<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
---------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-28674 .
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CADUS PHARMACEUTICAL CORPORATION
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3660391
- ------------------------------------------------- --------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
777 Old Saw Mill River Road, Tarrytown, New York 10591-6705
- ------------------------------------------------- --------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (914) 467-6200
--------------------------
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
----- -----
The number of shares of registrant's common stock, $.01 par value, outstanding
as of July 22, 1998 was 13,068,940.
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
INDEX
Page No.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 3
PART I -- CONDENSED FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets - June 30, 1998
and December 31, 1997 4
Condensed Statements of Operations -
Three and six months ended
June 30, 1998 and 1997 5
Condensed Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 6
Notes to Condensed Financial Statements 7- 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
2
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, the Company's lack of developed
pharmaceutical products and uncertainties regarding its ability to
develop safe and efficacious pharmaceutical products, technological
uncertainties regarding the Company's technologies, uncertainties
regarding the Company's future acquisition and licensing of technologies,
the Company's relationship with its collaborative partners and
uncertainties regarding its ability to enter into future collaborative
agreements, the Company's capital needs and uncertainty of future
funding, the Company's history of operating losses, the Company's
dependence on proprietary technology and the unpredictability of patent
protection, intense competition in the pharmaceutical and biotechnology
industries, rapid technological development that may result in the
Company's technologies and future products becoming obsolete,
uncertainties regarding the Company's ability to attract and retain key
officers, employees and consultants, as well as other risks and
uncertainties discussed in the Company's prospectus dated July 17, 1996.
3
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,914,197 $ 36,761,516
Prepaid and other current assets 692,101 405,597
------------ ------------
Total current assets 37,606,298 37,167,113
Fixed assets, net of accumulated depreciation and amortization of
$1,833,977 at June 30, 1998 and $2,582,661 at December 31, 1997 2,960,809 2,646,936
Investments in other ventures (note 3) 2,875,504 1,478,229
Other assets, net 1,207,320 948,912
------------ ------------
Total assets $ 44,649,931 $ 42,241,190
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue $ 113,279 $ 94,190
Accounts payable 695,688 892,636
Accrued expenses and other current liabilities 509,279 604,146
Note payable to partnership 150,000 150,000
------------ ------------
Total current liabilities 1,468,246 1,740,972
Commitments and contingencies
Stockholders' equity:
Common stock 132,101 125,001
Additional paidin capital 59,688,701 54,517,519
Accumulated deficit (16,339,042) (13,842,227)
Treasury stock (300,075) (300,075)
------------ ------------
Total stockholders' equity 43,181,685 40,500,218
------------ ------------
Total liabilities and stockholders' equity $ 44,649,931 $ 42,241,190
============ ============
</TABLE>
See accompanying notes to the condensed financial statements
4
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues, principally from
related parties $ 2,508,213 $ 2,271,865 $ 7,440,025 $ 4,161,786
Costs and expenses:
Research and development costs 3,487,896 3,128,962 7,237,080 5,368,530
General and administrative expenses 1,776,716 1,106,192 3,013,301 1,988,600
--------------- --------------- --------------- ---------------
Total costs and expenses 5,264,612 4,235,154 10,250,381 7,357,130
--------------- --------------- --------------- ---------------
Operating loss (2,756,399) (1,963,289) (2,810,356) (3,195,344)
--------------- --------------- --------------- ---------------
Other income and (expenses):
Net interest income 597,896 540,431 969,254 1,084,389
Equity in other ventures (186,240) (283,905) (602,725) (300,017)
Gain/(loss) on sale of equipment (18,617) -- (10,714) --
--------------- --------------- --------------- ---------------
Total other income and (expenses) 393,039 256,526 355,815 784,372
--------------- --------------- --------------- ---------------
Loss before income taxes (2,363,360) (1,706,763) (2,454,541) (2,410,972)
--------------- --------------- --------------- ---------------
State and local taxes 38,639 23,117 42,274 23,117
--------------- --------------- --------------- ---------------
Net loss $ (2,401,999) $ (1,729,880) $ (2,496,815) $ (2,434,089)
=============== =============== =============== ===============
Basic net loss per share (note 2) $ (0.19) $ (0.14) $ (0.20) $ (0.20)
Shares used in calculation of basic net
loss per share (note 2) 12,733,059 12,174,009 12,554,152 12,131,003
</TABLE>
See accompanying notes to the condensed financial statements
5
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,496,815) $ (2,434,089)
Equity in other ventures 602,725 300,017
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 463,447 627,667
Gain on sale of equipment (8,374) --
Amortization of gain on sale of equipment 18,885 --
Changes in assets and liabilities: -- --
(Increase) decrease in prepaid and other current assets (286,504) 104,165
(Increase) decrease in other assets (41,832) 4,355
Increase (decrease) in deferred revenue 204 (1,000,000)
(Decrease) increase in accounts payable (196,948) 214,619
(Decrease) in accrued expenses and other current liabilities (94,867) (213,668)
------------ ------------
Net cash used in operating activities (2,040,079) (2,396,934)
------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (1,458,583) (950,050)
Sale of fixed assets 724,661 --
Decrease in restricted cash -- 78,000
Repayment of stockholder's loan -- 3,881
Investments in other ventures (2,000,000) (2,000,000)
Patent costs (251,598) (254,539)
------------ ------------
Net cash used in investing activities (2,985,520) (3,122,708)
------------ ------------
Cash flows from financing activities:
Payments on bank loans -- (29,075)
Proceeds from issuance of common stock 5,178,280 450,390
------------ ------------
Net cash provided by financing activities 5,178,280 421,315
------------ ------------
Net increase (decrease) in cash and cash equivalents 152,681 (5,098,327)
Cash and cash equivalents at beginning of period 36,761,516 43,152,677
------------ ------------
Cash and cash equivalents at end of period $ 36,914,197 $ 38,054,350
============ ============
</TABLE>
See accompanying notes to the condensed financial statements
6
<PAGE>
Cadus Pharmaceutical Corporation
Notes to Condensed Financial Statements
(1) ORGANIZATION AND BASIS OF PREPARATION
The information presented as of June 30, 1998 and for the three and
six-month periods then ended, is unaudited, but includes all adjustments
(consisting only of normal recurring accruals) that the Company's
management believes to be necessary for the fair presentation of results
for the periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
the requirements of the Securities and Exchange Commission, although the
Company believes that the disclosures included in these financial
statements are adequate to make the information not misleading. The
December 31, 1997 balance sheet was derived from audited financial
statements. These financial statements should be read in conjunction
with the Company's annual report on Form 10-K for the year ended
December 31, 1997.
The results of operations for the three and six-month periods ended June
30, 1998 are not necessarily indicative of the results to be expected
for the year ending December 31, 1998.
(2) NET LOSS PER SHARE
At December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings per Share. For the
three and six-month periods ended June 30, 1998 and 1997, basic net loss
per share is computed by dividing the net loss by the weighted average
number of common shares outstanding. Diluted net loss per share is the
same as basic net loss per share since the inclusion of potential common
stock equivalents (stock options and warrants) in the computation would
be anti-dilutive.
(3) INVESTMENTS IN OTHER VENTURES
In December 1996, the Company issued a $150,000 promissory note bearing
interest at 7% per annum in exchange for a 42% limited partnership
interest in Laurel Partners Limited Partnership ("Laurel"), a limited
partnership of which a shareholder of the Company is the general
partner. An interest payment of $10,500 was accrued at December 31, 1997
and paid in January 1998. The principal amount and interest accrued
thereon 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 $5.0
million. This right expires on the earlier of December 31, 1999 or such
time that neither the shareholder nor one of his affiliates is the
general partner of Laurel. The Company is not required to make any
additional investment in Laurel. The investment is accounted for under
the equity method with the recognition of losses limited to the
Company's capital contributions. For the three and six-month periods
ended June 30, 1998, the Company recognized gains of $79 and $7,594,
respectively. For the three and six-month periods ended June 30, 1997,
the Company recognized losses of $126,092 and $142,204, respectively.
The remaining investment in Laurel of $144,290 is included in
investments in other ventures on the balance sheet.
In May 1997, the Company purchased $2.0 million of convertible preferred
stock in Axiom Biotechnologies Inc. ("Axiom"), representing
approximately 26% of the outstanding shares of Axiom on an as converted
basis. As part of the arrangement, Axiom agreed to deliver and license
to the Company its first High Throughput Pharmacology System
(HT-PS)(TM). The Company purchased an additional $2.0 million
of convertible preferred stock in Axiom on June 5, 1998 after
the Company received and accepted Axiom's HT-PS(TM).
The Company also made a payment to Axiom for the HT-PS(TM)
which is included in fixed assets in the
7
<PAGE>
Cadus Pharmaceutical Corporation
Notes to Condensed Financial Statements
accompanying balance sheet at June 30, 1998. The additional investment
increased the Company's equity interest in Axiom to approximately 30% of
Axiom's outstanding shares on an as converted basis, after taking into
account a recent investment in Axiom by JAFCO Co., Ltd., ("JAFCO"), an
affiliate of the Nomura Group. The Company's investment is accounted for
under the equity method with the Company recognizing 100% of Axiom's net
losses prior to the JAFCO investment and 50% after such investment. Such
percentage represents the extent to which the Company is deemed to be
funding Axiom's losses. For the three and six-month periods ended June
30, 1998, the Company recognized $186,319 and $610,319, respectively in
losses generated by Axiom. For the three and six-month periods ended
June 30, 1997, the Company recognized losses of $157,813. The remaining
investment in Axiom of $2,731,214 is included in investments in other
ventures on the balance sheet.
(4) RESEARCH COLLABORATIONS
Pursuant to the Bristol-Myers Squibb Company Research Collaboration and
License Agreement, the Company received and recognized revenue of
approximately $1.1 million and $2.1 million for the three and six-month
periods ended June 30, 1998. The Company also received and recognized
revenue of approximately $661,000 and $1.3 million, from a Research
Collaboration and License Agreement with Solvay Pharmaceuticals B.V.,
for the three and six-month periods ended June 30, 1998.
Pursuant to the SmithKline Beecham Research Collaboration and License
Agreement, the Company received and recognized research funding of
approximately $780,000 and $2.0 million during the three and six-month
periods ended June 30, 1998. In March 1998, the Company also received
and recognized a one-time technology development fee of $2.0 million
from SmithKline Beecham. On May 8, 1998, the Company exercised its
option to sell 660,962 shares of its common stock to SmithKline Beecham
p.l.c. and SmithKline Beecham Corporation for approximately $7.56 per
share or an aggregate consideration of $5.0 million. The sale closed on
May 15, 1998.
(5) RESEARCH AGREEMENT
In January 1998, the Company entered into a sponsored research agreement
with the Massachusetts Institute of Technology ("M.I.T.") pursuant to
which M.I.T. will use its expertise in micro-robotics to co-develop the
Living ChipTM, a novel drug discovery screening tool that would
miniaturize and automate the Company's proprietary hybrid yeast cell
technology. If developed, the Living ChipTM could ultimately accommodate
at least 100,000 yeast-based drug discovery assays on a single CD-sized
synthetic disc and could permit the testing of thousands of compounds on
multiple assays at the individual scientist's lab bench. The Company is
only obligated to provide M.I.T. with research funding for 1998 but has
the option to extend the arrangement through 1999. The Company also
entered into a license agreement with M.I.T. pursuant to which the
Company obtained exclusive worldwide rights, for use in pharmaceutical,
animal health and agricultural businesses, to the technology developed
under the sponsored research arrangement. In order to maintain its
exclusive license, the Company must provide M.I.T. with research funding
in 1998 and 1999 and make a minimum level of expenditures thereafter to
commercialize the technology until the technology is commercialized. The
Company is required to pay M.I.T. an annual license fee, royalties on
the sale or lease of Living ChipTM systems, royalties on the sale of
therapeutics and diagnostics developed using the Living ChipTM and
royalties on services rendered based on the Living ChipTM . In lieu of
royalty payments on sales by sublicensees of drugs initially identified
by sublicensees through the use of licensed technology, the Company pays
an annual fee for each sublicense in effect, provided that a license to
other technology owned or licensed by the Company was granted to the
sublicensee at the same time.
8
<PAGE>
Cadus Pharmaceutical Corporation
Notes to Condensed Financial Statements
(6) Commitments and Contingencies
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 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
unfair competition and intentional interference with prospective economic
advantage by SIBIA with respect to the Company's initial public offering.
On August 7, 1998, the court granted SIBIA's summary judgment motion to
dismiss the Company's counterclaims for unfair competition and intentional
interference with prospective economic advantage.
Trial of the action is presently scheduled for November 3, 1998.
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. 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 injuctive 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 could be
materially adversely affected.
(7) SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTH
ENDED JUNE 30,
--------------
1998 1997
------------------------------------
Cash payments for:
Interest............... $0 $2,754
== ======
Income taxes........... $25,274 $23,117
======= =======
(8) NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 130 requires that all items recognized under
accounting standards as components of comprehensive income be reported
in an annual financial statement that is displayed with the same
prominence as other annual financial statements. Other comprehensive
income may include foreign currency translation adjustments, minimum
pension liability adjustments and unrealized gains and losses on
marketable securities classified as available-for-sale. The adoption of
SFAS 130 had no impact on the Company's financial statements. SFAS 131
established standards to report information about operating segments and
related discussions about products and services, geographic areas and
major customers and requires that such information be included in the
Company's 1998 annual report. The adoption of SFAS 131 is not expected
to affect the Company's reporting of its results of operations and
financial position.
9
<PAGE>
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 $2.5 million during the
six-month period ended June 30, 1998. At June 30, 1998, the Company had
an accumulated deficit of approximately $16.3 million. The Company's
losses have resulted principally from costs incurred in research and
development and from general and administrative expenses 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
Six months Ended June 30, 1998 and June 30, 1997
Revenues
Revenues for the six months ended June 30, 1998 increased to $7.4
million from $4.2 million for the same period in 1997. This increase was
attributable primarily to a one time $2.0 million technology development
fee and an increase in the level of research funding from SmithKline
Beecham ("SmithKline"), one of the Company's collaborative partners. The
research collaboration with SmithKline began in February 1997.
Operating Expenses
The Company's research and development expenses for the six months ended
June 30, 1998 increased to $7.2 million from $5.4 million for the same
period in 1997. This increase was attributable to increases in staffing,
supplies and facility expenses as well as expenses associated with the
Company's sponsored research agreement with M.I.T., which began in
January of 1998.
General and administrative expenses for the six months ended June 30,
1998 increased to $3.0 million from $2.0 million for the same period in
1997. This increase was attributable primarily to increased litigation
expenses.
Net Interest Income
Net interest income for the six months ended June 30, 1998 decreased to
$1.0 from $1.1 million for the same period in 1997. This decrease
related primarily to the decrease in the Company's cash reserves.
Equity in Other Ventures
Equity in other ventures reflects gains and losses associated with the
Company's two investments. For the six months ended June 30, 1998 and
1997, the Company recognized a gain and a loss of $7,594 and $142,204,
respectively, related to its investment in Laurel Partners Limited
Partnership. For the six months ended June 30, 1998 and 1997, the
Company recognized $610,319 and $157,813, respectively, in losses
generated by Axiom Biotechnologies Inc. ("Axiom"). The Company's
investment in Axiom is accounted for under the
10
<PAGE>
equity method with the Company recognizing 100% of Axiom's net losses
prior to a recent investment made by JAFCO Co., Ltd., ("JAFCO") in
Axiom. Following the JAFCO investment the Company began recognizing 50%
of the net losses generated by Axiom which is the extent to which the
Company is deemed to be funding such losses.
Net Loss
The net loss for the six months ended June 30, 1998 increased to $2.5
million from $2.4 million for the same period in 1997. This increase can
be attributed to an increase in the Company's expenses, which was
partially offset by an increase in revenues as described above.
Three months Ended June 30, 1998 and June 30, 1997
Revenues
Revenues for the three months ended June 30, 1998 increased to $2.5
million from $2.3 million for the same period in 1997. This increase was
attributable primarily to inflation based increases in research funding
from the Company's research collaborations.
Operating Expenses
The Company's research and development expenses for the three months
ended June 30, 1998 increased to $3.5 million from $3.1 million for the
same period in 1997. This increase was attributable primarily to
increases in staffing, supplies, and facility expenses.
General and administrative expenses for the three months ended June 30,
1998 increased to $1.8 million from $1.1 million for the same period in
1997. This increase was attributable primarily to increased litigation
expenses.
Net Interest Income
Net interest income for the three months ended June 30, 1998 increased
to $598,000 from $540,000 for the same period in 1997. This increase
related primarily to higher cash reserves resulting from the Company's
sale to SmithKline Beecham Corporation of $5.0 million of its common
stock in May of 1998.
Equity in Other Ventures
Equity in other ventures reflects losses and gains associated with the
Company's two investments. For the three months ended June 30, 1998 and
1997, the Company recognized a gain and a loss of $79 and $126,092,
respectively, related to its investment in Laurel Partners Limited
Partnership. For the three months ended June 30, 1998 and 1997, the
Company recognized $186,319 and $157,813, respectively, in losses
generated by Axiom. The Company's investment in Axiom is accounted for
under the equity method with the Company recognizing 100% of Axiom's net
losses prior to a recent investment made by JAFCO Co., Ltd., ("JAFCO")
in Axiom. Following the JAFCO investment the Company began recognizing
50% of the net losses generated by Axiom, which is the extent to which
the Company is deemed to be funding such losses.
Net Loss
The net loss for the three months ended June 30, 1998 increased to $2.4
million from $1.7 million for the same period in 1997. This increase can
be attributed to an increase in the Company's expenses, which was
partially offset by an increase in revenues and net interest income as
described above.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company held cash and cash equivalents of $36.9
million. The Company's working capital at June 30, 1998 was $36.1
million.
In May 1997, the Company purchased $2.0 million of convertible preferred
stock in Axiom. On June 5, 1998 the Company purchased an additional $2.0
million of convertible preferred stock in Axiom upon the receipt and
acceptance of Axiom's High Throughput Pharmacological Screening System
(HT-PS)(TM).
On May 8, 1998, the Company exercised its option to sell to SmithKline
Beecham Corporation 660,962 shares of its common stock for approximately
$7.56 per share or an aggregate consideration of $5.0 million. The
sale closed on May 15, 1998.
For the six-month period ended June 30, 1998, the Company invested
approximately $1,459,000 in property and equipment and refinanced
approximately $704,000 of equipment through a sale leaseback arrangement
with GE Capital Corporation. 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
expects to finance the majority of these capital expenditures using its
existing lease line of credit with GE Capital Corporation or other
similar arrangements.
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. This forecast of the period of time through which the Company's
financial resources will be adequate to support its operations is a
forward-looking statement that may not prove accurate and, as such,
actual results may vary. The Company's capital requirements may vary as
a result of a number of factors, including the 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 financing or additional corporate partnerships. No
assurance can be given that such additional financing will be available
when needed or that, if available, such financing will be obtained on
terms favorable to the Company. To the extent that additional capital is
raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to the Company's
stockholders.
YEAR 2000
The Company is aware of challenges associated with the inability of
certain computer systems to properly format information after December
31, 1999 (the "Year 2000 Challenge"). The Company is modifying its
computer systems to address the Year 2000 Challenge and does not expect
that the cost of modifying such systems will be material. The Company
believes it will fully remediate any of its Year 2000 Challenges in
advance of the year 2000 and does not anticipate any material disruption
in its operations as the result of any failure by the Company to fully
remediate such challenges. The Company does not have any information
concerning the status of Year 2000 Challenges of its suppliers and
customers.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 revises
disclosures about pension an other postretirement benefit plans.
Management of the Company does not believe that the implementation of
SFAS No. 132 will have a significant impact on previously reported
information regarding its employee retirement plans.
12
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
This Company is not a party to any material legal proceedings
other than SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical
Corporation. SIBIA Neurosciences, Inc. ("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
unfair competition and intentional interference with prospective
economic advantage by SIBIA with respect to the Company's initial
public offering.
On August 7, 1998, the court granted SIBIA's summary judgment
motion to dismiss the Company's counterclaims for unfair
competition and intentional interference with prospective economic
advantage.
Trial of the action is presently scheduled for November 3, 1998
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. 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 could be materially
adversely affected.
Item 2. Changes in Securities and Use of Proceeds
(a) On May 15, 1998, the Company sold 660,962 shares of its
common stock to SmithKline Beecham p.l.c. and SmithKline
Beecham Corporation at a price of approximately $7.56
per share or an aggregate price of $5.0 million. Such
shares of common stock were not registered under the
Securities Act of 1933, as amended (the "Act"), in
reliance on the exemption from registration under the
Act set forth in Section 4(2) of the Act.
(b) Securities Act Rule 229.463 ("Rule 463") required
issuers to periodically report on Form SR their use of
proceeds from an initial public offering, until all such
proceeds were fully utilized. Effective September 2,
1997, pursuant to Release No. 34-38850, the Securities
and Exchange Commission amended Rule 463 to eliminate
Form SR and to require a registrant to report its use of
proceeds from an initial public offering in each of its
periodic reports filed pursuant to the requirements of
the Exchange Act until all such proceeds are fully
utilized. The Company has not reported, on previously
filed Forms SR or period reports, that it has utilized
any of the proceeds received from its initial public
offering. The information provided below represents a
reasonable estimate of the application through June 30,
1998 of the net proceeds of $19,783,140 which were
received from the Company's initial public offering on
July 17, 1996:
Construction of plant,
building and facilities $300,440
Purchase and installation of
machinery and equipment $863,353
Research and license
payments to others $600,965
Investment in companies
complementary to the
Company's business $2,000,000
Working capital used to
fund operations $1,266,310
Except for payments described in the following sentence,
the application of the net offering proceeds listed
above represents direct payments to others. No payments
were made to directors or officers or to their
associates except for payments made in the ordinary
course of business which include, but may not be limited
to, the payment of officer salaries, fringe benefits,
and expense reimbursements or compensation paid to
directors for their services provided to the Company
under consulting arrangements. At June 30, 1998, the
company had $14,752,072 of net offering proceeds that
were still not utilized.
Item 3. Defaults Upon Senior Securities
Nothing to report.
13
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On June 4, 1998, the Company held its annual meeting of
stockholders in Tarrytown, New York. The holders of
11,674,450 shares of Common Stock were present or
represented by proxy and, accordingly, a quorum was present
and matters were voted on as follows:
(a) The following persons were elected directors of the Company:
Votes For Votes Withheld
--------- --------------
Theodore Altman 11,464,059 210,391
James R. Broach 11,627,442 47,008
Harold First 11,617,198 57,252
Russell D. Glass 11,617,198 57,252
Carl Icahn 11,056,301 618,149
William Koster 11,627,442 47,008
Peter S. Liebert 11,617,198 57,252
Robert Mitchell 11,617,198 57,252
Siegfried G. Schaefer 11,617,198 57,252
Nicole Vitullo 11,627,442 47,008
Samuel D. Waksal 11,062,301 612,149
Jack G. Wasserman 11,262,998 411,452
(b) The proposal to approve the amendment to the Company's
1996 Incentive Plan (the "Plan") that increases the
maximum number of shares of Common Stock that may be the
subject of awards under the Plan by 1,000,000 from
833,334 shares to 1,833,334 shares was approved by the
stockholders. 8,104,326 shares of Common Stock voted for
the proposal, 209,142 shares voted against the proposal
and 5,735 shares abstained. There were 3,355,247 broker
non-votes with respect to the proposal.
Item 5. Other Information
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits listed in the Exhibit Index are included in
this report.
(c) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CADUS PHARMACEUTICAL CORPORATION
(REGISTRANT)
DATE: AUGUST 12, 1998 BY James S. Rielly
------------------------------
James S. Rielly
VICE PRESIDENT OF FINANCE, TREASURER AND
SECRETARY (AUTHORIZED OFFICER AND PRINCIPAL
FINANCIAL OFFICER)
15
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the Balance Sheet, and Statement of
Operations and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 36,914,197
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,606,298
<PP&E> 4,794,786
<DEPRECIATION> 1,833,977
<TOTAL-ASSETS> 44,649,931
<CURRENT-LIABILITIES> 1,468,246
<BONDS> 150,000
0
0
<COMMON> 132,101
<OTHER-SE> 43,049,584
<TOTAL-LIABILITY-AND-EQUITY> 44,649,931
<SALES> 0
<TOTAL-REVENUES> 7,440,025
<CGS> 0
<TOTAL-COSTS> 10,250,381
<OTHER-EXPENSES> 613,439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (969,254)
<INCOME-PRETAX> (2,454,541)
<INCOME-TAX> 42,274
<INCOME-CONTINUING> (2,496,815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,496,815)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
</TABLE>
