10-Q 1 c21563_10-q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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, 2001 -------------- |_| 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 on its Charter) Delaware 13-3660391 ------------------------------------------ ------------------------------------ (State of Other Jurisdiction of (I.R.S. Employer Identification No.) 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) 702-4315 ------------------------------------ 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, $0.01 par value, outstanding as of July 31, 2001 was 13,144,040. 1 CADUS PHARMACEUTICAL CORPORATION INDEX Page No. -------- SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 3 PART I - CONDENSED FINANCIAL INFORMATION Item 1. Condensed Financial Statements Condensed Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 (audited) 4 Condensed Statements of Operations - Three Months and Six Months ended June 30, 2001 and 2000 (unaudited) 5-6 Condensed Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited) 7 Notes to Condensed Financial Statements (unaudited) 8-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12-13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8K 13 SIGNATURES 14 EXHIBIT INDEX 15 2 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, uncertainties regarding the Company's future acquisition and in-licensing of technologies, 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 becoming obsolete, as well as other risks and uncertainties discussed in the Company's prospectus dated July 17, 1996. 3 CADUS PHARMACEUTICAL CORPORATION CONDENSED BALANCE SHEETS ASSETS ------ JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ (Unaudited) (Audited) Current assets: Cash and cash equivalents $ 24,723,639 $ 24,383,352 Prepaid and other current assets 7,694 81,250 ------------ ------------ Total current assets 24,731,333 24,464,602 Investment in other ventures 164,507 162,528 Other assets, net 1,031,074 1,081,527 ------------ ------------ Total assets $ 25,926,914 $ 25,708,657 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accrued expenses and other current liabilities $ 146,320 $ 36,244 ------------ ------------ Total current liabilities 146,320 36,244 ------------ ------------ Total liabilities 146,320 36,244 ------------ ------------ Stockholders' equity Common stock 132,857 132,857 Additional paid-in capital 59,844,355 59,844,355 Accumulated deficit (33,896,543) (34,004,724) Treasury stock (300,075) (300,075) ------------ ------------ Total stockholders' equity 25,780,594 25,672,413 ------------ ------------ Total liabilities and stockholders' equity $ 25,926,914 $ 25,708,657 ============ ============ See accompanying notes to condensed financial statements. 4 CADUS PHARMACEUTICAL CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended June 30, 2001 2000 ----------- ----------- License and maintenance fees $ -- $ -- ----------- ----------- Total revenues -- -- ----------- ----------- Costs and expenses: General and administrative expenses 407,641 347,630 (Gain) loss of equity in other ventures (2,165) 353,884 ----------- ----------- Total costs and expenses 405,476 701,514 ----------- ----------- Operating loss (405,476) (701,514) ----------- ----------- Other income: Interest Income 234,793 71,644 ----------- ----------- Total other income 234,793 71,644 ----------- ----------- Loss before income taxes (170,683) (629,870) Income taxes -- -- ----------- ----------- Net (loss) ($ 170,683) ($ 629,870) =========== =========== Basic and diluted net (loss) per share ($ 0.01) ($ 0.05) =========== =========== Weighted average shares of common stock outstanding - basic and diluted 13,144,040 13,144,040 =========== =========== See accompanying notes to condensed financial statements. 5 CADUS PHARMACEUTICAL CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Ended June 30, 2001 2000 ------------ ------------ License and maintenance fees $ 100,000 $ 700,000 ------------ ------------ Total revenues 100,000 700,000 ------------ ------------ Costs and expenses: General and administrative expenses 648,908 1,200,092 (Gain) loss of equity in other ventures (1,979) 714,238 (Gain) on sale of equipment -- (100,000) ------------ ------------ Total costs and expenses 646,929 1,814,330 ------------ ------------ Operating loss (546,929) (1,114,330) ------------ ------------ Other income: Interest income 529,494 143,341 Net reimbursement of SIBIA litigation costs 125,616 -- ------------ ------------ Total other income 655,110 143,341 ------------ ------------ Income (loss) before income taxes 108,181 (970,989) Income taxes -- -- ------------ ------------ Net income (loss) $ 108,181 ($ 970,989) ============ ============ Basic and diluted net income (loss) per share $ 0.01 ($ 0.07) ============ ============ Weighted average shares of common stock outstanding - basic and diluted 13,144,040 13,123,190 ============ ============ See accompanying notes to condensed financial statements. 6 CADUS PHARMACEUTICAL CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 2001 2000 ------------ ----------- Cash flows from operating activities: Net income (loss) $ 108,181 ($ 970,989) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of patent costs 40,453 40,453 (Gain) loss of equity in other ventures (1,979) 714,238 (Gain) on sale of equipment -- (100,000) Reserve for litigation damages -- 496,014 Changes in assets and liabilities: Decrease in due from officer and director -- 291,886 Decrease in prepaid and other assets 83,556 575 Decrease in accounts payable -- (17,644) Increase (decrease) in accrued expenses and other current liabilities 110,076 (41,150) ------------ ----------- Net cash provided by operating activities 340,287 413,383 ------------ ----------- Cash flows from investing activities: Increase in restricted cash -- (482,448) Proceeds from sale of equipment -- 100,000 ------------ ----------- Net cash used in investing activities -- (382,448) ------------ ----------- Cash flows from financing activities: Proceeds from issuance of common stock upon exercise of stock options -- 155,660 ------------ ----------- Net cash provided by financing activities -- 155,660 ------------ ----------- Net increase in cash and cash equivalents 340,287 186,595 Cash and cash equivalents - beginning of period 24,383,352 5,082,212 ------------ ----------- Cash and cash equivalents - end of period $ 24,723,639 $ 5,268,807 ============ =========== See accompanying notes to condensed financial statements. 7 CADUS PHARMACEUTICAL CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 Note - 1 ORGANIZATION AND BASIS OF PREPARATION The information presented as of June 30, 2001 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 accounting principles generally accepted in the United States of America 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, 2000 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, 2000. The results of operations for the three month and six month periods ended June 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. Note - 2 NET INCOME (LOSS) PER SHARE For the three and six month periods ended June 30, 2001 and 2000, basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is the same as basic net income (loss) per share since the inclusion of 719,976 shares of potential common stock equivalents (stock options and warrants) in the computations would be anti-dilutive. Note - 3 PATENT LITIGATION In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") (which was acquired by Merck and Co. in 1999) 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. 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 injunctive relief that precluded the Company from using the method claimed in SIBIA's patent. The Company appealed the judgment and deposited $18.5 million in escrow to secure payment of the judgment in the event the Company were to lose the appeal and recorded a reserve for litigation damages. Interest earned on the escrow account was added to the reserve for litigation damages. On September 6, 2000 the Court of Appeals ruled in favor of the Company stating the claims of the SIBIA patent asserted against the Company 8 were invalid. On October 30, 2000, the U.S. District Court set aside the $18.0 million judgment in favor of SIBIA and vacated the injunction against the Company. The Company obtained the release of the cash escrow of $19.9 million representing the original $18.5 million and interest that accumulated thereon. The reserve for litigation of $18,841,489 (net of direct legal costs of $1 million) was reversed and credited to the statement of operations for the year ended December 31, 2000. Pursuant to a court order, the Company received in February 2001 a $155,402 reimbursement of SIBIA litigation costs offset by legal costs incurred of $29,786. Note - 4 NON-EXCLUSIVE LICENSE OF YEAST TECHNOLOGY In February 2000, the Company licensed to OSI Pharmaceuticals Inc. ("OSI"), on a non- exclusive basis, its yeast technologies, including various reagents and its library of over 30,000 yeast strains, and its bioinformatics software. OSI paid to the Company a license fee of $100,000 and an access fee of $600,000, which were recorded as license fee revenue in the first quarter of fiscal year 2000. OSI also paid a supplemental license fee of $250,000 in December 2000 when the injunction obtained by SIBIA was dissolved. OSI also pays an annual maintenance fee of $100,000 which it is obligated to pay until the earlier of 2010 or the termination of the license. OSI may terminate the license at any time on 30 days prior written notice. 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 and ceased its internal drug discovery operations and research efforts for collaborative partners. The Company terminated all employees who were not hired by the purchaser of its assets or who did not voluntarily resign except for the Chief Executive Officer who resigned in April 2000. The Company has incurred operating losses in each year since its inception. At June 30, 2001, the Company had an accumulated deficit of approximately $33.9 million. The Company's losses have resulted principally from costs incurred in connection with its research and development activities and from general and administrative costs 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 and the cessation of its internal drug discovery operations and research efforts for collaborative partners, the Company ceased to have research funding revenues and substantially reduced its operating expenses. The Company expects to generate revenues in the future only if it is able to license its technologies. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 9 REVENUES There were no revenues for the three months ended June 30, 2001 and for the three months ended June 30, 2000. OPERATING EXPENSES General and administrative expenses increased to $407,641 for the three months ended June 30, 2001 from $347,630 for the same period in 2000. This increase is attributable primarily to an increase in legal costs in connection with a severance pay dispute with a former employee. OTHER INCOME Interest income for the three months ended June 30, 2001 increased to $234,793 from $71,644 for the same period in 2000. The increase is attributable primarily to the increase in the Company's unrestricted cash equivalent balances as compared to the same period in 2000 as a result of the release of funds that were held in escrow in connection with the SIBIA litigation. EQUITY IN OTHER VENTURES For the three months ended June 30, 2001 the Company recognized net income of $2,165 in its investment in Laurel Partners Limited Partnership ("Laurel"). The loss for the same period in 2000 was $353,884 representing losses in Laurel and Axiom Biotechnologies, Inc. ("Axiom"). The Company's investment in Axiom was written down to zero in fiscal year 2000. NET LOSS Net loss for the three months ended June 30, 2001 decreased to $170,683 from a net loss of $629,870 for the same period in 2000. This decrease can be attributed to the decrease in loss on equity in other ventures and an increase in interest income. SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 REVENUES Revenues for the six months ended June 30, 2001 decreased to $100,000 from $700,000 for the same period in 2000. This decrease is attributable primarily to the Company not receiving an access fee similar to the $600,000 it received in February 2000 in connection with its licensing agreement with OSI. OPERATING EXPENSES General and administrative expenses decreased to $648,908 for the six months ended June 30, 2001 from $1,200,092 for the same period in 2000. Such expenses in fiscal 2000 included $607,500 in compensation (including $497,500 in severance) paid to the Company's former Chief Executive Officer. The Company does not currently compensate its Chief Executive Officer. General and administrative expenses for the six 10 months ended June 30, 2001 principally consisted of patent maintenance costs, professional fees and insurance costs. OTHER INCOME Interest income for the six months ended June 30, 2001 increased to $529,494 from $143,341 for the same period in 2000. The increase is attributable primarily to the increase in the Company's unrestricted cash equivalent balances as compared to the same period in 2000 as a result of the release of funds that were held in escrow in connection with the SIBIA litigation. Pursuant to a court order, the Company received in February 2001 a $155,402 reimbursement of SIBIA litigation costs offset by legal costs incurred of $29,786. EQUITY IN OTHER VENTURES For the six months ended June 30, 2001 the Company recognized a net gain of $1,979 in Laurel Partners Limited Partnership ("Laurel"). The loss for the same period in 2000 was $714,238 representing losses in Laurel and Axiom Biotechnologies, Inc. ("Axiom"). The Company's investment in Axiom was written down to zero in fiscal year 2000. NET INCOME (LOSS) Net income for the six months ended June 30, 2001 increased to $108,181 from a net loss of $970,989 for the same period in 2000. This increase can be attributed to the decrease in general and administrative expenses and loss on equity in other ventures and an increase in interest income, offset by a decrease in revenues. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001 the Company held cash and cash equivalents of $24.7 million. The Company's working capital at June 30, 2001 was $24.6 million. In February 2000, the Company licensed to OSI, on a non-exclusive basis, its yeast technologies. OSI has paid to the Company a license fee of $100,000, an access fee of $600,000 and a supplemental license fee of $250,000. OSI is also obligated to pay an annual maintenance fee of $100,000 until the earlier of 2010 or the termination of the license. The Company received an annual maintenance fee of $100,000 in February 2001. OSI may terminate the license at any time on 30 days prior written notice. The Company believes that its existing capital resources, together with interest income, will be sufficient to support its operations through the end of 2002. 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 license its technologies and otherwise realize value from its assets; the transactions, if any, arising from the Company's efforts to acquire technologies or products or to acquire or invest in companies; and the expenses of pursuing such transactions. 11 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill And Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses the accounting for acquisitions of businesses and is effective for acquisitions occurring on or after July 1, 2001. SFAS 142 addresses the method of identifying and measuring goodwill and other intangible assets, eliminates further amortization of goodwill and intangible assets that have indefinite useful lives, and requires periodic evaluations of impairment of goodwill balances and intangible assets. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 141 will have no effect on the Company's financial position or results of operations. SFAS 142 will require the Company to reassess the useful lives of its capitalized patent costs reflected in the accompanying balance sheets as other assets. The Company amortized $40,453 of capitalized patent costs during both six month periods ended June 30, 2001 and 2000. The Company is currently assessing the impact of the adoption of SFAS 142. Item 3. QUANTITATIVE AND QUALITATIVE 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. 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 Nothing to report. Item 2. Changes in Securities and Use of Proceeds Nothing to report. Item 3. Defaults Upon Senior Securities Nothing to report Item 4. Submission of Matters to a Vote of Security Holders On June 13, 2001, the Company held its annual meeting of stockholders in New York, New York. The holders of 12,495,864 shares of Common Stock were present or represented by proxy and, accordingly, a quorum was present. The following matters were voted upon and received the votes set forth below: 1. All of the following persons nominated were elected to serve as directors and received the number of votes set opposite their respective names: 12 Votes For Votes Withheld --------- -------------- James R. Broach 11,773,155 722,709 Russell D. Glass 11,492,472 1,003,392 Carl C. Icahn 11,492,472 1,003,392 Peter S. Liebert 11,492,472 1,003,392 Siegfried G. Schaefer 11,492,472 1,003,392 Jack G. Wasserman 11,492,472 1,003,392 2. A stockholder proposal concerning a request that the Board of Directors of the Company pursue returning the Company's excess cash to shareholders received 1,552,590 votes FOR and 7,848,156 votes AGAINST, with 64,806 abstentions and 3,030,312 broker non-votes. Item 5. Other Information Nothing to report Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None (b) Reports on Form 8-K. None 13 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 9, 2001 By: /s/ Russell D. Glass ------------------------------------------------- Russell D. Glass President and Chief Executive Officer (Authorized Officer and Principal Financial Officer) 14 EXHIBIT INDEX There are no exhibits being filed as part of this Quarterly Report on Form 10-Q. 15