10-Q 1 c32368_10q.txt 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 MARCH 31, 2004 -------------- [ ] 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 CORPORATION -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified on its Charter) Delaware 13-3660391 -------------------------------------------------- ----------------------- (State of Other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification No.) 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 ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). Yes No X ----- ----- The number of shares of registrant's common stock, $0.01 par value, outstanding as of April 30, 2004 was 13,144,040. CADUS CORPORATION INDEX
PAGE NO. -------- SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 3 PART I - CONDENSED CONSOLIDATED FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets - March 31, 2004 (unaudited) and 4 December 31, 2003 (audited) Condensed Consolidated Statements of Operations - Three Months Ended 5 March 31, 2004 and 2003 (unaudited) Condensed Consolidated Statements of Cash Flows - Three Months Ended 6 March 31, 2004 and 2003 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 Item 4. Controls and Procedures 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 11 Item 3. Defaults Upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8K 12 SIGNATURES 13 EXHIBIT INDEX 14
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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and stated securities laws, including any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; any statement of our plans, strategies and objectives for our future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumption underlying any of the foregoing. Forward-looking statements may include the words "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and other similar words. Although the Company believes that the expectations reflected in our forward-looking statements are reasonable, 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, risks and uncertainties relating to the Company's ability to license its technologies to third parties, the Company's ability to acquire and operate other companies, 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 other filings with the Securities and Exchange Commission. The forward-looking statements made in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances unless otherwise required by law. 3 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CADUS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS ------
March 31, 2004 December 31, 2003 ------------- ----------------- (Unaudited) (Audited) Current assets: Cash and cash equivalents $ 24,207,305 $ 24,369,223 Royalty receivable 100,000 -- Prepaid and other current assets 37,806 34,393 Investment in marketable securities 1,156,435 1,412,627 ------------- ---------------- Total current assets 25,501,546 25,816,243 Investment in other ventures 159,507 162,805 Other assets, net 807,709 827,935 ------------- ---------------- Total assets $ 26,468,762 $ 26,806,983 ============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
Current liabilities: Accrued expenses and other current liabilities $ 60,611 $ 49,164 ------------- ---------------- Total current liabilities 60,611 49,164 ------------- ---------------- Commitments Stockholders' equity: Common stock 132,857 132,857 Additional paid-in capital 59,844,355 59,844,355 Accumulated deficit (33,289,043) (33,195,567) Accumulated other comprehensive income 20,057 276,249 Treasury stock (300,075) (300,075) ------------- ---------------- Total stockholders' equity 26,408,151 26,757,819 ------------- ---------------- Total liabilities and stockholder's equity $ 26,468,762 $ 26,806,983 ============= ================
See accompanying notes to condensed consolidated financial statements. 4 CADUS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 2003 -------------- -------------- (Unaudited) (Unaudited) License and maintenance fees $ 100,000 $ 100,000 -------------- -------------- Total revenues 100,000 100,000 -------------- -------------- Costs and expenses: General and administrative expenses 224,555 292,918 Loss from equity in other ventures 3,298 3,136 -------------- -------------- Total costs and expenses 227,853 296,054 -------------- -------------- Operating loss (127,853) (196,054) Other income: Interest income 34,377 53,587 -------------- -------------- (Loss) before income taxes (93,476) (142,467) Income taxes -- -- -------------- -------------- Net (loss) ($93,476) ($142,467) ============== ============== Basic and diluted loss per weighted average share of common stock outstanding ($ 0.01) ($0.01) ============== ============== Weighted average shares of common stock outstanding -- basic and diluted 13,144,040 13,144,040 ============== ==============
See accompanying notes to condensed consolidated financial statements. 5 CADUS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 2003 -------------- -------------- (Unaudited) (Unaudited) Cash flows from operating activities Net (loss) $ (93,476) $ (142,467) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Amortization of patent costs 20,226 20,227 Loss of equity in other ventures 3,298 3,136 Changes in assets and liabilities: Increase in license fee receivable (100,000) -- (Increase) decrease in prepaid and other current assets (3,413) 19,023 Increase (decrease) in accrued expenses and other current liabilities 11,447 (60,293) -------------- -------------- Net cash (used in) operating activities (161,918) (160,374) -------------- -------------- Net (decrease) in cash and cash equivalents (161,918) (160,374) Cash and cash equivalents - beginning of period 24,369,223 24,923,071 -------------- -------------- Cash and cash equivalents - end of period $ 24,207,305 $ 24,762,697 ============== ==============
See accompanying notes to condensed consolidated financial statements. 6 CADUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note - 1 ORGANIZATION AND BASIS OF PREPARATION The information presented as of March 31, 2004 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 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, 2003 consolidated balance sheet was derived from audited consolidated 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, 2003. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Cadus Technologies, Inc., organized in December 2001. All inter-company balances and transactions have been eliminated in consolidation. The results of operations for the three-month period ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. Note - 2 NET LOSS PER SHARE For the three-month periods ended March 31, 2004 and 2003 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 323,403 and 495,975 shares of potential common stock equivalents (stock options and warrants) in the computation at March 31, 2004 and 2003, respectively, would be anti-dilutive. Note - 3 LICENSING AGREEMENTS In December 2001, the Company licensed its yeast-based drug discovery technologies on a non-exclusive basis to a major pharmaceutical company. Under the licensing agreement, the Company received an up-front non-refundable fee of $500,000 that was recorded as revenue in the December 31, 2001 consolidated statement of operations as the Company has no further involvement with the development of the product. The Company received payment in January 2002. The Company received an additional licensing fee in 2002 of $1,000,000 upon the licensee achieving a research milestone. The licensee is entitled to use the technologies for five years from the date of the agreement. Following the initial five-year term, the licensee may renew the license annually upon payment of an annual licensing fee of $250,000. In September 2003, the parties entered into an addendum to the agreement pursuant to which the Company extended the license to an affiliate of the licensee in consideration for the licensee agreeing to pay $120,000 to the Company. In February 2000, Cadus licensed to OSI Pharmaceuticals, Inc. ("OSI"), on a non-exclusive basis, its yeast-based drug discovery technologies, including various reagents and its library of over 30,000 yeast strains, and its bioinformatics software. OSI paid to Cadus a license fee of $100,000 and an access fee of $600,000 and in December 2000 a supplemental license fee 7 CADUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. OSI may terminate the license at any time on 30 days prior written notice. During the three-month period ended March 31, 2004 and 2003, the Company recognized $100,000 of license revenue related to this agreement. Note - 4 INVESTMENT IN MARKETABLE SECURITIES The Company had an equity interest in Axiom Biotechnologies, Inc. ("Axiom"). Due to Axiom's operating losses, the Company's investment was written down to $0 at December 31, 2001. On August 30, 2002, Axiom entered into a merger agreement with a wholly- owned subsidiary of Sequenom, Inc. which is publicly traded on the Nasdaq National Market. In connection with the merger, the Company received 441,446 common shares of Sequenom, Inc. with a fair market value of $2.43 per share in exchange for its shares in Axiom. Pursuant to the merger, 102,685 of the Company's 441,446 common shares of Sequenom, Inc. were held in escrow (the "Escrow Shares") for a one-year period that expired on August 30, 2003. The Escrow Shares were held to secure rights to indemnification, compensation and reimbursement of Sequenom and other indemnitees as provided in the merger agreement. Upon the closing of the transaction, Cadus recorded a realized gain of $823,189 related to the 338,761 common shares received in the consolidated statement of operations for the year ended December 31, 2002. The Company was advised that the Escrow Shares had been released on August 30, 2003 and, accordingly, the Company recorded a realized gain on marketable securities related to the Escrow Shares of $313,189 in the consolidated statement of operations for the year ended December 31, 2003. In May 2004, the Company became aware that 38,507 shares of the 102,685 Escrow Shares were forfeited pursuant to the indemnification provisions of the merger agreement and therefore not issued to the Company. Accordingly, to reflect this reduction of the Escrow Shares received by the Company, the investment in marketable securities was reduced by $123,222 on the accompanying consolidated balance sheet as of March 31, 2004. Pursuant to the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" management deems its investment in Sequenom, Inc. to be available for sale and reports its investment at fair value with net unrealized gains or losses reported in accumulated other comprehensive income within stockholders' equity. Note - 5 ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company's long-lived assets (principally capitalized patent costs) are required to be measured at the lower of carrying amount of fair value, less cost to sell, whether reported in continuing operations or discontinued operations. Intangibles with determinable lives and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company's judgments regarding the existence of impairment indicators are based on historical and projected future operating results, changes in the Company's overall business strategy, and market and economic trends. In the future, events could cause the Company to conclude that impairment indicators exist and that certain intangibles with determinable lives and other long-lived assets are impaired 8 CADUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS which may result in an adverse impact on the Company's financial condition and results of operations. The provisions of SFAS No. 144 did not have an impact on the Company's financial statements as of and for the three months ended March 31, 2004. Note - 6 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March 2004, the Emergency Issues Task Force ("EITF") reached consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" regarding disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under Financial Account Standards Board Statements No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations." The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in such evaluations made in reporting periods beginning after June 15, 2004. The disclosures are effective in annual financial statements for fiscal years ending after December 15, 2003, for investments accounted for under Statements 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual financial statements for fiscal years ending after June 15, 2004. The additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. The Company does not expect that the implementation of EITF 03-1 will have a material effect on its financial statements. 9 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. At March 31, 2004, the Company had an accumulated deficit of approximately $33.3 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 MARCH 31, 2004 AND MARCH 31, 2003 REVENUES Revenues for the three months ended March 31, 2004 and 2003 were $100,000, which is the annual maintenance fee from OSI. COSTS AND EXPENSES General and administrative expenses decreased to $224,555 for the three months ended March 31, 2004 from $292,918 for the same period in 2003. Patent costs and professional fees decreased by $64,882; insurance expense decreased by $17,912; there was an increase in sales taxes of $12,960 due in connection with the sale of assets to OSI in 1999 as a result of an audit; and there were net increases in other expenses of $1,471. For the three months ended March 31, 2004 the Company recognized a loss of $3,298 in its investment in Laurel Partners Limited Partnership. The loss for the same period in 2003 was $3,136. INTEREST INCOME Interest income for the three months ended March 31, 2004 was $34,377 compared to interest income of $53,587 for the same period in 2003. This decrease is attributable primarily to lower interest rates earned on invested funds. NET (LOSS) Net loss for the three months ended March 31, 2004 was $93,476 compared to a net loss of $142,467 for the same period in 2003. This decrease in net loss can be attributed primarily to a decrease in professional fees and insurance expense offset by a decrease in interest income. 10 LIQUIDITY AND CAPITAL RESOURCES At March 31, 2004 the Company held cash and cash equivalents of $24.2 million. The Company's working capital at March 31, 2004 was $25.4 million. The Company believes that its existing capital resources, together with interest income, will be sufficient to support its operations through the end of 2005. 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 acquire or invest in companies and income-producing assets and the expenses of pursuing such transactions. 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. Item 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Based on the evaluation of the Company's disclosure controls and procedures conducted as of the period covered by this report on Form 10-Q, the Company's President and Chief Executive Officer, who also performs the functions of a principal financial officer, concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) are effective. CHANGES IN INTERNAL CONTROLS There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings. None. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. 11 Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) The Exhibits listed in the Exhibit Index are included in this quarterly report on Form 10-Q. (b) Reports on Form 8-K. A Current Report on Form 8-K was filed on May 11, 2004 to report a change in the Company's certifying accountant to Grant Thornton LLP from KPMG LLP. 12 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 CORPORATION (REGISTRANT) Dated: May 17, 2004 By: /s/ David Blitz -------------------------------------------------- David Blitz President and Chief Executive Officer (Authorized Officer and Principal Financial Officer) 13 EXHIBIT INDEX The following exhibits are filed as part of this Quarterly Report on Form 10-Q: Exhibit No. Description ---------- ----------- 31 Certifications 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 14