General
Cadus Corporation (“Cadus”)
was incorporated under the laws of the State of Delaware in January 1992 and initially devoted substantially all of its resources
to the development and application of novel yeast-based and other drug discovery technologies. Cadus no longer seeks to develop,
maintain or license its drug discovery technologies. Beginning in the fourth quarter of 2013, Cadus began to explore opportunities
to profit from purchasing land and residential homes for construction or renovation and resale in areas of the United States where
there may be increases in real estate value. Cadus then formed directly or indirectly wholly-owned subsidiaries (such subsidiaries
together with Cadus Technologies, Inc. which holds the intellectual property associated with the Company’s prior business,
the “Subsidiaries,” and Cadus together with its Subsidiaries, the “Company”) through which it would purchase
individual homes and individual residential lots for purposes of renovation or construction and resale. Cadus’ corporate
web site may be found at www.caduscorp.com.
The Company has
predominantly concentrated its real estate acquisition, renovation and construction activities in Miami-Dade County, Florida.
The Company bought its first residential properties in Florida in February 2014. As of March 1, 2018, the Company purchased
and continues to own twelve single-family residential zoned properties in Miami-Dade County, Florida. The majority of the
properties are waterfront properties. In addition, the Company purchased and continues to own an approximately one-acre
single-family residential zoned vacant lot in East Hampton, New York.
Of its twelve properties
in Miami-Dade County, ten are slated for the construction of new single-family homes, although certain of these properties may
be sold without undertaking construction, and two properties have been renovated.
The Company conducted a
rights offering for the issuance of up to 13,144,040 shares of its common stock, $.01 par value per share (the “Common Stock”),
pursuant to its S-1 filing with the Securities and Exchange Commission that became effective April 28, 2014. In connection with
the rights offering, the Company distributed to the holders of its Common Stock non-transferable subscription rights to purchase
up to 13,144,040 shares of its Common Stock at $1.53 per share. Effective June 6, 2014, all 13,144,040 shares available in the
offering were subscribed and the Company received gross proceeds of $20,110,381 less offering costs of approximately $263,300.
The Company is using the proceeds from the offering for, among other things, the acquisition, renovation, and construction of properties
as well as for maintenance, property taxes and other costs connected with its inventory of properties.
Depending on the availability
of transactions acceptable to Cadus, all of Cadus’ available cash may be utilized, and Cadus may seek debt or equity financing.
Although no such acquisitions or investments are currently contemplated, Cadus may also consider other acquisitions or investments
in various industries.
Merger Agreement
On January 20, 2018, the Company entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”),
by and among the Company, Starfire Holding Corporation (“Parent”) and Parent’s wholy-owned subsidiary, Cadus
Merger Sub LLC (“Merger Sub”), in accordance with the terms and subject to the conditions of which Merger Sub will
be merged with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of
Parent (the “Merger”). At the effective time of the Merger, each outstanding share of the Company’s Common Stock
(other than certain shares as set forth in the Merger Agreement) will automatically be converted into the right to receive an amount
in cash equal to $1.61, without interest and less any applicable withholding taxes. If the Merger is consummated, then the Company
will become a privately held company and a wholly-owned subsidiary of Parent, which is indirectly controlled by Mr. Carl C. Icahn.
Industry Overview and Current Market Conditions
The sale of homes has been
and will likely remain a large industry in the United States for four primary reasons: historical growth in both population and
households, demographic patterns that indicate an increased likelihood of home ownership as age and income increase, job creation
within geographic markets that necessitate new home construction or the renovation of existing homes, and consumer demand for home
features in new or renovated homes.
In any year, the demand
for homes is closely tied to job growth, the availability and cost of mortgage financing, the supply of new and existing homes
for sale and, importantly, consumer confidence. Consumer confidence is perhaps the most important of these demand variables and
is the hardest one to predict accurately because it is a function of, among other things, consumers’ views of their employment
and income prospects, recent and likely future home price trends, localized new and existing home inventory, the level of current
and near-term interest and mortgage rates, the availability of consumer credit, valuations in stock and bond markets, and other
geopolitical factors. In general, high levels of employment, significant affordability and low new home and resale home inventories
contribute to a strong and growing home renovation and homebuilding market environment.
While the Company believes
that long-term fundamentals for home renovation and new home construction remain intact, it does not believe market conditions
in Miami-Dade County, Florida are currently favorable for sellers of residential properties. This assessment is based upon a review
of recent comparisons of listed prices for properties in the county and the prices at which they actually sell, the prevalence
of price reductions for listed homes, the length of time properties remain on the market, and feedback received from local brokers.
In addition, the Company is seeing a rise in construction costs due to labor and materials becoming increasingly expensive. Furthermore,
insurance costs are rising due to among other things, recent named storms. The Company is also experiencing an increase in property
taxes as Miami-Dade continues to increase the underlying property values in 2017.
Properties
In connection
with the Company’s program to purchase residential properties for purposes of renovation or construction and resale, as
of March 1, 2018, the Company had previously purchased for an aggregate original purchase price of approximately $29.9
million, and continued to own, through two indirect wholly-owned subsidiaries, twelve residential properties in Miami-Dade
County, Florida and one residential property in East Hampton, New York. Of the properties in Miami-Dade County, when
purchased, eight properties had existing homes on them (which, in the case of six of the properties, were subsequently
demolished) and three properties were vacant lots (one of which, 700 88
th
Street, Surfside, Florida, was
subsequently subdivided into two equal lots). The Company does not currently intend to purchase additional properties until
it has sold sufficient properties from its existing inventory of properties. To date, except for the East Hampton property,
the Company has concentrated its real estate activities in Miami-Dade County, Florida.
When individual homes
are purchased, Cadus intends, as appropriate, to renovate them for resale or to demolish them for new home construction. When vacant
lots are purchased, Cadus intends to construct new homes on them. In some cases, the Company may resell acquired land without undertaking
construction.
As of March 1, 2018,
the Company’s existing inventory or properties consisted of twelve residential properties in Miami-Dade County, Florida and
one property in East Hampton, New York at the following addresses: (i) 700 88th Street, Surfside, FL 33154; (ii) 0 88th Street,
Surfside, FL 33154 (this lot currently does not have its own house number, but has a folio number); (iii) 1420 Biscaya Drive, Surfside,
FL 33154; (iv) 1211 Stillwater Drive, Miami Beach, FL 33141; (v) 2535 Shelter Avenue, Miami Beach, FL 33140; (vi) 2555 Shelter
Avenue, Miami Beach, FL 33140; (vii) 11400 N. Bayshore Drive, North Miami, FL 33181; (viii) 11404 N. Bay Shore Drive, North Miami,
FL 33181; (ix) 241 Atlantic Isle, Sunny Isles Beach, FL 33160 and the adjacent island which has its own folio number; (x) 18970
North Bay Road, Sunny Isles Beach, FL 33160; (xi) 3506 Main Lodge Drive, Coconut Grove, FL 33133; (xii) 3437 N. Moorings Way, Miami,
FL 33133; and (xiii) 65 East Hollow Road, East Hampton, NY 11937. As of that date, all were vacant lots, except for the two properties
listed in clauses (xi) and (xii) of the previous sentence, where the renovation of the existing homes have been completed, and
except the property listed in clause (v) above where a home is under construction. Several vacant lots and properties had been
listed for sale.
The Company engaged the
architectural firm of Max Strang Architecture, Inc. for schematic designs (including floor plans, design renderings and construction
budgets), which they completed, and other architectural services with respect to homes to be built on the Company’s current
Florida properties. Renderings of proposed construction on certain of the Company’s properties may be found at the Company’s
web site. As the Company sells homes into the market, its plan, depending on market conditions, is to begin construction on spec
or custom homes on other of its properties.
Competition
The business of developing
and selling residential properties is highly competitive and fragmented. The Company’s long-term success depends on its ability
to acquire at reasonable prices existing residential properties suitable for renovation or construction and resale. The acquisition
of residential homes and lots for renovation or construction and resale is highly competitive. In addition, the Company anticipates
that it will compete for residential sales on the basis of a number of interrelated factors, including location, reputation, amenities,
design, quality and price, with numerous large and small homebuilders, including some homebuilders with nationwide operations and
much greater financial resources and/or lower costs than the Company. The Company will also compete for residential sales with
individual resales of existing homes and available rental housing.
Employees
The Company currently has
no full-time employees and its only employee is Hunter C. Gary, the President and Chief Executive Officer of Cadus. Under his employment
agreement with Cadus, Mr. Gary is required to devote such time as may be required by Cadus’ Board of Directors to perform
his duties and responsibilities. David Blitz, the Treasurer and Secretary of Cadus who is acting as the Company’s principal
financial and accounting officer, is not an employee of the Company, and is serving under a consulting arrangement.
Patents
As of March 1, 2018,
Cadus Technologies, Inc., Cadus’ wholly-owned subsidiary, is the assignee of three issued U.S. patents covering aspects of
its yeast technology. The Company has not received any revenues from the licensing of its patents since 2010 and has not entered
into a new license for its patents since 2000. The Company wrote the valuation of its patents down to $0 in 2015 and no longer
maintains or seeks to license, utilize, sell or otherwise derive any revenue from its patents.
An investment in the
shares of Cadus’ Common Stock involves a high degree of risk. Accordingly, investors and prospective investors should consider
carefully the following risk factors, as well as all other information contained in this Annual Report on Form 10-K, in connection
with investments in shares of Cadus’ Common Stock.
The Company is implementing a new business
plan.
The Company has decided
not to maintain or seek to license or sell its drug discovery technologies. The Company has determined that it will seek to purchase
individual homes or individual residential lots for purposes of renovation or construction and resale. The Company has very limited
operating experience in this business and the Company’s limited operating history makes it difficult to predict the long-term
success of its business model. In addition, because of the Company’s new business plan, the Company’s historical performance
is not a meaningful indicator of future results.
The market value of the Company’s
land and/or homes may decline, leading to impairments and reduced profitability.
The Company intends to
regularly acquire residential homes and land for replacement and expansion of inventory within the Company’s existing or
new markets. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing
market conditions and the measures the Company employs to manage inventory risk may not be adequate to insulate its operations
from a severe drop in inventory values. When market conditions are such that real estate values are not appreciating, previously
entered into option agreements may become less desirable, at which time the Company may elect to forgo deposits and pre-acquisition
costs and terminate the agreements. In a situation of adverse market conditions, the Company may incur impairment charges or have
to sell its real estate inventory at a loss which would adversely affect its financial condition, results of operations and stockholders’
equity and its ability to comply with covenants in any future debt instruments linked to tangible net worth.
Uncertainty of Future Profitability
The Company’s ability to
generate revenues and become profitable is dependent in large part on the ability of the Company to acquire residential homes and
lots, renovate existing homes or construct new ones and sell them at a profit. There can be no assurance that the Company will
be able to do so or that the Company will ever achieve profitability.
Inability to Identify and Consummate Acquisitions
or Investments
Although the Company intends
to engage in the purchase and renovation of existing homes for resale and the purchase of land and the building of residential
homes on such land for sale, the Company may also seek to acquire or invest in companies or income producing assets. To date the
Company has not been able to identify and consummate an appropriate acquisition or investment in companies or income producing
assets and there can be no assurance that it will do so. There also can be no assurance that acquisitions or investments by the
Company will be profitable.
The Company’s home sales and operating
revenues could be adversely affected due to macro-economic and other factors outside of its control, such as changes in consumer
confidence, declines in employment levels, changes in tax laws and rates and increases in the quantity and decreases in the prices
of new homes and resale homes in the market.
Changes in international,
national and regional economic conditions, as well as local economic conditions where the Company conducts its operations and where
prospective purchasers of its homes currently live, may result in more caution on the part of homebuyers and, consequently, fewer
home purchases. These economic uncertainties involve, among other things, conditions of supply and demand in local markets and
changes in consumer confidence and income, employment levels, changes in mortgage interest rates, changes in tax laws and rates,
and government regulations. These risks and uncertainties could periodically have an adverse effect on consumer demand for and
the pricing of the Company’s homes, which could have an adverse effect on the Company’s operating revenues and profitability.
Such reductions in the Company’s revenues and profitability could, in turn, negatively affect the market price of the Company’s
securities.
Increases in the cost of labor or materials
could have a material adverse effect on the Company’s business.
Increases in the cost of
labor or materials could increase construction costs and have a material adverse effect on the Company’s business.
The Company’s geographic concentration
could materially and adversely affect us if sales of new homes and resale homes in Florida should experience a decline.
The Company currently intends
to concentrate its real estate acquisition, renovation and construction activities in Florida. A prolonged economic downturn in
the future in Florida could have a material adverse effect on the Company’s business, prospects, liquidity, financial condition
and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations.
Moreover, certain insurance
companies doing business in Florida have restricted, curtailed or suspended the issuance of homeowners’ insurance policies
on single-family homes. This has both reduced the availability of hurricane and other types of natural disaster insurance in Florida,
in general, and increased the cost of such insurance to prospective purchasers of homes in Florida. Mortgage financing for a new
home is conditioned, among other things, on the availability of adequate homeowners’ insurance. There can be no assurance
that homeowners’ insurance will be available or affordable to prospective purchasers of our homes offered for sale in the
Florida market. Long-term restrictions on, or unavailability of, homeowners’ insurance in the Florida market could have an
adverse effect on the homebuilding industry in that market in general, and on our business within the market.
The homebuilding industry is cyclical. A
severe downturn in the industry, as recently experienced, could adversely affect the Company’s business, results of operations
and stockholders’ equity.
During periods of downturn
in the industry, housing markets across the United States may experience an oversupply of both new and resale home inventory,
an increase in foreclosures, reduced levels of consumer demand for new homes, increased cancellation rates, aggressive price competition
among homebuilders and increased incentives for home sales. In the event of a downturn, the Company may temporarily experience
a material adverse effect on revenues and margins. Continued weakness in the homebuilding market could adversely affect the Company’s
business, results of operations and stockholders’ equity as compared to prior periods and could result in additional inventory
impairments in the future.
The Company will be dependent on the continued
availability and satisfactory performance of its general contractors and their subcontractors, which, if unavailable, could have
a material adverse effect on the Company’s business.
The Company will conduct
its renovation and construction operations through one or more general contractors and their respective subcontractors. Consequently,
the Company will depend on the continued availability of and satisfactory performance by its general contractors and their respective
subcontractors for the renovation and constructions of its homes. There may not be sufficient availability of and satisfactory
performance by these general contractors and subcontractors in the markets in which the Company operates. In addition, inadequate
subcontractor resources could have a material adverse effect on the Company’s business.
The Company’s long-term success depends
on its ability to acquire at reasonable prices existing residential properties suitable for renovation or construction and resale.
The acquisition of residential
homes and lots for renovation or construction and resale is highly competitive and the risk inherent in purchasing and renovating
or constructing such properties increases as consumer demand for housing increases. The availability of existing residential properties,
finished and partially finished developed lots and undeveloped land for purchase that meet the Company’s investment criteria
depends on a number of factors outside the Company’s control, including residential housing and land availability in general,
competition with other homebuilders and land and home buyers, inflation in land and home prices, zoning, allowable housing density,
the ability to obtain building permits and other regulatory requirements. Should suitable residential homes, lots or land become
less available, the number of homes the Company may be able to renovate or build and sell could be reduced, and the cost of existing
homes or land could be increased, perhaps substantially, which could adversely impact the Company’s results of operations.
As competition for suitable
homes and land increases, the cost of acquiring existing homes and finished and undeveloped lots and the cost of renovating or
constructing homes could rise and the availability of suitable homes and land at acceptable prices may decline, which could adversely
impact the Company’s financial results. The availability of suitable homes and land assets could also affect the success
of the Company’s residential homes and land acquisition strategy, which may impact the Company’s ability to increase
the number of properties that it has for sale, to grow the Company’s revenues and margins, and to achieve or maintain profitability.
The Company will be dependent on the services
of certain key employees, and the loss of their services could hurt its business.
The Company’s future
success will depend upon its ability to attract, train, assimilate and retain skilled personnel. If the Company is unable to attract,
train, assimilate or retain skilled personnel in the future, it could hinder its business strategy and impose additional costs
of identifying and training new individuals. The Company anticipates that competition for qualified personnel in its operating
markets will be intense.
Loans obtained by the Company may impose
significant restrictions and obligations on the Company. Restrictions on the Company’s ability to borrow could adversely
affect its liquidity. In addition, any substantial indebtedness could adversely affect the Company’s financial condition,
limit its growth and make it more difficult for the Company to satisfy its debt obligations.
Any secured or unsecured
indebtedness or revolving credit or letter of credit facilities obtained by the Company will impose certain restrictions and obligations
on the Company. Under certain of these instruments, the Company may be required to comply with defined covenants which limit the
Company’s ability to, among other things, incur additional indebtedness, engage in certain asset sales, make certain types of restricted
payments, engage in transactions with affiliates and create liens on assets of the Company. Failure to comply with certain of these
covenants could result in an event of default under the applicable instrument. Any such event of default could negatively impact
other covenants or lead to cross defaults under other debt of the Company. In such cases, there can be no assurance that the Company
will be able to obtain any waivers or amendments that may become necessary in the event of a future default situation without significant
additional cost or at all.
Any substantial indebtedness
of the Company could have important consequences to it and the holders of its securities, including, among other things:
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causing the Company to be unable to satisfy its obligations under its debt agreements;
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making the Company more vulnerable to adverse general economic and industry conditions;
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making it difficult to fund future working capital, home and land purchases, renovation and construction, general corporate
purposes or other purposes; and
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causing the Company to be limited in its flexibility in planning for, or reacting to, changes in its business.
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In addition, subject to
restrictions in its debt instruments, the Company may incur additional indebtedness. If new debt is added to the Company’s
then current debt levels, the related risks that the Company then faces could intensify. The Company’s growth plans and its
ability to make payments of principal or interest on, or to refinance, its indebtedness, will depend on its future operating performance
and its ability to enter into additional debt and/or equity financings. If the Company is unable to generate sufficient cash flows
in the future to service its debt, it may be required to refinance all or a portion of its then existing debt, to sell assets or
to obtain additional financing. The Company may not be able to do any of the foregoing on terms acceptable to the Company, if at
all.
A substantial increase in short-term and/or
long-term mortgage interest rates, the unavailability of mortgage financing or the recent change in tax laws regarding the deductibility
of mortgage interest may reduce consumer demand for the Company’s homes.
Purchasers of the Company’s
homes may finance their acquisition with mortgage financing. Housing demand is adversely affected by reduced availability of mortgage
financing and factors that increase the upfront or monthly cost of financing a home such as increases in interest rates, insurance
premiums, or limitations on mortgage interest deductibility. The recent decrease in the willingness and ability of lenders to make
home mortgage loans, the tightening of lending standards and the limitation of financing product options, have made it more difficult
for homebuyers to obtain acceptable financing. Any substantial increase in short-term and/or long-term mortgage interest rates
or unavailability of mortgage financing may adversely affect the ability of prospective homebuyers to obtain financing for the
Company’s homes, as well as adversely affect the ability of prospective homebuyers to sell their current homes. A disruption
in the credit markets and/or the curtailed availability of mortgage financing may adversely affect the Company’s business,
financial condition, results of operations and cash flows.
If the Company is unsuccessful in competing
against its homebuilding competitors, any future market share of the Company could decline or the Company’s growth could
be impaired and, as a result, the Company’s financial results could suffer.
Competition in the homebuilding
industry is intense, there are relatively low barriers to entry into this business, and we may not be able to compete successfully.
Increased competition could hurt the Company’s business, as it could prevent the Company from acquiring existing homes or
parcels of land on which to build homes or make such acquisitions more expensive, hinder the Company’s market share expansion,
and lead to pricing pressures on its homes that may adversely impact its margins and revenues. If the Company is unable to successfully
compete, its financial results could suffer and the value of, or its ability to service, its indebtedness, should it have any such
indebtedness, could be adversely affected. The Company’s competitors may independently renovate existing homes or construct
new homes that are superior or substantially similar to the Company’s products. Furthermore, a number of the anticipated
competitors of the Company will have substantially greater financial resources and lower costs of funds than will the Company.
Many of these competitors will also have longstanding relationships with subcontractors and suppliers in the markets in which the
Company operates.
The Company could experience an adverse
effect on home sales, revenues or cash flows due to its inability to acquire existing homes or finished lots or undeveloped land
for renovation or construction, if it is unable to obtain reasonably priced financing to support its homebuilding activities.
The homebuilding industry
is capital intensive, and homebuilding requires significant up-front expenditures to acquire existing homes or land and to begin
development. Accordingly, the Company will seek equity or debt financing from a variety of potential sources, including lender
financing and/or securities offerings. The availability of borrowed funds, especially for construction financing and existing home
or land acquisition, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be
invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital
markets have recently experienced significant volatility. If the Company is required to seek additional financing to fund its operations,
continued volatility in these markets may restrict the Company’s flexibility to access such financing. If the Company is
not successful in obtaining sufficient financing to fund its planned capital and other expenditures, it may be unable to acquire
existing homes or land for its homebuilding activities. Additionally, if the Company cannot obtain financing to fund the purchase
of real estate properties under contracts entered into by the Company, the Company may lose deposits or otherwise incur contractual
penalties and fees.
The Company is subject to government regulation
which could cause it to incur significant liabilities or restrict its business activities.
Regulatory requirements
could cause the Company to incur significant liabilities and operating expenses and could restrict its business activities. The
Company is subject to local, state and federal statutes and rules regulating, among other things, certain developmental matters,
building and site design, and matters concerning the protection of health and the environment. The Company’s operating expenses
may be increased by governmental regulations such as building permit allocation ordinances and impact and other fees and taxes,
which may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from
government agencies to grant the Company necessary licenses, permits and approvals could have an adverse effect on its operations.
The Company may incur additional operating
expenses due to compliance programs or fines, penalties and remediation costs pertaining to environmental regulations.
The Company is subject
to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the
environment. The particular environmental laws which apply vary greatly according to the location of the site, the site’s environmental
conditions and the present and former use of the site. Environmental laws may result in delays, may cause the Company to implement
time consuming and expensive compliance programs and may prohibit or severely restrict development or construction in certain environmentally
sensitive regions or areas. From time to time, the United States Environmental Protection Agency and similar federal or state agencies
review homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable
environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken
with respect to the Company may increase the Company’s costs. Further, the Company expects that increasingly stringent requirements
will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and
price of certain raw materials such as lumber.
The Company may be subject to significant
potential liabilities as a result of construction defect, product liability and warranty claims made against it.
As a homebuilder, the Company
will be subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims,
arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly.
With respect to certain
general liability exposures, including construction defect claims, product liability claims and related claims, interpretation
of underlying current and future trends, assessment of claims and the related liability and reserve estimation process is highly
judgmental due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once
claims are asserted for construction defects, it can be difficult to determine the extent to which the assertion of these claims
will expand geographically.
The Company’s operating expenses could
increase if it were required to pay higher insurance premiums or litigation costs for various claims, which could cause the Company’s
net income to decline.
The costs of insuring against
construction defects, product liability claims and claims against directors and officers are substantial. Increasingly in recent
years, lawsuits (including class action lawsuits) have been filed against builders, asserting claims of personal injury and property
damage. Insurance obtained by the Company may not cover all the claims, including personal injury claims, or such coverage may
become prohibitively expensive. If the Company is not able to obtain adequate insurance against these claims, the Company may experience
losses that could reduce its net income and restrict its cash flow available to service debt.
Historically, builders
have recovered from general contractors, subcontractors and insurance carriers a significant portion of the construction defect
liabilities and costs of defense that the builders have incurred. Insurance coverage available to general contractors and subcontractors
for construction defects is becoming increasingly expensive, and the scope of coverage is restricted. If the Company cannot effectively
recover from its general contractors or their respective subcontractors or their carriers, it may suffer greater losses which could
decrease its net income.
A builder’s ability to
recover against any available insurance policy depends upon the continued solvency and financial strength of the insurance carrier
that issued the policy. Many states have lengthy statutes of limitations applicable to claims for construction defects. To the
extent that any carrier providing insurance coverage to the Company or its general contractors or their respective subcontractors
becomes insolvent or experiences financial difficulty in the future, the Company may be unable to recover on those policies, and
its net income may decline.
The Company may experience fluctuations
and variability in its operating results and, as a result, its historical performance may not be a meaningful indicator of future
results.
The Company expects to
experience variability in home sales and net earnings. As a result of such variability, the Company’s historical performance
may not be a meaningful indicator of future results. The Company’s results of operations may fluctuate in the future as a
result of a variety of both national and local factors, including, among others:
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the timing of real estate acquisitions and home closings;
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the Company’s ability to continue to acquire additional properties for renovation or construction
or to secure contracts to acquire additional properties on acceptable terms;
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conditions of the real estate market in areas where the Company operates and of the general economy;
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raw material and labor shortages;
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seasonal home buying patterns; and
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other changes in operating expenses, including the cost of labor and raw materials, personnel and
general economic conditions.
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The occurrence of natural disasters
could increase the Company’s operating expenses and adversely affect its revenues and cash flows.
The climates and geology
of states in which the Company operates may present increased risks of natural disasters. To the extent that hurricanes, severe
storms, earthquakes, droughts, floods, wildfires or other natural disasters or similar events occur, the Company’s homes
under renovation or construction or the Company’s building lots could be damaged or destroyed, which may result in losses
exceeding the Company’s insurance coverage. Any of these events could increase the Company’s operating expenses, impair
its cash flows and adversely affect its revenues, which could, in turn, negatively affect the market price of the Company’s
securities.
Terrorist attacks against the United States
or increased domestic or international instability could have an adverse effect on the Company’s operations.
Adverse developments in
the war on terrorism, terrorist attacks against the United States, or any outbreak or escalation of hostilities between the United
States and any foreign power, may cause disruption to the economy, the Company, its employees and its customers, which could adversely
affect the Company’s revenues, operating expenses, and financial condition.
History of Operating Losses
The Company has incurred
operating losses in each year since its inception with the exception of 2002. At December 31, 2017, the Company had an accumulated
deficit of approximately $42 million. The Company’s losses have resulted principally from costs incurred in connection
with its previous research and development activities, its current real estate activities and from general and administrative costs
associated with the Company’s operations. These costs have exceeded the Company’s revenues and interest income.
Uncertainty of Utilization of Operating
Loss and Research and Development Credit Carryforwards.
As of December 31, 2017,
the Company had a net operating loss carryforward of approximately $22,374,000 and a research and development credit carryforward
of approximately $1,500,000 at December 31, 2017. These net operating loss carryforwards and the research and development credit
carryforward expire in various years from 2018 to 2037. The Company’s ability to utilize such net operating loss and research and
development credit carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations
in the future due to ownership changes, if any, as defined by rules enacted with the Tax Cuts and Jobs Act of 2017. As such,
there can be no assurance that the Company will be able to utilize such carryforwards. The Company presently maintains a full valuation
allowance against its deferred tax assets based on its assessment of the likelihood of realization.
Uncertainty of Access to Capital
There can be no assurance
that additional funding, if necessary, will be available on favorable terms, if at all.
Control by Existing Stockholders; Concentration
of Stock Ownership
Carl C. Icahn beneficially
owns, as of March 1, 2018, approximately 67.81% of the outstanding shares of the Company’s Common Stock. As a result,
Mr. Icahn, acting alone, will be able to control most matters requiring approval by the stockholders of the Company, including
the election of directors, the adoption of charter amendments, and the approval of mergers and other extraordinary corporate transactions
(although, as a condition to the consummation of the Merger, the Merger Agreement is required to be adopted by stockholders holding
a majority of the outstanding shares not owned by Parent, Merger Sub, or any of their affiliates). Such a concentration of ownership
may have the effect of delaying or preventing a change in control of the Company, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market prices.
Anti-Takeover Effect of Delaware Corporate
Law
Certain provisions of the
Delaware corporate law may have the effect of deterring hostile takeovers or delaying or preventing changes in the control or management
of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over the then current
market prices.
The Company’s stock price is volatile
and could decline.
The securities markets
in general and the Company’s Common Stock in particular have experienced significant price and volume volatility over the
past few years. The market price and volume of the Company’s Common Stock may continue to experience significant fluctuations
due not only to general stock market conditions but also to a change in sentiment in the market regarding the Company’s industry,
operations or business prospects. In addition to the other risk factors discussed in this section, the price and volume volatility
of the Company’s Common Stock may be affected by:
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operating results that vary from the expectations of securities analysts and investors;
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factors influencing home purchases, such as availability of home mortgage loans and interest rates,
credit criteria applicable to prospective borrowers, ability to sell existing residences, and homebuyer sentiment in general;
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the operating and securities price performance of companies that investors consider comparable
to the Company;
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announcements of strategic developments, acquisitions and other material events by the Company
or its competitors;
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changes in government regulations applicable to our business; and
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changes in global financial markets and global economies and general market conditions, such as
interest rates, commodity and equity prices and the value of financial assets.
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The Company’s ability
to raise funds through the issuance of equity or otherwise use its Common Stock as consideration is impacted by the price of its
Common Stock. A low stock price may adversely impact the Company’s ability to reduce its financial leverage, as measured
by the ratio of total debt to total capital. High levels of leverage or significant increases may adversely affect the Company’s
credit ratings and make it more difficult for the Company to access additional capital. These factors may limit the Company’s
ability to implement its operating and growth plans.
Absence of Dividends
The Company has not paid
any dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. The Merger Agreement also
limits the Company’s ability to pay dividends.
The Company has a Limited Trading Market
There is a limited public
trading market for the Company’s Common Stock. The Company cannot assure that a regular
trading market for the Company’s Common Stock will ever develop or that, if developed, it will be sustained. Because of the
Company’s limited public trading market, the market price for the Company’s Common Stock could be highly volatile and,
accordingly, substantial fluctuations in the price of the Company’s Common Stock could limit the ability of the Company’s
current stockholders to sell their shares at a favorable price.
If the Company ever become delinquent with
the filing of its reports with the SEC, Rule 144 will no longer be available until and unless we become current.
Rule 144 provides, as indicated
above, that sales of securities of Cadus may be made pursuant thereto only if Cadus has filed all relevant periodic reports that
it is required to file. If we become delinquent with our SEC reports, any holders of restricted securities will not be able to
sell pursuant to Rule 144 until, if ever, the Company becomes current for purposes of Rule 144. No assurance can be made that the
Company will be able to remain current with its reports.
The Merger is subject to closing conditions
as well as other uncertainties, and there can be no assurances as to whether and when the Merger may be completed. Failure to complete
the Merger could negatively impact our stock price, future business and financial results.
There can be no
assurance that the proposed Merger will be consummated. Completion of the Merger is subject to certain conditions, including, among
others: (i) receipt of the requisite vote of the Company’s stockholders adopting the Merger Agreement (including the
vote of stockholders holding a majority of the outstanding shares not owned by Parent, Merger Sub, or any of their
affiliates); (ii) the absence of any order or law prohibiting the Merger; (iii) the accuracy of the parties’ respective
representations and warranties, subject in some instances to materiality or “Material Adverse Effect” qualifiers,
as of the date of the Merger Agreement and the closing date of the Merger; (iv) the parties’ respective performance in
all material respects of their respective agreements and covenants contained in the Merger Agreement at or prior to the
closing of the Merger; and (v) the absence of a “Material Adverse Effect” with respect to the Company, since the
execution of the Merger Agreement. There can be no assurance that the closing conditions will be satisfied, or that the
Merger will be completed within the required time period pursuant to the Merger Agreement. Satisfaction of the closing
conditions may delay the completion of the Merger, and if certain closing conditions are not satisfied prior to June 30,
2018, the parties will not be obligated to complete the Merger.
If the Merger is not completed
for any reason, we will have incurred substantial expenses. We have incurred substantial legal, accounting and financial advisory
fees that are payable by us whether or not the Merger is completed, and our management has devoted considerable time and effort
in connection with the pending Merger. In addition, the trading price of our Common Stock could be adversely affected to the extent
that the current price reflects an assumption that the Merger will be completed. For these and other reasons, a failed Merger could
materially adversely affect our business, operating results or financial condition.
The pendency of the Merger may cause disruptions
in our business, which could have an adverse effect on our business, financial condition or results of operations.
The pendency of the Merger
could cause disruptions in and create uncertainty regarding our business, which could have an adverse effect on our financial condition
and results of operations, regardless of whether the Merger is completed. These risks, which could be exacerbated by a delay in
the completion of the Merger, include the following:
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Certain vendors may change their programs or processes
which might adversely affect the supply or cost of the products, which then might adversely affect our construction and other
real estate operations.
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Negotiations with third party payors might be adversely
affected which then might adversely affect our profits from any home sales.
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Prospective associates may experience
uncertainty about their future roles, which might adversely affect our ability to attract and retain key personnel.
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If the Merger is not completed for any reason, there
can be no assurance that any other strategic transaction acceptable to us will be offered or that our business, prospects or results
of operations will not be adversely affected.
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Our ability to make appropriate changes to our business
may be restricted by covenants in the Merger Agreement. These restrictions generally require us to operate and conduct our business
in the ordinary course. We may find that this and other contractual restrictions in the Merger Agreement may delay or prevent
us from responding, or limit our ability to respond, effectively to competitive pressures, industry developments and future business
opportunities that may arise during such period, even if our management believes they may be advisable.
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The costs and potential adverse outcomes of any litigation
relating to the Merger.
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