<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 September 30, 1999
------------------
[ ] 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
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CADUS PHARMACEUTICAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3660391
- --------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
767 Fifth Avenue, New York, New York 10153
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 702-4366
--------------
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 October 31, 1999 was 13,068,940.
1
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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 - September 30, 1999 (Unaudited) and
December 31, 1998 4
Condensed Statements of Operations - Three and nine months
ended September 30, 1999 and 1998 (Unaudited) 5
Condensed Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
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
</TABLE>
2
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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, technological uncertainties regarding the
Company's technologies, the Company's capital needs and uncertainty of
future funding, risks and uncertainties relating to the Company's ongoing
litigation with SIBIA Neurosciences, Inc. ("SIBIA"), including
uncertainties relating to the outcome of appeals and the re-examination of
SIBIA's patent at issue in the litigation, risks and uncertainties
relating to the Company's ability to realize value from its assets, 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 becoming obsolete, as well as other risks
and uncertainties discussed in the Company's prospectus dated July 17,
1996.
3
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CADUS PHARMACEUTICAL CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,710,254 $ 10,975,528
Restricted cash 12,702 286,000
Note due from related party (note 6) 286,000 --
Prepaid and other current assets 102,540 298,319
------------ ------------
Total current assets 6,111,496 11,559,847
Restricted cash-noncurrent (note 3) 18,830,736 18,500,000
Fixed assets, net of accumulated
depreciation and amortization of
$24,694 at September 30, 1999 and
$2,254,840 at December 31, 1998 391,617 2,792,268
Investments in other ventures 1,353,329 2,334,081
Other assets, net 1,193,785 1,400,870
------------ ------------
Total assets $ 27,880,963 $ 36,587,066
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 192,827 $ 217,414
Accrued expenses and other current liabilities 135,724 1,730,021
Deferred revenue 28,500 150,584
------------ ------------
Total current liabilities 357,051 2,098,019
Reserve for litigation damages (note 3) 18,830,736 18,500,000
------------ ------------
Total liabilities 19,187,787 20,598,019
Commitments and contingencies
Stockholders' equity:
Common stock 132,106 132,106
Additional paid-in capital 59,689,446 59,689,446
Accumulated deficit (50,828,301) (43,532,430)
Treasury stock (300,075) (300,075)
------------ ------------
Total stockholders' equity 8,693,176 15,989,047
------------ ------------
Total liabilities and stockholders' equity $ 27,880,963 $ 36,587,066
============ ============
</TABLE>
See accompanying notes to the condensed financial statements
4
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CADUS PHARMACEUTICAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues, principally from
related parties $ 949,992 $ 2,508,213 $ 6,027,544 $ 9,948,238
Costs and expenses:
Research and development costs 1,711,630 3,743,488 8,891,517 10,980,568
General and administrative expenses 864,022 2,703,682 3,306,205 5,716,983
------------ ------------ ------------ ------------
Total costs and expenses 2,575,652 6,447,170 12,197,722 16,697,551
------------ ------------ ------------ ------------
Operating loss (1,625,660) (3,938,957) (6,170,178) (6,749,313)
------------ ------------ ------------ ------------
Other income (expense):
Net interest income 76,868 470,968 493,670 1,440,222
Loss of equity in other ventures, net (299,820) (248,111) (980,752) (850,836)
Loss on sale of assets to OSI (note 7) (805,555) -- (805,555) --
Gain on sale of equipment 118,179 12,460 150,585 1,746
------------ ------------ ------------ ------------
Total other income (expense) (910,328) 235,317 (1,142,052) 591,132
------------ ------------ ------------ ------------
Loss before income taxes (2,535,988) (3,703,640) (7,312,230) (6,158,181)
State and local taxes 1,332 44,289 (16,359) 86,563
------------ ------------ ------------ ------------
Net loss $ (2,537,320) $ (3,747,929) $ (7,295,871) $ (6,244,744)
============ ============ ============ ============
Basic net loss per share (note 2) $ (0.19) $ (0.29) $ (0.56) $ (0.49)
============ ============ ============ ============
Shares used in calculation of basic net
loss per share (note 2) 13,068,940 13,068,857 13,068,940 12,725,720
============ ============ ============ ============
</TABLE>
See accompanying notes to the condensed financial statements
5
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CADUS PHARMACEUTICAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,295,871) $ (6,244,744)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 678,466 716,686
Loss of equity in other ventures 980,752 850,836
Other non-cash gain (150,585) (1,746)
Reserve for litigation damages 330,735 --
Loss on sale of assets to OSI 805,555 --
Changes in assets and liabilities:
Increase in prepaid and other current assets (90,221) (215,878)
Decrease (increase) in other assets 117,521 (87,570)
Increase in deferred revenue 28,500 780,000
Decrease in accounts payable (24,587) (199,331)
(Decrease) increase in accrued expenses and
other current liabilities (1,594,297) 389,172
------------ ------------
Net cash used in operating activities $ (6,214,032) $ (4,012,575)
------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (470,378) (2,407,654)
Proceeds from sale of assets and patents 1,644,073 1,336,092
Investments in other ventures -- (2,000,000)
Increase in restricted cash (57,437) (286,000)
Patent costs (167,500) (301,506)
------------ ------------
Net cash provided by (used in) investing activities 948,758 (3,659,068)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 179,032
Proceeds from issuance of restricted stock -- 5,000,000
------------ ------------
Net cash provided by financing activities -- 5,179,032
------------ ------------
Net decrease in cash and cash equivalents (5,265,274) (2,492,611)
------------ ------------
Cash and cash equivalents at beginning of period 10,975,528 36,761,516
------------ ------------
Cash and cash equivalents at end of period $ 5,710,254 $ 34,268,905
============ ============
</TABLE>
See accompanying notes to the condensed financial statements
6
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Cadus Pharmaceutical Corporation
Notes to Condensed Financial Statements
(Unaudited)
(1) Organization and Basis of Preparation
The information presented as of September 30, 1999 and for the three and
nine-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, 1998 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,
1998.
The results of operations for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results to be
expected for the year ending December 31, 1999.
(2) Net Loss Per Share
For the three and nine-month periods ended September 30, 1999 and 1998,
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) Patent Litigation
In July 1996, SIBIA commenced a patent infringement action against the
Company alleging infringement by the Company of a patent concerning the
use of cells, engineered to express any type of cell surface receptor and
a reporter gene, used to report results in the screening of compounds
against target assays, and seeking injunctive relief and monetary
damages. After trial, on December 18, 1998, the jury issued a verdict in
favor of SIBIA and awarded SIBIA $18.0 million in damages. On January 29,
1999, the United States District Court granted SIBIA's request for
injunctive relief that precludes the Company from using the method
claimed in SIBIA's patent. On February 26, 1999, the United States
District Court denied the Company's motions to set aside the jury
verdict, to grant a new trial and to reduce or set aside the $18.0
million damage award by the jury. The Company has appealed the judgment.
The appeal will be heard by the Court of Appeals for the Federal Circuit
in Washington, D.C. In order to stay execution pending appeal of the
$18.0 million judgment obtained by SIBIA, in March 1999, the Company
deposited $18.5 million in escrow to secure payment of the judgment in
the event the Company were to lose the appeal. Such $18.5 million was
classified, as of December 31, 1998, as "restricted cash noncurrent" and
the Company's "cash and cash equivalents" were reduced by $18.5 million.
The Company recorded a reserve for litigation damages of $18.5 million in
the statement of operations for the year ended December 31, 1998.
Interest earned on the restricted cash has been added to the reserve for
litigation damages.
In January 1999, the U.S. Patent and Trademark Office granted the
Company's request to re-examine the patent issued to SIBIA that was the
subject of the litigation. The re-examination by the Patent and Trademark
Office is independent of the litigation and a final decision by the
Patent Office that SIBIA's patent is invalid would take precedence over
the jury verdict. There can be no assurance that the Patent and Trademark
Office will find SIBIA's patent to be invalid.
7
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Cadus Pharmaceutical Corporation
Notes to Condensed Financial Statements
(Unaudited)
(4) Research Funding
SmithKline Beecham Milestone
In January 1999, the Company achieved a research milestone in its
collaboration with SmithKline Beecham Corporation. The milestone involved
the identification, during 1998, of ligands for orphan G-Protein coupled
receptors identified from the human genome. The Company received a $1.0
million payment for achieving the milestone, which payment was recorded
as revenue in January 1999.
(5) Supplemental Cash Flow Information
Nine months ended September 30,
1999 1998
---- ----
Cash payments for:
Income taxes $15,476 $69,563
======= =======
(6) Related Party Transaction
In August 1998, the Company guaranteed the payment of a $286,000 loan
made to the Director of Research of the Company (who is also a Board
member) and secured its guarantee obligation with cash collateral of
$286,000. In August 1999, the lender called on the guarantee and
foreclosed on the cash collateral. The Director of Research has executed
an interest bearing promissory note in the amount of $286,000 in favor of
the Company, which is payable, together with accrued interest, on August
31, 2000.
(7) Company Restructuring and Asset Sale to OSI Pharmaceuticals
In April 1999, the Company completed a restructuring by eliminating 23
positions. The restructuring reduced operating expenses and concentrated
the Company's resources on its internal drug discovery and genomics based
programs.
On July 30, 1999, the Company sold to OSI Pharmaceuticals, Inc. ("OSI"),
pursuant to an asset purchase agreement, its drug discovery programs
focused on G-protein-coupled receptors, its directed library of
approximately 150,000 small molecule compounds specifically designed for
drug discovery in the G protein-coupled receptor arena, its collaboration
with Solvay Pharmaceuticals B.V. ("Solvay Pharmaceuticals"), its lease to
its research facility in Tarrytown, New York together with the furniture
and fixtures and its lease to equipment in the facility, and its
inventory of laboratory supplies. Pursuant to such sale transaction, OSI
assumed the Company's lease to the Company's research facility in
Tarrytown, New York, the Company's equipment lease with General Electric
Capital Corporation ("GECC") and the Company's research collaboration and
license agreement with Solvay Pharmaceuticals. OSI also hired more than
45 of the Company's scientific and administrative personnel. As
consideration for the sale, the Company received approximately $1,500,000
in cash and OSI assumed certain liabilities of the Company relating to
employees hired by OSI aggregating approximately $133,000. In addition,
the Company would be entitled to royalties and up to $3.0 million in
milestone payments on the first product derived from compounds sold to
OSI or from the collaboration with Solvay Pharmaceuticals. The Company
licensed to OSI on a non-exclusive basis certain technology solely to
enable OSI to fulfill its obligations under the collaboration with Solvay
8
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Cadus Pharmaceutical Corporation
Notes to Condensed Financial Statements
(Unaudited)
and up to $3.0 million in milestone payments on the first product derived
from compounds sold to OSI or from the collaboration with Solvay
Pharmaceuticals. The Company licensed to OSI on a non-exclusive basis
certain technology solely to enable OSI to fulfill its obligations under
the collaboration with Solvay Pharmaceuticals. The Company also licensed
to OSI on a non-exclusive basis certain proprietary software and
technology relating to chemical resins in order to enable OSI to fully
benefit from the compounds it acquired from the Company. The Company is
retaining ownership of all its other assets, including its core yeast
technology for developing drug discovery assays, its collection of over
25,000 proprietary yeast strains, human and mammalian cell lines, and
genetic engineering tools, its program to identify and isolate human
orphan G protein-coupled receptors and elucidate their function, its
proprietary software, its genomics databases related to G protein-coupled
receptors, the LivingChip(TM) program, all assays and technologies
reverting to it from its collaboration with Bristol-Myers Squibb Company,
a 30% equity position in Axiom Biotechnologies Inc., the Company's
current cash and cash equivalents, and the approximately $18.8 million
being held in escrow pending appeal of the verdict in favor of SIBIA.
The Company recognized a loss on the sale of assets to OSI in the
three-month period ended September 30, 1999. A summary of the loss
recognized is as follows:
Proceeds:
Purchase price $1,500,000
Liabilities assumed by OSI 133,000
----------
Total 1,633,000
Less:
Net book value of patents sold 183,000
Net book value of fixed assets sold 2,256,000
----------
Loss on sale of assets $ 806,000
==========
The Company ceased its drug discovery operations and research efforts for
collaborators as a result of this transaction. Consequently, the Company
has terminated all employees who were not hired by OSI or who did not
voluntarily resign, except for the chief executive officer.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company was incorporated in 1992 and until July 30, 1999, devoted
substantially all of its resources to the development and application of
novel yeast-based and other drug discovery technologies. On July 30, 1999,
the Company sold its drug discovery assets to OSI and ceased its internal
drug discovery operations and research efforts for collaborative partners.
Pursuant to such sale transaction, OSI assumed the Company's lease to its
research facility in Tarrytown, New York, the Company's equipment lease
with GECC, and the Company's research collaboration and license agreement
with Solvay Pharmaceuticals. OSI hired more than 45 of the Company's
scientific and administrative personnel. The Company has terminated all
employees who were not hired by OSI or who did not voluntarily resign,
except for the chief executive officer.
The Company has incurred operating losses in each year since its inception
including net losses of approximately $7.3 million during the nine-month
period ended September 30, 1999. At September 30, 1999, the Company had an
accumulated deficit of approximately $50.8 million which includes an $18.8
million reserve for litigation damages with respect to the patent
infringement litigation with SIBIA Neurosciences, Inc. ("SIBIA"), which was
accrued as of December 31, 1998. The Company's losses have resulted
principally from costs incurred in connection with its research and
development activities and from general and administrative expenses
associated with the Company's operations. These costs have exceeded the
Company's revenues and interest income. As a result of the sale of its drug
discovery assets to OSI and the cessation of its internal drug discovery
operations and research efforts for collaborative partners, the Company
will cease to have revenues but also expects to substantially reduce its
operating expenses.
Results of Operations
Nine Months Ended September 30, 1999 and September 30, 1998
Revenues
Revenues for the nine months ended September 30, 1999 decreased to $6.0
million from $9.9 million for the same period in 1998. This decrease was
attributable primarily to the Company only receiving a research milestone
payment of $1.0 million from SmithKline Beecham ("SmithKline") in the first
quarter of 1999 as compared to the $2.0 million technology development fee
it received from SmithKline in the first quarter of 1998; the termination
in July 1999 of the research collaboration with Bristol-Myers Squibb; the
termination in August 1999 of the research collaboration with SmithKline;
and the sale to OSI of the research collaboration with Solvay
Pharmaceuticals in July 1999.
Operating Expenses
The Company's research and development expenses for the nine months ended
September 30, 1999 decreased to $8.9 million from $11.0 million due to the
reduction in staff and research activities as a result of the asset sale to
OSI on July 30, 1999.
General and administrative expenses for the nine months ended September 30,
1999 decreased to $3.3 million from $5.7 million for the same period in
1998. This decrease is attributable primarily to the decrease in litigation
expenses and the sale of drug discovery operations to OSI.
Net Interest Income
Net interest income for the nine months ended September 30, 1999 decreased
to $494,000 from $1.4 million for the same period in 1998. This decrease is
attributable primarily to the decrease in the Company's unrestricted cash
balances as compared to the prior year's nine-month period.
10
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Equity in Other Ventures
Equity in other ventures reflects losses and gains associated with the
Company's two investments. For the nine months ended September 30, 1999 and
1998, the Company recognized gains of $7,320 and $9,955, respectively,
related to its investment in Laurel Partners Limited Partnership. For the
nine months ended September 30, 1999 and 1998, the Company recognized
$988,072 and $860,791, respectively, in losses generated by Axiom
Biotechnologies Inc. ("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 an investment made by JAFCO Co., Ltd.,
("JAFCO") in Axiom in June 1998. 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 nine months ended September 30, 1999 increased to $7.3
million from $6.2 million for the same period in 1998. The loss for the
nine months ended September 30, 1999 includes approximately $806,000 of
loss related to the asset sale to OSI. This increase is attributable
primarily to the decrease in the Company's revenues and interest income
which was somewhat offset by the reduction in the Company's operating
expenses.
Three Months Ended September 30, 1999 and September 30,1998
Revenues
Revenues for the three months ended September 30, 1999 decreased to
$950,000 from $2.5 million for the same period in 1998. This decrease is
attributable primarily to the termination of the research collaborations
with Bristol-Myers Squibb and SmithKline Beecham Corporation and the sale
to OSI Pharmaceuticals of the research collaboration with Solvay
Pharmaceuticals.
Operating Expenses
The Company's research and development expenses for the three months ended
September 30, 1999 decreased to $1.7 million from $3.7 million for the same
period in 1998. This decrease is attributable primarily to a decrease in
operating expenses resulting from the reduction in research personnel.
General and administrative expenses for the three months ended September
30, 1999 decreased to $864,000 from $2.7 million for the same period in
1998. This decrease is attributable primarily to a decrease in litigation
expenses and the sale of drug discovery operations to OSI.
Net Interest Income
Net interest income for the three months ended September 30, 1999 decreased
to $77,000 from $471,000 for the same period in 1998. This decrease is
attributable primarily to the decrease in the Company's unrestricted cash
balances as compared to the prior year's three-month period.
Equity in Other Ventures
Equity in other ventures reflects losses and gains associated with the
Company's two investments. For the three months ended September 30, 1999
and 1998, the Company recognized gains of $4,363 and $2,361, respectively,
related to its investment in Laurel Partners Limited Partnership. For the
three months ended September 30, 1999 and 1998, the Company recognized
$304,183 and $250,472, 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 an investment
made by JAFCO in Axiom in June
11
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1998. 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 September 30, 1999 decreased to
$2.5 million from $3.7 million for the same period in 1998. The loss for
the three months ended September 30, 1999 includes approximately $806,000
of loss related to the asset sale to OSI. This decrease is attributable
primarily to the decrease in operating expenses as a result of the asset
sale to OSI on July 30, 1999.
Liquidity and Capital Resources
At September 30, 1999, the Company held cash and cash equivalents,
exclusive of restricted cash, of $5.7 million. The Company's working
capital at September 30, 1999 was $5.5 million.
For the nine-month period ended September 30, 1999, the Company invested
approximately $470,000 in property and equipment.
On July 30, 1999, the Company sold its drug discovery assets to OSI and
ceased its internal drug discovery operations and research efforts for
collaborative partners. Pursuant to such sale transaction, OSI assumed the
Company's lease to the Company's research facility in Tarrytown, New
York, the Company's equipment lease with GECC, and the Company's research
collaboration and license agreement with Solvay Pharmaceuticals. OSI hired
more than 45 of the Company's scientific and administrative personnel. The
Company also terminated all employees who were not hired by OSI or who did
not voluntarily resign, except for the chief executive officer. As a result
of the foregoing, the Company will cease to have revenues but will also
substantially reduce its operating expenses.
The Company believes that its existing capital resources, together with
interest income, will be sufficient to support its operations 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 transactions, if any, arising
from the Company's efforts to realize value from its assets, expenses of
pursuing such transactions, severance payments and obligations under
employment contracts to employees, and the outcome of the appeal of the
judgement in the SIBIA patent litigation.
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.
The above comments on the Year 2000 issue contain forward-looking
statements relating to the Company's plans, strategies, expectations,
intentions, and resources that should be read in conjunction with the
Company's disclosures on forward-looking statements.
New Accounting Pronouncements
In June 1999, the Financial Accounting Standard Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." SFAS 137 amends SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
issued in June
12
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1998 and was to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 137 defers the effective date of SFAS
133 to all fiscal quarters of fiscal years beginning after June 15, 2000.
Earlier application is permitted. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measures
those instruments at fair value. The Company does not believe that the
implementation of SFAS 133 will have a material effect on its financial
position or results of operations.
ITEM 3. QUANTITIATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade
corporate and U.S. government securities and, secondarily, its long-term
debt arrangements. The Company does not believe it is materially exposed to
changes in interest rates. Under its current policies the Company does not
use interest rate derivative instruments to manage exposure to interest
rate changes.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings
other than SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical
Corporation and an arbitration proceeding commenced by Philip
N. Sussman, the former Senior Vice President, Finance and
Corporate Development, and Chief Financial Officer of the
Company.
(a) 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 covering the
use of cells, engineered to express any type of cell surface
receptor and a reporter gene, used to report results in the
screening of compounds against target assays, and seeking
injunctive relief and monetary damages. After trial, on
December 18, 1998, the jury issued a verdict in favor of SIBIA
and awarded SIBIA $18.0 million in damages. On January 29,
1999, the United States District Court granted SIBIA's request
for injunctive relief that precludes the Company from using
the method claimed in SIBIA's patent. On February 26, 1999,
the United States District Court denied the Company's motions
to set aside the jury verdict, to grant a new trial and to
reduce or set aside the $18.0 million damage award by the
jury. The Company has appealed the judgment. The appeal will
be heard by the Court of Appeals for the Federal Circuit in
Washington, D.C. All briefs have been filed but the Court of
Appeals has not yet set a date for oral argument. In order to
stay execution pending appeal of the $18.0 million judgment
obtained by SIBIA, in March 1999, the Company deposited $18.5
million in escrow to secure payment of the judgment in the
event the Company were to lose the appeal. Such $18.5 million
was classified, as of December 31, 1998, as "restricted cash
noncurrent" and the Company's "cash and cash equivalents" was
reduced by $18.5 million. If the Company is not successful in
materially reducing or setting side the $18.0 million damage
award on appeal, the business, financial condition and results
of operations of the Company will be materially adversely
affected. The costs of and the diversion of Company resources
associated with this litigation have had a material adverse
effect on the business, financial condition, results of
operations and liquidity of the Company.
In January 1999, the U.S. Patent and Trademark Office granted
the Company's request to reexamine the patent issued to SIBIA
that was the subject of the litigation. The re-examination by
the Patent and Trademark Office is independent of the
litigation and a final decision by the Patent and Trademark
Office that SIBIA's patent is invalid would take precedence
over the jury verdict. There can be no assurance that the
Patent Office will find SIBIA's patent to be invalid.
(b) On October 4, 1999, Philip N. Sussman, the former Senior
Vice President, Finance and Corporate Development, and Chief
Financial Officer of the Company, commenced an arbitration
proceeding against the Company seeking severance pay of
approximately $525,000. The Company believes that Mr. Sussman
is not entitled to such severance pay and intends to
vigorously defend the action.
13
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
The information provided below represents a reasonable
estimate of the application through September 30, 1999 of the
net proceeds of $19,783,140 which were received from the
Company's initial public offering on July 17, 1996:
<TABLE>
<S> <C>
Construction of plant, building and facilities $849,515
Purchase and installation of machinery and equipment $2,776,203
Research and license payments to others $1,954,843
Investment in companies complementary to the
Company's business $2,150,000
Working capital used to fund operations $12,052,579
</TABLE>
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 September 30,
1999, the Company had utilized all of its offering proceeds.
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
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: November 12, 1999 By /s/ Charles Woler
-----------------
Charles Woler
President and Chief Executive Officer
(Authorized Officer and Principal Financial
Officer)
15
<PAGE>
EXHIBIT INDEX
The following exhibit is 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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,710,254
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,111,496
<PP&E> 416,311
<DEPRECIATION> 24,694
<TOTAL-ASSETS> 27,880,963
<CURRENT-LIABILITIES> 357,051
<BONDS> 0
0
0
<COMMON> 132,106
<OTHER-SE> 8,561,070
<TOTAL-LIABILITY-AND-EQUITY> 27,880,963
<SALES> 0
<TOTAL-REVENUES> 6,027,544
<CGS> 0
<TOTAL-COSTS> 12,197,722
<OTHER-EXPENSES> (830,167)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,312,230)
<INCOME-TAX> (16,359)
<INCOME-CONTINUING> (7,295,871)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,295,871)
<EPS-BASIC> (0.56)
<EPS-DILUTED> 0
</TABLE>
