<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K/A NO. 1
AMENDMENT NO. 1 TO FORM 8-K FILED ON JUNE 3, 1997
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Date of earliest event reported was May 21, 1997)
VAXCEL, INC.
-------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 000-22373 58-2027283
- ------------------------------- --------------- --------------------
(State or Other Jurisdiction of (Commission File (IRS Employer
Incorporation) Number) Identification No.)
154 Technology Parkway
Norcross, Georgia 30092
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(Addresses of Principal Executive Offices, Including Zip Code)
(770) 453-0195
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(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
The Current Report on Form 8-K of Vaxcel, Inc. (the "Company") filed on
June 3, 1997 reported the acquisition by the Company on May 21, 1997 of Zynaxis,
Inc. Items 7(a) and 7(b) of the report stated that the historical financial
statements of Zynaxis, Inc. required under Rule 3-05 of Regulation S-X and the
pro forma financial information required under Article 11 of Regulation S-X
would be filed no later than 60 days after the date by which the Form 8-K was
required to be filed. The purpose of this amendment is to file such financial
statements and information.
The undersigned Registrant hereby amends Item 7 of its Current Report on
Form 8-K dated June 3, 1997 to read in its entirety as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The following financial statements of Zynaxis, Inc. are incorporated
by reference from Exhibit 99.1 to this report:
1. Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996
2. Unaudited Consolidated Statements of Operations for the quarters
ending March 31, 1997 and March 31, 1996
3. Unaudited Consolidated Statements of Cash Flows for the quarters
ending March 31, 1997 and March 31, 1996
4. Notes to Consolidated Financial Statements for the periods ending
March 31, 1997 (Unaudited)
5. Report of Independent Public Accountants on consolidated financial
statements for periods ending December 31, 1996
6. Audited Consolidated Balance Sheets as of December 31, 1996 and 1995
7. Audited Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
8. Audited Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994
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9. Audited Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
10. Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
The following pro forma financial statements of Vaxcel, Inc. are
incorporated by reference from Exhibit 99.1 to this report:
1. Pro forma condensed balance sheet as of March 31, 1997
2. Pro forma condensed statements of income for the year ended December
31, 1996 and the quarter ending March 31, 1997
(c) Exhibits.
*2.1 Agreement and Plan of Merger and Contribution dated as of December 6,
1997, among the Registrant, CytRx Corporation, Vaxcel Merger
Subsidiary, Inc. and Zynaxis, Inc.
*2.2 Preferred Stock and Warrant Agreement dated as of December 6, 1996,
among the Registrant, Zynaxis, Inc. CytRx Corporation and each of the
holders of Zynaxis, Inc. warrants signatory thereto.
99.1 Financial Statements
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SIGNATURE
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 hereunto duly authorized.
VAXCEL, INC.
(REGISTRANT)
Date: July 21, 1997 By: /s/ Paul J. Wilson III
-----------------------------
Paul J. Wilson III, President
and Chief Executive Officer
(Principal Executive Officer)
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<PAGE> 5
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibit Page No.
- ------- ----------
<S> <C> <C>
*2.1 Agreement and Plan of Merger and Contribution dated as of
December 6, 1997, among the Registrant, CytRx Corporation,
Vaxcel Merger Subsidiary, Inc. and Zynaxis, Inc.
*2.2 Preferred Stock and Warrant Agreement dated as of December 6,
1996, among the Registrant, Zynaxis, Inc. CytRx Corporation
and each of the holders of Zynaxis, Inc. warrants signatory
thereto.
99.1 Financial Statements
</TABLE>
*Previously filed on Form 8-K dated May 21, 1997
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<PAGE> 1
EXHIBIT 99.1
Financial Statements
<PAGE> 2
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 147,281 $ 124,348
Collaborative, contract and grant
revenue receivable (Note 6) 250,638 182,047
Other current assets 61,773 107,254
----------- -----------
Total current assets 459,692 413,649
Property and equipment:
Equipment 831,888 1,610,520
Leasehold improvements 35,570 35,570
----------- -----------
867,458 1,646,090
Less accumulated depreciation and
amortization (840,805) (1,605,502)
----------- -----------
Net property and equipment 26,654 40,588
Other assets:
Other long-term assets 20,000 20,000
Cauldron-net assets (Note 7) 528,000 600,000
Note receivable 333,865 324,046
----------- -----------
Total other assets 881,865 944,046
$ 1,368,211 $ 1,398,283
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 3
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 439,245 $ 232,243
Accrued expenses 392,573 752,809
Notes payable to shareholders (Note 3) 450,000 450,000
Note payable to CytRx (Note 4) 975,000 975,000
Current portion of other long-term obligations 34,581 33,277
----------- -----------
Total current liabilities 2,291,399 2,443,329
Other long-term obligations 56,727 65,511
Commitments and contingencies
(Note 2)
Stockholders' equity:
Series A preferred stock,
2,000,000 shares authorized,
1,412,500 shares issued and outstanding at
March 31, 1997 and December 31, 1996
(Liquidation preference of $3,262,956 and
$3,207,230 at March 31, 1997 and
December 31, 1996, respectively) 2,554,304 2,554,304
Common Stock, $.01 par value, 25,000,000 shares
authorized, 10,377,240 and 10,338,768 shares
issued and outstanding at March 31, 1997 and
December 31, 1996, respectively 103,771 103,387
Additional paid-in capital 45,986,323 45,982,992
Accumulated deficit (49,624,313) (49,751,240)
----------- -----------
Total stockholders equity (979,915) (1,110,557)
$ 1,368,211 $ 1,398,283
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 4
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Revenues:
Collaborative, contract and grant revenues
(Note 6) $ 386,703 $ 543,044
----------- -----------
386,703 543,044
Costs and expenses:
Research and development 583,150 942,887
Marketing, general and administrative 452,696 513,111
----------- -----------
1,035,846 1,455,998
Operating loss (649,143) (912,954)
Other income (expense):
Interest income 12,926 16,078
Interest expense (14,829) (6,837)
Gain on sale of Zyn-Linker technology
Note (2) 720,000 --
Other 57,973 82,748
----------- -----------
776,070 91,989
Net income (loss) $ 126,927 $( 820,965)
=========== ===========
Net income (loss) per common share $ .01 $( 0.08)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 5
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 126,927 $(820,965)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 68,447 270,737
Issuance of Common Stock to 401k plan 385 --
Decrease (increase) in
Restricted cash -- (125)
Prepaid expenses 11,256 (56,542)
Collaborative, contract and grant
revenue receivables (68,591) (38,446)
Other current assets 34,225 17,984
Other long-term assets (9,819) 9,591
Increase (decrease) in
Accounts payable 207,002 58,424
Accrued expenses (360,236) (175,371)
Deferred income -- 29,993
Other long-term obligations (7,480) (7,497)
--------- ---------
Net cash used for operating
activities 2,116 (712,217)
Cash flow from investing activities:
Purchases of property and equipment -- (3,148)
Proceeds from sale of assets 23,517 --
Net sales short-term securities -- 97,437
--------- ---------
Net cash from investing activities 23,517 94,289
</TABLE>
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<PAGE> 6
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1997 1996
------------- --------------
<S> <C> <C>
Cash flow from financing activities:
Private placement of Common Stock -- 500,000
Proceeds from exercise of Common Stock options -- 603
Principal payments on capital lease obligations (2,700) (714)
Proceeds from note payable to CytRx Corp. 200,000 --
Repayment of principal owed under CytRx Note (200,000) --
Principal payments on notes payable -- (5,946)
--------- -----------
Net cash from financing activities (2,700) 493,943
Net (decrease) increase in cash and cash
equivalents 22,933 (123,985)
Cash and cash equivalents, beginning of period 124,348 411,706
--------- ---------
Cash and cash equivalents, end of period $ 147,281 $ 287,721
========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest expense $ 2,325 $ 3,104
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 7
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
periods. These financial statements do not include all disclosures required for
annual financial statements and should be read in conjunction with the more
complete disclosures contained in the audited financial statements of Zynaxis,
Inc. ("Zynaxis" or the "Company") included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
The statements reflect, in the opinion of management, all adjustments of a
normal and recurring nature necessary to present fairly the Company's
consolidated financial position at March 31, 1997 and December 31, 1996, the
consolidated results of operations for the three months ended March 31, 1997 and
1996, and the consolidated cash flows for the three months ended March 31, 1997
and 1996. The results of operations for the three months ended March 31, 1997,
and the cash flows for the three months ended March 31, 1997, are not
necessarily indicative of the results to be expected for the entire year.
Certain prior year amounts have been reclassified to conform to current
year classifications.
Note 2 - Background and Significant Uncertainties
Zynaxis was incorporated in Pennsylvania on March 5, 1987 and commenced
operations in July 1988. The Company initially focused on development of
cell-mediated therapies and cellular diagnostic products including research
reagents for cell tracking. Between 1988 and 1991, the Company received funding
primarily through venture capital financing involving the issuance of
convertible preferred stock and convertible notes, all of which have since been
converted into Common Stock. In January 1992, the Company completed an initial
public offering of its Common Stock, receiving net proceeds of approximately
$23,300,000 through the sale of 2,875,000 shares of Common Stock. Between 1992
and 1994, the Company focused on development of products for site-directed drug
delivery using its proprietary Zyn-Linker molecules and on the development of
cellular diagnostic products including its Zymmune CD4/CD8 Cell Monitoring Kit.
During 1995, the Company modified its strategic direction, divesting its
diagnostic products, acquiring vaccine technologies, and focusing its resources
on selected drug and vaccine delivery opportunities. Four key events occurred in
1995 as a result of the Company's modified strategic direction: (i) the sales of
the Company's diagnostic operations, accompanied by a significant reduction in
workforce, (ii) the acquisition by merger of Secretech, Inc. ("Secretech")
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<PAGE> 8
and associated technologies for oral and mucosal vaccine delivery, (iii) the
completion of a private placement which raised net proceeds of $2,700,000 to
fund operations, and (iv) the completion of a significant corporate
collaborative agreement for the development of certain technologies acquired
through the merger with Secretech.
During 1996, the Company began to focus on the possibility of selling its
process chemistry/pilot plant operations, known as Cauldron Process Chemistry
("Cauldron"), and its related assets for cash. Cauldron provides collaborative
consulting services on all aspects of bulk pharmaceutical production and offers
process research, development and pilot scale-up facilities for the
pharmaceutical, biochemical and fine chemical industries. In July 1996, the
Company signed a binding letter of intent to sell Cauldron to Seloc AG
("Seloc"), a subsidiary of Schwarz Pharma. On August 27, 1996, the Company
received notification that Seloc was terminating its agreement in principle to
purchase Cauldron. In March 1997, Zynaxis signed an Asset Purchase Agreement
with ProClinical, Inc. ("Proclinical") for the sale of all Cauldron assets for
the aggregate amount of $832,000. The Asset Purchase Agreement requires Zynaxis
to prepay $250,000 (approximately 10 months' worth of occupancy) to the landlord
of the Company's Malvern headquarters. This sale is subject to shareholder
approval at Zynaxis' May 1997 special shareholders meeting.
On September 23, 1996, the Company entered into an Exclusive License
Agreement and Purchase Option with Phanos Technologies, Inc. ("Phanos") for
intellectual property related to its Zyn-Linker technologies. At that time, the
Company received initial deposits totaling $200,000, of which $195,000 was
refundable in the event that Phanos decided not to exercise the option. On
January 21, 1997, the Company received notification that Phanos had exercised
its option and the Company received $525,000, representing the balance of the
purchase price. Under the terms of the agreement, Phanos acquired all of the
Company's Zyn-Linker technology.
On December 6, 1996, the Company entered into an Agreement and Plan of
Merger and Contribution ( the "Merger Agreement") with CytRx Corporation
("CytRx"), Vaxcel, Inc., a wholly-owned subsidiary of CytRx ("Vaxcel"), and
Vaxcel Merger Subsidiary, Inc., a wholly-owned subsidiary of Vaxcel ("Vaxcel
Merger Sub"). Pursuant to the Merger Agreement, subject to approval by
shareholders of Zynaxis and certain other conditions, Vaxcel Merger Sub will be
merged (the "Merger") with and into Zynaxis, which will be the surviving
corporation and will be a wholly-owned subsidiary of Vaxcel. The Company
anticipates that, subject to shareholder approval at the Company's special
meeting of shareholders in May 1997 and the satisfaction of conditions to the
Merger, the Merger will be consummated in late May 1997. In the Merger, the
security holders of Zynaxis will exchange their Zynaxis securities for
securities of Vaxcel and will own approximately 12.5% of the outstanding common
stock of Vaxcel immediately following the Merger. CytRx will own the remaining
approximately 87.5% of common stock of Vaxcel immediately following the Merger.
The Merger will be accounted for as a purchase transaction, with Vaxcel as the
acquirer. Simultaneously with the execution of the Merger Agreement, Zynaxis and
CytRx entered into a secured loan agreement to provide the Company with
sufficient funding for continued operations pending the Merger. As discussed in
Note 4 to the Consolidated Financial Statements, CytRx agreed to loan up to
$2,000,000 to the Company on a secured basis,
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<PAGE> 9
as provided for in the loan agreement. Among other agreements entered into in
connection with the Merger is an agreement providing for the sale of
substantially all assets of the Company.
At March 31, 1997, the Company had cash and cash equivalents of $147,281
and a working capital deficit of $1,831,700. For the three months ended March
31, 1997, net operating cash inflow was approximately $2,000. The Company's
profitability during the first quarter of 1997 was due to the infusion of cash
from the Phanos acquisition of the Company's Zyn-Linker technology.
The Company has not received significant revenues from the sale of any of
its products. For the period from its inception to March 31, 1997, the Company
had an accumulated deficit of $49,624,000.
The ability of the Company to survive as a going concern beyond March 31,
1997 is dependent on the consummation of the Merger. There is no assurance that
the Company will ultimately complete this transaction. Additionally, certain
matters associated with the transaction require the approval of shareholders at
the Company's special meeting of shareholders to be held in May 1997. If the
Company is unable to complete the transaction, if the shareholders fail to
approve the Merger or if certain conditions precedent to closing of the Merger
do not occur, the Company will not be able to continue operations. Should the
Company determine that it is no longer in the best interest of its shareholders
to continue operations, the ability of the Company to fund an orderly
disposition of assets, pay off its then outstanding liabilities and return any
remaining cash to its shareholders will be limited by the amount of working
capital then on hand, if any.
The financial statements were prepared assuming the Company will continue
as a going concern. The asset and liability carrying amounts do not purport to
represent realizable or final settlement values. See "Report of Independent
Accountants" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 regarding the Company's ability to continue as a going
concern.
Note 3 - Notes Payable to Shareholders
On May 3,1996, the Company issued Demand Promissory Notes (the "May 1996
Notes") aggregating $200,000 to two of its principal shareholders. A general
partner of the general partner of one shareholder and the president of the other
shareholder are members of the Board of Directors. These May 1996 Notes bear
interest at the annual rate of 11 1/4% and are due on the earlier of (i) the
receipt by the Company of proceeds from the sale of Cauldron aggregating at
least $1,000,000 or (ii) upon demand. The May 1996 Notes are convertible at the
option of the holder into an aggregate of 200,000 shares of the Company's Common
Stock at any time prior to repayment. In connection with the issuance of the May
1996 Notes, the Company issued warrants with a five-year term to purchase
200,000 shares of the Company's Common Stock at an exercise price of $1.00 per
share.
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<PAGE> 10
On June 7,1996, the Company issued a $250,000 Demand Promissory Note to
another of its principal shareholders. This note was canceled and reissued on
July 17,1996 due to a revision of the repayment terms (the "July 1996 Note").
This July 1996 Note bears interest at the annual rate of 11 1/4% and is due on
the earlier of (i) the receipt by the Company of proceeds from the sale of
Cauldron aggregating at least $1,000,000 or (ii) upon demand. This July 1996
Note is convertible at the option of the holder into an aggregate of 150,000
shares of the Company's Common Stock at any time prior to repayment. In
connection with the issuance, the Company also issued a warrant with a five-year
term to purchase 25,000 shares of the Company's Common Stock at an exercise
price of $1.00 per share.
In conjunction with the signing of the Merger Agreement in December 1996, a
Note Exchange Agreement was entered into whereby two of these three notes
payable to shareholders will be exchanged for Vaxcel common stock upon
consummation of the Merger. Additionally, in the Merger, the warrants will be
exchanged for warrants to purchase Vaxcel common stock.
Note 4 - Note Payable to CytRx
As discussed in Note 2, the Company has entered into a Merger Agreement
with CytRx and Vaxcel, an Atlanta-based vaccine technology company. In
conjunction with the Merger Agreement, Zynaxis also entered into a secured loan
agreement with CytRx, Vaxcel's parent company. The terms of the loan agreement
provide that the Company may borrow up to $2,000,000 from CytRx between December
1996 and the closing of the Merger, anticipated to be in May 1997. Proceeds from
any amounts borrowed are to be used to satisfy accounts payable and accrued
expenses, as well as to fund operations until the transaction is completed.
Through March 31, 1997, the Company had borrowed a total of $1,175,000 and had
repaid $200,000 of principal in January 1997 with a portion of the cash received
from Phanos (see Note 2), resulting in a principal balance owed at March 31,
1997 of $975,000. The borrowings accrue interest at prime plus 2%. Accrued
interest expense on these borrowings totaled approximately $30,000 as of March
31, 1997.
Note 5 - Net Income (Loss) Per Common Share
The net income (loss) per share is based upon the weighted average common
shares outstanding during the three months ended March 31, 1997. Common stock
equivalents have been included in the computation for this period since the
effect is dilutive.
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," which supersedes APB Opinion No. 15, "Earnings per Share," was
issued in February 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for complex capital structures on the face of
the income statement. Basic EPS is computed by dividing income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of securities
into common stock, such as stock options. SFAS 128 is required to be adopted for
year-end 1997; earlier application is not permitted. The Company does not expect
the basic or diluted EPS
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<PAGE> 11
measured under SFAS 128 to be materially different than its primary or
fully-diluted EPS measured under APB No. 15.
Note 6 - Collaborative, Contract and Grant Revenues
Collaboration with ALK A/S
In October 1995, the Company announced a development and licensing
agreement with ALK A/S ("ALK"), a leading European pharmaceutical company in the
field of allergy immunotherapy. The collaboration involves certain of the
technologies acquired in the merger with Secretech relating to bioactive
substance delivery technology.
Under the terms of the ALK development and licensing collaboration, the
Company has received payments aggregating $1,000,000. The Company received the
second installment of $250,000 in January 1996, the third installment of
$250,000 in April 1996, and the fourth and final installment of $250,000 in
August 1996.
The Company also has agreed to provide ALK with research and development
support of the licensed technology for which it will receive additional revenues
based upon costs incurred. During the three months ended March 31, 1996, the
Company recorded $18,600 of such revenue. As a result of a reduction in
workforce in September 1996, the Company's ability to continue to provide ALK
with research and development support has been significantly reduced, and there
was no revenue recognized for such support during the first three months of
1997.
The Company will receive a base royalty of 7% on net sales of products
using the Company's technology, increasing based upon certain sales criteria
established under the agreement. The Company could also receive additional
milestone payments of up to $2,000,000 based upon either FDA or certain other
regulatory approvals of additional products using the Company's vaccine delivery
technologies. There can be no assurance that ALK will ever obtain the
appropriate regulatory approvals, or will ever generate any sales using the
technology licensed from the Company.
Should the Company receive royalties under the ALK agreement, it will be
required to pay approximately 3% of the net sales of the licensed product to the
original patent holder of the technology.
Contract Manufacturing
During the three months ended March 31, 1997 and 1996, the Company, through
its Cauldron Process Chemistry division, recognized contract manufacturing
revenues of $269,000 and $152,000, respectively, by providing process chemistry
and pilot manufacturing services to other biotechnology, pharmaceutical and
chemical companies. The significant increase in these contract revenues was
attributable to an increased marketing effort throughout 1996 and 1997.
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<PAGE> 12
Grant Revenue
For the three months ended March 31, 1997 and 1996, the Company recognized
$83,200 and $109,000, respectively, pursuant to a Small Business Innovative
Research ("SBIR") grant awarded by the National Heart, Lung and Blood Institute.
This grant is funding the preclinical development of Zyn-Linker molecules linked
with heparin and the investigation of their ability to inhibit post-angioplasty
restenosis and local thrombosis. This grant was extended for a second year
through June 30, 1997; the Company could recognize up to an additional $115,000
under the terms of this grant extension.
During 1996, the Company received a Phase I SBIR grant for up to $100,000
to develop Zyn-Linker molecules linked with Taxol and for the investigation of
their ability to inhibit post-angioplasty restenosis and local thrombosis. The
Company recorded $12,000 of revenue related to this grant, which ended in
mid-January 1997, during the three months ended March 31, 1997.
Notwithstanding the January 1997 purchase by Phanos of the Zyn-Linker
technology, the studies conducted under the grant extension will continue to be
performed by Zynaxis. However, any patents, inventions or other intellectual
property that may arise from this SBIR research will become the property of
Phanos.
Note 7 - Cauldron Assets
In efforts to raise capital, and in conjunction with the Vaxcel Merger, the
Company solicited bids from third parties to purchase the Cauldron operations
and related assets. The net book value of the Cauldron assets at December 31,
1996 was written down to net realizeable value of $600,000. The difference
between the net book value and $600,000 is shown as a Provision for Asset
Impairment in the December 31, 1996 income statement. During the first quarter
of 1997, depreciation was taken on these assets at the rate of $24,000 per
month. As discussed in Note 2, an Asset Purchase Agreement was signed in March
1997 for the sale of the Cauldron assets for $832,000 (which will be partially
reduced by a $250,000 rent prepayment to be made by Zynaxis), subject to
shareholder approval in May 1997.
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<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zynaxis, Inc.:
We have audited the accompanying consolidated balance sheets of Zynaxis,
Inc. (a Pennsylvania corporation) and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zynaxis, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred significant losses from operations since its inception, has a
shareholders' deficit and requires substantial additional capital to fund its
operations. In addition, the Company has a significant operating lease
commitment. As discussed in Note 1, on December 6, 1996 the Company entered into
an agreement and plan of merger and contribution with CytRx Corporation, Vaxcel,
Inc. (a wholly-owned subsidiary of CytRx), and Vaxcel Merger Subsidiary, Inc. (a
wholly-owned subsidiary of Vaxcel). The merger is subject to approval of the
shareholders of each company except CytRx. If the merger is not consummated,
management will be required to consider other alternatives, including the
liquidation of the Company's remaining assets and the payment of its liabilities
and commitments. Management's plans in regard to these matters are described in
Notes 1, 6 and 13. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
January 21, 1997
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<PAGE> 14
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2).................. $ 124,348 $ 411,706
Short-term securities (Note 8)...................... -- 97,437
Collaborative, contract and grant revenue
receivable (Note 17)............................. 182,047 111,263
Restricted cash (Note 12)........................... -- 23,735
Other current assets................................ 107,254 68,991
----------- -----------
Total current assets............................. 413,649 713,132
----------- -----------
Property and equipment:
Equipment........................................... 1,610,520 1,935,739
Leasehold improvements.............................. 35,570 249,349
----------- -----------
1,646,090 2,185,088
Less--Accumulated depreciation and amortization..... (1,605,502) (1,930,127)
----------- -----------
Net property and equipment....................... 40,588 254,961
Other assets:
Restricted cash (Note 12)........................... -- 109,711
Other long-term assets.............................. 20,000 31,869
Cauldron--net assets (Note 6)....................... 600,000 2,590,580
Note receivable (Note 4)............................ 324,046 287,575
----------- -----------
Total other assets............................... 944,046 3,019,735
----------- -----------
$ 1,398,283 $ 3,987,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
- 13 -
<PAGE> 15
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 232,243 $ 747,777
Accrued expenses (Note 9)........................... 752,809 487,794
Notes payable to shareholders (Note 10)............. 450,000 150,000
Note payable to CytRx (Notes 3 and 11) 975,000 --
Current maturities of long-term debt (Note 12)...... -- 25,050
Current portion of other long-term obligations
(Note 13)........................................... 33,277 36,209
Total current liabilities........................ 2,443,329 1,446,830
----------- -----------
Long-term debt (Note 12)............................... -- 79,909
----------- -----------
Other long-term obligations (Note 13).................. 65,511 103,494
----------- -----------
Commitments and contingencies
(Notes 1 and 13)
Shareholders' equity (deficit) (Note 14):
Series A preferred stock, 2,000,000
shares authorized. 1,412,500 and
1,500,000 issued and outstanding at
December 31, 1996 and December 31, 1995,
respectively. (Liquidation preference of
$3,207,230 and $3,149,655 at December
31, 1996 and 1995, respectively).................... 2,554,304 2,712,535
Common Stock, $0.01 par value, 25,000,000 shares
authorized. 10,338,768 and 9,460,676 issued and
outstanding at December 31, 1996 and 1995,
respectively........................................ 103,387 94,607
Additional paid-in capital............................. 45,982,992 45,071,223
Accumulated deficit.................................... (49,751,240) (45,520,770)
----------- -----------
Total stockholders' equity (deficit)................ (1,110,557) 2,357,595
----------- -----------
$ 1,398,283 $ 3,987,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
- 14 -
<PAGE> 16
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Collaborative, contract and grant
revenues (Note 17).................. $ 2,050,467 $ 620,603 $ 760,196
Sales................................ -- 141,189 403,759
----------- ------------ ------------
2,050,467 761,792 1,163,955
Costs and expenses:
Cost of sales........................ -- 40,262 273,088
Research and development............. 3,642,195 5,168,912 6,344,221
Marketing, general and administrative 2,019,042 2,239,921 3,397,948
Restructuring charge (Note 4)........ -- 347,436 --
Charge for acquired research and
development (Note 3)................ -- 5,165,793 --
Provision for asset impairment
(Notes 4, 5 and 6).................. 1,152,130 -- 1,466,360
----------- ------------ ------------
6,813,367 12,962,324 11,481,617
Operating loss........................ (4,762,900) (12,200,532) (10,317,662)
Other income (expense):
Interest income...................... 56,881 80,919 366,910
Interest expense..................... (115,815) (36,896) (260,651)
Other (Note 18)...................... 591,364 162,232 --
Net gain on sale of diagnostic
technologies and assets (Note 4).... -- 1,616,840 --
----------- ------------ ------------
532,430 1,823,095 106,259
Net loss............................. $(4,230,470) $(10,377,437) $(10,211,403)
----------- ------------ ------------
Net loss per common share............ $ (0.42) $ (1.57) $ (1.95)
Shares used in computing net loss
per common share..................... 10,126,676 6,602,813 5,241,317
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
- 15 -
<PAGE> 17
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------- ---------------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 -- -- 5,233,734 $ 52,337
------------ ------------ ------------ ------------
Exercise of options to
purchase shares of
Common Stock -- -- 14,820 149
Issuance of Common Stock
to 401k Plan -- -- 3,500 35
Amortization of deferred
compensation -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1994 -- -- 5,252,054 $ 52,521
------------ ------------ ------------ ------------
Issuance of Common Stock
upon the exercise of
stock options -- -- 7,107 71
Issuance of Common Stock
to 401k Plan -- -- 12,911 129
Amortization of deferred
compensation -- -- -- --
Issuance of Common Stock
in connection with the
acquisition of Secretech,
Inc -- -- 4,132,000 41,320
Issuance of Common Stock
and warrants in
connection with reduction
in royalty obligation -- -- 56,604 566
Issuance of Series A
Convertible Preferred
Stock, net of $287,465 in
issue costs 1,500,000 2,712,535 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1995 1,500,000 $ 2,712,535 9,460,676 $ 94,607
------------ ------------ ------------ ------------
Issuance of Common Stock
upon the exercise of
stock options -- -- 2,989 30
Issuance of Common Stock
to 401k Plan -- -- 12,973 129
Conversion of Preferred
Stock into Common Stock (87,500) (158,231) 175,000 1,750
Issuance of warrants in
connection with notes
payable -- -- -- --
Issuance of Common Stock
in connection with
conversion of notes
payable -- -- 152,582 1,526
Issuance of Common Stock
in connection with
closing of private
placement -- -- 500,000 5,000
Issuance of Common Stock
in settlement of
consulting agreement -- -- 34,548 345
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 1,412,500 $ 2,554,304 10,338,768 $ 103,387
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated Deferred
Capital Deficit Compensation Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 40,353,316 $(24,931,930) $ (10,192) $ 15,463,531
------------ ------------ ------------ ------------
Exercise of options to
purchase shares of
Common Stock 11,124 -- -- 11,273
Issuance of Common Stock
to 401k Plan 7,336 -- -- 7,371
Amortization of deferred
compensation -- -- 6,421 6,421
Net loss -- (10,211,403) -- (10,211,403)
------------ ------------ ------------ ------------
Balance, December 31, 1994 $ 40,371,776 $(35,143,333) $ (3,771) $ 5,277,193
------------ ------------ ------------ ------------
Issuance of Common Stock
upon the exercise of
stock options 4,929 -- -- 5,000
Issuance of Common Stock
to 401k Plan 17,655 -- -- 17,784
Amortization of deferred
compensation -- -- 3,771 3,771
Issuance of Common Stock
in connection with the
acquisition of Secretech,
Inc 4,552,429 -- -- 4,593,749
Issuance of Common Stock
and warrants in
connection with reduction
in royalty obligation 124,434 -- -- 125,000
Issuance of Series A
Convertible Preferred
Stock, net of $287,465 in
issue costs -- -- -- 2,712,535
Net loss -- (10,377,437) -- (10,377,437)
------------ ------------ ------------ ------------
Balance, December 31, 1995 $ 45,071,223 $(45,520,770) $ -- $ 2,357,595
------------ ------------ ------------ ------------
Issuance of Common Stock
upon the exercise of
stock options 2,074 -- -- 2,104
Issuance of Common Stock
to 401k Plan 8,503 -- -- 8,632
Conversion of Preferred
Stock into Common Stock 156,481 -- -- --
Issuance of warrants in
connection with notes
payable 60,000 -- -- 60,000
Issuance of Common Stock
in connection with
conversion of notes
payable 151,056 -- -- 152,582
Issuance of Common Stock
in connection with
closing of private
placement 495,000 -- -- 500,000
Issuance of Common Stock
in settlement of
consulting agreement 38,655 -- -- 39,000
Net loss -- (4,230,470) -- (4,230,470)
------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 45,982,992 $(49,751,240) $ -- $ (1,110,557)
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
- 16 -
<PAGE> 18
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
------------ ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,230,470) $(10,377,437) $(10,211,403)
Adjustment to reconcile net loss to net cash
used for operating activities:
Charge for acquired research and development.............. -- 5,165,793 --
Gain on sale of diagnostic technologies and assets........ -- (1,616,840) --
Gain on asset disposals................................... (131,658) -- --
Gain on liability settlements............................. (152,717) -- --
Depreciation and amortization............................. 1,037,672 1,171,521 751,809
Imputed interest income on note receivable................ (36,472) -- --
Provision for asset impairment............................ 1,152,130 -- 1,466,360
Deferred compensation..................................... -- 3,771 6,421
Charge for reduction in royalty obligation................ -- 125,000 --
Issuance of Common Stock to 401k Plan..................... 8,632 17,784 7,371
Imputed interest expense on notes payable................. 60,000 -- --
Stock issuance for payables............................... 39,000 -- --
Decrease (increase) in Accounts receivable................ -- 12,493 (14,625)
Inventories............................................. -- -- (316,945)
Restricted cash......................................... 133,446 1,456 41,966
Collaborative, contract & grant revenue receivable...... (70,784) (96,089) --
Other current assets.................................... 26,737 (6,820) 84,933
Other long-term assets.................................. 11,869 8,812 12,279
Increase (decrease) in
Accounts payable........................................ (394,737) 455,132 (107,370)
Accrued expenses........................................ 267,600 61,503 (463,054)
Other long-term obligations............................. (27,489) (29,986) (29,717)
----------- ------------ ------------
Net cash used for operating activities.................. (2,307,241) (5,103,907) (8,771,975)
Cash flows from investing activities:
Proceeds from sale of property and equipment.............. 142,788 -- --
Cash used for purchase of property and equipment.......... (35,337) (54,257) (651,733)
Proceeds from sale of diagnostic technologies and assets.. -- 1,329,595 --
Payment of merger related costs........................... -- (379,850) --
Sales of long-term and short-term securities.............. 196,166 2,968,257 27,404,253
Purchases of long-term and short-term securities.......... (98,729) (939,518) (19,177,465)
Net cash from investing activities........................ 204,888 2,924,227 7,575,055
</TABLE>
- 17 -
<PAGE> 19
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<S> <C> <C> <C>
Cash flows from financing activities
Net proceeds from issuance of
Preferred Stock..................................... -- 2,712,535 --
Proceeds from issuance of
Common Stock........................................ 500,000 -- --
Proceeds from issuance of
short-term promissory notes
to shareholders..................................... 450,000 150,000 --
Proceeds from note payable
to CytRx............................................ 975,000 -- --
Proceeds from exercise of
Common Stock options................................ 2,104 5,000 11,273
Principal payments on note payable.................... (104,959) (342,578) (3,698,341)
Principal payments on capital lease obligations....... (7,150) (23,851) (48,389)
--------- --------- ----------
Net cash (used for) provided by financing activities 1,814,995 2,501,106 (3,735,457)
Net increase (decrease) in cash and
cash equivalents........................................ (287,358) 321,426 (4,932,377)
Cash and cash equivalents, beginning
of year.................................................. 411,706 90,280 5,022,657
Cash and cash equivalents, end of year..................... $ 124,348 $ 411,706 $ 90,280
--------- --------- ----------
Supplement disclosure of cash flow information:
Cash paid for interest expense......................... $ 14,242 $ 30,050 $ 244,459
</TABLE>
The accompanying notes are an integral part of these statements.
- 18 -
<PAGE> 20
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Background, Significant Uncertainties and Subsequent Events
Zynaxis, Inc. ("Zynaxis" or the "Company") was incorporated in Pennsylvania
on March 5, 1987 and commenced operations in July 1988. The Company initially
focused on development of cell-mediated therapies and cellular diagnostic
products including research reagents for cell tracking. Between 1988 and 1991,
the Company received funding primarily through venture capital financing
involving the issuance of convertible preferred stock and convertible notes, all
of which have since been converted into Common Stock. In January 1992, the
Company completed an initial public offering of its Common Stock, receiving net
proceeds of approximately $23,300,000 through the sale of 2,875,000 shares of
Common Stock. Between 1992 and 1994, the Company focused on development of
products for site-directed drug delivery using its proprietary Zyn-Linker(R)
molecules and on the development of cellular diagnostic products including its
Zymmune CD4/CD8 Cell Monitoring Kit.
During 1995 the Company modified its strategic direction, divesting its
diagnostic products, acquiring vaccine technologies, and focusing its resources
on selected drug and vaccine delivery opportunities. Four key events occurred in
1995 as a result of the Company's modified strategic direction: (i) the sales of
the Company's diagnostic operations, accompanied by a significant reduction in
work-force, (ii) the acquisition by merger of Secretech, Inc. ("Secretech") and
associated technologies for oral and mucosal vaccine delivery, (iii) the
completion of a private placement which raised net proceeds of $2,700,000 to
fund operations, and (iv) the completion of a significant corporate
collaborative agreement for the development of certain technologies acquired
through the merger with Secretech.
During 1996, the Company began to focus on the possibility of selling its
process chemistry/pilot plant operations, known as Cauldron Process
Chemistry("Cauldron") and its related assets for cash. Cauldron provides
collaborative consulting services on all aspects of bulk pharmaceutical
production and offers process research, development and pilot scale-up
facilities for the pharmaceutical, biochemical industries and fine chemical
industries. In July 1996, the Company signed a binding letter of intent to sell
Cauldron to Seloc AG ("Seloc"), a subsidiary of Schwarz Pharma. On August 27,
1996, the Company received notification that Seloc was terminating its agreement
in principle to purchase Cauldron (See Note 6).
On September 23, 1996, the Company entered into an Exclusive License
Agreement and Purchase Option with Phanos Technologies, Inc. ("Phanos") related
to intellectual property related to its Zyn-Linker technologies. At that time,
the Company received initial deposits totaling $200,000, of which $195,000 was
refundable should Phanos have decided not to exercise the option. On January
21,1997, the Company received notification that Phanos had exercised its option
and the Company received $525,000, representing the balance of the purchase
price. Under the terms of the agreement, Phanos acquired all of the Company's
Zyn-Linker technologies.
- 19 -
<PAGE> 21
On December 6, 1996 the Company entered into an Agreement and Plan of
Merger and Contribution (the "Merger Agreement") with CytRx Corporation
("CytRx"), Vaxcel, Inc., a wholly-owned subsidiary of CytRx ("Vaxcel"), and
Vaxcel Merger Subsidiary, Inc., a wholly-owned subsidiary of Vaxcel ("Vaxcel
Merger Sub"). Pursuant to the Merger Agreement, subject to approval by
shareholders of Zynaxis and certain other conditions, Vaxcel Merger Sub will be
merged (the "Merger") with and into Zynaxis, which will be the surviving
corporation and will be a wholly-owned subsidiary of Vaxcel. The Company
anticipates that, subject to shareholder approval and the satisfaction of
conditions to the Merger, the Merger will be consummated in the first half of
April 1997. In the Merger, the security holders of Zynaxis will exchange their
Zynaxis securities for securities of Vaxcel and will own approximately 12.5% of
the outstanding Common Stock of Vaxcel immediately following the Merger. CytRx
will own the remaining approximately 87.5% of Common Stock of Vaxcel immediately
following the Merger. The Merger will be accounted for as a purchase
transaction, with Vaxcel as the acquirer. Simultaneously with the execution of
the Merger Agreement, Zynaxis and CytRx entered into a secured loan agreement in
order for the Company to have sufficient funding for continued operations
pending the Merger. As discussed in Note 6 to the Consolidated Financial
Statements, CytRx agreed to loan up to $2,000,000 to the Company on a secured
basis, as defined in the loan agreement. Among other agreements entered into in
connection with the Merger is an agreement providing for the sale of
substantially all assets of the Company.
At December 31, 1996, the Company had cash, cash equivalents of $124,348
and a working capital deficit of $2,030,000. For the year ended December 31,
1996, net operating cash outflow was $2,307,000.
The Company has not received significant revenues from the sale of any of
its products. For the period from its inception to December 31, 1996, the
Company had an accumulated deficit of $49,751,000.
The ability of the Company to survive as a going concern beyond December
31,1996 is dependent on the consummation of the Merger. There is no assurance
that the Company will ultimately complete this transaction. Additionally,
certain matters associated with the transaction require the approval of
shareholders. If the Company is unable to complete the transaction, if the
shareholders fail to approve the Merger or if certain conditions precedent to
closing of the Merger do not occur, the Company will not be able to continue
operations. Should the Company determine that it is no longer in the best
interest of its shareholders to continue operations, the ability of the Company
to fund an orderly disposition of assets, pay off its then outstanding
liabilities and return any remaining cash to its shareholders will be limited by
the amount of working capital then on hand, if any. Refer to Note 6 regarding
the Cauldron assets and Note 13 regarding the Company's operating lease
commitment.
The Financial Statements were prepared assuming the Company will continue
as a going concern. The asset and liability carrying amounts do not propose to
represent realizable or final settlement values. See "Report of Independent
Public Accountants" regarding the Company's ability to continue as a going
concern.
- 20 -
<PAGE> 22
Note 2 -- Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Zynaxis and
its wholly-owned subsidiaries. All intercompany transactions and accounts have
been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all investments with an original maturity of less
than three months to be cash equivalents. Cash equivalents at December 31, 1996
and December 31, 1995 consisted of a bank repurchase agreement collateralized by
a United States government security.
Supplemental Cash Flow Information
In 1995, the Company acquired Secretech through the issuance of 4,132,075
shares of Common Stock with a value of $4,593,749. Refer to Note 3 to the
Consolidated Financial Statements.
In 1996 and 1995, the Company financed $25,642 and $33,628, respectively,
of equipment purchases with capital leases.
Property and Equipment
Property and equipment are carried at cost. Equipment consists of
laboratory and office equipment which is depreciated on a straight-line basis,
generally over three to five years. Property and equipment under capital leases
are amortized over the term of the lease. Leasehold improvements are amortized
over the then remaining lease term or the estimated useful life of the
improvement, whichever is shorter. Maintenance and repairs are charged to
expenses as incurred and were $142,677, $178,440, and $171,753 in 1996, 1995,
and 1994, respectively. Major renewals and betterments are capitalized. Upon
disposition, the net book value of assets is relieved and resulting gains or
losses are reflected in the results of operations. Included in other current
assets is a receivable of $65,000 relating to the sale of certain fixed assets
that were sold during the fourth quarter of 1996.
- 21 -
<PAGE> 23
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and undiscounted cash flows estimated to be generated by those assets are less
than the assets carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets where disposal is expected. The Company adopted SFAS No. 121
in the first quarter of 1996 and the adoption did not have any impact on the
Company's financial position or results of operations. See Note 6 regarding the
Cauldron assets.
Revenue Recognition
Government Small Business Innovative Research ("SBIR") grants revenue is
recognized on the percentage of completion method as the related expenses are
incurred. The Company receives payment based on the level of its related
research and development. Revenues recognized approximate costs incurred.
Collaboration revenues are recognized over the expected estimated period
services or work will be performed. Contract revenues are recognized according
to contract terms and milestones achieved on the percentage of completion
method. Sales are recognized upon product shipment. See Note 17 for further
disclosure.
Research and Development
Research and development costs are charged to expense as incurred. These
costs include personnel costs, materials consumed, depreciation on equipment and
cost of facilities used for research and development. Payments related to the
acquisition of technology rights for which development work is in process are
expensed and considered a component of research and development costs. Included
in research and development costs in 1994 are certain manufacturing, process
development and start-up costs associated with the Company's Zymmune CD4/CD8
Cell Monitoring Kit.
Net Loss Per Common Share
Net loss per share has been computed by dividing the net loss by the
weighted average number of shares of Common Stock outstanding during the periods
presented. The weighted average number of shares of Common Stock used in the
computation were 10,126,676, 6,602,813, and 5,241,317 for the years ended
December 31, 1996, 1995, and 1994, respectively. Common shares obtainable from
the assumed conversion of the Series A Convertible Preferred Stock and the
exercises of outstanding options and warrants have been excluded from the
computation of net loss per common share for all periods presented because their
inclusion would be antidilutive.
Reclassifications
The Company has reclassified certain prior year amounts to conform to the
current year presentation.
- 22 -
<PAGE> 24
Note 3 -- Acquisition of Secretech, Inc.
Effective July 27, 1995, the Company consummated the merger of Secretech, a
company engaged in the development of oral vaccines which stimulate mucosal and
systemic immunity, with and into a wholly-owned subsidiary of the Company.
In connection with this merger, the Company initially issued 3,000,000
shares of its Common Stock, independent of any fluctuations in its underlying
market value, to the former Secretech shareholders. Based on the July 27, 1995
market value of $1.03125 per share, the estimated total purchase price was
$3,093,750.
Pursuant to the terms of the merger agreement, as a result of the Company's
consummation of the collaborative agreement discussed in Note 17 to the
Consolidated Financial Statements, the Company issued an additional 1,132,075
shares (the "Contingent Shares") of Common Stock, with a market value at the
time of issuance of $1,500,000, to the former shareholders of Secretech. The
number of Contingent Shares was determined by dividing $1,500,000 by the then
current price per share of Zynaxis Common Stock based upon the ten day average
of the closing price on the Nasdaq National Market prior to public announcement
of the collaborative agreement.
The transaction was accounted for as a purchase. Revenues and expenses
related to Secretech are included in the results of operations for the Company
from the date of acquisition. The Company had recorded a total charge to 1995
earnings of $5,165,793 for acquired research and development equal to the value
of the initial 3,000,000 shares issued, the value of the 1,132,075 Contingent
Shares issued, the excess of liabilities assumed over assets acquired, as well
as fees and expenses to effect the transaction.
In connection with the merger of Secretech, Zynaxis' management performed
an analysis of all identifiable assets acquired. Such analysis included the
identification and evaluation of each significant development project to
determine if the technological feasibility had been achieved and if there were
any alternative future uses. As of the date of the merger, Secretech was a
development stage biotechnology company and had an accumulated deficit of
approximately $5 million. In addition, Secretech had no product sales since
inception and a shareholder deficit. Prior to the merger with Zynaxis, Secretech
was focused on developing new classes of oral vaccines. At the time of the
merger, one of Secretech's development programs was in human clinical trials and
was several years away from regulatory approval and ultimate commercialization.
The remaining development programs were preclinical. At that time, there were
significant risks that any of these product development efforts would be
successfully completed, that regulatory approval would be obtained or that any
products, if introduced, would be successfully marketed or achieve customers'
acceptance. The cost of developing this technology was significant. As a result
of the substantial time and effort to continue the development of the product
and the associated risk thereof, it was determined that technological
feasibility had not been achieved. In addition, since alternative uses of this
developmental technology did not exist at that time, the cost of such technology
had been charged to expense in accordance with SFAS No. 2.
- 23 -
<PAGE> 25
Note 5 to the Consolidated Financial Statements presents consolidated
condensed pro forma financial results of this transaction, and the pro forma
financial results of the diagnostic divestiture discussed in Note 4 below.
Note 4 -- Divestiture of Diagnostic Technologies
In January 1995, Zynaxis' management and Board of Directors committed to a
plan to divest its diagnostic products and technologies. Accordingly, the
realizability of all diagnostic assets was reviewed by the Company as of
December 31, 1994. As a result of the review of its diagnostic technologies and
assets, the Company recorded a charge in the statement of operations for the
year ended December 31, 1994 totaling $1,466,360 for the impairment of certain
of its diagnostic-related assets. The impairment represented substantially all
of the identifiable diagnostic-related assets, including equipment, prepaid
royalties, accounts receivable and leasehold improvements.
Also as a result of the decision to divest its diagnostic technologies and
assets, in January 1995 the Company recorded a restructuring charge of $347,436.
This charge consisted of severance and severance-related expenses resulting from
the termination of certain diagnostic employees, as well as amounts due to
certain distributors of the Company's Zymmune Cell Monitoring Kit pursuant to
the terms of their Zymmune distribution agreements.
Subsequent to these actions, the Company sold its diagnostic technologies
in two separate transactions and has recognized a combined net gain of
$1,616,840 on these transactions.
Sale of Cell Tracking Molecule Technology
In June 1995, the Company announced that it had reached an agreement with
Phanos for the sale of the Company's cell tracking molecules for use as research
and diagnostic reagents, including certain Zyn-Linker patents owned by the
Company.
The Company retained all rights to the therapeutic uses of the Zyn-Linker
technology. Upon signing, the Company received a lump sum payment of $1,100,000,
which is included in the gain on the sale of diagnostic technologies.
Under the terms of the agreement, the Company continued to manufacture and
distribute the research and diagnostic reagents for Phanos and receive royalty
and other payments based upon the sales of these products, if any. In December
1996, the Company assigned its rights under this agreement to a consulting firm,
the founders of which are former vice presidents of Zynaxis. As the result of
this assignment, the Company is no longer responsible for the manufacture or
distribution of the research reagents, nor does it collect a royalty.
- 24 -
<PAGE> 26
Sale of Zymmune Technology
In July 1995, the Company announced that it had reached an agreement (the
"Asset Purchase Agreement") with Intracel Corporation ("Intracel") for the sale
of the Company's Zymmune technology, Zymmune inventory, certain laboratory
equipment, patents, patent applications and certain other rights.
Under the terms of the Asset Purchase Agreement, as amended by a release
agreement dated October 24, 1995, the Company received $560,000 of cash and a
$450,000 four-year promissory note secured by certain of the purchased assets.
This promissory note is interest-free for several years; accordingly, the
Company recorded the discounted value of the note receivable of $285,000 as a
long-term asset. In 1996, imputed interest of $36,000 was charged to the
statement of operations and the current carrying value of the note is $324,000.
In connection with the asset and technology transfer, the Company was required
to make a cash payment of $152,000 to terminate an operating lease on certain
equipment and incurred other costs of $180,000 principally related to employee
costs during the technology transfer period.
The Company could receive milestone payments of up to $1,250,000 upon
Intracel's achievement of certain milestones, including, among other things, the
approval by the FDA of the 510(k) application submitted by Zynaxis for U.S.
marketing approval of the Zymmune CD4/CD8 Cell Monitoring Kit ("FDA approval")
and certain manufacturing milestones.
Disputes have arisen between the Company and Intracel regarding certain
provisions of the Asset Purchase Agreement. On or about November 14, 1995,
Intracel was notified that FDA approval had been granted. On February 7, 1996,
the Company was notified by Intracel that Intracel was withholding payment of a
$500,000 milestone payment due upon FDA approval, asserting that final approval
had not been received, along with other claims. The Company is considering
options available to it regarding collection of this milestone payment. The
Company has given no financial statement recognition to this milestone payment
pending its final resolution.
There can be no assurance that Intracel will be able to achieve any of the
other remaining milestones.
Zynaxis will be entitled to royalties on future sales, if any, of the
Zymmune CD4/CD8 Cell Monitoring Kit and certain related technologies.
Note 5 -- Pro Forma Information: Secretech Merger and Diagnostic Divestitures
The unaudited consolidated results of operations on a pro forma basis as if
the acquisition of Secretech and the divestiture of the diagnostic technologies
discussed in Notes 3 and 4 to the Consolidated Financial Statements had occurred
at the beginning of the respective periods are as follows:
- 25 -
<PAGE> 27
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenues...................... $ 904,359 $ 1,362,411
Net loss...................... (6,807,187) (6,958,468)
Net loss per common share $ (.63) $ (.74)
</TABLE>
These pro forma financial results of operations do not purport to be
indicative of the financial results of operations that might have occurred, nor
are they indicative of future results.
Note 6 -- Impairment of Cauldron Asset Value
In efforts to raise capital, and in conjunction with the Vaxcel Merger, the
Company has been soliciting bids from third parties who may have an interest in
purchasing the Cauldron operations and related assets. The net book value of the
Cauldron assets at December 31, 1996 was $1,752,130. Notwithstanding the
aforementioned, the most recent bid that the Company has received for the
Cauldron assets is significantly less than this amount. Accordingly,
conservative measures have been taken and the entire Cauldron asset base has
been reduced to $600,000. The difference between the net book value and $600,000
is shown as a Provision for Asset Impairment in 1996. See Note 13 regarding the
Company's operating lease commitment.
Note 7 -- Vaxcel Merger Agreement
On December 6, 1996, the Company entered into the Merger Agreement with
CytRx, Vaxcel, a wholly-owned subsidiary of CytRx, and Vaxcel Merger Sub, a
newly-formed, wholly-owned subsidiary of Vaxcel, which provides for the merger
of Vaxcel Merger Sub with and into Zynaxis, with the effect that Zynaxis, as the
surviving corporation resulting from the Merger, will be a wholly-owned
subsidiary of Vaxcel.
Upon consummation of the Merger, shares of Common Stock of Zynaxis will be
exchanged for the right to receive a number of shares of Vaxcel Common Stock
equal to an exchange ratio defined in the Merger Agreement (approximately
.0947). Shares of the Company's Series A Convertible Preferred Stock will be
exchanged for the right to receive a number of shares of Vaxcel Common Stock
equal to two times the exchange ratio. CytRx will own approximately 87.5% of
Vaxcel Common Stock upon consummation of the Merger.
Simultaneously with the execution of the Merger Agreement, Zynaxis and
CytRx entered into a secured loan agreement in order for the Company to have
sufficient funding for continuing operations until the Merger is approved by
shareholder vote and consummated, anticipated to be in the first half of April
1997. CytRx agreed to loan up to $2,000,000 to the Company on a secured basis.
At December 31, 1996, $975,000 had been advanced and was used in settling a
major portion of the Company's outstanding liabilities as well as funding
December operations. All advances accrue interest at a rate of prime plus 2%.
Upon the consummation of the Merger between Zynaxis and Vaxcel, CytRx will
contribute to Vaxcel an amount of funding equal to the outstanding principal and
interest of the loan, as well as additional amounts specified in the
- 26 -
<PAGE> 28
Merger Agreement. Another agreement entered into in connection with the Merger
Agreement provides for the sale of substantially all assets of the Company.
The transaction documents further provide that Zynaxis preferred
stockholders who also hold warrants to purchase the Company's Common Stock, and
three other warrant holders, will exchange the Zynaxis warrants for warrants to
purchase Vaxcel Common Stock. Additionally, certain shareholders who hold
convertible notes issued by Zynaxis will exchange such notes for shares of
Vaxcel Common Stock.
Upon execution of the Merger Agreement, a Technology Development Agreement
was also executed by the Company and Vaxcel relating to the development of the
Company's vaccine delivery technology pending the Merger.
Note 8 -- Securities
At December 31, 1996, the Company held no securities. All securities at
December 31, 1995 were classified as available-for-sale and were carried at fair
value. The adoption of Statement of Financial Accounting Standard No. 115 had no
effect on the Company's accumulated deficit or stockholders' equity as fair
market value equals the investments' amortized cost.
Note 9 -- Accrued Expenses
Accrued expenses at December 31, 1996 and 1995, respectively, consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Professional fees................................... $178,159 $251,889
Research Costs...................................... 10,000 76,462
Compensation, payroll withholding and related items. 262,925 14,615
License costs....................................... 40,002 18,813
Deposits............................................ 195,000 ---
Other............................................... 66,723 126,015
-------- --------
$752,809 $487,794
======== ========
</TABLE>
Note 10 -- Notes Payable to Shareholders
On December 28, 1995, the Company issued a $150,000 Demand Promissory Note
(the "December 1995 Note") to one of its principal shareholders. A general
partner of the shareholder is a member of the Board of Directors. On February
29, 1996, the holder of the December 1995 Note converted the outstanding
principal balance and all accrued interest thereon to Common Stock with transfer
restrictions, as described in Note 14 below.
- 27 -
<PAGE> 29
On May 3, 1996, the Company issued Demand Promissory Notes (the "May 1996
Notes") aggregating $200,000 to two of its principal shareholders. A general
partner of one shareholder and the president of another shareholder are members
of the Board of Directors. These May 1996 Notes bear interest at the annual rate
of 11 1/4% and are due on the earlier of (i) the receipt by the Company of
proceeds from the sale of Cauldron aggregating at least $1,000,000 or (ii) upon
demand if the closing on the sale of Cauldron does not occur by September 30,
1996. The May 1996 Notes are convertible at the option of the holder into an
aggregate of 200,000 shares of the Company's Common Stock at any time prior to
repayment. In connection with the issuance of the May 1996 Notes, the Company
issued warrants with five year terms to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
On June 7, 1996, the Company issued a $250,000 Demand Promissory Note to
another of its principal shareholders. This note was canceled and reissued on
July 17, 1996 due to a revision of the repayment terms (the "July 1996 Note").
This July 1996 Note bears interest at the annual rate of 11 1/4% and is due on
the earlier of (i) the receipt by the Company of proceeds from the sale of
Cauldron aggregating at least $1,000,000 or (ii) upon demand if the closing on
the sale of Cauldron does not occur by October 15, 1996. This July 1996 Note is
convertible at the option of the holder into an aggregate of 150,000 shares of
the Company's Common Stock at any time prior to repayment. In connection with
the issuance, the Company also issued a warrant with a five year term to
purchase 25,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share.
The value of these 225,000 warrants, relating to the May 1996 Notes and the
July 1996 Note, has been deemed to be $60,000 for accounting purposes and was
expensed in 1996 as a component of interest expense.
In conjunction with the signing of the Merger Agreement in December 1996, a
Note Exchange Agreement was entered into whereby two of these three notes
payable to shareholders will be exchanged for Vaxcel Common Stock upon
consummation of the Merger.
Note 11 -- Note Payable to CytRx
As discussed in Note 7, the Company has entered into a Merger Agreement
with Vaxcel, an Atlanta based vaccine technology company. In conjunction with
the Merger Agreement, Zynaxis also entered into a secured loan agreement with
CytRx, Vaxcel's parent company. The terms of the loan agreement allow for the
Company to borrow up to $2,000,000 from CytRx between December 1996 and the
closing of the Merger, anticipated to be in the first half of April 1997.
Proceeds from any amounts borrowed are to be used to satisfy accounts payable
and accrued expenses as well as to fund operations until the transaction is
completed. Through December 31, 1996, the Company had borrowed a total of
$975,000. The borrowings accrue interest at prime plus 2%. Interest expense on
these borrowings totaled $5,090 for the year ended December 31, 1996.
- 28 -
<PAGE> 30
Note 12 -- Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Other note payables.... $ $ 104,959
----------------- ----------------
-- 104,959
Less current maturities -- (25,050)
----------------- ----------------
$ $ 79,909
================= ================
</TABLE>
Other Note Payable
In 1989, the Company issued a ten-year note to the then lessor of its
office and research facility to finance certain leasehold and other
improvements. The note, with interest at 13%, was fully collateralized by a
certificate of deposit, which had been categorized as restricted cash in prior
years. During 1996, the Company was frequently unable to make the monthly
payments on a timely basis as required by the terms of the note. In November
1996, the holder of the note agreed to accept the full amount of the collateral
certificate of deposit, $91,142, in satisfaction of all obligations under the
note.
Note 13 -- Other Long-Term Obligations and Lease Commitments
Other long-term obligations consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Capital lease obligations ......... $ 50,908 $ 32,418
Deferred rent liability ........... 47,880 107,285
98,788 139,703
--------- ---------
Less current maturities ........... (33,277) (36,209)
--------- ---------
$ 65,511 $ 103,494
========= =========
</TABLE>
- 29 -
<PAGE> 31
Lease Obligations
The Company leases real property and equipment under noncancelable lease
agreements that expire at various dates through 2001. The future minimum lease
payments as of December 31, 1996, under all leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
--------- ---------
<S> <C> <C>
1997................................... 18,822 302,620
1998................................... 18,822 299,966
1999................................... 18,822 29,180
2000................................... 9,400 --
2001................................... 4,010 --
2002 & beyond.......................... -- --
-------- ---------
69,876 631,766
Less amounts representing interest (18,968) --
-------- ---------
$ 50,908 $ 631,766
======== =========
</TABLE>
Rent expense on the Company's leased facility in Malvern, Pennsylvania was
$411,856 in 1996, $439,609 in 1995, and $405,173 in 1994.
Management believes the Company's operating lease commitment will be
transferred to the buyer of the Cauldron assets. If the Cauldron assets are not
sold, management believes that the related facility, or a portion thereof, will
be sublet to cover the commitment. If the Company is unable to find a new tenant
for the facility, either through the Cauldron sale or subletting, the related
commitments could be accelerated (See Notes 1 and 6).
Deferred Rent Expense
The Company records rent expense on a straight-line basis and records the
excess of rent expense over cash paid as deferred rent. During November 1996,
the Company's lease was amended to reduce the occupied space from 39,200 square
feet to 23,460 square feet, a 40% reduction. As a result of the amendment, the
deferred rent liability was reduced and booked as a reduction of marketing,
general and administrative expense in 1996. Deferred rent was $47,880 and
$107,285 at December 31, 1996 and 1995, respectively, with $22,982 and $29,988
classified as current at December 31, 1996 and 1995, respectively.
Note 14 -- Stockholders' Equity
Common Stock
On February 29, 1996, the Company completed a private placement of Common
Stock with transfer restrictions, raising proceeds of $500,000. Additionally, a
$150,000 short-term promissory note payable held by a related party, plus
accrued interest of $2,582, was converted to Common Stock with transfer
restrictions on February 29, 1996.
- 30 -
<PAGE> 32
Under terms of the above agreements, the Company issued an aggregate of
652,582 shares of Common Stock at a price of $1.00 per share. Additionally, the
Company issued warrants to purchase 195,775 shares of Common Stock at an
exercise price of $1.00 per share.
In June 1995, the Company had entered into a Business Development
Consulting Agreement with a principal shareholder, of which the president is a
member of the Board of Directors. The terms of the one year agreement stated
that a portion of the compensation was to be in shares of Common Stock. In
November 1996, the Company issued 34,548 shares of Common Stock in settlement of
the amounts owed.
Series A Convertible Preferred Stock
In 1995, the Company issued 1,500,000 of Series A Convertible Preferred
Stock ("Preferred Stock") at $2.00 per share for aggregate proceeds, net of
offering costs, of $2,712,535. Each share of Preferred Stock is convertible into
two shares of Common Stock at an initial conversion price of $1.00 per share.
In 1996, a holder of Preferred Stock converted 87,500 shares of Preferred
Stock into 175,000 shares of Common Stock.
Stock Warrants
At December 31, 1996, there were warrants issued and outstanding to
purchase an aggregate of 3,647,189 shares of Common Stock at prices ranging from
$1.325 to $7.035 and expiration dates ranging from 1998 through 2007.
As discussed above, in connection with (i) the completion of a private
placement in February 1996 and (ii) the conversion of a short-term note into
equity in February 1996, the Company issued 195,775 warrants to purchase Common
Stock at $1.00 per share.
As discussed in Note 10, in connection with the issuance of the May 1996
Notes and the July 1996 Note, the Company issued warrants to purchase an
aggregate of 225,000 shares of Common Stock at $1.00 per share.
In addition to the above, as part of the 1995 private placement, the
Company issued 1,500,000 warrants to purchase up to 3,000,000 shares of Common
Stock. Each warrant is exercisable for two shares of Common Stock at an exercise
price of $1.00 per share. The warrants have five year terms and contain certain
automatic termination conditions.
In connection with a royalty abatement agreement entered into in 1995, the
Company issued warrants to purchase 200,000 shares of Common Stock at an
exercise price of $1.325 per share. These warrants expire on December 31, 2007.
- 31 -
<PAGE> 33
A five year warrant to purchase 15,000 shares of Common Stock at $1.00 per
share was issued in December 1995 in connection with the issuance of a note
payable.
Warrants to purchase 11,414 shares of Common Stock at $7.035 per share are
currently outstanding. These warrants were issued to the lessor upon the
execution of certain capital leases. These capital leases for laboratory and
office equipment have since expired and been bought out.
Stock Option Plan
The Company's stock option plan reserves shares of Common Stock for
issuance upon the exercise of incentive and nonqualified stock options. On July
27, 1995, the shareholders of the Company approved an increase in the number of
shares issuable under the Company's Amended and Restated 1989 Stock Option Plan
from 800,000 to 1,750,000. Incentive stock options are granted at market value
or above, and non-qualified stock options are granted at a price fixed by the
Board of Directors on the grant date. Options are exercisable for five to ten
years from the grant date and generally vest over a four-year period. Options
granted after December 31, 1991 are exercisable for ten years from the date of
grant.
The Company accounts for this plan under APB Opinion No. 25 under which no
compensation cost has been recognized.
Had compensation cost for this plan been determined consistent with FASB
Statement No. 123, the Company's net loss and loss per share would have been
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net Loss:
As reported ...................... $(4,230,470) $(10,377,437)
Pro Forma ........................ $(4,324,976) $(10,520,218)
Primary EPS:
As Reported ...................... $ (0.42) $ (1.57)
Pro Forma ........................ $ (0.43) $ (1.59)
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
At December 31, 1996, 98,070 options had been exercised, 394,634 were
exercisable at prices ranging from $.7035 to $7.125, and 755,021 shares of
Common Stock remained available for grant. A summary of the status of the
Company's stock option plan at December 31, 1996 and 1995 and changes during the
years then ended are presented in the table and narrative below.
- 32 -
<PAGE> 34
<TABLE>
<CAPTION>
1996 Weighted Average 1995 Weighted Average
---------------------------- -------------------------------
Shares Exercise Price Shares Exercise Price
--------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year ....................... 1,038,370 $3.44 825,784 $3.65
Granted......................... -- -- 512,800 $1.27
Exercised....................... 2,989 $ .70 7,107 $0.70
Forfeited....................... 128,472 $3.36 292,210 $3.76
Expired......................... -- -- 897 $.070
Outstanding at end of year...... 906,909 $3.71 1,038,370 $3.44
========= ==========
Exercisable at end of year...... 404,634 $3.44 296,077 $3.68
========= ==========
Weighted average fair value
of options granted............. $ -- $ 0.95
</TABLE>
404,634 of the 906,909 options outstanding at December 31, 1996 have
exercise prices between $0.70 and $7.13, with a weighted average exercise price
of $3.44 and a weighted average remaining contractual life of seven years. All
of these options are exercisable. The remaining 502,275 options outstanding at
December 31, 1996 have exercise prices between $0.70 and $7.13, with a weighted
average exercise price of $3.71 and a weighted average remaining contractual
life of seven years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995: risk-free interest rates ranging from 5.7%
to 7.2%, expected dividend yield of $0, expected life of seven years and
expected volatility of 70%. No options were granted in 1996.
In December 1995, 10,000 stock options outside of the Amended and Restated
1989 Stock Option Plan were granted to a board member. These options became
fully vested in June 1996 at an exercise price of $0.875.
401(k) Savings Plan
In June 1994, the Company began to provide a match to the contributions to
the Zynaxis Inc. 401(k) Savings Plan (the "Plan") comprised of both cash and
Company stock. In July 1996, the cash portion of the match was eliminated and
the match was comprised entirely of Company stock. The shares are generally
contributed quarterly and valued at the closing market price on the last day of
each quarter. The Company contributed 12,973 and 12,836 shares to the Plan
during 1996 and 1995, respectively.
Note 15 -- 401(k) Savings Plan
In 1994, the Company began making matching contributions to the Plan. The
matching contribution is determined each year by the Board of Directors and
vests over four years with credit given for prior service. For the year ended
December 31, 1996, the Company contributed 50% of the salary deferred by
participants, up to a maximum of 4% of each participant's deferred salary. For
the first half of 1996, the matching contribution was equally comprised of the
Company's Common Stock and cash. Effective July 1, 1996, the Board resolved to
eliminate the
- 33 -
<PAGE> 35
cash aspect of the match, thereby making the entire match in Company stock. The
matching contributions are made on a quarterly basis and the shares of the
Company's Common Stock which are contributed are valued at the closing market
price on the last business day of the quarter. Total Company contributions to
the Plan, in both cash and stock, were $19,659 in 1996 and $30,641 in 1995. In
1997, the Board of Directors resolved that the Zynaxis Inc. 401(k) Savings Plan
would be terminated effective January 7, 1997.
Note 16 -- Income Taxes
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $31,000,000. The net operating loss and credit
carryforwards will expire at various dates beginning in 2003, if not utilized.
The Tax Reform Act of 1986 contains various provisions that limit the
utilization of net operating loss and tax credit carryforwards if there has been
an ownership change. Such an ownership change as described in Section 382 of the
Internal Revenue Code may limit the Company's utilization of its net operating
loss and tax credit carryforwards. Additionally, a portion of the net operating
loss carryforward relating to the 1995 Secretech acquisition (see Note 3) are
subject to SRLY restrictions as defined in the Internal Revenue Code. The
proposed Merger with Vaxcel (Notes 1 and 6), if consummated, will significantly
limit the availability of the net operating loss and tax credit carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount reported for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes as of
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards.............. $ 10,910,000 $ 8,829,000
Capitalization of research and development.... 5,449,000 4,982,000
Asset impairment.............................. 392,000 --
Other--net.................................... 779,000 369,000
------------ -----------
Total deferred tax assets....................... 17,530,000 14,180,000
Valuation allowance for deferred tax assets..... (17,530,000) (14,180,000)
------------ -----------
Net deferred tax assets......................... $ -- $ --
============ ===========
</TABLE>
A valuation allowance has been established as realization of the tax assets
is uncertain.
Note 17 -- Collaborative, Contract and Grant Revenues
Collaboration with ALK A/S
In October 1995, the Company announced a development and licensing
agreement with ALK A/S ("ALK"), a leading European pharmaceutical company in the
field of allergy
- 34 -
<PAGE> 36
immunotherapy. The collaboration involves certain of the technologies acquired
in the merger with Secretech relating to bioactive substance delivery
technology.
Under the terms of the ALK development and licensing collaboration, the
Company has received payments aggregating $1,000,000. $250,000 was received in
November 1995 and three additional payments totaling $750,000 were received
during 1996. These amounts are reflected in collaborative, contract and grant
revenues. The Company incurred costs related to the ALK collaboration of
approximately $200,000 and $500,000 in 1995 and 1996, respectively. This
agreement can be unilaterally terminated by either party in certain
circumstances and with notification periods stated in the agreement. During
1996, the Company also provided ALK with significant research and development
support of the licensed technology for which it received additional revenues of
$36,000 based on costs incurred.
The Company will receive a royalty of 7% on net sales of products that
utilize the Company's technology, increasing based upon certain sales criteria
established within the agreement. The Company could also receive additional
milestone payments of up to $2,000,000 based upon either FDA or certain other
regulatory approvals of additional products using the Company's vaccine delivery
technologies. There can be no assurance that ALK will ever obtain the
appropriate regulatory approvals, or will ever generate any sales using the
technology licensed from the Company.
Should the Company receive royalties under this agreement, it will be
required to pay approximately 3% of the net sales of the licensed product to the
original patent holder of the technology.
Contract Manufacturing
During 1996, the Company's Cauldron division had a substantial increase in
business with third parties in providing process chemistry and pilot
manufacturing services to other biotechnology, pharmaceutical and chemical
organizations. Revenue recognized in connection with these contracts totaled
$809,000 and $45,000 for the years ended December 31, 1996 and 1995,
respectively.
Grant Revenue
For the years ended December 31, 1996 and 1995, the Company recognized
$311,000 and $251,000, respectively, pursuant to a SBIR grant awarded by the
National Heart, Lung and Blood Institute. Revenues recognized approximate costs
incurred. This grant is funding the preclinical development of Zyn-Linker
molecules linked with heparin and the investigation of their ability to inhibit
post-angioplasty restenosis and local thrombosis. In July 1996, this grant was
extended until June 1997. At December 31, 1996, the grant has a balance of
$198,000.
During 1996, the Company received a Phase I SBIR grant for up to $100,000
to develop Zyn-Linker molecules linked with Taxol and for the investigation of
their ability to inhibit post-angioplasty restenosis and local thrombosis. The
Company has recorded $88,000 of revenue
- 35 -
<PAGE> 37
related to this grant for the year ended December 31, 1996. Revenues recognized
approximate costs incurred.
Notwithstanding the January 1997 purchase by Phanos of the Zyn-Linker
technology, the studies conducted under these grants will continue to be
performed by Zynaxis. However, any patents, inventions or other intellectual
property that may arise from this SBIR research will become the property of
Phanos.
Collaboration with Eli Lilly and Company
The Company's agreement with Eli Lilly and Company ("Lilly") to apply the
Company's drug delivery technology to vascular drugs which have the potential to
reduce the rate of restenosis after angioplasty was terminated by Lilly,
effective in August 1994. The Company recognized revenues of $749,122 under this
agreement in 1994.
Various Other Collaborations
During 1996, in an effort to obtain on-going collaborative arrangements,
the Company entered into a few small collaborative agreements, primarily related
to the Zyn-Linker technology as it pertains to oligonucleotide studies. Total
revenue recognized under these agreements was $56,000.
Note 18 -- Other Income
Sublease Income
As a result of the divestiture of the diagnostics technologies in 1995, the
Company had certain laboratory and office space that was not being utilized. In
order to fully maximize the leased facility, Zynaxis began to sublet portions of
its laboratory and office space to independent third parties in 1995. These
sublease arrangements continued until November 1996, when the Company's lease
was amended to decrease the total square footage occupied by Zynaxis. Rental
income recognized under the sublease arrangements was $238,000 and $139,000 for
the years ended December 31, 1996 and 1995, respectively.
Royalty Income
As discussed in Note 4 to the Consolidated Financial Statements, through
November 1996 Zynaxis continued to manufacture and distribute the research and
diagnostic reagents for Phanos, pursuant to the June 1995 agreement. In
accordance with the agreement between the two companies, Zynaxis realized a 10%
royalty in exchange for providing these manufacturing and distribution services,
subject to certain minimum royalty amounts. Royalty income recognized was
$46,400 and $13,800 for the years ended December 31, 1996 and 1995,
respectively.
- 36 -
<PAGE> 38
Seloc
As discussed in Note 1 to the Consolidated Financial Statements, during
1996 the Company entered into a binding letter of intent with Seloc for the sale
of Cauldron. In conjunction with this letter, Seloc made an option payment in
the amount of $100,000, which, except under limited circumstances, would be
nonrefundable if the sale of Cauldron were not consummated. For reasons beyond
Zynaxis' control, in August 1996 Seloc decided not to proceed with the
acquisition, at which time the $100,000 was recognized as other income.
Asset Sales
In conjunction with the November 1996 lease amendment and in anticipation
of the consummation of the Merger, the Company began to sell various fixed
assets during the fourth quarter of 1996. A net gain on these asset disposals of
$131,600 was recorded in other income on the statement of operations for the
year ended December 31, 1996.
Note 19 -- Related Party Transactions
As described in Note 10 to the Consolidated Financial Statements, the
Company issued a $150,000 note to a related party in December 1995. This note
was extinguished in February 1996 as the note plus accrued interest, totaling
$152,582, was converted to equity.
As discussed in Note 14 to the Consolidated Financial Statements, business
development services were rendered to the Company by a consulting firm of which
a director of the Company is President and sole shareholder. Terms of the
consulting agreement provided that a portion of the fees be paid in Company
stock. The Company issued 34,548 shares of Common Stock in November 1996 in
settlement of this obligation. The number of shares issued was based upon the
fair market value of the services provided.
Consulting services were provided to the Company by a director of the
Company who was the former president of Secretech. This consulting arrangement
commenced on September 30, 1995 and ended September 30, 1996. Under the terms of
the agreement, the director was entitled to compensation at the annual rate of
$135,000 through March 31, 1996 and at an annual rate of $150,000 from April
through September 1996. During 1996, the Company recognized expense of $108,750
related to this agreement.
- 37 -
<PAGE> 39
VAXCEL, INC.
PRO FORMA FINANCIAL INFORMATION
The accompanying Pro Forma Condensed Combined Balance Sheet as of March 31,
1997 and the related Pro Forma Condensed Combined Statements of Operations for
the three months ended March 31, 1997 and the year ended December 31, 1996 give
effect to (i) the Merger of Zynaxis with and into Vaxcel and (ii) the
divestiture of Zynaxis' Cauldron division, (collectively, the "Transactions.").
The pro forma financial information assumes that these transactions had
occurred as of March 31, 1997 in the case of the Pro Forma Condensed Combined
Balance Sheet, January 1, 1997 in the case of the Pro Forma Condensed Combined
Statement of Operations for the three months ended March 31, 1997, or January 1,
1996 in the case of the Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1996.
This pro forma financial information has been prepared by management of
Vaxcel and should be read in conjunction with the historical financial
statements of Vaxcel and Zynaxis. The historical balances represent the
financial position and results of operations for each company and have been
prepared in accordance with generally accepted accounting principles. The pro
forma financial information is based on certain assumptions and estimates and
does not purport to be indicative of the financial position or results of
operations that might have occurred had the Transactions taken place as of the
dates indicated above, nor is it necessarily indicative of future results.
- 38 -
<PAGE> 40
VAXCEL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Cauldron
Merger Divestiture
Historical -------------------- ------------------ Pro Forma
------------------------ Pro Forma Pro Forma Pro Forma Combined)
Vaxcel Zynaxis Adjustments Ref Combined Adjustments Ref (as adjusted
----------- ----------- ------------ --- ---------- ------------ --- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,493 $ 147,281 $2,885,417 (1) $3,074,191 $ 282,000 (5) $ 3,356,191
Accounts receivable 54,812 250,638 305,450 305,450
Other current assets - 61,773 61,773 61,773
----------- ---------- ---------- ---------- --------- -----------
Total current assets 96,305 459,692 2,885,417 3,441,414 282,000 3,723,414
Net property and equipment 82,276 26,654 108,930 108,930
Acquired intangible assets - - 3,600,000 (4) 3,600,000 3,600,000
Other assets:
Cauldron - net assets - 528,000 528,000 (528,000) (5) -
Note receivable - 333,865 333,865 300,000 (5) 633,865
Other assets 120,257 20,000 (113,439) (2) 26,818 26,818
----------- ----------- ----------- ---------- --------- -----------
Total other assets 120,257 881,865 (113,439) 888,683 (228,000) 660,683
----------- ----------- ----------- ---------- --------- -----------
Total assets $ 298,838 $1,368,211 $ 6,371,978 $8,039,027 $ 54,000 $ 8,093,027
=========== ========== =========== ========== ========= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $19,971 $439,245 $ 459,216 $ 459,216
Accrued liabilities 45,026 392,573 250,000 (2) 672,820 672,820
(14,779) (3)
Amounts due to affiliates 231,948 - (139,583) (1) 92,365 92,365
Note payable to CytRx - 975,000 (975,000) (1) - -
Notes payable to
shareholders - 450,000 (350,000) (3) 100,000 100,000
Other current liabilities - 34,581 34,581 34,581
----------- ----------- ----------- ---------- -------- -----------
Total current liabilities 296,945 2,291,399 (1,229,362) 1,358,982 - 1,358,982
Long-term debt and other - 56,727 56,727 56,727
long-term obligations
Stockholder's equity:
Preferred stock - 2,554,304 (2,554,304) (3) - -
Common stock 8,250 103,771 1,375 (1) 11,000 11,000
393 (3)
(102,789) (4)
Additional paid-in capital 4,882,630 45,986,323 3,998,625 (1) 12,516,441 12,516,441
(363,439) (2)
2,918,690 (3)
(44,906,388) (4)
Accumulated deficit (4,888,987) (49,624,313) 48,609,177 (4) (5,904,123) 54,000 (5) (5,850,123)
----------- ----------- ----------- ---------- --------- -----------
Total stockholder's equity 1,893 (979,915) 7,601,340 6,623,318 54,000 6,677,318
----------- ----------- ---------- --------- -----------
Total liabilities and
stockholder's equity $ 298,838 $1,368,211 $ 6,371,978 $8,039,027 $ 54,000 $ 8,093,027
=========== =========== =========== ========== ========= ===========
</TABLE>
(1) To reflect the cash contribution and note cancellation by CytRx.
(2) To record the estimated remaining transaction costs and reclassification
of amounts capitalized by Vaxcel as deferred transaction costs.
(3) To reflect the conversion of Zynaxis Preferred Stock and certain Zynaxis
notes payable, together with accrued interest thereon, into Vaxcel Common
Stock.
(4) To reflect the elimination of Zynaxis equity accounts, issuance of Vaxcel
Common Stock to complete the Merger and allocation of the purchase price in
excess of net tangible assets acquired.
(5) To reflect the sale of the Cauldron division for $582,000 (net of $250,000
of rent to be prepaid pursuant to the asset purchase agreement).
- 39 -
<PAGE> 41
VAXCEL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Cauldron
Merger Divestiture
(A) Historical (A) ----------------- --------------- Pro Forma
----------------------------- Pro Forma Pro Forma Pro Forma Combined
Vaxcel Zynaxis Adjustments Ref Combined Adjustments Ref (as adjusted)
----------- ------------ ----------- --- ----------- ------------ --- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $ 50,000 $ - $ 50,000 $ - $ 50,000
Collaborative, contract
and grant revenue 78,435 2,050,467 2,128,902 (808,633) (6) 1,320,269
----------- ------------ ----------- ---------- ---------- -----------
128,435 2,050,467 - 2,178,902 (808,633) 1,370,269
Operating expenses:
Research and development 852,849 3,642,195 (262,024) (2) 4,668,132 (1,649,359) (6) 3,018,773
435,112 (3)
General and administrative 406,897 2,019,042 168,220 (4) 2,594,159 2,594,159
Provision for asset impairment - 1,152,130 838,870 (1) 1,991,000 1,991,000
----------- ------------ ----------- ---------- ---------- -----------
1,259,746 6,813,367 1,180,178 9,253,291 (1,649,359) 7,603,932
Other income (expense):
Interest income 7,128 56,881 64,009 64,009
Interest expense - (115,815) 19,940 (5) (95,875) (95,875)
Other income - 591,364 591,364 (100,000) (6) 491,364
----------- ------------ ---------- ----------- -----------
7,128 532,430 19,940 559,498 (100,000) 459,498
----------- ------------ ----------- ---------- ----------- -----------
Net loss $(1,124,183) $ (4,230,470) $(1,160,238) (6,514,891) $ 740,726 $(5,774,165)
=========== ============ =========== =========== ========== ===========
Net loss per common share $ (0.14) $ (0.59) $ (.52)
=========== ========== ===========
</TABLE>
(1) To reflect the write-down of Cauldron asset to net realizable value if it
had been calculated as of 1/1/96.
(2) To reflect the reduction of depreciation expense associated with the
pro-forma write-down of Cauldron net assets as of 1/1/96.
(3) To record charge for acquired research and development.
(4) To record amortization of intangible assets acquired. An amortization
period of 15 years is assumed.
(5) Elimination of interest expense associated with certain Zynaxis notes
payable converted into Vaxcel Common Stock as of the Merger date, and of
interest expense associated with the CytRx note payable cancelled upon the
Merger date.
(6) To reflect the sale of the Cauldron division as if it had occurred on
1/1/96.
(A) Agreed to S-4 filed with SEC.
- 40 -
<PAGE> 42
VAXCEL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Cauldron
Merger Divestiture
(B) Historical ---------------- ---------------- Pro Forma
---------------------- Pro Forma Pro Forma Pro Forma Combined
Vaxcel Zynaxis Adjustments Ref Combined Adjustments Ref (as adjusted)
----------- --------- ----------- --- ---------- ------------ --- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Collaborative, contract and
grant revenue $ 53,697 $ 386,703 $ 440,400 $(291,600) (4) $ 148,800
----------- --------- --------- ---------- --------- ----------
53,697 386,703 - 440,400 (291,600) 148,800
Operating expenses:
Research and development 176,839 583,150 620,778 (1) 1,380,767 (488,050) (4) 892,717
General and administrative 138,392 452,696 60,000 (2) 651,088 651,088
Transactions with affiliates:
Research and development 59,435 - 59,435 59,435
General and administrative 22,500 - 22,500 22,500
----------- --------- --------- ---------- --------- ----------
397,166 1,035,846 680,778 2,113,790 (488,050) 1,625,740
Other income (expense):
Interest income 496 12,926 13,422 13,422
Interest expense - (14,829) 14,829 (3) - -
Other income - 777,973 777,973 (57,973) (4) 720,000
----------- --------- ---------- --------- ----------
496 776,070 14,829 791,395 (57,973) 733,422
----------- --------- --------- ---------- --------- ----------
Net loss $ (342,973) $ 126,927 $(665,949) $ (881,995) $138,477 $ (743,518)
=========== ========= ========= ========== ========= ==========
Net loss per common share $ (0.04) $ (0.08) $ (0.07)
=========== ========== ==========
</TABLE>
(1) To record charge for acquired research and development.
(2) To record amortization of intangible assets acquired. An amortization
period of 15 years is assumed.
(3) Elimination of interest expense associated with CytRx note payable
cancelled upon the Merger date.
(4) To reflect the sale of the Cauldron division as if it had occurred on
1/1/97.
(B) Agreed to 3/31/97 10-Q filed with SEC.
- 41 -
<PAGE> 43
VAXCEL, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION
1. DETERMINATION OF PURCHASE PRICE
The purchase price for Zynaxis was determined in accordance with APB 16 and
was based upon a number of objective and subjective factors including, but not
limited to (a) reference to the $4 million cash contribution being made to
Vaxcel by CytRx for the same number of shares of Vaxcel Common Stock as were
exchanged for the outstanding shares of Zynaxis Common Stock, (b) reference to
the market price of Zynaxis Common Stock during the negotiation period and
leading up to the execution of the Merger agreement, (c) Vaxcel management's
estimation that the outstanding liabilities, transaction costs and ongoing
operation costs of Zynaxis through the closing of the Merger would generally
offset the realizable value of tangible assets, such that the only material
assets of Zynaxis remaining as of the Effective Time of Merger would be
intangible assets consisting of technology rights and license agreements, (d)
Vaxcel management's assessment of the synergistic value of Zynaxis' oral and
mucusal vaccine delivery technology in combination with its own injectible
technology in attracting corporate sponsors, facilitating technology licenses
and other fund raising activities, and providing a greater balance to
shareholders, and (e) the fact that Vaxcel will acquire a license agreement with
ALK.
APB 16 states that the cost of an acquired company is measured by the fair
value of the consideration received. As there was no trading market for the
Vaxcel Common Stock prior to the Merger, an objective measurement of its fair
value was difficult to ascertain. Based upon the factors stated above, the
$4,000,000 cash contribution by CytRx was used as the basis to assign a value to
the purchase price and of the consideration to be exchanged. Even though the
cash contribution by CytRx to Vaxcel was not at arms-length (and therefore may
not necessarily represent the fair value of Vaxcel Common Stock), management
determined that this was the most objective evidence available in the absence of
an active trading market for the Vaxcel Common Stock. This valuation has been
corroborated by an independent valuation of Zynaxis' assets which indicated a
value of approximately $3,600,000 for the Developed Technology (as defined
below), which is the primary asset being acquired by Vaxcel, given its current
business strategy.
2. ACCOUNTING FOR MERGER AND ALLOCATION OF PURCHASE PRICE
The Merger has been accounted for as a purchase transaction with Vaxcel as
the acquiring company. The $4 million purchase price has been allocated to the
fair market values of the assets acquired and the liabilities assumed.
In accordance with the provisions of APB Nos. 16 and 17, all identifiable
assets acquired, including identifiable intangible assets, were assigned a
portion of the purchase price on the basis of their fair values. To this end, an
independent valuation of Zynaxis' assets (the "Acquired Assets") was performed
and used as an aid in determining the fair value of the identifiable assets in
allocating the purchase price among the Acquired Assets.
- 42 -
