<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 March 31, 1998
------------------
[ ] 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)
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 April 30, 1998 was 12,403,753.
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 3
PART I -- CONDENSED FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets - March 31, 1998 and December 31, 4
1997
Condensed Statements of Operations - Three months ended March
31, 1998 and 1997 5
Condensed Statements of Cash Flows - Three months ended
March 31, 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 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</TABLE>
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>
March 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 36,891,851 $ 36,761,516
Prepaid and other current assets 493,873 405,597
-------------- --------------
Total current assets 37,385,724 37,167,113
Fixed assets, net of accumulated depreciation and amortization of
$1,881,954 at March 31, 1998 and $2,582,661 at December 31, 1997 2,055,441 2,646,936
Investments in other ventures (note 3) 1,061,744 1,478,229
Other assets, net 1,022,904 948,912
-------------- --------------
Total assets $ 41,525,813 $ 42,241,190
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Deferred revenue $ 124,261 $ 94,190
Accounts payable 107,979 892,636
Accrued expenses and other current liabilities 595,130 604,146
Note payable to partnership 150,000 150,000
-------------- --------------
Total current liabilities 977,370 1,740,972
Commitments and contingencies
Stockholders' equity:
Common stock 125,340 125,001
Additional paid-in capital 54,660,221 54,517,519
Accumulated deficit (13,937,043) (13,842,227)
Treasury stock (300,075) (300,075)
-------------- --------------
Total stockholders' equity 40,548,443 40,500,218
-------------- --------------
Total liabilities and stockholders' equity $ 41,525,813 $ 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
March 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues, principally from
related parties $ 4,931,812 $ 1,889,921
Costs and expenses:
Research and development costs 3,749,184 2,239,568
General and administrative expenses 1,236,585 882,408
------------ ------------
Total costs and expenses 4,985,769 3,121,976
------------ ------------
Operating loss (53,957) (1,232,055)
------------ ------------
Other income and (expenses):
Net interest income 371,358 543,958
Equity in other ventures (416,485) (16,112)
Gain on sale of equipment 7,903 --
------------ ------------
Total other income and (expenses) (37,224) 527,846
------------ ------------
Loss before income taxes (91,181) (704,209)
State and local taxes 3,635 --
------------ ------------
Net loss $ (94,816) $ (704,209)
============ ============
Basic net loss per share (note 2) $ (0.01) $ (0.06)
Shares used in calculation of basic net
loss per share (note 2) 12,375,245 12,087,997
</TABLE>
See accompanying notes to the condensed financial statements
5
<PAGE>
Cadus Pharmaceutical Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (94,816) $ (704,209)
Equity in other ventures 416,485 16,112
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 234,066 291,460
Gain on sale of equipment (37,974) --
Amortization of gain on sale of equipment 7,903 --
Changes in assets and liabilities: --
Increase in prepaid and other current assets (88,276) (26,342)
Increase in research support receivable -- (243,056)
(Increase) decrease in other assets (17,514) 42,501
Increase (decrease) in deferred revenue 22,168 (1,000,000)
(Decrease) increase in accounts payable, accrued expenses and
other current liabilities (793,673) 69,375
-------------- --------------
Net cash used in operating activities (351,631) (1,554,159)
-------------- --------------
Cash flows from investing activities:
Acquisition of fixed assets (292,965) (619,666)
Sale of fixed assets 704,661 --
Decrease in restricted cash -- 18,000
Repayment of stockholder's loan -- 1,941
Patent costs (72,771) (121,996)
-------------- --------------
Net cash provided by/(used in) investing activities 338,925 (721,721)
-------------- --------------
Cash flows from financing activities:
Payments on bank loans -- (3,498)
Proceeds from issuance of common stock upon exercise of stock options 143,041 149,220
-------------- --------------
Net cash provided by financing activities 143,041 145,722
-------------- --------------
Net increase (decrease) in cash and cash equivalents 130,335 (2,130,158)
Cash and cash equivalents at beginning of period 36,761,516 43,152,677
-------------- --------------
Cash and cash equivalents at end of period $ 36,891,851 $ 41,022,519
============== ==============
</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 March 31, 1998 and for the three-month
period 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-month period ended March 31,
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 month periods ended March 31, 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-month
periods ended March 31, 1998 and 1997, the Company recognized a gain
and a loss of $7,515 and $16,112, respectively. The remaining
investment in Laurel of $144,211 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 has agreed to deliver and
license to the Company its first High Throughput Pharmacology System
(HT-PS(TM)). The Company has agreed to purchase an additional $2.0
million of convertible preferred stock in Axiom if the Company receives
and accepts Axiom's HT-PS(TM)) on or prior to May 29, 1998. This would
increase the Company's equity interest in Axiom to approximately
7
<PAGE>
Cadus Pharmaceutical Corporation
Notes to Condensed Financial Statements
38% of Axiom's then outstanding shares (assuming no additional shares
of common stock or securities convertible into common stock are issued
by Axiom in the interim) on an as converted basis. The investment is
accounted for under the equity method with the Company recognizing 100%
of Axiom's net losses to the extent that the Company's investment is
funding those losses. For the three-month period ended March 31, 1998,
the Company recognized $424,000 in losses generated by Axiom. The
remaining investment in Axiom of $917,533 is included in investments in
other ventures on the balance sheet.
(4) Research Collaborations
In accordance with the Bristol-Myers Squibb Company Research
Collaboration and License Agreement the Company received and recognized
revenue of approximately $1,067,000 for the three-month period ended
March 31, 1998. The Company also received and recognized revenue of
approximately $661,000 from a Research Collaboration and License
Agreement with Solvay Pharmaceuticals B.V. Pursuant to the SmithKline
Beecham p.l.c. Research Collaboration and License Agreement, the
Company received and recognized a one-time technology development fee
of $2.0 million and approximately $1,204,000 in research funding during
the three-month period ended March 31, 1998.
(5) Research Agreement
In January 1998, the Company entered into a sponsored research agreement
with Massachusetts Institute of Technology ("M.I.T.") pursuant to which
M.I.T. will use its expertise in micro-robotics to co-develop the Living
Chip(TM), a novel drug discovery screening tool that would miniaturize and
automate the Company's proprietary hybrid yeast cell technology. If
developed, the Living Chip(TM) 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 Chip(TM) systems, royalties on the sale of
therapeutics and diagnostics developed using the Living Chip(TM) and
royalties on services rendered based on the Living Chip(TM). 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) Supplemental Cash Flow Information
Three Months
ended March 31,
---------------
1998 1997
----------------------
Cash payments for:
Interest...................... $0 $1,403
== ======
Income taxes.................. $43,635 $39,000
======= =======
(7) Subsequent Event
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. Such
sale is scheduled to close on May 15, 1998.
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 $95,000 during the
three-month period ended March 31, 1998. At March 31, 1998, the Company
had an accumulated deficit of approximately $13.9 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
Three months Ended March 31, 1998 and March 31, 1997
Revenues
Revenues for the three months ended March 31, 1998 increased to $4.9
million from $1.9 million for the same period in 1997. This increase was
attributable primarily to a one time $2.0 million technology development
fee and a contractual increase in the level 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 three months
ended March 31, 1998 increased to $3.7 million from $2.2 million for the
same period in 1997. This increase was attributable primarily to
expenses in connection with the Company's sponsored research agreement
with M.I.T. which began in January of 1998, as well as increases in
staffing and supplies for the SmithKline collaboration and the Company's
internal programs, including expansion of its bioinformatics
capabilities.
General and administrative expenses for the three months ended March 31,
1998 increased to $1.2 million from $882,000 for the same period in
1997. This increase was attributable primarily to increased legal
expenses and the increase in facilities expenses in connection with the
lease extension.
Net Interest Income
Net interest income for the three months ended March 31, 1998 decreased
to $371,000 from $544,000 for the same period in 1997. This decrease
related primarily to the decrease in the Company's cash reserves.
10
<PAGE>
Equity in Other Ventures
Equity in other ventures reflects losses and gains associated with the
Company's two investments. For the three months ended March 31, 1998 and
1997, the Company recognized a gain and a loss of $7,515 and $16,112,
respectively, related to its investment in Laurel Partners Limited
Partnership. For the three months ended March 31, 1998 and 1997, the
Company recognized $424,000 and $0, 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 to
the extent that the Company's investment is funding those losses.
Net Loss
The net loss for the three months ended March 31, 1998 decreased to
$95,000 from $704,000 for the same period in 1997. This decrease can be
attributed to an increase in the Company's revenues, which was partially
offset by an increase in operating expenses and a decrease in net
interest income as described above.
Liquidity and Capital Resources
At March 31, 1998, the Company held cash and cash equivalents of $36.9
million. The Company's working capital at March 31, 1998 was $36.4
million.
In May 1997, the Company purchased $2.0 million of convertible preferred
stock in Axiom Biotechnologies Inc. ("Axiom"). The Company has agreed to
purchase an additional $2.0 million of convertible preferred stock in
Axiom if the Company receives and accepts Axiom's High Throughput
Pharmacological Screening system on or prior to May 29, 1998.
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. Such sale
is scheduled to close on May 15, 1998. This statement as to the
anticipated closing of such transaction is a forward-looking statement
that may not prove accurate and, as such, actual results may vary.
For the three-month period ended March 31, 1998, the Company invested
approximately $293,000 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.
11
<PAGE>
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.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Nothing to report.
Item 2. Changes in Securities
Nothing to report.
Item 3. Defaults Upon Senior Securities
Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to report.
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.
(b) Reports on Form 8-K
None
13
<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: May 15, 1998 By /s/ James S. Rielly
------------------------------------------------------
James S. Rielly
Vice President of Finance, Treasurer and Secretary
(Authorized Officer and Principal Financial Officer)
14
<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
15
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 36,891,851
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,385,724
<PP&E> 3,937,395
<DEPRECIATION> 1,881,954
<TOTAL-ASSETS> 41,525,813
<CURRENT-LIABILITIES> 977,370
<BONDS> 150,000
0
0
<COMMON> 125,340
<OTHER-SE> 40,423,103
<TOTAL-LIABILITY-AND-EQUITY> 41,525,813
<SALES> 0
<TOTAL-REVENUES> 4,931,812
<CGS> 0
<TOTAL-COSTS> 4,985,769
<OTHER-EXPENSES> 37,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (91,181)
<INCOME-TAX> 3,635
<INCOME-CONTINUING> (94,816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94,816)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.00)
</TABLE>
