammation. Other
programs with Bristol-Myers Squibb include those relating to cardiovascular and
metabolic diseases. 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,
adjusted for inflation commencing in July 1997. From July 1994 through February
28, 1997, Bristol-Myers Squibb paid the Company approximately $10.4 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 1999 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.
Bristol-Myers Squibb purchased $12.5 million of the Company's Series B
Preferred Stock in July 1994, an additional $5.0 million of such Series B
Preferred Stock in September 1995 upon the Company achieving a research
milestone and $2.5 million of the Company's Common Stock in the Company's
initial public offering in July 1996. All such shares of Series B Preferred
Stock were
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converted into shares of Common Stock on July 22, 1996. Bristol-Myers Squibb has
certain registration rights with respect to the shares of Common Stock issued to
it upon such conversion.
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. From November 1995 through
February 28, 1997, Solvay Duphar paid the Company approximately $3.6 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 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.
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 November 1995 and $5.0 million of the Company's Common Stock
in the Company's initial public offering in July 1996. All such shares of Series
B Preferred Stock were converted into shares of Common Stock on July 22, 1996.
The Solvay Subsidiary has certain registration rights with respect to the shares
of Common Stock issued to it upon such conversion.
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The SmithKline Beecham Collaboration
In February 1997, the Company entered into a research collaboration and
license agreement with SmithKline Beecham. During the term of the research
collaboration, which expires in February 2002, the Company will seek to
identify ligands and to elucidate the function of orphan G protein-coupled
receptors included within the collaboration and create high-throughput
screens to discover small molecule agonists and antagonists to these receptors.
During the term of the research collaboration, SmithKline Beecham is
required to provide the Company with research funding of $3.0 million each year,
adjusted for inflation, and certain other payments, including a $2.0 million
payment in February 1998. SmithKline Beecham is also required to make payments
to the Company upon the achievement of certain research milestones and upon the
achievement by SmithKline Beecham of certain drug development milestones.
SmithKline Beecham is also required to pay the Company royalties on the sale of
drugs developed through the use of the Company's drug discovery technologies.
The Company has co-promotion rights in North America for certain products that
may result from the collaboration and rights to certain potential products that
SmithKline Beecham may choose not to develop.
SmithKline Beecham has the right to extend the term of the research
collaboration for between two and five years by notice to the Company given
prior to February 25, 2001. SmithKline Beecham has the right to terminate the
research collaboration after February 25, 1999 (or later under certain
circumstances) ("Evaluation Date") if (i) the Company fails to meet certain
scientific objectives in connection with the conduct of the research
collaboration or (ii) fails to perform its obligations in the conduct of the
research collaboration in any material respect and does not cure such failure
within a period of 60 days after receiving notice thereof. In the event of such
termination, SmithKline Beecham has no further obligation to provide the Company
with funding for the research collaboration.
In February 1997, the Company and SmithKline Beecham Corporation entered
into a stock purchase agreement pursuant to which the Company has the option to
sell to SmithKline Beecham Corporation (i) shares of the Company's common stock
having a then fair market value of $5.0 million during a 90-day period
commencing on February 25, 1998 and (ii) shares of the Company's Common Stock
having a then fair market value of $5.0 million, during a 90-day period
commencing on the date certain scientific objectives are achieved (subject to
the Company achieving such objectives prior to the Evaluation Date and meeting
certain financial requirements). In addition, SmithKline Beecham Corporation has
the right, at its option, to purchase up to $5.0 million worth of shares of the
Company's Common Stock at 150% of then fair market value in lieu of making
certain research milestone payments. The Company granted SmithKline Beecham
Corporation certain registration rights with respect to shares of the Company's
Common Stock which SmithKline Beecham Corporation may purchase pursuant to the
stock purchase agreement.
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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 March 21,
1997, 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 51 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.
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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 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, Solvay Duphar and SmithKline Beecham.
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
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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.
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") commenced a patent
infringement action against the Company alleging infringement by the Company of
a patent relating to an aspect of drug screening techniques used, seeking
injunctive relief and monetary damages. The Company has filed an Answer and
Counterclaim, claiming that the patent is not infringed and is invalid and
unenforceable, seeking a declaratory judgment of patent invalidity,
unenforceability and noninfringement and claiming intentional and tortious
interference by SIBIA with the Company's initial public offering. The Company
believes, based on advice of counsel, that none of its operations infringes any
valid claim of the patent and intends to vigorously defend the action and pursue
its counterclaims against SIBIA. 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. If
injunctive relief is granted, certain aspects of the drug discovery and
development efforts of the Company and its collaborative partners could be
delayed. If monetary damages are awarded, the business, financial condition and
results of operations of the Company
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could be materially adversely affected. 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., that may be
engaged in efforts to determine the biological function of orphan receptors, and
other companies such as Novartis A.G. 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
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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.
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
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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 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
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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.
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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.
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 vested in July 1996. 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 eight 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
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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.
Eva J. Neer, M.D., is a Professor of Medicine (Biochemistry), and an
Associate Master, Cannon Society at Harvard Medical School and Senior Biochemist
in the Department of Medicine at Brigham and Women's Hospital. Dr. Neer is best
known for her studies on the structure and
24
<PAGE>
function of the heterotrimeric G proteins. She has served as Chairman of the
Board of Scientific Counselors of the Division of Intramural Research and as
Chairman of the Board of the Publication Committee for ASBMB. She serves on
multiple editorial boards and has been the recipient of numerous scientific
awards. Dr. Neer had post-doctoral training at Yale University and Harvard
University and received her M.D. at Columbia University's College of Physicians
and Surgeons.
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
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.
Thomas E. Shenk, Ph.D., a scientific founder of the Company, became a
member of the SAB in December 1996. From the Company's inception to December
1996, Dr. Shenk was a director of the Company. 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.
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 March 21, 1997, the Company had 86 full-time employees, 31 of whom
hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 64 are engaged
directly in scientific research and 22 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.
25
<PAGE>
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.
Item 2. Properties.
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 3,510 square feet of laboratory and
office facilities at the Colorado Bio/Medical Venture Center in Lakewood,
Colorado, under an agreement which expired on March 9, 1997. The Company is
currently a month-to-month tenant but has received a letter from the landlord of
the Colorado facility agreeing to extend the term of the sublease. 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.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings other than
SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical Corporation. SIBIA commenced
an action on July 9, 1996 in the United States District Court for the Southern
District of California alleging infringement by the Company of a patent relating
to an aspect of drug screening techniques and seeking injunctive relief and
monetary damages. On August 1, 1996, the Company filed an Answer and
Counterclaim claiming that the patent is not infringed and is invalid and
unenforceable, seeking a declaratory judgment of patent invalidity,
unenforceability and noninfringement, and claiming intentional and tortious
interference by SIBIA with the Company's initial public offering. The Company
intends to vigorously defend against the claims made by SIBIA and to pursue its
counterclaims against SIBIA.
Item 4. Submission to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.
26
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's common stock, $.01 par value per share (the "Common
Stock"), is traded on the Nasdaq National Market under the symbol KDUS. The
stock prices listed below represent the high and low bid prices of the Common
Stock for each fiscal quarter since the Company's July 17, 1996 initial public
offering, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal Year 1996 High Low
<S> <C> <C>
Third quarter ended September 30, 1996
(July 17, 1996 - September 30, 1996) $8 1/4 $5 1/2
Fourth quarter ended December 31, 1996 $9 3/8 $ 6
</TABLE>
(b) As of March 21, 1997, there were approximately 123 holders of record of
the Company's Common Stock.
(c) The Company has not declared or paid any cash dividends on its Common
Stock during the past two fiscal years and does not anticipate paying any such
dividends in the foreseeable future. The Company intends to retain any earnings
for the growth of and for use in its business.
Recent Sales of Unregistered Securities.
Within the past three years, the Company has issued and sold the following
securities that were not registered under the Securities Act of 1933, as amended
(the "Act"), in each case in reliance on an exemption from required registration
pursuant to Section 3(b) or 4(2) of the Act:
(1) In July 1994, the Company issued an aggregate of 3,571,429 shares of
Series B Preferred Stock to Bristol-Myers Squibb at a price of $3.50 per share.
The 3,571,429 shares of Series B Preferred Stock were converted into 1,264,199
shares of Common Stock concurrently with the closing of the Company's initial
public offering in July 1996.
(2) In August and September 1995, the Company issued an aggregate of
1,250,000 shares of Series B Preferred Stock at a price of $4.00 per share to
Bristol-Myers Squibb. The 1,250,000 shares of Series B Preferred Stock were
converted into 442,474 shares of Common Stock concurrently with the closing of
the Company's initial public offering in July 1996.
(3) 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 an aggregate of 50,004 shares of Common Stock at
$2.25 per share.
27
<PAGE>
(4) In November 1995, the Company issued 2,500,000 shares of Series B
Preferred Stock at a price of $4.00 per share to Physica B.V. The 2,500,000
shares of Series B Preferred Stock were converted into 884,942 shares of Common
Stock concurrently with the closing of the Company's initial public offering in
July 1996.
(5) From March 21, 1994 to May 10, 1996, the Company granted options to
acquire 240,350 shares of the Company's Common Stock to employees, officers and
consultants of the Company pursuant to the Company's 1993 Stock Option Plan. In
general, such options are exercisable at a price equal to the fair market value
of a share of Common Stock on the date of grant, as determined in good faith by
the Board of Directors, have a ten-year term and vest or have vested over
four-year periods at various rates.
(6) From March 21, 1994 to March 21, 1997, options to acquire 65,086 shares
of the Company's Common Stock granted pursuant to the Company's 1993 Stock
Option Plan were exercised. The exercise price of such options ranged from $1.37
to $3.51.
(7) From May 10, 1996 to March 21, 1997, the Company granted options to
acquire 669,864 shares of the Company's Common Stock to employees, officers and
consultants pursuant to the Company's 1996 Incentive Plan. In general such
options are exercisable at a price equal to the fair market value of a share of
Common Stock on the date of grant, have a ten-year term and vest over four-year
periods at various rates.
(8) From March 21, 1994 to March 21, 1997, the Company granted options to
acquire 646,301 shares of the Company's Common Stock to employees, officers and
consultants pursuant to individual stock option agreements. In general, such
options are exercisable at a price equal to the fair market value of a share of
Common Stock on the date of grant, have a ten-year term and vest over four-year
periods at various rates.
(9) In November 1996, the Company granted options to acquire 120,000 shares
of the Company's Common Stock to certain directors pursuant to individual stock
option agreements. The exercise price of such options is $6.75. Such options
have a ten-year term and vest over four years in equal annual installments.
(10) From March 21, 1994 to March 21, 1997, options to acquire 1,500 shares
of the Company's Common Stock granted pursuant to individual stock option
agreements had been exercised. The exercise price of such options was $3.60.
Item 6. Selected Financial Data.
The selected financial data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and notes thereto included
elsewhere in this Report.
28
<PAGE>
<TABLE>
<CAPTION>
January 23, January 23,
1992 (date of 1992 (date of
inception) to inception) to
December 31, December 31,
Year Ended December 31, 1992 1996
----------------------- ---- ----
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: (in thousands, except per share data)
Revenues.............................. $6,500 $4,418 $1,355 $ - $ - $12,272
Operating costs and expenses:
Research and development........... 8,283 5,383 2,246 1,645 753 18,311
General and administrative......... 2,315 1,376 937 550 214 5,391
------ ------ -------- ---- --- ------
Total operating costs and
expenses.......................... 10,598 6,759 3,183 2,195 967 23,702
Operating loss........................ (4,098) (2,341) (1,828) (2,195) (967) (11,430)
Net loss (1).......................... $(2,441) $(1,482) $(1,393) $(2,148) $(967) $(8,431)
======== ======== ======== ======= ====== ========
Net loss per share (2)................ $(.39) $(.16)
====== ======
Weighted average shares
outstanding (2).................. 6,280,917 9,132,577
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (in thousands)
Cash and cash equivalents........... $43,153 $25,683 $14,406 $3,568 $ 4
Total assets........................ 47,287 30,725 15,740 3,962 113
Short-term debt..................... 13 2,397 203 6 -
Long-term debt...................... 166 29 46 12 -
Deficit accumulated during the (8,431) (5,991) (4,508) (3,115) (967)
development stage...............
Stockholders' equity (deficit)...... 45,181 27,723 14,534 3,491 (963)
</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.
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.
29
<PAGE>
Item 7. 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. To date, all of the Company's revenues
have resulted from research funding provided by its collaborative partners.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $2.4 million during the year ended
December 31, 1996. At December 31, 1996, the Company had an accumulated deficit
of approximately $8.4 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.
Results of Operations
Years Ended December 31, 1996 and 1995
Revenues
Revenues for 1996 increased to $6.5 million from $4.4 million in 1995. This
increase was attributable to the inclusion in 1996 of a full year of research
funding from Solvay Duphar. The Solvay Duphar collaboration began in November
1995.
Operating Expenses
The Company's research and development expenses for 1996 increased to $8.3
million from $5.4 million in 1995. This increase was attributable primarily to
an increase in staffing related to the research collaboration with Solvay Duphar
and the Company's internal programs, including expansion of its chemistry
capability, as well as expenses in connection with licenses from third parties
and a full year of facilities expenses in connection with the Company's
occupancy of its facility in Tarrytown, New York.
General and administrative expenses for 1996 increased to $2.3 million from
$1.4 million in 1995. This increase was attributable primarily to expenses in
connection with the Company's ongoing litigation, the recruiting and hiring of
management personnel, and the increases in
30
<PAGE>
professional fees and the Company's directors and officers liability insurance
premiums resulting from the Company becoming a public company.
Interest Income
Net interest income for 1996 increased to $1.7 million from $903,000 in
1995. This increase related primarily to interest earned on the net proceeds
from the sale of Series B Convertible Preferred Stock in September and November
1995 and from the sale of Common Stock in July and August 1996 pursuant to the
Company's initial public offering, net of interest expense on a line of credit
and bank loans.
Net Loss
The net loss for 1996 increased to $2.4 million from $1.5 million in 1995.
The increase can be attributed to the increase in the operating expenses of the
Company as described above, most of which was offset by increases in revenues
and interest income.
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.
31
<PAGE>
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.
Liquidity and Capital Resources
At December 31, 1996, the Company held cash and cash equivalents with a
value of $43.2 million. The Company's working capital at December 31, 1996 was
$41.5 million. The Company has funded operations through December 31, 1996 with
sales of preferred stock and common stock totaling $51.9 million and payments
from corporate collaborators totaling $13.3 million.
In July 1996, the Company completed an initial public offering of 2,750,000
shares of Common Stock at $7.00 per share. The Company received proceeds, net of
underwriting discounts, commissions and other initial public offering expenses,
of $17,176,624.
In August 1996, the Company sold an additional 412,500 shares of Common
Stock at $7.00 per share pursuant to the exercise by the underwriters of an
over-allotment option granted to them. The Company received proceeds, net of
underwriting discounts and commissions, of $2,685,375.
In September 1996, the Company repaid an outstanding line of credit balance
of $2,380,000, which was secured by negotiable certificates of deposit. As a
result of such repayment, these certificates of deposit are no longer considered
restricted cash and are classified as cash equivalents on the balance sheet as
of December 31, 1996.
The Company has invested $4.4 million in property and equipment, including
purchases aggregating to $1.6 million in 1996. 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 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 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 2000. 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
32
<PAGE>
equity or convertible debt securities, the issuance of such securities could
result in dilution to the Company's stockholders. The Company's forecast of the
period of time through which its financial resources will be adequate to support
its operations is forward-looking information and, as such, actual results may
vary.
At December 31, 1996, the Company had tax net operating loss carryforwards
of approximately $6.6 million and research and development credit carryforwards
of approximately $571,000 which expire in years 2007 through 2012. The Company's
ability to utilize such net operating loss and research and development credit
carryforwards is subject to certain limitations due to ownership changes as
defined by rules enacted with the Tax Reform Act of 1986.
Item 8. Financial Statements.
The financial statements and notes thereto may be found following Item 14
of this report. For an index to the financial statements and supplementary data,
see Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
33
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
Information with respect to the executive officers, directors, key
employees and consultants of the Company as of March 27, 1997 is set forth
below:
<TABLE>
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Jeremy M. Levin, D.Phil., MB.BCHIR 43 Chief Executive Officer, President and Chairman of
the Board of Directors
David R. Webb, Ph.D. 52 Vice President of Research and Chief Scientific
Officer
Philip N. Sussman 45 Vice President of Corporate Development
Arlindo L. Castelhano, Ph.D. 43 Executive Director of Chemistry
James R. Broach, Ph.D. 49 Director of Research
John C. Cambier, Ph.D. 48 Director of Immunology
Gary L. Johnson, Ph.D. 47 Director of Cell Biology
Algis Anilionis, Ph.D. 46 Director of Intellectual Property
James S. Rielly 33 Director of Finance, Controller, Treasurer and
Secretary
Jennifer LaVin 31 Director of Corporate Communications & Business
Strategy
O. Prem Das 43 Director of Business Development
Carl C. Icahn 61 Director
Theodore Altman 55 Director
Harold First (1)(2) 60 Director
Peter S. Liebert, M.D. 61 Director
Robert J. Mitchell(2) 50 Director
Lawrence D. Muschek, Ph.D. 53 Director
Mark H. Rachesky, M.D. 38 Director
Leon E. Rosenberg, M.D. 64 Director
Nicole Vitullo 39 Director
Samuel D. Waksal, Ph.D. (2) 49 Director
Jack G. Wasserman (1) 60 Director
</TABLE>
- - ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
34
<PAGE>
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 Physiome Sciences, 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.
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.
Arlindo L. Castelhano, Ph.D., has been Executive Director of Chemistry of
the Company since June 1996 and Director of Chemistry from September 1995 to
June 1996. 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.
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.
35
<PAGE>
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.
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.
Jennifer LaVin, Director of Corporate Communications & Business Strategy,
joined the Company in September 1996. From December 1992 to September 1996, Ms.
LaVin was an equity analyst and Assistant Vice President at Merrill Lynch & Co.,
Inc. focusing on the pharmaceutical industry. Prior to that, she was an internal
consultant and served in diversified research positions at biotechnology and
pharmaceutical companies. Ms. LaVin received her MBA from Columbia Business
School and her B.A. in Biochemistry from the University of Pennsylvania.
36
<PAGE>
O. Prem Das., Ph.D., Director of Business Development, joined the Company
in September 1996. Dr. Das was President of Heartland BioTechnologies, Inc. from
May 1995 to September 1996, and its Vice President from April 1994 to May 1995.
From April 1994 to September 1996, he was also Director of Research at
Heartland. Prior to that, Dr. Das completed several postdoctoral fellowships in
biochemistry, molecular biology and genetics at Rutgers University, the
University of Minnesota and Georgetown University. Dr. Das received his Ph.D.
from MIT, an M.Sc. from the Indian Institute of Technology and a B.Sc. from
Loyola College, Madras 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. From before 1990, Mr. Icahn has been Chief Executive Officer and
Chairman of the Board of Starfire Holding Corporation, a privately-held holding
company. From before 1991 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 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.
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 holding company, and related entities. He has
been a director of Trump Taj Mahal Realty Corp., a privately-held real estate
company, from October 1991 until September 1996; a member of the Supervisory
Board of Directors of Memorex Telex N.V., a public technology company, from
February 1992 until February 1997; 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
37
<PAGE>
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. Mr. Mitchell has been a
director of National Energy Group, Inc., a public company involved in the
exploration of oil and gas reserves, since August 1996.
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. From February 1990 until June
1996, Dr. Rachesky was employed by Icahn Holding Corporation where he initially
served as a senior investment officer and, for the last three years, as Carl C.
Icahn's chief investment advisor. 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
38
<PAGE>
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.
Leon E. Rosenberg, M.D., became a Director of the Company in March 1997.
Dr. Rosenberg has been Senior Vice President, Scientific Affairs of Bristol-
Myers Squibb Company since January 1997. From September 1991 to January 1997,
Dr. Rosenberg was President of Bristol-Myers Squibb Pharmaceutical Research
Institute. From July 1984 to September 1991, he served as Dean of the Yale
University School of Medicine. Dr. Rosenberg currently serves on the Boards of
Directors of Somatix Therapy Corporation, SEQ, Ltd., EntreMed, Inc., and
Research!America. He received both his M.D. and his B.A. from the University of
Wisconsin.
Nicole Vitullo became a director of the Company in January 1997. Ms.
Vitullo has been Senior Vice President of Rothschild International Asset
Management since November 1996 and Vice President thereof from November 1992
until November 1996. From July 1991 to November 1992, Ms. Vitullo served as
Director of Corporate Communications and Investor Relations at Cephalon, Inc., a
public biotechnology company. From June 1979 to July 1991, she held various
positions at Eastman Kodak, including Manager of Venture Capital Development of
the Healthcare Group. Ms. Vitullo serves as a director of Cytel Corporation,
Anergen, Inc. and Corvas International, public biotechnology companies. Ms.
Vitullo received her MBA from the University of Rochester's William E. Simon
School of Business and her B.S. in Mathematics/Statistics from the University of
Rochester.
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.
Dr. Rachesky has agreed to tender his resignation as a director of the
Company if so requested by Mr. Icahn.
39
<PAGE>
The Board of Directors has (i) a Compensation Committee, consisting of
Messrs. First and Wasserman, which makes recommendations regarding salaries and
incentive compensation for employees of and consultants to the Company and which
administers the 1993 Stock Option Plan and the 1996 Incentive Plan 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, then a director of the
Company, and Samuel D. Waksal exercised his option and purchased 8,334 shares of
Common Stock at $2.25 per share. In November 1996, the Compensation Committee
granted to each of the non-employee directors then in office, other than Dr.
Muschek, an option to purchase 12,000 shares of Common Stock at an exercise
price of $6.75 per share. Each stock option is exercisable in four cumulative
annual installments of 3,000 shares commencing in November 1997 and expires in
November 2006. In February 1997, the shares issuable upon the exercise of such
options were registered on the Company's registration statement on Form S-8.
The non-employee directors receive $1,000 for each meeting of the Board of
Directors attended and $500 for each meeting of a committee of the Board of
Directors attended.
Item 11. Executive Compensation.
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal years ended December 31, 1996, 1995 and 1994,
by its Chief Executive Officer and each of the Company's other executive
officers whose total salary and bonus exceeded $100,000 during such fiscal year
(collectively, the "Named Executive Officers"):
40
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
--------------------------- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation
--------------------------- ---- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Jeremy M. Levin............................... 1996 225,000 45,000 25,000 --
President and Chief Executive Officer 1995 175,260 65,000 -- --
1994 163,333 35,000 101,737 --
Philip N. Sussman............................. 1996 149,375 -- 65,000 --
Vice President of Corporate 1995 110,260 70,000 33,334 --
Development 1994 103,333 40,000 -- --
David R. Webb................................. 1996 175,000 17,500 17,500 --
Vice President of Research and Chief 1995 94,868(1) 30,000 66,667 128,021(2)
Scientific Officer 1994 -- -- -- --
Arlindo L. Castelhano, Ph.D................... 1996 105,833 15,000 11,666 --
Executive Director of Chemistry 1995 -- -- -- --
1994 -- -- -- --
James S. Rielly............................... 1996 100,846 15,000 16,666 --
Director of Finance & Controller 1995 -- -- -- --
1994 -- -- -- --
</TABLE>
- - ----------
(1) Dr. Webb joined the Company in June 1995 and receives a salary at the rate
of $175,000 per annum.
(2) 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
41
<PAGE>
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.
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.
James S. Rielly
Mr. Rielly is an employee at will but has a severance agreement with the
Company which provides that if he is terminated without cause the Company will
continue to pay him his then salary and provide him with medical benefits until
the earlier of six months from the date of termination or his commencement of
new employment.
Option Grants
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 by the Company to the
Named Executive Officers:
42
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
--------------------------------------------------------- Potential Realizable Value
Percent of At Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration -----------------------
Name Granted (#) Fiscal Year ($/share) Date 5% 10%
---- ----------- ----------- --------- ------ -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Jeremy M. Levin............ 25,000 6.88 6.625 12/18/06 104,161 263,964
Philip N. Sussman.......... 25,000 6.88 6.625 12/18/06 104,161 263,964
40,000 11.01 6.625 12/13/06 166,657 422,342
David R. Webb.............. 17,500 4.82 6.625 12/13/06 72,912 184,775
Arlindo L. Castelhano...... 11,666 3.21 6.625 12/13/06 48,606 123,176
James S. Rielly............ 16,666 4.59 6.625 12/13/06 69,438 175,969
</TABLE>
Option Exercises and Holdings
The following table sets forth certain information concerning each exercise
of stock options, during the fiscal year ended December 31, 1996, by the Named
Executive Officers and unexercised stock options held by the Named Executive
Officers as of the end of such fiscal year.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
Shares Aggregate December 31, 1996 (#) December 31, 1996 ($)(1)
Acquired on Value ---------------------------- --------------------------------
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeremy M. Levin.......... - - 281,159 58,912 2,052,269 298,987
Philip N. Sussman........ - - 33,334 98,334 227,420 328,380
David R. Webb............ - - 16,666 67,501 108,329 362,194
Arlindo L. Castelhano.... - - 3,333 21,667 21,665 89,797
James S. Rielly.......... - - 8,334 21,666 57,788 61,165
</TABLE>
- - ------------
(1) Based on the difference between the closing price of the underlying shares
of Common Stock on December 31, 1996 as reported by the NASDAQ National
Market ($8.75) and the option exercise price.
43
<PAGE>
1993 Stock Option Plan
The 1993 Stock Option Plan provides for the grant of options to purchase
shares of Common Stock to officers, employees and consultants of the Company.
The maximum number of shares of Common Stock that may be issued pursuant to the
1993 Stock Option Plan is 666,667 (plus any shares that are the subject of
canceled or forfeited awards). Effective as of May 10, 1996, the 1993 Stock
Option Plan was replaced by the 1996 Incentive Plan with respect to all future
awards to the Company's employees and consultants. See " -- 1996 Incentive
Plan."
The 1993 Stock Option Plan is administered by the Compensation Committee
which is presently comprised of Harold First and Jack G. Wasserman.
Under the 1993 Stock Option Plan, the Compensation Committee may establish
with respect to each option granted such vesting provisions as it determines to
be appropriate or advisable. In general, options granted under the 1993 Stock
Option Plan have a ten-year term, and such options vest or have vested over
four-year periods at various rates. Unexercised options automatically terminate
upon the termination of the holder's relationship with the Company. However, the
Compensation Committee may accelerate a vesting schedule and/or extend the time
for exercise of all or any part of an option in the event of the termination of
the holder's relationship with the Company. In addition, the 1993 Stock Option
Plan includes a provision authorizing the Compensation Committee to adjust the
number of shares of Common Stock available for grant, the number of shares of
Common Stock subject to outstanding awards thereunder and the per share exercise
price thereof in the event of any stock dividend, stock split, recapitalization,
merger or certain other events. The Compensation Committee may terminate the
1993 Stock Option Plan at any time but any such termination will not adversely
affect options previously granted.
Options granted under the 1993 Stock Option Plan are nontransferable except
by will or the laws of descent and distribution.
During 1996, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 21, 1997, an aggregate of 583,185 shares of Common Stock were
subject to outstanding stock options granted under the 1993 Stock Option Plan.
As of March 21, 1997, options to purchase 486,691 shares were exercisable at
prices ranging from $1.37 to $3.51 per share.
In February 1997, the Company registered the shares issuable upon exercise
of stock options granted under the 1993 Stock Option Plan pursuant to a
registration statement on Form S-8.
Stock Option Agreements
The Company has granted non-qualified stock options to directors, officers,
employees and consultants of the Company by means of stock option agreements.
During 1996, stock options to purchase an aggregate of 120,000 shares of Common
Stock at an exercise price of $6.75 per share
44
<PAGE>
were granted pursuant to stock option agreements to directors of the Company. As
of March 21, 1997, 108,000 of such stock options were outstanding and none were
exercisable. As of March 21, 1997, an aggregate of 724,050 shares of Common
Stock were subject to outstanding stock options granted under stock option
agreements, and options to purchase 330,916 shares under such option agreements
were exercisable at prices ranging from $1.50 to $3.60 per share.
In February 1997, the Company registered the shares issuable upon exercise
of stock options granted under such stock option agreements pursuant to a
registration statement on Form S-8
1996 Incentive Plan
The Company's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company in May
1996. The 1996 Incentive Plan replaced the 1993 Stock Option Plan, effective as
of May 10, 1996, with respect to all future awards by the Company to its
employees and consultants. However, while all future awards will be made under
the 1996 Incentive Plan, awards made under the 1993 Stock Option Plan will
continue to be administered in accordance with the 1993 Stock Option Plan. See
"Incentive Plans -- 1993 Stock Option Plan." In December 1996, the maximum
number of shares of Common Stock that may be the subject of awards under the
1996 Incentive Plan was increased from 333,334 to 833,334 (plus any shares that
are the subject of canceled or forfeited awards) by the Board of Directors
subject to approval by the stockholders of the Company.
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 share awarded or sold such vesting provisions as
it determines to be appropriate or advisable. Unvested options will
automatically terminate within a specified period of time following the
termination of the holder's relationship with the Company and in no event beyond
the expiration of the term. The Company may either repurchase unvested shares of
Common Stock at their original
45
<PAGE>
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
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
46
<PAGE>
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.
As of March 21, 1997, an aggregate of 656,941 shares of Common Stock were
subject to outstanding stock options granted under the 1996 Incentive Plan. As
of March 21, 1997, stock options to purchase 26,126 shares were exercisable at
$6.625 per share.
In February 1997, the Company registered the shares issuable upon exercise
of stock options granted or which may be granted under the 1996 Incentive Plan
pursuant to a registration statement on Form S-8.
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 made an aggregate matching contribution
for the fiscal year ended December 31, 1996 of approximately $37,856 to
participants under the 40l(k) Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 21, 1997, with respect to (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all directors and officers as a group. All
information is based upon ownership filings made by such persons with the
Securities and Exchange Commission (the "Commission") or upon information
provided by such persons to the Company.
47
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Owner (1) of Beneficial Ownership Owned(2)
- - ---------------------------------------- ----------------------- -------------------------
<S> <C> <C>
Carl C. Icahn................................... 3,361,216(3) 27.73%
767 Fifth Avenue
New York, New York 10153
Bristol-Myers Squibb............................ 2,061,673 17.01%
P.O. Box 4000
South 206 and Province Line Road
Princeton, New Jersey 08543-4000
Physica B.V.(4)................................. 1,599,942 13.20%
C.J. van Houtenlaan 36
1381 CP Weesp
The Netherlands
International Biotechnology Trust plc........... 850,000(5) 7.01%
c/o Rothschild Asset Management Limited
Five Arrows House
St. Swithins Lane
London EC4N 8NR
United Kingdom
The Global Health Sciences Fund................. 729,395(6) 6.02%
c/o INVESCO Trust Company
7800 East Union Avenue, Suite 800
Denver, Colorado 80237
Jeremy M. Levin, D.Phil., MB.BCHIR.............. 315,071(7) 2.53%
Philip N. Sussman............................... 33,334(8) *
David R. Webb, Ph.D............................. 16,666(9) *
Arlindo L. Castelhano, Ph.D..................... 3,333(10) *
James S. Rielly................................. 3,534(11) *
Theodore Altman................................. - -
Harold First.................................... 8,334 *
Peter S. Liebert, M.D........................... 8,334 *
Robert J. Mitchell.............................. - -
Lawrence D. Muschek, Ph.D....................... 1,599,942(12) 13.20%
Mark H. Rachesky, M.D........................... 190,683 1.57%
Leon E. Rosenberg, M.D.......................... 2,061,673(13) 17.01%
Nicole Vitullo.................................. 850,000(14) 7.01%
Samuel D. Waksal, Ph.D.......................... 8,334 *
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Owner (1) of Beneficial Ownership Owned(2)
- - ---------------------------------------- ----------------------- -------------------------
<S> <C> <C>
Jack G. Wasserman............................... - -
All executive officers and directors as a....... 8,460,454(15) 67.72%
group (16 persons)
</TABLE>
- - ----------
* Less than one percent
(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 March 21,
1997, that may be exercised within 60 days after such date for purposes of
computing the percentage of Common Stock owned by such person, but not for
purposes of computing the percentage of Common Stock owned by any other
person.
(3) Includes 2,258,790 shares of Common Stock held by High River Limited
Partnership. Mr. Icahn is the sole shareholder of the sole general partner
of High River Limited Partnership.
(4) Physica B.V. is referred to in this Prospectus as the Solvay Subsidiary.
(5) Consists of 850,000 shares of Common Stock held by the International
Biotechnology Trust plc ("IBT"). Rothschild Asset Management acts as the
investment manager to IBT and therefore may be deemed to share beneficial
ownership of these shares.
(6) 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.
(7) Consists of 315,071 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 33,334 shares of Common Stock which Mr. Sussman currently has
the right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(9) Consists of 16,666 shares of Common Stock which Dr. Webb currently has the
right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(10) Consists of 3,333 shares of Common Stock which Dr. Castelhano currently has
the right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(11) Includes 3,334 shares of Common Stock which Mr. Rielly currently has the
right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(12) Consists of 1,599,942 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 1,599,942
shares of Common Stock held by Physica B.V., but disclaims such beneficial
ownership.
49
<PAGE>
(13) Consists of 2,061,673 shares of Common Stock held by Bristol-Myers Squibb.
Dr. Rosenberg is Senior Vice President of Scientific Affairs of
Bristol-Myers Squibb. Dr. Rosenberg may be deemed the beneficial owner of
the 2,061,673 shares of Common Stock held by Bristol-Myers Squibb, but
disclaims such beneficial ownership.
(14) Consists of 850,000 shares of Common Stock held by IBT. Ms. Vitullo is
Vice President of Rothschild Asset Management Ltd., the investment
manager for IBT. Ms. Vitullo may be deemed the beneficial owner of the
850,000 shares of Common Stock held by IBT, but disclaims such beneficial
ownership.
(15) Includes (a) 368,405 shares of Common Stock issuable upon exercise of
options, (b) 2,061,673 shares of Common Stock held by Bristol-Myers Squibb,
and (c) 1,599,942 shares of Common Stock held by Physica B.V. See footnotes
(3), (7), (8), (9), (10), (11), (12), (13) and (14).
Item 13. Certain Relationships and Related Transactions.
In February 1997, the Company entered into a research collaboration and
license agreement with SmithKline Beecham. During the term of the research
collaboration, which expires in February 2002, the Company will seek to identify
ligands and to elucidate the function of orphan G protein-coupled receptors
included within the collaboration and create high-throughput screens to discover
small molecule agonists and antagonists to these receptors.
During the term of the research collaboration, SmithKline Beecham is
required to provide the Company with research funding of $3.0 million each year,
adjusted for inflation, and certain other payments, including a $2.0 million
payment in February 1998. SmithKline Beecham is also required to make payments
to the Company upon the achievement of certain research milestones and upon the
achievement by SmithKline Beecham of certain drug development milestones.
SmithKline Beecham is also required to pay the Company royalties on the sale of
drugs developed through the use of the Company's drug discovery technologies.
The Company has co-promotion rights in North America for certain products that
may result from the collaboration and rights to certain potential products that
SmithKline Beecham may choose not to develop.
SmithKline Beecham has the right to extend the term of the research
collaboration for between two and five years by notice to the Company given
prior to February 25, 2001. SmithKline Beecham has the right to terminate the
research collaboration after February 25, 1999 (or later under certain
circumstances) ("Evaluation Date") if (i) the Company fails to meet certain
scientific objectives in connection with the conduct of the research
collaboration or (ii) fails to perform its obligations in the conduct of the
research collaboration in any material respect and does not cure such failure
within a period of 60 days after receiving notice thereof. In the event of such
termination, SmithKline Beecham has no further obligation to provide the Company
with funding for the research collaboration.
In February 1997, the Company and SmithKline Beecham Corporation entered
into a stock purchase agreement pursuant to which the Company has the option to
sell to SmithKline Beecham Corporation (i) shares of the Company's common stock
having a then fair market value of $5.0 million during a 90-day period
commencing on February 25, 1998 and (ii) shares of the Company's common stock
having a then fair market value of $5.0 million, during a 90-day period
commencing on the date certain scientific objectives are achieved (subject to
the Company achieving such
50
<PAGE>
objectives prior to the Evaluation Date and meeting certain financial
requirements). In addition, SmithKline Beecham Corporation has the right, at its
option, to purchase up to $5 million worth of shares of the Company's common
stock at 150% of the then fair market value in lieu of making certain research
milestone payments. The Company granted to SmithKline Beecham Corporation
certain registration rights with respect to shares of the Company's common stock
which SmithKline Beecham Corporation may purchase pursuant to the stock purchase
agreement.
In December 1996, the Company contributed a $150,000 promissory note,
payable on December 26, 1998, to Laurel Partners Limited Partnership ("Laurel"),
a limited partnership of which Carl Icahn is the general partner, for a limited
partnership interest in Laurel. In addition, the Company purchased for $160,660
a limited partnership interest in Laurel from Tortoise Corp., a corporation
wholly-owned by Carl Icahn. At the time of the transactions, Laurel's assets
consisted of cash and securities and Laurel had no liabilities. The percentage
interest acquired by the Company in Laurel is equal to the percentage of the
fair market value of Laurel's assets at the time of the transactions represented
by the purchase price paid by the Company for its limited partnership interest
in Laurel. Laurel's purpose is to invest, directly or indirectly, in securities
of biotechnology companies. Laurel may seek to control or acquire the businesses
of such companies and may invest directly or as a partner, investor or joint
venturer with others. The Company has the right to require Carl Icahn to match
any future investment made by the Company in Laurel up to an aggregate
investment on the part of Carl Icahn of $5,000,000. This right expires on the
earlier of December 31, 1999 or such time that neither Carl Icahn nor one of his
affiliates is the general partner of Laurel. The Company is not required to make
any additional investment in Laurel.
In July 1996, Bristol-Myers Squibb purchased 355,000 shares of the
Company's Common Stock at $7.00 per share in the Company's initial public
offering. For the year ended December 31, 1996, the Company received $5 million
in cash for research funding from Bristol-Myers Squibb and recorded $4 million
as revenue, which constituted 61.5% of the Company's gross revenues in 1996, and
$1 million as deferred revenue. Leon E. Rosenberg, a director of the Company, is
the Senior Vice President of Scientific Affairs of Bristol-Myers Squibb.
In July 1996, Physica B.V. purchased 715,000 shares of the Company's Common
Stock at $7.00 per share in the Company's initial public offering. For the year
ended December 31, 1996, the Company received $2.5 million in cash for research
funding from Solvay Duphar, an affiliate of Physica B.V., which constituted
38.5% of the Company's gross revenues in 1996. Lawrence D. Muschek, a director
of the Company, is the Senior Vice President for Research and Development of the
Human Health Division of Solvay Duphar.
51
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements Page
Index to Financial Statements F-1
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the last quarter of the
period covered by this Report.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- - ----------- -----------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of Cadus Pharmaceutical
Corporation (the "Company"), as filed with the Secretary of State of Delaware on
July 22, 1996. (1)
3.2 By-laws of the Company. (2)
4.1 Specimen of Common Stock Certificate of the Company. (2)
4.2 1993 Cadus Pharmaceutical Corporation Stock Option Plan. (2)
4.3 Cadus Pharmaceutical Corporation 1996 Incentive Plan. (2)
4.4 Amendment to Cadus Pharmaceutical Corporation 1996 Incentive Plan. (1)
4.5 Form of Incentive Stock Option Agreement utilized in connection with issuances
of stock options under the Cadus Pharmaceutical Corporation 1996 Incentive
Plan. (1)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- - ----------- -----------------------
<C> <S>
4.6 Form of Stock Option Agreement between the Company and each of the
following employees of the Company: Philip N. Sussman, John Manfredi,
Andrew Murphy, Jeremy Paul, Lauren Silverman, Joshua Trueheart, James S.
Rielly, Thomas F. Deuel, Norman R. Klinman, Elliott M. Ross, Jeremy Thorner,
Arnold Levine, John Ransom, Christine Klein, Suzanne K. Wakamoto,
Christopher Pleiman, Algis Anilionis, Anupama K. Nadkarni, Mitchell
Silverstein, Michael A. Spruyt and David Fruhling. (1)
4.7 Form of Stock Option Agreement between the Company and each of the
following non-employee directors of the Company: Theodore Altman, Harold
First, Carl Icahn, Peter Liebert, Robert Mitchell, Mark Rachesky, William Scott,
Jack Wasserman and Samuel D. Waksal. (1)
4.2 Stock Purchase Agreement between the Company and SmithKline Beecham
Corporation, dated as of February 25, 1997. (3)
4.3 Registration Rights Agreement between the Company and SmithKline Beecham
Corporation, dated as of February 25, 1997. (3)
10.1 Form of Indemnification Agreement entered into between the Company and its
directors and officers. (2)
10.2 Form of Agreement Regarding Assignment of Inventions, Confidentiality and
Non-Competition. (2)
10.3 The 401(k) Plan of the Cadus Pharmaceutical Corporation. (2)
10.4 Employment Agreement between Jeremy M. Levin and the Company. (2)
10.5 Preferred Stock Purchase Agreement dated as of July 30, 1993 between the
Company and the purchasers of Series A Preferred Stock, together with the First
and Second Amendments thereto dated as of July 26, 1994 and October 31, 1995,
respectively. (2)
10.6 Preferred Stock Purchase Agreement dated as of July 26, 1994 between the
Company and Bristol-Myers Squibb Company ("Bristol-Myers") concerning
Series B Preferred Stock, together with the First Amendment thereto dated as of
October 31, 1995. (2)
10.7 Preferred Stock Purchase Agreement dated as of November 1, 1995 between the
Company and Physica B.V. concerning Series B Preferred Stock. (2)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- - ----------- -----------------------
<S> <C>
10.8 Research Collaboration and License Agreement, dated as of July 26, 1994,
between the Company and Bristol-Myers. (2)
10.9 Screening and Option Agreement, dated as of July 26, 1994, between the
Company and Bristol-Myers. (2)
10.10 Research Collaboration and License Agreement, dated as of November 1, 1995
between the Company and Solvay Duphar B.V. (2)
10.11 Sublease Agreement, dated as of October 19, 1994, between the Company and
Union Carbide Corporation. (2)
10.12 Lease, dated as of June 20, 1995 between the Company and Keren Limited
Partnership. (2)
10.13 Consulting Agreement between the Company and James R. Broach, dated
February 1, 1994. (2)
10.14 Amended and Restated License Agreement between the Company and Duke
University, dated May 10, 1994. (2)
10.15 License Agreement between the Company and National Jewish Center for
Immunology and Respiratory Medicine dated November 1, 1994. (2)
10.16 Stock Option Agreement, dated as of November 1, 1994, between the Company
and John C. Cambier. (2)
10.17 Stock Option Agreement, dated as of November 1, 1994, between the Company
and Gary L. Johnson. (2)
10.18 Consulting Agreement, dated as of November 1, 1994, between the Company and
John C. Cambier. (2)
10.19 Consulting Agreement, dated as of November 1, 1994, between the Company and
Gary L. Johnson. (2)
10.20 Research Collaboration Agreement, dated as of January 9, 1995, between the
Company and Houghten Pharmaceuticals, Inc., together with the Amendment
thereto dated as of March 1996. (2)
10.21 Stock Option Agreement, dated as of December 18, 1995, between the Company
and James R. Broach. (2)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- - ----------- -----------------------
<S> <C>
10.22 Waiver, dated May 17, 1996, of Section 1.05 of the Preferred Stock Purchase
Agreement dated as of July 26, 1994 between the Company and Bristol-Myers, as
amended by the First Amendment thereto dated as of October 31, 1995. (2)
10.23 Waiver, dated May 17, 1996, of Section 1.04 of the Preferred Stock Purchase
Agreement dated as of November 1, 1995 between the Company and Physica B.V.
(2)
10.24 Research Collaboration and License Agreement among the Company, SmithKline
Beecham Corporation and SmithKline Beecham p.l.c., dated as of February 25,
1997. (3)*
11 Computation of Net Loss per Share.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
24 Power of Attorney (filed as part of the signature page to this Report).
27 Financial Data Schedule.
</TABLE>
- - ----------
* Confidential treatment has been requested with respect to certain
information filed with this agreement.
(1) Filed with the Company's Registration Statement on Form S-8 (Registration
No. 333-21871), dated February 14, 1997.
(2) Filed with the Company's Registration Statement on Form S-1 (Registration
No. 333-4441), declared effective by the Commission on July 17, 1996.
(3) Filed with the Company's Current Report on Form 8-K, dated March 7, 1997.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CADUS PHARMACEUTICAL CORPORATION
By: /s/ Jeremy M. Levin
---------------------------------------
Jeremy M. Levin
President and Chief Executive Officer
Each person whose signature appears below constitutes and appoints Jeremy
M. Levin and James S. Rielly, or either of them, each with the power of
substitution, his or her true and lawful attorney-in-fact to sign any amendments
to this report and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact, or his or her
substitute, may do or choose to be done by virtue hereof.
Pursuant to the Requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Jeremy M. Levin President and Chief Executive Officer (Principal Executive March 27, 1997
- - -------------------
Jeremy M. Levin Officer) and Chairman of the Board of Directors
/s/ James S. Rielly Director of Finance, Controller, Treasurer and Secretary March 27, 1997
- - -------------------
James S. Rielly (Principal Financial and Accounting Officer)
Director
- - -----------------
Carl C. Icahn
/s/ Theodore Altman Director March 24, 1997
- - -------------------
Theodore Altman
/s/ Harold First Director March 27, 1997
- - -------------------
Harold First
/s/ Peter Liebert Director March 24, 1997
- - -------------------
Peter Liebert
/s/ Robert Mitchell Director March 27, 1997
- - -------------------
Robert Mitchell
/s/ Lawrence Muschek Director March 25, 1997
- - -------------------
Lawrence Muschek
/s/ Mark H. Rachesky Director March 25, 1997
- - --------------------
Mark H. Rachesky
/s/ Leon E. Rosenberg Director March 24, 1997
- - ---------------------
Leon E. Rosenberg
/s/ Nicole Vitullo Director March 27, 1997
- - -------------------
Nicole Vitullo
/s/ Samuel D. Waksal Director March 27, 1997
- - --------------------
Samuel D. Waksal
/s/ Jack G. Wasserman Director March 25, 1997
- - ---------------------
Jack G. Wasserman
</TABLE>
56
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Index
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets - December 31, 1996 and 1995 F-3
Statements of Operations - For the years ended December 31, 1996, 1995, 1994
and the period from January 23, 1992 (date of inception) to December 31, 1996 F-4
Statement of Stockholders' Equity for the period from January 23, 1992 (date
of inception) to December 31, 1996 F-5
Statements of Cash Flows - For the years ended December 31, 1996, 1995, 1994
and the period from January 23, 1992 (date of inception) to December 31, 1996 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, 1996 and 1995,
and the related statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996 and the
period from January 23, 1992 (date of inception) to December 31, 1996. 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 state corporation) as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1996 and the period from January 23,
1992 (date of inception) to December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 25, 1997
F-2
<PAGE>
Cadus Pharmaceutical Corporation
(a development stage corporation)
Balance Sheets
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------- -------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,152,677 $ 25,682,920
Restricted cash (note 5) -- 2,380,000
Prepaid and other current assets 263,052 76,810
------------ ------------
Total current assets 43,415,729 28,139,730
Restricted cash (note 5) 118,000 118,000
Fixed assets, net of accumulated depreciation and amortization of
$1,488,015 at December 31, 1996 and $649,016 at December 31, 1995 (note 3) 2,955,530 2,219,851
Deferred tax asset, less valuation allowance of $3,787,000 at December 31, 1996
and $2,621,000 at December 31, 1995 (note 6) -- --
Due from stockholder (note 4) 5,974 13,736
Other assets, net (notes 2 and 4) 791,625 233,874
------------ ------------
Total assets $ 47,286,858 $ 30,725,191
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Deferred revenue (note 7) $ 1,000,000 $ --
Accounts payable 455,794 154,463
Accrued expenses and other current liabilities (note 11) 470,660 421,155
Line of credit and loans payable to bank-current portion (note 5) 12,601 2,397,459
------------ ------------
Total current liabilities 1,939,055 2,973,077
Loans payable to bank (note 5) 16,474 29,002
Note payable to partnership (note 4) 150,000 --
------------ ------------
Total liabilities 2,105,529 3,002,079
Commitments and contingencies (note 12)
Stockholders' equity (notes 7, 8 and 9 ):
Preferred Stock, $.001 par value
Authorized 0 and 22,201,080 shares, issuable in series, at December 31, 1996 and
and 1995, respectively
Convertible Preferred Stock, Series A 0 and 14,879,651 shares designated, issued
and outstanding at December 31, 1996 and 1995, respectively -- 14,880
Convertible Preferred Stock, Series B 0 and 7,321,429 shares designated, issued
and outstanding at December 31, 1996 and 1995, respectively -- 7,321
Common Stock, $.01 par value. Authorized 35,000,000 shares at December 31, 1996 and
1995; issued 12,202,900 shares at December 31, 1996 and 1,465,009 shares at
December 31, 1995; outstanding 12,061,233 shares at December 31, 1996 and 1,323,342
shares at December 31, 1995 122,029 14,650
Additional paid-in capital 53,790,704 33,976,940
Deficit accumulated during the development stage (note 1) (8,431,329) (5,990,604)
Treasury stock, 141,667 shares of common stock at December 31, 1996 and 1995,
respectively, at cost; (300,075) (300,075)
------------ ------------
Total stockholders' equity 45,181,329 27,723,112
------------ ------------
Total liabilities and stockholders' equity $ 47,286,858 $ 30,725,191
============ ============
</TABLE>
See accompanying notes to the financial statements
F-3
<PAGE>
Cadus Pharmaceutical Corporation
(a development stage corporation)
Statements of Operations
<TABLE>
<CAPTION>
January 23,
1992 (date of
inception) to
December 31, December 31, December 31, December 31,
1996 1995 1994 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues, principally from
related parties (notes 2 and 7) $ 6,500,000 $ 4,417,809 $ 1,354,619 $ 12,272,428
------------ ------------ ------------ ------------
Costs and expenses:
Research and development costs 8,282,507 5,383,285 2,246,207 18,311,029
General and administrative expenses 2,315,042 1,376,126 936,762 5,391,432
------------ ------------ ------------ ------------
Total costs and expenses 10,597,549 6,759,411 3,182,969 23,702,461
------------ ------------ ------------ ------------
Operating loss (4,097,549) (2,341,602) (1,828,350) (11,430,033)
------------ ------------ ------------ ------------
Interest income 1,829,820 980,567 318,868 3,177,293
Interest expense 110,416 77,866 5,063 193,345
------------ ------------ ------------ ------------
Interest income, net 1,719,404 902,701 313,805 2,983,948
------------ ------------ ------------ ------------
Loss before income taxes and extraordinary item (2,378,145) (1,438,901) (1,514,545) (8,446,085)
State and local taxes (note 6) 62,580 43,589 36,994 143,892
------------ ------------ ------------ ------------
Loss before extraordinary item (2,440,725) (1,482,490) (1,551,539) (8,589,977)
Extraordinary gain from early extinguishment
of debt (note 4) -- -- 158,648 158,648
------------ ------------ ------------ ------------
Net loss $ (2,440,725) $ (1,482,490) $ (1,392,891) $ (8,431,329)
------------ ------------ ------------ ------------
Net loss per share (note 2) $ (0.39) $ (0.16)
Shares used in calculation of net loss
per share (note 2) 6,280,917 9,132,577
Net loss per share assuming full dilution (note 2) $ (0.24)
Shares used in calculation of net loss per share
assuming full dilution (note 2) 10,289,454
</TABLE>
See accompanying notes to the financial statements
F-4
<PAGE>
Cadus Pharmaceutical Corporation
(a development stage corporation)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Stock, Series A Preferred Stock, Series B
-------------------------- -------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares issued from January 23, 1992 (date of inception)
to December 31, 1992 at $.01 per share in connection
with initial offering
Net loss for period January 23, 1992 to December 31, 1992
-------------------------- ----------------------
Balance at December 31, 1992
Repurchase of stock from founder for cash
Issuance of common stock for cash in connection with
exercise of options
Issuance of Convertible Preferred Stock, Series A for
cash, net of issuance costs at $200,299 in July 1993 14,879,651 $14,880
Net loss for year ended December 31, 1993
-------------------------- ----------------------
Balance at December 31, 1993 14,879,651 14,880
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
Issuance of common stock for cash in connection with
exercise of options
Net loss for year ended December 31, 1994
-------------------------- ----------------------
Balance at December 31, 1994 14,879,651 14,880 3,571,429 3,571
Issuance of Convertible Preferred Stock, Series B for cash,
in connection with achievement of scientific milestone 1,250,000 1,250
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
Issuance of common stock for cash in connection with
exercise of options
Repurchase of stock from founder for cash
Net loss for year ended December 31, 1995
-------------------------- ----------------------
Balance at December 31, 1995 14,879,651 14,880 7,321,429 7,321
Issuance of common stock for cash in connection with
exercise of options
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996
Conversion of Preferred Stock into common stock in
connection with the initial public offering in July 1996 (14,879,651) (14,880) (7,321,429) (7,321)
Issuance of common stock for cash at $7.00 per share, net of
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996
-------------------------- ---------------------
Balance at December 31, 1996 - $ - - $ -
========================== =====================
</TABLE>
<TABLE>
<CAPTION>
Defecit
Accumulated
Common Stock Additional during the
------------ paid-in development
Shares Amount capital stage
------ ------ ------- -----
<S> <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 at $200,299 in July 1993 6,584,821
Net loss for year ended December 31, 1993 (2,147,814)
-------------------------------- ----------------------------------
Balance at December 31, 1993 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 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 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 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 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 1,323,342 14,650 33,976,940 (5,990,604)
Issuance of common stock for cash in connection with
exercise of options 23,877 239 36,704
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 2,750,000 27,500 17,149,124
Conversion of Preferred Stock into common stock in
connection with the initial public offering in July 1996 7,551,514 75,515 (53,314)
Issuance of common stock for cash at $7.00 per share, net of 412,500 4,125 2,681,250
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996 (2,440,725)
-------------------------------- ----------------------------------
Balance at December 31, 1996 12,061,233 $ 122,029 $ 53,790,704 $ (8,431,329)
================================-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
--------------
Shares Amount Total
------ ------ -----
<S> <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 $ 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 at $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 36,943
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 17,176,624
Conversion of Preferred Stock into common stock in
connection with the initial public offering in July 1996
Issuance of common stock for cash at $7.00 per share, net of 2,685,375
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996 (2,440,725)
----------------------------- -------------
Balance at December 31, 1996 (141,667) $ (300,075) $ 45,181,329
----------------------------- ------------
</TABLE>
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, December 31, December 31, December 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,440,725) $ (1,482,490) $ (1,392,891) $ (8,431,329)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 837,984 544,855 103,428 1,583,202
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:
(Increase) decrease in prepaid and other current assets (186,242) 10,327 (69,717) (263,052)
(Increase) decrease in other assets (64,701) 5,088 (6,794) (69,706)
Increase (decrease) in deferred revenue 1,000,000 (645,381) 645,381 1,000,000
Increase (decrease) in accounts payable 301,331 (102,595) 238,850 455,794
Increase in accrued expenses and other current
liabilities 49,505 366,989 28,266 470,660
------------ ------------ ------------ ------------
Net cash used in operating activities (502,848) (1,300,549) (612,125) (5,410,421)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (1,574,678) (1,893,858) (605,096) (4,433,976)
Decrease (increase) in restricted cash 2,380,000 (2,193,000) (287,000) (118,000)
Stockholder borrowing 7,762 7,763 (1,626) (5,974)
Investment in partnership (160,660) -- -- (160,660)
Patent costs (181,375) (192,170) (16,552) (443,673)
------------ ------------ ------------ ------------
Net cash provided by/(used in) investing activities 471,049 (4,271,265) (910,274) (5,162,283)
------------ ------------ ------------ ------------
Cash flows from financing activities:
(Repayments of)/proceeds from bank line of credit (2,380,000) 2,193,000 187,000 --
Payments on bank loans (17,386) (15,941) (12,598) (45,925)
(Payments to)/proceeds from stockholder -- -- (250,000) 2,158,648
Net proceeds from issuance of common stock in public offering 19,861,999 -- -- 19,861,999
Proceeds from issuance of common stock upon exercise of
stock options 36,943 126,855 8,135 178,633
Net proceeds from issuance of convertible preferred stock -- 14,845,142 12,427,258 31,872,101
Purchase of treasury stock -- (300,000) -- (300,075)
------------ ------------ ------------ ------------
Net cash provided by financing activities 17,501,556 16,849,056 12,359,795 53,725,381
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 17,469,757 11,277,242 10,837,396 43,152,677
Cash and cash equivalents at beginning of period 25,682,920 14,405,678 3,568,282 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 43,152,677 $ 25,682,920 $ 14,405,678 $ 43,152,677
============ ============ ============ ============
</TABLE>
See accompanying notes to the financial statements
F-6
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(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 $8,431,329 from January 23, 1992
(date of inception) to December 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 common stock in the public market, the sale of convertible
preferred stock and through revenues resulting from research funding
provided by its collaborative partners (note 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 December 31, 1996 and 1995, cash equivalents consist
of $41,099,144 and $25,324,631, 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 December 31,
1996 and 1995, accumulated amortization is $32,414 and $33,429,
respectively.
F-7
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(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) 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) Net Loss Per Share
All common share data has been restated to give effect to a
one-for-three reverse stock split effected on July 18, 1996 (see note
8). 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 occurred in connection with the
Company's initial public offering.
For the year ended December 31, 1996, primary net loss per share is
computed using the weighted average number of shares of common stock
outstanding. Common shares issued in connection with the initial
public offering and the conversion of the convertible preferred stock
are included from the date of issuance. The calculation for
F-8
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
the year ended December 31, 1996 also includes, pursuant to Securities
and Exchange Commission Staff Accounting Bulletin ("SAB") No. 83,
stock options (using the treasury stock method and the initial public
offering price) issued at prices substantially below the public
offering price during the 12-month period prior to the offering as if
they were outstanding for the three months ended March 31, 1996. For
the remainder of the year ended December 31, 1996, common equivalent
shares from stock options are excluded from the computation as their
effect is anti-dilutive.
In addition, for the year ended December 31, 1996, fully diluted net
loss per share includes common equivalent shares from convertible
preferred stock, which was converted on July 22, 1996, from the
beginning of the period to the date of conversion.
Pro forma net loss per share for the year ended December 31, 1995 is
computed using the weighted average number of shares of common stock
outstanding. Pursuant to SAB No. 83, the Series B Convertible
Preferred Stock (using the if-converted method) and stock options
(using the treasury stock method and the initial public offering
price) issued at prices substantially below the public offering price
during the 12-month period prior to the offering have been included in
the calculation. Furthermore, common equivalent shares from
convertible preferred stock issued prior to the 12-month period
preceding the offering that converted upon the completion of the
Company's 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 offering are excluded from the
computation as their effect is anti-dilutive.
(j) 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.
F-9
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(k) 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.
(l) Stock-Based Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation," establishes a
fair value based method for accounting for stock-based compensation
plans and for the measurement basis of transactions in which an entity
acquires goods or services from non-employees in exchange for equity
instruments. SFAS No. 123 requires that reporting entities either
elect expense recognition or its disclosure-only alternative for
stock-based employee compensation. During 1996, the Company adopted
SFAS No. 123 and has elected to continue measuring stock-based
employee compensation cost in accordance with the intrinsic value
based method of Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees". Therefore, the Company has
included in the notes to the financial statements pro forma net income
and pro forma earnings per share using the fair value based method for
the year ended December 31, 1996 with comparable disclosures for the
year ended December 31, 1995.
(3) Fixed Assets
Fixed assets, at cost, are summarized as follows at December 31:
1996 1995
---- ----
Equipment $3,364,781 $2,123,959
Furniture and fixtures 238,252 167,875
Leasehold improvements 840,512 577,033
---------- ----------
4,443,545 $2,868,867
Less accumulated depreciation
and amortization 1,488,015 649,016
---------- ----------
$2,955,530 $2,219,851
========== ==========
Depreciation expense for the years ended December 31, 1996, 1995, 1994, and
the period from January 23, 1993 (date of inception) to December 31, 1996
was $839,000, $517,700, $99,200, and $1,550,800, respectively.
F-10
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(4) Due from Stockholder and Related Party Transactions
A former 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 canceled 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 former 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 $5,974 and $13,736 at December
31, 1996 and 1995, respectively. 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.
In December 1996, the Company contributed a $150,000 promissory note
bearing interest at 7% per annum in exchange for a 42% limited partnership
interest in Laurel Partners Limited Partnership ("Laurel"), a limited
partnership of which a shareholder of the Company is the general partner.
The note is payable on December 26, 1998. In addition, the Company
purchased for $160,660 a 47% limited partnership interest in Laurel from
Tortoise Corporation, a corporation wholly owned by the shareholder.
Laurel's purpose is to invest, directly or indirectly, in securities of
biotechnology companies. The Company has the right to require the
shareholder to match any future investment made by the Company in Laurel up
to an aggregate investment on the part of the shareholder of $5,000,000.
This right expires on the earlier of December 31, 1999 or such time that
neither the shareholder nor one of his affiliates is the general partner of
Laurel. The Company is not required to make any additional investment in
Laurel. The investment in Laurel of $310,660 is included in other assets,
net. The investment will be accounted for under the equity method with the
recognition of losses limited to the Company's capital contributions.
See note 7 for further discussion of transactions with related parties.
F-11
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(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
December 31, 1996 and 1995, the balance of this loan was $574 and $6,866,
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
December 31, 1996 and 1995, the balance of this loan was $28,501 and
$39,595, 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 this line of
credit at December 31, 1995 totaled $2,380,000. In September 1996, the
Company repaid the outstanding line of credit balance of $2,380,000 and
canceled the line of credit. Upon repayment and cancellation of the line of
credit, the certificates of deposit which acted as collateral on the line
were no longer considered restricted cash and instead are classified as
cash equivalents on the balance sheet as of December 31, 1996.
The aggregate maturities of the loans payable to the bank for each of the
five years subsequent to December 31, 1996 are as follows: 1997, $12,601;
1998, $13,025; 1999, $3,449; 2000, $0.
(6) Income Taxes
Deferred tax assets of approximately $3,787,000 and $2,621,000 at December
31, 1996 and 1995, respectively, relate principally to tax net operating
loss carryforwards of $6,576,000 and $5,391,000 and research credit
carryforwards of $571,000 and $431,400 at December 31, 1996 and 1995,
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 $1,166,000 and
$588,000 during the years ended December 31, 1996 and 1995, respectively.
F-12
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
The Company's net operating loss carryforwards and research and development
tax credit carryforwards noted above expire in various years from 2007 to
2012. The Company's ability to utilize such net operating loss and research
and development tax credit carryforwards is subject to certain limitations
due to ownership changes, as defined by rules enacted with the Tax Reform
Act of 1986.
The Company is subject to New York State tax on capital.
(7) Preferred Stock Purchase and Research Collaboration and License Agreements
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 Convertible Preferred Stock ("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 which was due to expire in July 1997. In
January 1997, BMS exercised its option to extend its collaboration with the
Company for an additional two years through July 1999. For the year ended
December 31, 1996, the Company received $5,000,000 in cash and recorded
$4,000,000 of revenue and $1,000,000 of deferred revenue pursuant to this
agreement. For the year ended December 31, 1995, the Company received
$3,354,619 in cash and recorded revenue of $4,000,000. 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.
F-13
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
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 years ended
December 31, 1996 and 1995, the Company received and recorded revenue of
$2,500,000 and $417,809, respectively. In addition, Solvay Duphar 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 1996 or 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.
See note 8 for discussion of the conversion of the Convertible Preferred
Stock to Common Stock.
(8) Equity Transactions
In July 1996, the Company effected a one-for-three reverse Common Stock
split and changed the par value of the Common Stock to $.01 from $.001. All
Common Stock data have been restated to give effect to this reverse stock
split and change in par value for all periods presented.
In July 1996, the Company completed an initial public offering of 2,750,000
shares of Common Stock at $7.00 per share. The Company received proceeds,
net of underwriting discounts, commissions and other initial public
offering expenses of $17,176,624. Following the initial public offering,
all outstanding shares of the Series A and Series B Preferred Stock were
converted into an aggregate of 7,551,514 shares of Common Stock. Upon
conversion, the entire class of Convertible Preferred Stock of the Company
was canceled and withdrawn from the authorized capital stock of the
Company. As a result, upon completion of the offering, the Company's
authorized capital consisted of 35,000,000 shares of Common Stock.
F-14
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
In August 1996, the Company sold an additional 412,500 shares of Common
Stock at $7.00 per share pursuant to the exercise by the underwriters of an
over-allotment option granted to them. The Company received proceeds, net
of underwriting discounts and commissions, of $2,685,375.
(9) Stock Options
The 1993 Stock Option Plan ("the 1993 Plan") was adopted in January 1993.
The 1993 Plan provides for the grant of options to reward executives,
consultants and employees in order to foster in such personnel an increased
personal interest in the future growth and prosperity of the Company. The
options granted under the 1993 Plan may be either incentive stock options
or nonqualified options. An aggregate of 666,667 common shares were
reserved for issuance under the 1993 Plan.
Options granted under the 1993 Plan expire no later than ten years from the
date of grant. The option price is required to be at least 100% and 85% of
the fair market value on the date of grant as determined by the Board of
Directors for incentive stock options and nonqualified options,
respectively. The options generally become exercisable according to a
schedule of vesting as determined by the Compensation Committee of the
Board of Directors. The schedule prescribes the date or dates on which the
options become exercisable, and may provide that the option rights accrue
or become exercisable in installments over a period of months or years.
Effective May 10, 1996, the 1993 Plan was replaced by the 1996 Incentive
Plan ("the 1996 Plan") with respect to all future awards to the Company's
employees and consultants. However, awards made under the 1993 Plan will
continue to be administered in accordance with the 1993 Plan.
F-15
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
Activity under the 1993 Plan through December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options outstanding
-------------------------
Number Weighted
of Average
shares Exercise Price
------ --------------
<S> <C> <C>
Balance at December 31, 1992 -- $ --
1993 activity:
Granted 453,346 1.49
Exercised (1,667) 1.50
Canceled (5,000) 1.50
-------
Balance at December 31, 1993 446,679 1.49
------- -----
1994 activity:
Granted 115,490 1.50
Exercised (3,334) 2.44
Canceled (10,334) 2.41
-------
Balance at December 31, 1994 548,501 1.47
------- -----
1995 activity:
Granted 124,860 2.49
Exercised (10,000) 1.44
Canceled (11,668) 1.39
-------
Balance at December 31, 1995 651,693 1.67
------- -----
1996 activity:
Granted -- --
Exercised (23,877) 1.55
Canceled (10,091) 2.91
-------
Balance at December 31, 1996 617,725 $1.65
======= -----
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.37 to $3.51 and 7
years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was
486,041 and 429,659, respectively and the weighted-average exercise price
of those options was $1.54 and $1.66, respectively.
The Company entered into stock option agreements not pursuant to any plan
with certain directors, employees, founders and consultants. These options
generally become exercisable
F-16
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
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, 1996, an
aggregate of 632,967 common shares 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.
In November 1996, the Compensation Committee granted to certain directors
then in office an option to purchase 12,000 shares of Common Stock at an
exercise price of $6.75 per share. The options will become exercisable
according to a schedule of vesting as determined by the Compensation
Committee.
Activity for all of the above grants through December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Options outstanding
-------------------
Number Weighted-
of Average
shares Exercise Price
------ --------------
<S> <C> <C>
Balance at December 31, 1993 -- $ --
1994 activity:
Granted 333,334 1.50
Exercised -- --
Canceled -- --
------------
Balance at December 31, 1994 333,334 1.50
------------ --------
1995 activity:
Granted 379,639 2.98
Exercised (50,004) 2.25
Canceled (16,668) 2.25
------------
Balance at December 31, 1995 646,301 2.29
------------ ---------
1996 activity:
Granted 120,000 6.75
Exercised -- --
Canceled (25,334) 5.09
------------
Balance at December 31, 1996 740,967 $ 2.92
============ =========
</TABLE>
F-17
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 to $6.75 and
8.5 years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was
264,499 and 0, respectively and the weighted-average exercise price of
those options was $2.39 at December 31, 1996.
The 1996 Plan was adopted in May 1996. The purpose of the 1996 Plan is to
encourage and enable key employees and consultants of the Company to
acquire a proprietary interest in the Company through the ownership of the
Company's common stock. Such ownership will provide such employees and
consultants with a more direct stake in the future welfare of the Company
and encourage them to remain with the Company. It is also expected that the
1996 Plan will encourage qualified persons to seek and accept employment
with the Company. The options granted under the 1996 Plan may be either
incentive stock options or nonqualified options. In December 1996, the
maximum number of shares of Common Stock that may be the subject of awards
under the 1996 Incentive Plan was increased from 333,334 to 833,334 (plus
any shares that are the subject of canceled or forfeited awards) by the
Board of Directors subject to approval by the stockholders of the Company.
Options granted under the 1996 Plan expire no later than ten years from the
date of grant. The option price is required to be at least 100% of the fair
value on the date of grant as determined by the Board of Directors for
incentive stock options. The options generally become exercisable according
to a schedule of vesting as determined by the Compensation Committee of the
Board of Directors. The schedule prescribes the date or dates on which the
options become exercisable, and may provide that the option rights accrue
or become exercisable in installments over a period of months or years.
Activity under the 1996 Plan through December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options outstanding
-------------------
Number Weighted-
of Average
shares Exercise Price
------ --------------
<S> <C> <C>
Balance at December 31, 1995 -- $ --
1996 activity:
Granted 369,864 6.58
Exercised -- --
Canceled -- --
------- -----
Balance at December 31, 1996 369,864 $6.58
======= =====
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $5.75 to $6.625 and
10 years, respectively.
F-18
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
At December 31, 1996, none of these options were exercisable.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. If the Company had elected to
recognize compensation cost based on the fair value of the options granted
at the grant date under SFAS No. 123, net income and earnings per share
would have been reduced to the pro forma amounts indicated in the table
below (in thousands except per share amounts):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income - as reported $ (2,441) $ (1,482)
Net income - pro forma $ (3,217) $ (1,546)
Earnings per share - as reported $ (.39) $ (.16)
Earnings per share - pro forma $ (.51) $ (.17)
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of 4 years and compensation cost for options
granted prior to January 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 0.90 .0001
Risk-free interest rate 6.00% to 6.66% 5.58% to 6.51%
Expected life of options 6 years 6 years
</TABLE>
The weighted average grant date fair value of options granted during 1996
and 1995 was $5.02 per share and $.80 per share, respectively.
(10) 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
F-19
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
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, 1996, 1995, 1994, and the period from January 23, 1992 (date
of inception) to December 31, 1996 amounted to approximately $355,000,
$250,000, $236,000 and $948,000, respectively.
(11) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrued legal costs $175,000 $ --
Accrued rent 65,431 130,845
Accrued bonuses 32,500 100,000
Other accrued expenses and
current liabilities 197,729 190,310
-------- --------
$470,660 $421,155
======== ========
</TABLE>
(12) 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 accrued expenses and other
current liabilities 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 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.
F-20
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
In November 1994, the Company entered into an agreement to sublease 2,989
square feet of laboratory/office space, in Lakewood, Colorado, from
Colorado Bio/Medical Venture Center ("CBVC") for a period of 21 months
ending on July 9, 1996. In March 1996, the Company extended the sublease
agreement for eight additional months, therefore extending the lease
expiration date to March 9, 1997. The Company will become a month-to-month
tenant beginning March 10, 1997 but has received a letter from the landlord
of the Colorado facility agreeing to extend the term of the sublease. In
May 1996, the Company subleased an additional 521 square feet of office
space from CBVC.
Future minimum lease payments for the year ending December 31, 1997 are
$751,026.
Rent expense for the years ended December 31, 1996, 1995, and 1994, and the
period from January 23, 1992 (date of inception) to December 31, 1996
amounted to approximately $620,600, $434,600, $100,500, and $1,234,900,
respectively.
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.
(13) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Period from
January 23, 1992
(date of inception)
to December 31,
1996 1995 1994 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash payment for :
Interest $110,416 $77,866 $ 5,063 $193,345
======== ======= ======= ========
Income taxes $ 45,475 $21,694 $36,994 $104,892
======== ======= ======= ========
</TABLE>
F-21
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
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 $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.
(14) Employee Benefits
The Company has a 401(k) savings plan in which substantially all of its
permanent employees are eligible to participate. Annually, the Company's
Compensation Committee determines the amount the Company will match of the
participants' contributions. In 1996, the Compensation Committee elected to
match 50% of the participant's contribution up to a maximum of 6% of the
participant's salary for a total Company contribution of $37,856 for the
year ended December 31, 1996. No matching contributions were made by the
Company prior to the year ended December 31, 1996.
(15) 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. Through December 31,
1996, the Company had 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
continue to 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.
F-22
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
(a development stage corporation)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
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.
(16) Subsequent Event
In February 1997, the Company entered into a research collaboration and
license agreement with SmithKline Beecham. During the term of the research
collaboration, which expires in February 2002, the Company will seek to
identify ligands and to elucidate the function of orphan G protein-coupled
receptors included within the collaboration and create high-throughput
screens to discover small molecule agonists and antagonists to these
receptors.
During the term of the research collaboration, SmithKline Beecham is
required to provide the Company with research funding of $3.0 million each
year, adjusted for inflation, and certain other payments, including a $2.0
million payment in February 1998. SmithKline Beecham is also required to
make payments to the Company upon the achievement of certain research
milestones and upon the achievement by SmithKline Beecham of certain drug
development milestones. SmithKline Beecham is also required to pay the
Company royalties on the sale of drugs developed through the use of the
Company's drug discovery technologies. The Company has co-promotion rights
in North America for certain products that may result from the
collaboration and rights to certain potential products that SmithKline
Beecham may choose not to develop.
SmithKline Beecham has the right to extend the term of the research
collaboration for between two and five years by notice to the Company given
prior to February 25, 2001. SmithKline Beecham has the right to terminate
the research collaboration after February 25, 1999 (or later under certain
circumstances) ("Evaluation Date") if (i) the Company fails to meet certain
scientific objectives in connection with the conduct of the research
collaboration or (ii) fails to perform its obligations in the conduct of
the research collaboration in any material respect and does not cure such
failure within a period of 60 days after receiving notice thereof. In the
event of such termination, SmithKline Beecham has no further obligation to
provide the Company with funding for the research collaboration.
In February 1997, the Company and SmithKline Beecham Corporation entered
into a stock purchase agreement pursuant to which the Company has the
option to sell to SmithKline Beecham Corporation (i) shares of the
Company's common stock having a then fair market value of $5.0 million
during a 90-day period commencing on February 25, 1998 and (ii) shares of
the Company's common stock having a then fair market value of $5.0 million,
during a 90-day period commencing on the date certain scientific objectives
are achieved (subject to the Company achieving such objectives prior to the
Evaluation Date and meeting certain financial requirements). In addition,
SmithKline Beecham Corporation has the right, at its option, to purchase up
to $5.0 million worth of shares of the Company's common stock at 150% of
the then fair market value in lieu of making certain research milestone
payments. The Company granted SmithKline Beecham Corporation certain
registration rights with respect to shares of the Company's common stock
which SmithKline Beecham Corporation may purchase pursuant to the stock
purchase agreement.
F-23
Exhibit 11
<PAGE>
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
(pro forma)
<S> <C> <C>
Net loss $ (2,440,725) $ (1,482,490)
Loss per common and common equivalent share:
Weighted average number of shares of common stock
outstanding during the period after giving effect to the
one-for-three reverse stock split 6,231,186 1,382,139
Common equivalent shares from stock options issued
during the 12-month period prior to the registration
statement filing using the treasury stock method 49,731 198,924
Conversion of the Series A Convertible Preferred Stock
using the if-converted method -- 4,959,901
Conversion of the Series B Convertible Preferred Stock
using the if-converted method -- 2,591,613
------------ ------------
Shares used in calculation of net loss per share 6,280,917 9,132,577
Net loss per common and common equivalent share $ (0.39) $ (0.16)
============ ============
Loss per common and common equivalent share
assuming full dilution:
Weighted average number of shares of common stock
outstanding during the period after giving effect to the
one-for-three reverse stock split 6,280,917 --
Series A Convertible Preferred stock prior to conversion 2,686,612 --
Series B Convertible Preferred stock prior to conversion 1,321,925 --
------------ ------------
Weighted average number of common and common
equivalent shares outstanding - assuming full dilution 10,289,454 --
Net loss per common and common equivalent share
assuming full dilution $ (0.24) --
============ ============
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cadus Pharmaceutical Corporation:
We consent to incorporation by reference in the registration statement (No.
333-21871) on Form S-8 of Cadus Pharmaceutical Corporation (a development stage
corporation) of our report dated March 25, 1997, relating to the balance sheets
of Cadus Pharmaceutical Corporation as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996 and the period
from January 23, 1992 (date of inception) to December 31, 1996, which report
appears in the December 31, 1996 annual report on Form 10-K of Cadus
Pharmaceutical Corporation.
KPMG Peat Marwick LLP
New York, New York
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the Balance Sheet, and Income Statement
and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000911148
<NAME> Cadus Pharmaceutical Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 43,152,677
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,415,729
<PP&E> 4,443,545
<DEPRECIATION> 1,488,015
<TOTAL-ASSETS> 47,286,858
<CURRENT-LIABILITIES> 1,939,055
<BONDS> 16,474
0
0
<COMMON> 122,029
<OTHER-SE> 45,059,300
<TOTAL-LIABILITY-AND-EQUITY> 47,286,858
<SALES> 0
<TOTAL-REVENUES> 6,500,000
<CGS> 0
<TOTAL-COSTS> 10,597,549
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,416
<INCOME-PRETAX> (2,378,145)
<INCOME-TAX> 62,580
<INCOME-CONTINUING> (2,440,725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,440,725)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.24)
</TABLE>
