<PAGE> 1
File Pursuant to Rule 424(a).
Registration No. 333-19125.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 31, 1996
PROSPECTUS
VAXCEL, INC.
AN ESTIMATED 1,807,719 SHARES
COMMON STOCK, $0.001 PAR VALUE
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS OF
ZYNAXIS, INC.
This Prospectus of Vaxcel, Inc. ("Vaxcel"), a corporation organized and
existing under the laws of the State of Delaware, relates to up to 1,807,719
shares of common stock, $0.001 par value, of Vaxcel ("Vaxcel Common Stock"),
including shares subject to assumed options and warrants, which are issuable to
the shareholders and certain holders of convertible promissory notes of Zynaxis,
Inc. ("Zynaxis"), a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania, upon consummation of the proposed merger (the
"Merger") described herein by which Vaxcel Merger Subsidiary, Inc. ("Vaxcel
Merger Sub"), a corporation organized and existing under the laws of the State
of Georgia and a newly formed, wholly owned subsidiary of Vaxcel, will merge
with and into Zynaxis pursuant to the terms of the Agreement and Plan of Merger
and Contribution, dated as of December 6, 1996 (the "Agreement"), by and among
Vaxcel, CytRx Corporation ("CytRx"), a corporation organized and existing under
the laws of the State of Delaware and the sole shareholder of Vaxcel, Vaxcel
Merger Sub, and Zynaxis, with the effect that Zynaxis will be the surviving
corporation resulting from the Merger, and will continue to conduct its business
and operations as a wholly owned subsidiary of Vaxcel. As a result of the
Merger, the former shareholders of Zynaxis will own approximately 12.5% of the
issued and outstanding shares of Vaxcel Common Stock, and CytRx will own
approximately 87.5% of such shares (assuming no exercise of any options or
warrants to purchase Vaxcel Common Stock).
This Prospectus also serves as a Proxy Statement of Zynaxis, and is being
furnished to the shareholders of Zynaxis in connection with the solicitation of
proxies by the Board of Directors of Zynaxis ("Zynaxis Board") for use at its
special meeting of shareholders (including any adjournment or postponement
thereof, the "Special Meeting"), to be held on March , 1997, to consider and
vote upon: (i) the Agreement and the Merger contemplated thereby; (ii) a plan of
asset transfer for the sale of substantially all of the assets of Zynaxis
("Asset Sales") on terms and conditions to be determined by the Zynaxis Board;
and (iii) an amendment (the "Charter Amendment") to the Amended and Restated
Articles of Incorporation, as amended, ("Articles of Incorporation") of Zynaxis
to make Subchapter 25E of the Pennsylvania Business Corporation Law of 1988, as
amended ("PBCL") inapplicable to Zynaxis. This Proxy Statement/Prospectus
("Proxy Statement") and related materials enclosed herewith are being mailed to
shareholders of Zynaxis on or about February , 1997.
Pursuant to the Agreement, upon consummation of the Merger: (i) each share
of $0.01 par value common stock of Zynaxis ("Zynaxis Common Stock") issued and
outstanding immediately prior to the Effective Time (excluding shares held by
any Zynaxis company or any Vaxcel company, and excluding shares held by
shareholders who perfect their statutory dissenters' rights under Subchapter 15D
of the PBCL or statutory objection rights under Subchapter 25E of the PBCL) will
be exchanged for the right to receive a number of shares of Vaxcel Common Stock
equal to the Exchange Ratio (as defined in the Agreement), estimated to be
approximately .0948, with cash being paid in lieu of issuing fractional shares;
(ii) each share of no par value Series A convertible preferred stock of Zynaxis
("Zynaxis Preferred Stock," and, together with Zynaxis Common Stock, "Zynaxis
Capital Stock") issued and outstanding immediately prior to the Effective Time
(excluding shares held by any Zynaxis company or any Vaxcel company, and
excluding shares held by shareholders who perfect their statutory dissenters'
rights under Subchapter 15D of the PBCL or statutory objection rights under
Subchapter 25E of the PBCL) will be exchanged for the right to receive a number
of shares of Vaxcel Common Stock equal to two times the Exchange Ratio, with
cash being paid in lieu of issuing fractional shares; and (iii) in exchange for
the contribution to Vaxcel of the Senior Credit Facility (as defined below), and
a Cash Payment (as defined in the Agreement). CytRx will receive (a) a warrant
to purchase shares of Vaxcel Common Stock ("CytRx Warrant") at an exercise price
equal to one-half of the Per Share Price multiplied by the Exchange Ratio which
may be exercised if, and only if, CytRx reasonably determines that Vaxcel's
total assets and capital and surplus are insufficient to satisfy the total
assets and capital and surplus requirements for inclusion of the Vaxcel Common
Stock in the Nasdaq SmallCap Market, (b) 1,374,996 shares of Vaxcel Common
Stock, and (c) a number of shares of Vaxcel Common Stock equal to the product of
the Exchange Ratio times the number of votes entitled to be cast by the holders
of Zynaxis Capital Stock, if any, who elect to exercise their statutory
dissenters' rights under Subchapter 15D of the PBCL or their statutory objection
rights under Subchapter 25E of the PBCL; and (iv) Vaxcel will assume the
obligations of Zynaxis under the Zynaxis, Inc. Amended and Restated 1989 Stock
Option Plan and various other option agreements and adopt substitute plans and
agreements where appropriate.
(Cover continued on following page)
IN EVALUATING THE MERGER, ZYNAXIS SHAREHOLDERS SHOULD CAREFULLY CONSIDER
THE FACTORS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 13.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT IS FEBRUARY , 1997.
<PAGE> 2
(Continued from previous page)
Simultaneously with the execution of the Agreement: (i) Zynaxis and CytRx
entered into a secured loan agreement, pursuant to which CytRx agreed to loan up
to $2,000,000 to Zynaxis on a secured basis (together with a senior secured note
and certain security agreements, the "Senior Credit Facility"); (ii) Zynaxis and
CytRx entered into a letter agreement (the "Liquidation Agreement") which
provides for CytRx to serve as Zynaxis' agent and assist Zynaxis in conducting
the Asset Sales prior to the Merger; (iii) Zynaxis, CytRx, Vaxcel, and the
holders of all of the outstanding shares of Zynaxis Preferred Stock, who also
hold certain warrants to purchase Zynaxis Common Stock ("Zynaxis Warrants"),
entered into a certain agreement ("Preferred Stock and Warrant Agreement"),
conditioned upon the consummation of the Merger, making certain agreements with
respect to their rights, and converting the Zynaxis Warrants, upon consummation
of the Merger, into warrants for the purchase of Vaxcel Common Stock ("Vaxcel
Warrants"); (iv) Zynaxis, CytRx, and Vaxcel entered into a certain agreement
("Note Exchange Agreement") with Euclid Partners III, L.P. and S.R. One, Ltd.,
who hold convertible notes ("Zynaxis Notes") issued by Zynaxis, conditioned upon
the consummation of the Merger, converting the Zynaxis Notes, upon consummation
of the Merger, into the right to receive shares of Vaxcel Common Stock; (v)
CytRx and certain holders of Zynaxis Capital Stock entered into shareholder
voting agreements (each a "Shareholder Voting Agreement") pursuant to which each
of such shareholders granted CytRx an irrevocable proxy to vote shares of
Zynaxis Common Stock held by such shareholder in favor of the Agreement and the
Merger contemplated thereby, the Asset Sales, and the Charter Amendment; and
(vi) Vaxcel and Zynaxis entered into a technology development agreement
("Technology Development Agreement") concerning the development, by Vaxcel, of
certain technologies owned by or licensed to Zynaxis. Each of the Senior Credit
Facility, the Liquidation Agreement, the Preferred Stock and Warrant Agreement,
the Note Exchange Agreement, the Shareholder Voting Agreements, and the
Technology Development Agreement (collectively, the "Transaction Documents") are
incorporated into the Agreement as exhibits thereto.
At the Special Meeting, the Charter Amendment will be the first matter put
before the shareholders for consideration and for a vote. If the Charter
Amendment is approved by the shareholders, the Special Meeting will be adjourned
pending the filing of the articles of amendment amending Zynaxis' Amended and
Restated Articles of Incorporation, as amended ("Articles of Amendment"),
reflecting the Charter Amendment, with the Department of State of the
Commonwealth of Pennsylvania. After the filing of the Articles of Amendment and
the effectiveness of the Charter Amendment, the Special Meeting will be
reconvened to consider and vote upon the Agreement and the Merger contemplated
thereby, the Asset Sales, and such other business as may properly come before
the Special Meeting. If the shareholders do not approve the Charter Amendment,
the Special Meeting will not be adjourned and the shareholders will be asked to
consider and vote upon the Agreement and the Merger contemplated thereby, the
Asset Sales, and such other business as may properly come before the Special
Meeting.
Approval of the Agreement and the Merger contemplated thereby, the Asset
Sales, and the Charter Amendment will require the affirmative vote of: (i) a
majority of the votes cast, whether in person or by proxy, by all holders of
Zynaxis Preferred Stock (voting on an as converted basis) and by the holders of
Zynaxis Common Stock, entitled to vote and voting together as a class; and (ii)
a majority of the votes cast, whether in person or by proxy, by all holders of
Zynaxis Preferred Stock, entitled to vote and voting as a separate class.
Holders of Zynaxis Common Stock are entitled to one vote for each share of
Zynaxis Common Stock held. When voting together as a class with holders of
Zynaxis Common Stock, holders of Zynaxis Preferred Stock are entitled to vote on
an as converted basis and are, therefore, entitled to two votes for each share
of Zynaxis Preferred Stock held.
The shares of Vaxcel Common Stock issuable to CytRx pursuant to the
Agreement, the CytRx Warrant issuable to CytRx pursuant to the Agreement, the
Vaxcel Warrants issuable to certain holders of Zynaxis Warrants pursuant to the
Preferred Stock and Warrant Agreement, and the warrants to purchase Vaxcel
Common Stock ("Vaxcel Non-Financing Warrants") issuable to certain holders of
other warrants to purchase Zynaxis Common Stock ("Zynaxis Non-Financing
Warrants") pursuant to the Agreement are not being registered pursuant to the
Registration Statement (as defined below) of which this Proxy Statement is a
part. These securities are being concurrently privately placed with CytRx and
the holders of Zynaxis Warrants and Zynaxis Non-Financing Warrants in
transactions exempt from the registration requirements of the Securities Act
pursuant to the exemptions provided in Section 4(2) thereof.
The Registration Statement of which this Proxy Statement is a part, also
registers for resale: (i) the shares of Vaxcel Common Stock issued by Vaxcel
hereunder to any persons who may be deemed to be "affiliates" of Zynaxis within
the meaning of Rule 145 of the Securities Act of 1933, as amended (the
"Securities Act"); (ii) the shares of Vaxcel Common Stock issued by Vaxcel
hereunder to certain shareholders of Zynaxis who have entered into the
Shareholder Voting Agreements; (iii) the shares of Vaxcel Common Stock issuable
upon the exercise of Vaxcel Warrants issued by Vaxcel pursuant to the Preferred
Stock and Warrant Agreement to holders of Zynaxis Warrants in exchange for such
Zynaxis Warrants; and (iv) the shares of Vaxcel Common Stock issuable upon the
exercise of Vaxcel Non-Financing Warrants by certain holders of Zynaxis'
Non-Financing Warrants assumed by Vaxcel pursuant to the Agreement (such
"persons," "shareholders," and "holders" being collectively, the "Selling
Shareholders"). Such shares of Vaxcel Common Stock registered for resale
pursuant to the Registration Statement are referred to herein as the "Resale
Shares." The Selling Shareholders have not advised Vaxcel of any specific plans
for the distribution of the Resale Shares covered by this Proxy Statement, but
it is anticipated that the Resale Shares will be offered for sale under this
Proxy Statement from time to time primarily in transactions (which may include
block transactions) on the Nasdaq SmallCap Market, in negotiated transactions,
through the writing of options on the shares, or any combination of these and
other methods of sale, at prices related to prevailing market prices or at
negotiated prices. The Selling Shareholders may sell their shares directly or
through agents, dealers or underwriters. The Selling Shareholders may sell some,
all, or none of their shares offered hereby. Vaxcel will not receive any
proceeds from the sale of the Resale Shares by the Selling Shareholders. Vaxcel
and Zynaxis have agreed to bear all expenses (other than underwriting discounts
and selling commissions, and fees and expenses of counsel and other advisors to
the Selling Shareholders) in connection with the registration of the shares
being offered by the Selling Shareholders. See "Selling Shareholders of Zynaxis"
and "Plan of Distribution."
Each holder of shares of Zynaxis Capital Stock has the right to dissent from
the Merger and the Asset Sales, and to demand appraisal and payment of the fair
value of such holder's shares of Zynaxis Capital Stock if the Merger or the
Asset Sales, as the case may be, are approved and consummated. The right of any
such shareholder to such rights and remedies is contingent upon strict
compliance with the requirements set forth in Subchapter 15D of the PBCL, the
full text of which is attached as Appendix D hereto. A shareholder of Zynaxis
who wishes to dissent from the Merger or the Asset Sales, as the case may be,
must not vote any shares of Zynaxis Capital Stock in favor of the Merger or the
Asset Sales, as the case may be. See "Description of the
Transaction -- Dissenters' Rights."
If the Charter Amendment is not approved, each holder of shares of Zynaxis
Capital Stock will have the right to object to the Merger and the right to
receive cash for each of such holder's shares of Zynaxis Capital Stock in an
amount equal to the "fair value" of each share of Zynaxis Capital Stock as of
the date of consummation of the Merger. The right of any such shareholder to
such rights and remedies is contingent upon the consummation of the Merger and
upon strict compliance with the requirements set forth in Subchapter 25E of the
PBCL, the full text of which is attached as Appendix E hereto. See "Description
of the Transaction -- Objection Rights Under Subchapter 25E of the PBCL."
2
<PAGE> 3
AVAILABLE INFORMATION
Zynaxis is subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, is
required to file reports, proxy and information statements, and other
information with the Securities and Exchange Commission (the "SEC"). Copies of
such reports, proxy and information statements, and other information can be
obtained, at prescribed rates, from the SEC by addressing written requests for
such copies to the Public Reference Section at the SEC at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports, proxy
and information statements, and other information can be inspected at the public
reference facilities referred to above and at the regional offices of the SEC at
7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
SEC also maintains a web site on the World Wide Web that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC and the address is http://www.sec.gov.
This Proxy Statement constitutes part of the Registration Statement on Form
S-4 of Vaxcel (including any exhibits and amendments thereto, the "Registration
Statement") filed with the SEC under the Securities Act, relating to the
securities offered hereby. This Proxy Statement does not include all of the
information in the Registration Statement, certain portions of which have been
omitted pursuant to the rules and regulations of the SEC. For further
information about Vaxcel and the securities offered hereby, reference is made to
the Registration Statement. The Registration Statement may be inspected and
copied, at prescribed rates, at the SEC's public reference facilities at the
addresses set forth above.
All information contained in this Proxy Statement or incorporated herein by
reference with respect to Vaxcel was supplied by Vaxcel, and all information
contained in this Proxy Statement or incorporated herein by reference with
respect to Zynaxis was supplied by Zynaxis.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS PROXY STATEMENT IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR ANY DISTRIBUTION
OF THE SECURITIES BEING OFFERED PURSUANT TO THIS PROXY STATEMENT SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF VAXCEL OR ZYNAXIS OR THE INFORMATION SET FORTH OR INCORPORATED BY
REFERENCE HEREIN SINCE THE DATE OF THIS PROXY STATEMENT.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the SEC by Zynaxis pursuant
to the Exchange Act are hereby incorporated by reference herein:
(a) Zynaxis' Annual Report on Form 10-K/A-1 for the fiscal year ended
December 31, 1995 (provided that any information included or incorporated
by reference in response to Items 402(a)(8), (i), (k) or (1) of Regulation
S-K of the SEC shall not be deemed to be incorporated herein and is not a
part of the Registration Statement);
(b) Zynaxis' Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, June 30, and September 30, 1996;
(c) Zynaxis' Current Report on Form 8-K dated December 20, 1995; and
(d) Zynaxis' Current Report on Form 8-K dated December 6, 1996.
This Proxy Statement is accompanied by a copy of Zynaxis' Annual Report to
Shareholders for the fiscal year ended December 31, 1995 and Zynaxis' Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996.
Zynaxis will provide without charge, upon the written or oral request of
any person, including any beneficial owner, to whom this Proxy Statement is
delivered, a copy of any and all information (excluding certain exhibits)
relating to Zynaxis that has been incorporated by reference in the Registration
Statement of which this Proxy Statement is a part. Such requests should be
directed to Michael A. Christie, Secretary, Zynaxis, Inc., 371 Phoenixville
Pike, Malvern, Pennsylvania 19355 (telephone (610) 889-2200). In order to ensure
timely delivery of the documents, any request should be made by February ,
1997.
i
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY............................................................................... 1
The Parties...................................................................... 1
Meeting of Shareholders.......................................................... 2
The Merger....................................................................... 3
Proposed Asset Sales............................................................. 9
Proposed Charter Amendment....................................................... 9
Comparative Market Prices of Common Stock........................................ 10
Comparative Per Share Data....................................................... 10
SELECTED HISTORICAL FINANCIAL DATA OF VAXCEL.......................................... 11
SELECTED HISTORICAL FINANCIAL DATA OF ZYNAXIS......................................... 12
RISK FACTORS.......................................................................... 13
No Assurance of Successful Development and Commercialization of Products......... 13
CytRx Control of Vaxcel.......................................................... 13
Limited Operating History and Lack of Profitability.............................. 13
Future Capital Needs; Outstanding Options; Potential Dilution.................... 14
Dependence on Collaborations and Other Commercial Arrangements................... 14
Uncertainty Regarding Sale of Cauldron Division and Other Assets................. 15
Market Acceptance; Need for Industry Group Recommendation........................ 15
Competition...................................................................... 15
Lack of Manufacturing Capabilities; Reliance on Third-Party Manufacturers........ 16
Product Liability Risks.......................................................... 16
Uncertainty of Patent Protection and Proprietary Technology...................... 16
Unfavorable Licensing Terms for PLG Technology................................... 16
Impact of Government Regulation; No Assurance of FDA Approval.................... 17
Health Care Reform Initiatives................................................... 18
No Assurance of Adequate Reimbursement........................................... 18
Lack of Marketing Experience..................................................... 19
Recruiting and Retaining of Key Personnel........................................ 19
No Prior Public Markets for Common Stock; Possible Volatility of Stock Price..... 19
Uncertainty of Listing on the Nasdaq SmallCap Market............................. 19
Absence of Dividends............................................................. 20
Anti-Takeover Protections........................................................ 20
SPECIAL MEETING OF ZYNAXIS SHAREHOLDERS............................................... 20
Date, Place, Time, and Purpose................................................... 20
Record Dates, Voting Rights, Required Votes, and Revocability of Proxies......... 21
Solicitation of Proxies.......................................................... 22
Recommendation................................................................... 22
DESCRIPTION OF TRANSACTION............................................................ 23
General.......................................................................... 23
Background of and Reasons for the Merger......................................... 24
The Merger....................................................................... 27
Exchange Ratio................................................................... 27
Per Share Price.................................................................. 28
The Transaction Documents........................................................ 28
Effect of the Merger on Stock Options, Warrants, and Promissory Notes............ 33
Effective Time of the Merger..................................................... 35
Distribution of Vaxcel Stock Certificates and Warrants........................... 35
Conditions to Consummation of the Merger......................................... 36
Regulatory Approvals............................................................. 37
Waiver, Amendment, and Termination............................................... 37
</TABLE>
ii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Dissenters' Rights............................................................... 38
Objection Rights Under Subchapter 25E of the PBCL................................ 40
Conduct of Business Pending the Merger........................................... 42
Management and Operations After the Merger....................................... 44
Interests of Certain Persons in the Merger....................................... 44
Certain Federal Income Tax Consequences.......................................... 45
Accounting Treatment............................................................. 46
Expenses and Fees................................................................ 46
Resales of Vaxcel Common Stock................................................... 47
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS........................................ 48
Anti-takeover Provisions Generally............................................... 48
Authorized Capital Stock......................................................... 48
Amendment of Certificate of Incorporation and Bylaws............................. 49
Removal of Directors............................................................. 49
Limitations on Director Liability................................................ 49
Indemnification.................................................................. 50
Special Meetings of Shareholders................................................. 50
Actions by Shareholders Without a Meeting........................................ 51
Business Combinations with Certain Persons....................................... 51
Mergers, Consolidations, and Sales of Assets Generally........................... 52
Dissenters' Rights of Appraisal.................................................. 52
Shareholders' Rights to Examine Books and Records................................ 53
Dividends........................................................................ 53
COMPARATIVE MARKET PRICES AND DIVIDENDS............................................... 54
PRO FORMA FINANCIAL INFORMATION....................................................... 55
Pro Forma Condensed Combined Balance Sheet at September 30, 1996................. 56
Pro Forma Condensed Combined Statement of Operations for Nine Months Ended
September 30, 1996.............................................................. 57
Pro Forma Condensed Combined Statement of Operations for Year Ended
December 31, 1995.............................................................. 58
SELECTED HISTORICAL FINANCIAL DATA OF VAXCEL.......................................... 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS AND OPERATIONS
OF VAXCEL........................................................................... 60
General.......................................................................... 60
Financial Condition and Liquidity................................................ 60
Results of Operations............................................................ 60
Impact of Recently-Issued Accounting Standards................................... 61
BUSINESS OF VAXCEL.................................................................... 62
General.......................................................................... 62
Executive Summary................................................................ 62
Vaccines......................................................................... 62
The Vaccine Market............................................................... 62
Need for Enhanced Vaccine Adjuvants/Delivery Systems............................. 63
Vaxcel's Adjuvant/Vaccine Delivery System Technologies........................... 64
Vaxcel's Injectable Technology................................................... 64
Vaxcel's Oral Technologies....................................................... 66
Vaxcel's Business Strategy....................................................... 67
Current Corporate Collaborations................................................. 67
Product Development Activities................................................... 68
Marketing and Sales.............................................................. 69
Patents and Proprietary Technology............................................... 70
</TABLE>
iii
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Government Regulation............................................................ 70
Competition...................................................................... 72
Manufacturing.................................................................... 73
Certain Transactions............................................................. 73
Facilities and Employees......................................................... 75
Properties....................................................................... 76
Legal Proceedings................................................................ 76
MANAGEMENT OF VAXCEL.................................................................. 77
Directors and Executive Officers................................................. 77
Director Compensation............................................................ 78
Executive Compensation and Other Information..................................... 79
Employment Agreement............................................................. 79
1993 Stock Option Plan........................................................... 80
Limitation of Liability and Indemnification...................................... 81
PRINCIPAL STOCKHOLDERS OF VAXCEL...................................................... 82
SELECTED HISTORICAL FINANCIAL DATA OF ZYNAXIS......................................... 83
BUSINESS OF ZYNAXIS................................................................... 84
SELLING SHAREHOLDERS OF ZYNAXIS....................................................... 85
PLAN OF DISTRIBUTION.................................................................. 88
PROPOSED ASSET SALES.................................................................. 89
AMENDMENT OF ZYNAXIS ARTICLES OF INCORPORATION........................................ 91
DESCRIPTION OF VAXCEL CAPITAL STOCK................................................... 92
Common Stock..................................................................... 92
Preferred Stock.................................................................. 92
Vaxcel Warrants.................................................................. 92
CytRx Warrant.................................................................... 93
Vaxcel Non-Financing Warrants.................................................... 94
LEGAL MATTERS......................................................................... 95
EXPERTS............................................................................... 96
OTHER MATTERS......................................................................... 96
APPENDICES:
Appendix A -- Agreement and Plan of Merger and Contribution
Appendix B -- Liquidation Agreement
Appendix C -- Charter Amendment
Appendix D -- Subchapter 15D of the Pennsylvania Business Corporation Law,
relating to dissenters' rights of appraisal
Appendix E -- Subchapter 25E of the Pennsylvania Business Corporation Law,
relating to objectors' rights of appraisal
Appendix F -- Note Exchange Agreement
Appendix G -- Preferred Stock and Warrant Agreement
Appendix H -- Vaxcel Warrant
Appendix I -- CytRx Warrant
</TABLE>
iv
<PAGE> 7
SUMMARY
The following is a summary of certain information contained in this Proxy
Statement and the documents incorporated herein by reference. This summary is
not intended to be a complete description of the matters covered in this Proxy
Statement and is qualified in its entirety by the more detailed information
appearing elsewhere or incorporated by reference in this Proxy Statement.
Holders of Zynaxis Capital Stock are urged to read carefully the entire Proxy
Statement, including the Appendices. In addition, holders of Zynaxis Capital
Stock should carefully consider the factors set forth under "Risk Factors." As
used in this Proxy Statement, the terms "CytRx," "Vaxcel," "Vaxcel Merger Sub"
and "Zynaxis" refer to those entities, respectively, and, where the context
requires, to those entities and their respective subsidiaries.
This Proxy Statement contains certain statements of a forward-looking
nature relating to future events or the future financial performance of Vaxcel.
Holders of Zynaxis Capital Stock are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, the holders should specifically consider the various
factors identified in this Proxy Statement, including the matters set forth
under "Risk Factors," which would cause actual results to differ materially from
those indicated by such forward-looking statements.
THE PARTIES
CytRx. CytRx is the sole shareholder of Vaxcel and is engaged in the
development and commercialization of pharmaceutical related products and
services.
CytRx is a Delaware corporation, founded and incorporated in 1985. CytRx
files reports with the SEC under the Exchange Act. The common stock of CytRx is
traded on the Nasdaq National Market. The principal executive offices of CytRx
are located at 154 Technology Parkway, Norcross, Georgia 30092, and its
telephone number at such address is (770) 368-9500.
Vaxcel. Vaxcel is engaged in the development of a proprietary vaccine
delivery system ("OPTIVAX(R)") to enhance the effectiveness of a wide range of
existing vaccines and to aid in the development of new vaccines. OPTIVAX
includes a range of formulations containing certain proprietary nonionic block
copolymers which are then combined with antigens to form vaccines. Vaxcel
derives its rights to develop and commercialize OPTIVAX from a license agreement
with CytRx, which became effective in January 1993.
Since its inception, Vaxcel has devoted substantially all of its resources
to the research, development and commercialization of OPTIVAX. Vaxcel has not
received significant revenues from the sale of any of its products and has
sustained continuing operating losses. Vaxcel's accumulated deficit through
September 30, 1996 is approximately $4,200,000. Accordingly, Vaxcel has been
dependent on CytRx for capital to fund Vaxcel's operations. There can be no
assurance that Vaxcel will not require additional capital from investors to fund
its operations after the Merger. If additional capital is obtained through the
sale of securities, then the ownership position of shareholders of Vaxcel may be
diluted.
Vaxcel is a Delaware corporation, founded and incorporated in 1993 by CytRx
in order to focus on the commercial potential of OPTIVAX. Since the inception of
Vaxcel, CytRx has owned, and, until the date of the consummation of the Merger
(the "Closing"), CytRx will own all of the issued and outstanding shares of
Vaxcel Common Stock. The principal executive offices of Vaxcel are located at
154 Technology Parkway, Norcross, Georgia 30092, and its telephone number at
such address is (770) 453-0195. See "Business of Vaxcel."
Vaxcel Merger Sub. Vaxcel Merger Sub is a Georgia corporation and a newly
formed, wholly owned subsidiary of Vaxcel. Vaxcel Merger Sub has been
established for the sole purpose of merging with and into Zynaxis, in accordance
with the terms of the Agreement. As such, Vaxcel Merger Sub has no assets and
engages in no business activities. The principal executive offices of Vaxcel
Merger Sub are located at 154 Technology Parkway, Norcross, Georgia 30092, and
its telephone number at such address is (770) 453-0195.
Zynaxis. Zynaxis is engaged in the development of delivery systems
designed to enhance the performance of vaccines and drugs. In July 1995, through
a merger, Zynaxis acquired Secretech, Inc. ("Secretech"), a company engaged in
the development of oral and mucosal vaccine delivery technologies. Vaccines
using Zynaxis' proprietary delivery systems can be administered orally or
nasally rather than by
<PAGE> 8
injection and have the potential to increase protective immunity by stimulating
formation of antibodies at the most common points of entry for infectious
agents. In October 1995, Zynaxis entered into a development and licensing
agreement with ALK A/S ("ALK"), a Danish company and a leader in the area of
specific immunotherapy for allergies, which grants to ALK exclusive rights to
evaluate and develop Zynaxis' vaccine technologies for delivery of bioactive
substances to treat allergies. Prior to the acquisition of Secretech, Zynaxis
focused on the development of proprietary cell linker molecule technology
("Zyn-Linkers(R)") for the retention at disease sites of therapeutic drugs and
radiopharmaceuticals, as well as the development of cellular diagnostic products
(Zymmune(TM) CD4/CD8 Cell Monitoring Kit) to type and enumerate blood cells for
diagnosis and disease monitoring. In October 1995, Zynaxis sold the assets of
its cellular diagnostic products business to Intracel Corporation. In September
1996, Zynaxis entered into an exclusive license and purchase option agreement
with Phanos Technologies, Inc. ("Phanos") pursuant to which it granted Phanos a
license for all of its proprietary Zyn-Linker(R) technology and an option to
acquire such technology. Zynaxis also operates the Cauldron Process Chemistry
("Cauldron") division which provides collaborative consulting services on all
aspects of bulk pharmaceutical production and provides research, development and
pilot scale-up facilities to the pharmaceutical, biochemical and fine chemical
industries. Zynaxis presently is seeking a buyer for the Cauldron division.
Since its inception, Zynaxis has devoted substantially all of its resources
to the research and development of its technologies. Zynaxis has not received
significant revenues from the sale of any of its products and has sustained
continuing operating losses. Zynaxis' accumulated deficit through September 30,
1996 is approximately $47,500,000. The operations of Zynaxis will continue to
require additional capital investment by Vaxcel after the Merger.
Zynaxis is a Pennsylvania corporation, founded and incorporated in 1988.
Zynaxis files reports with the SEC under the Exchange Act. Zynaxis Common Stock
was, until December 24, 1996, traded on the Nasdaq SmallCap Market under the
symbol "ZNXS." Currently, Zynaxis Common Stock is not traded in any established
market. The mailing address of Zynaxis' principal executive office is 371
Phoenixville Pike, Malvern, Pennsylvania 19355, and its telephone number at such
address is (610) 889-2200. Additional information with respect to Zynaxis and
its subsidiaries is included in documents incorporated by reference in this
Proxy Statement. See "Available Information," "Documents Incorporated by
Reference," and "Business of Zynaxis."
MEETING OF SHAREHOLDERS
This Proxy Statement is being furnished to the holders of Zynaxis Capital
Stock in connection with the solicitation by the Zynaxis Board of proxies for
use at the Special Meeting at which Zynaxis shareholders will be asked to vote
upon (i) proposals to approve each of the Agreement and the Merger contemplated
thereby, the Asset Sales, and the Charter Amendment, and (ii) such other
business as may properly come before the meeting. The Special Meeting will be
held at 371 Phoenixville Pike, Malvern, Pennsylvania 19355, at M. local
time, on March , 1997. See "Special Meeting of Zynaxis Shareholders -- Date,
Place, Time, and Purpose."
At the Special Meeting, the Charter Amendment will be the first matter put
before the shareholders for consideration and for a vote. If the Charter
Amendment is approved by the shareholders, the Special Meeting will be adjourned
pending the filing of the Articles of Amendment, reflecting the Charter
Amendment, with the Department of State of the Commonwealth of Pennsylvania.
After the filing of the Articles of Amendment and the effectiveness of the
Charter Amendment, the Special Meeting will be reconvened to consider and vote
upon the Agreement and the Merger contemplated thereby, the Asset Sales, and
such other business as may properly come before the Special Meeting. If the
shareholders do not approve the Charter Amendment, the Special Meeting will not
be adjourned and the shareholders will be asked to consider and vote upon the
Agreement and the Merger contemplated thereby, the Asset Sales, and such other
business as may properly come before the Special Meeting.
The vote required for approval of each of the Agreement and the Merger
contemplated thereby, the Asset Sales, and the Charter Amendment, is the
affirmative vote of: (i) a majority of the votes cast, whether in person or by
proxy, by all holders of Zynaxis Preferred Stock (voting on an as converted
basis) and by all holders of Zynaxis Common Stock, entitled to vote and voting
together as a class; and (ii) a majority of the
2
<PAGE> 9
votes cast, whether in person or by proxy, by all holders of Zynaxis Preferred
Stock, entitled to vote and voting as a separate class. The directors and
executive officers of Zynaxis and their affiliates are entitled to vote %
of the issued and outstanding shares of Zynaxis Capital Stock, including
% of the issued and outstanding shares of Zynaxis Preferred Stock. EACH
MEMBER OF THE ZYNAXIS BOARD INTENDS TO VOTE THOSE SHARES OF ZYNAXIS CAPITAL
STOCK OVER WHICH SUCH MEMBER HAS VOTING AUTHORITY (OTHER THAN IN A FIDUCIARY
CAPACITY) IN FAVOR OF THE AGREEMENT AND THE MERGER CONTEMPLATED THEREBY, THE
ASSET SALES AND THE CHARTER AMENDMENT, RESPECTIVELY. See "Special Meeting of
Shareholders -- Record Dates, Voting Rights, Required Votes, and Revocability of
Proxies."
The Zynaxis Board has fixed the close of business on February , 1997 as
the record date (the "Record Date") for determination of the shareholders
entitled to notice of and to vote at the Special Meeting. Only holders of record
of shares of Zynaxis Capital Stock on the Record Date will be entitled to notice
of and to vote at the Special Meeting. Holders of Zynaxis Common Stock are
entitled to one vote for each share of Zynaxis Common Stock held. When voting
together as a class with holders of Zynaxis Common Stock, holders of Zynaxis
Preferred Stock are entitled to vote on an as converted basis and are,
therefore, entitled to two votes for each share of Zynaxis Preferred Stock held.
When voting separately as a class, holders of Zynaxis Preferred Stock are
entitled to one vote for each share of Zynaxis Preferred Stock held.
Shareholders who execute proxies retain the right to revoke them at any time
prior to being voted at the Special Meeting. On the Record Date, there were
shares of Zynaxis Common Stock issued and outstanding and shares
of Zynaxis Preferred Stock issued and outstanding. See "Special Meeting of
Zynaxis Shareholders -- Record Dates, Voting Rights, Required Votes, and
Revocability of Proxies."
THE MERGER
General. Pursuant to the Agreement, at the Effective Time, Vaxcel Merger
Sub will merge with and into Zynaxis, with the effect that Zynaxis will be the
surviving corporation resulting from the Merger, and will continue to conduct
its business and operations as a wholly owned subsidiary of Vaxcel. As a result
of the Merger, the former shareholders of Zynaxis will own approximately 12.5%
of the issued and outstanding shares of Vaxcel Common Stock, and CytRx will own
approximately 87.5% of such shares assuming no exercise of any options or
warrants to purchase Vaxcel Common Stock.
At the Effective Time, (i) each share of Zynaxis Common Stock issued and
outstanding immediately prior to the Effective Time (excluding shares held by
any Zynaxis company or any Vaxcel company, and excluding shares held by
shareholders who perfect their statutory dissenters' rights under Subchapter 15D
of the PBCL or statutory objection rights under Subchapter 25E of the PBCL) will
be exchanged for the right to receive a number of shares of Vaxcel Common Stock
equal to the Exchange Ratio (as defined in the Agreement), estimated to be
approximately .0948, with cash being paid in lieu of issuing fractional shares,
and (ii) each share of Zynaxis Preferred Stock issued and outstanding
immediately prior to the Effective Time (excluding shares held by any Zynaxis
company or any Vaxcel company, and excluding shares held by shareholders who
perfect their statutory dissenters' rights under Subchapter 15D of the PBCL or
statutory objection rights under Subchapter 25E of the PBCL) will be exchanged
for the right to receive a number of shares of Vaxcel Common Stock equal to two
times the Exchange Ratio, with cash being paid in lieu of issuing fractional
shares. See "Description of Transaction -- General."
In addition, at the Effective Time, upon consummation of the Merger, CytRx
will contribute to Vaxcel the Senior Credit Facility and a cash payment (the
"Cash Payment") in an amount equal to the difference, as of the Closing, between
$4,000,000 and the sum of: (i) the aggregate principal and interest balance
outstanding under the Senior Credit Facility; and (ii) (a) the Per Share Price,
estimated to be approximately $.2757, multiplied by (b) the number of votes
entitled to be cast by the holders of Zynaxis Capital Stock, if any, who elect
to exercise their statutory dissenters' rights under Subchapter 15D of the PBCL
or their statutory objection rights under Subchapter 25E of the PBCL in excess
of three percent of the votes that could be cast by all holders of Zynaxis
Capital Stock voting together as a class. See "Description of
Transactions -- General."
Subject to the terms and conditions of the Agreement, upon consummation of
the Merger, in exchange for the contribution of the Senior Credit Facility and
the Cash Payment, Vaxcel will deliver to CytRx: (i) the CytRx Warrant to
purchase, additional shares of Vaxcel Common Stock at an exercise price equal to
one-half
3
<PAGE> 10
of the Per Share Price multiplied by the Exchange Ratio which may be exercised
if, and only if, CytRx reasonably determines that Vaxcel's total assets and
capital and surplus are insufficient to satisfy the total assets and capital and
surplus requirements for inclusion of the Vaxcel Common Stock in the Nasdaq
SmallCap Market; (ii) 1,374,996 shares of Vaxcel Common Stock; and (iii) a
number of shares of Vaxcel Common Stock equal to the product of the Exchange
Ratio, times the number of votes entitled to be cast by the holders of shares of
Zynaxis Capital Stock, if any, who elect to exercise their statutory dissenters'
rights under Subchapter 15D of the PBCL or their statutory objection rights
under Subchapter 25E of the PBCL. See "Description of Transaction -- General."
Transaction Documents. Simultaneously with the execution of the Agreement:
(i) Zynaxis and CytRx entered into the Senior Credit Facility; (ii) Zynaxis and
CytRx entered into the Liquidation Agreement, which provides for CytRx to serve
as Zynaxis' agent and assist Zynaxis in conducting the Asset Sales prior to the
Merger; (iii) Zynaxis, CytRx, Vaxcel, and the holders of all of the outstanding
shares of Zynaxis Preferred Stock, who also hold certain Zynaxis Warrants,
entered into the Preferred Stock and Warrant Agreement, conditioned upon the
consummation of the Merger, making certain agreements with respect to their
rights, and converting the Zynaxis Warrants, upon consummation of the Merger,
into Vaxcel Warrants; (iv) Zynaxis, CytRx, and Vaxcel entered into the Note
Exchange Agreement with Euclid Partners III, L.P. ("Euclid") and S.R. One, Ltd.,
who hold Zynaxis Notes, conditioned upon the consummation of the Merger,
converting the Zynaxis Notes, upon consummation of the Merger, into the right to
receive shares of Vaxcel Common Stock; (v) CytRx and certain holders of Zynaxis
Capital Stock entered into the Shareholder Voting Agreements pursuant to which
each of the Shareholders granted CytRx an irrevocable proxy to vote the shares
of Zynaxis Capital Stock held by such shareholders in favor of the Agreement and
the Merger contemplated thereby, the Asset Sales, and the Charter Amendment, and
(vi) Vaxcel and Zynaxis entered into the Technology Development Agreement
concerning the development, by Vaxcel, of certain technologies owned by or
licensed to Zynaxis. Each of the Senior Credit Facility, the Liquidation
Agreement, the Preferred Stock and Warrant Agreement, the Note Exchange
Agreement, the Shareholder Voting Agreements, and the Technology Development
Agreement are incorporated into the Agreement as exhibits thereto. See
"Description of Transaction -- The Transaction Documents."
Senior Credit Facility. In order to provide necessary funding for the
operations of Zynaxis pending the Merger, Zynaxis and CytRx entered into a
secured loan agreement (the "Secured Loan Agreement"), pursuant to which CytRx
agreed to lend up to $2,000,000 (the "Loan") to Zynaxis. Repayment of the Loan
is evidenced by a Senior Secured Note (the "Senior Secured Note") and secured by
a security interest in all of the assets of Zynaxis and its subsidiaries and
guaranteed by Zynaxis Vaccine Technologies, Inc., a wholly-owned subsidiary of
Zynaxis, pursuant to various agreements (the "Security Agreements"). The Secured
Loan Agreement, the Senior Secured Note and the Security Agreements are
collectively referred to as the "Senior Credit Facility." If the Merger is not
consummated before May 1, 1997, Zynaxis may not be able to repay the outstanding
balance due under the Senior Credit Facility. If Zynaxis defaults under the
Senior Credit Facility, CytRx may exercise its rights as a secured creditor with
respect to certain assets of Zynaxis, including, but not limited to, foreclosing
on Zynaxis' rights in its vaccine delivery technologies. See "Description of
Transaction -- Transaction Documents -- The Senior Credit Facility."
Shareholder Voting Agreements. CytRx entered into the Shareholder Voting
Agreements with certain of the shareholders of Zynaxis who, as of December 6,
1996, collectively held approximately 13.2% of the issued and outstanding shares
of Zynaxis Common Stock and approximately 25.1% of the issue and outstanding
shares of Zynaxis Preferred Stock and who, as of the Record Date, collectively
held % of the issued and outstanding shares of Zynaxis Common Stock and
% of the issued and outstanding shares of Zynaxis Preferred Stock.
Pursuant to the Shareholder Voting Agreements, each of the shareholders agreed
that: (i) at any meeting of shareholders of Zynaxis called to vote upon any of
the matters contemplated by the Agreement (including, without limitation, the
Asset Sales and the Charter Amendment) or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval with respect to
any of the matters contemplated by the Agreement is sought (each a
"Shareholders' Meeting"), the shareholder will vote (or cause to be voted) the
holder's shares, to the extent then held, in favor of each of the matters
contemplated by the Agreement; and (ii) at any meeting of shareholders of
Zynaxis or at any adjournment thereof or in any other circumstances upon which
their vote, consent or other approval is sought,
4
<PAGE> 11
the holder will vote (or cause to be voted) such shareholder's shares, to the
extent then held, against (a) any merger, consolidation, combination, sale of
substantial assets, reorganization, recapitalization, dissolution, liquidation
or winding up of or by Zynaxis (other than the transactions contemplated by the
Agreement), or (b) any amendment of Zynaxis' Articles of Incorporation or Bylaws
or other proposal or transaction involving Zynaxis or any of its subsidiaries,
which amendment or other proposal or transaction would in any manner impede,
frustrate, prevent or nullify any of the transactions contemplated by the
Agreement (each of the foregoing in clause (a) or (b) above, a "Competing
Transaction"). In addition, pursuant to the Shareholder Voting Agreements, each
shareholder irrevocably granted to, and appointed, CytRx, Jack J. Luchese,
Chairman of the Board, President and Chief Executive Officer of CytRx, and Mark
W. Reynolds, Chief Financial Officer of CytRx, in their respective capacities as
officers of CytRx, and any individual who should succeed to any such office of
CytRx, and each of them individually, the shareholder's proxy and attorney-in-
fact (with full power of substitution), for and in the name, place and stead of
the shareholder, to vote the shareholder's shares, or grant a consent or
approval in respect of such shares (i) in favor of each of the matters
contemplated by the Agreement, and (ii) against any Competing Transaction. For a
more detailed discussion of the Shareholder Voting Agreements, see "Description
of the Transaction -- The Transaction Documents -- Shareholder Voting
Agreements."
Effect of the Merger on Stock Options, Warrants, and Promissory Notes. The
Agreement contemplates that at the Effective Time, each option or other equity
right to purchase shares of Zynaxis Common Stock pursuant to stock options or
stock appreciation rights ("Zynaxis Options") granted by Zynaxis under the
Zynaxis Stock Plan, as defined in the Agreement, which are outstanding at the
Effective Time, whether or not exercisable, will be converted into and become
rights with respect to Vaxcel Common Stock, and Vaxcel will assume each Zynaxis
Option, in accordance with the terms of the Zynaxis Stock Plan, and stock option
agreement by which it is evidenced, subject to certain terms as further
described herein. See "Description of the Transaction -- Effect of the Merger on
Stock Options, Warrants, and Promissory Notes."
The Agreement also contemplates that at the Effective Time, each Zynaxis
Warrant which is outstanding at the Effective Time and is held by a party to the
Preferred Stock and Warrant Agreement will be exchanged for a Vaxcel Warrant, in
accordance with the terms of the Preferred Stock and Warrant Agreement.
Specifically, pursuant to the Preferred Stock and Warrant Agreement, each of the
holders of Zynaxis Preferred Stock agreed that upon consummation of the Merger,
each Zynaxis Warrant held by the holders of Zynaxis Preferred Stock will be
exchanged for a warrant to purchase the number of shares of Vaxcel Common Stock
equal to: (i) the number of shares of Zynaxis Common Stock that the Zynaxis
Warrants held by such securityholder are exercisable to purchase at that time
multiplied by (ii) the Exchange Ratio. See "Description of the
Transaction -- Effect of the Merger on Stock Options, Warrants, and Promissory
Notes."
Additionally, each warrant to purchase Zynaxis Common Stock which is
outstanding at the Effective Time and is not being exchanged for a Vaxcel
Warrant in accordance with the Agreement and pursuant to the Preferred Stock and
Warrant Agreement (a "Zynaxis Non-Financing Warrant") will be converted into and
become a Vaxcel Non-Financing Warrant, at the Effective Time, and Vaxcel will
assume each such Zynaxis Non-Financing Warrant, in accordance with the terms of
the warrant agreement by which it is evidenced, except that from and after the
Effective Time, (i) each Zynaxis Non-Financing Warrant assumed by Vaxcel may be
exercised solely for shares of Vaxcel Common Stock, (ii) the number of shares of
Vaxcel Common Stock subject to such Zynaxis Non-Financing Warrant will be equal
to the number of shares of Zynaxis Common Stock subject to such Zynaxis
Non-Financing Warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio, and (iii) the per share exercise price under each such Zynaxis
Non-Financing Warrant will be adjusted by dividing the per share exercise price
under each such Zynaxis Non-Financing Warrant by the Exchange Ratio and rounding
up to the nearest cent. See "Description of the Transaction -- Effect of the
Merger on Stock Options, Warrants, and Promissory Notes."
Each Zynaxis Note on which Zynaxis is the obligor and which is held by a
party to the Note Exchange Agreement, will be exchanged for shares of Vaxcel
Common Stock in accordance with the terms of the Note Exchange Agreement.
Zynaxis, CytRx, and Vaxcel entered into the Note Exchange Agreement with Euclid
and S.R. One, Ltd. (together with Euclid, the "Noteholders") simultaneously with
the execution of the Agreement. The Noteholders hold certain Zynaxis Notes, on
which Zynaxis is the obligor. The Note Exchange Agreement provides that upon
consummation of the Merger, each Zynaxis Note issued by Zynaxis
5
<PAGE> 12
and held by a Noteholder will be exchanged for the number of shares of Vaxcel
Common Stock equal to the Exchange Ratio multiplied by the quotient (rounded
down to the nearest whole share) obtained by dividing the unpaid principal
amount of such Zynaxis Note, together with unpaid interest thereon accrued
through September 30, 1996, by the Per Share Price. See "Description of
Transaction -- The Transaction Documents -- Note Exchange Agreement" and
" -- Effect of the Merger on Stock Options, Warrants, and Promissory Notes."
Reasons for the Merger; Recommendations of the Board of Directors of
Zynaxis. The Zynaxis Board believes that the Agreement and the Merger, the
Asset Sales and the Charter Amendment are in the best interests of Zynaxis and
its shareholders. THE ZYNAXIS DIRECTORS UNANIMOUSLY RECOMMEND THAT ZYNAXIS
SHAREHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT AND THE MERGER CONTEMPLATED
THEREBY, THE ASSET SALES AND THE CHARTER AMENDMENT.
THE ZYNAXIS BOARD BELIEVES THAT, IF THE MERGER IS NOT CONSUMMATED, IT IS
HIGHLY PROBABLE THAT ZYNAXIS WILL CEASE TO EXIST AS A GOING CONCERN. The Zynaxis
Board believes that, if the Merger is not consummated, Zynaxis may not have cash
sufficient to fund its ongoing operations or to repay the funds that will have
been borrowed under the Senior Credit Facility. If Zynaxis defaults under the
Senior Credit Facility, CytRx may exercise its rights as a secured creditor with
respect to certain assets of Zynaxis, including, but not limited to, foreclosing
on Zynaxis' rights in its vaccine delivery technologies. In addition, although
Zynaxis contacted a number of interested merger partners and began negotiations
with several of them, Vaxcel was the only one willing to enter into a
transaction on terms acceptable to the Zynaxis Board. The terms of the Agreement
and the Transaction Documents provide Zynaxis with short-term financing that
allows Zynaxis to continue its operations until the Merger can be consummated,
and provides the Zynaxis shareholders with the opportunity to participate in the
equity growth that may result from the development and commercialization of the
Zynaxis vaccine delivery technologies. See "Description of
Transaction -- Background of and Reasons for the Merger."
In unanimously approving the Agreement and the Merger contemplated thereby,
the Asset Sales and the Charter Amendment, Zynaxis' directors considered, among
other things, Zynaxis' financial condition, the financial terms and the income
tax consequences of the Merger, legal advice concerning the proposed Merger, and
in general the fairness of the terms of the Merger to Zynaxis shareholders. See
"Description of Transaction -- Background of and Reasons for the Merger."
Exchange Ratio. Assuming no changes in the capitalization of either Vaxcel
or Zynaxis, the Exchange Ratio is estimated to be approximately .0948. For a
detailed description of the Exchange Ratio calculation, see "Description of
Transaction -- Exchange Ratio."
Per Share Price. Assuming no changes in the capitalization of either
Vaxcel or Zynaxis, the Per Share Price is estimated to be approximately $.2757.
For a detailed description of the Per Share Price calculation, see "Description
of Transaction -- Per Share Price."
Effective Time. Subject to the conditions to the obligations of the
parties to effect the Merger, the Effective Time of the Merger and other
transactions contemplated by the Agreement will occur upon the last to occur of:
(i) the filing of the Articles of Merger in the Department of State of the
Commonwealth of Pennsylvania; and (ii) the filing of the Certificate of Merger
with the Secretary of State of the State of Georgia (the "Effective Time").
Unless otherwise agreed upon by Vaxcel and Zynaxis, and subject to the
conditions to the obligations of the parties to effect the Merger, the parties
will use their reasonable efforts to cause the Effective Time to occur as soon
as practical following the last to occur of: (i) the effective date (including
the expiration of any applicable waiting period) of the last consent of any
regulatory authority required for the Merger; and (ii) the date on which the
shareholders of Zynaxis approve the matters relating to this Agreement required
to be approved by such shareholders by applicable law. See "Description of
Transaction -- Effective Time of the Merger," "-- Conditions to Consummation of
the Merger," and "-- Waiver, Amendment, and Termination."
NO ASSURANCE CAN BE PROVIDED THAT THE NECESSARY SHAREHOLDER APPROVALS CAN
BE OBTAINED OR THAT THE OTHER CONDITIONS PRECEDENT TO THE MERGER CAN OR WILL BE
SATISFIED. ZYNAXIS AND VAXCEL ANTICIPATE THAT ALL CONDITIONS TO THE CONSUMMATION
OF THE MERGER WILL BE SATISFIED SO THAT THE MERGER CAN BE CONSUMMATED DURING THE
FIRST QUARTER OF 1997. HOWEVER, DELAYS IN THE CONSUMMATION OF THE MERGER COULD
OCCUR.
6
<PAGE> 13
Exchange of Stock Certificates, Warrants and Promissory Notes. Promptly
after the Effective Time, Vaxcel will cause American Stock Transfer and Trust
Company, acting in its capacity as exchange agent for Vaxcel (the "Exchange
Agent"), to mail to each holder of record of a certificate or certificates
(collectively, the "Certificates") which, immediately prior to the Effective
Time, represented outstanding shares of Zynaxis Capital Stock, a letter of
transmittal and instructions for use in effecting the surrender and cancellation
of the Certificates in exchange for certificates representing shares of Vaxcel
Common Stock. Cash will be paid to the holders of Zynaxis Capital Stock in lieu
of the issuance of any fractional shares of Vaxcel Common Stock. In no event
will the holder of any surrendered Certificate(s) be entitled to receive
interest on any cash to be issued to such holder, and in no event will Zynaxis,
Vaxcel, or the Exchange Agent be liable to any holder of Zynaxis Capital Stock
for any Vaxcel Common Stock or dividends thereon or cash delivered in good faith
to a public official pursuant to any applicable abandoned property, escheat, or
similar law. See "Description of Transaction -- General" and "-- Distribution of
Vaxcel Stock Certificates and Warrants."
Pursuant to the Preferred Stock and Warrant Agreement, at the Closing, each
holder of a Zynaxis Warrant who is a party to the Preferred Stock and Warrant
Agreement will surrender the Zynaxis Warrant and Vaxcel will deliver to each
such holder in exchange a Vaxcel Warrant. At the Closing, each holder of a
Zynaxis Non-Financing Warrant will surrender such warrant and Vaxcel will
deliver to each such holder in exchange a Vaxcel Non-Financing Warrant. At the
Closing, each holder of a Zynaxis Note will deliver to Zynaxis the Zynaxis Note,
marked "Paid in Full," and Vaxcel will deliver to each such holder in exchange a
certificate representing all the Note Shares to be issued in exchange for such
Zynaxis Note. See "Description of Transaction -- Distribution of Vaxcel Stock
Certificates and Warrants."
Conditions to Consummation. Consummation of the Merger is subject to
various conditions, including receipt of the required approvals of Zynaxis
shareholders, receipt of an opinion of counsel as to the tax-free nature of
certain aspects of the Merger and certain other conditions. See "Description of
Transaction -- Conditions to Consummation of the Merger."
Waiver, Amendment, and Termination. The Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Time (i) by the mutual
consent of the Boards of Directors of Zynaxis and CytRx; and (ii) by the Boards
of Directors of either Zynaxis or CytRx (a) in the event of any material breach
of any representation or warranty of the other party contained in the Agreement
which cannot be or has not been cured within 30 days after giving written notice
to the breaching party of such inaccuracy and which breach is reasonably likely,
in the opinion of the non-breaching party, to have, individually or in the
aggregate, a Material Adverse Effect, as defined in the Agreement, on the
breaching party (provided that the terminating party is not then in material
breach of any representation warranty, covenant, or other agreement contained in
the Agreement), (b) in the event of a material breach by the other party of any
covenant or agreement contained in the Agreement which cannot be or has not been
cured within 30 days after the giving of written notice to the breaching party
of such breach (provided that the terminating party is not then in material
breach of any representation, warranty, covenant, or other agreement contained
in the Agreement), (c) in the event (1) any consent of any regulatory authority
required for consummation of the Merger and the other transactions contemplated
hereby shall have been denied by final nonappealable action of such authority or
if any action taken by such authority is not appealed within the time limit for
appeal, or (2) the shareholders of Zynaxis fail to vote their approval of the
matters relating to the Agreement and the transactions contemplated thereby at
the Special Meeting where such matters were presented to such shareholders for
approval and voted upon (provided that the terminating party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in the Agreement), (d) if the Merger is not consummated by March 31,
1997, provided that the failure to consummate is not due to the breach by the
party electing to terminate, or (e) if any of the conditions precedent to the
obligations of such party to consummate the Merger have not been satisfied,
fulfilled, or waived by the appropriate party by March 31, 1997 (provided that
the terminating party is not then in material breach of any representation,
warranty or covenant or other agreement contained in the Agreement). To the
extent permitted by law, the Agreement may be amended upon the written agreement
of the parties to the Agreement without the approval of shareholders; provided,
however, that after the Special Meeting, no amendment may reduce or modify in
any material respect the consideration to be received by holders of Zynaxis
Capital Stock without the requisite approval of the holders of the issued and
outstanding shares of Zynaxis Capital Stock entitled to vote thereon. In
addition, prior to or
7
<PAGE> 14
at the Effective Time, either Zynaxis or Vaxcel, or both, acting through their
respective Boards of Directors or chief executive officers or other authorized
officers may waive any default in the performance of any term of the Agreement
by the other party, may waive or extend the time for the compliance or
fulfillment by the other party of any and all of its obligations under the
Agreement, and may waive any of the conditions precedent to the obligations of
such party under the Agreement, except any condition that, if not satisfied,
would result in the violation of any applicable law or governmental regulation.
No such waiver will be effective unless written and unless executed by a duly
authorized officer of Zynaxis or Vaxcel, as the case may be. See "Description of
Transaction -- Waiver, Amendment, and Termination."
Dissenters' Rights. Pursuant to Subchapter 15D of the PBCL, the holders of
Zynaxis Capital Stock have dissenters' rights with respect to the Merger and the
Asset Sales. Any Zynaxis shareholder who does not vote in favor of the proposal
to approve the Agreement and the Merger contemplated thereby, or the Asset Sales
and who complies with certain requirements of the applicable provisions of the
PBCL may have the right to an appraisal and payment for such person's shares of
Zynaxis Capital Stock.
TO PERFECT DISSENTERS' RIGHTS OF APPRAISAL, A HOLDER OF ZYNAXIS CAPITAL
STOCK MUST STRICTLY COMPLY WITH THE APPLICABLE STATUTORY PROVISIONS THEREOF, A
COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX D. ANY HOLDER OF
ZYNAXIS CAPITAL STOCK WHO RETURNS A SIGNED PROXY BUT WHO FAILS TO PROVIDE VOTING
INSTRUCTIONS WITH RESPECT TO THE PROPOSALS TO APPROVE THE AGREEMENT AND THE
MERGER CONTEMPLATED THEREBY, AND THE ASSET SALES WILL BE DEEMED TO HAVE VOTED IN
FAVOR OF SUCH PROPOSAL AND WILL NOT BE ENTITLED TO ASSERT DISSENTERS' RIGHTS OF
APPRAISAL. See "Description of Transaction -- Dissenters' Rights."
Objection Rights Under Subchapter 25E of the PBCL. If the Charter
Amendment is not approved by the holders of Zynaxis Capital Stock and Vaxcel
elects to proceed with the Merger, each of the holders of Zynaxis Capital Stock,
pursuant to Subchapter 25E of the PBCL, who objects to the Merger and complies
with certain procedural requirements will be entitled to receive cash for each
of such shareholder's shares of Zynaxis Capital Stock in an amount equal to the
"fair value" of each share of Zynaxis Capital Stock as of the date of
consummation of the Merger.
TO BE ENTITLED TO THE RIGHTS AND REMEDIES UNDER SUBCHAPTER 25E, A HOLDER OF
ZYNAXIS CAPITAL STOCK MUST STRICTLY COMPLY WITH THE APPLICABLE STATUTORY
PROVISIONS THEREOF, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT AS
APPENDIX E. See "Description of Transaction -- Objection Rights Under Subchapter
25E of the PBCL."
Interests of Certain Persons in the Merger. Certain members of Zynaxis'
management and the Zynaxis Board have interests in the Merger in addition to
their interests as shareholders of Zynaxis generally. See "Description of
Transaction -- Interests of Certain Persons in the Merger."
Certain Federal Income Tax Consequences of the Merger. It is the intention
of the parties to the Agreement that the transactions contemplated by the
Agreement shall qualify for federal income tax purposes for treatment under
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code").
Consummation of the Merger is conditioned upon receipt by each party of a
written opinion from Alston & Bird to the effect that for federal income tax
purposes the contributions solely in exchange for Vaxcel Common Stock will
constitute a tax-free exchange under Section 351 of the Code. TAX CONSEQUENCES
OF THE MERGER FOR INDIVIDUAL TAXPAYERS CAN VARY, HOWEVER, AND ALL ZYNAXIS
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE EFFECT
OF THE MERGER ON THEM UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS. NO
OPINION IS EXPRESSED AS TO THE TAXATION OF THE EXCHANGE BY HOLDERS OF WARRANTS
FOR ZYNAXIS COMMON STOCK FOR WARRANTS FOR VAXCEL COMMON STOCK. For a further
discussion of the federal income tax consequences of the Merger, See
"Description of Transaction -- Certain Federal Income Tax Consequences."
Accounting Treatment. It is intended that the Merger will be accounted for
as a purchase by Vaxcel of Zynaxis for accounting and financial reporting
purposes. See "Description of Transaction -- Accounting Treatment."
Certain Differences in Shareholders' Rights. At the Effective Time,
Zynaxis shareholders, whose rights are governed by Zynaxis' Articles of
Incorporation and Bylaws and by the PBCL, will automatically become Vaxcel
shareholders, and their rights as Vaxcel shareholders will be determined by
Vaxcel's Amended and
8
<PAGE> 15
Restated Certificate of Incorporation ("Certificate of Incorporation") and
Bylaws and by the Delaware General Corporation Law ("DGCL"). See "Effect of the
Merger on Rights of Shareholders."
The rights of Vaxcel shareholders differ from the rights of Zynaxis
shareholders in certain important respects, some of which constitute additional
anti-takeover provisions provided for in Vaxcel's governing documents. See
"Effect of the Merger on Rights of Shareholders."
Conduct of Business Pending the Merger. Each party has agreed in the
Agreement to, among other things, operate its business only in the ordinary
course, except for the Asset Sales, and to take no action that would adversely
affect its ability to perform its covenants and agreements under the Agreement.
In addition, Zynaxis has agreed not to take certain actions relating to the
operation of Zynaxis pending consummation of the Merger without the prior
written consent of Vaxcel, except as otherwise permitted by the Agreement,
including, among other things: (i) incurring any additional debt obligation or
other obligation for borrowed money, except in the ordinary course of business
consistent with past practices; (ii) paying any dividends, exchanging any shares
of its capital stock, or, subject to certain exceptions, issuing any additional
shares of its capital stock or giving any person the right to acquire any such
shares; (iii) acquiring control over any other entity; (iv) subject to certain
exceptions, granting any increase in compensation or benefits, or paying any
bonus, to any of its officers or employees; or (v) subject to certain
exceptions, modifying or adopting any employee benefit plans, including any
employment contract. See "Description of Transaction -- Conduct of Business
Pending the Merger."
Risk Factors. Holders of Zynaxis Capital Stock should take into account
the specific considerations set forth under "Risk Factors" as well as the other
information set forth in this Proxy Statement. In particular, shareholders of
Zynaxis should take into account the following risk factors: (i) no assurance of
successful development and commercialization of products; (ii) control of Vaxcel
by CytRx; (iii) limited operating history of Vaxcel and lack of profitability;
(iv) need for more capital in the future and accompanying dilution; (v)
dependence on collaborations and other commercial arrangements; (vi) uncertainty
regarding the sale of certain assets; (vii) market acceptance of major products;
(viii) competition; (ix) lack of manufacturing capabilities; (x) product
liability risks; (xi) uncertainty of patent protection and proprietary
technology; (xii) unfavorable licensing terms for certain technologies; (xiii)
impact of government regulation and no assurance of Food and Drug Administration
approvals; (xiv) health care reform initiatives and no assurance of adequate
reimbursement; (xv) lack of marketing experience; (xvi) need to recruit
personnel; (xvii) lack of a prior market for Vaxcel Common Stock and the
volatility of market prices for securities of similar companies; (xviii)
uncertainty of being able to list shares on the Nasdaq SmallCap Market and (xix)
certain anti-takeover protections.
FOR A MORE DETAILED DISCUSSION OF THESE AND OTHER RISK FACTORS IN
CONNECTION WITH THE MERGER, SEE "RISK FACTORS."
PROPOSED ASSET SALES
At the Special Meeting, the shareholders of Zynaxis will also be asked to
consider and vote upon the approval of Asset Sales on terms and conditions to be
determined by the Zynaxis Board of Directors. Pursuant to the Liquidation
Agreement and subject to shareholder approval, CytRx will serve as Zynaxis'
agent and assist Zynaxis in conducting the Asset Sales prior to the Merger. All
sales of material assets will be contingent on shareholder approval of the Asset
Sales. The approval of the Asset Sales by the shareholders of Zynaxis is a
condition to consummation of the Merger. See "Description of Transaction -- The
Transaction Documents" and "Proposed Asset Sales."
PROPOSED CHARTER AMENDMENT
At the Special Meeting, the shareholders of Zynaxis will be asked to
consider and vote upon the approval of the Charter Amendment to the Articles of
Incorporation of Zynaxis to make Subchapter 25E of the PBCL inapplicable to
Zynaxis. Subchapter 25E (relating to control transactions) provides that if any
person or group acquires 20% or more of the voting power of a covered
corporation, the remaining shareholders may demand from such person or group the
fair value of their shares, including a proportionate amount of any control
premium. Pursuant to Section 2541(a)(4) of the PBCL, the articles of
incorporation of a Pennsylvania corporation can explicitly provide that
Subchapter 25E is not applicable by an amendment adopted by the shareholders of
such corporation prior to a control transaction. The adoption of the Charter
Amendment
9
<PAGE> 16
amending the Articles of Incorporation and making Subchapter 25E inapplicable to
the Merger is a condition to consummation of the Merger. See "Description of the
Transaction -- Objection Rights Under Subchapter 25E of the PBCL."
COMPARATIVE MARKET PRICES OF COMMON STOCK
There is no public trading market for Vaxcel Common Stock. Zynaxis Common
Stock was, until December 24, 1996, traded in the over-the-counter market and
quoted on the Nasdaq SmallCap Market under the symbol "ZNXS." Currently, Zynaxis
Common Stock is not traded in any established market. The following table sets
forth, as of the indicated dates, the last sale price of Zynaxis Common Stock as
reported by the Nasdaq SmallCap Market or as known by management of Zynaxis.
Because there is no public trading market for Vaxcel Common Stock, no equivalent
per share price of Zynaxis Common Stock based on the Exchange Ratio can be
calculated. The indicated dates of December 5, 1996 and February , 1997
represent, respectively, the last trading day immediately preceding public
announcement of the proposed acquisition of Zynaxis by Vaxcel and the latest
practicable date prior to the mailing of this Proxy Statement. For more
information, see "Comparative Market Prices and Dividends."
<TABLE>
<CAPTION>
MARKET PRICE ZYNAXIS
PER SHARE AT: COMMON STOCK
- ----------------- ------------
<S> <C>
December 5, 1996 $ 0.1875
February , 1997 $
</TABLE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain unaudited selected financial
information on a pro forma and pro forma equivalent basis per common share. The
information presented in this table should be read in conjunction with the
separate historical financial statements and the interim unaudited condensed
financial statements of Vaxcel and Zynaxis and the notes thereto and in
conjunction with the unaudited pro forma condensed combined financial
information included elsewhere herein.
The pro forma combined net loss per share assumes that the Merger was
effective as of the first day of each period reported. The pro forma combined
book value per share assumes that the Merger was effective as of the date
reported. The number of common shares outstanding used to calculate pro forma
combined net loss per share and pro forma combined book value per share is based
on the presumption that there would be 11,000,000 shares of Vaxcel Common Stock
outstanding upon each of the pro forma effective dates of the Merger. The pro
forma equivalent data for Zynaxis was computed by multiplying the pro forma
combined net loss per share or the pro forma combined book value per share by
the Exchange Ratio. No cash dividends have been declared or paid by Vaxcel or
Zynaxis during the periods reported. For more information, see "Pro Forma
Financial Information."
<TABLE>
<CAPTION>
HISTORICAL ZYNAXIS
----------------- PRO FORMA PRO FORMA
VAXCEL ZYNAXIS EQUIVALENT COMBINED
------ ------- --------- ---------
<S> <C> <C> <C> <C>
Net loss per share:
Nine months ended September 30, 1996....... $(0.10) $ (0.20) $(.02) $ (0.24)
Year ended December 31, 1995............... (0.17) (1.57) (.10) (1.03)
Book value per share:
September 30, 1996......................... 0.01 0.10 .06 0.68
December 31, 1995.......................... 0.07 0.25 .07 0.72
</TABLE>
10
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA OF VAXCEL
The selected financial data as of December 31, 1995, and for each of the
two years in the period ended December 31, 1995, and for the period from
inception (at January 6, 1993) through December 31, 1993, is derived from the
financial statements of Vaxcel, which are included herein. Such financial
statements have been audited by Ernst & Young LLP, independent auditors of
Vaxcel. The selected statement of operations data for the nine months ended
September 30, 1995 and 1996 and the selected balance sheet data as of September
30, 1996, have been derived from unaudited financial statements of Vaxcel, that,
in the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation of such data at such
dates and for such periods in accordance with generally accepted accounting
principles. The selected financial data for the nine months ended September 30,
1996 are not necessarily indicative of the results to be expected for the full
year. The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Vaxcel" and the financial statements of Vaxcel and notes thereto
included in this Proxy Statement.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JANUARY 6,
FOR THE FOR THE 1993)
NINE MONTHS ENDED YEARS ENDED THROUGH
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------ ------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................ $ 80,635 $ 25,000 $ 121,709 $ 500,814 $ 506,317
Operating Expenses:
Cost of sales....................... -- -- -- 72,636 74,066
Research and development............ 540,744 559,965 894,754 570,548 791,996
Marketing, general and
administrative.................... 316,663 364,794 534,542 845,901 1,027,803
Write-off of patent costs........... -- 128,216 128,216 -- --
------------- ------------- ------------- ------------- ------------
857,407 1,052,975 1,557,512 1,489,085 1,893,865
Other Income (Expense):
Interest income (expense), net...... 6,459 47,930 56,998 (111,572) (55,635)
Sale of animal adjuvant rights...... -- -- -- 500,000 --
------------- ------------- ------------- ------------- ------------
6,459 47,930 56,998 388,428 (55,635)
Net loss................................ $(770,313) $ (980,045) $ (1,378,805) $ (599,843) $ (1,443,183)
------------- ------------- ------------- ------------- ------------
Net loss per common share............... $ (.10) $ (.12) $ (.17) $ (.09) $ (.24)
============ ========== ============ ============ ============
Shares used in computing net loss per
common share.......................... 8,058,029 8,000,000 8,000,000 6,826,027 6,000,000
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------- ----------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 18,832 $ 515,522 $ 527,948 $ 40,423
Working capital..................... (29,894) 402,861 521,913 (45,117)
Total assets........................ 168,945 701,868 1,043,575 825,900
Stockholder's equity................ 113,856 584,169 962,974 (1,437,183)
</TABLE>
11
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA OF ZYNAXIS
The selected consolidated financial data as of December 31, 1994 and
December 31, 1995, and for each of the three years in the period ended December
31, 1995, is derived from the consolidated financial statements of Zynaxis,
which are incorporated by reference in Zynaxis' Form 10-K/A-1 for the year ended
December 31, 1995. Such financial statements have been audited by Arthur
Andersen LLP, independent public accountants, whose report on the financial
statements includes an explanatory paragraph concerning Zynaxis' ability to
continue as a going concern. The selected consolidated financial data as of
December 31, 1991, December 31, 1992 and December 31, 1993, and for the years
ended December 31, 1991 and 1992, is derived from the audited financial
statements of Zynaxis, not included or incorporated by reference herein. The
selected consolidated statement of operations data for the nine months ended
September 30, 1995 and 1996 and the selected consolidated balance sheet data as
of September 30, 1996, have been derived from unaudited consolidated financial
statements of Zynaxis, which are incorporated by reference in Zynaxis' Form 10-Q
for the quarterly period ended September 30, 1996, that, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of such data at such dates and for
such periods in accordance with generally accepted accounting principles. The
selected consolidated financial data for the nine months ended September 30,
1996 are not necessarily indicative of the results to be expected for the full
year. The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of Zynaxis
and notes thereto incorporated by reference in this Proxy Statement. For more
information, see "Selected Historical Financial Data of Zynaxis."
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------------- -----------------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues......... $ 1,689,205 $ 305,816 $ 761,792 $ 1,163,955 $ 1,573,550 $ 1,166,658 $ 199,172
Operating Expenses:
Cost of sales.... -- 40,261 40,262 273,088 -- -- --
Research and
development.... 2,781,827 4,192,422 5,168,912 6,344,221 7,042,790 4,341,691 3,030,627
Marketing,
general and
administrative... 1,333,356 1,547,162 2,239,921 3,397,948 2,875,112 1,263,317 583,326
Charge for
acquired
research and
development.... -- 3,647,321 5,165,793 -- -- -- --
Restructuring
charge......... -- 347,436 347,436 -- -- -- --
Provision for
asset
impairment..... -- -- -- 1,466,360 -- -- --
------------- ------------- ------------- ------------- ------------- ------------- -------------
4,115,183 9,774,602 12,962,324 11,481,617 9,917,902 5,605,008 3,613,953
Other Income
(Expense):
Interest income
(expense),
net............ 10,956 38,104 44,023 106,259 574,261 1,023,676 (65,575)
Other income
(expense)...... 420,346 91,134 162,232 -- -- -- --
Net gain on sale
of diagnostics
technologies
and assets..... -- 1,595,616 1,616,840 -- -- -- --
------------- ------------- ------------- ------------- ------------- ------------- -------------
431,302 1,724,854 1,823,095 106,259 574,261 1,023,676 (65,575)
Net loss........... $(1,994,676) $ (7,743,932) $ (10,377,437) $ (10,211,403) $ (7,770,091) $ (3,414,674) $ (3,480,356)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Net loss per common
share............ $ (0.20) $ (1.29) $ (1.57) $ (1.95) $ (1.49) $ (0.71) $ (1.69)
=========== ========== =========== =========== ========== ========== ===========
Shares used in
computing net
loss per common
share(1)......... 10,060,509 5,988,748 6,602,813 5,241,317 5,204,967 4,837,661 2,061,560
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash
equivalents and
investments.... $ 223,177 $ 509,143 $ 2,216,456 $ 15,375,621 $ 22,901,516 $ 401,455
Working capital
(deficit)...... (1,307,660) (733,698) 1,122,483 12,917,242 13,005,985 (1,515,674)
Total assets..... 2,933,269 3,987,828 6,399,135 20,888,148 24,429,508 1,672,064
Long-term debt
and other
long-term
obligations.... 157,087 183,403 212,245 3,833,841 312,058 11,989,041
Shareholders'
equity
(deficit)(2)... 1,023,517 2,357,595 5,277,193 15,463,531 23,063,154 (12,357,179)
</TABLE>
- ---------------
(1) Computed on basis described for net loss per share in Note 2 to the
consolidated financial statements of Zynaxis.
(2) Includes accretion of $2,543,068 to Zynaxis Preferred Stock redemption
value. No dividends on the Zynaxis Common Stock have been declared or paid
since the inception of Zynaxis.
12
<PAGE> 19
RISK FACTORS
Holders of Zynaxis Capital Stock and Zynaxis Notes should be aware that
ownership of the shares of Vaxcel Common Stock to be exchanged for shares of
Zynaxis Capital Stock and Zynaxis Notes involves a high degree of risk. In
addition to other information in this Proxy Statement, the following risk
factors should be considered carefully by such shareholders and note holders in
evaluating the Merger. Except for historical information contained herein, the
discussion in this Proxy Statement contains forward-looking statements that
involve risks and uncertainties, such as statements of Vaxcel's plans,
objectives, expectations and intentions. The cautionary statements made in this
Proxy Statement should be read as being applicable to all related
forward-looking statements wherever they appear in this Proxy Statement.
Vaxcel's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.
NO ASSURANCE OF SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS
Vaxcel's OPTIVAX adjuvant and the Zynaxis vaccine technologies to be
acquired by Vaxcel pursuant to the Merger are in the early stages of development
and significant amounts of money and time will be required to commercialize
vaccines in partnering or other collaborative arrangements based on the
technologies. Research and development activities, by their nature, preclude
definitive statements as to the time required and costs involved in reaching
certain objectives. Therefore, actual research and development costs could
exceed budgeted amounts, and estimated time frames may require extension. Cost
overruns due to unanticipated regulatory delays or demands, unexpected adverse
side effects or insufficient therapeutic efficacy would prevent or substantially
slow development efforts and ultimately could have a material adverse effect on
Vaxcel and its partners. If Vaxcel or its partners encounter technical problems
in the further development of the technologies, Vaxcel could be required either
to abandon or substantially modify its development program. There can be no
assurance that OPTIVAX or any of the Zynaxis technologies will prove to be safe
and effective with any vaccine. There can be no assurance that OPTIVAX or any of
the Zynaxis technologies will be approved by the United States Food and Drug
Administration (the "FDA") or equivalent foreign authorities for use with any
vaccine that is currently on the market or under development or that, if
approved, the product will be accepted in the market or that such product can be
commercialized in a profitable manner. Furthermore, OPTIVAX and/or the Zynaxis
technologies could produce adverse side effects after commercialization that
would cause the vaccine to be withdrawn from the market. Vaxcel does not expect
that vaccines utilizing OPTIVAX or the Zynaxis technologies will be
commercialized for several years, if at all. The failure of Vaxcel to
successfully commercialize OPTIVAX and/or the Zynaxis technologies or delays in
the development and commercialization process could materially adversely affect
the business, financial condition and results of operations of Vaxcel.
CYTRX CONTROL OF VAXCEL
CytRx currently holds all of the issued and outstanding shares of capital
stock of Vaxcel. Following the consummation of the Merger, CytRx will own
approximately 87.5% of the issued and outstanding shares of Vaxcel Common Stock,
assuming that no holder of Zynaxis Capital Stock exercises its appraisal or
objection rights and before giving effect to the exercise of any Vaxcel Warrants
or the CytRx Warrant. Accordingly, CytRx will have the ability to control the
management and policies of Vaxcel and the outcome of matters submitted to the
shareholders for approval, including the election of directors.
LIMITED OPERATING HISTORY AND LACK OF PROFITABILITY
Zynaxis and Vaxcel commenced operations in 1988 and 1993, respectively, and
both companies have been unprofitable since their inception. The report of
Zynaxis' independent public accountants on the audited financial statements of
Zynaxis for the year ended December 31, 1995 includes an explanatory paragraph
regarding Zynaxis' inability to continue as a going concern. After the
consummation of the Merger, Vaxcel will experience further losses, which could
be significant, during the next several years and there can be no assurance that
further significant losses will not be realized by Vaxcel over a longer period
of time. In addition, Vaxcel's cash needs could be affected by higher than
anticipated costs of preclinical and clinical trials, delays
13
<PAGE> 20
in the FDA regulatory process, the inability of Vaxcel to enter into
collaborative arrangements with third parties, the inability of Vaxcel to find
third-party manufacturing facilities, the inability of Vaxcel to sell Cauldron
at the anticipated price and other factors.
To achieve profitable operations after the consummation of the Merger,
Vaxcel, through collaborations with vaccine companies, must successfully
develop, manufacture, introduce and market products containing its technologies.
The development of vaccines utilizing Vaxcel's technologies will require
substantial resources to conduct research, preclinical trials and clinical
trials; to establish pilot scale and commercial scale manufacturing processes
and facilities; and to establish quality control, regulatory and administrative
capabilities. The time required to reach sustained profitability is highly
uncertain, and there can be no assurance that Vaxcel will be able to achieve
profitability on a sustained basis, if at all. If profitability is achieved, the
level of the profitability cannot be predicted.
FUTURE CAPITAL NEEDS; OUTSTANDING OPTIONS; POTENTIAL DILUTION
Since their inception, neither Vaxcel or Zynaxis has recorded an operating
profit. Vaxcel has been dependent upon CytRx for its continuing capital needs.
However, CytRx is not obligated to provide any capital to Vaxcel or its
subsidiaries. After consummation of the Merger, Vaxcel may need to raise
substantial additional funds to conduct the research and development activities
necessary to receive FDA approval for vaccines containing OPTIVAX and the
Zynaxis technologies. Adequate funds for these purposes may not be available
when needed or on terms satisfactory to Vaxcel. Lack of funding when needed may
cause Vaxcel to delay, reduce and/or abandon certain or all aspects of its
research and development programs. Vaxcel may seek additional funding for its
research and development activities through a variety of financing mechanisms,
including the issuance of equity securities. Any such financing may dilute the
existing shareholders of Vaxcel.
Vaxcel has granted options to employees and directors to purchase 794,953
shares of Vaxcel Common Stock at an exercise price of $1.50 per share. Holders
of such options are likely to exercise them when, in all likelihood, Vaxcel
could obtain additional capital on terms more favorable then those provided by
the options. In addition, the exercise of such options will result in dilution
to the interests of the shareholders of Vaxcel to the extent that the exercise
price is less than the fair market value of the Vaxcel Common Stock.
DEPENDENCE ON COLLABORATIONS AND OTHER COMMERCIAL ARRANGEMENTS
At the present time, Vaxcel does not own or have the right to any vaccines
or antigens that can be used with OPTIVAX or the Zynaxis technologies, nor does
it expect to conduct research and development on antigens internally in the near
future. Vaxcel's success is dependent upon its ability to license its
technologies to vaccine manufacturers for use with their vaccines.
Pharmaceutical companies seeking collaborative agreements in order to avail
themselves of products in the development stage have become increasingly more
selective and have required substantial proof of principal, safety and efficacy
before agreeing to provide any collaborative funding. After consummation of the
Merger, Vaxcel will have two license agreements, two option agreements, and
several research agreements. There can be no assurance that any of the option or
research agreements between Vaxcel and vaccine manufacturers and institutions
will be expanded into licensing or other collaboration agreements or that any
new license, option, or research agreements will be entered into in the future.
Even if a vaccine company or other third party is interested in entering into an
arrangement to use OPTIVAX or the Zynaxis technologies with its vaccine, there
can be no assurance that any such arrangement will be on terms satisfactory to
Vaxcel or that any funds received by Vaxcel from the collaboration will be
sufficient to cover Vaxcel's expenses related to the product. Moreover, if
Vaxcel does enter into a licensing or other collaboration arrangement with
respect to a vaccine, it may be required to rely on the third party for
important research, development, regulatory, manufacturing and marketing
activities involving Vaxcel's technologies. There can be no assurance that
Vaxcel's licensees or collaborative partners will perform such activities in a
timely or adequate manner, or that any products resulting from any such
arrangement will be successfully commercialized.
14
<PAGE> 21
UNCERTAINTY REGARDING SALE OF CAULDRON DIVISION AND OTHER ASSETS
In the Merger, Vaxcel will acquire the Cauldron division which provides
collaborative consulting services on all aspects of bulk pharmaceutical
production and provides research, development, and pilot scale-up facilities to
the pharmaceutical, biochemical and fine chemical industries. Prior to the
merger, Zynaxis has been seeking a buyer for the Cauldron division. After
consummation of the Merger, Vaxcel plans to divest the Cauldron division in
order to generate cash to fund its operations, including development of its
vaccine adjuvants/delivery technologies. There can be no assurance that Vaxcel
will be able to conclude a sale, on a timely basis, or that such a sale will
generate a fair market value for the division. If Vaxcel fails to find a buyer
for the Cauldron division, Vaxcel will experience higher operating costs than
anticipated which could have an adverse affect on Vaxcel's financial resources.
While the costs may be partially offset by the revenues generated by the
Cauldron division, such revenues are uncertain in the future. Also, if Vaxcel is
forced to close the Cauldron division, Vaxcel could be faced with the costs of
such a shutdown, including the costs of employee severance.
Vaxcel also plans to sell certain other assets of Zynaxis that are of no
value to the new entity. However, there are no assurances that Vaxcel will be
able to successfully dispose of such assets.
MARKET ACCEPTANCE; NEED FOR INDUSTRY GROUP RECOMMENDATION
Even if products being developed by Vaxcel and its collaborators are
approved for commercial use, there can be no assurance that a vaccine
administered with OPTIVAX or the Zynaxis technologies will be widely used.
Although Vaxcel will attempt to license the technologies for use with vaccines
that present attractive market opportunities, the widespread usage of vaccines
is often determined by the immunization policies of a country. In the United
States, three medical groups develop the immunization policies of an
FDA-approved vaccine for the general population: (i) the Committee on Infectious
Diseases of the American Academy of Pediatrics establishes policies for private
practicing pediatricians; (ii) the Immunization Practices Advisory Committee
develops similar policies for city, county and state public health clinics; and
(iii) the Committee on Immunization of the Council of Medical Societies of the
American College of Physicians determines policies for generalists and
internists. The support of these groups is critical to the commercial success of
a vaccine. A recommendation for routine use of a new vaccine in the general
population is typically required for widespread acceptance by the medical
community, especially for pediatric vaccines. There can be no assurance that any
vaccine used with OPTIVAX or the Zynaxis technologies will be recommended for
use by any of these committees.
COMPETITION
Research and development of vaccine adjuvants/delivery systems is a
relatively new field. Management of Vaxcel is aware of certain companies that
have experience in this field, some of which have licensed compounds to major
vaccine manufacturers. Some of the products being developed by these companies
have been tested in human clinical trials. In addition, a variety of smaller
companies and academic and research institutions are attempting to develop
vaccine adjuvants/delivery systems. To date, there have been limited preclinical
and human studies comparing the various delivery systems. There can be no
assurance that OPTIVAX or the Zynaxis technologies will perform better than or
equal to competitive vaccine adjuvants/ delivery systems. These competitors or
others may develop products or technologies that could render OPTIVAX and the
Zynaxis technologies either obsolete or less competitive. In addition, advances
in disease prevention or treatment methods also could adversely affect the
market for OPTIVAX and the Zynaxis technologies. The research, development,
manufacturing and marketing of vaccines is a growing field that is becoming
increasingly competitive and is subject to rapid technological change. The major
vaccine manufacturers have larger research and development staffs and financial
resources than Vaxcel and, therefore, could devote substantial resources to the
development of vaccine adjuvants/delivery systems, which if successful, would
eliminate the need for Vaxcel's technologies. See "Business of
Vaxcel -- Competition."
15
<PAGE> 22
LACK OF MANUFACTURING CAPABILITIES; RELIANCE ON THIRD-PARTY MANUFACTURERS
After the consummation of the Merger, the success of Vaxcel will depend in
part upon its ability to manufacture, or have manufactured through licensees or
other third parties, the supplies of products needed for clinical trials and
commercial purposes. Neither Vaxcel nor CytRx currently has the capability to
manufacture any component of OPTIVAX or the Zynaxis technologies alone or with a
vaccine and therefore Vaxcel must rely on third parties for its manufacturing
needs. If Vaxcel enters into licensing or collaborative arrangements with third
parties related to OPTIVAX or the Zynaxis technologies, it may be required to
rely on such third parties for manufacturing the finished products or seek to
use third-party contract manufacturers to manufacture Vaxcel's requirements of
finished product. There can be no assurance that Vaxcel can obtain and/or
maintain a reliable manufacturing source for its products at a reasonable price.
See "Business of Vaxcel -- Manufacturing."
Vaxcel has an exclusive supply agreement with CytRx to obtain its
requirements of the bulk OPTIVAX copolymers being developed by Vaxcel. The
inability of CytRx or CytRx's designated third-party contract manufacturers to
supply the bulk OPTIVAX copolymers could have a material adverse affect on
Vaxcel.
PRODUCT LIABILITY RISKS
Vaxcel faces an inherent risk of product liability claims in the event that
the use of OPTIVAX or the Zynaxis technologies causes or is alleged to have
caused adverse effects. There can be no assurance that it will avoid significant
product liability exposure that would materially adversely effect the business
or financial condition of Vaxcel.
Based on historical data, a small number of healthy individuals can be
expected to have severe adverse reactions to certain vaccines. In an effort to
compensate injured parties and protect the nation's immunization program, the
U.S. Congress enacted the National Childhood Vaccine Injury Act (the "NCVI Act")
in 1986, which provides for excise-tax financing of a compensation system for
childhood vaccine injuries resulting from immunizations administered after
October 1, 1988. Liability exposure for manufacturers is not totally eliminated
under the NCVI Act, because it only applies to claims resulting from vaccines
administered to children and because a claimant may reject an award and
institute a lawsuit. There can be no assurance that if products manufactured or
sold by Vaxcel or its partners cause or are alleged to have caused adverse
effects, a claimant will not reject an award under the NCVI Act and institute a
lawsuit against a vaccine manufacturer. There can be no assurance that the NCVI
Act will be extended after expiration of its current term, or that, if exposed
to such product liability, Vaxcel will receive any benefit from the NCVI Act or
other similar statutes.
UNCERTAINTY OF PATENT PROTECTION AND PROPRIETARY TECHNOLOGY
After the consummation of the Merger, the success of Vaxcel will depend, in
part, on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties. There can
be no assurance that any of OPTIVAX or the Zynaxis technology patent
applications will issue, that Vaxcel will develop additional proprietary
products that are patentable, that any patents issued to date will provide any
competitive advantages or will not be challenged by any third parties, or that
the patents of others will not have an adverse effect on the ability of Vaxcel
to do business. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate any products of Vaxcel or, if
patents are issued to Vaxcel, design around its patented products. Vaxcel could
incur substantial costs in defending itself in lawsuits brought against it
alleging infringement of such patents or in lawsuits by it against another
party.
UNFAVORABLE LICENSING TERMS FOR PLG TECHNOLOGY
Vaxcel will acquire rights to the poly-(DL-lactide-co-glycolide) ("PLG")
microencapsulation technology via the Merger with Zynaxis. Vaxcel considers the
PLG technology to be the most valuable technology to which Zynaxis has rights.
These rights to develop, commercialize, and sublicense the PLG
microencapsulation technology are based on the terms of an exclusive, worldwide
license agreement (the "PLG Agreement"), effective July 1987, in the field of
oral vaccine delivery with Southern Research Institute ("SRI")
16
<PAGE> 23
and The University of Alabama at Birmingham Research Foundation ("UAB"). Under
the terms of the PLG Agreement, Vaxcel will be required to pay SRI and UAB 6% of
net sales for the life of the patent or patents or 5% of net sales for 15 years
after the effective date of the PLG Agreement should a patent or patents fail to
issue or be invalidated if third parties (other than ALK) generate any product
sales using the microencapsulation technology. Such a high royalty rate may make
it difficult for Vaxcel to sublicense the PLG microsphere technology to
corporate partners. Also, certain other terms and conditions of the PLG
Agreement are unfavorable to Vaxcel. Although Vaxcel will attempt to renegotiate
the PLG Agreement with SRI and UAB, there can be no assurance that Vaxcel can
renegotiate the PLG Agreement on terms and conditions acceptable to Vaxcel, if
at all. The failure of Vaxcel to successfully renegotiate the PLG Agreement
could have an adverse effect on the business of Vaxcel or cause Vaxcel to
abandon development of the PLG microencapsulation technology.
IMPACT OF GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL
Pharmaceutical products are subject to regulation under the federal Food,
Drug and Cosmetics Act, and the marketing of vaccines utilizing OPTIVAX and the
Zynaxis technologies will require the approval of the FDA and comparable
regulatory authorities in foreign countries. The approval process can be lengthy
and there can be no assurance that the FDA or any other foreign regulatory
authority will review the vaccines utilizing OPTIVAX or the Zynaxis technologies
on a timely basis. The FDA has established regulations, guidelines and policies
which apply to the preclinical evaluation, clinical testing, manufacture and
marketing of pharmaceutical products. The process of obtaining FDA approval for
a new product generally takes several years and involves the expenditure of
substantial resources. Additional government regulations may be promulgated
which could impose additional costly testing procedures necessary to obtain
regulatory approval and delay regulatory approval of Vaxcel's vaccine
adjuvant/delivery system. Furthermore, some regulatory authorities in foreign
countries may require testing beyond that required by the FDA, and any such
additional testing could result in delays in the approval process as well as
additional expenditures by Vaxcel.
The steps required before a vaccine product can be produced and marketed
for human use in the United States include preclinical studies in animal models,
the filing of an Investigational New Drug ("IND") application, the conduct of
human clinical trials (usually in three separate phases) and the submission and
approval of a Product License Application ("PLA"). The PLA involves considerable
data collection, verification and analysis, as well as the preparation of
summaries of, among other issues, the manufacturing and testing processes,
preclinical studies, and clinical trials. The administration of any product
utilizing OPTIVAX or the Zynaxis technologies may produce undesirable side
effects in humans, which must be reported to the FDA and other regulatory
authorities. Vaxcel or the FDA may suspend clinical trials at any time if it is
believed that the people participating in such trials are being exposed to
unacceptable health risks. Such side effects could interrupt or delay clinical
testing of such products and could ultimately prevent their approval by the FDA
or foreign regulatory authorities for any or all targeted indications. There can
be no assurance that Vaxcel and its collaborators will be able to obtain the
required FDA approvals for any of the vaccines containing OPTIVAX or the Zynaxis
technologies, or that the FDA will not require additional clinical studies in
order to approve the products. In addition, some foreign jurisdictions require
pricing and reimbursement approval before a vaccine can be marketed, which may
require the submission of data from additional studies. There can be no
assurance that pricing or reimbursement approvals will be obtained at all or on
terms that would allow the vaccine to be accepted in the market and profitable
to Vaxcel.
In addition to obtaining FDA approval for each product, the manufacturing
establishment for any vaccine utilizing OPTIVAX and the Zynaxis technologies
used in humans must also be approved by the FDA. The facilities and process for
the manufacture of such vaccine, whether manufactured directly by Vaxcel or by a
third party, are subject to rigorous regulation, including the need to comply
with the FDA's current Good Manufacturing Practice ("GMP") regulations, and may
also be subject to regulation by foreign regulatory authorities. There can be no
assurance that Vaxcel, CytRx or any third-party manufacturer of their products
will be able to comply with such requirements.
In addition to these general manufacturing requirements, samples of
internal testing release data for each manufactured batch of vaccines must be
submitted to the FDA. For certain types of vaccines, samples of
17
<PAGE> 24
every batch of vaccine intended for commercial use also must be submitted to the
FDA prior to distribution. In addition, certain vaccines may not be distributed
for commercial use in the United States until written notification of official
release of the batch is received from the FDA. The FDA also has the authority to
request batch samples for all vaccines. The FDA may test a batch before
releasing it to the market, and any such testing could result in delays in the
distribution process. There can be no assurance that the vaccines utilizing
OPTIVAX or the Zynaxis technologies will pass the FDA tests and be released for
human use in a timely manner, or at all.
The FDA frequently revises the rules, regulations and guidelines applicable
to the approval requirements for vaccines and drug products. Vaxcel is
conducting research and development activities based on what it believes are
current FDA regulations. There can be no assurance that the FDA will not change
the approval requirements for products under development by Vaxcel during the
development period or that Vaxcel will be able to comply with any changes in the
approval requirements for such products.
Vaxcel is also subject to regulation under a variety of federal, state and
local statutes including, at the federal level, the Occupational Safety and
Health Act, the Environmental Protection Act, the Nuclear Energy and Radiation
Control Act, the Toxic Substance Control Act and the Resource Conservation and
Recovery Act. There can be no assurance that Vaxcel will be able to comply with
the applicable requirements of these statutes or that such compliance will be at
a reasonable cost.
The development of OPTIVAX and the Zynaxis technologies may have been
supported with federal funds. In addition, Vaxcel has entered into various
contracts with federal agencies by which such federal agencies provide testing
and other services. To the extent any of these activities are subject to the
Technology Transfer Act of 1986 or the Bayh-Dole Act, the federal government
retains a non-exclusive right to make, have made or sell any invention that
results from the activities of the federal government or the use of federal
funds. The scope of these rights and the circumstances under which they may be
exercised is not clear. If the federal government were to exercise any of such
rights in the future, the business and financial condition of Vaxcel could be
materially adversely affected. See "Business of Vaxcel -- Government
Regulation."
HEALTH CARE REFORM INITIATIVES
Health care reform remains an area of increasing national and international
attention. Several proposals to modify the current health care system in the
United States to improve access and control costs currently are being considered
by both federal and state governments. Any such reform measures could adversely
affect the amount of reimbursement available from governmental or private payers
or could affect the ability to set prices for newly approved products. Similar
proposals are being considered by governmental officials in other significant
pharmaceutical markets, including Europe. It is uncertain what proposals will be
adopted or what actions governmental or private payers for health care goods and
services may take in response to proposed or actual legislation in the United
States or other important markets. Any such health care reform proposals may
materially adversely affect the business of Vaxcel.
In addition to these general health care reform proposals, the Clinton
administration has proposed methods to increase the immunization rates of all
children in the United States. The administration has considered in the past
having the federal government become the sole purchaser of vaccines and
distribute them free of charge to all children, regardless of ability to pay.
Some proposals would allow individual states to purchase unlimited supplies of
vaccines at federally negotiated prices under the annual contracts of the
Centers for Disease Control and Prevention. Prices in these public sector
contracts typically are lower than the prices for vaccines that could be
obtained in the private sector. At present, about half of all major childhood
vaccines are purchased using state and federal funds and are distributed to
public health clinics throughout the country. Any dramatic shift in vaccine
purchases from the private sector to the public sector could have a material
adverse impact on the vaccine market in general and on the business of Vaxcel.
NO ASSURANCE OF ADEQUATE REIMBURSEMENT
The success of vaccines utilizing OPTIVAX or the Zynaxis technologies in
the United States and other significant markets will depend in part upon the
extent to which a consumer will be able to obtain
18
<PAGE> 25
reimbursement for the cost of such products from government health
administration authorities, private health insurers and other organizations.
Uncertainty exists as to the reimbursement status of any newly approved product.
Government and other third-party payors are increasingly attempting to contain
health care costs by refusing, in some cases, to provide any coverage for uses
of approved products for disease indications for which the FDA has not granted
marketing approval and by limiting both coverage and the level of reimbursement
for new technologies approved for marketing by the FDA. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
use of products containing OPTIVAX or the Zynaxis technologies, the market
acceptance of the technology would be adversely affected. Even if a product is
approved for marketing, there can be no assurance that patients will have
sufficient resources to pay for the therapy or that governmental or private
payers will provide adequate reimbursement for such product, if at all.
LACK OF MARKETING EXPERIENCE
At present, Vaxcel plans to commercialize vaccines containing OPTIVAX or
the Zynaxis technologies utilizing the sales and marketing capabilities of its
collaborators. However, there can be no assurance that any such arrangement with
collaborators will be available at all or on acceptable terms. If Vaxcel
develops a vaccine without a co-development partner, Vaxcel will need to build a
sales and marketing force or enter into an agreement with a third-party
distributor to successfully market the vaccine. There can be no assurance that
Vaxcel will be able to build a sales force or that its sales and marketing
efforts will be successful.
RECRUITING AND RETAINING OF KEY PERSONNEL
The success of Vaxcel will depend, in part, upon the ability of Vaxcel to
attract and retain highly qualified scientific and management personnel. Vaxcel
faces competition for personnel from other companies, research and academic
institutions, government entities and other organizations. There can be no
assurance that Vaxcel will be successful in hiring or retaining qualified
personnel. The inability of Vaxcel to hire or retain qualified employees could
delay the development and introduction of its products.
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Merger, there has been no public market for Vaxcel Common
Stock. Until December 24, 1996, Zynaxis was traded on the Nasdaq SmallCap
Market. Zynaxis is not now actively traded in an established market. After the
consummation of the Merger, there can be no assurance that an active public
market for Vaxcel Common Stock will develop or be sustained. The market prices
for securities of comparable companies have been highly volatile and the market
has experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. Announcements of
technological innovations or new commercial products by Vaxcel or its
competitors, developments concerning proprietary rights, including patents and
litigation matters, publicity regarding actual or potential results with respect
to products or compounds under development by Vaxcel or its collaborative
partners, regulatory developments in both the United States and foreign
countries, public concern as to the efficacy of new technologies, general market
conditions, as well as quarterly fluctuations in Vaxcel's revenues and financial
results and other factors, may have a significant impact on the market price of
the Vaxcel Common Stock. In particular, the realization of any of the risks
described in these "Risk Factors" could have a dramatic and adverse impact on
such market price.
UNCERTAINTY OF LISTING ON THE NASDAQ SMALLCAP MARKET
Vaxcel plans to apply for listing of Vaxcel Common Stock on the Nasdaq
SmallCap Market. Approval of Vaxcel's application is subject to the discretion
of the staff of The Nasdaq Stock Market, Inc. ("Nasdaq"). The staff's approval
will be based in large part upon Vaxcel's satisfaction of quantitative listing
criteria that include minimum requirements for public float, total assets and
the bid price of Vaxcel Common Stock. Currently, a company that wishes to be
considered for listing on the Nasdaq SmallCap Market must have a public float of
at least $1 million, at least $4 million in total assets, and a bid price of at
least $3.00 per share. There can be no assurance that Vaxcel and Vaxcel Common
Stock will satisfy such criteria or that, even if such criteria are satisfied,
the staff of Nasdaq will approve the inclusion of Vaxcel Common Stock in the
19
<PAGE> 26
Nasdaq SmallCap Market. If Vaxcel Common Stock is not included in the Nasdaq
SmallCap Market, Vaxcel Common Stock will likely be traded on the
over-the-counter market and holders of Vaxcel Common Stock may have less
liquidity and Vaxcel may be less visible in the public markets than would be the
case if Vaxcel Common Stock were included in the Nasdaq SmallCap Market.
In addition, on November 6, 1996, the Board of Directors of Nasdaq proposed
changes to the quantitative and qualitative criteria for issuers listing on
Nasdaq that would raise the quantitative requirements for listing. The proposed
changes in quantitative standards include: (i) an increase in minimum public
float from $1 million to $5 million, (ii) an increase in minimum assets from $4
million in total assets to $4 million in net tangible assets, and (iii) an
increase in minimum bid price from $3.00 per share to $4.00 per share.
Management of Vaxcel does not expect that Vaxcel and Vaxcel Common Stock would
meet these more stringent listing criteria, if they are adopted prior to the
Closing of the Merger, without significant additional funding from CytRx and
without other changes in the terms of the proposed transactions. After the
passage of the comment period, the Board of Directors of Nasdaq will consider
any comments, make changes to the proposal if warranted, and file the
appropriate rule changes with the SEC for final approval. Vaxcel cannot predict
if or when the proposed changes in the listing criteria will be implemented or
what the new listing criteria, if any, will be. There can be no assurance that
the listing criteria will not be implemented prior to the Closing of the Merger,
preventing the inclusion of Vaxcel Common Stock on the Nasdaq SmallCap Market,
or that the staff of Nasdaq will not exercise its discretion to apply the
proposed listing criteria prior to their adoption. If either occurs, there can
be no assurance that CytRx and Vaxcel will take measures necessary to cause
Vaxcel to satisfy the more stringent listing criteria.
ABSENCE OF DIVIDENDS
Neither Vaxcel nor Zynaxis has paid any cash dividends in the past on its
common stock and Vaxcel does not anticipate paying any such cash dividends in
the foreseeable future. Earnings, if any, will be retained to finance future
growth.
ANTI-TAKEOVER PROTECTIONS
Following the consummation of the Merger, CytRx will own approximately
87.5% of the issued and outstanding shares of Vaxcel Common Stock, assuming that
no holder of Zynaxis Capital Stock exercises its appraisal or objection rights
and before giving effect to the exercise of any Vaxcel Warrants or the CytRx
Warrant. Accordingly, Vaxcel will not be able to engage in any strategic
transactions without the approval of CytRx. Even if CytRx's ownership interest
were substantially reduced below such level, Vaxcel's Certificate of
Incorporation contains certain provisions that could make it more difficult for
a third party to acquire, or discourage a third party from attempting to
acquire, control of Vaxcel. Such provisions could limit the price that certain
investors are willing to pay in the future for shares of Vaxcel Common Stock.
Certain of such provisions allow Vaxcel to issue preferred stock with rights
senior to those of Vaxcel Common Stock and impose various procedural and other
requirements which could make it more difficult for shareholders to effect
certain corporate actions. See "Description of Vaxcel Capital Stock" and "Effect
of the Merger on the Rights of Shareholders."
SPECIAL MEETING OF ZYNAXIS SHAREHOLDERS
DATE, PLACE, TIME, AND PURPOSE
This Proxy Statement is being furnished to the holders of Zynaxis Capital
Stock in connection with the solicitation by the Zynaxis Board of proxies for
use at the Special Meeting. At the Special Meeting, holders of Zynaxis Capital
Stock will be asked to consider and act upon a proposal to approve the
Agreement, the Asset Sales, and the Charter Amendment. The Special Meeting will
be held at 371 Phoenixville Pike, Malvern, Pennsylvania 19355, at .M.,
local time, on , 1997. See "Description of Transaction."
20
<PAGE> 27
RECORD DATES, VOTING RIGHTS, REQUIRED VOTES, AND REVOCABILITY OF PROXIES
The close of business on February , 1997 has been fixed as the Record
Date for determining holders of outstanding shares of Zynaxis Capital Stock
entitled to notice of and to vote at the Special Meeting. Only holders of
Zynaxis Capital Stock of record on the books of Zynaxis at the close of business
on the Record Date are entitled to notice of and to vote at the Special Meeting.
As of the Record Date, there were shares of Zynaxis Common Stock issued
and outstanding and held by holders of record and shares of
Zynaxis Preferred Stock issued and outstanding and held by holders of
record.
Holders of Zynaxis Capital Stock are entitled to vote on each matter
considered and voted upon at the Special Meeting. Holders of Zynaxis Common
Stock are entitled to one vote for each share of Zynaxis Common Stock held. When
voting together as a class with holders of Zynaxis Common Stock, holders of
Zynaxis Preferred Stock are entitled to vote on an as converted basis and are,
therefore, entitled to two votes for each share of Zynaxis Preferred Stock held.
When voting separately as a class, holders of Zynaxis Preferred Stock are
entitled to vote one vote for each share of Zynaxis Preferred Stock held.
Shareholders who execute proxies retain the right to revoke them at any time
prior to being voted at the Special Meeting. To hold a vote on any proposal, a
quorum must be assembled. In determining whether a quorum exists at the Special
Meeting for purposes of all matters to be voted on, all votes "for" or
"against," as well as all abstentions, with respect to the proposal receiving
the most such votes, will be counted. The vote required for approval of each of
the Agreement and the Merger contemplated thereby, the Asset Sales, and the
Charter Amendment, is: (i) a majority of the votes cast, whether in person or by
proxy, by all holders of Zynaxis Preferred Stock (voting on an as converted
basis) and by all holders of Zynaxis Common Stock, entitled to vote and voting
together as a class; and (ii) a majority of the votes cast, whether in person or
by proxy, by all holders of Zynaxis Preferred Stock, entitled to vote and voting
as a separate class.
At the Special Meeting, the Charter Amendment will be the first matter put
before the shareholders for consideration and for a vote. If the Charter
Amendment is approved by the shareholders, the Special Meeting will be adjourned
pending the filing of the Articles of Amendment, reflecting the Charter
Amendment, with the Department of State of the Commonwealth of Pennsylvania.
After the filing of the Articles of Amendment and the effectiveness of the
Charter Amendment, the Special Meeting will be reconvened to consider and vote
upon the Agreement and the Merger contemplated thereby, the Asset Sales, and
such other business as may properly come before the Special Meeting. If the
shareholders do not approve the Charter Amendment, the Special Meeting will not
be adjourned and the shareholders will be asked to consider and vote upon the
Agreement and the Merger contemplated thereby, the Asset Sales, and such other
business as may properly come before the Special Meeting.
Shares of Zynaxis Capital Stock represented by properly executed proxies,
if such proxies are received in time and not revoked, will be voted in
accordance with the instructions indicated on the proxies. IF NO INSTRUCTIONS
ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF EACH OF THE AGREEMENT
AND THE MERGER CONTEMPLATED THEREBY, THE ASSET SALES, AND THE CHARTER AMENDMENT
AND, IN THE DISCRETION OF THE PROXY HOLDER, AS TO ANY OTHER MATTER WHICH MAY
COME PROPERLY BEFORE THE SPECIAL MEETING. IF NECESSARY, THE PROXY HOLDER MAY
VOTE IN FAVOR OF A PROPOSAL TO ADJOURN THE SPECIAL MEETING IN ORDER TO PERMIT
FURTHER SOLICITATION OF PROXIES IN THE EVENT THERE ARE NOT SUFFICIENT VOTES TO
APPROVE THE FOREGOING PROPOSALS AT THE TIME OF THE SPECIAL MEETING.
A Zynaxis shareholder who has given a proxy may revoke it at any time prior
to its exercise at the Special Meeting by (i) giving written notice of
revocation to the Secretary of Zynaxis, (ii) properly submitting to Zynaxis a
duly executed proxy bearing a later date or (iii) attending the Special Meeting
and voting in person. All written notices of revocation and other communications
with respect to revocation of proxies should be addressed as follows: Zynaxis,
Inc., 371 Phoenixville Pike, Malvern, Pennsylvania 19355; Attention: Michael A.
Christie, Secretary.
The directors and executive officers of Zynaxis and their affiliates
beneficially owned, as of the Zynaxis Record Date, shares (or
approximately % of the issued and outstanding shares) of Zynaxis Capital
Stock of which shares were shares of Zynaxis Preferred Stock (or
approximately % of the issued and outstanding shares of Zynaxis Preferred
Stock). EACH MEMBER OF THE ZYNAXIS BOARD INTENDS TO
21
<PAGE> 28
VOTE THOSE SHARES OF ZYNAXIS CAPITAL STOCK OVER WHICH SUCH MEMBER HAS VOTING
AUTHORITY (OTHER THAN IN A FIDUCIARY CAPACITY) IN FAVOR OF THE AGREEMENT AND THE
MERGER CONTEMPLATED THEREBY, AND THE ASSET SALES AND THE CHARTER AMENDMENT,
RESPECTIVELY.
SOLICITATION OF PROXIES
Proxies may be solicited by the directors, officers, and employees of
Zynaxis by mail, in person, or by telephone or telegraph. Such persons will
receive no additional compensation for such services. Zynaxis may make
arrangements with brokerage firms and other custodians, nominees, and
fiduciaries, if any, for the forwarding of solicitation materials to the
beneficial owners of Zynaxis Capital Stock held of record by such persons. Any
such brokers, custodians, nominees, and fiduciaries will be reimbursed for the
reasonable out-of-pocket expenses incurred by them for such services. All
expenses associated with the solicitation of proxies, other expenses associated
with the Special Meeting, and expenses related to the printing and mailing of
this Proxy Statement, will be shared by Vaxcel and Zynaxis as provided in the
Agreement. See "Description of the Transaction -- Expenses and Fees."
RECOMMENDATION
THE ZYNAXIS BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND THE MERGER
CONTEMPLATED THEREBY, THE ASSET SALES, AND THE CHARTER AMENDMENT, BELIEVES THAT
THE PROPOSAL TO APPROVE THE AGREEMENT AND THE MERGER CONTEMPLATED THEREBY IS IN
THE BEST INTERESTS OF ZYNAXIS AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS
THAT THE ZYNAXIS SHAREHOLDERS VOTE FOR APPROVAL OF EACH OF THE PROPOSALS TO
APPROVE THE AGREEMENT AND THE MERGER CONTEMPLATED THEREBY, THE ASSET SALES, AND
THE CHARTER AMENDMENT.
22
<PAGE> 29
DESCRIPTION OF TRANSACTION
The following information describes certain aspects of the Merger. This
description does not purport to be complete and is qualified in its entirety by
reference to the Appendices hereto, including the Agreement, which is attached
as Appendix A to this Proxy Statement and incorporated herein by reference. All
shareholders are urged to read the Appendices in their entirety.
GENERAL
Pursuant to the Agreement, at the Effective Time, Vaxcel Merger Sub will
merge with and into Zynaxis, with the effect that Zynaxis will be the surviving
corporation resulting from the Merger, and will continue to conduct its business
and operations as a wholly owned subsidiary of Vaxcel. As a result of the
Merger, the former shareholders of Zynaxis will own approximately 12.5% of the
outstanding shares of Vaxcel Common Stock, and CytRx will own approximately
87.5% of such shares (assuming no exercise of options or warrants with respect
to Vaxcel).
At the Effective Time, (i) each share of Zynaxis Common Stock (excluding
shares held by any Zynaxis company or any Vaxcel company, and excluding shares
held by shareholders who perfect their statutory dissenters' rights under
Subchapter 15D of the PBCL or statutory objection rights under Section 2546 of
the PBCL) issued and outstanding immediately prior to the Effective Time will be
exchanged for the right to receive a number of shares of Vaxcel Common Stock
equal to the Exchange Ratio, (as defined in the Agreement), estimated to be
approximately .0948, with cash being paid in lieu of issuing fractional shares,
and (ii) each share of Zynaxis Preferred Stock (excluding shares held by any
Zynaxis company or any Vaxcel company, and excluding shares held by shareholders
who perfect their statutory dissenters' rights under Subchapter 15D of the PBCL
or statutory objection rights under Section 2546 of the PBCL) issued and
outstanding immediately prior to the Effective Time will be exchanged for the
right to receive a number of shares of Vaxcel Common Stock equal to two times
the Exchange Ratio, with cash being paid in lieu of issuing fractional shares.
In addition, at the Effective Time, upon consummation of the Merger, CytRx
will contribute to Vaxcel the Senior Credit Facility and the Cash Payment in an
amount equal to the difference, as of the Closing, between $4,000,000 and the
sum of: (i) the aggregate principal and interest balance outstanding under the
Senior Credit Facility; and (ii) (a) the Per Share Price, as defined in the
Agreement and described below, multiplied by (b) the number of votes entitled to
be cast by the holders of Zynaxis Capital Stock, if any, who elect to exercise
their statutory dissenters' rights under Subchapter 15D of the PBCL or their
objection rights under Section 2546 of the PBCL in excess of three percent (3%)
of the votes that could be cast by all holders of Zynaxis Capital Stock voting
together as a single class. In exchange for the contribution of the Senior
Credit Facility and the Cash Payment, Vaxcel will deliver to CytRx: (i) the
CytRx Warrant; (ii) 1,374,996 shares of Vaxcel Common Stock; and (iii) a number
of shares of Vaxcel Common Stock equal to the product of the Exchange Ratio, as
defined in the Agreement and described below, times the number of votes entitled
to be cast by the shareholders of Zynaxis Capital Stock, if any, who elect to
exercise their statutory dissenters' rights under Subchapter 15D of the PBCL or
their statutory objection rights under Section 2546 of the PBCL.
No fractional shares of Vaxcel Common Stock will be issued. Rather, cash
(without interest) will be paid in lieu of any fractional share interest to
which any Zynaxis shareholder would be entitled upon consummation of the Merger,
in an amount equal to such fractional part of a share of Vaxcel Common Stock
divided by the Exchange Ratio and multiplied by the Per Share Price.
As of the Record Date, Zynaxis had shares of Zynaxis Common Stock
issued and outstanding and shares of Zynaxis Preferred Stock issued and
outstanding. It is anticipated that upon consummation of the Merger, Vaxcel
would issue approximately 2,750,000 shares of Vaxcel Common Stock, excluding
shares subject to assumed options or warrants. Accordingly, Vaxcel would then
have issued and outstanding approximately 11,000,000 shares of Vaxcel Common
Stock based on the number of shares of Vaxcel Common Stock issued and
outstanding on December 31, 1996.
23
<PAGE> 30
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger. Zynaxis was formed in 1988 for the purpose of
the development and commercialization of cellular diagnostic products for
disease monitoring and new delivery systems for therapeutic drugs. Since its
inception, Zynaxis has sustained continuing operating losses as it devoted
substantially all of its resources to the research and development of its
products. Because Zynaxis has not received significant revenues from the sale of
any of its products, Zynaxis is dependent on financial investors and strategic
corporate partnerships and collaborations for cash to fund its operations.
Zynaxis received its first funding from venture capital investors. Zynaxis
completed an initial public offering of Zynaxis Common Stock in 1992, but was
unable to sell additional securities at acceptable prices in 1993 or 1994. As a
result, Zynaxis was forced to discontinue its cellular diagnostic products
business in January 1995, and limit its focus to its therapeutic delivery
systems. Zynaxis' merger with Secretech in July 1995 provided Zynaxis with
additional capital which was contributed by the then existing stockholders of
Zynaxis and Secretech. Although Secretech had also been unprofitable since
inception, Zynaxis believed that acquiring the Secretech oral vaccine delivery
technology would enhance the ability of Zynaxis to attract capital in the
short-term and collaborative partners in the long-term.
During the latter part of 1995, Zynaxis established a strategic goal of
raising cash through corporate partnerships and collaborations, and the sale of
assets unrelated to its core drug delivery technologies. Although Zynaxis
devoted its best efforts toward achieving this goal, the company was unable to
raise the required capital. In September 1995, Zynaxis entered into a
development and licensing agreement with ALK and, as of the end of 1996, ALK has
paid Zynaxis $1,000,000 under the agreement. ALK, however, has no obligation to
make any additional payments until specified regulatory approvals have been
obtained, and Zynaxis has not been able to enter into any other partnerships or
collaborations. The Zynaxis Board has been unable to obtain any assurance that
Zynaxis will be able to enter into any of such strategic alliances in the
future.
In October 1995, Zynaxis sold the assets related to its discontinued
diagnostics business and, in July 1996, Zynaxis signed a letter of intent to
sell the Cauldron division assets to Seloc AG ("Seloc"), a subsidiary of Schwarz
Pharma. Seloc made nonrefundable, up-front payments to Zynaxis upon execution of
the letter of intent. On August 23, 1996, however, Seloc terminated its
agreement in principle to purchase the Cauldron division. Although Zynaxis has
renewed discussions with purchasers previously interested in the Cauldron
division and initiated discussions with others, Zynaxis has not been able to
enter into any agreement to sell the division and the Zynaxis Board has been
unable to obtain any assurance that Zynaxis will be able to enter into any such
agreement in the future.
Zynaxis' deteriorating cash position became critical during the latter part
of 1996. On August 21, 1996, Southern Research Technologies, Inc. ("SRT"), the
company responsible for administering and commercializing SRI's intellectual
property, notified Zynaxis that Zynaxis had failed to pay approximately $5,000
in patent expenses and $70,000 in minimum license fees due under the PLG
Agreement. On August 27, 1996, SRT declared Zynaxis in default under the PLG
Agreement and that the agreement would be terminated unless Zynaxis made the
delinquent payments before the end of the 90-day cure period stated in the
agreement. Also, on August 27, 1996, Nasdaq notified Zynaxis that the Zynaxis
Common Stock failed to meet the criteria for continued listing on the Nasdaq
SmallCap Market and that, if Zynaxis was unable to demonstrate to the
satisfaction of Nasdaq before November 27, 1996 that Zynaxis Common Stock would
maintain a minimum bid price of $1.00 or, as an alternative, that Zynaxis would
maintain capital and surplus of $2,000,000 and a market value of public float of
$1,000,000, then Nasdaq would delist the Zynaxis Common Stock. Finally, on
October 2, 1996, Fox Realty Co. notified Zynaxis that Zynaxis had failed under
the lease agreement for the Zynaxis Malvern facility to pay approximately
$93,988 due for the months of September and October 1996, and threatened to
declare the lease in default and accelerate the remaining payments if Zynaxis
did not make the delinquent payments before October 15, 1996.
In response to the problems caused by Zynaxis' deteriorating cash position,
the Zynaxis Board implemented a three-part plan. First, Zynaxis reduced its
workforce by 40%, thereby reducing its operations to its Cauldron division,
research and development which was funded through Small Business Innovative
Research Grants ("SBIRs") and other essential corporate functions. Second,
Zynaxis entered into an
24
<PAGE> 31
exclusive license and purchase option agreement with Phanos for Zynaxis'
Zyn-Linker(R) technology. Zynaxis had previously granted Phanos a license for
certain diagnostic applications of its Zyn-Linker(R) technology. Upon execution
of this agreement, Zynaxis received an initial deposit of $50,000, of which
$5,000 is non-refundable. In October 1996, Zynaxis received an additional
refundable deposit of $150,000. If Phanos elects to exercise its purchase
option, it will be required to pay an additional $525,000 for the Zyn-Linker(R)
technology. If, however, Phanos elects not to exercise its purchase option,
Zynaxis must repay Phanos $195,000. The repayment obligation is secured by the
patents covering the Zyn-Linker(R) technology. The Zynaxis Board has been unable
to obtain any assurance that Phanos will exercise the purchase option for the
Zyn-Linker(R) technology. Third, Zynaxis began investigating other financing
arrangements, including a significant private placement of its equity
securities, a business combination through a merger, acquisition or joint
venture and technology sales and acquisitions. Because of its immediate need for
cash, Zynaxis focused specifically on merger opportunities that offered
short-term financing (a bridge loan) sufficient to allow Zynaxis to continue
operating as a going concern until a merger could be consummated. Martyn D.
Greenacre, the President and Chief Executive Officer of Zynaxis, contacted a
number of potential merger partners and investigated opportunities for
short-term financing using the assets of the Cauldron division as collateral.
Representatives of Zynaxis and Vaxcel met initially to discuss
opportunities for a strategic alliance. Although representatives of the
companies had engaged in general technical discussions of their respective
technologies in previous years, Mr. Greenacre and Paul J. Wilson, the President
and Chief Executive Officer of Vaxcel, met in Malvern, Pennsylvania on May 21,
1996, to review Zynaxis' drug and vaccine delivery technologies for the purpose
of exploring a strategic alliance between the two companies. On June 10, 1996,
the executives held a similar meeting in Norcross, Georgia during which they
reviewed the Vaxcel vaccine technologies.
Subsequently, representatives of Zynaxis and CytRx met to discuss
opportunities for a merger of Zynaxis with a subsidiary of CytRx. On July 19,
1996, Jack J. Luchese, the Chairman of the Board, President and Chief Executive
Officer of CytRx, Frank Casieri, President and Chief Executive Officer of
Proceutics, Inc. ("Proceutics"), and Howard Wachtler, an advisor to CytRx, met
with Mr. Greenacre and Frank Conway, the Zynaxis Controller, to discuss such a
merger. Proceutics is a wholly-owned subsidiary of CytRx that provides contract
research pre-clinical development services to the pharmaceutical industry.
Messrs. Luchese, Wachtler, Greenacre and Conway met again on August 8, 1996, to
review additional information related to Zynaxis for the purpose of allowing
CytRx to formulate a formal merger proposal. On August 12, 1996, Messrs. Luchese
and Wachtler presented a proposal for the merger of Zynaxis and Proceutics to
Mr. Greenacre, Stephen R. Reidy, a director of Zynaxis and general partner of
Euclid Associates III, L.P., the general partner of a substantial investor in
Zynaxis, and John F. Chappell, a director of Zynaxis and President of Plexus
Ventures, Inc., which is an investor in Zynaxis.
At the same time that representatives of Zynaxis were meeting with
representatives of CytRx and its subsidiaries, Mr. Greenacre continued to pursue
opportunities presented by other merger partners, and potential purchasers of
the Zynaxis technologies. The results of his efforts were reported to and
considered by the Zynaxis Board. On August 21, 1996, Messrs. Luchese, Wachtler
and Greenacre held a telephone conference during which Mr. Greenacre expressed
the opinion of the Zynaxis Board members that the August 12 offer be deferred
pending completion of certain preconditions to the offer, including the sale of
Cauldron to Seloc.
Messrs. Luchese, Wachtler, Greenacre and Conway met on September 4, 1996 to
discuss a revised proposal which recognized the withdrawal of Seloc from the
purchase of the Cauldron division and the need of Zynaxis for short-term
financing. The proposal set forth alternate deal structures for a merger of
Zynaxis with Proceutics and a merger of Zynaxis with Vaxcel. The Zynaxis Board
met on September 10, 1996 to review the revised proposal and requested
additional information. The Zynaxis Board also considered a proposal by another
potential merger partner. The next day, September 11, 1996, Messrs. Lyle A.
Hohnke, Dennis P. Schafer, and Messrs. Chappell and Reidy, each a director of
Zynaxis, and Messrs. Greenacre, Luchese and Wachtler held a telephone conference
to discuss the revised proposal and to review additional information about the
Vaxcel technology. The Zynaxis Board expressed a number of concerns about the
proposal to
25
<PAGE> 32
Messrs. Luchese and Wachtler. On September 12, 1996, the Zynaxis Board met again
by teleconference to discuss the revised proposal and voted to reject the
proposal.
Messrs. Luchese and Wachtler then made a new proposal to Messrs. Greenacre
and Conway for the merger of Zynaxis with Vaxcel on economic terms and
conditions substantially the same as those set forth in the Agreement. Mr.
Greenacre agreed to discuss the proposal with the Zynaxis Board. On September
13, 1996, the Zynaxis Board met by teleconference to consider the new proposal
and authorized Mr. Greenacre to proceed to negotiate detailed terms for a merger
with Vaxcel.
During the second half of September and early October, representatives of
CytRx, Vaxcel, Zynaxis and their respective legal and financial counsel met both
face-to-face and by teleconference to negotiate the terms of the merger
agreement and to carry out their respective "due diligence" reviews. On October
14, 1996, the Zynaxis Board met by teleconference to review the draft terms of
the Agreement. While the terms of the merger remained subject to modifications
for legal reasons, the Zynaxis Board reaffirmed its support of the proposed
merger. Following further discussions between both parties to the merger, final
documents were presented independently to the Boards of Zynaxis, Vaxcel and
CytRx on November 7, 1996. Each of the Boards unanimously recommended approval
of the Agreement and the transactions contemplated thereby subject to
satisfactory completion of certain events, including, but not limited to the
agreement of all holders of Zynaxis Preferred Stock to convert their Zynaxis
Preferred Stock to Vaxcel Common Stock in the Merger, the agreement among
certain shareholders to vote in favor of the Merger, and the agreement of
Zynaxis' landlord to amend its lease. CytRx, Vaxcel, Vaxcel Merger Sub and
Zynaxis entered into the Agreement on the morning of December 6, 1996, and
announced the Agreement that day through a press release.
Knowing that it would be able to fund its operations with the cash
available under the Senior Credit Facility, Zynaxis made the delinquent payments
due under the PLG Agreement and the Malvern lease. On a number of occasions in
September and October 1996, Zynaxis contacted personnel at Nasdaq in order to
attempt to persuade Nasdaq not to delist Zynaxis Common Stock pending the
closing of the Merger because it was anticipated that as a result of the Merger
shareholders of Zynaxis would receive stock satisfying Nasdaq's continued
listing criteria. On October 11, 1996, Zynaxis submitted a written summary of
the proposed transaction and a written request not to delist Zynaxis Common
Stock prior to consummation of the Merger. Zynaxis was informed that in order to
consider the continued listing of Zynaxis Common Stock, Nasdaq would need to
receive and review a more detailed written proposal from Zynaxis regarding
Zynaxis' plans for bringing its common stock into compliance with the listing
criteria of the Nasdaq SmallCap Market. On November 27, 1996, Zynaxis sent
Nasdaq a package notifying Nasdaq of the expected execution of the Agreement,
explaining the details of the Merger, and repeating its request that the listing
of Zynaxis Common Stock on the Nasdaq SmallCap Market be continued until
consummation of the Merger. By letter dated December 14, 1996, Nasdaq informed
Zynaxis that, notwithstanding the Merger, Zynaxis would not be afforded an
extension of time in which to achieve compliance with the continued listing
requirements of the Nasdaq SmallCap Market and that the securities of Zynaxis
would be delisted from the Nasdaq SmallCap Market effective with the opening of
business on Tuesday, December 24, 1996.
Zynaxis' Reasons for the Merger. The Zynaxis Board believes that, if the
Merger is not consummated, then it is highly probable that Zynaxis will cease to
exist as a going concern. The Zynaxis Board believes that, if the Merger is not
consummated, Zynaxis may not have cash sufficient to fund its ongoing operations
or to repay the funds that will have been borrowed under the Senior Credit
Facility. If Zynaxis defaults under the Senior Credit Facility, then CytRx may
exercise its rights as a secured creditor under the Uniform Commercial Code (as
adopted in the State of Georgia) with respect to certain assets of Zynaxis,
including, but not limited to, foreclosing on Zynaxis' rights in its vaccine
delivery technologies. In addition, although Zynaxis contacted a number of
interested merger partners and began negotiations with several of them, Vaxcel
was the only one willing to enter into a transaction on terms acceptable to the
Zynaxis Board. The terms of the Agreement and the other Transaction Documents
provide Zynaxis with short-term financing that allows Zynaxis to continue its
operations until the Merger can be consummated, and provides the Zynaxis
shareholders with the opportunity to participate in the equity growth that may
result from the development and commercialization of the Zynaxis vaccine
delivery technologies. The Zynaxis Board believes that Vaxcel's and Zynaxis'
vaccine technologies are complementary and may afford the combined company
greater access
26
<PAGE> 33
to corporate development partnerships generating research and development
funding as well as greater access to capital markets than Zynaxis would have had
by remaining independent.
In reaching its conclusion, the Zynaxis Board also considered the
disadvantages of the Merger, including the following: (i) the highly dilutive
nature of the proposed Merger; (ii) the loss of control by Zynaxis' shareholders
and management; and (iii) the concentration of risk in the area of vaccine
technology as opposed to the diversification of risk attributable to having both
drug and vaccine development programs. The Zynaxis Board believes that these
disadvantages were outweighed by the advantages of the transaction, and has
determined that the Merger and Asset Sales are in the best interests of Zynaxis
and its shareholders. Accordingly, the Zynaxis Board unanimously approved and
adopted the Agreement and the Merger contemplated thereby, the Asset Sales, and
the Charter Amendment.
THE ZYNAXIS BOARD RECOMMENDS THAT THE ZYNAXIS SHAREHOLDERS VOTE IN FAVOR OF
THE CHARTER AMENDMENT, THE AGREEMENT AND THE MERGER CONTEMPLATED THEREBY, AND
THE ASSET SALES.
In reaching its conclusions, the Zynaxis Board considered a number of
factors, including, among other things, the terms and conditions of the
Agreement, information with respect to the financial condition, business
operations and prospects of both Zynaxis and Vaxcel on both a historical and
prospective basis, including information reflecting the two companies on a pro
forma basis, and the views and opinions of its management.
Vaxcel's Reasons for the Merger. Vaxcel has rights to injectable vaccine
delivery technology, but it does not currently have rights to oral or mucosal
delivery technology or a significant public holding of its stock that would
provide a liquid market for those shares. The Vaxcel Board of Directors believes
that the Zynaxis oral technologies may have commercial application for many
marketed vaccines currently administered by parenteral injection, as well as
certain new vaccines under development. The Zynaxis oral technologies can be
administered alone or in combination with other vaccine carriers, delivery
systems, and adjuvants; and oral immunization is an attractive alternative to
injectable administration of vaccines, particularly when mucosal immunity is
important. Accordingly, the Merger is consistent with Vaxcel's goal of building
its competitive strength through the expansion of its vaccine delivery portfolio
and enhancing its shareholder value by increasing liquidity for the Vaxcel
Common Stock. The Board of Directors of Vaxcel also considered other advantages
of the Merger, such as the fact that Vaxcel will acquire a license agreement
with ALK.
The Vaxcel Board also identified and considered certain potential
disadvantages related to the Merger with Zynaxis. The disadvantages included,
among others, (i) the uncertainty regarding divestiture of the Cauldron
division; (ii) the cost of satisfying the current and expected liabilities of
Zynaxis; and (iii) the absence of cash that Vaxcel could have obtained through
an initial public offering.
THE MERGER
Subject to the terms and conditions of the Agreement, at the Effective
Time, Vaxcel Merger Sub will be merged with and into Zynaxis in accordance with
the provisions of Section 1921 et seq. of the PBCL and Sections 14-2-1101 and
14-2-1107 of the Georgia Business Corporation Code ("GBCC") and with the effects
provided in Section 1929 of the PBCL and Section 14-2-1106 of the GBCC. Zynaxis
will be the surviving corporation resulting from the Merger and will become a
wholly owned subsidiary of Vaxcel and will continue to be governed by the laws
of the Commonwealth of Pennsylvania.
EXCHANGE RATIO
Assuming no changes in the capitalization of either Vaxcel or Zynaxis, the
Exchange Ratio is estimated to be approximately .0948. The Exchange Ratio is
calculated based upon approximately 11,000,000 total shares outstanding of
Vaxcel Common Stock subsequent to the Closing, with approximately 9,625,000
being held by CytRx and approximately 1,375,000 being held by the former Zynaxis
shareholders.
Generally, the Exchange Ratio is defined as: (i) 1,375,000, divided by (ii)
the number of shares of Zynaxis Common Stock outstanding immediately prior to
the Effective Time, giving effect to all issuances of common stock to which
Zynaxis is committed as of the time of the Closing (other than issuances to
occur upon the exercise of outstanding stock options and warrants) including but
not limited to: (a) the number of
27
<PAGE> 34
shares of Zynaxis Capital Stock issuable upon conversion of all outstanding
shares of Zynaxis Preferred Stock, and (b) the number of shares of Zynaxis
Capital Stock issuable upon conversion of the principal and accrued interest of
the Zynaxis Notes at the Per Share Price.
Specifically, under the Agreement, the Exchange Ratio is defined as: (i)
the number of shares of Vaxcel Common Stock held by CytRx immediately prior to
the Closing, giving effect to the issuance of shares to CytRx in connection with
the Closing pursuant to the Agreement, divided by (ii) 7 and further divided by
(iii) the sum of (a) the number of shares of Zynaxis Common Stock outstanding
immediately prior to the Closing, giving effect to all issuances of common stock
to which Zynaxis is committed as of the time of the Closing other than issuances
to occur upon the exercise of outstanding stock options and warrants including
but not limited to: (1) the delivery of 34,548 shares of Zynaxis Common Stock to
certain officers and employees of Plexus Ventures, Inc. pursuant to the
settlement agreement set forth in the letter from Zynaxis to Plexus Ventures,
Inc. dated October 10, 1996, and (2) the issuance of approximately 22,000
additional shares of Zynaxis Common Stock to the Zynaxis 401(k) plan for the
fourth quarter of 1996; (b) two times the number of shares of Zynaxis Preferred
Stock outstanding as of the Closing; and (c) 1,320,706. The number 1,320,706
will be adjusted for splits and reverse splits of Vaxcel Common Stock.
PER SHARE PRICE
Assuming no changes in the capitalization of either Vaxcel or Zynaxis, the
Per Share Price is estimated to be approximately $.2758. The Per Share Price
represents the value per share assigned to Zynaxis Capital Stock in the Merger
transaction. Both CytRx and the Zynaxis shareholders will receive approximately
1,375,000 shares of Vaxcel Common Stock upon consummation of the Merger. As the
CytRx contribution will principally be in the form of cash, the transaction
price per share (of Vaxcel Common Stock) is easily determined as $4,000,000
divided by 1,375,000, or $2.909. To arrive at the Per Share Price of Zynaxis
Common Stock, the Vaxcel per share price is multiplied by the Exchange Ratio
(estimated to be approximately .0948), yielding an estimated Per Share Price of
.2758.
Specifically, in the Agreement, the Per Share Price is defined as: (i)
$4,000,000, divided by (ii) the sum of (a) the number of shares of Zynaxis
Common Stock outstanding immediately prior to the Closing, giving effect to all
issuances of Zynaxis Common Stock to which Zynaxis is committed as of the time
of the Closing other than issuances to occur upon the exercise of outstanding
stock options and warrants including but not limited to: (1) the delivery of
34,548 shares of Zynaxis Common Stock to certain officers and employees of
Plexus Ventures, Inc. pursuant to the settlement agreement set forth in the
letter from Zynaxis to Plexus Ventures, Inc. dated October 10, 1996, and (2) the
issuance of approximately 22,000 additional shares of Zynaxis Common Stock to
the Zynaxis 401(k) plan for the fourth quarter of 1996; (b) two times the number
of shares of Zynaxis Preferred Stock outstanding immediately prior to the
Closing; and (c) 1,320,706. The number 1,320,706 will be adjusted for splits and
reverse splits of Vaxcel Common Stock.
THE TRANSACTION DOCUMENTS
Simultaneously with the execution of the Agreement: (i) Zynaxis and CytRx
entered into the Senior Credit Facility; (ii) Zynaxis and CytRx entered into the
Liquidation Agreement, which provides for CytRx to serve as Zynaxis' agent in
the Asset Sales; (iii) Zynaxis, CytRx, Vaxcel, and the holders of all of the
outstanding shares of Zynaxis Preferred Stock, who also hold certain Zynaxis
Warrants, entered into the Preferred Stock and Warrant Agreement, conditioned
upon the consummation of the Merger, making certain agreements with respect to
their rights and converting the Zynaxis Warrants, upon consummation of the
Merger, into Vaxcel Warrants; (iv) Zynaxis, CytRx and Vaxcel entered into the
Note Exchange Agreement with Euclid and S.R. One, Ltd., who hold Zynaxis Notes,
conditioned upon the consummation of the Merger, converting the Zynaxis Notes,
upon consummation of the Merger, into the right to receive shares of Vaxcel
Common Stock; (v) CytRx and certain holders of Zynaxis Capital Stock entered
into the Shareholder Voting Agreements granting CytRx an irrevocable proxy to
vote the shares held by such shareholders in favor of the Agreement and the
Merger contemplated thereby, the Asset Sales, and the Charter Amendment, and
(vi) Vaxcel and Zynaxis entered into the Technology Development Agreement
concerning the development, by Vaxcel, of certain technologies owned by or
licensed to Zynaxis. Each of the Senior Credit Facility, the Liquidation
Agreement, the Preferred Stock and Warrant Agreement, the Note Exchange
Agreement, the
28
<PAGE> 35
Shareholder Voting Agreements, and the Technology Development Agreement are
incorporated into the Agreement as exhibits to the Agreement.
The Senior Credit Facility. Simultaneously with the execution of the
Agreement, in order to provide necessary funding for the operations of Zynaxis
pending the Merger, Zynaxis and CytRx entered into a Secured Loan Agreement,
pursuant to which CytRx agreed to lend up to $2,000,000 (the "Loan") to Zynaxis.
Repayment of the Loan is evidenced by the Senior Secured Note, and is subject to
a Security Agreement which grants to CytRx a security interest in all of the
assets of Zynaxis and its subsidiaries. In addition, to secure the Senior
Secured Note, Zynaxis Vaccine Technologies, Inc. ("ZVT"), a Pennsylvania
corporation and a wholly owned subsidiary of Zynaxis, entered into a Collateral
Assignment of License Agreement, a Guaranty and a Security Agreement ("ZVT
Security Agreement"). The Collateral Assignment of License Agreement grants a
security interest to CytRx in all of ZVT's right, title, and interest in, to and
under a certain license agreement, as amended, dated July 1, 1987, by and among
ZVT, SRI and UAB, licensing certain technology. The ZVT Security Agreement
grants CytRx a security interest in all of the assets of ZVT.
The Liquidation Agreement. The Zynaxis Board has appointed CytRx as its
agent for the sale of certain assets listed in the Liquidation Agreement at the
prices, and the settlement of the liabilities listed in the Liquidation
Agreement for the amounts, identified in the Liquidation Agreement. The Zynaxis
Board (and any applicable committees thereof) also have approved (i) an
operating budget for the period between the date of the Liquidation Agreement
and the Closing, (ii) certain agreements to be entered into by Zynaxis and CytRx
with Martyn D. Greenacre and Michael A. Christie, and (iii) an agreement between
QED Technologies, L.P. ("QED") and Zynaxis covering QED's relationship as
Zynaxis' agent for the sale of the Cauldron division.
Zynaxis has committed to exert its commercially reasonable best efforts to
sell the assets and to cooperate with CytRx in its efforts to assist Zynaxis in
selling the assets. Zynaxis has committed to approve and execute documents
evidencing and perform any agreement negotiated by Zynaxis or CytRx with any
prospective purchaser of any asset if (i) the purchase price is no lower than
the amount and is consistent with the terms set forth in the Liquidation
Agreement, and (ii) the other terms and conditions of the transaction are not
less favorable to Zynaxis in any material respect than the terms and conditions
of similar transactions.
Zynaxis has committed to exert its commercially reasonable best efforts to
settle the liabilities and to cooperate with CytRx in its efforts to assist
Zynaxis in settling the liabilities. Zynaxis has committed to approve and
execute documents evidencing and perform any agreement negotiated by Zynaxis or
CytRx with any creditor for any liability, if (i) the cash payment required to
be paid by Zynaxis to such creditor is no greater than the settlement amount and
is consistent with the terms set forth for such liability in the Liquidation
Agreement, and (ii) the other terms and conditions of the transaction are not
less favorable to Zynaxis in any material respect than the terms and conditions
of similar transactions.
The Liquidation Agreement further provides that, subject to approval by the
Committee (as defined below), which approval will not be unreasonably withheld,
Zynaxis will approve and execute documents evidencing and perform any agreement
negotiated by CytRx with any counsel, accountants, appraisers, brokers and other
advisors in connection with the transactions (all for the account of Zynaxis),
if (i) such person is not an affiliate of CytRx, and (ii) the terms and
conditions of such agreement, taken as a whole, are fair to Zynaxis.
In connection with CytRx's activities on Zynaxis' behalf, Zynaxis has
agreed to cooperate with CytRx, to furnish or cause to be furnished to CytRx
such information and data as CytRx may reasonably request, and to give CytRx
reasonable access to Zynaxis' officers, directors, employees, appraisers and
independent accountants.
The Zynaxis Board has established a committee (the "Committee") of the
Board consisting of John F. Chappell, Stephen K. Reidy and Martyn D. Greenacre,
which has the full authority of the Board to authorize the transactions and the
institution and prosecution of actions (including arbitration proceedings)
relating to the transactions contemplated by the Liquidation Agreement. The
Committee will confer with CytRx at such times as CytRx reasonably requests.
29
<PAGE> 36
The Liquidation Agreement also provides that Zynaxis will reimburse CytRx
promptly for all reasonable out-of-pocket expenses, including reasonable fees
and expenses of CytRx's counsel, incurred in connection with the rendering of
CytRx services under the Liquidation Agreement. Zynaxis also has agreed to
indemnify CytRx in accordance with certain indemnification provisions.
CytRx may terminate the Liquidation Agreement at any time upon written
notice, without liability or continuing obligation to Zynaxis. Zynaxis may not
terminate the Liquidation Agreement unless and until the Agreement is
terminated.
Preferred Stock and Warrant Agreement. Simultaneously with the execution
of the Agreement, Zynaxis, CytRx, Vaxcel, and the holders of Zynaxis Preferred
Stock entered into the Preferred Stock and Warrant Agreement to modify, as of
the Effective Time, the rights of the holders of Zynaxis Preferred Stock.
Prior to the execution of the Preferred Stock and Warrant Agreement, the
rights of holders of Zynaxis Preferred Stock were governed by a Preferred Stock
and Warrant Purchase Agreement dated March 29, 1995, as amended (the "Preferred
Stock and Warrant Purchase Agreement"), and the Statement with Respect to Shares
filed by Zynaxis in the Department of State of the Commonwealth of Pennsylvania
on April 6, 1995 ("Statement with Respect to Shares"). Pursuant to the Preferred
Stock and Warrant Agreement, the holders of Zynaxis Preferred Stock agreed that
the Preferred Stock and Warrant Purchase Agreement and all rights of the holders
of Zynaxis Preferred Stock thereunder will terminate upon consummation of the
Merger.
The Preferred Stock and Warrant Agreement also provides that each of the
holders of Zynaxis Preferred Stock elects that the consummation of the
transactions contemplated by the Agreement and the Transaction Documents,
including but not limited to the Liquidation Agreement, will not be deemed a
liquidation for purposes of the Zynaxis Articles of Incorporation. In addition,
each of the holders of Zynaxis Preferred Stock consented to the Senior Credit
Facility and all liens, pledges, mortgages, security interests and other
encumbrances to which the assets or properties of Zynaxis may become subject as
part of the Senior Credit Facility.
Pursuant to the Preferred Stock and Warrant Agreement, each of the holders
of Zynaxis Preferred Stock agreed that upon consummation of the Merger, each
Zynaxis Warrant held by the holders of Zynaxis Preferred Stock will be exchanged
for a Vaxcel Warrant for a number of shares of Vaxcel Common Stock equal to: (i)
the number of shares of Zynaxis Common Stock that the Zynaxis Warrants held by
such shareholder are exercisable to purchase at that time multiplied by (ii) the
Exchange Ratio.
Each of the holders of Zynaxis Preferred Stock further agreed that: (i)
upon execution of the Preferred Stock and Warrant Agreement, all rights that the
holder of Zynaxis Preferred Stock may have had to require Zynaxis to register
securities of Zynaxis for sale under applicable state and federal securities
laws, whether granted pursuant to the Preferred Stock and Warrant Purchase
Agreement or otherwise ("Preferred Stock Holder Registration Rights"), are
suspended pending the Merger, and (ii) upon consummation of the Merger, all such
Preferred Stock Holder Registration Rights will be terminated and such holder of
Zynaxis Preferred Stock will have such registration rights as are provided in
the Agreement. If the Agreement is terminated for any reason, then effective
upon such termination, each holder of Zynaxis Preferred Stock will have such
Preferred Stock Holder Registration Rights as such holder of Zynaxis Preferred
Stock would have had if such Registration Rights had not been suspended.
Note Exchange Agreement. Simultaneously with the execution of the
Agreement, Zynaxis, CytRx, and Vaxcel entered into a Note Exchange Agreement
with Euclid and S.R. One, Ltd. (together the "Noteholders"). The Noteholders
hold Zynaxis Notes on which Zynaxis is the obligor.
The Note Exchange Agreement provides that upon consummation of the Merger,
each Zynaxis Note will be exchanged for the number of shares of Vaxcel Common
Stock equal to the Exchange Ratio multiplied by the quotient (rounded down to
the nearest whole share) obtained by dividing the unpaid principal amount of
such Zynaxis Note, together with unpaid interest thereon accrued through
September 30, 1996, by the Per Share Price, as such term is defined in the
Agreement. At the Closing of the Merger, each holder of a Zynaxis Note will
deliver to Zynaxis the Zynaxis Note, marked "Paid in Full," and Vaxcel will
deliver to each such holder in exchange a certificate representing all the Note
Shares to be issued in exchange for such Zynaxis Note.
30
<PAGE> 37
The Note Exchange Agreement also provides that: (i) upon execution of the
Note Exchange Agreement, all rights that a Noteholder may have to require
Zynaxis to register securities of Zynaxis for sale under applicable state and
federal securities laws ("Noteholder Registration Rights") are suspended pending
the consummation of the Merger; and (ii) upon consummation of the Merger, all
such Noteholder Registration Rights will be terminated and such Noteholder will
have such Noteholder Registration Rights as are provided for such Noteholder in
the Agreement. If the Agreement is terminated for any reason, then effective
upon such termination, the Noteholders will have the registration rights as such
Noteholder would have had at such time if such rights had not been suspended.
Technology Development Agreement. Pursuant to a license agreement dated
July 1, 1987 by and between SRI, UAB, and Molecular Engineering Associates,
Ltd., as amended, Zynaxis has an exclusive right and license to the PLG
microencapsulation technology. Zynaxis also owns certain oral vaccine delivery
technology related to compounds which bind to mucosal tissues (the
"mucoadhesive").
Because the Merger will take several months to consummate and the parties
want to ensure the continued development of the PLG and the mucoadhesive
technologies during the time period between execution of the Agreement and the
consummation of the Merger, Vaxcel and ZVT entered into the Technology
Development Agreement. Pursuant to the Technology Development Agreement, ZVT
granted to Vaxcel during the term of the Agreement the exclusive right to
continue to develop the PLG and the mucoadhesive technologies at Vaxcel's own
cost and expense, subject to the rights granted to ALK in a development and
licensing agreement dated September 21, 1995, by and between Zynaxis, ZVT, and
ALK.
Under the Technology Development Agreement, Vaxcel may, at its option and
its sole discretion, elect to undertake the following activities: (i) perform
preclinical experiments using the PLG and the mucoadhesive technologies at
Vaxcel facilities or with other third parties and potential sublicensees; (ii)
negotiate and execute agreements for the PLG and the mucoadhesive technologies,
including, but not limited to, materials transfer agreements, research
agreements, option agreements, sublicense agreements, or other similar
agreements, subject to Zynaxis' right of approval as provided for in the
Technology Development Agreement; (iii) conduct research activities involving
the PLG and the mucoadhesive technologies and receive compensation from
potential sublicensees regarding such research activities; (iv) gain access to
data from current Zynaxis sublicensees for the PLG and the mucoadhesive
technologies; (v) attend scientific conferences and present information to the
conferences on the PLG and the mucoadhesive technologies; (vi) handle all patent
application matters on behalf of Zynaxis as they arise, provided that in the
event Vaxcel elects not to handle a patent application matter, then Zynaxis
shall have the option to handle such matter; and (vii) perform other development
activities that may arise during the term of the Technology Development
Agreement. Vaxcel shall inform and provide updates to Zynaxis on a regular basis
regarding development activities undertaken by Vaxcel.
In the event Vaxcel obtains an agreement for the PLG and the mucoadhesive
technologies as provided for under the Technology Development Agreement, Vaxcel
will retain a maximum of the first $50,000 received from such agreement in
consideration of the services performed under the Technology Development
Agreement. Any amounts received in excess of $50,000 will be transferred to
Zynaxis to be used in satisfaction of Zynaxis' obligations under the Agreement
and the Senior Credit Facility. In the event that the Technology Development
Agreement is terminated due to the termination of the Agreement, then (i) if the
Agreement is terminated under certain circumstances described in the Agreement,
all payments received following termination of the Agreement as a result of
agreements for the PLG and the mucoadhesive technologies entered into by Vaxcel
during the term of the Technology Development Agreement shall be divided such
that 90% of all payments are promptly paid to Vaxcel, or (ii) if the Agreement
is terminated for other reasons, all payments received following termination of
the Technology Development Agreement as a result of agreements for the
technologies entered into by Vaxcel during the term of the Technology
Development Agreement will be paid to Zynaxis.
Shareholder Voting Agreements. Simultaneously with the execution of the
Agreement, CytRx entered into the Shareholder Voting Agreements with certain of
the shareholders of Zynaxis. The following shareholders executed Shareholder
Voting Agreements: Senmed Medical Ventures, Commonwealth Venture Partners I,
L.P., Philadelphia Ventures-Japan I L.P., CIP Capital L.P., Gus G. Casten, and
Alphi Fund L.P.
31
<PAGE> 38
Collectively, as of December 6, 1996, these shareholders held approximately
13.2% of the issued and outstanding shares of Zynaxis Common Stock and
approximately 25.1% of the issued and outstanding shares of Zynaxis Preferred
Stock and, as of the Record Date, held % of the issued and outstanding shares
of Zynaxis Common Stock and % of the issued and outstanding shares of Zynaxis
Preferred Stock. Pursuant to the Shareholder Voting Agreements, each of the
shareholders agreed that: (i) at any meeting of shareholders of Zynaxis called
to vote upon any of the matters contemplated by the Agreement (including,
without limitation, the Asset Sales and the Charter Amendment) or at any
adjournment thereof or in any other circumstances upon which a vote, consent or
other approval with respect to any of the matters contemplated by the Agreement
is sought, the shareholder will vote (or cause to be voted) the holder's shares
in favor of each of the matters contemplated by the Agreement; and (ii) at any
meeting of shareholders of Zynaxis or at any adjournment thereof or in any other
circumstances upon which their vote, consent or other approval is sought, the
holder will vote (or cause to be voted) such shareholder's shares against (a)
any merger, consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of or
by Zynaxis (other than the transactions contemplated by the Agreement), or (b)
any amendment of Zynaxis' Articles of Incorporation, or Bylaws or other proposal
or transaction involving Zynaxis or any of its subsidiaries, which amendment or
other proposal or transaction would in any manner impede, frustrate, prevent or
nullify any of the transactions contemplated by the Agreement (each of the
foregoing in clause (a) or (b) above, a "Competing Transaction").
The Shareholder Voting Agreements are substantially identical except for
two of the Shareholder Voting Agreements. CIP Capital L.P., as of December 6,
1996, held approximately 3.2% of the issued and outstanding shares of Zynaxis
Preferred Stock and, as of the Record Date, held % of the issued and
outstanding shares of Zynaxis Preferred Stock and Alphi Fund L.P. held, as of
December 6, 1996, approximately 2.7% of the issued and outstanding shares of
Zynaxis Common Stock and approximately 10.6% of the issued and outstanding
shares of Zynaxis Preferred Stock and, as of the Record Date, held % of the
issued and outstanding shares of Zynaxis Common Stock and % of the issued and
outstanding shares of Zynaxis Preferred Stock. CIP Capital L.P. and Alphi Fund
L.P. executed Shareholder Voting Agreements that do not restrict the
shareholder's ability to transfer his shares prior to consummation of the
Merger. Each of the other Shareholder Voting Agreements provide that such
shareholder will not transfer (which term includes, without limitation, any
sale, gift, pledge or other disposition), or consent to any transfer of, any or
all of such shareholder's shares or any interest therein; provided, that such
shareholder may transfer any of the shareholder's shares to any other person who
is, or to any family member of a person or charitable institution which prior to
such transfer becomes, a party to the Shareholder Voting Agreements.
Each of the Shareholder Voting Agreements provides that such shareholder
will not (i) grant any proxy, power of attorney or other authorization in or
with respect to such shareholder's shares, except for this Agreement, or (ii)
deposit such shareholder's shares into a voting trust or enter into a voting
agreement or arrangement with respect to such shareholder's shares. Further,
each of the shareholders agreed: (i) to waive any rights of appraisal, or rights
to dissent from the transactions contemplated by the Agreement, that such
shareholder may have (including, without limitation, any rights arising under
Subchapter 25E of the PBCL) and (ii) not to, nor permit any investment banker,
attorney or other adviser or representative of the shareholder to, directly or
indirectly, (a) solicit, initiate or encourage the submission of, any takeover
proposal or (b) participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any takeover proposal. "Takeover
proposal" means any proposal for a merger or other business combination
involving Zynaxis or any of its subsidiaries or any proposal or offer to acquire
in any manner, directly or indirectly, an equity interest in any voting
securities of, or a substantial portion of the assets of Zynaxis or any of its
subsidiaries, other than the transactions contemplated by the Agreement and
other than any transfer expressly permitted by the Shareholder Voting
Agreements.
Also pursuant to the Shareholder Voting Agreements, each shareholder
irrevocably granted to, and appointed, CytRx, Jack J. Luchese, Chairman of the
Board, President and Chief Executive Officer of CytRx, and Mark W. Reynolds,
Chief Financial Officer of CytRx, in their respective capacities as officers of
CytRx, and any individual who should succeed to any such office of CytRx, and
each of them individually, the shareholder's proxy and attorney-in-fact (with
full power of substitution), for and in the name, place and stead
32
<PAGE> 39
of the shareholder, to vote the shareholder's shares, or grant a consent or
approval in respect of such shares (i) in favor of each of the matters
contemplated by the Agreement, and (ii) against any Competing Transaction.
Finally, each of the Shareholder Voting Agreements, and all rights and
obligations of the parties thereunder, terminates upon the first to occur of (i)
the Closing, or (ii) the date upon which the Agreement is terminated in
accordance with its terms; provided that if an Extension Event, as such term is
defined below, shall have occurred as of or prior to termination of the
Agreement, then, for a period of one year following such termination, certain of
the rights and obligations of the parties under the Shareholder Voting
Agreements will continue in full force and effect and the shareholder agrees not
to transfer any or all of the shareholder's shares in connection with any
Competing Transaction or takeover proposal. Each of the Shareholder Voting
Agreements defines an "Extension Event" to mean any of the following events: (i)
the Special Meeting to approve the matters contemplated by the Agreement is not
held or the requisite approval at the Special Meeting by the holders of Zynaxis
Capital Stock is not obtained, or (ii) any person (other than CytRx or any
subsidiary of CytRx) has made, or disclosed an intention to make, a takeover
proposal or proposal for a Competing Transaction.
Vaxcel Warrants. The Vaxcel Warrants to be issued in exchange for the
Zynaxis Warrants upon consummation of the Merger are governed by the Preferred
Stock and Warrant Agreement and their own terms. The Vaxcel Warrants are
convertible into shares of Vaxcel Common Stock. Pursuant to their terms, the
Vaxcel Warrants are immediately exercisable upon consummation of the Merger and
have a term of one year from the Closing. The Vaxcel Warrants are exercisable at
a price per share equal to: (i) the Per Share Price divided by (ii) the Exchange
Ratio (the "Vaxcel Warrant Price"). Beginning at the 60th day following the
Closing, the Vaxcel Warrants are exercisable at a price per share equal to two
times the Vaxcel Warrant Price in effect immediately prior to such time, subject
to adjustment by the terms of such Vaxcel Warrant in the case of a Merger,
consolidation, or reorganization of Vaxcel.
The Vaxcel Warrants may be exercised during their term in whole or in part
by the surrender of such Vaxcel Warrant, with the purchase agreement attached to
such Vaxcel Warrant properly completed and executed, at the principal office of
Vaxcel and upon payment to it by certified check or bank draft to the order of
Vaxcel for the purchase price for the shares to be purchased upon such exercise.
See "Description of Capital Stock -- Vaxcel Warrants."
CytRx Warrant. The CytRx Warrant, to be issued to CytRx upon consummation
of the Merger pursuant to the Agreement, provides that CytRx is entitled to
purchase from Vaxcel a number of shares of Vaxcel Common Stock equal to: (i) the
amount that the Board of Directors of CytRx reasonably determines is the minimum
amount that must be contributed to the capital of Vaxcel in order for Vaxcel to
satisfy or continue to satisfy quantitative requirements for inclusion or
continued inclusion of the Vaxcel Common Stock on the Nasdaq SmallCap Market
divided by (ii) one-half of the Per Share Price and multiplied by (iii) the
Exchange Ratio.
The per share price for the shares which may be purchased upon the exercise
of the CytRx Warrant (the "Exercise Price") is initially equal to: (i) one-half
of the Per Share Price, divided by (ii) the Exchange Ratio, subject to
adjustment pursuant to the terms of the CytRx Warrant for any mergers,
consolidations or reorganizations of Vaxcel. The CytRx Warrant may be exercised
by giving written notice to Vaxcel and providing Vaxcel with the Exercise Price.
CytRx has the right to purchase shares of Vaxcel Common Stock under the
terms of the CytRx Warrant from the time that the CytRx Board reasonably
determines that Vaxcel's total assets and capital and surplus are insufficient
to satisfy the total assets and capital and surplus requirements for inclusion
of the Vaxcel Common Stock in the Nasdaq SmallCap Market until December 6, 1997.
See "Description of Capital Stock -- CytRx Warrant."
EFFECT OF THE MERGER ON STOCK OPTIONS, WARRANTS, AND PROMISSORY NOTES
The Agreement contemplates that at the Effective Time, each of the Zynaxis
Options granted by Zynaxis under the Zynaxis Stock Plan, as that term is defined
in the Agreement, which are outstanding at the Effective Time, whether or not
exercisable, will be converted into and become rights with respect to Vaxcel
Common
33
<PAGE> 40
Stock, and Vaxcel will assume each Zynaxis Option, in accordance with the terms
of the Zynaxis Stock Plan and stock option agreement by which it is evidenced,
except that from and after the Effective Time, (i) Vaxcel and its Compensation
Committee will be substituted for Zynaxis and the committee of the Zynaxis Board
(including, if applicable, the entire Zynaxis Board) administering such Zynaxis
Stock Plan, (ii) each Zynaxis Option assumed by Vaxcel may be exercised solely
for shares of Vaxcel Common Stock (or cash, if so provided under the terms of
the Zynaxis Option), (iii) the number of shares of Vaxcel Common Stock subject
to such Zynaxis Option will be equal to the number of shares of Zynaxis Common
Stock subject to such Zynaxis Option immediately prior to the Effective Time
multiplied by the Exchange Ratio, and (iv) the per share exercise price under
each such Zynaxis Option will be adjusted by dividing the per share exercise
price under each such Zynaxis Option by the Exchange Ratio and rounding up to
the nearest cent. Notwithstanding the provisions of clause (iii) of the
preceding sentence, Vaxcel will not be obligated to issue any fraction of a
share of Vaxcel Common Stock upon exercise of Zynaxis Options and any fraction
of a share of Vaxcel Common Stock that otherwise would be subject to a converted
Zynaxis Option will represent the right to receive a cash payment equal to the
product of such fraction and the difference between the market value of one
share of Vaxcel Common Stock and the per share exercise price of such option. In
addition, notwithstanding any other term in the Agreement, each Zynaxis Option
which is an "incentive stock option" will be adjusted as required by Section 424
of the Code, and the regulations promulgated thereunder, so as not to constitute
a modification, extension, or renewal of the option, within the meaning of
Section 424(h) of the Code.
All restrictions or limitations on transfer with respect to Zynaxis Common
Stock awarded under the Zynaxis Stock Plans or any other plan, program,
contract, or arrangement of any Zynaxis company, to the extent that such
restrictions or limitations will not have already lapsed (whether as a result of
the Merger or otherwise), and except as otherwise expressly provided in such
plan, program, contract, or arrangement, will remain in full force and effect
with respect to shares of Vaxcel Common Stock into which such restricted stock
is converted pursuant to the Agreement.
The Agreement also contemplates that at the Effective Time, each Zynaxis
Warrant which is outstanding at the Effective Time and is held by a party to the
Preferred Stock and Warrant Agreement shall be exchanged for a warrant to
purchase Vaxcel Common Stock in accordance with the terms of the Preferred
Stock and Warrant Agreement.
Each Zynaxis Non-Financing Warrant which is outstanding at the Effective
Time will be converted into and become a Vaxcel Non-Financing Warrant and Vaxcel
will assume each such warrant, in accordance with the terms of the warrant
agreement by which it is evidenced, except that from and after the Effective
Time, (i) each Zynaxis Non-Financing Warrant assumed by Vaxcel may be exercised
solely for shares of Vaxcel Common Stock, (ii) the number of shares of Vaxcel
Common Stock subject to such Vaxcel Non-Financing Warrant will be equal to the
number of shares of Zynaxis Common Stock subject to such Zynaxis Non-Financing
Warrant immediately prior to the Effective Time multiplied by the Exchange
Ratio, and (iii) the per share exercise price under each such Vaxcel
Non-Financing Warrant will be adjusted by dividing the per share exercise price
under each such Zynaxis Non-Financing Warrant by the Exchange Ratio and rounding
up to the nearest cent. Notwithstanding the foregoing, Vaxcel will not be
obligated to issue any fraction of a share of Vaxcel Common Stock upon exercise
of such Vaxcel Non-Financing Warrants and any fraction of a share of Vaxcel
Common Stock that otherwise would be subject to a converted Vaxcel Non-Financing
Warrant will represent the right to receive a cash payment upon exercise of such
converted Vaxcel Non-Financing Warrant equal to the product of such fraction and
the difference between the market value of one share of Vaxcel Common Stock at
the time of exercise of such converted Vaxcel Non-Financing Warrant and the per
share exercise price of such converted Vaxcel Non-Financing Warrant. The market
value of one share of Vaxcel Common Stock at the time of exercise of a converted
Vaxcel Non-Financing Warrant will be the last sale price of a share of Vaxcel
Common Stock on the Nasdaq SmallCap Market (as reported by The Wall Street
Journal or, if not reported thereby, any other authoritative source selected by
Vaxcel) on the last trading day preceding the date of exercise.
34
<PAGE> 41
Each Zynaxis Note which is held by a party to the Note Exchange Agreement
will be exchanged for shares of Vaxcel Common Stock in accordance with the terms
of the Note Exchange Agreement, as described above.
EFFECTIVE TIME OF THE MERGER
Subject to the conditions to the obligations of the parties to effect the
Merger, the Effective Time of the Merger and other transactions contemplated by
the Agreement will occur upon the last to occur of: (i) the filing of the
Articles of Merger in the Department of State of the Commonwealth of
Pennsylvania and (ii) the filing of the Certificate of Merger with the Secretary
of State of the State of Georgia. Unless otherwise agreed upon by Vaxcel and
Zynaxis, and subject to the conditions to the obligations of the parties to
effect the Merger, the parties will use their reasonable efforts to cause the
Effective Time to occur as soon as practical following the last to occur of (i)
the effective date (including the expiration of any applicable waiting period)
of the last consent of any regulatory authority required for the Merger and (ii)
the date on which the shareholders of Zynaxis approve the matters relating to
this Agreement required to be approved by such shareholders by applicable law.
No assurance can be provided that the necessary shareholder approval can be
obtained or that other conditions precedent to the Merger can or will be
satisfied. Zynaxis and Vaxcel anticipate that all conditions to consummation of
the Merger will be satisfied so that the Merger can be consummated during the
first quarter of 1997. However, delays in the consummation of the Merger could
occur.
The Board of Directors of Zynaxis, Vaxcel, or CytRx generally may terminate
the Agreement if the Merger is not consummated by March 31, 1997, unless the
failure to consummate by that date is the result of a breach of the Agreement by
the party seeking termination. See "-- Conditions to Consummation of the Merger"
and "-- Waiver, Amendment, and Termination."
DISTRIBUTION OF VAXCEL STOCK CERTIFICATES AND WARRANTS
Promptly after the Effective Time, Vaxcel will cause American Stock
Transfer and Trust Company, acting in its capacity as Exchange Agent as such
term is defined in the Agreement, to mail a letter of transmittal, together with
instructions for the exchange of the Certificates representing shares of Zynaxis
Capital Stock for certificates representing shares of Vaxcel Common Stock, to
the former shareholders of Zynaxis.
ZYNAXIS SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS.
Upon surrender to the Exchange Agent of Certificates for Zynaxis Capital
Stock, together with a properly completed letter of transmittal, there will be
issued and mailed to each holder of Zynaxis Capital Stock surrendering such
items a certificate or certificates representing the number of shares of Vaxcel
Common Stock to which such holder is entitled, if any, and a check for the
amount to be paid in lieu of any fractional share (without interest), together
with all undelivered dividends or distributions in respect of such shares
(without interest thereon). After the Effective Time, to the extent permitted by
law, Zynaxis shareholders of record as of the Effective Time will be entitled to
vote at any meeting of Vaxcel shareholders the number of whole shares of Vaxcel
Common Stock into which their shares of Zynaxis Capital Stock have been
converted, regardless of whether such shareholders have surrendered their
Zynaxis Capital Stock Certificates. Whenever a dividend or other distribution is
declared by Vaxcel on Vaxcel Common Stock, the record date for which is at or
after the Effective Time, the declaration will include dividends or other
distributions on all shares issuable pursuant to the Agreement, but, beginning
30 days after the Effective Time, no dividend or other distribution payable
after the Effective Time with respect to Vaxcel Common Stock will be paid to the
holder of any unsurrendered Zynaxis Common Stock Certificate until the holder
duly surrenders such certificate. Upon surrender of such Zynaxis Common Stock
Certificate, however, both the Vaxcel Common Stock certificate, together with
all undelivered dividends or other distributions (without interest) and any
undelivered cash payments to be paid in lieu of fractional shares (without
interest), will be delivered and paid with respect to each share represented by
such certificate.
35
<PAGE> 42
After the Effective Time, there will be no transfers of shares of Zynaxis
Capital Stock on Zynaxis' stock transfer books. If Certificates representing
shares of Zynaxis Capital Stock are presented for transfer after the Effective
Time, they will be canceled and exchanged for the shares of Vaxcel Common Stock
and a check for the amount due in lieu of fractional shares and undelivered
dividends, if any, deliverable in respect thereof. In no event will the holder
of any surrendered Certificate(s) be entitled to receive interest on any cash to
be issued to such holder, and in no event will Zynaxis, Vaxcel, or the Exchange
Agent be liable to any holder of Zynaxis Capital Stock for any Vaxcel Common
Stock or dividends thereon or cash delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat, or similar law.
Pursuant to the Preferred Stock and Warrant Agreement, at the Closing, each
holder of a Zynaxis Warrant who is a party to the Preferred Stock and Warrant
Agreement will surrender the Zynaxis Warrant and Vaxcel will deliver to each
such holder in exchange a Vaxcel Warrant. At the Closing, each holder of a
Zynaxis Non-Financing Warrant will surrender such warrant and Vaxcel will
deliver to each such holder in exchange a Vaxcel Non-Financing Warrant. At the
Closing, each holder of a Zynaxis Note will deliver to Zynaxis the Zynaxis Note,
marked "Paid in Full," and Vaxcel will deliver to each such holder in exchange a
certificate representing all the Note Shares to be issued in exchange for such
Zynaxis Note.
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to various conditions, including the
following: (i) receipt of the approval of the Agreement and the Merger
contemplated thereby, the Asset Sales, and the Charter Amendment by the
shareholders of Zynaxis as required by the PBCL; (ii) receipt of any regulatory
approvals required for consummation of the Merger; (iii) receipt of an opinion
of Alston & Bird in form reasonably satisfactory to the parties, to the effect
that for federal income tax purposes the contributions in exchange for Vaxcel
Common Stock will constitute a transaction described in Section 351 of the Code;
(iv) receipt of approval of the shares of Vaxcel Common Stock issuable pursuant
to the Merger for listing on the Nasdaq SmallCap market, subject to official
notice of issuance; (v) the Registration Statement being declared effective and
all necessary SEC and state approvals relating to the issuance or trading of the
shares of Vaxcel Common Stock issuable pursuant to the Merger shall have been
received; (vi) the accuracy, as of the date of the Agreement and as of the
Effective Time, of the representations and warranties of Zynaxis and Vaxcel as
set forth in the Agreement; (vii) the performance of all agreements and the
compliance with all covenants of Zynaxis and Vaxcel as set forth in the
Agreement; (viii) receipt of all consents required for consummation of the
Merger or for the preventing of any default under any contract or permit which,
if not obtained or made, is reasonably likely to have, individually or in the
aggregate, a material adverse effect; (ix) the absence of any law or order or
any action taken by any court, governmental, or regulatory authority
prohibiting, restricting, or making illegal the consummation of the transaction;
(x) receipt by the parties of legal opinions as to the matters set forth in the
Agreement; (xi) receipt by Vaxcel, from each affiliate of Zynaxis, of the
affiliates letters referred to in the Agreement; (xii) execution of the
Transaction Documents by each of the intended parties and no party can be in
default under the Transaction Documents; (xiii) execution by Zynaxis of an
amendment to its lease that is reasonably satisfactory to CytRx, Vaxcel and
Vaxcel Merger Sub; (xiv) releases from liability under a sublease of which
Zynaxis is a sublessor being obtained by Zynaxis that are satisfactory to CytRx,
Vaxcel, and Vaxcel Merger Sub; (xv) the Zynaxis Board and all relevant
committees thereof must have adopted resolutions that in the judgment of CytRx
and its counsel are sufficient to prevent immediate vesting of outstanding
options of Zynaxis, to approve the treatment of outstanding options of Zynaxis
in the Merger and to find the options to be received "comparable" to currently
outstanding options of Zynaxis within the meaning of the Zynaxis Stock Plan;
(xvi) the holders of shares of Zynaxis Capital Stock having the right to vote no
more than 10% of the votes that could be cast by all holders of Zynaxis Capital
Stock voting together as a single class will have elected to exercise their
statutory dissenters' rights or their statutory objection rights, if any, under
Section 2546 of the PBCL; (xvii) the execution by every holder of shares of
Zynaxis Preferred Stock or of Zynaxis Warrants referenced in the Preferred Stock
and Warrant Agreement must have executed the Preferred Stock and Warrant
Agreement; and (xvii) satisfaction of certain other conditions, including the
receipt of certain legal opinions and various certificates from the officers of
Zynaxis and Vaxcel. See "-- Regulatory Approvals" and "-- Waiver, Amendment, and
Termination."
36
<PAGE> 43
No assurance can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the party
permitted to do so. In the event the Merger is not effected on or before March
31, 1997, the Agreement may be terminated and the Merger abandoned by a vote of
a majority of the Board of Directors of either Zynaxis, Vaxcel, or CytRx. See
"-- Waiver, Amendment, and Termination."
REGULATORY APPROVALS
The Merger is not subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder, which provide that certain merger transactions may not be
consummated until required information and material have been furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and certain waiting periods have expired or been terminated. Other than certain
filings and approvals which may be required under certain state securities or
"blue sky" laws, Vaxcel and Zynaxis are not aware of any federal or state
regulatory requirements that must be complied with or approval obtained in
connection with the Merger.
Should any approval or action be required, it presently is contemplated
that such approval or action would be sought. The Merger may not proceed in the
absence of receipt of the requisite regulatory approvals. There can be no
assurance that any such approvals, if necessary, will not impose conditions or
be restricted in a manner (including requirements relating to the raising of
additional capital or the disposition of assets) which in the reasonable
judgment of the Board of Directors of either Vaxcel or Zynaxis would so
materially adversely impact the economic or business benefits of the
transactions contemplated by the Agreement that, had such condition or
requirement been known, such party would not, in its reasonable judgment, have
entered into the Agreement.
WAIVER, AMENDMENT, AND TERMINATION
To the extent permitted by applicable law, the parties to the Agreement,
with the approval of their respective Boards of Directors, may amend the
Agreement by written agreement at any time before or after approval of the
Agreement by the Zynaxis shareholders; provided, however, that after the Special
Meeting, no amendment may reduce or modify in any material respect the
consideration to be received by holders of Zynaxis Capital Stock without the
requisite approval of the holders of the issued and outstanding shares of
Zynaxis Capital Stock entitled to vote thereon. In addition, prior to or at the
Effective Time, either Zynaxis or Vaxcel, or both, acting through their
respective Boards of Directors or chief executive officers or other authorized
officers may waive any default in the performance of any term of the Agreement
by the other party, may waive or extend the time for the compliance or
fulfillment by the other party of any and all of its obligations under the
Agreement, and may waive any of the conditions precedent to the obligations of
such party under the Agreement, except any condition that, if not satisfied,
would result in the violation of any applicable law or governmental regulation.
No such waiver will be effective unless written and unless executed by a duly
authorized officer of Zynaxis or Vaxcel, as the case may be.
The Agreement may be terminated and the Merger abandoned at any time prior
to the Effective Time (i) by the mutual consent of the Boards of Directors of
Zynaxis and CytRx, (ii) by the Board of Directors of Zynaxis or CytRx (a) in the
event of any material breach of any representation or warranty of the other
party contained in the Agreement which cannot be or has not been cured within 30
days after giving written notice to the breaching party of such inaccuracy and
which breach is reasonably likely, in the opinion of the non-breaching party, to
have, individually or in the aggregate, a Material Adverse Effect, as defined in
the Agreement, on the breaching party (provided that the terminating party is
not then in material breach of any representation, warranty, covenant, or other
agreement contained in the Agreement), (b) in the event of a material breach by
the other party of any covenant or agreement contained in the Agreement which
cannot be or has not been cured within 30 days after the giving of written
notice to the breaching party of such breach (provided that the terminating
party is not then in material breach of any representation, warranty, covenant,
or other agreement contained in the Agreement), (c) in the event (1) any consent
of any regulatory authority required for consummation of the Merger and the
other transactions contemplated hereby shall have been denied by final
nonappealable action of such authority or if any action taken by such authority
is not appealed within the time limit for appeal, or (2) the shareholders of
Zynaxis fail to vote their approval of the matters relating to the Agreement and
the transactions contemplated thereby at the Special Meeting where such
37
<PAGE> 44
matters were presented to such shareholders for approval and voted upon
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant, or other agreement contained in the
Agreement), (d) if the Merger is not consummated by March 31, 1997, provided
that the failure to consummate is not due to the breach by the party electing to
terminate, or (e) if any of the conditions precedent to the obligations of such
party to consummate the Merger have not been satisfied, fulfilled, or waived by
the appropriate party by March 31, 1997 (provided that the terminating party is
not then in material breach of any representation, warranty or covenant or other
agreement contained in the Agreement).
If the Merger is terminated as described above, the Agreement will become
void and have no effect, except that certain provisions of the Agreement,
including those relating to the obligations to share certain expenses, maintain
the confidentiality of certain information obtained, and return all documents
obtained from the other party under the Agreement, will survive. In addition,
termination of the Agreement will not relieve any breaching party from liability
for any uncured willful breach of a representation, warranty, covenant, or
agreement giving rise to such termination. See "-- Expenses and Fees."
DISSENTERS' RIGHTS
Pursuant to the PBCL, the owners of shares of Zynaxis Capital Stock at the
Record Date (collectively, the "Eligible Shares") will have dissenters rights in
connection with the Merger under PBCL Subchapter 15D (hereinafter "Subchapter
15D"), a copy of which is attached to this Proxy Statement as Appendix D, and
may object to the Agreement and the Merger contemplated thereby, and the Asset
Sales, and demand in writing that Vaxcel pay the fair value of their Eligible
Shares.
FAILURE BY ANY DISSENTING SHAREHOLDER TO COMPLY WITH ANY PROCEDURE REQUIRED
BY SUBCHAPTER 15D MAY CAUSE A TERMINATION OF SUCH SHAREHOLDER'S DISSENTERS
RIGHTS. THE PARTIES WILL NOT GIVE ANY NOTICE OF THE FOLLOWING REQUIREMENTS OTHER
THAN AS DESCRIBED IN THIS PROXY STATEMENT AND AS REQUIRED BY THE PBCL.
A holder of record of Eligible Shares may assert dissenters rights as to
fewer than all of the Eligible Shares registered in such holder's name only if
the holder dissents with respect to all the Eligible Shares of the same class or
series beneficially owned by any one person and discloses the name and address
of the person or persons on whose behalf the holder dissents. In that event, the
holder's rights shall be determined as if the shares as to which the holder has
dissented and the other shares were registered in the names of different
holders. A beneficial owner of Eligible Shares, who is not also the record
holder of such shares, may assert dissenters rights with respect to shares held
on the owner's behalf and shall be treated as a dissenting shareholder under the
terms of Subchapter 15D if the beneficial owner submits to Zynaxis not later
than the time of filing the Notice of Intention to Dissent (as defined below) a
written consent of the record holder. Such beneficial owner may not dissent with
respect to some but less than all Eligible Shares of the same class or series so
owned.
Holders of Eligible Shares (or beneficial owners thereof as provided above)
who follow the procedures of Subchapter 15D as outlined below will be entitled
to receive from Vaxcel the fair value of their Eligible Shares immediately
before the Effective Time of the Merger, taking into account all relevant
factors but excluding any appreciation or depreciation in anticipation of the
Merger. Holders of Eligible Shares (or beneficial owners thereof) who elect to
exercise their dissenters rights must comply with all of the following
procedures to preserve those rights.
Holders of Eligible Shares (or beneficial owners thereof) who wish to
exercise dissenters rights must file a written notice of intention to demand the
fair value of their Eligible Shares if one or more of the Merger, or the Asset
Sales is effectuated (the "Notice of Intention to Dissent"). Such dissenters
must file the Notice of Intention to Dissent with the Secretary of Zynaxis prior
to the vote for the proposal to which the holder objects, but in no event later
than .M. on 1997, the time and date of the Special Meeting;
they must make no change in their beneficial ownership of Eligible Shares from
the date of such filing until the Effective Time of the Merger; and they must
refrain from voting their Eligible Shares for the adoption of the proposal or
proposals to which the holder objects. Neither a proxy nor a vote against a
proposal will constitute the giving of the Notice of Intention to Dissent.
Shareholders who return signed, unvoted proxy
38
<PAGE> 45
cards will be deemed to have voted for the proposals set forth on such cards and
will not be entitled to dissenters rights.
If either the Agreement and the Merger contemplated thereby, or the Asset
Sales is approved by the required vote at the Special Meeting, Vaxcel will mail
a notice (the "Notice of Approval") to all dissenters who filed a Notice of
Intention to Dissent prior to the vote on each of the Agreement, or the Asset
Sales who refrained from voting for the adoption of one or more of the
proposals. Vaxcel expects to mail the Notice of Approval promptly after
effectuation of the Merger. The Notice of Approval will state where and when
(the "Demand Deadline") a demand for payment must be sent and certificates for
Eligible Shares must be deposited in order to obtain payment; it will supply a
form for demanding payment (the "Demand Form") which includes a request for
certification of the date on which the holder, or the person on whose behalf the
holder dissents, acquired beneficial ownership of Eligible Shares; and it will
be accompanied by a copy of Subchapter 15D. Dissenters must ensure that the
Demand Form and their certificates for Eligible Shares are received by Vaxcel on
or before the Demand Deadline. All mailings to Vaxcel are at the risk of the
dissenter. Accordingly, Vaxcel recommends that the Notice of Intention to
Dissent, the Demand Form and the holder's stock certificates be sent by
certified mail.
Any holder (or beneficial owner) of Eligible Shares who fails to file a
Notice of Intention to Dissent, fails to complete and return the Demand Form, or
fails to deposit stock certificates with Vaxcel, each within the time periods
provided above, will lose the holder's (or beneficial owner's) dissenters rights
under Subchapter 15D. A dissenter will retain all rights of a shareholder, or
beneficial owner, as the case may be, until those rights are modified by
effectuation of the Merger.
Upon timely receipt of the completed Demand Form, Vaxcel is required by the
PBCL either to remit to dissenters who have returned the Notice of Intention to
Dissent and the completed Demand Form and have deposited their certificates, the
amount Vaxcel estimates to be the fair value for their shares or to give written
notice that no such remittance will be made. Vaxcel will determine whether to
make such a remittance or to defer payment for such shares until completion of
the necessary appraisal proceedings, after giving due consideration to the
number of shares, if any, with respect to which shareholders have dissented and
any objections that may be raised with respect to the standing of the dissenting
shareholder. The remittance or notice will be accompanied by:
(1) The closing balance sheet and statement of operations of Vaxcel
for the fiscal year ended December 31, 1996, together with the latest
available interim financial statements.
(2) A statement of Vaxcel's estimate of the fair value of the Eligible
Shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of
Subchapter 15D.
If Vaxcel does not remit the amount of its estimate of the fair value of
the Eligible Shares, it will return any certificates that have been deposited,
and may make a notation on any such certificates that a demand for payment in
accordance with Subchapter 15D has been made. If shares carrying such notation
are thereafter transferred, each new certificate issued therefor may bear a
similar notation, together with the name of the original dissenting holder or
owner of such shares. A transferee of such shares will not acquire by such
transfer any rights in Vaxcel other than those which the original dissenter had
after making demand for payment of their fair value.
If Vaxcel gives notice of its estimate of the fair value of the shares as
provided above, without remitting such amount, or remits payment of its estimate
of the fair value of a dissenter's shares and the dissenter believes that the
amount remitted or stated is less than the fair value of such shares, the
dissenter may send to Vaxcel the dissenter's own estimate (the "Holder's
Estimate") of the fair value of the shares as contemplated by PBCL sec. 1578,
which will be deemed a demand for payment of the amount of the deficiency. If a
dissenter does not file a Holder's Estimate within 30 days after the mailing by
Vaxcel of its remittance or notice, the dissenter will be entitled to no more
than the amount stated in the notice or remitted to the dissenter by Vaxcel.
If, within 60 days after the Effective Time of the Merger or after the
timely receipt by Vaxcel of any Holder's Estimate, whichever is later, any
demands for payment remain unsettled, Vaxcel may file in the
39
<PAGE> 46
Court of Common Pleas of Chester County an application for relief requesting
that the fair value of the shares be determined by the court. There is no
assurance that Vaxcel will file such an application. All dissenters, wherever
residing, whose demands have not been settled will be made parties to any such
appraisal proceeding. The court may appoint an appraiser to receive evidence and
recommend a decision on the issue of fair value. Each dissenter who is made a
party will be entitled to recover the amount by which the fair value of the
dissenter's shares is found to exceed the amount, if any, previously remitted,
plus interest. If Vaxcel fails to file an application for relief, any dissenter
who has made a demand and who has not already settled the dissenter's claim
against Vaxcel may do so in the name of Vaxcel at any time within 30 days after
the expiration of the 60-day period. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an application shall
be paid Vaxcel's estimate of the fair value of the shares and no more, and may
bring an action to recover any amount not previously remitted.
The costs and expenses of such court proceedings, including the reasonable
compensation and expenses of the appraiser appointed by the court, will be
determined by the court and assessed against Vaxcel, except that any part of the
costs and expenses may be apportioned and assessed as the court deems
appropriate against all or some of the dissenters who are parties and whose
action in demanding supplemental payment the court finds to be dilatory,
obdurate, arbitrary, vexatious, or in bad faith. Fees and expenses of counsel
and of experts for the respective parties may be assessed as the court deems
appropriate against Vaxcel, and in favor of any or all dissenters, if Vaxcel
fails to comply substantially with the requirements of Subchapter 15D. Such fees
and expenses may be assessed against either Vaxcel or a dissenter, if the court
finds that the party against whom the fees and expenses are assessed acted in
bad faith or in a dilatory manner. If the court finds that the services of
counsel for any dissenter were of substantial benefit to other dissenters
similarly situated and should not be assessed against Vaxcel, it may award such
counsel reasonable fees to be paid out of the amounts awarded to the dissenters
who were benefited.
Under the PBCL, a shareholder of Zynaxis has no right to obtain, in the
absence of fraud or fundamental unfairness, an injunction against the Merger or
Asset Sales, nor any right to valuation and payment of the fair value of the
holder's shares because of the Merger or Asset Sales, except to the extent
provided by the dissenters rights provisions of Subchapter 15D. The PBCL also
provides that absent fraud or fundamental unfairness, the rights and remedies
provided by Subchapter 15D are exclusive.
The foregoing description of the rights of dissenters under Subchapter 15D
should be read in conjunction with Appendix D to this Proxy Statement, and is
qualified in its entirety by the provisions of Subchapter 15D.
OBJECTION RIGHTS UNDER SUBCHAPTER 25E OF THE PBCL
The adoption of the Charter Amendment amending the Articles of
Incorporation of Zynaxis and making PBCL Subchapter 25E (hereinafter "Subchapter
25E") inapplicable to the Merger is a condition to the consummation of the
Merger. If the Charter Amendment is not approved by holders of Zynaxis Capital
Stock and Vaxcel elects to proceed with the Merger, each of the holders of
Eligible Shares pursuant to Subchapter 25E of the PBCL who objects to the Merger
and complies with certain procedural requirements will be entitled to receive
cash from CytRx for each of such shareholder's Eligible Shares in an amount
equal to the "fair value" of each Eligible Share as of the date the control
transaction occurs. Although Subchapter 25E of the PBCL provides for a judicial
appraisal procedure, "fair value" is defined to be not less than the highest
price per share paid by the acquiror in a control transaction at any time during
the 90-day period ending on and including the date of the control transaction,
plus to the extent not reflected in such price paid, an increment representing
any value, including, without limitation, any proportion of any value payable
for control of such corporation. A control transaction is the acquisition by a
person (or group of persons acting in concert) of voting power over voting
shares of a registered corporation (of which Zynaxis is one) which would entitle
the holders of such shares to cast 20% or more of the votes that all
shareholders would be entitled to cast in an election of directors of such
corporation.
FAILURE BY ANY OBJECTING SHAREHOLDER TO COMPLY WITH ANY PROCEDURE REQUIRED
BY SUBCHAPTER 25E MAY CAUSE A TERMINATION OF SUCH SHAREHOLDER'S RIGHT TO RECEIVE
PAYMENT THEREUNDER. THE PARTIES WILL NOT GIVE
40
<PAGE> 47
ANY NOTICE OF THE FOLLOWING REQUIREMENTS OTHER THAN AS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS AND AS REQUIRED BY THE PBCL.
Pursuant to Subchapter 25E, prompt notice (the "Notice") that a control
transaction has occurred is required to be given to each holder of Eligible
Shares and the Court of Common Pleas of Chester County (the "Court"),
accompanied by a petition (the "Petition") to the Court requesting that the fair
value of the Eligible Shares be determined pursuant to Subchapter 25E if the
Court receives certificates from holders of Eligible Shares or an equivalent
request for transfer of uncertificated securities. The Notice must include a
copy of Subchapter 25E and inform all holders of Eligible Shares that they are
entitled to demand fair value for their shares. It must also set forth the
minimum value a holder of Eligible Shares can receive under Subchapter 25E and
inform the holders of Eligible Shares (who believe the fair value to be higher
than the minimum value described above) of the appraisal procedure for
determining fair value provided for under Subchapter 25E.
In the event Zynaxis shareholders do not approve the Charter Amendment and
Vaxcel elects to proceed with the Merger, any holder of Eligible Shares may,
prior to or within a reasonable time after the Notice is given, make written
demand (the "Objector's Demand") on CytRx for payment of cash for each Eligible
Share in an amount equal to the fair value thereof as of the date on which the
control transaction occurs, taking into account all relevant factors. Such
Objector's Demand must state the number and class or series, if any, of Eligible
Shares owned with respect to which the Objectors Demand is made. CytRx will be
required to pay this amount to the holders of Eligible Shares pursuant to the
procedures in Subchapter 25E. Nothing in Subchapter 25E precludes CytRx from
offering to purchase Eligible Shares at a price other than that provided in
Subchapter 25E, and nothing therein precludes any holder of Eligible Shares from
agreeing to sell such shares at that or any other price to any person. ALL
MAILINGS TO CYTRX ARE AT THE RISK OF THE OBJECTOR. ACCORDINGLY, CYTRX AND VAXCEL
RECOMMEND THAT THE OBJECTORS DEMAND AND ANY OTHER DOCUMENTS BE SENT BY CERTIFIED
MAIL.
CytRx, at its option, may supply with the Notice a form for the holder of
Eligible Shares to demand payment (the "Alternative Demand Form") of an amount
equal to the highest price paid per Eligible Share by CytRx within the 90-day
period ending on and including the date of the control transaction (the "Partial
Payment") directly from CytRx without utilizing the Court-appointed appraisal
procedure set forth in Subchapter 25E. The Alternative Demand Form requires the
holder of Eligible Shares to state the number and class or series, if any, of
Eligible Shares, where the payment demand must be sent and the procedures to be
followed.
If, within 45 days (or such other period required by applicable law) after
the date of the Notice, or, if such Notice was not provided prior to the date of
the Objectors Demand by the holder of Eligible Shares, then within 45 days (or
such other time required by applicable law) of the date of such Objectors
Demand, CytRx and the holder of Eligible Shares are unable to agree on the fair
value of the Eligible Shares or on a binding procedure to determine the fair
value of the Eligible Shares, then each holder of Eligible Shares who is unable
to agree on both the fair value and on such a procedure with CytRx and who so
desires to obtain the rights and remedies provided in Subchapter 25E must, no
later than 30 days after the expiration of the applicable 45-day or other
period, surrender to the Court certificates representing any of the Eligible
Shares that are certificated shares, duly endorsed for transfer to CytRx, or
cause any uncertificated share to be transferred to the Court as escrow agent
under Subchapter 25E. A notice must also be included which states that the
certificates or uncertificated shares are being surrendered or transferred, as
the case may be, in connection with the Petition or, if no Petition has
theretofore been filed, the holder of Eligible Shares may file a petition within
the 30-day period in the Court, requesting that the fair value of the Eligible
Shares be determined.
Any holder of Eligible Shares who does not give notice and surrender any
certificates or cause uncertificated shares to be transferred within such time
period will have no further right to receive, with respect to shares the
certificates of which were not so surrendered or the uncertificated shares which
were not so transferred, payment under Subchapter 25E from CytRx with respect to
the transaction giving rise to the rights of the holder of Eligible Shares under
Subchapter 25E.
41
<PAGE> 48
The Court shall hold the certificates and uncertificated shares in escrow
for, and following the expiration of the time period during which certificates
may be surrendered and uncertificated shares transferred, shall promptly provide
notice to CytRx of the number of Eligible Shares surrendered or transferred.
CytRx will make the Partial Payment for the Eligible Shares so surrendered
or transferred to the Court, within ten business days of receipt of the notice
from the Court, at a per-share price equal to the Partial Payment amount. The
Court will then make payment as soon as practicable, but in any event within ten
business days, to the holders of Eligible Shares who surrendered or transferred
their shares to the Court.
Any amount owed including interest, as determined pursuant to the appraisal
procedures shall be payable by CytRx after it is determined and concurrently
with the delivery or transfer to CytRx by the Court of the certificates
representing the Eligible Shares surrendered or uncertificated shares
transferred to the Court. The Court shall promptly make payment to the holder of
Eligible Shares.
Upon receipt of any Eligible Share certificate surrendered or
uncertificated share transferred under Subchapter 25E, the Court will, as soon
as practicable, but in any event within 30 days, appoint an appraiser with
experience in appraising share values of companies of like nature to Zynaxis to
determine the fair value of the Eligible Shares. The appraiser shall determine
the fair value of the Eligible Shares subject to its appraisal and the
appropriate market rate of interest owned by CytRx to the holder of the Eligible
Shares. The determination of any appraiser will be final and binding on both
CytRx and all holders of Eligible Shares who so surrendered their share
certificates or transferred their shares to the Court, except that the
determination of the appraiser is subject to judicial review.
Holders of Eligible Shares who surrender their shares to the Court pursuant
to Subchapter 25E will retain the right to vote their shares and receive
dividends or other distributions thereon until the Court receives payment in
full for each of the Eligible Shares so surrendered or transferred of the
Partial Payment amount. Thereafter, CytRx will be entitled to vote such shares
and receive dividends or other distributions thereon. The fair value (as
determined by the appraiser) of any dividends or other distributions so received
by the holders of Eligible Shares will be subtracted from any amount owing to
such holders under Subchapter 25E. The costs and expenses of any appraiser or
other agents appointed by the Court shall be assessed against CytRx and the
costs and expenses of any other procedure to determine fair value shall be paid
as agreed to by CytRx and the holders of Eligible Shares.
Zynaxis is required to comply with requests for information, which may be
submitted pursuant to procedures maintaining the confidentiality of the
information, made by the Court or the appraiser selected by the Court. If any of
the Eligible Shares are not represented by certificates, the transfer, escrow or
retransfer of those shares contemplated by Subchapter 25E must be registered by
Zynaxis, which must give the written notice to the transferring holder, CytRx
and the Court.
Any amount agreed upon or determined pursuant to the procedure set forth in
Subchapter 25E will be payable by CytRx after it is agreed upon or determined
and concurrently with the delivery of any certificate or certificates
representing such Eligible Shares or the transfer of any uncertificated shares
to CytRx by the holder. Upon full payment by CytRx to the holder of Eligible
Shares, or to the Court, as appropriate, the holder will cease to have any
interest in the Eligible Shares.
The foregoing description of objection rights under Subchapter 25E should
be read in conjunction with Appendix E to this Proxy Statement, and is qualified
in its entirety by the provisions of Subchapter 25E.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Agreement, Zynaxis has agreed that unless the prior written
consent of Vaxcel has been obtained, and except as otherwise expressly
contemplated in the Agreement, the Transaction Documents, or as previously
disclosed by Zynaxis to Vaxcel, Zynaxis will (i) operate its business only in
the usual, regular, and ordinary course, (ii) preserve intact its business
organization and assets and maintain its rights and franchises, and (iii) take
no action which would (a) materially adversely affect the ability of any party
to obtain any consents required for the transactions contemplated by the
Agreement without imposition of a condition or restriction of the type referred
to in the Agreement or (b) materially adversely affect the ability of any party
to perform its covenants and agreements under the Agreement.
42
<PAGE> 49
In addition, Zynaxis has agreed that, prior to the earlier of the Effective
Time or termination of the Agreement, Zynaxis will not, except with the prior
written consent of Vaxcel or as expressly contemplated or permitted by the
Agreement, the Transaction Documents, or as previously disclosed by Zynaxis to
Vaxcel, agree or commit to do, any of the following: (i) amend the Articles of
Incorporation, Bylaws, or other governing instruments of any Zynaxis company;
(ii) incur any additional debt obligation or other obligation for borrowed money
except in the ordinary course of business of Zynaxis and its subsidiaries
consistent with past practices or impose, or suffer the imposition, on any asset
of any Zynaxis company any lien or permit any such lien to exist; (iii)
repurchase, redeem, or otherwise acquire or exchange (other than exchanges in
the ordinary course under employee benefit plans or in their capacity as
transfer agent), directly or indirectly, any shares, or any securities
convertible into any shares, of the capital stock of any Zynaxis company, or
declare or pay any dividend or make any other distribution in respect of any
Zynaxis Capital Stock; (iv) except pursuant to the conversion of Zynaxis
Preferred Stock or pursuant to the exercise of stock options or warrants
previously disclosed by Zynaxis to Vaxcel, issue, sell, pledge, encumber,
authorize the issuance of, enter into any contract to issue, sell, pledge,
encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional shares of Zynaxis Capital Stock, or any other
capital stock of any Zynaxis company, or any stock appreciation rights, or any
option, warrant, conversion, or other right to acquire any such stock, or any
security convertible into any such stock; (v) adjust, split, combine, or
reclassify any capital stock of any Zynaxis company or issue or authorize the
issuance of any other securities in respect of or in substitution for shares of
Zynaxis Capital Stock or sell, lease, mortgage, or otherwise dispose of or
otherwise encumber any shares of capital stock of any Zynaxis company (unless
any such shares of stock are sold or otherwise transferred to another Zynaxis
company) or any assets other than in the ordinary course of business for
reasonable and adequate consideration; (vi) except for purchases of U.S.
Treasury securities or U.S. government agency securities, which in either case
have maturities of three years or less, purchase any securities or make any
material investment, either by purchase of stock or securities, contributions to
capital, asset transfers, or purchase of any assets, in any person other than a
wholly owned Zynaxis subsidiary, or otherwise acquire direct or indirect control
over any person, other than in connection with foreclosures in the ordinary
course of business; (vii) grant any increase in compensation or benefits to the
employees or officers of any Zynaxis company except in the ordinary course of
business or as previously disclosed to Vaxcel by Zynaxis or as required by law;
pay any severance or termination or any bonus other than pursuant to written
policies or written contracts in effect on December 6, 1996, and previously
disclosed to Vaxcel by Zynaxis; enter into or amend any severance agreements
with officers of any Zynaxis company; or grant any increase in fees or other
increases in compensation or other benefits to directors of any Zynaxis company
except as previously disclosed to Vaxcel by Zynaxis; (viii) enter into or amend
any employment contract between any Zynaxis company and any person (unless such
amendment is required by law) that the Zynaxis company does not have the
unconditional right to terminate without liability (other than liability for
services already rendered), at any time on or after the Effective Time; (ix)
adopt any new employee benefit plan of any Zynaxis company or make any material
change in or to any existing employee benefit plans of any Zynaxis company other
than any such change that is required by law or that, in the opinion of counsel,
is necessary or advisable to maintain the tax qualified status of any such plan;
(x) make any significant change in any tax or accounting methods or systems of
internal accounting controls, except as may be appropriate to conform to changes
in tax laws or regulatory accounting requirements or generally accepted
accounting principles; (xi) commence or settle any litigation other than in
accordance with past practice or settle any litigation involving any liability
of any Zynaxis company for material money damages or restrictions upon the
operations of any Zynaxis company; or (xii) enter into, modify, amend or
terminate any material contract or waive, release, compromise or assign any
material rights or claims.
The Agreement also provides that from the date of the Agreement until the
earlier of the Effective Time or the termination of the Agreement, unless the
prior written consent of Zynaxis is obtained, Vaxcel covenants and agrees that
it will (i) continue to conduct its business and the business of its
subsidiaries in a manner designed in its reasonable judgment, to enhance the
long-term value of the Vaxcel Common Stock and the business prospects of the
Vaxcel companies and to the extent consistent therewith, use all reasonable
efforts to preserve intact the Vaxcel companies' core businesses and goodwill
with their respective employees and the communities they serve, and (ii) take no
action which would (a) materially adversely affect the ability of any
43
<PAGE> 50
party to obtain any consents required for the transactions contemplated by the
Agreement without imposition of a condition or restriction of the type referred
to in the Agreement or (b) materially adversely affect the ability of any party
to perform its covenants and agreements under the Agreement; provided, that any
Vaxcel company may acquire any other company or discontinue or dispose of any of
its assets or business if such action is, in the reasonable judgment of Vaxcel,
desirable in the conduct of the business of Vaxcel and its subsidiaries,
provided that such actions may not materially delay the Effective Time or
materially hinder consummation of the Merger. Vaxcel further agrees that it will
not, without the prior written consent of Zynaxis, which consent may not be
unreasonably withheld, amend the Certificate of Incorporation or Bylaws of
Vaxcel or, except as expressly contemplated by the Agreement or the Transaction
Documents, in any manner adverse to the holders of Zynaxis Capital Stock as
compared to rights of holders of Vaxcel Common Stock generally as of December 6,
1996.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Consummation of the Merger will not alter the present management of Vaxcel
or the Vaxcel Board. Information concerning the management of Vaxcel is included
herein. See "Business of Vaxcel -- Directors and Executive Officers." For
additional information regarding the interests of certain persons in the Merger,
see "-- Interests of Certain Persons in the Merger."
Vaxcel will be the parent of Zynaxis as a result of the Merger and shall
continue to be governed by the laws of the State of Delaware and operate in
accordance with its Certificate of Incorporation and Bylaws as in effect on the
date of the Agreement until otherwise amended or repealed after the Effective
Time.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
No director or executive officer of CytRx or Vaxcel had or will have a
business relationship with Zynaxis prior to the Effective Time. No director or
executive officer of Zynaxis had or will have a business relationship with CytRx
or Vaxcel prior to the Effective Time. In considering the recommendation of the
Zynaxis Board with respect to the Merger, however, the Zynaxis shareholders
should be aware that certain directors and executive officers of Zynaxis have an
interest in the consummation of the Merger. Stephen K. Reidy, a member of the
Zynaxis Board, is a general partner of the general partner of Euclid, which is a
holder of Zynaxis Common Stock, Zynaxis Preferred Stock, Zynaxis Warrants and a
Zynaxis Note. Lyle A. Hohnke, a member of the Zynaxis Board, is a member of a
limited liability company which is a general partner of Javelin Capital Fund,
L.P. ("Javelin"), which is a holder of Zynaxis Preferred Stock and Zynaxis
Warrants. John F. Chappell, a member of the Zynaxis Board, is the President and
sole shareholder of Plexus Ventures, Inc. ("Plexus"), which is a holder of
Zynaxis Common Stock, Zynaxis Preferred Stock, Zynaxis Warrants and a Zynaxis
Note. Donald E. Morel, Jr., a member of the Zynaxis Board, is a vice president
of The West Company ("West"), which is a holder of Zynaxis Preferred Stock and
Zynaxis Options. Additionally, each of Messrs. Reidy, Hohnke, Chappell and Morel
individually owns Zynaxis Options and Dennis P. Schafer, a member of the Zynaxis
Board, is a holder of Zynaxis Common Stock and Zynaxis Options. Martyn D.
Greenacre, the President and Chief Executive Officer of Zynaxis and a member of
the Zynaxis Board, is a holder of Zynaxis Options. Michael A. Christie, an
executive officer of Zynaxis, is a holder of Zynaxis Options. Upon the
consummation of the Merger, (i) Euclid, Javelin, Plexus, West and Mr. Schafer
will receive Vaxcel Common Stock in exchange for their shares of Zynaxis Common
Stock and Zynaxis Preferred Stock, if any, (ii) Euclid, Javelin, Plexus and West
will receive Vaxcel Warrants in exchange for their Zynaxis Warrants; (iii)
Euclid will receive shares of Vaxcel Common Stock in exchange for the surrender
and cancellation of its Zynaxis Note; (iv) Plexus will be repaid the full amount
of its Zynaxis Note, with unpaid interest accrued thereon (presently estimated
to be $107,409); and (v) each of Messrs. Reidy, Hohnke, Chappell, Morel,
Schafer, Greenacre and Christie will receive options to purchase Vaxcel Common
Stock in exchange for their Zynaxis Options. See "-- Selling Shareholders of
Zynaxis." Messrs. Greenacre and Christie hold 595,000 and 16,000 Zynaxis
Options, respectively, which will be exchanged in the Merger for approximately
56,387 and 1,516 options to purchase Vaxcel Common Stock, respectively.
Mr. Greenacre has entered into an amendment to his employment agreement
which provides that (a) Mr. Greenacre shall continue to serve as the President
and Chief Executive Officer of Zynaxis until the first to occur of (i)
termination of his employment under the terms of his employment agreement or
(ii) the
44
<PAGE> 51
Closing of the Merger; (b) compensation payable to Mr. Greenacre under the
employment agreement and deferred through the Closing shall be paid to Mr.
Greenacre in a lump sum at the Closing (currently estimated to be $37,093); (c)
severance of $29,960 shall be paid to Mr. Greenacre at the Closing; and (d)
performance bonuses up to an aggregate amount of $55,000 shall be paid to Mr.
Greenacre at the Closing upon the occurrence of certain events, including, among
others, (i) if Zynaxis operates within the operating budget agreed to by Zynaxis
and CytRx over a specified period, (ii) certain assets sales for specified gross
proceeds, (iii) Zynaxis subleases certain leased space at its corporate
headquarters under specified terms, and (iv) Phanos exercises its purchase
option for the Zyn-Linker(R) technology. Additionally, Zynaxis has agreed to pay
Mr. Christie a bonus of $25,000 on the closing of the sale of the Cauldron
division if a definitive agreement of sale is executed before the Closing of the
Merger and Mr. Christie continues to be employed by Zynaxis at that time, and
after the Closing, provided Mr. Christie remains employed by Zynaxis or Vaxcel,
a bonus of $10,000 on the closing of the sale of the Cauldron division.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A SUMMARY OF CERTAIN ANTICIPATED FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO ZYNAXIS SHAREHOLDERS. THIS SUMMARY IS BASED ON THE
FEDERAL INCOME TAX LAWS AS NOW IN EFFECT AND AS CURRENTLY INTERPRETED; IT DOES
NOT TAKE INTO ACCOUNT POSSIBLE CHANGES IN SUCH LAWS OR INTERPRETATIONS,
INCLUDING AMENDMENTS TO APPLICABLE STATUTES OR REGULATIONS OR CHANGES IN
JUDICIAL OR ADMINISTRATIVE RULINGS, SOME OF WHICH MAY HAVE RETROACTIVE EFFECT.
THIS SUMMARY DOES NOT PURPORT TO ADDRESS ALL ASPECTS OF THE POSSIBLE FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND IS NOT INTENDED AS TAX ADVICE TO ANY
PERSON. IN PARTICULAR, AND WITHOUT LIMITING THE FOREGOING, THIS SUMMARY DOES NOT
ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO ZYNAXIS
SHAREHOLDERS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES OR STATUS (FOR EXAMPLE,
AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES, DEALERS IN SECURITIES, INSURANCE
COMPANIES, AND CORPORATIONS, AMONG OTHERS). NOR DOES THIS SUMMARY ADDRESS: (I)
ANY CONSEQUENCES OF THE MERGER UNDER ANY STATE, LOCAL, ESTATE, OR FOREIGN TAX
LAWS, OR (II) THE TAXATION OF THE EXCHANGE OF WARRANTS FOR ZYNAXIS COMMON STOCK
FOR WARRANTS FOR VAXCEL COMMON STOCK. ZYNAXIS SHAREHOLDERS, THEREFORE, ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICATION AND
EFFECT OF FEDERAL, FOREIGN, STATE, LOCAL, AND OTHER TAX LAWS, AND THE
IMPLICATIONS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
For federal income tax purposes, the Merger is intended to constitute a
transaction described in Section 351 of the Code, in which case the following
tax consequences will generally result (subject to the limitations and
qualifications referred to herein):
(a) Generally, no gain or loss will be recognized to CytRx, the
Zynaxis shareholders, or the Noteholders upon the transfer of property to
Vaxcel solely in exchange for Vaxcel Common Stock.
(b) No gain or loss will be recognized to Vaxcel upon its receipt of
property solely in exchange for Vaxcel Common Stock.
(c) The basis of the Vaxcel Common Stock to be received by each
transferor will be the same as the basis of the property exchanged
therefor, plus any gain recognized by such transferor on the exchange and
less the basis allocated to any fractional share of Vaxcel Common Stock
settled by cash payment.
(d) The basis to Vaxcel of the property to be received in the exchange
will be the same as the basis of such property in the hands of the
transferor immediately prior to the exchange, increased by the amount of
gain recognized by such transferor as a result of the exchange.
(e) The holding period of the Vaxcel Common Stock to be received by
each transferor will include the holding period of the property exchanged
therefor, provided that such property is held as a capital asset on the
date of the exchange or as property described in Section 1231.
(f) The holding period of the property to be received by Vaxcel in the
exchange will, in each instance, include the period during which such
property was held by the transferor.
45
<PAGE> 52
(g) The payment of cash in lieu of fractional shares of Vaxcel Common
Stock will be treated as if the fractional shares were issued as part of
the exchange and then redeemed by Vaxcel. These cash payments will be
treated as having been received as distributions in full payment in
exchange for the fractional shares of Vaxcel Common Stock as provided in
Section 302(a). Generally, any gain or loss recognized upon such exchange
will be capital gain or loss, provided the fractional share would
constitute a capital asset in the hands of the exchanging shareholder.
(h) Where solely cash is received by a transferor in exchange for its
shares of Zynaxis Capital Stock pursuant to the exercise of dissenters'
rights, such cash will be treated as having been received in redemption of
its shares of Zynaxis Capital Stock, subject to the provisions and
limitations of Section 302 of the Code.
A federal income tax ruling with respect to this transaction was not
requested from the Internal Revenue Service ("IRS"). Instead, Alston & Bird,
counsel to Vaxcel, will render an opinion to Zynaxis and Vaxcel concerning
certain federal income tax consequences of the proposed Merger under federal
income tax law. It is such firm's opinion that, based upon the assumption the
Merger is consummated pursuant to Delaware law and that the proposed
transactions are consummated in accordance with the terms of the Agreement and
in conformity with the representations made by the management of Zynaxis and
Vaxcel, the transaction will be described in Section 351 of the Code (the "Tax
Opinion"). The Tax Opinion does not address any state, local, or other tax
consequences of the Merger. The Tax Opinion does not bind the IRS nor preclude
the IRS from adopting a contrary position. In addition, the Tax Opinion will be
subject to certain assumptions and qualifications and will be based on the truth
and accuracy of certain representations made by the management of Zynaxis and
Vaxcel. FINALLY, THE TAX OPINION DOES NOT ADDRESS THE TAXATION OF THE EXCHANGE
OF WARRANTS FOR ZYNAXIS COMMON STOCK FOR WARRANTS FOR VAXCEL COMMON STOCK.
A successful IRS challenge to the status of the transaction as a
transaction described in Section 351 of the Code would result in a Zynaxis
shareholder recognizing gain or loss with respect to each share of Zynaxis
Capital Stock surrendered equal to the difference between the shareholder's
basis in such share and the fair market value, as of the Effective Time of the
Merger, of the Vaxcel Common Stock received in exchange therefor. In such event,
a Zynaxis shareholder's aggregate basis in the Vaxcel Common Stock received
would equal its fair market value and his or her holding period for such stock
would begin the day after the Merger.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a purchase of
Zynaxis by Vaxcel as that term is used pursuant to generally accepted accounting
principles, for accounting and financial reporting purposes. Under the purchase
method of accounting, the assets and liabilities of Zynaxis as of the Effective
Time will be recorded at their estimated respective fair values and added to
those of Vaxcel. Financial statements of Vaxcel issued after the Effective Time
will reflect such values and will not be restated retroactively to include the
historical financial position or results of operations of Zynaxis.
EXPENSES AND FEES
The Agreement provides, in general, that each of the parties will bear and
pay all direct costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated by the Agreement, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel, except that: (i) each of the parties will bear and pay one-half of the
filing fees payable in connection with the Proxy Statement and printing costs
incurred in connection with the printing of the Proxy Statement; and (ii)
Zynaxis will pay all fees and expenses of counsel to CytRx and Vaxcel. However,
if the Agreement is terminated for any reason other than as set forth below,
then the amount of fees and expenses of Alston & Bird, counsel to CytRx and
Vaxcel, paid by Zynaxis through the date of termination will be deducted from
the balance due under the Senior Credit Facility.
Notwithstanding the foregoing: (a) if the Agreement is terminated by CytRx
based on the failure of Zynaxis' shareholders to approve the Agreement; (b) if
the Merger is not consummated as a result of the failure, due to intentional
action or inaction on the part of Zynaxis or any of its officers, directors,
employees, or agents of Zynaxis to satisfy any of the conditions to the
obligations of Vaxcel, CytRx and Vaxcel Merger
46
<PAGE> 53
Sub to consummation of the transactions contemplated by the Agreement; or (c) if
the Agreement is terminated for any reason after the Zynaxis Board supplies
information to another potential acquiror or fails to recommend the approval of
the Agreement to its shareholders, then Zynaxis will be obligated to promptly
pay CytRx all the out-of-pocket costs and expenses of CytRx and its
subsidiaries, including reasonable costs of counsel, investment bankers,
actuaries, and accountants, incurred in connection with the transactions
contemplated by the Agreement.
In addition, if, after the date of the Agreement and within 12 months
following (a) any termination of the Agreement by CytRx on the basis of the
failure of Zynaxis to satisfy certain conditions, or by either party based on
the failure of the shareholders of Zynaxis to approve the Agreement and the
Merger contemplated thereby, or (b) failure to consummate the Merger by reason
of any failure of Zynaxis to satisfy certain conditions, including approval of
the Agreement by the shareholders of Zynaxis, any third party shall acquire,
merge with, combine with, purchase a substantial part of the assets of, or
engage in any other business combination with, or purchase any equity securities
involving an acquisition of 20% or more of the voting stock of Zynaxis, or enter
into any binding agreement to do any of the foregoing (collectively, a "Business
Combination"), such third party that is a party to the Business Combination must
pay to CytRx, prior to the earlier of consummation of the Business Combination
or execution of any letter of intent or definitive agreement with Zynaxis
relating to such Business Combination, an amount in cash equal to the sum of:
(x) the certain direct costs and expenses or portion incurred by or on behalf of
CytRx or Vaxcel in connection with the transactions contemplated by the
Agreement, and (y) 5% of the aggregate fair market value of the consideration
received by the shareholders of Zynaxis in such Business Combination, less (z)
any certain other expense amounts previously paid by Zynaxis to CytRx or Vaxcel
pursuant to the Agreement which would represent additional compensation for
CytRx's loss as the result of the transactions contemplated by the Agreement not
being consummated. In the event such third party shall refuse to pay such
amounts within ten days of demand therefor by CytRx, the amounts shall be an
obligation of Zynaxis and shall be paid by Zynaxis promptly upon notice to
Zynaxis by CytRx.
RESALES OF VAXCEL COMMON STOCK
The shares of Vaxcel Common Stock issuable in connection with the Merger
have been registered under the Securities Act. Accordingly, there will be no
federal securities law restrictions upon the resale or transfer of such shares
by Zynaxis shareholders except for those shareholders who are deemed
"affiliates" of Zynaxis, as that term is defined in Rule 144 and Rule 145
adopted under the Securities Act. Under the Agreement, Zynaxis has agreed to
keep the Registration Statement effective to cover the resale by such
affiliates. The Vaxcel Warrants and the Vaxcel Non-Financing Warrants and the
shares of Vaxcel Common Stock issuable pursuant to such warrants have not been
registered under the Securities Act, by reason of their issuance in a
transaction exempt from the registration requirements of the Securities Act
pursuant to the exemption provided in Section 4(2) thereof, and will not be
registered under state securities laws by reason of their issuance in a
transaction exempt from such registration requirements. Consequently, the Vaxcel
Warrants and the Vaxcel Non-Financing Warrants and the shares of Vaxcel Common
Stock issuable pursuant to such warrants may not be sold, transferred or
otherwise disposed of unless registered under the Securities Act and applicable
state securities laws or exempted from such registration. However, under the
Agreement, Vaxcel has agreed to keep the Registration Statement effective to
cover the resale of shares issued pursuant to the Vaxcel Warrants and the Vaxcel
Non-Financing Warrants. See "Selling Shareholders of Zynaxis" and "Plan of
Distribution."
47
<PAGE> 54
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
As a result of the Merger, holders of Zynaxis Capital Stock will be
exchanging their shares of a Pennsylvania corporation governed by the PBCL and
Zynaxis' Articles of Incorporation (the "Articles") and Bylaws, for shares of
Vaxcel, a Delaware corporation governed by the DGCL and Vaxcel's Certificate of
Incorporation and Bylaws. Certain significant differences exist between the
rights of Zynaxis shareholders and those of Vaxcel shareholders. The differences
deemed material by Zynaxis and Vaxcel are summarized below. In particular,
Vaxcel's Certificate and Bylaws contain several provisions that may be deemed to
have an anti-takeover effect in that they could impede or prevent an acquisition
of Vaxcel unless the potential acquirer has obtained the approval of Vaxcel's
Board. The following discussion is necessarily general; it is not intended to be
a complete statement of all differences affecting the rights of shareholders and
their respective entities, and it is qualified in its entirety by reference to
the PBCL and the DGCL as well as to Vaxcel's Certificate and Bylaws and Zynaxis'
Articles and Bylaws.
ANTI-TAKEOVER PROVISIONS GENERALLY
The provisions of Vaxcel's Certificate and Bylaws described below under the
headings, "Authorized Capital Stock," "Amendment of Certificate of Incorporation
and Bylaws," "Removal of Directors," "Limitations on Director Liability,"
"Special Meetings of Shareholders," "Actions by Shareholders Without a Meeting,"
and "Mergers, Consolidations, and Sales of Assets Generally," and the provisions
of the DGCL described under the heading "Business Combinations with Certain
Persons" are referred to herein as the "Protective Provisions." In general, one
purpose of the Protective Provisions is to assist Vaxcel's Board in playing a
role if any group or person attempts to acquire control of Vaxcel, so that the
Board can further protect the interests of Vaxcel and its shareholders as
appropriate under the circumstances, including, if the Vaxcel Board determines
that a sale of control is in their best interests, by enhancing the Board's
ability to maximize the value to be received by the shareholders upon such a
sale.
Although Vaxcel's management believes the Protective Provisions are,
therefore, beneficial to Vaxcel's shareholders, the Protective Provisions also
may tend to discourage some takeover bids. As a result, Vaxcel's shareholders
may be deprived of opportunities to sell some or all of their shares at prices
that represent a premium over prevailing market prices. On the other hand,
defeating undesirable acquisition offers can be a very expensive and
time-consuming process. To the extent that the Protective Provisions discourage
undesirable proposals, Vaxcel may be able to avoid those expenditures of time
and money.
The Protective Provisions also may discourage open market purchases by a
potential acquirer. Such purchases may increase the market price of Vaxcel
Common Stock temporarily, enabling shareholders to sell their shares at a price
higher than that which otherwise would prevail. In addition, the Protective
Provisions may decrease the market price of Vaxcel Common Stock by making the
stock less attractive to persons who invest in securities in anticipation of
price increases from potential acquisition attempts. The Protective Provisions
also may make it more difficult and time consuming for a potential acquirer to
obtain control of Vaxcel through replacing the Board of Directors and
management. Furthermore, the Protective Provisions may make it more difficult
for Vaxcel's shareholders to replace the Board of Directors or management, even
if a majority of the shareholders believe such replacement is in the best
interests of Vaxcel. As a result, the Protective Provisions may tend to
perpetuate the incumbent Board of Directors and management.
AUTHORIZED CAPITAL STOCK
Vaxcel. The Certificate authorizes the issuance of up to 30,000,000 shares
of Vaxcel Common Stock, of which 8,250,004 shares were issued as of
, 1997, and 2,000,000 shares of Vaxcel Preferred Stock of which no shares have
been issued. Vaxcel's shareholders do not have the preemptive right to purchase
or subscribe to any unissued authorized shares of Vaxcel Common Stock or any
option or warrant for the purchase thereof. Subject to the limitations set forth
in the DGCL, Vaxcel's Board may authorize the issuance of one or more classes,
or series thereof, of Vaxcel's Preferred Stock, without further action by
Vaxcel's shareholders.
48
<PAGE> 55
Zynaxis. Zynaxis' authorized capital stock consists of 25,000,000 shares
of Zynaxis Common Stock, of which, as of the Record Date, shares were
issued and outstanding and 2,000,000 shares of no par value Preferred Stock, of
which, as of the Record Date, shares were designated Series A Convertible
Preferred Stock and were issued and outstanding. Zynaxis' shareholders do not
have the preemptive right to purchase or subscribe to any unissued authorized
shares of Zynaxis Capital Stock or any option or warrant for the purchase
thereof. In addition, 500,000 shares of Preferred Stock of Zynaxis can be issued
in a new series by authorization of the Zynaxis Board without the approval of
the shareholders, except in certain instances prescribed by the PBCL.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
Vaxcel. The DGCL generally provides that the approval of a corporation's
board of directors and the affirmative vote of a majority of (i) all shares
entitled to vote thereon and (ii) the shares of each class of stock entitled to
vote thereon as a class, is required to amend a corporation's certificate of
incorporation, unless the certificate specifies a greater voting requirement.
The Certificate provides that the Vaxcel Board has the power to adopt, amend,
alter, change, or repeal the Bylaws.
Zynaxis. The PBCL requires the affirmative vote of the holders entitled to
cast at least a majority of the votes actually cast on an amendment to the
articles of incorporation, provided that shareholder approval is not required
for certain non-material amendments, such as a change in the corporate name, a
provision for perpetual existence or, if the corporation has only one class of
shares outstanding, a change in the number and par value of the authorized
shares to effect a stock split. The Zynaxis Articles provide that the Zynaxis
Articles may be amended as provided by the PBCL, and all rights conferred upon
the shareholders therein are granted subject to such reservation. Under
Pennsylvania law the power to adopt, amend or repeal bylaws may be vested by the
bylaws in the directors, with certain statutory exceptions for certain actions
and subject to the power of shareholders to change such action. Pennsylvania law
provides that unless the articles of incorporation otherwise provide, the board
of directors does not have the authority to adopt or change a bylaw on any
subject that is committed expressly to the shareholders by statute. The Zynaxis
Bylaws provide that the Zynaxis Bylaws may be amended by the Zynaxis
shareholders or, with respect to those matters not expressly committed to the
shareholders by statute, by the vote of a majority of the directors.
REMOVAL OF DIRECTORS
Vaxcel. Pursuant to the Bylaws, any director or the entire Vaxcel Board
may be removed with or without cause by the affirmative vote of the holders of a
majority of the shares of Vaxcel's voting stock.
Zynaxis. Under the PBCL, unless a bylaw adopted by the shareholders
provides otherwise, the entire board of directors, a class of the board where
the board is classified with respect to the power to select directors, or any
individual director, may be removed with or without cause by the holders of the
class or series of shares entitled to elect the class of directors, and by the
board of directors for any proper cause specified in the bylaws. Because the
Zynaxis Board is classified by directors elected by holders of Zynaxis Common
Stock and directors elected by holders of Zynaxis Preferred Stock, only the
holders of Zynaxis Common Stock may remove Zynaxis Common Stock directors and
only the holders of Zynaxis Preferred Stock may remove Zynaxis Preferred Stock
directors. The Zynaxis Bylaws provide that directors may be removed without
cause by the Zynaxis shareholders.
LIMITATIONS ON DIRECTOR LIABILITY
Vaxcel. The Certificate provides that a director of Vaxcel will have no
personal liability to Vaxcel or its shareholders for monetary damages for breach
of fiduciary duty as a director, except liability for (i) any breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) acts or
omissions that are not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) the payment of certain unlawful dividends and
the making of certain unlawful stock purchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
49
<PAGE> 56
Although this provision does not affect the availability of injunctive or
other equitable relief as a remedy for a breach of duty by a director, it does
limit the remedies available to a shareholder who has a valid claim that a
director acted in violation of his duties, if the action is among those as to
which liability is limited. This provision may reduce the likelihood of
shareholder derivative litigation against directors and may discourage or deter
shareholders or management from bringing a lawsuit against directors for breach
of their duties, even though such action, if successful, might have benefited
Vaxcel and its shareholders. The SEC has taken the position that similar
provisions added to other corporations' certificates of incorporation would not
protect those corporations' directors from liability for violations of the
federal securities laws.
Zynaxis. Zynaxis' Bylaws generally provide that a director shall not be
held personally liable for any action taken or failure to take action, unless
(i) the director has breached or failed to perform his fiduciary duties and the
breach constitutes self-dealing, willful misconduct or recklessness, or (ii) the
director has been held liable under a criminal statute or for failure to pay
federal, state or local taxes.
INDEMNIFICATION
Vaxcel. Vaxcel's Certificate and Bylaws contain a provision which
generally provides that Vaxcel will indemnify its directors and Board-elected
officers to the full extent permitted by the DGCL. Under Section 145 of the DGCL
as currently in effect, other than in actions brought by or in the right of
Vaxcel, such indemnification would apply if it were determined in the specific
case that the proposed indemnitee acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of
Vaxcel and, with respect to any criminal proceeding, if such person had no
reasonable cause to believe that the conduct was unlawful. In actions brought by
or in the right of Vaxcel, such indemnification probably would be limited to
reasonable expenses (including attorneys' fees) and would apply if it were
determined in the specific case that the proposed indemnitee acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of Vaxcel, except that no indemnification may be made with
respect to any matter as to which such person is adjudged liable to Vaxcel,
unless, and only to the extent that, the court determines upon application that,
in view of all the circumstances of the case, the proposed indemnitee is fairly
and reasonably entitled to indemnity for such expenses as the court deems
proper. To the extent that any director, officer, employee, or agent of Vaxcel
has been successful on the merits or otherwise in defense of any action,
lawsuit, or proceeding, whether civil, criminal, administrative, or
investigative, such person must be indemnified against reasonable expenses
incurred by him in connection therewith. The Certificate and the Bylaws provide
that indemnification also may be extended to any other officers, agents or
employees of Vaxcel on a case-by-case basis.
Zynaxis. The Zynaxis Bylaws provide that directors, officers and any other
person designated by the Zynaxis Board are entitled to be indemnified as
provided in the Zynaxis Bylaws. Zynaxis will indemnify such a representative of
the corporation against any liability incurred in connection with any proceeding
in which the representative may be involved as a party or otherwise by reason of
the fact that such person is or was serving in an indemnified capacity,
including, without limitation, liabilities resulting from any actual or alleged
breach or neglect of duty, error, misstatement or misleading statement,
negligence, gross negligence or act giving rise to strict or products liability.
Such representatives are not entitled to indemnification (i) where such
indemnification is expressly prohibited by applicable law or has been finally
determined in a final adjudication to be otherwise unlawful, or (ii) where the
conduct of the representative has been finally determined to constitute willful
misconduct or recklessness or to be based upon or attributable to the receipt by
the representative from the corporation of a personal benefit to which the
representative is not legally entitled.
SPECIAL MEETINGS OF SHAREHOLDERS
Vaxcel. Vaxcel's Bylaws provide that such meetings may be called at any
time, by the Chairman of the Board, a majority of the Vaxcel Board, the
President, or at the request, in writing, of the holders of a majority of shares
of voting stock of Vaxcel entitled to vote at the special meeting of Vaxcel.
50
<PAGE> 57
Zynaxis. The Zynaxis Bylaws provide that special meetings of the
shareholders may be called at any time by resolution of the board of directors.
Under the PBCL, shareholders of a registered corporation, like Zynaxis, are not
entitled to call a special meeting of the shareholders.
ACTIONS BY SHAREHOLDERS WITHOUT A MEETING
Vaxcel. The Bylaws provide that any action required or permitted to be
taken at a meeting by Vaxcel shareholders may be effected by any written consent
by the shareholders.
Zynaxis. The PBCL provides that any action which may be taken at a meeting
of the shareholders may be taken without a meeting by less than unanimous
written consent of the shareholders who would have been entitled to vote at a
meeting if permitted by the articles of incorporation of a registered
corporation (of which Zynaxis is one). Zynaxis' Articles of Incorporation permit
shareholder action without a meeting by less than unanimous consent.
BUSINESS COMBINATIONS WITH CERTAIN PERSONS
Vaxcel. Section 203 of the DGCL ("Section 203") places certain
restrictions on "business combinations" (as defined in Section 203, generally
including mergers, sales and leases of assets, issuances of securities, and
similar transactions) by Delaware corporations with an "interested shareholder"
(as defined in Section 203, generally the beneficial owner of 15% or more of the
corporation's outstanding voting stock). Section 203 generally applies to
Delaware corporations that have a class of voting stock listed on a national
securities exchange, authorized for quotation on an interdealer quotation system
of a registered national securities association, or held of record by more than
2,000 shareholders, unless the corporation expressly elects in its certificate
of incorporation or bylaws not to be governed by Section 203.
Vaxcel has not specifically elected to avoid the application of Section
203. As a result, Section 203 generally would prohibit a business combination by
Vaxcel or a subsidiary with an interested shareholder within three years after
the person or entity becomes an interested shareholder, unless (i) prior to the
time when the person or entity became an interested shareholder, Vaxcel's Board
approved either the business combination or the transaction pursuant to which
such person or entity became an interested shareholder, (ii) upon consummation
of the transaction in which the person or entity became an interested
shareholder, the interested shareholder held at least 85% of the outstanding
Vaxcel voting stock (excluding shares held by persons who are both officers and
directors and shares held by certain employee benefit plans), or (iii) once the
person or entity became an interested shareholder, the business combination was
approved by Vaxcel's Board and by the holders of at least two-thirds of the
outstanding Vaxcel voting stock, excluding shares owned by the interested
shareholder.
Zynaxis. The PBCL provides that if a shareholder of a registered
corporation (of which Zynaxis is one) is a party to a sale of assets
transaction, share exchange, merger or consolidation involving the corporation
or a subsidiary, or if a shareholder is to be treated differently in a corporate
dissolution from other shareholders of the same class, then approval must be
obtained of the shareholders entitled to cast at least a majority of the votes
which all shareholders other than the interested shareholder are entitled to
cast with respect to the transaction, without counting the votes of the
interested shareholder. Such additional shareholder approval is not required if
the consideration to be received by the other shareholders in such transaction
for shares of any class is not less than the highest amount paid by the
interested shareholder in acquiring shares of the same class, or if the proposed
transaction is approved by a majority of the board of directors other than
certain directors ("disqualified directors") affiliated or associated with, or
nominated by, the interested shareholder. The PBCL provides that a director who
has held office for at least 24 months prior to the date of vote on the proposed
transaction is not a disqualified director.
Further, the PBCL prohibits certain "business combinations" between the
corporation and an "interested shareholder" except under specified
circumstances. An "interested shareholder" in this instance is one who, directly
or indirectly, is the beneficial owner of shares entitling that person to cast
at least 20% of the votes that all shareholders would be entitled to cast in an
election of directors of the corporation or is an affiliate or associate of such
corporation and at any time within the five-year period immediately prior to the
date in
51
<PAGE> 58
question was the beneficial owner, directly or indirectly, of shares entitling
that person to cast at least 20% of the votes that all shareholders would be
entitled to cast in an election of directors of the corporation. A "business
combination" includes a merger, consolidation, share exchange or division of the
corporation or any subsidiary of the corporation with the interested shareholder
or with, involving or resulting in any other corporation which is, or, after the
merger, consolidation, share exchange or division would be, an affiliate or
associate of the interested shareholder. A "business combination" also includes
a sale or other disposition to the interested shareholder or any affiliate or
associate of the interested shareholder of assets of the corporation or any
subsidiary (1) having an aggregate market value equal to 10% or more of the
aggregate market value of the corporation's consolidated assets, (2) having an
aggregate market value equal to 10% or more of the aggregate market value of all
the outstanding shares of such corporation, or (3) representing 10% or more of
the consolidated earning power or net income of such corporation. A "business
combination" also includes certain transactions with an interested shareholder
involving the issuance of shares of a corporation or its subsidiary having an
aggregate market value equal to 5% or more of the aggregate market value of all
outstanding shares under certain circumstances, the adoption of a plan for the
liquidation or dissolution of the corporation pursuant to certain agreements
with an interested shareholder and certain reclassifications and loans involving
the interested shareholder. The prohibition against such business combinations
does not apply under specified circumstances and if the corporation has opted
out of this provision. Zynaxis has not opted out of this statutory provision.
MERGERS, CONSOLIDATIONS, AND SALES OF ASSETS GENERALLY
Vaxcel. Under the DGCL generally a merger, consolidation, share exchange,
dissolution or sale of substantially all of a corporation's assets other than in
the ordinary course of business must be approved by the affirmative vote of a
majority of the votes cast by all shareholders entitled to vote thereon. Neither
the Vaxcel Certificate nor the Vaxcel Bylaws contain a provision relating to the
approval of mergers, consolidations, share exchanges, dissolutions or sales of
assets.
Zynaxis. The PBCL provides that the affirmative vote of a majority of the
votes cast is required to effect a merger, consolidation, share exchange,
dissolution or sale of substantially all of a corporation's assets other than in
the ordinary course of business.
DISSENTERS' RIGHTS OF APPRAISAL
Vaxcel. The rights of appraisal of dissenting shareholders of Vaxcel are
governed by the DGCL. Pursuant thereto, except as described below, any
shareholder has the right to dissent from any merger of which Vaxcel could be a
constituent corporation. No appraisal rights are available, however, for (i) the
shares of any class or series of stock that is either listed on a national
securities exchange, quoted on the Nasdaq National Market, or held of record by
more than 2,000 shareholders or (ii) any shares of stock of the constituent
corporation surviving a merger if the merger did not require the approval of the
surviving corporation's shareholders, unless, in either case, the holders of
such stock are required by an agreement of merger or consolidation to accept for
that stock something other than: (a) shares of stock of the corporation
surviving or resulting from the merger or consolidation; (b) shares of stock of
any other corporation that will be listed at the effective time of the merger on
a national securities exchange, quoted on the Nasdaq National Market, or held of
record by more than 2,000 shareholders; (c) cash in lieu of fractional shares of
stock described in clause (a) or (b) immediately above; or (d) any combination
of the shares of stock and cash in lieu of fractional shares described in
clauses (a) through (c) immediately above.
Zynaxis. Under the PBCL, shareholders may perfect dissenters' rights with
regard to corporate actions involving certain mergers, consolidations, and the
sale, lease or exchange of substantially all the assets of the corporation
(under limited circumstances). However, under the PBCL, dissenters' rights may
be denied when a corporation's shares are listed on a national securities
exchange or held of record by more than 2,000 persons.
52
<PAGE> 59
SHAREHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS
Vaxcel. The DGCL provides that a shareholder may inspect books and records
upon written demand under oath stating the purpose of the inspection, if such
purpose is reasonably related to such person's interest as a shareholder.
Zynaxis. Pursuant to the PBCL, Zynaxis' shareholders generally have the
right to inspect in person or by agent or attorney and copy certain of Zynaxis'
corporate documents, upon a verified written demand stating a proper purpose for
such inspection.
DIVIDENDS
Vaxcel. The DGCL provides that, subject to any restrictions in the
corporation's certificate of incorporation, dividends may be declared from the
corporation's surplus, or, if there is no surplus, from its net profits for the
fiscal year in which the dividend is declared and the preceding fiscal year.
Dividends may not be declared, however, if the corporation's capital has been
diminished to an amount less than the aggregate amount of all capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets.
Zynaxis. Zynaxis has not paid any dividends on the Zynaxis Common Stock to
date. Zynaxis currently intends to retain its cash to finance current needs and
therefore does not intend to pay any cash dividends prior to the Effective Time
of the Merger.
53
<PAGE> 60
COMPARATIVE MARKET PRICES AND DIVIDENDS
Because Vaxcel is a wholly owned subsidiary of CytRx, Vaxcel Common Stock
is not traded in any established market. Zynaxis Common Stock was, until
December 23, 1996, quoted on the Nasdaq SmallCap Market under the symbol "ZNXS."
Currently, Zynaxis Common Stock is not traded in any established market. The
following table sets forth, for the indicated periods, the high and low closing
sale prices for Zynaxis Common Stock as reported on the Nasdaq SmallCap Market
(or the Nasdaq National Market for the periods prior to the fourth quarter of
1995) or as known by management of Zynaxis. Neither Vaxcel nor Zynaxis has ever
declared a cash dividend on the shares of Vaxcel Common Stock and Zynaxis Common
Stock, respectively, issued and outstanding.
<TABLE>
<CAPTION>
ZYNAXIS
------------
PRICE RANGE
------------
HIGH LOW
----- ----
<S> <C> <C>
1994
First Quarter................................................. 5 2 7/8
Second Quarter................................................ 3 1/8 2 1/4
Third Quarter................................................. 2 7/8 1 3/4
Fourth Quarter................................................ 2 1/4 1 1/8
1995
First Quarter................................................. 2 1/8 1
Second Quarter................................................ 1 7/8 1
Third Quarter................................................. 2 1/4 15/1
Fourth Quarter................................................ 1 1/2 5/8
1996
First Quarter................................................. 1 3/8 5/8
Second Quarter................................................ 1 3/4 3/4
Third Quarter................................................. 1 5/32 7/1
Fourth Quarter................................................
</TABLE>
On , 1997, the last reported sale price of Zynaxis Common
Stock that management of Zynaxis is aware of was $ . On December 5, 1996,
the last business day prior to public announcement of the proposed Merger, the
last reported sale price of Zynaxis Common Stock as reported on the Nasdaq
SmallCap Market was $0.1875.
54
<PAGE> 61
PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information gives effect to the proposed
Merger. The pro forma condensed combined financial statements have 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 statements are based on certain assumptions and preliminary estimates
which are subject to change. These statements do not purport to be indicative of
the financial position or results of operations that might have occurred, nor
are they necessarily indicative of future results.
The Pro Forma Condensed Combined Balance Sheet as of September 30, 1996 has
been prepared to give pro forma effect to the Merger as if the Merger had
occurred on September 30, 1996. The Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 have been prepared to give pro forma effect to the Merger as
if the Merger had occurred on January 1, 1995 and January 1, 1996, respectively.
The shares used in computing pro forma net loss per common share assumes the
Merger had occurred as of January 1, 1995 for the year ended December 31, 1995,
and January 1, 1996 for the nine months ended September 30, 1996. No assumptions
are made regarding additional issuances of shares of Vaxcel Common Stock
subsequent to the Merger.
The Merger will be accounted for as a purchase transaction with Vaxcel as
the acquiring company. The total estimated Zynaxis purchase price of $4,000,000
has been allocated to the fair market value of the assets acquired and the
liabilities assumed.
55
<PAGE> 62
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA PRO FORMA
VAXCEL ZYNAXIS ADJUSTMENTS COMBINED
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 18,832 $ 223,177 $ 3,350,000(1) $ 3,592,009
Accounts receivable........... 6,363 134,111 -- 140,474
Other current assets.......... -- 87,717 -- 87,717
----------- ------------ ------------ -----------
25,195 445,005 3,350,000 3,820,200
Property and equipment, net........ 108,076 2,060,383 (210,383)(2) 1,958,076
Acquired intangible assets......... -- -- 2,822,087 (6) 2,822,087
Other assets:
Note receivable............... -- 314,516 -- 314,516
Other assets.................. 35,674 113,365 -- 149,039
----------- ------------ ------------ -----------
35,674 427,881 -- 463,555
----------- ------------ ------------ -----------
Total assets............. $ 168,945 $ 2,933,269 $ 5,961,704 $ 9,063,918
=========== ============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............. $ 8,991 $ 863,147 $ -- $ 872,138
Accrued liabilities........... 46,098 335,544 (14,779)(3) 366,863
Notes payable to
shareholders................ -- 450,000 (350,000)(3) 100,000
Other current liabilities..... -- 103,974 -- 103,974
----------- ------------ ------------ -----------
55,089 1,752,665 (364,779) 1,442,975
Long-term debt and other long-term
obligations...................... -- 157,087 -- 157,087
Shareholders' equity:
Preferred stock............... -- 2,554,305 (2,554,305)(4) --
Common Stock.................. 8,200 102,980 (100,180)(5) 11,000
Additional Paid-in capital.... 4,297,800 45,881,678 (38,534,478)(5) 11,645,000
Accumulated deficit........... (4,192,144) (47,515,446) 47,515,446 (5) (4,192,144)
----------- ------------ ------------ -----------
113,856 1,023,517 6,326,483 7,463,856
----------- ------------ ------------ -----------
Total liabilities and
shareholders' equity... $ 168,945 $ 2,933,269 $ 5,961,704 $ 9,063,918
=========== ============ ============ ===========
</TABLE>
- ---------------
Pro Forma Adjustments:
(1) Cash contribution by CytRx, net of transaction-related costs.
(2) Write-down of property and equipment to estimated fair market value.
(3) Conversion of the Zynaxis Notes and accrued interest into Vaxcel Common
Stock (at the Merger transaction price) as a condition of the Merger.
(4) Conversion of Zynaxis Preferred Stock into Vaxcel Common Stock (at the
Merger transaction price) as a condition of the Merger.
(5) Adjustment represents the new equity arising from the issuance of Vaxcel
Common Stock to complete the Merger, less the actual historical equity of
Zynaxis prior to the Merger.
(6) Allocation of purchase price in excess of net assets acquired to intangible
assets, including technology rights from SRI and a development and
licensing agreement with ALK.
56
<PAGE> 63
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA PRO FORMA
VAXCEL ZYNAXIS ADJUSTMENTS COMBINED
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
License fees.................... $ 50,000 $ -- $ 50,000
Collaborative, contract and
grant revenue................. 30,635 1,689,205 1,719,840
==========
--------- -----------
80,635 1,689,205 1,769,840
Operating Expenses
Research and development........ 540,744 2,781,827 $(248,885)(1) 3,073,686
General and administrative...... 316,663 1,333,356 93,298 (4) 1,743,317
--------- ----------- ----------- -----------
857,407 4,115,183 (155,587) 4,817,003
--------- ----------- ----------- -----------
Other Income (expense):
Interest income................. 6,459 42,687 49,146
Interest expense................ -- (31,731) 14,779 (2) (16,952)
Other income.................... -- 420,346 420,346
--------- ----------- ----------- -----------
6,459 431,302 14,779 (2) 452,540
--------- ----------- ----------- -----------
Net loss............................. $(770,313) $(1,994,676) $ 170,366 $(2,594,623)
========= ========== ========= ==========
Net loss per common share............ $ (0.10) $ (0.20) $ (0.24)(3)
========= ========== ==========
</TABLE>
- ---------------
Pro Forma Adjustments:
(1) Adjustment to depreciation expense associated with property write-down to
fair market value.
(2) Adjustment to eliminate interest expense associated with Zynaxis Notes
converted into Vaxcel Common Stock.
(3) The average number of shares of Vaxcel Common Stock outstanding used to
calculate pro forma net loss per common share is based on the presumption
that there would be 11,000,000 shares of Vaxcel Common Stock outstanding
upon the assumed effective date of the Merger.
(4) Amortization of intangible assets acquired.
57
<PAGE> 64
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA PRO FORMA
VAXCEL ZYNAXIS ADJUSTMENTS COMBINED
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Net sales................... $ -- $ 141,189 $ 141,189
License fees................ 115,000 -- 115,000
Collaborative, contract and
grant revenue............. 6,709 620,603 627,312
----------- ------------ ------------
121,709 761,792 883,501
Operating Expenses
Cost of sales............... -- 40,262 40,262
Research and development.... 894,754 5,168,912 $(519,795)(1) 5,543,871
General and
administrative............ 534,542 2,239,921 40,099 (3) 2,814,562
Write-off of patent costs... 128,216 -- 128,216
Charge for acquired research
and development........... -- 5,165,793 5,165,793
Restructuring charge........ -- 347,436 347,436
----------- ------------ ---------- ------------
1,557,512 12,962,324 (479,696) 14,040,140
----------- ------------ ---------- ------------
Other Income (Expense):
Interest income............. 56,998 80,919 137,917
Interest expense............ -- (36,896) (36,896)
Net gain on sale of
diagnostic technologies... -- 1,616,840 1,616,840
Other income................ -- 162,232 162,232
----------- ------------ ------------
56,998 1,823,095 1,880,093
----------- ------------ ---------- ------------
Net loss......................... $(1,378,805) $(10,377,437) $(479,696) $(11,276,546)
=========== ============ ========== ============
Net loss per common share........ $ (0.17) $ (1.57) $ (1.03)(2)
=========== ============ ============
</TABLE>
- ---------------
Pro Forma Adjustments:
(1) Adjustment to depreciation expense associated with property write-down to
fair market value.
(2) The average number of shares of Vaxcel Common Stock outstanding used to
calculate pro forma net loss per common share is based on the presumption
that there would be 11,000,000 shares of Vaxcel Common Stock outstanding
upon the assumed effective date of the Merger.
(3) Amortization of intangible assets acquired.
58
<PAGE> 65
SELECTED HISTORICAL FINANCIAL DATA OF VAXCEL
The selected financial data as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995, and for the period from inception
(at January 6, 1993) through December 31, 1993, is derived from the financial
statements of Vaxcel, which are included herein. Such financial statements have
been audited by Ernst & Young LLP, independent auditors of Vaxcel. The selected
statement of operations data for the nine months ended September 30, 1995 and
1996 and the selected balance sheet data as of September 30, 1996, have been
derived from unaudited financial statements of Vaxcel, that, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of such data at such dates and for
such periods in accordance with generally accepted accounting principles. The
selected financial data for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year. The
following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Vaxcel" and the financial statements of Vaxcel and notes thereto
included in this Proxy Statement.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JANUARY 6,
FOR THE FOR THE 1993)
NINE MONTHS ENDED YEARS ENDED THROUGH
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------ ------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................ $ 80,635 $ 25,000 $ 121,709 $ 500,814 $ 506,317
Operating Expenses:
Cost of sales....................... -- -- -- 72,636 74,066
Research and development............ 540,744 559,965 894,754 570,548 791,996
Marketing, general and
administrative.................... 316,663 364,794 534,542 845,901 1,027,803
Write-off of patent costs........... -- 128,216 128,216 -- --
--------- ----------- ------------ ------------ ------------
857,407 1,052,975 1,557,512 1,489,085 1,893,865
Other Income (Expense):
Interest income (expense), net...... 6,459 47,930 56,998 (111,572) (55,635)
Sale of animal adjuvant rights...... -- -- -- 500,000 --
--------- ----------- ------------ ------------ ------------
6,459 47,930 56,998 388,428 (55,635)
Net loss................................ $(770,313) $ (980,045) $ (1,378,805) $ (599,843) $ (1,443,183)
========= =========== ============ ============ ============
Net loss per common share............... $ (.10) $ (.12) $ (.17) $ (.09) $ (.24)
========= =========== ============ ============ ============
Shares used in computing net loss per
common share.......................... 8,058,029 8,000,000 8,000,000 6,826,027 6,000,000
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 18,832 $ 515,522 $ 527,948 $ 40,423
Working capital..................... (29,894) 402,861 521,913 (45,117)
Total assets........................ 168,945 701,868 1,043,575 825,900
Stockholder's equity................ 113,856 584,169 962,974 (1,437,183)
</TABLE>
59
<PAGE> 66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS AND OPERATIONS OF VAXCEL
GENERAL
In conjunction with Vaxcel's organization and commencement of operations in
January 1993, Vaxcel entered into certain licensing agreements with CytRx which
granted Vaxcel exclusive rights to OPTIVAX(R), a vaccine adjuvant being
developed by Vaxcel for use in human vaccines, and to Titermax(R), a vaccine
adjuvant marketed by Vaxcel exclusively for research purposes. In December 1994
Vaxcel relinquished its rights to Titermax, as discussed below.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1996 Vaxcel had cash and cash equivalents of $18,832 and
net assets of $113,856 compared to $515,522 and $584,169, respectively, at
December 31, 1995, and $527,948 and $962,974, respectively, at December 31,
1994.
Since its inception Vaxcel has incurred operating losses and has been
economically dependent upon CytRx to provide the funding necessary to conduct
its operations. During 1994 and 1993 the principal source of capital was from a
$3,000,000 line of credit provided by CytRx pursuant to two convertible
promissory notes. In July and August 1994, the full amount of the debt owed to
CytRx ($3,000,000) was converted into shares of Vaxcel Common Stock. Since then,
additional cash funding has been provided by CytRx as needed by Vaxcel through
the direct purchase of shares of Vaxcel Common Stock.
Vaxcel's primary requirement for capital will be to continue its
development activities for OPTIVAX and technologies acquired pursuant to the
Merger (PLG microspheres and mucoadhesives) and for general corporate purposes.
Substantial losses are expected over the next several years resulting primarily
from research and development expenses. Management anticipates to partially
offset these losses with revenues generated from corporate collaborations.
CytRx has firmly committed to provide a substantial level of capital
funding subject to the Closing of the Merger. Management believes that the net
proceeds of CytRx's cash contribution pursuant to the Merger, combined with cash
on hand, will be sufficient to support Vaxcel's operation for the next two
years. Management expects that proceeds from corporate partnering arrangements
may further supplement Vaxcel's liquidity and capital resources. In the event
the Merger is not consummated, CytRx has expressed its commitment to continue
financial support of Vaxcel's operations as necessary at least through 1997.
Vaxcel will consider additional sources of funding as appropriate and available.
RESULTS OF OPERATIONS
During 1994 and the period from inception (January 6, 1993) through
December 31, 1993 (the "1993 Period"), Vaxcel reported net sales of $500,814 and
$506,317, respectively, related to Titermax. In December 1994, CytRx repurchased
the rights to Vaxcel's OPTIVAX technology for use in non-human animals,
including the rights to Titermax, for $500,000. Cost of sales and selling and
marketing expense during 1994 and the 1993 Period related entirely to sales of
Titermax. Selling and marketing expense declined from $444,512 during the 1993
Period to $181,542 during 1994 due to a reduction in Vaxcel's marketing staff
and an overall reduction in promotional activities related to Titermax.
During the nine months ended September 30, 1996 and 1995 and the year ended
December 31, 1995, Vaxcel reported license fee income of $50,000, $25,000, and
$115,000, respectively, representing initial payments pursuant to its agreements
with Connaught Laboratories, Inc., Corixa Corporation and Medeva Europe Limited
related to OPTIVAX.
Investment income was $56,998 during 1995, as compared to $8,072 during
1994 and $0 during the 1993 Period. Investment income was $6,459 during the nine
months ended September 30, 1996, as compared to $47,930 during the same period
in 1995. During the 1993 Period and much of 1994 no excess cash balances were
carried by Vaxcel as expenditures were funded by CytRx on an as-needed basis,
pursuant to a convertible
60
<PAGE> 67
line of credit. During 1995, Vaxcel benefited from excess cash balances carried
over from the December 1994 sale of non-human adjuvant rights to CytRx, as well
as an additional $1,000,000 cash contribution by CytRx in January 1995. During
the nine month period ended September 30, 1996, investment income declined due
to lower cash balances; CytRx continues to provide financial support through
periodic purchases of Vaxcel Common Stock.
Research and development expenditures were $894,754 during 1995, as
compared to $570,548 during 1994 and $791,996 during the 1993 Period. The
decrease from 1993 to 1994 is attributable to staff reductions and a scale-back
in the OPTIVAX development program during the second half of 1994 as Vaxcel
sought to conserve cash resources. Subsequent to the sale of non-human adjuvant
rights in December 1994 and an additional cash infusion by CytRx in January
1995, Vaxcel accelerated its development efforts. Research and development
expenditures were $540,744 during the nine months ended September 30, 1996, as
compared to $559,965 during the same period in 1995.
General and administrative expenses were $534,542 during 1995, $664,359
during 1994 and $583,291 during the 1993 Period. The increase from 1993 to 1994
primarily related to staff additions, including the addition of Vaxcel's
President and Chief Executive Officer who was hired during the second half of
1993. The decline from 1994 to 1995 was due to subsequent staff reductions and
other cash conservation measures taken in late 1994, including the relocation of
Vaxcel's operations from its leased facility to CytRx's headquarters. In January
1996 Vaxcel subleased its former facility at a full recovery of its ongoing
carrying cost. General and administrative expenses were $316,663 during the nine
month period ended September 30, 1996, as compared to $364,794 during the same
period during 1995. This decline is due primarily to savings realized from
subleasing Vaxcel's former facility. As discussed in Note 2 to the Vaxcel
financial statements, during 1995, Vaxcel recorded a one-time charge of $128,216
related to a change in the method of accounting for patent costs.
Interest expense of $119,644 and $55,635 during 1994 and the 1993 Period,
respectively, relates entirely to interest accrued on two convertible lines of
credit from CytRx. The outstanding principal and accrued interest under these
loans was converted into Vaxcel Common Stock in July and August 1994.
IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 121 ("Statement No. 121") which
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. Vaxcel adopted Statement No. 121
in the first quarter of 1996, and such adoption had no material effect on its
financial statements.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("Statement No. 123") which provides an alternative to
Accounting Principles Board Opinion No. 25 ("Opinion No. 25") in accounting for
stock-based compensation issued to employees. For companies that continue to
account for stock-based compensation arrangements under Opinion No. 25,
Statement No. 123 requires disclosure of the pro forma effect on net income and
earnings per share of its "fair value" based accounting for those arrangements,
effective for fiscal years beginning after December 15, 1995. Vaxcel plans to
continue accounting for stock option grants in accordance with Opinion No. 25,
and, accordingly, recognizes no compensation expense for stock option grants.
Vaxcel will make the additional disclosures required by Statement No. 123
beginning with its annual financial statements as of and for the year ended
December 31, 1996.
61
<PAGE> 68
BUSINESS OF VAXCEL
GENERAL
Executive Summary. Vaxcel is currently a wholly-owned subsidiary of CytRx
engaged in the development and commercialization of OPTIVAX(R), the tradename
for a family of proprietary nonionic block copolymers which may augment or
modulate the immune response to vaccines when administered injectably. Vaxcel
derives its rights to OPTIVAX from an exclusive, worldwide license agreement
with CytRx. Vaxcel believes OPTIVAX may improve the effectiveness and/or
convenience of existing vaccines and may contribute to the development of new
vaccines. Vaxcel and its institutional/corporate collaborators have conducted
preclinical studies in which OPTIVAX appears to act both as a delivery system
and as a vaccine adjuvant. In addition, Vaxcel initiated a Phase I trial in
early 1996 to help demonstrate that OPTIVAX was safe and adjuvant active in
humans when given by the injectable route. The results from this Phase I trial
are expected in the first quarter of 1997. Vaxcel's business strategy is to
license OPTIVAX on a vaccine-by-vaccine basis to pharmaceutical and
biotechnology companies engaged in vaccine research and development. Under such
arrangements, these companies would combine OPTIVAX with their vaccines and
assume responsibility for product development, regulatory approval, and
marketing at their expense. In return, Vaxcel would receive licensing fees,
milestone payments, and royalty on sales. At present, Vaxcel has entered into
option agreements for the development of OPTIVAX with Medeva PLC ("Medeva") and
Connaught Laboratories, Inc. ("Connaught") and a license agreement with Corixa
Corporation ("Corixa").
As a result of the Merger, Vaxcel will acquire the PLG microencapsulation
and mucoadhesive vaccine technologies of Zynaxis. These technologies appear to
be complementary to Vaxcel's current technology, as OPTIVAX is primarily focused
on enhancing the effectiveness of injectable vaccines, while the Zynaxis
technologies are primarily targeted toward development of vaccines for oral and
mucosal delivery. Vaxcel believes the Zynaxis oral delivery technologies may
have commercial application for many marketed vaccines currently administered by
parenteral injection, as well as certain new vaccines under development. In
addition, the Zynaxis technologies can be administered alone or in combination
with other vaccine carriers, delivery systems, and adjuvants. Similar to
OPTIVAX, Vaxcel's business strategy for the PLG microencapsulation and
mucoadhesive vaccine technologies will be to license these technologies to
companies engaged in vaccine research and development. In September 1995, ALK
executed a development and licensing agreement which granted ALK exclusive,
worldwide rights to evaluate and develop the Zynaxis technologies for oral
delivery of bioactive substances for the treatment of allergy. ALK is a world
leader in the preparation and standardization of allergen extracts for allergy
immunotherapy. ALK is currently conducting a Phase II human clinical trial.
Vaccines
One of the most desirable and cost effective ways to control a disease is
to prevent it from ever occurring. Vaccines are medicines designed to prevent
the occurrence of diseases by stimulating the body's natural defenses, the
immune system. In some circumstances, when an individual is exposed to a
pathogen (a microbial organism which causes disease), the body's immune system
may not react quickly enough to prevent it from causing disease. After repeated
exposure to the pathogen, however, the immune system may recognize the organism
and develop an immune response to prevent or eliminate the disease. This ability
of the immune system to "remember" is the basis for immunization. By vaccinating
people with antigens, which are components of pathogens, subsequent exposure to
the pathogen should result in an effective immune response, thereby protecting
the individual from the disease.
The Vaccine Market
According to industry publications, annual worldwide sales for vaccines has
grown quite dramatically during the past decade, from approximately a few
hundred million dollars in the early 1980s to over $3 billion dollars today. At
present, there are 16 vaccines in routine use in the United States which protect
individuals against major diseases such as polio, tetanus, diphtheria,
pertussis, hepatitis A and B, measles, mumps, rubella, Haemophilus influenzae
type B, chickenpox, influenza, and pneumococcal pneumonia.
62
<PAGE> 69
The vaccine market is expected to continue to grow at double-digit rates in
the future. Discussed below are several factors that have contributed to the
historical double-digit growth of the vaccine market and are expected to help
fuel strong growth in the future:
- New Vaccine Introductions: New techniques in molecular genetics and
biology, as well as a better understanding of the human immune process,
have increased the probability that new vaccines can be successfully
developed. These advances in medical technology have already contributed
to the licensure and commercialization of new vaccines within the past
few years. Industry publications estimate that many new vaccines are in
various stages of development and could be marketable within the next
decade.
- Favorable Environment for Vaccines: Immunization programs are supported
by state and federal governments and managed health care organizations
because of their favorable impact on reducing both the incidence and cost
of disease. This support for vaccines is critical as both the private and
public sectors debate methods for controlling rising health care costs.
- Antibiotic Resistance: Not too long ago, antibiotics were considered to
be "wonder drugs." Unfortunately, certain bacteria are becoming
increasingly resistant to currently available antibiotics. Vaccines are
one of the most promising alternatives for dealing with the growing
problem of antibiotic resistance.
- Success of Vaccine Programs: Vaccines may have contributed more to
disease eradication and reduction than any other modern medical
intervention as some of the most devastating human diseases (polio,
tetanus, measles, and others) have been significantly controlled by safe
and effective vaccines. Many health experts believe similar successes can
be achieved with future vaccines.
- Cost Effectiveness of Vaccines: Because of their ability to prevent
diseases from occurring, vaccines are one of the most cost-effective
methods for controlling health care costs. The Centers for Disease
Control and Prevention ("CDC") estimates that every dollar spent on
immunization in the United States saves $16 in health care costs. This
positive cost/benefit ratio is powerful data given global efforts to
control disease and associated health care costs.
- Reduced Vaccine Liability: During the mid 1980s, manufacturers were
exposed to significant expenditures associated with lawsuits arising from
alleged vaccine associated side effects. In an effort to foster
development of new vaccines and protect the supply of existing vaccines,
the United States federal government enacted the National Childhood
Vaccine Injury Act ("NCVI Act"), which established a trust mechanism to
limit manufacturers' liability associated with certain pediatric
vaccines.
- Improvement of Existing Vaccines: Some currently available vaccines
require multiple doses in order to adequately protect an individual and
others are only marginally effective. Technological improvements in
formulations that could address the shortcomings of existing vaccines
could further expand the dollar size of the vaccine market.
Need for Enhanced Vaccine Adjuvants/Delivery Systems. Adjuvants are
compounds that augment or modulate immune responses when administered in
conjunction with a vaccine. Delivery systems are compounds which appropriately
target vaccines to cells of the immune system. Vaxcel believes there are several
strong medical/technical needs in the market for adjuvants/delivery systems
which will enhance the effectiveness and/or convenience of both vaccines
currently on the market and vaccines under development, including:
- Reduce Number of Doses: Many currently marketed injectable vaccines
require multiple doses and several visits to a physician or medical
center to adequately protect individuals against disease. This is a
complex and costly procedure that often leads to noncompliance by
individuals and higher costs to society. Therefore, benefits would be
gained by reducing the number of required injections with an effective
vaccine adjuvant/delivery system.
- Increase Effectiveness of Existing Vaccines: Some currently marketed
injectable vaccines are only marginally effective, and consequently,
patients contract disease even though they are properly
63
<PAGE> 70
immunized. Safe and effective adjuvants/delivery systems may increase the
effectiveness of marginally effective vaccines, thereby improving patient
response rates.
- Increase Potency of New Vaccines: A promising approach to new vaccine
development is the area of subunit injectable vaccines. These subunit
vaccines are highly purified, as only the active components of the
microorganism are used in the formulation. While promising, many new
subunit vaccine candidates are poorly immunogenic or induce inappropriate
immune responses, and therefore, lack the efficacy required for FDA
approval. Safe and effective adjuvants/delivery systems may enhance the
effectiveness of injectable subunit vaccines, thereby providing the
required efficacy for approval and ultimate commercialization.
- Aid Development of Combination Vaccines: Today, children receive
multiple injections per physician visit in order to become properly
immunized. One strategy for reducing the number of injections required is
to combine several vaccines into a single formulation. Safe and effective
adjuvants delivery systems may aid in the development of combination
vaccines.
- Aid in Development of Oral Vaccines: Oral immunization has advantages
over injectable vaccines, including patient acceptability, ease of
administration, and induction of mucosal immunity. Adjuvants/ delivery
systems which could possibly lead to the development of additional oral
vaccines should be attractive in the marketplace.
Vaxcel's Adjuvant/Vaccine Delivery System Technologies. Prior to the
Merger, Vaxcel has been totally focused on development and commercialization of
OPTIVAX. After consummation of the Merger, Vaxcel will possess a portfolio of
proprietary injectable and oral vaccine adjuvants and delivery systems which are
designed to improve the effectiveness and/or convenience of currently marketed
vaccines and vaccines under development. The following table summarizes the
portfolio of technologies Vaxcel will possess once the Merger with Zynaxis is
consummated:
<TABLE>
<CAPTION>
ADJUVANT/DELIVERY ROUTE OF
SYSTEM COMPOSITION ADMINISTRATION
- ------------------- -------------------------- -------------
<S> <C> <C>
OPTIVAX Nonionic Block Copolymers Injectable
Microencapsulation PLG Oral
Mucoadhesives Mucoadhesive Polymers Oral & Nasal
</TABLE>
Discussed below is a brief description and current status of development of
OPTIVAX and the Zynaxis technologies.
Vaxcel's Injectable Technology. Vaxcel is developing OPTIVAX, the
tradename for a family of proprietary nonionic block copolymers which augment or
modify the immune response to vaccines when administered injectably. Each
copolymer molecule consists of a hydrophobic polyoxypropylene ("POP") core block
and hydrophilic polyoxyethylene ("POE") blocks on the ends. The ratio of POP to
POE and the molecular weight of the copolymers represent the proprietary
features of the molecule and are two factors that may dictate the ability of
OPTIVAX to enhance the activity of injectable vaccines.
OPTIVAX is combined with an antigen, and in some instances other active or
inactive ingredients, to form a final vaccine formulation. OPTIVAX can
self-assemble into microparticles in saline solutions, and can therefore, be
used in the absence of oils and other surfactants which may contribute to
toxicities. This simple aqueous environment also preserves the integrity of the
antigen. OPTIVAX appears to act both as a delivery system that targets vaccines
to cells of the immune system and as a vaccine adjuvant that augments the immune
system's response to vaccines.
Preclinical studies have been performed at Vaxcel and with
institutional/corporate collaborators to characterize the activity of injectable
OPTIVAX as an adjuvant/delivery system, including the following:
- Vaxcel concluded a study evaluating the magnitude, kinetics, duration and
function of antibody responses induced by a commercially available
injectable trivalent influenza virus vaccine supplemented with several
block copolymers. The results of this study demonstrated the adjuvant
activity of
64
<PAGE> 71
OPTIVAX in animals and allowed for the identification of a certain
copolymer, termed OPTIVAX CRL1005 copolymer, for possible use with this
type of vaccine. The OPTIVAX CRL1005 copolymer increased the levels of
antibodies specific for total virus preparations and HAI antibody
responses in mice by approximately ten-fold.
- Vaxcel completed a study of the OPTIVAX CRL1005 copolymer in combination
with a currently marketed injectable influenza virus vaccine in non-human
primates, a species that is more similar to humans than mice. In this
study, the influenza vaccine alone proved to be only marginally
immunogenic in these animals and required two immunizations to induce
any detectable serum antibodies. However, the immunogenicity of the
vaccine was increased by the addition of the OPTIVAX CRL1005 copolymer
which augmented responses to both the influenza B virus and the
influenza A virus strains.
- In a study comparing the OPTIVAX CRL1005 copolymer to certain competitive
injectable adjuvants, the activity of OPTIVAX CRL1005 copolymer in
animals was comparable to or greater than these competitive adjuvants
with respect to antibody responses, cytokines produced following antigen
stimulation, and cytotoxic T-lymphocyte ("CTL") responses. The OPTIVAX
CRL1005 copolymer augmented antibody responses greater than certain
single component adjuvants and was comparable to certain multicomponent
systems. Vaxcel also demonstrated that OPTIVAX CRL1005 copolymer
augmented both Type-l and Type-2 cytokine responses and induced CTL.
- As part of an IND application filed with the FDA in late 1995, Vaxcel
preclinically tested the injectable OPTIVAX CRL1005 copolymer in
combination with a synthetic peptide based on the beta chain of human
chonionic gonadotropin ("(LOGO)hCG") conjugated to diphtheria toxoid
("DT"). In this study, the OPTIVAX CRL1005 copolymer augmented antibody
responses specific for (LOGO)hCG to levels comparable to a Complete
Freund's Adjuvant-like water-in-oil emulsion.
- In addition to the OPTIVAX CRL1005 copolymer, Vaxcel has also evaluated a
series of injectable copolymers with POP core units identical in size to
CRL1005 (12,000), but with increasing concentrations of POE (2.5%-20%).
Copolymers with POP core sizes ranging from 9,000 to 15,000 have also
been evaluated.
Vaxcel evaluated the adjuvant activity of these different, but related,
injectable OPTIVAX copolymers in animals using two different protein
immunogens: a currently marketed influenza virus vaccine and ovalbumin
("OVA"). The copolymers with the lowest POE concentration (2.5%-5.0%)
functioned best with the influenza virus proteins and OVA was most
compatible with OPTIVAX copolymers with slightly higher POE
concentrations (7.5%-10%).
Safety is critical when considering any new injectable vaccine
adjuvant/delivery system, as several compounds can induce an immune response,
but are too toxic either systemically or at the site of injection for use in
humans. For this reasons, Vaxcel has performed the following safety trials on
OPTIVAX:
- Nonionic block copolymers consisting of POE and POP in the same
orientation as OPTIVAX, but with different ratios and/or lower molecular
weight blocks, have been used as wetting agents in a number of consumer
products, such as toothpaste and mouth wash solutions. These products
are considered to be safe and are listed in the National Formulary.
- A toxicology study on the OPTIVAX CRL1005 copolymer was performed by
Pharmakon Research International, Inc., Waverly, Pennsylvania, under
contract with Vaxcel. In this study, no systemic or site of injection
reactions were observed.
- Under contract with Vaxcel, Coming Hazelton, Madison, Wisconsin,
performed a series of general vaccine safety tests in accordance with the
applicable federal regulations on the OPTIVAX CRL1005 copolymer
administered in combination with the (LOGO)hCG-DT immunogen. All OPTIVAX
CRL1005 copolymer formulations "passed" the regulatory general safety
tests.
- A pyrogenicity test was performed by Hazelton on (LOGO)hCG-DT in
combination with the OPTIVAX CRL1005 copolymer and the product was found
to be non-pyrogenic.
65
<PAGE> 72
Some potential injectable adjuvant products have appeared to be promising
in laboratory animals, but have not lived up to expectations in humans due to
lack of efficacy or toxicities. For this reason, Vaxcel believed it was
important to attempt to prove that OPTIVAX was safe and adjuvant active in
humans when given by the injectable route. Therefore, an IND was filed with the
FDA in late 1995 and an open-label, dose escalation Phase I clinical trial was
initiated in January 1996 to evaluate the safety and adjuvant activity of the
OPTIVAX CRL1005 copolymer in humans. In this trial, the OPTIVAX CRL1005
copolymer was administered in combination with (LOGO)hCG-DT, an antigen being
developed as an immunotherapeutic vaccine for patients with metastatic cancer.
The (LOGO)hCG-DT vaccine is a very poor immunogen without an adjuvant and
therefore had been tested in prior human trials only in adjuvant supplemented
formulations. The doses of OPTIVAX CRL1005 copolymer evaluated in this trial
were 3 mg, 10 mg, 25 mg, and 75 mg. All patients were scheduled to receive
three doses of the OPTIVAX+(LOGO)hCG-DT vaccine administered at monthly
intervals. The results from this Phase I trial are expected in the first quarter
of 1997.
Vaxcel's Oral Technologies. To date, Vaxcel has been employing OPTIVAX in
the development of injectable vaccines. After consummation of the Merger, Vaxcel
will expand its program by using the Zynaxis proprietary delivery technologies
to develop oral vaccines. Discussed below is a description of this program.
Most currently available vaccines are administered by needle injection to
stimulate the body's immune system by producing circulating antibodies against a
specific disease. Of the 16 vaccines currently in routine use in the United
States, 14 are delivered by the injection route as only polio and typhoid
vaccines are administered orally. Research has led to the increased recognition
that oral immunization is an important alternative to injectable administration
of vaccines, particularly when mucosal immunity is important. Also, oral
immunization has certain advantages over injectable vaccines, including patient
acceptability and ease of administration.
As a result of the Merger, Vaxcel will acquire two different types of oral
vaccine delivery technologies: (i) microencapsulation and (ii) bioadhesives.
Vaxcel believes these oral delivery technologies may have commercial application
for many marketed vaccines currently administered by parenteral injection (e.g.,
influenza and hepatitis B), as well as certain new vaccines under development.
In addition, these technologies can be administered alone or in combination with
other vaccine carriers, delivery systems, and adjuvants.
The PLG microencapsulation technology is based on the use of lactide and
glycolide polymers. The safety of PLG in humans is well recognized as these
polymers are both biocompatible and biodegradable and have been widely used as
synthetic absorbable sutures. The actual microencapsulation process involves the
trapping of an antigen into pockets or cavities formed within the PLG
microspheres during production. When the final vaccine formulation is
administered to humans, the PLG microspheres degrade and the encapsulated
antigen is then released to the appropriate immunological site in the body.
While vaccines encapsulated in PLG microspheres can be administered by
parenteral injection, it is the oral delivery of vaccines using this technology
that may hold the most promise. Vaxcel believes the PLG microspheres may be
ideally suited for oral delivery of vaccines for several reasons. First, the PLG
microspheres appear to protect antigens from degradation during passage through
the acidic environment of the stomach. This property of PLG may allow the
antigen to be appropriately delivered to the Peyer's Patches, which are the
lymphoid tissues of the small intestines. Secondly, microspheres in the 1-10
micron size range can be reproducibly synthesized using PLG and there is certain
scientific evidence that this size range may be ideal for uptake by the Peyer's
Patches. Thirdly, the PLG polymers are hydrophobic, an important property since
hydrophobic materials may be more efficiently taken up through the Peyer's
Patches.
Experimental vaccines encapsulated using PLG have been evaluated in
laboratory animals and non-human primates by academic and industrial scientific
groups. PLG encapsulated vaccines have induced systemic and mucosal antibody
responses following oral administration. They have also induced immune responses
that protected animals from experimental infectious challenge with both
bacterial and viral pathogens, including Helicobactor species (the causative
agent of common peptic ulcers), influenza virus, and simian immunodeficiency
virus. PLG-encapsulated vaccines have been and are continuing to be evaluated in
human clinical trials.
66
<PAGE> 73
The second oral vaccine delivery technology Vaxcel will acquire in the
Merger is based on bioadhesives, which are natural or synthetic polymers that
interact with the membrane surfaces of tissues. Bioadhesives that bind to
mucosal tissues or the mucin that coats these tissues are called mucoadhesives.
To date, mucoadhesive polymers have been favorably evaluated by others as
components in oral drug formulations.
The bioadhesive oral vaccine delivery program is predominantly focused on
mucoadhesive polymers. The lead mucoadhesive polymer has been evaluated in a
mouse influenza vaccine model where it was shown to induce a stronger mucosal
immune response following a single oral dose than the injected vaccine. The oral
route was also used as a second vaccination to boost the pre-existing immune
responses induced by either injected or orally administered vaccines. This
second observation supports its potential use in humans where most adults have
pre-existing immunity either from previous vaccines or infection with influenza
virus.
Vaxcel's Business Strategy. Once the Merger is consummated, Vaxcel's
business strategy will be to develop and commercialize its portfolio of
proprietary vaccine adjuvants and delivery systems that can be used in
conjunction with existing vaccines and new vaccines under development. Vaxcel
plans to attempt to license its adjuvant/delivery system technologies on an
antigen-by-antigen basis to pharmaceutical/biotechnology companies engaged in
vaccine research and development. In the short-term, Vaxcel will focus its
licensing efforts on the OPTIVAX injectable delivery technology, because this
technology is more advanced from a development standpoint than the oral delivery
technologies being acquired from Zynaxis. At present, Vaxcel has option
agreements for the development of its OPTIVAX technology with Medeva and
Connaught and a license agreement with Corixa. Also, Vaxcel will acquire in the
Merger a development and licensing agreement with ALK for oral delivery of
bioactive substances for the treatment of allergy. Vaxcel will seek additional
corporate partners for development and commercialization of specific vaccines
incorporating its adjuvant/delivery system technologies. The strategy will be to
build a data package on each of its technologies in order to assure maximum
value under sublicensing agreements with its collaborators. Under such
agreements, sublicensees will combine Vaxcel's technologies with the
sublicensee's vaccines and assume responsibility for product development,
regulatory approval, and marketing at the expense of the sublicensee. In return,
Vaxcel will receive up-front licensing fees, milestone payments, and royalties
on sales. The structure of these arrangements and Vaxcel's responsibilities will
vary depending upon a number of factors, including the identity of Vaxcel's
collaborator, the potential market for the vaccine, and the stage of development
of the vaccine. Vaxcel believes these arrangements will limit its research and
development costs and speed market entry by capitalizing upon the expertise of
its partners.
Current Corporate Collaborations. Once the Merger is consummated, Vaxcel
will have four corporate collaboration agreements for the development of its
technologies:
Connaught. In August 1995, Vaxcel signed an option agreement with
Connaught to evaluate OPTIVAX in combination with a Connaught vaccine being
developed for the prevention of an infectious disease. Connaught, located
in Swiftwater, Pennsylvania, is one of the largest vaccine companies in the
world and offers the broadest range of human vaccines and biologicals
commercially available from any single U.S. company. Connaught is a
subsidiary of Connaught Laboratories Ltd. and a member of the Pasteur
Merieux Serums & Vaccins family of companies.
The option agreement gives Connaught exclusive rights to evaluate
OPTIVAX with a vaccine currently under development at Connaught through
Phase I human clinical trials. Under the terms of this agreement, Vaxcel
received an upfront cash payment and Connaught will assume responsibility
for all preclinical, clinical and regulatory activities. If the Phase I
trials are successful, Connaught will have the right to negotiate an
exclusive license to further develop and market OPTIVAX in the specific
disease field. Under such a licensing arrangement, Vaxcel will receive
further milestone payments, royalties on sales, and payments under a supply
agreement for having OPTIVAX manufactured for Connaught.
Medeva. In October 1995, Vaxcel signed an option agreement with
Medeva to evaluate OPTIVAX in combination with a Medeva viral antigen.
Medeva is a London based pharmaceutical company specializing in the
therapeutic areas of vaccines, respiratory products, and pain management.
Medeva currently markets a variety of important vaccines and is also in
late-stage development of a hepatitis B
67
<PAGE> 74
vaccine that may show utility in people for whom existing hepatitis B
vaccines offer limited or no protection.
This agreement gives Medeva rights to evaluate OPTIVAX in combination
with their viral antigen in both preclinical and Phase I human clinical
testing. In return, Vaxcel received an upfront cash payment and will
receive milestone payments for successful product development. In addition,
Medeva will fund product development activities. If the Phase I trials are
successful, Medeva will have the right to negotiate a co-exclusive license
to further develop and market OPTIVAX in the specific disease field. Under
such a licensing arrangement, Vaxcel will receive further milestone
payments, royalties on sales, and payments under a supply agreement for
having OPTIVAX manufactured for Medeva.
Corixa. In April 1996, Vaxcel signed a definitive license agreement
with Corixa for use of Vaxcel's OPTIVAX in combination with vaccines being
developed by Corixa. Corixa, a privately-held Seattle-based biotechnology
company formed in late 1994, is discovering and developing T cell
therapeutic vaccines for the treatment of certain infectious diseases and
cancer.
Under terms of the agreement, Corixa received worldwide, exclusive
rights to use OPTIVAX with a variety of cancer and infectious disease
vaccines being developed by Corixa. Corixa also has the right to sublicense
vaccines containing OPTIVAX. Corixa or its sublicensees will be responsible
for conducting all development, regulatory submissions and marketing
activities for their vaccines combined with OPTIVAX. In return, if vaccines
are successfully developed, Vaxcel will receive milestone payments,
royalties on sales, and payments under a supply agreement for having
OPTIVAX manufactured for Corixa or its sublicenses.
ALK. Vaxcel will assume an agreement with ALK in the Merger. ALK is a
world leader in the preparation and standardization of allergen extracts
for allergy immunotherapy. In September 1995, ALK executed a development
and licensing agreement under which Zynaxis granted ALK exclusive,
worldwide rights to evaluate and develop Zynaxis' oral technologies for
delivery of bioactive substances for the treatment of allergy.
Prior to the Merger, Zynaxis received four quarterly payments from ALK
totaling $1,000,000. Once the Merger is consummated, Vaxcel may receive
additional milestone and royalty payments from ALK if ALK receives FDA or
certain other regulatory approvals for allergy products using the Zynaxis
vaccine delivery technologies. Under the terms of this agreement, ALK is
responsible for conducting all development, regulatory submissions and
marketing activities for ALK's allergy products using the Zynaxis
technologies. In addition, ALK has the right to make or have made the PLG
microspheres.
In addition to the above mentioned corporate collaborations, Vaxcel has
several research and materials transfer agreements with leading vaccine
manufacturers and biotechnology companies whereby Vaxcel has provided its
adjuvant/delivery system technology for evaluation with their antigens. Under
other arrangements, some companies have provided Vaxcel with their antigens to
be tested in conjunction with Vaxcel's adjuvant/delivery system technology.
Assuming successful results from such evaluations, Vaxcel intends to pursue
sublicensing agreements or other arrangements with certain of these research
partners.
Product Development Activities. Discussed below is the current status of
two product development programs Vaxcel will have after the Merger is
consummated:
Influenza Products. Pursuant to an agreement with a corporate
collaborator, the collaborator is attempting to develop an
OPTIVAX-adjuvanted influenza virus vaccine. The influenza virus (commonly
referred to as the "flu") is a significant health care problem almost every
year, infecting about 20% of the global population. In an average year in
the United States, influenza and its complications account for 20,000
deaths (most notably in the elderly), 10-15 million patient visits to
physicians, 600,000 or more hospitalizations, over 15 million days of lost
work, and almost $10 billion in total direct health care costs. Some
experts estimate that influenza causes more deaths and direct health care
expenditures than acquired immune deficiency syndrome ("AIDS").
68
<PAGE> 75
At present, there is no effective therapy for influenza and vaccines
are used to help prevent the incidence of the disease. The influenza
vaccines that are administered in the United States may vary each year and
their composition is determined by the CDC and others based on the types of
viruses expected to be prevalent during the upcoming influenza season.
The annual volume for flu vaccines in the United States has grown from
about 20,000,000 doses in 1991 to over 70,000,000 doses today. A similar
growth pattern has occurred in Western Europe. This strong growth has
occurred even though: (a) currently marketed vaccines are only 30-80%
effective in preventing influenza depending upon the age of the vaccinee
(efficacy is generally lower in the elderly); (b) no new influenza vaccine
has been developed in years; (c) compliance to annual immunizations is low
even among high risk groups, despite strong recommendations to vaccinate by
organizations such as the CDC; and (d) no major promotional effort has been
initiated by marketers of flu vaccines for several years.
Currently marketed influenza vaccines are considered to be highly cost
effective despite their reduced efficacy. A 1994 large scale health
maintenance organization study demonstrated a direct cost savings of
approximately $117 per person vaccinated.
Current vaccines have reached the limit of their potency and
conventional approaches to improve efficacy, such as formulating with
aluminium salts ("alum"), have failed to increase potency. In preclinical
studies conducted by Vaxcel and a corporate collaborator, an OPTIVAX
adjuvanted influenza vaccine increased the levels of antibodies specific
for total virus preparations and HAI antibody responses versus the
collaborator's influenza vaccine alone or supplemented with alum.
Allergy Products. Most individuals respond to pollens, animal
proteins, or other environmental substances in a controlled fashion. In
individuals who are allergic, the immune system responds inappropriately,
resulting in congestion, allergic rhinitis and other symptoms. In severe
cases, allergic reactions can include anaphylaxis and systemic shock.
It is estimated that there are forty million individuals in the United
States suffering from various allergies. The most common allergies are to
grass pollens, ragweed, house dust mites, and cat dander. Steroids,
antihistamines, decongestants, and cough syrups are used to treat allergy
associated symptoms, but can cause substantial side effects and do not
effect the underlying immune response. Approximately one to three million
people who suffer severe or debilitating allergies are treated using
immunotherapy. This typically requires weekly or monthly injections with
allergen extracts over prolonged time periods, sometimes as long as several
years.
The allergy products being developed by a collaborator using the
Zynaxis technologies may provide effective therapy in a convenient oral
formulation. These products may increase the size of the allergy
immunotherapy market by offering a more patient-friendly alternative to
routine injections.
At present, ALK is performing a Phase II human clinical trial with the
PLG microencapsulation technology.
Marketing and Sales. If Vaxcel obtains approval for commercialization of
vaccines using its vaccine adjuvant/delivery system technologies, Vaxcel intends
to market and sell such products directly through its collaborators. Pediatric
vaccines are sold and distributed in the United States directly to private
practicing physicians (primarily pediatricians and generalists), pharmacies,
surgical supply dealers, and government agencies such as the CDC, the military,
and city, county and state health departments. For pediatric vaccines
recommended for routine use in children, approximately 50% of the doses are
distributed through the private sector and 50% through the public sector. Adult
vaccines are sold through the same channels, except with minimal pediatrician
and less extensive public sector involvement. The United States government
negotiates annual contracts for vaccines to be used in the public health sector.
These contracts are awarded based on price, ability to supply and product
innovation. Prices in the public sector are generally lower than those in the
private sector.
69
<PAGE> 76
Because of well-documented reports on the cost-effectiveness of vaccines,
some managed health care organizations have initiated programs to increase the
immunization rates of their members. Other groups have implemented creative
programs, including incentives, to accomplish this goal. Vaxcel believes that
these programs will result in an increased demand for vaccines in the future.
Patents and Proprietary Technology. Vaxcel actively seeks patent
protection for its technologies, processes, uses, and ongoing improvements and
considers its patents and other intellectual property to be critical to its
business.
Vaxcel has received a worldwide, exclusive license from CytRx for the use
of a series of certain copolymers as a vaccine adjuvants/delivery system. See
"-- Certain Transactions." The patent rights obtained by Vaxcel under the
agreement include three patents and patent applications in the United States and
selected foreign countries including, but not limited to, Japan, Canada, Israel,
Australia, China and the European Patent Office. These patents and patent
applications contain claims directed to the use of copolymers as vaccine
adjuvants/delivery systems and the use of the copolymers in any vaccine
preparation. The patent applications also cover novel copolymers, including the
composition of the OPTIVAX CRL1005 copolymer currently being developed by
Vaxcel. The patent applications also contain composition of matter claims for
certain vaccine delivery systems and vaccine formulations which contain
copolymers.
The compositions and methods for the administration of bioactive agents to
and through the Peyer's Patches by means of microencapsulation in biocompatible,
biodegradable microspheres of 1-10 microns in diameter are protected by issued
patents, pending United States patent applications, and foreign counterparts
held by SRI and UAB. By means of the Merger with Zynaxis, this
microencapsulation technology will be exclusively licensed to Vaxcel in the
field of oral vaccine delivery. See "-- Certain Transactions."
The European patent on the PLG microencapsulation technology is currently
being challenged by certain third parties and is the subject of an opposition
hearing. Based on the opinions of certain patent counsel, Vaxcel is optimistic
that the challenge by third parties will be unsuccessful and the patent will be
upheld.
Through the Merger, Vaxcel will also acquire rights to pending United
States patent applications and foreign counterparts relating to the use of
polymeric mucoadhesives for the oral delivery of vaccines at mucosal surfaces
and compositions and methods for preparation of solid, orally administered
dosage units for live viral vaccines.
Vaxcel continually evaluates the patentability of new inventions and
improvements developed by its employees and collaborators. Whenever appropriate,
Vaxcel will endeavor to file United States and international patent applications
to protect these new inventions and improvements. However, there can be no
assurance that any of the current pending patent applications or any new patent
applications that may be filed will result in issued United States or foreign
patents.
Vaxcel also attempts to protect its proprietary products, processes and
other information by relying on trade secrets and non-disclosure agreements with
its employees, consultants and certain other persons who have access to such
products, processes and information. Under the agreements, all inventions
conceived by employees are the exclusive property of Vaxcel. Nevertheless, there
can be no assurance that these agreements will afford significant protection
against misappropriation or unauthorized disclosure of Vaxcel's trade secrets
and confidential information.
Government Regulation. The manufacture and sale of any product based on
Vaxcel's proprietary injectable and oral vaccine adjuvants and delivery systems
is subject to extensive regulation by United States and foreign governmental
authorities. In particular, vaccines and vaccine delivery systems are subject to
rigorous preclinical and clinical testing and other approval requirements by the
FDA in the United States under the federal Food, Drug and Cosmetics Act and by
comparable agencies in most foreign countries.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to assess safety and efficacy. For
certain diseases, animal models exist which are believed to be predictive of
human efficacy, and the vaccine candidate is tested in such animal models. For
other diseases for which no animal model exists, the testing of a vaccine may
proceed to human trials, provided that preclinical
70
<PAGE> 77
testing in animals establishes the safety of the vaccine and suggests a
relationship of the vaccine to the human immune response.
After preclinical studies are completed, an IND must be submitted to the
FDA which contains, among other things, data regarding the results of all
preclinical studies, detailed characteristics of the vaccine (for example,
stability and chemical structure), methods of manufacturing and a detailed
description of the intended clinical trials. The data must be reviewed and
approved by the FDA prior to the initiation of clinical trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
introduction of the vaccine into healthy adult humans, the vaccine will be
tested for safety and, if possible, to gain early information on effectiveness.
Phase II typically involves studies in a small sample of the intended population
to assess the safety and efficacy of the vaccine and to determine the
appropriate dosing regimen. Phase III trials are undertaken in an expanded
target population at geographically dispersed study sites in order to confirm
safety and efficacy, determine the overall risk/benefit ratio of the vaccine,
and provide an adequate basis for physician labeling. Each trial is conducted in
accordance with certain standards under protocols that detail the objectives of
the study, the parameters to be used to monitor safety and the efficacy criteria
to be evaluated. Each protocol must be submitted to the FDA as part of the IND.
Furthermore, each clinical study must be evaluated by an independent
Institutional Review Board ("IRB") at the institution at which the study will be
conducted. The IRB will consider, among other things, ethical factors, the
safety of human subjects and the possible liability of the institution.
The clinical trial requirements for FDA approval of an improved version of
a vaccine that is already on the market may differ from the requirements for a
new vaccine. For a new vaccine, a company must demonstrate in clinical trials
that the vaccine actually reduces the incidence of disease in healthy
individuals and that a certain antibody level has been achieved. This process of
establishing a clinical correlate usually takes place during Phase III trials,
can take two or more years to complete and can be extremely costly. Therefore,
the FDA approval process for a new vaccine from Phase I to commercialization can
take seven or more years. For certain improved versions of an existing vaccine,
however, the company may be required to demonstrate only that the vaccine
induces equal or greater antibody levels as compared to the original version of
the vaccine. Therefore, lengthy and costly clinical trials might be avoided for
these vaccine improvements, and the amount of time required to commercialize a
product might be reduced significantly.
Data from preclinical testing, clinical trials, and related information on
a vaccine are submitted to the FDA in a Product License Application ("PLA") for
marketing approval. The process of completing clinical testing and obtaining FDA
approval for a new vaccine is likely to take a number of years and require the
expenditure of substantial resources. Preparing a PLA involves considerable data
collection, verification, analysis and expense, and there can be no assurance
that any approval will be granted on a timely basis, if at all. The approval
process is affected by a number of factors, including the severity of the
disease, the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials. The FDA may deny a PLA if applicable regulatory
criteria are not satisfied, or it may require additional testing or information.
Among the conditions for marketing approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's GMP regulations, which must be followed at all times. In complying
with standards set forth in these regulations, manufacturers must continue to
expend time, money and effort in the area of production and quality control to
ensure full technical compliance. Manufacturing establishments, both foreign and
domestic, also are subject to inspections by or under the authority of the FDA
and by other federal, state or local agencies. In addition, manufacturers of
certain vaccines must submit a sample of each vaccine batch to the FDA.
Manufacturers of all vaccines must submit internal testing data for each batch.
For certain vaccines, the FDA is required to release each batch for commercial
sale which may involve additional testing by the FDA of the particular batch.
Pursuant to the Prescription Drug User Fee Act of 1992, pharmaceutical
manufacturers now will be required to pay three types of user fees: (i) a
one-time application fee for a prescription New Drug Application ("NDA") or PLA;
(ii) an annual product fee imposed on prescription drug products after FDA
71
<PAGE> 78
approval; and (iii) an annual establishment fee imposed on facilities used to
manufacture prescription drugs. Vaxcel estimates that its fees for the original
submission of a NDA or PLA involving clinical data could range up to $233,000
over the next five years, and annual establishment fees could range up to
$138,000; annual product fees will be less significant, but will be required for
each specific strength or potency of the marketed drug. Although there are
exemptions for certain products, and deferrals of payment and significant
discounts for small businesses, it still is uncertain how the FDA will interpret
and apply these provisions of the legislation.
Even if a license to manufacture the vaccine has been obtained, further
studies, including post-marketing studies, may be required to provide additional
data on safety. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the vaccine, including changes in indication, manufacturing process, labeling,
or a change in manufacturing facility, a PLA supplement may be required to be
submitted to the FDA. If the FDA has reasonable grounds to believe that a
vaccine presents a danger to health, and the regulatory grounds for license
revocation are met, the FDA may suspend a product license.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general each
country at this time has its own procedures and requirements.
Competition. Given the attractiveness of the vaccine market in terms of
sales potential, the number of biotechnology and large pharmaceutical companies
that are engaged in vaccine research and development has increased dramatically
over the past decade. In addition, Vaxcel is aware of significant vaccine
research and development activities at certain major universities and research
institutions. Consequently, competition is quite intense.
The field of vaccine adjuvants/delivery systems has emerged in recent years
as immunologists have recognized the need for technologies capable of generating
potent immune responses. At present, the only adjuvant used in licensed human
vaccines is alum. While alum has been sufficient to augment human immunological
responses to certain potent antigens, alum is not effective with the new
generation of highly purified subunit vaccines under development which are
inherently less potent. In addition, alum has been evaluated with currently
marketed influenza vaccines in human clinical trials with unfavorable results.
A number of companies are attempting to develop new injectable and oral
vaccine adjuvants/delivery systems and some have already licensed their
technologies to large pharmaceutical and/or biotechnology companies for the
development of certain vaccines. Vaxcel believes its major competitors in the
vaccine adjuvant/delivery field are: (i) Adjumer, Micromer, and VibrioVec
adjuvants/delivery systems by Virus Research Institute, Inc.; (ii) QS-21 by
Aquila Biopharm; (iii) MF59 by Chiron Biocine; (iv) MPL by Ribi Immunochem
Research, Inc., (v) ISCOMs by Isotec AB/CSL Limited; and (vi) liposomes by
multiple developers. After showing promising results in early development, some
of these competitive technologies have experienced problems (formulation
difficulties, systemic or site of injection toxicities, etc.) when subjected to
more extensive preclinical or clinical testing. These problems may limit the
usefulness of some of these competitive adjuvants/delivery systems.
Regarding product development, Vaxcel is aware of competitors who are
attempting to develop improved influenza virus vaccines based on recombinant
antigens, injectable adjuvants, oral delivery systems, and intranasal
administration of attenuated strains, some of which are currently being
evaluated in human studies. Vaxcel and its corporate partner believe that the
OPTIVAX formulated influenza virus vaccine can effectively compete against these
alternative approaches based on the ease of formulation, safety, efficacy, and
development timetable of this formulation. In addition, Vaxcel will likely seek
additional corporate partners to develop oral influenza virus vaccines using the
acquired PLG microsphere and mucoadhesive technologies.
72
<PAGE> 79
The primary competitor in the allergy immunotherapy market is Immunologic,
a company developing peptide-based injectable products for cat dander, ragweed,
and other common allergies, some of which are in clinical development. Because
of the efficacy, ease of administration, and improved patient acceptance of the
oral allergy formulations being developing using the PLG technology, Vaxcel
believes these formulations will effectively compete with Immunologic's
peptide-based injectable products.
Manufacturing. Vaxcel currently does not have the capabilities to
manufacture any of its vaccine delivery/adjuvant technologies and plans to rely
upon collaborators and/or contract manufacturers to produce both its
technologies and final vaccine products for preclinical, clinical, and
commercial purposes.
Vaxcel is required to purchase its requirements for bulk OPTIVAX copolymers
from CytRx or CytRx's designated third party contract manufacturer under the
terms of a supply agreement between Vaxcel and CytRx. See "-- Certain
Transactions." To date, Vaxcel has been contracting with CytRx to synthesize and
supply the bulk OPTIVAX copolymers under GMP conditions for both preclinical and
clinical purposes. Vaxcel believes that the manufacturing process used by CytRx
for the OPTIVAX copolymers currently under development can be readily scaled up
to permit bulk manufacture in commercial quantities by either CytRx or CytRx's
designated third-party contract manufacturer. After the bulk OPTIVAX copolymers
are supplied to Vaxcel by CytRx, Vaxcel plans to send this bulk material to
sublicensees at prices per kilogram which have been predetermined in a supply
agreement between Vaxcel and the sublicensee. The sublicensees will be
responsible for bulk manufacture of the antigen and for formulation of the final
vaccine product.
Upon consummation of the Merger, Vaxcel will have no internal manufacturing
capabilities and no written agreement with a contract manufacturer for
production of the PLG microencapsulation technology. The PLG microspheres
currently being used in the ALK Phase II clinical trial were produced by SRI,
one of the original patent holders for the technology. In the near future,
Vaxcel will continue to rely on contract manufacturers, including SRI, for
supplying PLG microspheres for both preclinical studies and clinical trials of
the technology. Vaxcel believes that there are several third-party contract
manufacturers which could produce the PLG technology under GMP conditions and
Vaxcel will seek to identify and negotiate a written supply agreement with such
a supplier. In addition, under the terms of the license agreement for the
technology with SRI and UAB, Vaxcel will have the right to transfer the know-how
for manufacturing the PLG microspheres to its sublicenses and Vaxcel may employ
this strategy with certain sublicenses.
Upon consummation of the Merger,Vaxcel will have no capabilities of
internally or externally manufacturing the mucoadhesive technology in accordance
with GMP conditions. To date, mucoadhesives have been produced at the laboratory
level in order to conduct preclinical studies. Assuming preclinical studies
continue to be positive, Vaxcel will seek a third-party contract manufacturer to
produce mucoadhesives for further development and clinical testing and Vaxcel
will attempt to negotiate a written supply agreement with such a manufacturer.
Vaxcel believes the mucoadhesives can be produced at commercial scale under GMP
conditions since this technology has been manufactured by others as components
in oral drug formulations.
CERTAIN TRANSACTIONS
Vaxcel derives its rights to develop and commercialize OPTIVAX from a
license agreement with CytRx effective January 1993, as amended (the "OPTIVAX
Agreement"), which grants to Vaxcel the exclusive, worldwide right to develop
and sell certain copolymers covered by claims of certain United States and
foreign patent rights of CytRx, for use to enhance immune response in humans, in
combination with an antigen in a vaccine delivery system (the "OPTIVAX Field").
Expressly excluded from the OPTIVAX Field are use of the copolymers alone as
non-specific immune stimulants and use of the copolymers as therapeutic agents
for infectious diseases. Under the terms of the OPTIVAX Agreement, Vaxcel is
required to pay CytRx a 10% royalty on net sales by Vaxcel or its affiliates of
vaccines directly commercialized by Vaxcel in the OPTIVAX Field for the longer
of ten years from the first commercial sale of the product or the life of any
patent right covering the licensed product. CytRx has licensed certain of its
technology from Emory University and BASF Corporation. CytRx has agreed to pay
royalty owed to Emory University or BASF Corporation, if any, as a result of
Vaxcel's commercialization of licensed products. Vaxcel is responsible for all
other third-party royalties resulting from its activities under the OPTIVAX
Agreement. The OPTIVAX Agreement gives
73
<PAGE> 80
Vaxcel the right to sublicense its rights, subject to certain conditions and the
payment to CytRx of 15% of the sublicense compensation received by Vaxcel.
CytRx has the right to an exclusive license of any improvements made by
Vaxcel relating to the licensed products, to the extent such improvements fall
outside of the OPTIVAX Field, on terms that would be no less favorable to CytRx
than those included in the OPTIVAX Agreement. Vaxcel has the exclusive right and
title to any improvements made by Vaxcel within the OPTIVAX Field. Vaxcel has
agreed, during the term of the OPTIVAX Agreement and for a period of five years
thereafter, not to develop or commercialize any product that competes with the
development and commercialization activities of CytRx related to surfactant,
surfactant-like and glycosaminoglycan molecules and derivatives. CytRx has
agreed, during the term of the OPTIVAX Agreement, not to develop or sell any
product that consists of polyoxyethylene/polyoxypropylene copolymer in the
OPTIVAX Field. If CytRx discovers a copolymer that has a potential use in the
OPTIVAX Field that it has elected not to develop for any use, CytRx is required
to offer the copolymer to Vaxcel for licensing on substantially the same terms
as the OPTIVAX Agreement.
The OPTIVAX Agreement may be terminated by CytRx under certain customary
circumstances (such as breach of the OPTIVAX Agreement by Vaxcel) and also may
be terminated by CytRx under the following circumstances: (i) Vaxcel fails to
use its best efforts to file a PLA with the FDA by January 1, 2000, for a
product not requiring full-scale efficacy trials; or (ii) Vaxcel fails to use
its best efforts to make any commercial sales of a licensed product in the
United States, Japan or Europe by January 1, 2001. The OPTIVAX Agreement may be
terminated by Vaxcel at any time upon sixty days' notice following breach of the
agreement by CytRx.
The OPTIVAX Agreement gives Vaxcel the right to make finished vaccines but
does not provide the right to make the bulk copolymers, which are supplied by
CytRx under a supply agreement entered into between Vaxcel and CytRx effective
January 1993 and amended as of October 10, 1997 (the "Supply Agreement"). Under
the terms of the Supply Agreement, CytRx is to provide the OPTIVAX CRL1005
copolymer at prices per kilogram which have been predetermined in the Supply
Agreement. If Vaxcel requests CytRx to synthesize and supply a copolymer
different than the OPTIVAX CRL1005 copolymer, CytRx will offer to supply such
copolymers to Vaxcel upon terms similar to the OPTIVAX CRL1005 copolymer if such
copolymer is similar in structure and requires similar manufacturing procedures
with similar cost. In the event the cost of CytRx supplying such copolymers to
Vaxcel is not similar to the OPTIVAX CRL1005 copolymer or involves other
manufacturing processes, the parties will negotiate revised prices per kilogram
and all other terms of the Supply Agreement will remain unchanged. Vaxcel's
requirements of the copolymers are to be provided either directly by CytRx or
through a third-party supplier selected by CytRx. If CytRx or its licensed
third-party chemical manufacturer is unwilling or unable to supply the
copolymers, then Vaxcel and/or its sublicensees shall have the right to make or
have made the copolymers and CytRx will make appropriate manufacturing know-how
available to Vaxcel or its designee. The Supply Agreement is subject to
termination by CytRx upon a termination event under the OPTIVAX Agreement and in
other customary circumstances (such as a breach by Vaxcel).
Upon consummation of the Merger, Vaxcel will acquire rights to the PLG
microencapsulation technology. The rights to develop, commercialize, and
sublicense the PLG microencapsulation technology is based on the terms of the
PLG Agreement, effective July 1987, in the field of oral vaccine delivery with
SRI and UAB. The PLG Agreement will grant Vaxcel the right to make, have made,
use, sell, and sublicense (with the consent of SRI and UAB) the oral PLG
technology. Expressly excluded from the PLG Agreement are use of the PLG
technology for vaccines administered via injection; non-vaccine drugs,
nutrients, proteins, and peptides; and enterically coated antigens. Under the
terms of the PLG Agreement, Vaxcel will be required to pay SRI and UAB: (i) an
annual minimum fee of $80,000 in 1997, which shall increase by $10,000 per year
from 1998 through 2002; (ii) 3.5% of net sales if ALK generates any product
sales using the microencapsulation technology; and (iii) 6% of net sales for the
life of the patent or patents or 5% of net sales for 15 years after the
effective date of the PLG Agreement should a patent or patents fail to issue or
be invalidated if third parties other than ALK generate any product sales using
the microencapsulation technology.
74
<PAGE> 81
The PLG Agreement may be terminated by SRI and UAB under certain customary
circumstances (such as breach of the agreement by Vaxcel) and also may be
terminated by SRI and UAB under the following circumstances after the
consummation of the Merger: (i) Vaxcel discontinues the business of developing,
making, or selling (directly and through sublicensees) the PLG technology for
more than 90 consecutive days; or (ii) Vaxcel becomes insolvent or declares
bankruptcy. After the Merger, the PLG Agreement may be terminated by Vaxcel at
any time upon giving 90 days' notice to SRI and UAB.
Effective June 1, 1993 and amended October 10, 1996, Vaxcel and CytRx
entered into a services and facilities use agreement pursuant to which CytRx
agreed to provide Vaxcel with certain management, administrative, and scientific
services, as well as the use of certain administrative space at the CytRx
facility in Norcross, Georgia. CytRx has made available to Vaxcel certain
employees at various hourly rates based on salary plus overhead factors. Vaxcel
has no obligation to use any employees from CytRx, except in relation to the
supply of OPTIVAX copolymers, for any period during the agreement. For certain
administrative office space, Vaxcel will pay CytRx a monthly fee of $15 per
square foot of space used by Vaxcel. This fee paid by Vaxcel to CytRx includes
basic office furniture, utilities, taxes, general management and maintenance,
basic phone service, and reasonable usage of copy machines, office supplies,
postage, conference rooms, and other common areas. Pursuant to the services and
facilities agreement, out-of-pocket expenditures for such items as long distance
telephone, office equipment, large office supplies are paid directly by Vaxcel.
The agreement continues in force unless terminated by either party. At any time,
the agreement may be terminated by either party upon eight months' notice.
Effective January 1, 1996 and amended October 16, 1996, Vaxcel and
Proceutics entered into a facilities use agreement whereby Proceutics has
reserved and made available to Vaxcel approximately two-thirds of its vivarium
facility, together with the necessary support functions, and a 570 square foot
laboratory. Under the services and facilities agreement, for use of the vivarium
space, Vaxcel will pay Proceutics a monthly fee of $2,000 for the balance of
1996 and $3,250 for 1997, and for use of the laboratory space, Vaxcel will pay
Proceutics a monthly fee of $1,425 in 1996. Such fees will increase or decrease
annually on January 1 based on changes in the Producer Price Index. Upon three
months' written notice to Proceutics, Vaxcel may occupy less space in the
vivarium, with a corresponding reduction in monthly fees, if Vaxcel's planned
volume of experiments decreases. These fees paid by Vaxcel to Proceutics include
all utilities, taxes, maintenance, basic phone service, veterinarian services,
and reasonable usage of copy machines, warehouse, conference rooms and other
common areas. Vaxcel is responsible for all direct costs associated with animal
care and experiments in this facility. The agreement continues in force unless
terminated by either party. At any time, the agreement may be terminated by
either party upon 12 months' notice.
FACILITIES AND EMPLOYEES
In total, Vaxcel leases approximately 2,500 square feet of space within the
CytRx and Proceutics Norcross, Georgia complex. Vaxcel believes that these
facilities are sufficient for its needs for the near future.
At present, Vaxcel has a staff of six individuals dedicated to the
development of its vaccine adjuvant/ delivery system technologies, two of whom
are Ph.D.s. None of Vaxcel's employees is represented by a labor union. Vaxcel
believes that its employee relations are good.
Effective June 1, 1993, and amended October 10, 1996, Vaxcel and CytRx
entered into a services agreement pursuant to which CytRx agreed to provide
Vaxcel with certain management, administrative, and scientific services. CytRx
has made available to Vaxcel certain employees at various hourly rates based on
salary plus overhead factors. Vaxcel has no obligation to use any employees from
CytRx, except in relation to the supply of OPTIVAX copolymers, for any period
during the agreement. At any time, the agreement may be terminated by either
party upon eight months notice. See "Business of Vaxcel -- Certain
Transactions."
A supply agreement has also been executed for CytRx to manufacture and
supply GMP copolymer for Vaxcel's development and commercial requirements for
OPTIVAX. See "Business of Vaxcel -- Certain Transactions".
75
<PAGE> 82
PROPERTIES
From January 1994 to August 1995, Vaxcel occupied administrative offices
and laboratories in a separate facility in Norcross, Georgia under a five-year
lease agreement. In August 1995, Vaxcel relocated its administrative offices and
laboratories to the CytRx and Proceutics complex in Norcross and subleased its
prior facility to SeaLite Sciences, Inc. commencing January 23, 1996. This
sublease agreement will remain in effect until January 22, 1999. The rental
income received by Vaxcel under this sublease agreement with SeaLite Sciences,
Inc. approximates Vaxcel's costs under the original lease agreement.
LEGAL PROCEEDINGS
Vaxcel is not a party to any legal proceedings.
76
<PAGE> 83
MANAGEMENT OF VAXCEL
DIRECTORS AND EXECUTIVE OFFICERS
Vaxcel's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Paul J. Wilson......................... 44 President and Chief Executive Officer
Jack J. Luchese........................ 47 Chairman(1)
Jack L. Bowman......................... 63 Director(1)
Raymond C. Carnahan, Jr................ 70 Director(1)
Herbert H. McDade, Jr.................. 69 Director(1)
Mark J. Newman......................... 41 Vice President, Research & Development
Mark W. Reynolds....................... 35 Chief Financial Officer and Secretary
</TABLE>
- ---------------
(1) Each Director holds office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Mr. Wilson has served as President, Chief Executive Officer and a Director
of Vaxcel since August 1993. Prior to joining Vaxcel, Mr. Wilson was employed by
American Cyanamid (now part of American Home Products) from November 1974 to
August 1993. From 1992 to August 1993, Mr. Wilson served as Vice President and
General Manager of American Cyanamid's Lederle-Praxis Vaccine Division. In this
position, he had worldwide responsibility for sales, earnings, marketing, market
research, manufacturing, and quality control for Lederle-Praxis' complete line
of vaccine products. In other recent positions at American Cyanamid, Mr. Wilson
was Vice President of Marketing for Lederle Laboratories from 1991 to 1992,
where he had full marketing responsibility for Lederle Laboratories' United
States pharmaceuticals business. Prior to that, he was General Manager for
Lederle International's Canadian operations from 1988 to 1991. Throughout his
career, Mr. Wilson has held similar increasingly responsible positions in sales,
market research, marketing, and commercial operations. In various management and
marketing capacities during his career, Mr. Wilson has commercialized eight new
pharmaceutical products in both the United States and Canada, four of which were
vaccines.
Mr. Luchese has been a Director of Vaxcel since its inception in January
1993 and the Chairman of the Board since October 1993. From January 1993 to
August 1993, Mr. Luchese served as President and Chief Executive Officer of
Vaxcel. Mr. Luchese has been President and Chief Executive Officer of CytRx
since March 1989 and became Chairman of the Board in June 1995. Prior to joining
CytRx, Mr. Luchese served as Vice President and General Manager of the Armour
Pharmaceutical Corporation, and as Vice President, Corporate Business
Development and a member of the Management Committee of Rorer Group, Inc. (now
Rhone-Poulenc Rorer). Prior to joining Rorer Group, Inc., Mr. Luchese was with
Johnson & Johnson Company for 15 years where he held various positions in
business development, licensing, sales, new products marketing, and finance. Mr.
Luchese also serves as a director of Proceutics, Inc. and Vetlife, Inc., wholly
owned subsidiaries of CytRx.
Mr. Bowman has been a Director of Vaxcel since October 1993. Prior to his
retirement at the end of 1993, Mr. Bowman was Company Group Chairman at Johnson
& Johnson Company, a position he held from 1987. From 1991 to 1993, Mr. Bowman
was responsible for Johnson & Johnson Company's diagnostic, blood glucose
monitoring, and certain over-the-counter pharmaceutical businesses. Prior to
that assignment at Johnson & Johnson, he was responsible for a major portion of
Johnson & Johnson's global pharmaceutical businesses. From 1983 to 1987, he was
Executive Vice President of American Cyanamid Company where he was responsible
for the pharmaceutical, medical device, and over-the-counter and toiletry
businesses. Mr. Bowman has also served as President, Lederle Laboratories
Division and Executive Vice President, CIBA-GEIGY Pharmaceutical Division. Mr.
Bowman serves as a director of CytRx, NeoRx Corporation,
77
<PAGE> 84
Pharmagenics, Inc., Cell Therapeutics, Inc. and Coating Technologies
International. He also is a director of Proceutics, Inc. and Vetlife, Inc., two
wholly owned subsidiaries of CytRx and is a former member of the Johns Hopkins
University Board of Trustees.
Mr. Carnahan has been a Director of Vaxcel since March 1996. Mr. Carnahan
has over 39 years experience in cost controls and operational systems in a
variety of industries. Prior to his retirement in 1991, Mr. Carnahan served as
Manager, International Cost Analysis planning for Johnson & Johnson
International from 1974 to 1991. Mr. Carnahan is an arbitrator for the American
Arbitration Association and has provided consulting services to
Waterford-Wedgewood Corporation in England and to Torf Pharmaceutical
Corporation in Portland. Mr. Carnahan also serves as Treasurer for the
Morristown Memorial Hospital Chaplaincy Service in Morristown, New Jersey, and
is a director of CytRx. He also is a director of Proceutics, Inc. and Vetlife,
Inc., two wholly owned subsidiaries of CytRx.
Mr. McDade has been a Director of Vaxcel since March 1996. From 1989 to
1996, Mr. McDade was Chairman, President, and Chief Executive Officer of Chemex
Pharmaceuticals, Inc., becoming Chairman of Access Pharmaceutical Co. (the
successor corporation to Chemex) in January 1996. From 1986 to 1989, he was
Chairman and President of Armour Pharmaceutical Corporation, a wholly owned
subsidiary of Rorer Group, Inc. (now Rhone-Poulenc Rorer). Prior to 1986, Mr.
McDade served as Vice President of the Revlon Corporation. Mr. McDade also
serves as a director of CytRx and is a member of the Board of Trustees of Thomas
Acquinas College. He also is a director of Proceutics, Inc. and Vetlife, Inc.,
two wholly owned subsidiaries of CytRx.
Dr. Newman has served as Vice President, Research and Development of
Vaxcel, Inc. since January 1995. In this position, Dr. Newman is responsible for
all aspects of Vaxcel's research and development efforts. Prior to joining
Vaxcel, Dr. Newman was Associate Vice President, Research and Development, for
Apollon, Inc. during 1994 where he was responsible for developing DNA-based
vaccines. Prior to that, he was Director, Immunology and Virology Section and
Senior Director, Clinical Research, at the Biopharmaceuticals Division of
Cambridge Biotech Corporation (now called Aquila Biopharm) from 1989 to 1993. At
Cambridge, he was heavily involved with the development and clinical testing of
the QS21 saponin adjuvant for use with subunit vaccines. During his career, Dr.
Newman has received numerous grants from the National Institutes of Health and
over 50 articles written or co-authored by Dr. Newman have been published in
scientific journals. In addition, he has been involved with several new vaccine
review articles and book chapters. Recently, Dr. Newman co-edited a 900+ page
book entitled Vaccine Design: The Subunit and Adjuvant Approach.
Mr. Reynolds has been Chief Financial Officer and Secretary of Vaxcel since
November 1996, prior to which time he served as Controller and Assistant
Secretary. Mr. Reynolds is concurrently serving as Chief Financial Officer and
Secretary of CytRx. Prior to his joining CytRx in 1988, Mr. Reynolds was
employed as a certified public accountant with Arthur Andersen LLP.
DIRECTOR COMPENSATION
Directors who are employees of Vaxcel ("Employee Directors") or of CytRx
("Affiliate Employee Directors") do not currently receive any compensation for
their services as members of the Board of Directors of Vaxcel. Directors who are
also non-employee Directors of CytRx ("Affiliate Directors") currently receive
$3,000 for each two-day Board meeting cycle of CytRx and its subsidiaries
attended. These fees, and any travel-related costs incurred by Affiliate
Directors, are allocated among CytRx and its subsidiaries on a pro rata basis.
There are currently no Directors who are neither Employee Directors, Affiliate
Employee Directors, or Affiliate Directors ("Outside Directors"). Vaxcel expects
that, subsequent to the Merger, there will be one or more Outside Directors on
its Board. There are currently no established committees of the Board. Upon
consummation of the Merger, Vaxcel will establish an Audit Committee and a
Compensation Committee of the Board.
78
<PAGE> 85
All Directors, except Employee Directors, each receive an option to
purchase 5,000 shares of Vaxcel Common Stock upon joining the Board, and each
will receive 2,500 stock options each year thereafter upon their re-election to
the Board.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning the
compensation earned for services rendered in all capacities to Vaxcel by the
executive officers of Vaxcel.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ------------
SECURITIES
UNDERLYING
BONUS/ STOCK ALL OTHER
NAME AND POSITION YEAR SALARY COMMISSION OPTIONS COMPENSATION
- ---------------------------------------- ---- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Paul J. Wilson.......................... 1996 $205,250 $ -- -- $ 4,750(1)
President & Chief Executive Officer 1995 $191,875 $ -- -- $ 4,620(1)
1994 $179,500 $ -- 100,000 $ --
Mark J. Newman.......................... 1996 $122,500 $ 22,000 40,000 $ 4,750(1)
Vice President 1995 $108,513 $ 20,000 175,000 $29,128(2)
R&D 1994 $ NA $ NA -- $ --
Mark W. Reynolds(3)..................... 1996 $ 82,333 $ 25,000 -- $ 4,750(4)
Chief Financial Officer and Secretary 1995 $ 76,000 $ 8,000 -- $ 4,620(4)
1994 $ 71,000 $ 8,000 -- $ 4,620(4)
James M. Yahres(3)...................... 1996 $151,000 $ 5,000 -- $ 4,750(4)
Former Chief Financial Officer 1995 $146,500 $ 15,000 -- $ 4,620(4)
and Secretary 1994 $141,000 $ 25,000 -- $ 4,620(4)
</TABLE>
- ---------------
(1) Vaxcel's matching contribution to CytRx's 401(k) Plan. Vaxcel does not have
a 401(k) Plan. Employees of Vaxcel are eligible to participate in CytRx's
401(k) Plan.
(2) Includes $3,830 of Vaxcel's matching contributions to CytRx's 401(k) Plan
and $25,298 of costs associated with relocation.
(3) Mr. Reynolds and Mr. Yahres are employees of CytRx. No compensation is paid
by Vaxcel directly to these individuals; the amounts shown in the table
above represent total compensation paid to Mr. Reynolds and Mr. Yahres by
CytRx for services rendered in all capacities for CytRx and its
subsidiaries. Pursuant to a services and facilities use agreement between
Vaxcel and CytRx (see "Business of Vaxcel -- Certain Transactions"), Vaxcel
pays to CytRx a fee for the services rendered by these individuals as well
as for other administrative services.
(4) CytRx's matching contribution to 401(k) Plan.
EMPLOYMENT AGREEMENT
The employment agreement for Paul J. Wilson, President and Chief Executive
Officer of Vaxcel (the "Employment Agreement"), provides for a five-year term of
employment beginning August 16, 1993. Pursuant to the terms of the Employment
Agreement, Mr. Wilson's annual cash compensation is currently $214,000 and will
increase to $229,000, effective August 16, 1997, during the remaining term of
the Employment Agreement. In addition, Mr. Wilson has received options to
purchase up to 500,000 shares of Vaxcel Common Stock. Such options have an
exercise price of $1.50 per share. All of the options will vest
79
<PAGE> 86
over the five-year period of Mr. Wilson's Employment Agreement if Vaxcel
achieves during such time period certain milestones related to both the vaccine
technologies and Vaxcel.
The Employment Agreement may be terminated by Vaxcel under customary
circumstances, including "for cause" (as defined in the Employment Agreement),
without cause and upon the death or disability of Mr. Wilson. Upon termination
for cause, Mr. Wilson would be entitled to receive severance equal to from one
to three months' salary, depending upon the specific "for cause" event. Upon
termination of employment without cause by Vaxcel, Mr. Wilson would receive his
salary for one year (at the then current salary rate). Upon termination of
employment by reason of death or disability, Mr. Wilson would receive severance
equal to six months' salary. The vesting of options shall cease upon any
employment termination for cause; if Mr. Wilson's employment is terminated by
Vaxcel for any other reason, certain options that would have vested on the next
anniversary will be accelerated to vest immediately and certain others may vest
during the twelve-month period after termination.
The current annual cash compensation for Dr. Mark J. Newman, Vice President
of Research and Development of Vaxcel, is $122,500 and will increase to $129,500
effective January 1, 1997. Dr. Newman is also eligible for an annual cash bonus
based on performance. Pursuant to his employment, Dr. Newman has also received
options to purchase up to 215,000 shares of Vaxcel Common Stock. Such options
have an exercise price of $1.50 per share. All of the options will vest over a
four-year period ending January 1999 if Vaxcel achieves during such time period
certain milestones related to its vaccine adjuvant/delivery system technologies.
Option Grants in Last Fiscal Year. The following table summarizes the
stock options granted during the fiscal year ended December 31, 1996, to each of
Vaxcel's executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL POTENTIAL REALIZED VALUE
UNDERLYING OPTIONS AT ASSUMED ANNUAL RATES
OPTIONS GRANTED TO EXERCISE OR OF STOCK PRICE APPRECIATION
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- --------------------------- ---------- ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Mark J. Newman............. 40,000 85.8 $1.50 12/05/06 $ 37,734 $ 95,625
</TABLE>
1993 STOCK OPTION PLAN
Effective June 1, 1993, Vaxcel adopted its 1993 Stock Option Plan, as later
amended (the "Stock Option Plan" or the "Plan") for the purpose of promoting the
interests of Vaxcel by granting options to purchase Vaxcel Common Stock to key
employees, consultants, and non-employee and affiliate employee directors in
order to attract and retain qualified persons in those positions and in order to
provide an additional incentive to each such person to increase the value of the
Vaxcel Common Stock. Vaxcel has reserved 1,000,000 shares of Vaxcel Common Stock
for issuance under the Stock Option Plan, and the Plan is administered by the
Vaxcel Board. Pursuant to the Stock Option Plan, the Vaxcel Board, in its
complete discretion may grant options qualified under Section 422 of the Code to
"key employees" or consultants. The Stock Option Plan defines the term "key
employee" to mean any employee or officer of Vaxcel or the parent corporation or
any subsidiary of Vaxcel who, in the judgment of the Vaxcel Board acting in its
discretion, is a key to the success of Vaxcel or such parent or subsidiary.
Non-employee and affiliate employee directors also receive options pursuant to
the Stock Option Plan. The exercise price for all options granted under the Plan
shall be determined in accordance with the terms of the Plan, but in no event
shall the exercise price be less than the fair market value of a share of the
Vaxcel Common Stock on the date the option is granted. All qualified stock
options granted to key employees and consultants shall be exercisable as
determined by the Vaxcel Board at the time the option is granted, but in no
event shall the exercise date be later than the tenth anniversary of the date
the option is granted if the key employee or consultant is not a 10% stockholder
of Vaxcel. The options granted to non-
80
<PAGE> 87
employee and affiliate employee Directors shall become exercisable with respect
to 33% of the Vaxcel Common Stock underlying such option on each anniversary
date following the date of the grant.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Provisions of Certificate of Incorporation. As allowed by the DGCL,
Vaxcel's Certificate of Incorporation provides for the limitation of the
liability of the directors of Vaxcel for monetary damages to the fullest extent
permissible under Delaware law. This is intended to limit the personal liability
of a director to monetary damages incurred in an action brought by or in the
right of Vaxcel for breach of a director's duties to Vaxcel or its stockholders:
(i) for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law; (ii) for any breach of the director's duty of loyalty
to Vaxcel or its stockholders; (iii) for any transaction from which a director
has derived an improper personal benefit; and (iv) as expressly imposed by
statute, for approval of certain improper distributions to stockholders or the
wasting of Vaxcel assets.
Bylaws. Vaxcel's Bylaws also permit Vaxcel to indemnify its officers and
directors to the fullest extent permitted by law.
Directors and Officers Insurance. As a majority-owned subsidiary of CytRx,
Vaxcel directors and officers are covered by CytRx's directors and officers
liability insurance policy which has a $3,000,000 limit.
81
<PAGE> 88
PRINCIPAL STOCKHOLDERS OF VAXCEL
The following table sets forth certain information, as of December 31,
1996, regarding the beneficial ownership of the Vaxcel Common Stock, and the
issuing of Vaxcel Common Stock pursuant to the Merger with respect to: (i) each
director of Vaxcel, (ii) each person who is known by Vaxcel to own beneficially
5% or more of the Vaxcel Common Stock, (iii) each of the named executive
officers, and (iv) all directors and executive officers of Vaxcel as a group.
The table sets forth the number and percentage of the outstanding shares
projected to be beneficially owned by each of such shareholders after
consummation of the Merger.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO MERGER AFTER THE MERGER
--------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
CytRx Corporation.......................... 8,250,004 97.8% 9,625,000 86.1%
154 Technology Parkway
Norcross, Georgia 30092
Paul J. Wilson............................. 120,000(2) 1.4% 120,000(2) 1.1%
5775 Commons Lane
Alpharetta, Georgia 30202
Mark J. Newman............................. 25,000(2) 0.3% 25,000(2) 0.2%
230 Lazy Shade Court
Duluth, Georgia 30136
Jack L. Bowman............................. 6,500(2) 0.1% 6,500(2) 0.1%
9102 Mt. Vista Avenue
Lummi Island, Washington 98262
Raymond C. Carnahan, Jr.................... 0 0.0% 0 0.0%
2 Tiffany Road
Morristown, New Jersey 07960
Jack J. Luchese............................ 0 0.0% 0 0.0%
3915 River Hallow Run
Duluth, Georgia 30136
Herbert H. McDade, Jr...................... 6,500(2) 0.1% 6,500(2) 0.1%
19 Beechwood Way
Scarborough, New York 10510
Mark W. Reynolds........................... 0 0.0% 0 0.0%
9325 Delft Way
Alpharetta, Georgia 30202
All directors and executive officers as a
group (7 individuals).................... 158,000 1.9% 158,000 1.4%
</TABLE>
- ---------------
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting and
investment power with respect to the shares shown as beneficially owned by
such stockholder. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
of this Proxy Statement upon exercise of options and warrants. Each
beneficial owner's percentage ownership is determined by assuming options
that are held by such person (but not those held by any other person) and
that are exercisable within sixty days from the date of this Proxy Statement
have been exercised.
(2) Made up of shares of Vaxcel Common Stock that the individual has option
rights to acquire which are vested as of the date of this Proxy Statement
and which are immediately exercisable as of the date of this Proxy
Statement.
82
<PAGE> 89
SELECTED HISTORICAL FINANCIAL DATA OF ZYNAXIS
The selected consolidated financial data as of December 31, 1994 and
December 31, 1995, and for each of the three years in the period ended December
31, 1995, is derived from the consolidated financial statements of Zynaxis,
which are incorporated by reference in Zynaxis' Form 10-K/A-1 for the year ended
December 31, 1995. Such financial statements have been audited by Arthur
Andersen LLP, independent public accountants, whose report on the financial
statements includes an explanatory paragraph concerning Zynaxis' ability to
continue as a going concern. The selected consolidated financial data as of
December 31, 1991, December 31, 1992 and December 31, 1993, and for the years
ended December 31, 1991 and 1992, is derived from the audited financial
statements of Zynaxis, not included or incorporated by reference herein. The
selected consolidated statement of operations data for the nine months ended
September 30, 1995 and 1996 and the selected consolidated balance sheet data as
of September 30, 1996, have been derived from unaudited consolidated financial
statements of Zynaxis, which are incorporated by reference in Zynaxis' Form 10-Q
for the quarterly period ended September 30, 1996, that, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of such data at such dates and for
such periods in accordance with generally accepted accounting principles. The
selected consolidated financial data for the nine months ended September 30,
1996 are not necessarily indicative of the results to be expected for the full
year. The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of Zynaxis
and notes thereto incorporated by reference in this Proxy Statement.
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------------- -----------------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues......... $ 1,689,205 $ 305,816 $ 761,792 $ 1,163,955 $ 1,573,550 $ 1,166,658 $ 199,172
Operating Expenses:
Cost of sales.... -- 40,261 40,262 273,088 -- -- --
Research and
development.... 2,781,827 4,192,422 5,168,912 6,344,221 7,042,790 4,341,691 3,030,627
Marketing,
general and
administrative... 1,333,356 1,547,162 2,239,921 3,397,948 2,875,112 1,263,317 583,326
Charge for
acquired
research and
development.... -- 3,647,321 5,165,793 -- -- -- --
Restructuring
charge......... -- 347,436 347,436 -- -- -- --
Provision for
asset
impairment..... -- -- -- 1,466,360 -- -- --
------------ ------------ ------------- ------------- ------------ ------------- ------------
4,115,183 9,774,602 12,962,324 11,481,617 9,917,902 5,605,008 3,613,953
Other Income
(Expense):
Interest income
(expense),
net............ 10,956 38,104 44,023 106,259 574,261 1,023,676 (65,575)
Other income
(expense)...... 420,346 91,134 162,232 -- -- -- --
Net gain on sale
of diagnostics
technologies
and assets..... -- 1,595,616 1,616,840 -- -- -- --
------------ ------------ ------------- ------------- ------------ ------------- ------------
431,302 1,724,854 1,823,095 106,259 574,261 1,023,676 (65,575)
Net loss........... $(1,994,676) $ (7,743,932) $ (10,377,437) $ (10,211,403) $ (7,770,091) $ (3,414,674) $ (3,480,356)
----------- ------------ ------------- ------------- ------------ ------------- ------------
Net loss per common
share............ $ (0.20) $ (1.29) $ (1.57) $ (1.95) $ (1.49) $ (0.71) $ (1.69)
=========== ============ ============= ============= ============ ============= ============
Shares used in
computing net
loss per common
share(1)......... 10,060,509 5,988,748 6,602,813 5,241,317 5,204,967 4,837,661 2,061,560
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash
equivalents and
investments.... $ 223,177 $ 509,143 $ 2,216,456 $ 15,375,621 $ 22,901,516 $ 401,455
Working capital
(deficit)...... (1,307,660) (733,698) 1,122,483 12,917,242 13,005,985 (1,515,674)
Total assets..... 2,933,269 3,987,828 6,399,135 20,888,148 24,429,508 1,672,064
Long-term debt
and other
long-term
obligations.... 157,087 183,403 212,245 3,833,841 312,058 11,989,041
Shareholders'
equity
(deficit)(2)... 1,023,517 2,357,595 5,277,193 15,463,531 23,063,154 (12,357,179)
</TABLE>
- ---------------
(1) Computed on basis described for net loss per share in Note 2 to the
consolidated financial statements of Zynaxis.
(2) Includes accretion of $2,543,068 to Zynaxis Preferred Stock redemption
value. No dividends on the Zynaxis Common Stock have been declared or paid
since the inception of Zynaxis.
83
<PAGE> 90
BUSINESS OF ZYNAXIS
Zynaxis, which commenced operations in 1988 and completed its initial
public offering in 1992, is a company engaged in the development of delivery
systems designed to enhance the performance of vaccines and drugs. In July 1995,
through a merger, Zynaxis acquired Secretech, a biotechnology company engaged in
the development of oral and mucosal vaccine delivery technologies. Vaccines
using Zynaxis' proprietary delivery systems can be administered orally or
nasally rather than by injection and have the potential to increase protective
immunity by stimulating formation of antibodies at the most common points of
entry for infectious agents. In October 1995, Zynaxis entered into a development
and licensing agreement with ALK, a Danish company and a leader in the area of
specific immunotherapy for allergies, which grants to ALK exclusive rights to
evaluate and develop Zynaxis' vaccine technologies for delivery of bioactive
substances to treat allergies. Prior to the acquisition of Secretech, Zynaxis
focused on the development of proprietary cell linker molecule technology
(Zyn-Linkers(R)) for the retention at disease sites of therapeutic drugs and
radiopharmaceuticals, as well as the development of cellular diagnostic products
(Zymmune(TM) CD4/CD8 Cell Monitoring Kit) to type and enumerate blood cells for
diagnosis and disease monitoring. In October 1995, Zynaxis sold the assets of
its cellular diagnostic products business to Intracel Corporation. In September
1996, Zynaxis entered into an exclusive license and purchase option agreement
with Phanos pursuant to which it granted Phanos a license for all of its
proprietary Zyn-Linker(R) technology and an option to acquire such technology.
Zynaxis also operates the Cauldron division which provides collaborative
consulting services on all aspects of bulk pharmaceutical production and
provides research, development and pilot scale-up facilities to the
pharmaceutical, biochemical and fine chemical industries. Zynaxis presently is
seeking a buyer for the Cauldron division.
84
<PAGE> 91
SELLING SHAREHOLDERS OF ZYNAXIS
The table below sets forth certain information regarding ownership of the
Vaxcel Common Stock by the Selling Shareholders as of December 15, 1996 (after
giving effect to the Merger and the exercise of the Vaxcel Warrants), and the
number of Resale Shares to be sold by them under this Proxy Statement. The
Resale Shares include (i) the shares of Vaxcel Common Stock issued by Vaxcel
hereunder to any persons who may be deemed to be "affiliates" of Zynaxis within
the meaning of Rule 145 of the Securities Act, (ii) the shares of Vaxcel Common
Stock issued by Vaxcel hereunder to certain shareholders of Zynaxis who have
entered into agreements with CytRx to vote in favor of the Merger at the Special
Meeting, (iii) the shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants issued by Vaxcel pursuant to the Preferred Stock and Warrant
Agreement and the Agreement to holders of Zynaxis Warrants in exchange for such
Zynaxis Warrants, and (iv) the shares of Vaxcel Common Stock issuable upon the
exercise of Vaxcel Non-Financing Warrants assumed pursuant to the Agreement in
exchange for the Zynaxis Non-Financing Warrants.
In recognition of the fact that investors may wish to be legally permitted
to sell their Resale Shares when they deem appropriate, Vaxcel has filed with
the SEC, under the Securities Act, a Registration Statement, of which this Proxy
Statement forms a part, with respect to the resale of the Resale Shares from
time to time in transactions on the Nasdaq SmallCap Market, in negotiated
transactions or through other methods of sale and intends to prepare and file
such amendments and supplements to the Registration Statement as may be
necessary to keep the Registration Statement effective until the earlier of the
date on which the Resale Shares may be sold without restriction under the
Securities Act and the fifth anniversary of the Closing of the Merger. See "Plan
of Distribution."
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO OFFERING(1) AFTER OFFERING
---------------------- SHARES ----------------------
NUMBER OF BEING NUMBER OF
NAME OF SELLING SHAREHOLDER SHARES PERCENT(2) OFFERED(1) SHARES PERCENT(2)
- ------------------------------------------ --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Euclid Partners III, L.P.(3).............. 289,285 2.6% 287,285 -- --
S.R. One, Limited(4)...................... 227,056 2.1% 227,056 -- --
Sentron Medical, Inc.(5).................. 145,620 1.3% 145,620 -- --
Javelin Capital Fund, L.P.(6)............. 94,900 * 94,900 -- --
Alphi Fund L.P.(7)........................ 71,650 * 71,650 -- --
MassMutual Life Insurance Company(8)...... 61,685 * 14,235 47,450 *
Plexus Ventures, Inc.(9).................. 48,034 * 48,034 -- --
The West Company(10)...................... 47,450 * 47,450 -- --
William M. Spencer, III(11)............... 45,781 * 10,439 35,342 *
CIP Capital L.P.(12)...................... 33,689 * 33,689 -- --
Grotech Partners III, L.P.(13)............ 29,067 * 5,027 24,040 *
The UAB Research Foundation(14)........... 28,202 * 18,980 9,222 *
Biotechnology Venture Fund S.A.(15)....... 18,980 * 9,490 9,490 *
Gus G. Casten(16)......................... 13,688 * 13,688 -- --
Dennis P. Schafer(17)..................... 13,198 * 13,198 -- --
Grotech Partners II, L.P.(18)............. 3,800 * 655 3,145 *
Commonwealth Venture Partners I,
L.P.(19)................................ 3,796 * 3,796 -- --
Grotech III Companion Fund, L.P.(20)...... 3,502 * 598 2,904 *
Grotech III Pennsylvania Fund, L.P.(21)... 2,104 * 360 1,744 *
Comdisco, Inc.(22)........................ 1,083 * 1,083 -- --
Philadelphia Ventures-Japan I, L.P.(23)... 949 * 949 -- --
</TABLE>
- ---------------
(*) Less than 1%.
(1) Assumes the issuance of the Vaxcel Common Stock in the Merger in exchange
for Zynaxis Common Stock, Zynaxis Preferred Stock and Zynaxis Notes and the
exercise of Vaxcel Warrants to be issued in
85
<PAGE> 92
the Merger in exchange for Zynaxis Warrants and Vaxcel Non-Financing
Warrants assumed in exchange for Zynaxis Non-Financing Warrants.
(2) Based on 11,000,000 shares of Vaxcel Common Stock to be outstanding upon
the consummation of the Merger.
(3) Includes 64,605 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
Stephen K. Reidy, a director of Zynaxis from April 1995 to the Merger, is a
general partner of Euclid Associates III, L.P., the general partner of
Euclid Partners III, L.P.
(4) Includes 17,655 shares owned of record by SmithKline Beecham Corporation,
the parent of S.R. One, Limited. Also includes 51,246 shares of Vaxcel
Common Stock issuable upon the exercise of Vaxcel Warrants to be issued to
the Selling Shareholder in the Merger.
(5) Includes 25,623 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
(6) Includes 47,450 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger. Lyle
A. Hohnke, a director of Zynaxis from April 1996 to the Merger, is a member
of Javelin Venture Partners, L.L.C., a general partner of Javelin Capital
Fund, L.P.
(7) Includes 28,470 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
(8) Includes 14,235 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
Barry Gonder, a director of Zynaxis from March 1996 to September 1996, was
an officer of Connecticut Mutual Life Insurance Company, the predecessor to
MassMutual Life Insurance Company.
(9) Includes 14,235 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger. John
F. Chappell, a director of Zynaxis from July 1995 to the Merger, is the
President and sole shareholder of Plexus Ventures, Inc.
(10) Includes 23,735 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
Donald E. Morel, Jr., a director of Zynaxis from July 1995 to the Merger,
is a vice president of The West Company.
(11) Also includes 10,439 shares of Vaxcel Common Stock issuable upon the
exercise of Vaxcel Warrants to be issued to the Selling Shareholder in the
Merger.
(12) Includes 25,148 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
(13) Includes 5,027 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
Grotech Partners III, L.P., Grotech Partners II, L.P., Grotech III
Companion Fund, L.P. and Grotech III Pennsylvania Fund, L.P. are affiliated
venture capital funds, of which Grotech Capital Group, Inc. ("GCGI") is the
general partner, except for Grotech Partners II, L.P. for which it is the
general partner of the general partner. Deborah A. Smeltzer, a director of
Zynaxis from 1990 to February 1995, was a managing director of GCGI during
that time.
(14) Includes 18,980 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
(15) Includes 9,490 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
(16) Includes 2,372 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
(17) Mr. Schafer was a director of Zynaxis from July 1995 to the Merger.
86
<PAGE> 93
(18) Includes 655 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger. See
note (13) with respect to information regarding the Selling Shareholder's
relationship to Zynaxis.
(19) Includes 1,898 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
Commonwealth Venture Partners I, L.P. ("Commonwealth") is an affiliated
venture capital fund of Philadelphia Ventures-Japan I, L.P., both of which
are managed by Philadelphia Ventures, Inc. ("PVI"). Thomas R. Morse, a
director of Zynaxis from 1988 to July 1995, is a general partner of
Commonwealth and an officer and shareholder of PVI.
(20) Includes 598 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger. See
note (13) with respect to information regarding the Selling Shareholder's
relationship to Zynaxis.
(21) Includes 360 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger. See
note (13) with respect to information regarding the Selling Shareholder's
relationship to Zynaxis.
(22) Represents 1,083 shares of Vaxcel Common Stock issuable upon the exercise
of Vaxcel Warrants to be issued to the Selling Shareholder in the Merger.
(23) Includes 474 shares of Vaxcel Common Stock issuable upon the exercise of
Vaxcel Warrants to be issued to the Selling Shareholder in the Merger. See
note (19) with respect to information regarding the Selling Shareholder's
relationship to Zynaxis.
87
<PAGE> 94
PLAN OF DISTRIBUTION
The Registration Statement of which this Proxy Statement is a part relates
to and covers the reoffering and resale by the Selling Shareholders (who are
listed in the Selling Shareholders of Zynaxis table included herein), or their
pledgees, donees, transferees or other successors, of the Resale Shares issued
or issuable to them by Vaxcel. Any Resale Shares owned by the Selling
Shareholders may be offered by them from time to time in transactions (which may
involve crosses and block transactions) on the Nasdaq SmallCap Market, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices. Selling Shareholders may sell some or all of the
shares in transactions involving broker-dealers, who may act solely as agent or
who may acquire shares as principal. There is no assurance that the Selling
Shareholders will sell any or all of the shares offered hereby. Broker-dealers,
agents or underwriters participating in such transactions as agent may receive
commissions from the Selling Shareholders and, if they act as agent for the
purchaser of the shares, from the purchaser. Participating broker-dealers may
agree with the Selling Shareholders to sell a specified number of shares at a
stipulated price per share, and to the extent such broker-dealer is unable to do
so as agent for the Selling Shareholders, the broker-dealer may purchase as
principal any unsold shares at the price required to fulfill the broker-dealer's
commitment to the Selling Shareholders. In addition, shares may be sold by
Selling Shareholders by or through broker-dealers in special offerings, exchange
distributions or secondary distributions, and in connection therewith
commissions in excess of the customary commission prescribed by applicable rules
may be paid to participating broker-dealers or, in the case of certain secondary
distributions, a discount or concession from the offering price may be allowed
to participating broker-dealers in excess of such customary commissions.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions on the Nasdaq SmallCap Market, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
commissions from the purchaser of such shares.
The Selling Shareholders and any underwriters, broker-dealers or agents
that participate in a distribution of such shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
commissions or concessions received by any such underwriters, dealers or agents
might be deemed to be underwriting discounts and commissions under the
Securities Act. Under applicable rules and regulations under the Exchange Act,
any person engaged in a distribution of any of the Resale Shares may not
simultaneously engage in market activities with respect to any of the Resale
Shares for a period of nine business days prior to the commencement of such
distribution. In addition, the Selling Shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rules 10b-6 and 10b-7, which provisions
may limit the timing of purchases and sales of Resale Shares by the Selling
Shareholders. All of the foregoing may affect the marketability of the Resale
Shares.
Vaxcel and Zynaxis will pay substantially all expenses incident to the
reoffering of the Resale Shares by the Selling Shareholders to the public, other
than commissions and discounts of underwriters, dealers or agents. Vaxcel will
receive no proceeds from any sales of such shares under this Proxy Statement by
any Selling Shareholders.
88
<PAGE> 95
PROPOSED ASSET SALES
Under Section 1932 of the PBCL, a sale of substantially all of the assets
of a Pennsylvania corporation may be made only pursuant to a plan of asset
transfer approved by the shareholders of such corporation. Pursuant to Section
1932(b) of the PBCL, the plan of asset transfer shall set forth the terms and
conditions of the sale, lease, exchange or other disposition or may authorize
the board of directors to fix any or all of the terms and conditions, including
the consideration to be received by the corporation therefor. The plan of asset
transfer adopted by the Zynaxis Board and proposed by the Zynaxis Board to the
holders of the Zynaxis Capital Stock grants to the Zynaxis Board unrestricted
authority to sell any and all of the assets of Zynaxis (the "Assets") on any
terms and conditions deemed necessary or appropriate by the Zynaxis Board.
Pursuant to the Liquidation Agreement, the Zynaxis Board has authorized
CytRx to serve as Zynaxis' agent and assist Zynaxis in selling the Assets at the
prices and settling of the liabilities listed in the Liquidation Agreement for
the amounts specified in the Liquidation Agreement no greater than indicated. In
particular, the Liquidation Agreement provides for the sale of the leasehold
improvements, physical plant and laboratory equipment related to the Cauldron
division and the leasehold improvements, physical plant and laboratory equipment
associated with other aspects of Zynaxis. In addition, the Liquidation Agreement
calls for the collection of certain notes receivable. Pursuant to the
Liquidation Agreement, the Zynaxis Board (and any applicable committees thereof)
also approved (i) an operating budget for the period between the date of the
Liquidation Agreement and the Closing, (ii) certain agreements to be entered
into by Zynaxis and CytRx with Martyn D. Greenacre and Michael A. Christie, and
(iii) an agreement between QED and Zynaxis covering QED's relationship as
Zynaxis' agent for the sale of the Cauldron division. Because the plan of asset
transfer grants the Zynaxis Board unrestricted authority to sell the Assets, the
Zynaxis Board may amend the Liquidation Agreement to change the Assets to be
sold, the selling prices of such Assets, the liabilities to be settled or the
settlement value of such liabilities, all without obtaining any further approval
of the holders of the Zynaxis Capital Stock.
Pursuant to the Liquidation Agreement, Zynaxis has committed to exert its
commercially reasonable best efforts to sell the Assets and to cooperate with
CytRx in its efforts to assist Zynaxis in selling the Assets. Zynaxis has
committed to approve and execute documents evidencing and perform any agreement
negotiated by Zynaxis or CytRx with any prospective purchaser of any Zynaxis
asset if (i) the purchase price is no lower than the amount and is consistent
with the terms set forth in the Liquidation Agreement, and (ii) the other terms
and conditions of the transaction are not less favorable to Zynaxis in any
material respect than the terms and conditions of similar transactions.
Zynaxis has committed to exert its commercially reasonable best efforts to
settle the liabilities and to cooperate with CytRx in its efforts to assist in
settling the liabilities. Zynaxis has committed to approve and execute documents
evidencing and perform any agreement negotiated by Zynaxis or CytRx with any
creditor for any liability, if (i) the cash payment required to be paid by
Zynaxis to such creditor is no greater than the settlement amount and is
consistent with the terms set forth for such liability in the Liquidation
Agreement, and (ii) the other terms and conditions of the transaction are not
less favorable to Zynaxis in any material respect than the terms and conditions
of similar transactions.
The Liquidation Agreement further provides that, subject to approval by the
Committee (as defined below), which approval will not be unreasonably withheld,
Vaxcel shall approve and execute documents evidencing and perform any agreement
negotiated by CytRx with any counsel, accountants, appraisers, brokers and other
advisors in connection with the transactions (all for the account of Zynaxis),
if (i) such person is not an affiliate of CytRx, and (ii) the terms and
conditions of such agreement, taken as a whole, are fair to Zynaxis.
In connection with CytRx's activities on Zynaxis' behalf, the Liquidation
Agreement provides that Zynaxis agrees to cooperate with CytRx, to furnish or
cause to be furnished to CytRx such information and data as CytRx may reasonably
request, and to give CytRx reasonable access to Zynaxis' officers, directors,
employees, appraisers and independent accountants.
89
<PAGE> 96
The members of the Committee are John F. Chappell, Stephen K. Reidy and
Martyn D. Greenacre, and the Committee has full authority of the Zynaxis Board
to authorize the transactions and the institution and prosecution of actions
(including arbitration proceedings) relating to the transactions contemplated by
the Liquidation Agreement. The Committee will confer with CytRx at such times as
CytRx reasonably requests.
The Liquidation Agreement also provides that Zynaxis will reimburse CytRx
promptly for all reasonable out-of-pocket expenses, including reasonable fees
and expenses of CytRx's counsel, incurred in connection with the rendering of
CytRx's services under the Liquidation Agreement. Zynaxis also agrees to
indemnify CytRx in accordance with certain indemnification provisions.
CytRx may terminate the Liquidation Agreement at any time upon written
notice, without liability or continuing obligation to Zynaxis. Zynaxis may not
terminate the Liquidation Agreement unless and until the Agreement is
terminated.
THE BOARD OF DIRECTORS OF ZYNAXIS RECOMMENDS THAT THE SHAREHOLDERS VOTE
"FOR" THE ASSET SALES.
90
<PAGE> 97
AMENDMENT OF ZYNAXIS
ARTICLES OF INCORPORATION
The text of the proposed amendment to the Articles of Incorporation of
Zynaxis to be effected by the Charter Amendment, is attached as Appendix C to
this Proxy Statement and is incorporated herein by reference. The following
summary is qualified in its entirety by reference to Appendix C to the Proxy
Statement.
Zynaxis is subject to various statutory "anti-takeover" provisions of the
PBCL, including Subchapter 25E of the PBCL. Subchapter 25E of the PBCL generally
provides that any holder of voting shares of a Pennsylvania registered
corporation that becomes the subject of a control transaction (as described
below) is entitled to receive cash for each of such person's voting shares in an
amount equal to the "fair value" of each voting share as of the date on which
such control transaction occurred. Although Subchapter 25E of the PBCL provides
for a judicial appraisal procedure, "fair value" is defined to be not less than
the highest price per share paid by the acquiror in a control transaction at any
time during the 90-day period ending on and including the date of the control
transaction, plus, to the extent not reflected in such price paid, an increment
representing any value, including, without limitation, any proportion of any
value payable for control of such corporation. A control transaction is the
acquisition by a person (or group of persons acting in concert) of voting power
over voting shares of a registered corporation which would entitle the holders
of such shares to cast 20% or more of the votes that all shareholders would be
entitled to cast in an election of directors of such corporation.
Because of Subchapter 25E of the PBCL, CytRx could not purchase 20% or more
of the shares of Zynaxis Capital Stock in a tender offer or other transaction
without all holders of shares of Zynaxis Capital Stock having the right to
immediately put the shares of Zynaxis Capital Stock to CytRx for at least the
cash value of the consideration to be offered in the Agreement. Unless the
Zynaxis shareholders approve the Charter Amendment, Vaxcel and CytRx will have
to comply with the provisions of Subchapter 25E.
Pursuant to Section 2541(a)(4) of the PBCL, the articles of incorporation
of a Pennsylvania corporation can explicitly provide that Subchapter 25E is not
applicable either by a provision contained in the original articles of
incorporation of such corporation or by an amendment adopted by the shareholders
of such corporation prior to a control transaction.
The Articles of Incorporation of Zynaxis do not currently contain a
provision making Subchapter 25E inapplicable to Zynaxis. The adoption of the
Charter Amendment amending the Articles of Incorporation and making Subchapter
25E inapplicable to the Merger is a condition to consummation of the Merger. The
vote required for approval of the Charter Amendment is an affirmative vote of
(i) a majority of the votes cast, whether in person or by proxy, by all holders
of Zynaxis Preferred Stock (voting on an as converted basis) and by all holders
of Zynaxis Common Stock, entitled to vote and voting together as a class; and
(ii) a majority of the votes cast, whether in person or by proxy, by all holders
of Zynaxis Preferred Stock, entitled to vote and voting as a separate class.
THE ZYNAXIS BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE CHARTER
AMENDMENT.
91
<PAGE> 98
DESCRIPTION OF VAXCEL CAPITAL STOCK
The authorized capital stock of Vaxcel consists of 30,000,000 shares of
Vaxcel Common Stock, par value $.001 per share, and 2,000,000 shares of
Preferred Stock, par value $.001 per share ("Vaxcel Preferred Stock").
COMMON STOCK
As of December 23, 1996, there were 8,250,004 shares of Vaxcel Common Stock
outstanding, all of which are held by CytRx. Holders of shares of Vaxcel Common
Stock are entitled to one vote per share on all matters to be voted upon by the
shareholders and are not entitled to cumulative votes for the election of
directors. Holders of shares of Vaxcel Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors of Vaxcel out of funds legally available therefor. In the
event of liquidation, dissolution or winding up of Vaxcel, the holders of shares
of Vaxcel Common Stock are entitled to share ratably in all assets remaining
outstanding. Shares of Vaxcel Common Stock have no preemptive, conversion or
other subscription rights and there are no redemption or sinking fund provisions
applicable to Vaxcel Common Stock.
For a further description of Vaxcel Common Stock, see "Effects of the
Merger on Rights of Shareholders."
PREFERRED STOCK
Vaxcel is authorized to issue up to 2,000,000 shares of Vaxcel Preferred
Stock, none of which are outstanding. The shares of Vaxcel Preferred Stock may
be issued by the Vaxcel Board, from time to time, in one or more classes or
series, the shares of each class or series having such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions, as are stated and expressed in the Certificate of Incorporation
or in the resolution or resolutions providing for the issue of such class or
series, adopted by Vaxcel's Board.
VAXCEL WARRANTS
The Vaxcel Warrants to be issued in exchange for the Zynaxis Warrants upon
consummation of the Merger are governed by the Preferred Stock and Warrant
Agreement and their own terms. The Vaxcel Warrants are convertible into shares
of Vaxcel Common Stock. Pursuant to their terms, the Vaxcel Warrants are
immediately exercisable upon consummation of the Merger and have a term of one
year from the Closing. The Vaxcel Warrants are exercisable at a price per share
equal to: (i) the Per Share Price divided by (ii) the Exchange Ratio (the
"Vaxcel Warrant Price"). Beginning at the sixtieth day following the Closing,
the Vaxcel Warrants are exercisable at a price per share equal to two times the
Vaxcel Warrant Price in effect immediately prior to such time, subject to
adjustment by the terms of such Vaxcel Warrant in the case of a merger,
consolidation, or reorganization of Vaxcel.
The Vaxcel Warrants may be exercised during their term in whole or in part
by the surrender of such Vaxcel Warrant, with the purchase agreement attached to
such Vaxcel Warrant properly completed and executed, at the principal office of
Vaxcel and upon payment to it by certified check or bank draft to the order of
Vaxcel for the purchase price for the shares to be purchased upon such exercise.
The Vaxcel Warrants and the shares of Vaxcel Common Stock that may be
issued upon exercise thereof have not been registered under the Securities Act,
by reason of their issuance in a transaction exempt from the registration
requirements of the Securities Act pursuant to the exemption provided in Section
4(2) thereof, and have not been registered under state securities laws by reason
of their issuance in a transaction exempt from such registration requirements.
The Vaxcel Warrants may not be sold, transferred or otherwise disposed of unless
registered under the Securities Act and applicable state securities laws
registration. However, under the Agreement, Vaxcel has agreed to keep the
Registration Statement effective to cover the resale of shares issued pursuant
to the Vaxcel Warrants.
92
<PAGE> 99
The Vaxcel Warrants also provide that, prior to any transfer of such a
Warrant, the holder will give written notice to Vaxcel of such holder's
intention to effect such transfer and to comply with the terms of the Vaxcel
Warrant. Each such notice must contain (i) a statement setting forth the
intention of such holder's prospective transferee with respect to its retention
or disposition of the Vaxcel Warrant, and (ii) unless waived by Vaxcel, an
opinion of counsel for such holder (who may be the inside or staff counsel
employed by such holder), as to the necessity or non-necessity for registration
under the Securities Act and applicable state securities laws in connection with
such transfer and stating the factual and statutory bases relied upon by
counsel. If in the opinion of counsel for Vaxcel the proposed transfer of the
Vaxcel Warrant may be effected without registration or qualification under the
Securities Act and any applicable state securities laws, then the registered
holder of the Vaxcel Warrant shall be entitled to transfer the Vaxcel Warrant in
accordance with the intended method of disposition specified in the statement
delivered by such holder to Vaxcel. If in the opinion of counsel for Vaxcel the
proposed transfer of the Vaxcel Warrant may not be effected without registration
under the Securities Act or registration or qualification under any applicable
state securities laws, the registered holder of the Vaxcel Warrant shall not be
entitled to transfer the Vaxcel Warrant until the requisite registration or
qualification is effective.
CYTRX WARRANT
The CytRx Warrant, to be issued to CytRx upon consummation of the Merger
pursuant to the Agreement, provides that CytRx is entitled to purchase from
Vaxcel a number of shares of Vaxcel Common Stock equal to: (i) the amount that
the Board of Directors of CytRx reasonably determines is the minimum amount that
must be contributed to the capital of Vaxcel in order for Vaxcel to satisfy or
continue to satisfy quantitative requirements for inclusion or continued
inclusion of Vaxcel Common Stock in the Nasdaq SmallCap Market divided by (ii)
one-half of the Per Share Price and multiplied by (iii) the Exchange Ratio.
The per share price for the shares which may be purchased upon the exercise
of the CytRx Warrant (the "CytRx Warrant Exercise Price") shall be initially
equal to: (i) one-half of the Per Share Price, divided by (ii) the Exchange
Ratio, subject to adjustment pursuant to the terms of the CytRx Warrant for any
mergers, consolidations or reorganizations of Vaxcel. The CytRx Warrant may be
exercised by giving written notice to Vaxcel and providing Vaxcel with the CytRx
Warrant Exercise Price.
CytRx has the right to purchase shares of Vaxcel Common Stock under the
terms of the CytRx Warrant from the time that the CytRx Board reasonably
determines that Vaxcel's total assets and capital and surplus are insufficient
to satisfy the total assets and capital and surplus requirements for inclusion
of Vaxcel Common Stock in the Nasdaq SmallCap Market until December 6, 1997.
Pursuant to the CytRx Warrant, Vaxcel must provide written notice to CytRx
if: (i) Vaxcel declares any discretionary dividend upon any class of its capital
stock payable in securities or makes any special dividend or other distribution;
(ii) Vaxcel offers for subscription pro rata to the holders of any class of its
capital stock any additional securities of any class or other rights; (iii)
there shall be any capital reorganization, or reclassification of the capital
stock of Vaxcel, or consolidation or merger of Vaxcel with, or sale of all or
substantially all its assets or stock to, another corporation; (iv) Vaxcel
enters into a voluntary or involuntary dissolution, liquidation or winding-up of
Vaxcel; or (v) Vaxcel enters into an agreement or adopts a plan for the purpose
of effecting a consolidation, merger, or sale of all or substantially all of its
assets or stock, other than a merger where Vaxcel is the surviving corporation
and the terms of Vaxcel's capital stock remain unchanged. Such written notice
shall be given at least 30 days prior to the action in question if practicable
and not less than 30 days prior to the record date or the date on which Vaxcel's
transfer books are closed in respect thereto if practicable.
The CytRx Warrant and the shares of Vaxcel Common Stock that may be issued
upon exercise thereof have not been registered under the Securities Act, by
reason of their issuance in a transaction exempt from the registration
requirements of the Securities Act pursuant to the exemption provided in Section
4(2) thereof, and have not been registered under state securities laws by reason
of their issuance in a transaction exempt from such registration requirements.
The CytRx Warrant may not be sold, transferred or otherwise disposed of unless
registered under the Securities Act and applicable state securities laws
registration.
93
<PAGE> 100
VAXCEL NON-FINANCING WARRANTS
Zynaxis issued the Zynaxis Non-Financing Warrants to Comdisco, Inc.
("Comdisco"), The UAB Research Foundation ("UAB") and Connecticut Mutual Life
Insurance Company ("Connecticut Mutual"). The Agreement provides that each such
warrant shall be converted into and become a Vaxcel Non-Financing Warrant, and
Vaxcel shall assume each such warrant in accordance with the terms of the
warrant agreement by which it is evidenced, except that from and after the
Effective Time, (i) each Zynaxis Non-Financing Warrant assumed by Vaxcel may be
exercised solely for shares of Vaxcel Common Stock, (ii) the number of shares of
Vaxcel Common Stock subject to such Vaxcel Non-Financing Warrant will be equal
to the number of shares of Zynaxis Common Stock subject to such Zynaxis
Non-Financing Warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio, and (iii) the per share exercise price under each such Vaxcel
Non-Financing Warrant will be adjusted by dividing the per share exercise price
under each such Zynaxis Non-Financing Warrant by the Exchange Ratio and rounding
up to the nearest cent. Notwithstanding the provisions of clause (ii) of the
preceding sentence, Vaxcel will not be obligated to issue any fraction of a
share of Vaxcel Common Stock upon exercise of such Vaxcel Non-Financing Warrants
and any fraction of a share of Vaxcel Common Stock that otherwise would be
subject to a converted Vaxcel Non-Financing Warrant shall represent the right to
receive a cash payment upon exercise of such converted Vaxcel Non-Financing
Warrant equal to the product of such fraction and the difference between the
market value of one share of Vaxcel Common Stock at the time of exercise of such
converted Vaxcel Non-Financing Warrant and the per share exercise price of such
converted Vaxcel Non-Financing Warrant. The market value of one share of Vaxcel
Common Stock at the time of exercise of a converted Vaxcel Non-Financing Warrant
will be the last sale price of a share of Vaxcel Common Stock on the Nasdaq
SmallCap Market (as reported by the Wall Street Journal or, if not reported
thereby, any other authoritative source selected by Vaxcel) on the last trading
day preceding the date of exercise.
Comdisco Warrants
The Zynaxis Non-Financing Warrants held by Comdisco are evidenced by a
Warrant Agreement dated as of December 14, 1988, and amended on March 4, 1989
and January 17, 1992, between Zynaxis and Comdisco (the "1988 Comdisco
Warrant"), and a Warrant Agreement dated as of November 9, 1990, and amended
January 17, 1992, between Zynaxis and Comdisco (the "1990 Comdisco Warrant").
The 1988 Comdisco Warrant grants Comdisco the right to purchase 8,955 shares of
Zynaxis Common Stock at an exercise price of $7.035 per share. The exercise
price may be paid in cash or by cancelling shares otherwise issuable under the
warrant with a fair market value equal to the exercise price. The term of the
1988 Comdisco Warrant began on December 1, 1988, and ends on December 1, 1998.
Comdisco has not purchased any shares under the warrant. The exercise price and
the number of shares of Zynaxis Common Stock subject to the warrant are subject
to adjustment in the event of a merger or sale of assets, reclassification of
shares, subdivision or combination of shares, or stock dividends. Comdisco has
limited registration rights with respect to the shares of Zynaxis Common Stock
issuable under the 1988 Comdisco Warrant.
The 1990 Comdisco Warrant grants Comdisco the right to purchase 2,459
shares of Zynaxis Common Stock at an exercise price of $7.035 per share. The
exercise price may be paid in cash or by cancelling shares otherwise issuable
under the warrant with a fair market value equal to the exercise price. The term
of the 1990 Comdisco Warrant began on November 9, 1990, and ends on November 9,
2000. Comdisco has not purchased any shares under the warrant. The exercise
price and the number of shares of Zynaxis Common Stock subject to the warrant
are subject to adjustment in the event of a merger or sale of assets,
reclassification of shares, subdivision or combination of shares, or stock
dividends. Comdisco has limited registration rights with respect to the shares
of Zynaxis Common Stock issuable under the 1990 Comdisco Warrant.
UAB Warrants
The Zynaxis Non-Financing Warrants held by UAB are evidenced by a Common
Stock and Warrant Purchase Agreement dated as of December 1, 1995, between
Zynaxis and UAB and related warrant agreement (the "UAB Warrant"). The UAB
Warrant grants UAB the right to purchase 200,000 share of Zynaxis Common Stock
at an exercise price of $1.325 per share. The term of the UAB Warrant begins on
the
94
<PAGE> 101
date of the first royalty payment which would otherwise be due to UAB under the
Agreement for Assignment of Royalties dated December 1, 1995, between UAB and
Zynaxis and ends on December 31, 2007; provided, however, that the term shall
terminate automatically 60 days after the Zynaxis Common Stock has traded at an
average closing price per share as reported on the Nasdaq National Market of
greater than $10 for any 30 consecutive trading days. UAB has not purchased any
shares under the warrant. The exercise price shall be increased or decreased as
appropriate, to avoid dilution of the exercise rights under the UAB Warrant in
the event of a dividend on Zynaxis Common Stock payable in such common stock, or
in any right to acquire Zynaxis Common Stock for any consideration less than the
exercise price, or a subdivision or a combination or consolidation (by reverse
stock split, reclassification or otherwise) of the Zynaxis Common Stock. In the
event of a reclassification, change, or consolidation of the Zynaxis Common
Stock, or the merger, sale or transfer of Zynaxis or its assets, the UAB Warrant
shall be converted into a new warrant that grants to UAB the right (upon terms
not less favorable to UAB than those set forth in the warrant) to purchase, in
lieu of Zynaxis Common Stock, the stock or other property that UAB would have
received had UAB exercised the warrant immediately prior to such transaction.
Subject to limited exceptions, Zynaxis is obligated to register for resale under
the Securities Act all of the Zynaxis Common Stock issued or issuable under the
warrant in the event that Zynaxis registers any of its other securities (other
than shares of Zynaxis Common Stock issued or issuable to holders of Zynaxis
Preferred Stock which are registered under the Preferred Stock and Warrant
Purchase Agreement dated March 29, 1995, as amended, among Zynaxis and certain
purchasers identified therein) under the Securities Act. Zynaxis shall pay all
expenses of such registration, other than selling commissions, underwriting fees
and stock transfer taxes applicable to the securities and all fees and
disbursements of counsel for UAB.
Connecticut Mutual Warrants
The Zynaxis Non-Financing Warrants held by Connecticut Mutual are evidenced
by a Common Stock and Warrant Purchase Agreement dated as of February 28, 1996,
between Zynaxis and Connecticut Mutual and related warrant agreement (the
"Connecticut Mutual Warrant"). The Connecticut Mutual Warrant grants Connecticut
Mutual the right to purchase 150,000 share of Zynaxis Common Stock at an
exercise price of $1.00 per share. The term of the Connecticut Mutual Warrant
began on November 28, 1996 and ends on February 28, 2001; provided, however,
that the term shall terminate automatically 60 days after the Zynaxis Common
Stock has traded at an average closing price per share as reported on the Nasdaq
SmallCap Market or the OTC Bulletin Board, as the case may be, of $3 or greater
for any 30 consecutive trading days. Connecticut Mutual has not purchased any
shares under the warrant. The exercise price shall be increased or decreased, as
appropriate, to avoid dilution of the exercise rights under the Connecticut
Mutual Warrant in the event of a dividend on Zynaxis Common Stock payable in
such common stock or in any right to acquire Zynaxis Common Stock for any
consideration less than the exercise price, or a subdivision or a combination or
consolidation (by reverse stock split, reclassification or otherwise) of the
Zynaxis Common Stock. In the event of a reclassification, change, or
consolidation of the Zynaxis Common Stock, or the merger, sale or transfer of
Zynaxis or its assets, the Connecticut Mutual Warrant shall be converted into a
new warrant that grants to Connecticut Mutual the right (upon terms not less
favorable to Connecticut Mutual than those set forth in the warrant) to
purchase, in lieu of Zynaxis Common Stock, the stock or other property that
Connecticut Mutual would have received had Connecticut Mutual exercised the
warrant immediately prior to such transaction. Zynaxis is obligated to file with
the SEC and use its best efforts to have declared effective and keep effective
for five years a registration statement on Form S-3 that includes shares of the
Zynaxis Common Stock issued or issuable under the warrant.
LEGAL MATTERS
Alston & Bird, counsel for Vaxcel, has delivered its opinion to the effect
that Vaxcel Common Stock to be issued to the holders of Zynaxis Capital Stock in
connection with the Merger, when issued as contemplated in the Agreement, will
be validly issued, fully paid, and nonassessable. In addition, Alston & Bird has
delivered its opinion concerning the federal income tax consequences of the
Merger. See "Description of Transaction -- Certain Federal Income Tax
Consequences." Certain other legal matters in connection with
95
<PAGE> 102
the Merger will be passed upon for Vaxcel by Alston & Bird and for Zynaxis by
Morgan, Lewis & Bockius LLP.
EXPERTS
The financial statements of Vaxcel at December 31, 1995 and 1994, and for
each of the two years in the period ended December 31, 1995, and for the period
from inception (January 6, 1993) through December 31, 1993, included in this
Proxy Statement and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Zynaxis incorporated by reference
in this Proxy Statement and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report which includes an explanatory paragraph
regarding Zynaxis' ability to continue as a going concern.
OTHER MATTERS
As of the date of this Proxy Statement, the Zynaxis Board knows of no
matters that will be presented for consideration at the Special Meeting other
than as described in this Proxy Statement. However, if any other matters shall
properly come before the Special Meeting or any adjournment thereof and be voted
upon, the enclosed proxy shall be deemed to confer discretionary authority to
the individuals named as proxies therein to vote the shares represented by such
proxy as to any such matters.
96
<PAGE> 103
VAXCEL, INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Financial Statements:
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and
1994............................................................................. F-3
Statements of Operations for the Nine Months Ended September 30, 1996 and 1995
(unaudited), for the Years Ended December 31, 1995 and 1994 and for the Period
from Inception (January 6, 1993) to December 31, 1993............................ F-4
Statements of Stockholder's Equity for the Period from Inception (January 6,
1993) to December 31, 1993, for the Years Ended December 31, 1994 and 1995 and
for the Nine Months Ended September 30, 1996 (unaudited)......................... F-5
Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995
(unaudited), for the Years Ended December 31, 1995 and 1994 and for the Period
from Inception (January 6, 1993) to December 31, 1993............................ F-6
Notes to Financial Statements.................................................... F-7
</TABLE>
F-1
<PAGE> 104
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
VAXCEL, INC.
We have audited the accompanying balance sheets of Vaxcel, Inc. as of
December 1995 and 1994, and the related statements of operations, stockholder's
equity and cash flows for the years then ended, and for the period from
inception (January 6, 1993) through December 31, 1993. 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 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 Vaxcel, Inc. at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, and for the period from inception (January 6, 1993) through
December 31, 1993, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 19, 1996
F-2
<PAGE> 105
VAXCEL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 18,832 $ 515,522 $ 527,948
Accounts receivable.............................. 6,363 5,038 67,615
Inventories...................................... -- -- 6,651
Other............................................ -- -- 300
------------ ----------- -----------
Total current assets........................ 25,195 520,560 602,514
Property and equipment:
Furnishings and equipment........................ 264,801 261,894 266,911
Leasehold improvements........................... -- -- 95,263
------------ ----------- -----------
264,801 261,894 362,174
Accumulated depreciation.............................. (156,725) (118,025) (86,768)
------------ ----------- -----------
Net property and equipment....................... 108,076 143,869 275,406
Other assets:
Patent costs..................................... -- -- 128,216
Deposits......................................... 35,674 37,439 37,439
------------ ----------- -----------
Total other assets.......................... 35,674 37,439 165,655
------------ ----------- -----------
Total assets................................ $ 168,945 $ 701,868 $ 1,043,575
============ =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................. $ 8,991 $ 61,386 $ 10,082
Accrued liabilities.............................. 40,516 41,896 35,771
Amounts due to CytRx Corporation................. 5,582 14,417 34,748
------------ ----------- -----------
Total current liabilities................... 55,089 117,699 80,601
Commitments
Stockholder's equity:
Preferred stock ($.001 par value, 2,000,000
shares authorized; no shares issued and
outstanding)................................... -- -- --
Common stock ($.001 par value, 30,000,000 shares
authorized; 8,200,000, 8,000,000, and 8,000,000
shares issued and outstanding at September 30,
1996, December 31, 1995, and December 31, 1994,
respectively).................................. 8,200 8,000 8,000
Additional paid-in capital....................... 4,297,800 3,998,000 2,998,000
Accumulated deficit.............................. (4,192,144) (3,421,831) (2,043,026)
------------ ----------- -----------
Total stockholder's equity.................. 113,856 584,169 962,974
------------ ----------- -----------
Total liabilities and stockholder's
equity.................................... $ 168,945 $ 701,868 $ 1,043,575
============ =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 106
VAXCEL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED YEAR ENDED INCEPTION
SEPTEMBER 30, DECEMBER 31, (JANUARY 6, 1993)
---------------------- ------------------------ THROUGH
1996 1995 1995 1994 DECEMBER 31, 1993
--------- --------- ----------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales......................... $ -- $ -- $ -- $ 500,814 $ 506,317
License fees...................... 50,000 25,000 115,000 -- --
Collaborative and grant revenue... 30,635 -- 6,709 -- --
--------- --------- ----------- --------- -----------
80,635 25,000 121,709 500,814 506,317
OPERATING EXPENSES:
Cost of sales..................... -- -- -- 72,636 74,066
Research and development.......... 540,744 559,965 894,754 570,548 791,996
Selling and marketing............. -- -- -- 181,542 444,512
General and administrative........ 316,663 364,794 534,542 664,359 583,291
Write-off of patent costs......... -- 128,216 128,216 -- --
--------- --------- ----------- --------- -----------
857,407 1,052,975 1,557,512 1,489,085 1,893,865
OTHER INCOME (EXPENSE):
Sale of animal adjuvant rights.... -- -- -- 500,000 --
Interest income................... 6,459 47,930 56,998 8,072 --
Interest expense.................. -- -- -- (119,644) (55,635)
--------- --------- ----------- --------- -----------
6,459 47,930 56,998 388,428 (55,635)
--------- --------- ----------- --------- -----------
Net loss.......................... $(770,313) $(980,045) $(1,378,805) $(599,843) $(1,443,183)
========= ========= =========== ========= ===========
Net loss per common share......... $ (0.10) $ (0.12) $ (0.17) $ (0.09) $ (0.24)
========= ========= =========== ========= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 107
VAXCEL, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
SHARES ADDITIONAL ACCUMULATED
OUTSTANDING AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
----------- ------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 6, 1993................. 6,000 $6,000 $ -- $ -- $ 6,000
Net loss............................... -- -- -- (1,443,183) (1,443,183)
---------- ------ ----------- ----------- -----------
Balance at December 31, 1993............... 6,000 6,000 -- (1,443,183) (1,437,183)
Conversion of CytRx note payable....... 2,000,000 2,000 2,998,000 -- 3,000,000
Net loss............................... -- -- -- (599,843) (599,843)
---------- ------ ----------- ----------- -----------
Balance at December 31, 1994............... 8,000,000 8,000 2,998,000 (2,043,026) 962,974
Capital contribution by CytRx.......... -- -- 1,000,000 -- 1,000,000
Net loss............................... -- -- -- (1,378,805) (1,378,805)
---------- ------ ----------- ----------- -----------
Balance at December 31, 1995............... 8,000,000 8,000 3,998,000 (3,421,831) 584,169
Issuance of stock to CytRx............. 200,000 200 299,800 300,000
Net loss (unaudited)................... -- -- -- (770,313) (770,313)
---------- ------ ----------- ----------- -----------
Balance at September 30, 1996
(unaudited).............................. 8,200,000 $8,200 $ 4,297,800 $ 4,192,144 $ 113,856
========== ====== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 108
VAXCEL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED YEAR ENDED INCEPTION
SEPTEMBER 30, DECEMBER 31, (JANUARY 6, 1993)
---------------------- ------------------------- THROUGH
1996 1995 1995 1994 DECEMBER 31, 1993
--------- --------- ----------- ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.......................... $(770,313) $(980,045) $(1,378,805) $ (599,843) $(1,443,183)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and
amortization............... 38,700 54,789 70,084 69,468 17,648
Write-off to patent costs.... -- 128,216 128,216 -- --
Write-off of fixed assets.... -- -- 71,503 -- --
Change in assets and
liabilities:
Receivables.............. (1,325) 40,945 62,577 (1,538) 24,190
Inventories.............. -- 6,651 6,651 4,242 (4,181)
Other assets............. 1,765 (7,768) 300 (10,395) (155,908)
Accounts payable......... (53,746) (18,916) 36,328 (62,237) 88,646
Other liabilities........ (8,864) (22,029) 770 (291,272) 224,210
--------- --------- ----------- ---------- -----------
Total adjustments... (23,470) 181,888 376,429 (291,732) 194,605
--------- --------- ----------- ---------- -----------
Net cash used by operating
activities...................... (793,783) (798,157) (1,002,376) (891,575) (1,248,578)
Cash Flows From Investing Activities:
Capital expenditures, net......... (2,907) 4,295 (10,050) (63,527) (177,393)
Loans to officer.................. -- -- -- 96,600 (96,600)
Escrow account.................... -- -- -- 175,000 (175,000)
--------- --------- ----------- ---------- -----------
Net cash provided (used) by
investing activities............ (2,907) 4,295 (10,050) 208,073 (448,993)
Cash Flows From Financing Activities:
Borrowings on convertible note.... -- -- -- 1,171,027 1,731,994
Equity contribution by CytRx...... -- 1,000,000 1,000,000 -- --
Proceeds from sale of common
stock........................... 300,000 -- -- -- 6,000
--------- --------- ----------- ---------- -----------
Net cash provided by
financing activities............ 300,000 1,000,000 1,000,000 1,171,027 1,737,994
--------- --------- ----------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents.................... (496,690) 206,138 (12,426) 487,525 40,423
Cash and cash equivalents at beginning
of period........................... 515,522 527,948 527,948 40,423 --
--------- --------- ----------- ---------- -----------
Cash and cash equivalents at end
of period........................... $ 18,832 $ 734,086 $ 515,522 $ 527,948 $ 40,423
========= ========= =========== ========== ===========
Supplemental Disclosure Of Information
Not Effecting Cash Flows:
Conversion of CytRx note payable
into common stock............... $ -- $ -- $ -- $3,000,000 $ --
========= ========= =========== ========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 109
VAXCEL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 6, 1993) THROUGH DECEMBER 31, 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND ANY DATE OR PERIOD
SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Vaxcel, Inc. (the "Company") was formed on January 6, 1993 (date of
inception). The Company is a wholly-owned subsidiary of CytRx Corporation
("CytRx"). The Company is engaged in the development and commercialization of
proprietary vaccine delivery system technology to improve the effectiveness and
convenience of existing vaccines and contribute to the development of new
vaccines. The Company's core technology (the "OPTIVAX(R) System") is based upon
novel vaccine formulations containing certain biologically active copolymers
licensed exclusively for this purpose by the Company from CytRx.
The accompanying financial statements at September 30, 1996 and for the
nine months then ended are unaudited, but include all adjustments which the
Company's management believes to be necessary for a fair presentation of the
period presented. Interim results are not necessarily indicative of results for
a full year.
Since its inception the Company has incurred operating losses and has been
economically dependent upon CytRx to provide the funding necessary to conduct
its operations. CytRx has expressed its commitment to continue financial support
of the Company's operations as necessary at least through 1997, and has firmly
committed to provide a substantial level of capital funding subject to the
closure of the Merger transaction discussed in Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents -- The Company considers all highly liquid debt
instruments with an original maturity of 90 days or less to be cash equivalents.
Cash equivalents consist primarily of auction-market preferred stock, commercial
paper, and amounts invested in money market accounts.
Short-term Investments -- Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in a separate component of stockholder's equity. Realized gains and
losses are included in investment income and are determined on a first-in,
first-out basis.
Inventories -- Inventories are valued at the lower of cost or market. Cost
is determined using the first-in, first-out method.
Property and Equipment -- Property and equipment are stated at cost and
depreciated using the straight-line method based on the estimated useful lives
of the related assets. Leasehold improvements are amortized over the remaining
term of the related lease using the straight-line method.
Patents and Patent Application Costs -- Prior to 1995, the Company
capitalized the costs associated with obtaining patents on its technologies.
During the first quarter of 1995 the Company changed from deferring and
amortizing such costs to recording them as expenses when incurred because, even
though the Company believes the patents and underlying technology have
continuing value, the amount of future benefits to be derived therefrom is
uncertain. Accordingly, the new accounting method has been adopted in
recognition of a possible change in estimated future benefits. Since the effect
of this change in accounting principle is inseparable from the effect of the
change in accounting estimate, such change has been accounted for as a change in
estimate in accordance with Opinion No. 20 of the Accounting Principles Board.
As a result, the
F-7
<PAGE> 110
VAXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Company recorded a non-cash write-off of $128,216 during 1995 ($.02 per share).
Future patent costs are expected to be expensed since the benefits to be derived
therefrom are likely to be uncertain.
Fair Value of Financial Instruments -- The carrying amounts reported in the
balance sheets for cash and cash equivalents, accounts receivable and accounts
payable approximate their fair values.
Loss Per Common Share -- Loss per common share is based on the weighted
average number of common shares and common share equivalents outstanding during
each period. Stock options outstanding are excluded from the computation of net
loss per share since the effect is antidilutive.
Revenue Recognition -- Sales are recognized at the time the products are
shipped. License fees are recognized as income when they become receivable under
the terms of the related contracts, either by the passage of time or upon the
occurrence of certain events.
Stock Based Compensation -- The Company grants stock options for a fixed
number of shares to key employees, directors and consultants with an exercise
price equal to the fair market value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and, accordingly, recognizes no
compensation expense for the stock option grants (see Note 6).
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-based Compensation, which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. However, the Company plans to continue to account for
stock-based compensation in accordance with APB Opinion No. 25.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
New Accounting Standard -- Statement of Financial Accounting Standards No.
121 ("SFAS 121") establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill. This statement
was issued in 1995 and is required to be adopted January 1, 1996. The Company
will adopt SFAS 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
3. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). In accordance with SFAS 115, the Company did
not restate prior period financial statements. There was no cumulative effect of
adopting SFAS 115.
At December 31, 1995, the Company has classified all of its short-term
investments as held-to-maturity. The costs of such short-term investments
totaling $399,000 at December 31, 1995, approximate their fair values and are
classified as cash equivalents in the accompanying balance sheets. There were no
short-term investments held at September 30, 1996 or December 31, 1994. The
contractual maturities of all securities held at December 31, 1995 are 90 days
or less.
Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments. The Company maintains cash equivalents and
short-term investments in large well-capitalized financial institutions, and the
Company's investment policy disallows investment in any debt securities rated
less than "investment-grade" by national ratings services.
F-8
<PAGE> 111
VAXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories at December 31, 1994 consist of the following:
<TABLE>
<S> <C>
Finished goods.............................................................. $2,392
Raw materials............................................................... 4,259
------
Total..................................................................... $6,651
======
</TABLE>
5. LEASE COMMITMENTS
Rental expense under operating leases during the nine months ended
September 30, 1996 and 1995, and for the years ended 1995, 1994 and 1993
approximated $41,000, $32,000, $45,000, $40,000 and $3,000, respectively.
Minimum future obligations for operating leases are shown below. Aggregate
minimum rentals the Company expects to receive under noncancellable subleases
total approximately $144,000 at December 31, 1995.
<TABLE>
<S> <C>
1996...................................................................... $ 53,000
1997...................................................................... 55,000
1998...................................................................... 52,000
1999...................................................................... 3,000
--------
$163,000
========
</TABLE>
6. STOCK OPTIONS AND WARRANTS
In January 1993 the Company adopted a stock option plan (the "Plan") under
which 1,000,000 shares of the Company's common stock are reserved for grant.
Pursuant to the Plan, certain key employees, directors and consultants are
eligible to receive incentive and/or nonqualified stock options.
The options granted under the Plan have lives of ten years from the dates
of grant and generally become exercisable over a three year period from the
dates of grant, with the exception of certain options granted to the Company's
Chief Executive Officer and its Vice President of Research and Development,
which are subject to additional vesting criteria. Exercise prices are set at the
fair market values of the common stock on the dates of grant, as determined by
the Company's Board of Directors.
Stock option activity during the period from inception (January 6, 1993) to
September 30, 1996 was as follows:
<TABLE>
<CAPTION>
SHARES EXERCISE
UNDER OPTION PRICE
------------ ------------
<S> <C> <C>
Balance, January 6, 1993 (inception)....................... 0 $ 0
Granted............................................... 423,000 $1.75
---------- -----
Balance, December 31, 1993................................. 423,000 $1.75
Granted............................................... 127,000 $1.50 - 2.25
Canceled.............................................. (18,500) $1.75 - 2.25
---------- ------------
Balance, December 31, 1994................................. 531,500 $1.50
Granted............................................... 203,500 $1.50
---------- -----
Balance, December 31, 1995................................. 735,000 $1.50
Granted............................................... 32,120 $1.50
Canceled.............................................. (14,167) $1.50
---------- -----
Balance, September 30, 1996................................ 752,953 $1.50
========== =====
</TABLE>
F-9
<PAGE> 112
VAXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
In December 1994, options as to 521,500 shares with exercise prices ranging
from $1.75 to $2.25 were repriced to $1.50. At December 31, 1995, options as to
95,498 shares were exercisable and options as to 265,000 shares were available
for future grants.
7. INCOME TAXES
For income tax purposes, as of December 31, 1995, the Company has an
aggregate of approximately $3,400,000 of net operating losses available to
offset against future taxable income, subject to certain limitations. Such
losses expire in 2008 through 2010. The Company also has an aggregate of
approximately $63,000 of research and development credits available for offset
against future income taxes which expire in 2008 through 2010.
Net deferred income tax assets of approximately $1,300,000 and $800,000
exist at December 31, 1995, and 1994, respectively, principally with respect to
the net operating losses. Based on assessments of all available evidence as of
those dates, management has concluded that the respective deferred income tax
assets should be reduced by valuation allowances equal to the amounts of the net
deferred income tax assets.
8. LICENSE AGREEMENTS
During 1995 the Company executed option agreements with Connaught
Laboratories, Inc. and Medeva PLC to evaluate the Company's OPTIVAX(R) vaccine
delivery system technology in combination with vaccines being developed by
Connaught and Medeva. In April 1996 the Company executed a definitive license
agreement with Corixa Corporation for use of OPTIVAX in combination with
vaccines being developed by Corixa. The Company has recognized $50,000, $25,000,
and $115,000 in revenues associated with these agreements during the nine months
ended September 30, 1996 and 1995, and the year ended December 31, 1995,
respectively.
9. RELATED PARTY TRANSACTIONS
Convertible Note
In January 1993 CytRx made available to the Company a revolving line of
credit pursuant to a convertible note agreement. The note accrued interest at
the prime rate plus two percentage points per annum. In August 1994 CytRx
converted the outstanding balance of the note plus interest ($3,000,000 in the
aggregate) into common stock of the Company at a price of $1.50 per share
(2,000,000 shares). Interest accrued pursuant to the note during 1994 and 1993
amounted to $119,644 and $55,718, respectively.
License Agreements
At inception, the Company obtained from CytRx through license agreements,
exclusive rights to Titermax(R) and the OPTIVAX(R) vaccine delivery system
technology. Royalties paid to CytRx pursuant to these agreements amounted to
$7,500, $0, $17,250, $49,476 and $49,482 during the nine months ended September
30, 1996 and 1995, and for the years ended December 31, 1995, 1994 and 1993,
respectively.
In December 1994, CytRx repurchased the rights to use of its vaccine
delivery technology in animals, including the rights to Titermax, for $500,000.
Net sales, cost of sales, and selling and marketing expense in the accompanying
Statements of Operations during 1993 and 1994 relate entirely to sales of
Titermax. The term of the remaining license to the OPTIVAX technology will
expire upon the later of ten years after the first commercial sale of products
covered by the license, or upon expiration of the last-to-expire patent covered
by the license.
F-10
<PAGE> 113
VAXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS -- (CONTINUED)
Supply Agreement
During the term of the related license agreement, CytRx agreed to supply
the Company with certain copolymers required in the manufacture and development
of the OPTIVAX vaccine delivery system. Amounts paid to CytRx for production of
copolymers were $10,923, $15,915, $15,915 and $9,500 during the nine months
ended September 30, 1996 and 1995, and during the years ended December 31, 1995
and 1994, respectively.
Services and Facilities Agreements
The Company entered into service and facilities agreements with CytRx and
Proceutics, Inc., another wholly-owned subsidiary of CytRx, whereby CytRx and
Proceutics provide the Company with office and laboratory space, certain
administrative and laboratory services, and the services of certain CytRx
executives. Pursuant to these agreements, the Company expensed a total of
$93,197, $81,446, $105,246, $79,823 and $315,429 during the nine months ended
September 30, 1996 and 1995, and during the years ended December 31, 1995, 1994
and 1993, respectively. Management believes that the methods used in allocating
these costs are reasonable and that such charges approximate the fair value of
the space and services provided.
10. SUBSEQUENT EVENTS
In December 1996 the Company, Vaxcel Merger Subsidiary, Inc. ("Vaxcel
Merger Sub"), a wholly owned subsidiary of Vaxcel, CytRx and Zynaxis signed an
agreement whereby Vaxcel Merger Sub will be merged into Zynaxis. Zynaxis is a
publicly-held company engaged in the development of certain vaccine
technologies. Under the terms of the agreement, all of the outstanding shares of
Zynaxis will be converted into shares of the Company based upon certain exchange
ratios defined in the agreement resulting in the issuance of an aggregate of
12.5% of the outstanding shares of Vaxcel common stock at the date of closing to
former Zynaxis stockholders. The Merger will be treated as a purchase and is
expected to constitute a tax-free reorganization for former Zynaxis
stockholders.
Pursuant to the agreement, CytRx will provide up to $2,000,000 to Zynaxis
under a secured credit facility during the period prior to the closing of the
Merger, at which time the outstanding principal and interest will be contributed
to the capital of Vaxcel, together with additional equity in the amount of
$4,000,000 less the outstanding principal and interest of the secured note.
It is anticipated that the proposed transaction will be submitted for the
approval of the Zynaxis stockholders in early 1997. The transaction is also
subject to effectiveness of a registration statement to be filed with the
Securities and Exchange Commission.
F-11
<PAGE> 114
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND CONTRIBUTION
BY AND AMONG
CYTRX CORPORATION,
VAXCEL, INC.,
VAXCEL MERGER SUBSIDIARY, INC.,
AND
ZYNAXIS, INC.
DATED AS OF DECEMBER 6, 1996
A-1
<PAGE> 115
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PARTIES................................................................................ A-6
SECTION 351 PLAN....................................................................... A-6
ARTICLE 1 -- SUMMARY OF THE CONTRIBUTION AND THE MERGER................................ A-6
1.1 Contribution by CytRx...................................................... A-6
1.2 Issuance of Shares......................................................... A-7
1.3 Merger..................................................................... A-7
1.4 Time and Place of Closing.................................................. A-7
1.5 Effective Time............................................................. A-7
ARTICLE 2 -- TERMS OF MERGER AND MANAGEMENT AFTER THE MERGER........................... A-7
2.1 Charter.................................................................... A-7
2.2 Bylaws..................................................................... A-7
2.3 Directors and Officers of Surviving Corporation............................ A-7
2.4 Board of Directors of Vaxcel............................................... A-8
2.5 Officers of Vaxcel......................................................... A-8
ARTICLE 3 -- MANNER OF CONVERTING SHARES............................................... A-8
3.1 Conversion of Shares....................................................... A-8
3.2 Shares Held by Zynaxis or Vaxcel........................................... A-8
3.3 Dissenting Shareholders.................................................... A-8
3.4 Fractional Shares.......................................................... A-9
3.5 Conversion of Stock Options; Restricted Stock.............................. A-9
3.6 Conversion of Financing Warrants........................................... A-10
3.7 Conversion of Warrants Other Than Financing Warrants....................... A-10
3.8 Conversion of Promissory Notes............................................. A-11
ARTICLE 4 -- EXCHANGE OF SHARES........................................................ A-11
4.1 Exchange Procedures........................................................ A-11
4.2 Rights of Former Zynaxis Shareholders...................................... A-12
ARTICLE 5 -- REPRESENTATIONS AND WARRANTIES OF ZYNAXIS................................. A-12
5.1 Organization, Standing, and Power.......................................... A-12
5.2 Authority; No Breach By Agreement.......................................... A-12
5.3 Capital Stock.............................................................. A-13
5.4 Zynaxis Subsidiaries....................................................... A-13
5.5 SEC Filings; Financial Statements.......................................... A-14
5.6 Absence of Undisclosed Liabilities......................................... A-14
5.7 Absence of Certain Changes or Events....................................... A-15
5.8 Tax Matters................................................................ A-15
5.9 Assets..................................................................... A-15
5.10 Intellectual Property...................................................... A-16
5.11 Environmental Matters...................................................... A-17
5.12 Compliance with Laws....................................................... A-17
5.13 Labor Relations............................................................ A-18
5.14 Employee Benefit Plans..................................................... A-18
5.15 Material Contracts......................................................... A-19
5.16 Legal Proceedings.......................................................... A-19
5.17 Reports.................................................................... A-20
5.18 Statements True and Correct................................................ A-20
5.19 Regulatory Matters......................................................... A-20
5.20 Charter Provisions......................................................... A-20
</TABLE>
A-2
<PAGE> 116
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 6 -- REPRESENTATIONS AND WARRANTIES OF CYTRX, VAXCEL AND
VAXCEL MERGER SUB...................................................................... A-21
6.1 Organization, Standing, and Power.......................................... A-21
6.2 Authority; No Breach By Agreement.......................................... A-21
6.3 Capital Stock.............................................................. A-22
6.4 Vaxcel Subsidiaries........................................................ A-22
6.5 Vaxcel Financial Statements................................................ A-23
6.6 Absence of Undisclosed Liabilities......................................... A-23
6.7 Absence of Certain Changes or Events....................................... A-23
6.8 Tax Matters................................................................ A-23
6.9 Assets..................................................................... A-24
6.10 Intellectual Property...................................................... A-25
6.11 Environmental Matters...................................................... A-25
6.12 Compliance With Laws....................................................... A-25
6.13 Labor Relations............................................................ A-26
6.14 Employee Benefit Plans..................................................... A-26
6.15 Material Contracts......................................................... A-27
6.16 Legal Proceedings.......................................................... A-28
6.17 Reports.................................................................... A-28
6.18 Statements True and Correct................................................ A-28
6.19 Regulatory Matters......................................................... A-28
ARTICLE 7 -- CONDUCT OF BUSINESS PENDING CONSUMMATION.................................. A-29
7.1 Affirmative Covenants of Zynaxis........................................... A-29
7.2 Negative Covenants of Zynaxis.............................................. A-29
7.3 Covenants of Vaxcel........................................................ A-30
7.4 Adverse Changes in Condition............................................... A-30
7.5 Reports.................................................................... A-31
ARTICLE 8 -- ADDITIONAL AGREEMENTS..................................................... A-31
8.1 Registration Statement; Proxy Statement; Shareholder Approval.............. A-31
8.2 Applications............................................................... A-31
8.3 Filings with State Offices................................................. A-32
8.4 Agreement as to Efforts to Consummate...................................... A-32
8.5 Investigation and Confidentiality.......................................... A-32
8.6 Press Releases............................................................. A-32
8.7 Certain Actions............................................................ A-32
8.8 State Antitakeover Laws.................................................... A-33
8.9 Charter Provisions......................................................... A-33
8.10 Cure of Defaults........................................................... A-33
8.11 Negotiation of Malvern Lease Amendment..................................... A-33
8.12 Nasdaq Listing............................................................. A-33
8.13 Agreements of Affiliates................................................... A-33
8.14 Use of Proceeds of Senior Credit Facility.................................. A-34
8.15 Registration Rights Agreement.............................................. A-34
ARTICLE 9 -- CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE......................... A-34
9.1 Conditions to Obligations of Each Party.................................... A-34
9.2 Conditions to Obligations of CytRx, Vaxcel and Vaxcel Merger Sub........... A-35
9.3 Conditions to Obligations of Zynaxis....................................... A-36
</TABLE>
A-3
<PAGE> 117
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 10 -- TERMINATION.............................................................. A-37
10.1 Termination................................................................ A-37
10.2 Effect of Termination...................................................... A-38
10.3 Non-Survival of Representations and Covenants.............................. A-38
ARTICLE 11 -- MISCELLANEOUS............................................................ A-38
11.1 Definitions................................................................ A-38
11.2 Expenses................................................................... A-46
11.3 Brokers and Finders........................................................ A-47
11.4 Entire Agreement........................................................... A-48
11.5 Amendments................................................................. A-48
11.6 Waivers.................................................................... A-48
11.7 Assignment................................................................. A-48
11.8 Notices.................................................................... A-48
11.9 Governing Law.............................................................. A-49
11.10 Counterparts............................................................... A-49
11.11 Captions; Articles and Sections............................................ A-49
11.12 Interpretations............................................................ A-50
11.13 Severability............................................................... A-50
SIGNATURES............................................................................. A-50
</TABLE>
A-4
<PAGE> 118
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------------------------
<S> <C>
1. Warrant Agreement. (sec. 1.2).
2. Agreement of Affiliates. (sec. 8.13).
3. Matters as to which Morgan, Lewis & Bockius will opine. (sec. 9.2(d)).
4. Matters as to which Alston & Bird will opine. (sec. 9.3(d)).
5. Form of Charter Amendments. (sec. 11.1(a)).
6. Example of Calculation of Exchange Ratio. (sec. 11.1(a)).
7. Liquidation Agreement. (sec. 11.1(a)).
8. Note Exchange Agreement. (sec. 11.1(a)).
9. Preferred Stock and Warrant Agreement. (sec. 11.1(a)).
10. Registration Rights Agreement. (sec. 11.1(a)).
11. Secured Loan Agreement. (sec. 11.1(a)).
12. Senior Secured Note. (sec. 11.1(a)).
13. Shareholder Voting Agreement. (sec. 11.1(a)).
14. Technology Development Agreement. (sec. 11.1(a)).
15. Zynaxis Pledge Agreement. (sec. 11.1(a)).
16. Zynaxis Security Agreement. (sec. 11.1(a)).
17. Zynaxis Vaccine Technologies Collateral Assignment of License Agreement.
(sec. 11.1(a)).
18. Zynaxis Vaccine Technologies Guaranty. (sec. 11.1(a)).
19. Zynaxis Vaccine Technologies Security Agreement. (sec. 11.1(a)).
</TABLE>
A-5
<PAGE> 119
AGREEMENT AND PLAN OF MERGER AND CONTRIBUTION
THIS AGREEMENT AND PLAN OF MERGER AND CONTRIBUTION (this "Agreement") is
made and entered into as of December 6, 1996, by and among CYTRX CORPORATION
("CytRx"), a Delaware corporation, VAXCEL, INC.("Vaxcel"), a Delaware
corporation and a wholly owned subsidiary of CytRx, VAXCEL MERGER SUBSIDIARY,
INC. ("Vaxcel Merger Sub"), a Georgia corporation, and a newly formed, wholly
owned subsidiary of Vaxcel, and ZYNAXIS, INC. ("Zynaxis"), a Pennsylvania
corporation.
SECTION 351 PLAN
The respective Boards of Directors of CytRx, Vaxcel, Vaxcel Merger Sub and
Zynaxis are of the opinion that the transactions described herein are in the
best interests of the Parties to this Agreement and their respective
shareholders. This Agreement provides for the issuance to CytRx of shares of
Vaxcel Common Stock and a warrant to purchase shares of Vaxcel Common Stock in
exchange for CytRx's contribution to Vaxcel of the Senior Secured Note and an
amount of cash equal to the difference, as of the Closing Date, between the
aggregate principal and interest balance outstanding under the Senior Credit
Facility and Four Million Dollars ($4,000,000). This Agreement also provides for
the issuance of shares of Vaxcel Common Stock to the existing shareholders of
Zynaxis in exchange for the contribution to Vaxcel by the existing shareholders
of Zynaxis of all of the outstanding shares of Zynaxis Capital Stock by means of
a merger of Vaxcel Merger Sub with and into Zynaxis. At the Effective Time of
the Merger, the outstanding shares of the Zynaxis Capital Stock shall be
converted into the right to receive shares of Vaxcel Common Stock (except as
provided herein) and the outstanding shares of Vaxcel Merger Sub Common Stock
shall be converted into Zynaxis Common Stock. As a result, shareholders of
Zynaxis shall become shareholders of Vaxcel and Zynaxis shall continue to
conduct its business and operations as a wholly owned subsidiary of Vaxcel. The
transactions described in this Agreement are subject to the approval of the
shareholders of Zynaxis, and the satisfaction of certain other conditions
described in this Agreement. It is the intention of the Parties to this
Agreement that the transactions contemplated by this Agreement shall qualify for
federal income tax purposes for treatment under Section 351 of the Internal
Revenue Code. The execution of this Agreement by each of the Parties hereto
shall constitute its adoption by such Party.
Simultaneously with the execution of this Agreement: (i) CytRx is extending
the Senior Credit Facility to Zynaxis; (ii) CytRx and Zynaxis are entering into
a Liquidation Agreement pursuant to which CytRx will serve as Zynaxis's agent
and assist Zynaxis in selling its assets and settling its liabilities prior to
the Merger; (iii) holders of Zynaxis Preferred Stock, warrants and convertible
notes issued by Zynaxis are entering into agreements regarding the exchange of
their warrants and the exchange of their convertible notes for shares of Zynaxis
Common Stock in the Merger and certain other matters; and (iv) Vaxcel and
Zynaxis are entering into the Technology Development Agreement.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants, and agreements set forth herein, the Parties agree
as follows:
ARTICLE 1
SUMMARY OF THE CONTRIBUTION AND THE MERGER
1.1 Contribution by CytRx. For the consideration hereinafter provided and
subject to the terms and conditions of this Agreement, at the Closing, CytRx
shall contribute to Vaxcel the Senior Credit Facility and a cash payment (the
"Cash Payment") in an amount equal to the difference, as of the Closing Date,
between Four Million Dollars ($4,000,000) and the sum of: (i) the aggregate
principal and interest balance outstanding under the Senior Secured Note; and
(ii) (A) the Per Share Price multiplied by (B) the number of votes entitled to
be cast by the holders of Zynaxis Capital Stock who elect to exercise their
statutory dissenters' rights or their objection rights, if any, under Section
2545 of the PBCL in excess of three percent
A-6
<PAGE> 120
(3%) of the votes that could be cast by all holders of Zynaxis Capital Stock
voting together as a single class. The Cash Payment shall be made by wire
transfer of immediately available funds to an account specified in writing by
Vaxcel.
1.2 Issuance of Shares. Subject to the terms and conditions of this
Agreement, at the Closing, Vaxcel shall: (i) deliver to CytRx, in exchange for
the contribution of the Senior Secured Note and the Cash Payment, one warrant
agreement substantially in the form of Exhibit 1 hereto (the "CytRx Warrant")
and one certificate representing One Million Three Hundred Seventy Four Thousand
Nine Hundred Ninety-Six (1,374,996) shares of Vaxcel Common Stock; and (ii)
deliver to CytRx one certificate representing a number of shares of Vaxcel
Common Stock equal to the product of the Exchange Ratio, as defined below, times
the number of votes entitled to be cast by the holders of Zynaxis Capital Stock
who elect to exercise their statutory dissenters' rights or their objection
rights, if any, under Section 2545 of the PBCL. Each certificate of Vaxcel
Common Stock issued pursuant to this Section 1.2 shall be registered in the name
of CytRx, free and clear of any Liens.
1.3 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, Vaxcel Merger Sub shall be merged with and into Zynaxis in
accordance with the provisions of Section 1921 et seq. of the PBCL and Sections
14-2-1101 and 14-2-1107 of the GBCC and with the effects provided in Section
1929 of the PBCL and Section 14-2-1106 of the GBCC (the "Merger"). Zynaxis shall
be the Surviving Corporation resulting from the Merger and shall become a wholly
owned Subsidiary of Vaxcel and shall continue to be governed by the Laws of the
Commonwealth of Pennsylvania. The Merger shall be consummated pursuant to the
terms of this Agreement, which has been approved and adopted by the respective
Boards of Directors of CytRx, Zynaxis, Vaxcel Merger Sub, and Vaxcel and by
Vaxcel, as the sole shareholder of Vaxcel Merger Sub.
1.4 Time and Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") will take place at 10:00 A.M. on the date on
which the Effective Time occurs (or the immediately preceding day if the
Effective Time is earlier than 10:00 A.M.), or at such other time as the
Parties, acting through their authorized officers, may mutually agree. The
Closing shall be held at such location as may be mutually agreed upon by the
Parties.
1.5 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective upon the last to occur of: (i) the filing of
the Articles of Merger in the Department of State of the Commonwealth of
Pennsylvania and (ii) the filing of the Certificate of Merger with the Secretary
of State of the State of Georgia (the "Effective Time"). Subject to the terms
and conditions hereof, unless otherwise mutually agreed upon in writing by the
authorized officers of each Party, the Parties shall use their reasonable
efforts to cause the Effective Time to occur on the first business day following
the last to occur of (i) the effective date (including expiration of any
applicable waiting period) of the last required Consent of any Regulatory
Authority having authority over and approving or exempting the Merger, and (ii)
the date on which the shareholders of Zynaxis approve this Agreement to the
extent such approval is required by applicable Law.
ARTICLE 2
TERMS OF MERGER AND
MANAGEMENT AFTER THE MERGER
2.1 Charter. The Articles of Incorporation, as amended, of Zynaxis in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until duly amended or repealed.
2.2 Bylaws. The Bylaws of Zynaxis in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation until duly
amended or repealed.
2.3 Directors and Officers of Surviving Corporation. Jack L. Bowman,
Raymond C. Carnahan, Jr., Jack J. Luchese, Herbert H. McDade, Jr., and Paul
Wilson shall serve as the directors of the Surviving
A-7
<PAGE> 121
Corporation from and after the Effective Time in accordance with the Bylaws of
the Surviving Corporation until their successors are elected and qualify. The
following persons shall serve as the officers of the Surviving Corporation from
and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation until their successors are elected and qualify: Paul Wilson,
President and Chief Executive Officer; Mark Newman, Vice President -- Research
and Development; and Mark W. Reynolds, Chief Financial Officer, Controller and
Secretary.
2.4 Board of Directors of Vaxcel. Jack L. Bowman, Raymond C. Carnahan,
Jr., Lyle A. Hohnke, Jack J. Luchese, Herbert H. McDade, Jr., and Paul Wilson
shall serve as the directors of Vaxcel from and after the Effective Time in
accordance with the Bylaws of Vaxcel until their successors are elected and
qualify.
2.5 Officers of Vaxcel. The officers of Vaxcel in office immediately prior
to the Effective Time, together with such additional persons as may thereafter
be elected, shall serve as the officers of Vaxcel from and after the Effective
Time in accordance with the Bylaws of Vaxcel until their successors are elected
and qualify.
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of Vaxcel, Vaxcel Merger Sub or Zynaxis, or the shareholders of any of the
foregoing, the shares of the constituent corporations shall be converted as
follows:
(a) Each share of capital stock of Vaxcel issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding
from and after the Effective Time.
(b) Each share of Vaxcel Merger Sub Common Stock issued and
outstanding immediately prior to the Effective Time shall cease to be
outstanding and shall be converted into one share of Zynaxis Common Stock.
(c) Each share of Zynaxis Common Stock (excluding shares held by any
Zynaxis Company or any Vaxcel Company, and excluding shares held by
shareholders who perfect their statutory dissenters' rights or objection
rights under Section 2545 of the PBCL as provided in Section 3.3) issued
and outstanding immediately prior to the Effective Time shall cease to be
outstanding and shall be converted into and exchanged for the right to
receive a number of shares of Vaxcel Common Stock equal to two times the
Exchange Ratio.
(d) Each share of Zynaxis Preferred Stock (excluding shares held by
any Zynaxis Company or any Vaxcel Company, and excluding shares held by
shareholders who perfect their statutory dissenters' rights or objection
rights under Section 2545 of the PBCL as provided in Section 3.3) issued
and outstanding immediately prior to the Effective Time shall cease to be
outstanding and shall be converted into and exchanged for the right to
receive a number of shares of Vaxcel Common Stock equal to two times the
Exchange Ratio.
3.2 Shares Held by Zynaxis or Vaxcel. Each of the shares of Zynaxis Common
Stock held by any Zynaxis Company or by any Vaxcel Company shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
3.3 Dissenting Shareholders.
(a) Any holder of shares of Zynaxis Capital Stock who perfects his or her
dissenters' rights in accordance with and as contemplated by Section 1930 of the
PBCL shall be entitled to receive the value of such shares in cash as determined
pursuant to such provision of Law; provided, that no such payment shall be made
to any dissenting shareholder unless and until such dissenting shareholder has
complied with the applicable provisions of the PBCL and surrendered to Zynaxis
the certificate or certificates representing the shares for which payment is
being made. In the event that after the Effective Time a dissenting shareholder
of Zynaxis fails to perfect, or effectively withdraws or loses, his right to
appraisal and of payment for his shares, Vaxcel shall issue and deliver the
consideration to which such holder of shares of Zynaxis Capital Stock is
A-8
<PAGE> 122
entitled under this Article 3 (without interest) upon surrender by such holder
of the certificate or certificates representing shares of Zynaxis Capital Stock
held by him. If and to the extent required by applicable Law, Vaxcel will
establish (or cause to be established) an escrow account with an amount
sufficient to satisfy the maximum aggregate payment that may be required to be
paid to dissenting shareholders. Upon satisfaction of all claims of dissenting
shareholders, the remaining escrowed amount, reduced by payment of the fees and
expenses of the escrow agent, will be returned to Vaxcel.
(b) Any holder of shares of Zynaxis Capital Stock who objects to the
transaction and in accordance with and as contemplated by Sections 2544 and 2546
of the PBCL shall be entitled to receive the value of such shares in cash as
determined pursuant to such provision of Law; provided, that no such payment
shall be made to any objecting shareholder unless and until such objecting
shareholder has complied with the applicable provisions of the PBCL and
surrendered to Zynaxis the certificate or certificates representing the shares
for which payment is being made. In the event that after the Effective Time an
objecting shareholder of Zynaxis fails to give proper notice and surrender his
certificates as required by Section 2547 of the PBCL, or otherwise effectively
withdraws or loses his right to appraisal and of payment for his shares, Vaxcel
shall issue and CytRx and Vaxcel shall deliver the consideration to which such
holder of shares of Zynaxis Capital Stock is entitled under this Article 3
(without interest) upon surrender by such holder of the certificate or
certificates representing shares of Zynaxis Capital Stock held by him. If and to
the extent required by applicable Law, Vaxcel will establish (or cause to be
established) an escrow account with an amount sufficient to satisfy the maximum
aggregate payment that may be required to be paid to objecting shareholders.
Upon satisfaction of all claims of objecting shareholders, the remaining
escrowed amount, reduced by payment of the fees and expenses of the escrow
agent, will be returned to Vaxcel.
3.4 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of Zynaxis Common Stock and each holder of
shares of Zynaxis Preferred Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Vaxcel Common
Stock (after taking into account all whole shares delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Vaxcel Common Stock divided by the Exchange
Ratio and multiplied by the Per Share Price.
3.5 Conversion of Stock Options; Restricted Stock.
(a) At the Effective Time, each option or other Equity Right to purchase
shares of Zynaxis Common Stock pursuant to stock options or stock appreciation
rights ("Zynaxis Options") granted by Zynaxis under the Zynaxis Stock Plan which
are outstanding at the Effective Time, whether or not exercisable, shall be
converted into and become rights with respect to Vaxcel Common Stock, and Vaxcel
shall assume each Zynaxis Option, in accordance with the terms of the Zynaxis
Stock Plan and stock option agreement by which it is evidenced, except that from
and after the Effective Time, (i) Vaxcel and its Compensation Committee shall be
substituted for Zynaxis and the Committee of Zynaxis's Board of Directors
(including, if applicable, the entire Board of Directors of Zynaxis)
administering such Zynaxis Stock Plan, (ii) each Zynaxis Option assumed by
Vaxcel may be exercised solely for shares of Vaxcel Common Stock (or cash, if so
provided under the terms of such Zynaxis Option), (iii) the number of shares of
Vaxcel Common Stock subject to such Zynaxis Option shall be equal to the number
of shares of Zynaxis Common Stock subject to such Zynaxis Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, and (iv) the per
share exercise price under each such Zynaxis Option shall be adjusted by
dividing the per share exercise price under each such Zynaxis Option by the
Exchange Ratio and rounding up to the nearest cent. Notwithstanding the
provisions of clause (iii) of the preceding sentence, Vaxcel shall not be
obligated to issue any fraction of a share of Vaxcel Common Stock upon exercise
of Zynaxis Options and any fraction of a share of Vaxcel Common Stock that
otherwise would be subject to a converted Zynaxis Option shall represent the
right to receive a cash payment upon exercise of such converted Zynaxis Option
equal to the product of such fraction and the difference between the market
value of one share of Vaxcel Common Stock at the time of exercise of such Option
and the per share exercise price of such Zynaxis Option. The market value of one
share of Vaxcel Common Stock at the time of exercise of an Option shall be the
last sale price of a share of Vaxcel Common Stock on the Nasdaq SmallCap Market
(as reported by The Wall Street Journal or, if not reported thereby, any other
authoritative source selected by Vaxcel) on the last trading day preceding the
date of exercise. In
A-9
<PAGE> 123
addition, notwithstanding the provisions of clauses (iii) and (iv) of the first
sentence of this Section 3.5, each Zynaxis Option which is an "incentive stock
option" shall be adjusted as required by Section 424 of the Internal Revenue
Code, and the regulations promulgated thereunder, so as not to constitute a
modification, extension or renewal of the option, within the meaning of Section
424(h) of the Internal Revenue Code. Each of Zynaxis and Vaxcel agrees to take
all necessary steps to effectuate the foregoing provisions of this Section 3.5,
including using its reasonable efforts to obtain from each holder of a Zynaxis
Option any Consent or Contract that may be deemed necessary or advisable in
order to effect the transactions contemplated by this Section 3.5. Anything in
this Agreement to the contrary notwithstanding, Vaxcel shall have the right, in
its sole discretion, not to deliver the consideration provided in this Section
3.5 to a former holder of a Zynaxis Option who has not delivered such Consent or
Contract.
(b) As soon as practicable after the Effective Time, Vaxcel shall deliver
to the participants in the Zynaxis Stock Plan an appropriate notice setting
forth such participant's rights pursuant thereto and the grants subject to the
Zynaxis Stock Plan shall continue in effect on the same terms and conditions
(subject to the adjustments required by Section 3.5(a) after giving effect to
the Merger), and Vaxcel shall comply with the terms of the Zynaxis Stock Plan to
ensure, to the extent required by, and subject to the provisions of, such
Zynaxis Stock Plan, that Zynaxis Options which qualified as incentive stock
options prior to the Effective Time continue to qualify as incentive stock
options after the Effective Time. At or prior to the Effective Time, Vaxcel
shall take all corporate action necessary to reserve for issuance sufficient
shares of Vaxcel Common Stock for delivery upon exercise of Zynaxis Options
assumed by it in accordance with this Section 3.5. As soon as practicable after
the Effective Time, Vaxcel shall file a registration statement on Form S-3 or
Form S-8, as the case may be (or any successor or other appropriate forms), with
respect to the shares of Vaxcel Common Stock subject to such options and shall
use its reasonable efforts to maintain the effectiveness of such registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such options remain outstanding.
(c) All contractual restrictions or limitations on transfer with respect to
Zynaxis Common Stock awarded under the Zynaxis Stock Plan or any other plan,
program, Contract or arrangement of any Zynaxis Company, to the extent that such
restrictions or limitations shall not have already lapsed (whether as a result
of the Merger or otherwise), and except as otherwise expressly provided in such
plan, program, Contract or arrangement, shall remain in full force and effect
with respect to shares of Vaxcel Common Stock into which such restricted stock
is converted pursuant to Section 3.1.
3.6 Conversion of Financing Warrants. At the Effective Time, each warrant
to purchase shares of Zynaxis Common Stock which is outstanding at the Effective
Time and is held by a party to the Preferred Stock and Warrant Agreement shall
be exchanged for a warrant to purchase Vaxcel Common Stock in accordance with
the terms of the Preferred Stock and Warrant Agreement.
3.7 Conversion of Warrants Other Than Financing Warrants. At the Effective
Time, each warrant to purchase shares of Zynaxis Common Stock which is
outstanding at the Effective Time and is not being exchanged for a warrant to
purchase Vaxcel Common Stock in accordance with Section 3.6 and pursuant to the
Preferred Stock and Warrant Agreement (a "Non-Financing Warrant") shall be
converted into and become a warrant to purchase shares of Vaxcel Common Stock,
and Vaxcel shall assume each such warrant, in accordance with the terms of the
warrant agreement by which it is evidenced, except that from and after the
Effective Time, (i) each Non-Financing Warrant assumed by Vaxcel may be
exercised solely for shares of Vaxcel Common Stock, (ii) the number of shares of
Vaxcel Common Stock subject to such Non-Financing Warrant shall be equal to the
number of shares of Zynaxis Common Stock subject to such Non-Financing Warrant
immediately prior to the Effective Time multiplied by the Exchange Ratio, and
(iii) the per share exercise price under each such Non-Financing Warrant shall
be adjusted by dividing the per share exercise price under each such
Non-Financing Warrant by the Exchange Ratio and rounding up to the nearest cent.
Notwithstanding the provisions of clause (ii) of the preceding sentence, Vaxcel
shall not be obligated to issue any fraction of a share of Vaxcel Common Stock
upon exercise of such Non-Financing Warrants and any fraction of a share of
Vaxcel Common Stock that otherwise would be subject to a converted Non-Financing
Warrant shall represent the right to receive a cash payment upon exercise of
such converted Non-Financing Warrant equal to the product of such fraction and
the difference between the market value of one share of
A-10
<PAGE> 124
Vaxcel Common Stock at the time of exercise of such converted Non-Financing
Warrant and the per share exercise price of such converted Non-Financing
Warrant. The market value of one share of Vaxcel Common Stock at the time of
exercise of a converted Non-Financing Warrant shall be the last sale price of a
share of Vaxcel Common Stock on the Nasdaq SmallCap Market (as reported by The
Wall Street Journal or, if not reported thereby, any other authoritative source
selected by Vaxcel) on the last trading day preceding the date of exercise.
(b) As soon as practicable after the Effective Time, Vaxcel shall deliver
to the holders of Non-Financing Warrants an appropriate notice setting forth
such participant's rights pursuant thereto and the converted Non-Financing
Warrants shall continue in effect on the same terms and conditions (subject to
the adjustments required by Section 3.7(a) after giving effect to the Merger).
At or prior to the Effective Time, Vaxcel shall take all corporate action
necessary to reserve for issuance sufficient shares of Vaxcel Common Stock for
delivery upon exercise of converted Non-Financing Warrants assumed by it in
accordance with this Section 3.7.
3.8 Conversion of Promissory Notes. At the Effective Time, each promissory
note on which Zynaxis is the obligor and which is held by a party to the Note
Exchange Agreement shall be exchanged for shares of Vaxcel Common Stock in
accordance with the terms of the Note Exchange Agreement.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures. Promptly after the Effective Time, Vaxcel and
Zynaxis shall cause the exchange agent selected by Vaxcel (the "Exchange Agent")
to mail to each holder of record of a certificate or certificates which
represented shares of Zynaxis Capital Stock immediately prior to the Effective
Time (the "Certificates") appropriate transmittal materials and instructions
(which shall specify that delivery shall be effected, and risk of loss and title
to such Certificates shall pass, only upon proper delivery of such Certificates
to the Exchange Agent). The Certificate or Certificates of Zynaxis Capital Stock
so delivered shall be duly endorsed as the Exchange Agent may require. In the
event of a transfer of ownership of shares of Zynaxis Capital Stock represented
by Certificates that are not registered in the transfer records of Zynaxis, the
consideration provided in Section 3.1 may be issued to a transferee if the
Certificates representing such shares are delivered to the Exchange Agent,
accompanied by all documents required to evidence such transfer and by evidence
satisfactory to the Exchange Agent that any applicable stock transfer taxes have
been paid. If any Certificate shall have been lost, stolen, mislaid or
destroyed, upon receipt of (i) an affidavit of that fact from the holder
claiming such Certificate to be lost, mislaid, stolen or destroyed, (ii) such
bond, security or indemnity as Vaxcel and the Exchange Agent may reasonably
require and (iii) any other documents necessary to evidence and effect the bona
fide exchange thereof, the Exchange Agent shall issue to such holder the
consideration into which the shares represented by such lost, stolen, mislaid or
destroyed Certificate shall have been converted. The Exchange Agent may
establish such other reasonable and customary rules and procedures in connection
with its duties as it may deem appropriate. After the Effective Time, each
holder of shares of Zynaxis Capital Stock (other than shares to be canceled
pursuant to Section 3.2, or as to which statutory dissenters' rights have been
perfected as provided in Section 3.3(a), or as to which proper notice has been
given as provided in Section 3.3(b)) issued and outstanding at the Effective
Time shall surrender the Certificate or Certificates representing such shares to
the Exchange Agent and shall promptly upon surrender thereof receive in exchange
therefor the consideration provided in Section 3.1, together with all
undelivered dividends or distributions in respect of such shares (without
interest thereon) pursuant to Section 4.2. To the extent required by Section
3.4, each holder of shares of Zynaxis Capital Stock issued and outstanding at
the Effective Time also shall receive, upon surrender of the Certificate or
Certificates, cash in lieu of any fractional share of Vaxcel Common Stock to
which such holder may be otherwise entitled (without interest). Vaxcel shall not
be obligated to deliver the consideration to which any former holder of Zynaxis
Capital Stock is entitled as a result of the Merger until such holder surrenders
such holder's Certificate or Certificates for exchange as provided in this
Section 4.1. Any other provision of this Agreement notwithstanding, neither
Vaxcel, the Surviving Corporation nor the Exchange Agent shall be liable to a
holder of Zynaxis Capital Stock
A-11
<PAGE> 125
for any amounts paid or property delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat or similar Law. Adoption
of this Agreement by the shareholders of Zynaxis shall constitute ratification
of the appointment of the Exchange Agent.
4.2 Rights of Former Zynaxis Shareholders. At the Effective Time, the
stock transfer books of Zynaxis shall be closed as to holders of Zynaxis Capital
Stock immediately prior to the Effective Time and no transfer of Zynaxis Capital
Stock by any such holder shall thereafter be made or recognized. Until
surrendered for exchange in accordance with the provisions of Section 4.1, each
Certificate theretofore representing shares of Zynaxis Capital Stock (other than
shares to be canceled pursuant to Section 3.2, or as to which statutory
dissenters' rights have been perfected as provided in Section 3.3(a), or as to
which proper notice has been given as provided in Section 3.3(b)) shall from and
after the Effective Time represent for all purposes only the right to receive
the consideration provided in Sections 3.1 and 3.4 in exchange therefor,
subject, however, to the Surviving Corporation's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which have been declared or made by Zynaxis in respect of such shares of Zynaxis
Capital Stock in accordance with the terms of this Agreement and which remain
unpaid at the Effective Time. To the extent permitted by Law, former
shareholders of record of Zynaxis shall be entitled to vote after the Effective
Time at any meeting of Vaxcel shareholders the number of whole shares of Vaxcel
Common Stock into which their respective shares of Zynaxis Capital Stock are
converted, regardless of whether such holders have exchanged their Certificates
for certificates representing Vaxcel Common Stock in accordance with the
provisions of this Agreement. Whenever a dividend or other distribution is
declared by Vaxcel on the Vaxcel Common Stock, the record date for which is at
or after the Effective Time, the declaration shall include dividends or other
distributions on all shares of Vaxcel Common Stock issuable pursuant to this
Agreement, but beginning 30 days after the Effective Time no dividend or other
distribution payable to the holders of record of Vaxcel Common Stock as of any
time subsequent to the Effective Time shall be delivered to the holder of any
Certificate until such holder surrenders such Certificate for exchange as
provided in Section 4.1. However, upon surrender of such Certificate, both the
Vaxcel Common Stock certificate (together with all such undelivered dividends or
other distributions without interest) and any undelivered dividends and cash
payments payable hereunder (without interest) shall be delivered and paid with
respect to each share represented by such Certificate.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF ZYNAXIS
Zynaxis hereby represents and warrants to Vaxcel as follows:
5.1 Organization, Standing, and Power. Zynaxis is a corporation duly
organized, validly existing, and in good standing under the Laws of the
Commonwealth of Pennsylvania, and has the corporate power and authority to carry
on its business as now conducted and to own, lease and operate its Assets.
Zynaxis is duly qualified or licensed to transact business as a foreign
corporation in good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Zynaxis. The minute book and other organizational documents for
Zynaxis have been made available to Vaxcel for its review and, except as
disclosed in Section 5.1 of the Zynaxis Disclosure Memorandum, are true and
complete in all material respects as of the date of this Agreement and
accurately reflect in all material respects all amendments thereto and all
proceedings of the Board of Directors and shareholders thereof.
5.2 Authority; No Breach By Agreement.
(a) Zynaxis has the corporate power and authority necessary to execute,
deliver, and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery, and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of Zynaxis, subject to the
adoption of this Agreement: (i) by a majority vote of the votes
A-12
<PAGE> 126
cast by all shareholders entitled to vote thereon (the holders of shares of
Zynaxis Common Stock and the holders of shares of Zynaxis Preferred Stock,
voting on an as-converted basis), and (ii) by a majority of the votes cast by
all holders of Zynaxis Preferred Stock entitled to vote thereon, voting as a
class. These are the only shareholder votes required for approval of this
Agreement and consummation of the transactions contemplated herein, including
the Merger, by Zynaxis. Subject to approval of this Agreement by the
shareholders of Zynaxis, this Agreement represents a legal, valid, and binding
obligation of Zynaxis, enforceable against Zynaxis in accordance with its terms.
(b) The execution and delivery of this Agreement by Zynaxis, and, upon
approval of this Agreement and the transactions contemplated hereby by the
shareholders of Zynaxis, the consummation by Zynaxis of the transactions
contemplated hereby and the compliance by Zynaxis with any of the provisions
hereof, will not (i) conflict with or result in a breach of any provision of
Zynaxis's Articles of Incorporation, as amended, or Bylaws or the certificate or
articles of incorporation or bylaws of any Zynaxis Subsidiary or any resolution
adopted by the board of directors or the shareholders of any Zynaxis Company, or
(ii) except as disclosed in Section 5.2 of the Zynaxis Disclosure Memorandum,
constitute or result in a Default under, or require any Consent pursuant to, or
result in the creation of any Lien on any Asset of any Zynaxis Company under,
any Contract or Permit of any Zynaxis Company, or, (iii) subject to receipt of
the requisite Consents referred to in Section 9.1(b), constitute or result in a
Default under, or require any Consent pursuant to, any Law or Order applicable
to any Zynaxis Company or any of their respective material Assets (including any
Vaxcel Company or any Zynaxis Company becoming subject to or liable for the
payment of any Tax or any of the Assets owned by any Vaxcel Company or any
Zynaxis Company being reassessed or revalued by any Taxing authority).
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
no notice to, filing with, or Consent of, any public body or authority is
necessary for the execution, delivery and performance by Zynaxis of its
obligations under this Agreement.
5.3 Capital Stock.
(a) The authorized capital stock of Zynaxis consists of (i) 25,000,000
shares of Zynaxis Common Stock, of which 10,338,768 shares are issued and
outstanding, and (ii) 2,000,000 shares of preferred stock, 1,500,000 shares of
which are designated Series A Convertible Preferred Stock and of which 1,412,500
shares are issued and outstanding. The Conversion Price (as that term is defined
in the Statement With Respect to Shares) of the Zynaxis Preferred Stock is One
Dollar ($1.00) per share. All of the issued and outstanding shares of capital
stock of Zynaxis are duly and validly issued and outstanding and are fully paid
and nonassessable under the PBCL. None of the outstanding shares of Zynaxis
Capital Stock has been issued in violation of any preemptive rights of the
current or past shareholders of Zynaxis.
(b) Except as set forth in Section 5.3(a) or as disclosed in Section 5.3 of
the Zynaxis Disclosure Memorandum, there are no shares of capital stock or other
equity securities of Zynaxis outstanding and no outstanding Equity Rights
relating to the Zynaxis Capital Stock.
5.4 Zynaxis Subsidiaries. Zynaxis has disclosed in Section 5.4 of the
Zynaxis Disclosure Memorandum all of the Zynaxis Subsidiaries (in each case
identifying its jurisdiction of incorporation, each jurisdiction in which it is
qualified and/or licensed to transact business, and the number of shares owned
by Zynaxis and percentage ownership interest represented by such share
ownership). Except as disclosed in Section 5.4 of the Zynaxis Disclosure
Memorandum, Zynaxis or one of its Subsidiaries owns all of the issued and
outstanding shares of capital stock (or other equity interests) of each Zynaxis
Subsidiary. No capital stock (or other equity interest) of any Zynaxis
Subsidiary is or may become required to be issued (other than to another Zynaxis
Company) by reason of any Equity Rights, and there are no Contracts by which any
Zynaxis Subsidiary is bound to issue (other than to another Zynaxis Company)
additional shares of its capital stock (or other equity interests) or Equity
Rights or by which any Zynaxis Company is or may be bound to transfer any shares
of the capital stock (or other equity interests) of any Zynaxis Subsidiary
(other than to another Zynaxis Company). There are no Contracts relating to the
rights of any Zynaxis Company to vote or to dispose of any shares of the
A-13
<PAGE> 127
capital stock (or other equity interests) of any Zynaxis Subsidiary. All of the
shares of capital stock (or other equity interests) of each Zynaxis Subsidiary
held by a Zynaxis Company are fully paid and nonassessable under the applicable
corporation Law of the jurisdiction in which such Subsidiary is incorporated or
organized and are owned by the Zynaxis Company free and clear of any Lien,
except as contemplated in the Transaction Documents. Except as disclosed in
Section 5.4 of the Zynaxis Disclosure Memorandum, each Zynaxis Subsidiary is a
corporation, and each such Subsidiary is duly organized, validly existing, and
(as to corporations) in good standing under the Laws of the jurisdiction in
which it is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease, and operate its Assets and to carry on its
business as now conducted. Each Zynaxis Subsidiary is duly qualified or licensed
to transact business as a foreign corporation in good standing in the States of
the United States and foreign jurisdictions where the character of its Assets or
the nature or conduct of its business requires it to be so qualified or
licensed, except for such jurisdictions in which the failure to be so qualified
or licensed is not reasonably likely to have, individually or in the aggregate,
a Material Adverse Effect on Zynaxis. The minute book and other organizational
documents for each Zynaxis Subsidiary have been made available to Vaxcel for its
review, and, except as disclosed in Section 5.4 of the Zynaxis Disclosure
Memorandum, are true and complete in all material respects as in effect as of
the date of this Agreement and accurately reflect in all material respects all
amendments thereto and all proceedings of the Board of Directors and
shareholders thereof.
5.5 SEC Filings; Financial Statements.
(a) Zynaxis has timely filed and made available to Vaxcel all SEC Documents
required to be filed by Zynaxis since December 31, 1992 (the "Zynaxis SEC
Reports"). The Zynaxis SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Laws and
(ii) did not, at the time they were filed (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in such Zynaxis SEC Reports or necessary in order to make
the statements in such Zynaxis SEC Reports, in light of the circumstances under
which they were made, not misleading. No Zynaxis Subsidiary is required to file
any SEC Documents.
(b) Each of the Zynaxis Financial Statements (including, in each case, any
related notes) contained in the Zynaxis SEC Reports, including any Zynaxis SEC
Reports filed after the date of this Agreement until the Effective Time,
complied or will comply as to form in all material respects with the applicable
published rules and regulations of the SEC with respect thereto, was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial statements
or, in the case of unaudited interim statements, as permitted by Form 10-Q of
the SEC), and fairly presented in all material respects the consolidated
financial position of Zynaxis and its Subsidiaries as at the respective dates
and the consolidated results of operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount or effect.
5.6 Absence of Undisclosed Liabilities. Except as disclosed in Section 5.6
of the Zynaxis Disclosure Memorandum, no Zynaxis Company has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Zynaxis, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of Zynaxis as of December 31, 1995
and June 30, 1996, included in the Zynaxis Financial Statements delivered prior
to the date of this Agreement or reflected in the notes thereto. Except as
disclosed in Section 5.6 of the Zynaxis Disclosure Memorandum, no Zynaxis
Company has incurred or paid any Liability since June 30, 1996, except for such
Liabilities incurred or paid (i) in the ordinary course of business consistent
with past business practice and which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Zynaxis or (ii)
in connection with the transactions contemplated by this Agreement. Except as
disclosed in Section 5.6 of the Zynaxis Disclosure Memorandum or in the Zynaxis
Financial Statements, no Zynaxis Company is directly or indirectly liable, by
guarantee, indemnity, or otherwise, upon or with respect to, or obligated, by
discount or repurchase agreement or in any other way, to provide funds in
respect to, or obligated to guarantee or assume any Liability of any Person for
any amount in excess of $10,000.
A-14
<PAGE> 128
5.7 Absence of Certain Changes or Events. Since December 31, 1995, except
as disclosed in the Zynaxis Financial Statements delivered prior to the date of
this Agreement or as disclosed in Section 5.7 of the Zynaxis Disclosure
Memorandum, (i) there have been no events, changes, or occurrences which have
had, or are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Zynaxis, and (ii) the Zynaxis Companies have not
taken any action, or failed to take any action, prior to the date of this
Agreement, which action or failure, if taken after the date of this Agreement,
would represent or result in a material breach or violation of any of the
covenants and agreements of Zynaxis provided in Article 7.
5.8 Tax Matters.
(a) All material Tax Returns required to be filed by or on behalf of any of
the Zynaxis Companies have been timely filed or requests for extensions have
been timely filed, granted, and have not expired for periods ended on or before
December 31, 1995, and on or before the date of the most recent fiscal year end
immediately preceding the Effective Time, and all Tax Returns filed are complete
and accurate. All Taxes shown on filed Tax Returns have been paid. As of the
date of this Agreement, there is no audit examination, deficiency, or refund
Litigation with respect to any Taxes, except as reserved against in the Zynaxis
Financial Statements delivered prior to the date of this Agreement. All Taxes
and other Liabilities due with respect to completed and settled examinations or
concluded Litigation have been paid. There are no Liens with respect to Taxes
upon any of the Assets of the Zynaxis Companies, except for any such Liens which
are not reasonably likely to have a Material Adverse Effect on Zynaxis.
(b) None of the Zynaxis Companies has executed an extension or waiver of
any statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination by the
Internal Revenue Service or other applicable taxing authorities) that is
currently in effect.
(c) The provision for any Taxes due or to become due for any of the Zynaxis
Companies for the period or periods through and including the date of the
respective Zynaxis Financial Statements that has been made and is reflected on
such Zynaxis Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the Zynaxis Companies have been provided for in
accordance with GAAP.
(e) None of the Zynaxis Companies is a party to any Tax allocation or
sharing agreement and none of the Zynaxis Companies has been a member of an
affiliated group filing a consolidated federal income Tax Return (other than a
group the common parent of which was Zynaxis) or has any Liability for Taxes of
any Person (other than Zynaxis and its Subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign Law) as a
transferee or successor or by Contract or otherwise.
(f) Each of the Zynaxis Companies is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code.
(g) Except as disclosed in Section 5.8 of the Zynaxis Disclosure
Memorandum, none of the Zynaxis Companies has made any payments, is obligated to
make any payments, or is a party to any Contract that could obligate it to make
any payments that would be disallowed as a deduction under Section 280G or
162(m) of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal Revenue
Code Section 382(g), of the Zynaxis Companies that occurred during or after any
taxable period in which the Zynaxis Companies incurred a net operating loss that
carries over to any taxable period ending after December 31, 1995.
(i) No Zynaxis Company has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between the
United States and such foreign country.
5.9 Assets.
(a) Except as disclosed in Section 5.9 of the Zynaxis Disclosure Memorandum
or as disclosed or reserved against in the Zynaxis Financial Statements
delivered prior to the date of this Agreement, the
A-15
<PAGE> 129
Zynaxis Companies have good and marketable title, free and clear of all Liens,
to all of their respective Assets, except for any such Liens or other defects of
title which are not reasonably likely to have a Material Adverse Effect on
Zynaxis.
(b) Except as disclosed in Section 5.9(b) of the Zynaxis Disclosure
Memorandum, the accounts receivable of the Zynaxis Companies as set forth on the
most recent balance sheet included in the Zynaxis Financial Statements delivered
prior to the date of this Agreement or arising since the date thereof are valid
and genuine; have arisen solely out of bona fide sales and deliveries of goods,
performance of services and other business transactions in the ordinary course
of business consistent with past practice; are not subject to valid defenses,
set-offs or counterclaims. The allowance for collection losses on such balance
sheet has been determined in accordance with GAAP.
(c) All Assets which are material to Zynaxis's business on a consolidated
basis, held under leases or subleases by any of the Zynaxis Companies, are held
under valid Contracts enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceedings may be brought), and each such
Contract is in full force and effect.
(d) Set forth in Section 5.9(d) of the Zynaxis Disclosure Memorandum is a
description of each insurance policy maintained by any of the Zynaxis Companies,
including the type of policy, the name of the insurer, the coverage limits and
the premiums. None of the Zynaxis Companies has received notice from any
insurance carrier that (i) any policy of insurance will be canceled or that
coverage thereunder will be reduced or eliminated, or (ii) premium costs with
respect to such policies of insurance will be substantially increased. There are
presently no claims for amounts exceeding in any individual case $5,000 pending
under such policies of insurance and no notices of claims in excess of such
amounts have been given by any Zynaxis Company under such policies.
(e) The Assets of the Zynaxis Companies include all Assets required to
operate the business of the Zynaxis Companies as presently conducted. The
Zynaxis Companies have no Inventory.
5.10 Intellectual Property. Except as disclosed in Section 5.10 of the
Zynaxis Disclosure Memorandum, each Zynaxis Company owns or has a license to use
all of the Intellectual Property used by such Zynaxis Company in the course of
its business. Each Zynaxis Company is the owner of or has a license to any
Intellectual Property sold or licensed to a third party by such Zynaxis Company
in connection with such Zynaxis Company's business operations, and such Zynaxis
Company has the right to convey by sale or license any Intellectual Property so
conveyed. Except as disclosed in Section 5.10 of the Zynaxis Disclosure
Memorandum, no Zynaxis Company is in Default under any of its Intellectual
Property licenses. Except as disclosed in Section 5.10 of the Zynaxis Disclosure
Memorandum, no proceedings have been instituted, or are pending or to the
Knowledge of Zynaxis threatened, which challenge the rights of any Zynaxis
Company with respect to Intellectual Property used, sold or licensed by such
Zynaxis Company in the course of its business, nor has any person claimed or
alleged any rights to such Intellectual Property. To the Knowledge of Zynaxis,
the conduct of the business of the Zynaxis Companies does not infringe any
Intellectual Property of any other person. Except as disclosed in Section 5.10
of the Zynaxis Disclosure Memorandum, no Zynaxis Company is obligated to pay any
recurring royalties to any Person with respect to any such Intellectual
Property. Except as disclosed in Section 5.10 of the Zynaxis Disclosure
Memorandum, every officer, director, or employee of any Zynaxis Company is a
party to a Contract which requires such officer, director or employee to assign
any interest in any Intellectual Property to a Zynaxis Company and to keep
confidential any trade secrets, proprietary data, customer information, or other
business information of a Zynaxis Company, and, to the Knowledge of Zynaxis, no
such officer, director or employee is party to any Contract with any Person
other than a Zynaxis Company which requires such officer, director or employee
to assign any interest in any Intellectual Property to any Person other than a
Zynaxis Company or to keep confidential any trade secrets, proprietary data,
customer information, or other business information of any Person other than a
Zynaxis Company. Except as disclosed in Section 5.10 of the Zynaxis Disclosure
Memorandum, to the Knowledge of
A-16
<PAGE> 130
Zynaxis, no officer, director or employee of any Zynaxis Company is party to any
Contract which restricts or prohibits such officer, director or employee from
engaging in activities competitive with any Person, including any Zynaxis
Company.
5.11 Environmental Matters.
(a) Each Zynaxis Company, its Participation Facilities, and its Operating
Properties are, and have been, in compliance with all Environmental Laws.
(b) There is no Litigation pending or, to the Knowledge of Zynaxis,
threatened before any court, governmental agency, or authority or other forum in
which any Zynaxis Company or any of its Operating Properties or Participation
Facilities (or Zynaxis in respect of such Operating Property or Participation
Facility) has been or, with respect to threatened Litigation, may be named as a
defendant (i) for alleged noncompliance (including by any predecessor) with any
Environmental Law or (ii) relating to the release, discharge, spillage, or
disposal into the environment of any Hazardous Material, whether or not
occurring at, on, under, adjacent to, or affecting (or potentially affecting) a
site owned, leased, or operated by any Zynaxis Company or any of its Operating
Properties or Participation Facilities, nor is there any reasonable basis for
any Litigation of a type described in this sentence.
(c) During the period of (i) any Zynaxis Company's ownership or operation
of any of their respective current properties, (ii) any Zynaxis Company's
participation in the management of any Participation Facility, or (iii) any
Zynaxis Company's holding of a security interest in an Operating Property, there
have been no releases, discharges, spillages, or disposals of Hazardous Material
in, on, under, adjacent to, or affecting (or potentially affecting) such
properties. Prior to the period of (i) any Zynaxis Company's ownership or
operation of any of their respective current properties, (ii) any Zynaxis
Company's participation in the management of any Participation Facility, or
(iii) any Zynaxis Company's holding of a security interest in a Operating
Property, to the Knowledge of Zynaxis, there were no releases, discharges,
spillages, or disposals of Hazardous Material in, on, under, or affecting any
such property, Participation Facility or Operating Property.
5.12 Compliance with Laws. Each Zynaxis Company has in effect all Permits
necessary for it to own, lease, or operate its material Assets and to carry on
its business as now conducted, except for those Permits the absence of which are
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Zynaxis, and there has occurred no Default under any such
Permit other than Defaults which are not reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect on Zynaxis. Except as disclosed
in Section 5.12 of the Zynaxis Disclosure Memorandum, none of the Zynaxis
Companies:
(a) is in Default under any of the provisions of its Articles of
Incorporation, as amended, or Bylaws (or other governing instruments);
(b) is in Default under any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for Defaults which
are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Zynaxis; or
(c) since January 1, 1993, has received any notification or
communication from any agency or department of federal, state, or local
government or any Regulatory Authority or the staff thereof (i) asserting
that any Zynaxis Company is not in compliance with any of the Laws or
Orders which such governmental authority or Regulatory Authority enforces,
where such noncompliance is reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on Zynaxis, (ii) threatening to
revoke any Permits, the revocation of which is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Zynaxis, or
(iii) requiring any Zynaxis Company to enter into or consent to the
issuance of a cease and desist order, formal agreement, directive,
commitment, or memorandum of understanding, or to adopt any Board
resolution or similar undertaking.
Copies of all material reports, correspondence, notices and other documents
relating to any inspection, audit, monitoring or other form of review or
enforcement action by a Regulatory Authority have been made available to Vaxcel.
A-17
<PAGE> 131
5.13 Labor Relations. No Zynaxis Company is the subject of any Litigation
asserting that it or any other Zynaxis Company has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state Law) or seeking to compel it or any other Zynaxis Company to bargain with
any labor organization as to wages or conditions of employment, nor is any
Zynaxis Company party to any collective bargaining agreement, nor is there any
strike or other labor dispute involving any Zynaxis Company, pending or
threatened, nor to the Knowledge of Zynaxis, is there any activity involving any
Zynaxis Company's employees seeking to certify a collective bargaining unit or
engaging in any other organization activity.
5.14 Employee Benefit Plans.
(a) Zynaxis has disclosed in Section 5.14 of the Zynaxis Disclosure
Memorandum, and has delivered or made available to Vaxcel prior to the execution
of this Agreement, copies in each case of, all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus, or other incentive plan, all other written
employee programs, arrangements, or agreements, all medical, vision, dental, or
other health plans, all life insurance plans, and all other employee benefit
plans or fringe benefit plans, including "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any Zynaxis Company or ERISA
Affiliate (as defined below) thereof for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
and under which employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries are eligible to participate (collectively,
the "Zynaxis Benefit Plans"). Any of the Zynaxis Benefit Plans which is an
"employee pension benefit plan," as that term is defined in Section 3(2) of
ERISA, is referred to herein as a "Zynaxis ERISA Plan." Each Zynaxis ERISA Plan
which is also a "defined benefit plan" (as defined in Section 414(j) of the
Internal Revenue Code) is referred to herein as a "Zynaxis Pension Plan." No
Zynaxis Pension Plan is or has been a multiemployer plan within the meaning of
Section 3(37) of ERISA.
(b) All Zynaxis Benefit Plans are in compliance with the applicable terms
of ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Zynaxis. Each Zynaxis ERISA Plan which
is intended to be qualified under Section 401(a) of the Internal Revenue Code
has received a favorable determination letter from the Internal Revenue Service,
and Zynaxis is not aware of any circumstances likely to result in revocation of
any such favorable determination letter. To the Knowledge of Zynaxis, no Zynaxis
Company has engaged in a transaction with respect to any Zynaxis Benefit Plan
that, assuming the taxable period of such transaction expired as of the date
hereof, would subject any Zynaxis Company to a Tax imposed by either Section
4975 of the Internal Revenue Code or Section 502(i) of ERISA that, individually
or in the aggregate, is reasonably likely to have a Material Adverse Effect on
Zynaxis.
(c) No Zynaxis Pension Plan has any "unfunded current liability," as that
term is defined in Section 302(d)(8)(A) of ERISA, and the fair market value of
the assets of any such plan exceeds the plan's "benefit liabilities," as that
term is defined in Section 4001(a)(16) of ERISA when determined under actuarial
factors that would apply if the Zynaxis Pension Plan were terminated in
accordance with all applicable legal requirements. Since the date of the most
recent actuarial valuation, there has been (i) no material change in the
financial position of any Zynaxis Pension Plan, (ii) no change in the actuarial
assumptions with respect to any Zynaxis Pension Plan, and (iii) no increase in
benefits under any Zynaxis Pension Plan as a result of plan amendments or
changes in applicable Law which is reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on Zynaxis or materially adversely
affect the funding status of any such plan. Neither any Zynaxis Pension Plan nor
any "single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any Zynaxis Company, or the single-employer
plan of any entity which is considered one employer with Zynaxis under Section
4001 of ERISA or Section 414 of the Internal Revenue Code or Section 302 of
ERISA (whether or not waived) (an "ERISA Affiliate") has an "accumulated funding
deficiency" within the meaning of Section 412 of the Internal Revenue Code or
Section 302 of ERISA. No Zynaxis Company has provided, or is required to
provide, security to a Zynaxis Pension Plan or to any single-employer plan of an
ERISA Affiliate pursuant to Section 401(a)(29) of the Internal Revenue Code.
A-18
<PAGE> 132
(d) No Liability under Subtitle C or D of Title IV of ERISA has been or is
expected to be incurred by any Zynaxis Company with respect to any ongoing,
frozen, or terminated single-employer plan or the single-employer plan of any
ERISA Affiliate. No Zynaxis Company has incurred any withdrawal Liability with
respect to a multiemployer plan under Subtitle B of Title IV of ERISA
(regardless of whether based on contributions of an ERISA Affiliate). No notice
of a "reportable event," within the meaning of Section 4043 of ERISA for which
the 30-day reporting requirement has not been waived, has been required to be
filed for any Zynaxis Pension Plan or by any ERISA Affiliate within the 12-month
period ending on the date hereof.
(e) Except as disclosed in Section 5.14 of the Zynaxis Disclosure
Memorandum, no Zynaxis Company has any Liability for retiree health and life
benefits under any of the Zynaxis Benefit Plans and there are no restrictions on
the rights of such Zynaxis Company to amend or terminate any such retiree health
or benefit Plan without incurring any Liability thereunder.
(f) Except as disclosed in Section 5.14 of the Zynaxis Disclosure
Memorandum, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of any Zynaxis Company
from any Zynaxis Company under any Zynaxis Benefit Plan or otherwise, (ii)
increase any benefits otherwise payable under any Zynaxis Benefit Plan, or (iii)
result in any acceleration of the time of payment or vesting of any such
benefit.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any Zynaxis Company and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on the Zynaxis Financial Statements to the extent
required by and in accordance with GAAP.
5.15 Material Contracts. Except as disclosed in Section 5.15 of the
Zynaxis Disclosure Memorandum or otherwise reflected in the Zynaxis Financial
Statements, none of the Zynaxis Companies, nor any of their respective Assets,
businesses, or operations, is a party to, or is bound or affected by, or
receives benefits under, (i) any employment, severance, termination, consulting,
or retirement Contract providing for aggregate payments to any Person in any
calendar year in excess of $10,000, (ii) any Contract relating to the borrowing
of money by any Zynaxis Company or the guarantee by any Zynaxis Company of any
such obligation (other than Contracts evidencing trade payables and Contracts
relating to borrowings or guarantees made in the ordinary course of business),
(iii) any Contract which prohibits or restricts any Zynaxis Company from
engaging in any business activities in any geographic area, line of business or
otherwise in competition with any other Person, (iv) any Contract between or
among Zynaxis Companies, (v) any Contract involving Intellectual Property (other
than Contracts entered into in the ordinary course with customers and "shrink-
wrap" software licenses), (vi) any Contract relating to the provision of data
processing, network communication, or other technical services to or by any
Zynaxis Company, (vii) any Contract relating to the purchase or sale of any
goods or services (other than Contracts entered into in the ordinary course of
business and involving payments under any individual Contract not in excess of
$20,000), and (viii) any other Contract or amendment thereto that would be
required to be filed as an exhibit to a Form 10-K filed by Zynaxis with the SEC
as of the date of this Agreement (together with all Contracts referred to in
Sections 5.9 and 5.14(a), the "Zynaxis Contracts"). With respect to each Zynaxis
Contract and except as disclosed in Section 5.15 of the Zynaxis Disclosure
Memorandum: (i) the Contract is in full force and effect; (ii) no Zynaxis
Company is in Default thereunder; (iii) no Zynaxis Company has repudiated or
waived any material provision of any such Contract; and (iv) no other party to
any such Contract is, to the Knowledge of Zynaxis, in Default in any respect or
has repudiated or waived any material provision thereunder. Except as disclosed
in Section 5.15 of the Zynaxis Disclosure Memorandum, all of the indebtedness of
any Zynaxis Company for money borrowed is prepayable at any time by such Zynaxis
Company without penalty or premium.
5.16 Legal Proceedings. Except as disclosed in Section 5.16 of the Zynaxis
Disclosure Memorandum, there is no Litigation instituted or pending, or, to the
Knowledge of Zynaxis, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an
A-19
<PAGE> 133
unfavorable outcome) against any Zynaxis Company, or against any director,
employee or employee benefit plan of any Zynaxis Company, or against any Asset,
interest, or right of any of them, that are reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Zynaxis, nor are
there any Orders of any Regulatory Authorities, other governmental authorities,
or arbitrators outstanding against any Zynaxis Company that is reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect on Zynaxis.
Section 5.16 of the Zynaxis Disclosure Memorandum contains a summary of all
Litigation as of the date of this Agreement to which any Zynaxis Company is a
party and which names a Zynaxis Company as a defendant or cross-defendant or for
which any Zynaxis Company has any potential Liability.
5.17 Reports. Since January 1, 1993, or the date of organization, if
later, each Zynaxis Company has timely filed all reports and statements,
together with any amendments required to be made with respect thereto, that it
was required to file with Regulatory Authorities (except, in the case of state
securities authorities, failures to file which are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Zynaxis).
As of their respective dates, each of such reports and documents, including the
financial statements, exhibits, and schedules thereto, complied in all material
respects with all applicable Laws. As of its respective date, each such report
and document did not, in all material respects, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
5.18 Statements True and Correct. No statement, certificate, instrument,
or other writing furnished or to be furnished by any Zynaxis Company or any
officer, director, employee or Subsidiary thereof to any Vaxcel Company pursuant
to this Agreement or any other document, agreement, or instrument referred to
herein contains or will contain any untrue statement of material fact or will
omit to state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by any Zynaxis Company or any officer,
director, employee or Subsidiary thereof for inclusion in the Registration
Statement to be filed by Vaxcel with the SEC will, when the Registration
Statement becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein not misleading. None of the information supplied or to be supplied by
any Zynaxis Company or any officer, director, employee or Subsidiary thereof for
inclusion in the Proxy Statement to be mailed to Zynaxis's shareholders in
connection with the Shareholders' Meeting, and any other documents to be filed
by a Zynaxis Company or any officer, director, employee or Subsidiary thereof
with the SEC or any other Regulatory Authority in connection with the
transactions contemplated hereby, will, at the respective time such documents
are filed, and with respect to the Proxy Statement, when first mailed to the
shareholders of Zynaxis, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for the Shareholders' Meeting. All documents that
any Zynaxis Company or any officer, director, employee or Subsidiary thereof is
responsible for filing with any Regulatory Authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable Law.
5.19 Regulatory Matters. No Zynaxis Company or any officer, director,
employee or Subsidiary thereof has taken or agreed to take any action or has any
Knowledge of any fact or circumstance that is reasonably likely to materially
impede or delay receipt of any Consents of Regulatory Authorities referred to in
Section 7.1(b) or result in the imposition of a condition or restriction of the
type referred to in the last sentence of such Section.
5.20 Charter Provisions. Each Zynaxis Company has taken all action so that
the entering into of this Agreement and the consummation of the Merger and the
other transactions contemplated by this Agreement do not and will not result in
the grant of any rights to any Person under the Articles of Incorporation, as
amended, Bylaws or other governing instruments of any Zynaxis Company, except
such rights as exist on the date hereof, or restrict or impair the ability of
Vaxcel or any of its Subsidiaries to vote, or otherwise to exercise the rights
of a shareholder with respect to, shares of any Zynaxis Company that may be
directly or indirectly acquired or controlled by them.
A-20
<PAGE> 134
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF
CYTRX, VAXCEL AND VAXCEL MERGER SUB
CytRx, Vaxcel and Vaxcel Merger Sub hereby represent and warrant to Zynaxis
as follows:
6.1 Organization, Standing, and Power.
(a) CytRx is a corporation duly organized, validly existing, and in good
standing under the Laws of the State of Delaware, and has the corporate power
and authority to carry on its business as now conducted and to own, lease and
operate its Assets. CytRx is duly qualified or licensed to transact business as
a foreign corporation in good standing in the states of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on CytRx.
(b) Vaxcel is a corporation duly organized, validly existing, and in good
standing under the Laws of the State of Delaware, and has the corporate power
and authority to carry on its business as now conducted and to own, lease and
operate its Assets. Vaxcel is duly qualified or licensed to transact business as
a foreign corporation in good standing in the States of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Vaxcel. The minute book and other organizational documents for Vaxcel
have been made available to Zynaxis for its review and, except as disclosed in
Section 6.1 of the Vaxcel Disclosure Memorandum, are true and complete in all
material respects as of the date of this Agreement and accurately reflect in all
material respects all amendments thereto and all proceedings of the Board of
Directors and shareholders thereof.
(c) Vaxcel Merger Sub is a corporation duly organized, validly existing,
and in good standing under the Laws of the State of Georgia, and has the
corporate power and authority to carry on its business as now conducted and to
own, lease and operate its Assets. The minute book and other organizational
documents for Vaxcel Merger Sub have been made available to Zynaxis for its
review and are true and complete in all material respects as of the date of this
Agreement and accurately reflect in all material respects all amendments thereto
and all proceedings of the Board of Directors and shareholders thereof.
6.2 Authority; No Breach By Agreement.
(a) Each of CytRx, Vaxcel and Vaxcel Merger Sub has the corporate power and
authority necessary to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein, including the Merger, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of such corporations. Vaxcel, as the sole shareholder of Vaxcel Merger Sub,
has voted all outstanding shares of Vaxcel Merger Sub Common Stock in favor of
adoption of this Agreement, as and to the extent required by applicable Law.
This Agreement represents a legal, valid, and binding obligation of each of
CytRx, Vaxcel and Vaxcel Merger Sub, enforceable against each of CytRx, Vaxcel
and Vaxcel Merger Sub in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by CytRx, Vaxcel
and Vaxcel Merger Sub, nor the consummation by CytRx, Vaxcel and Vaxcel Merger
Sub of the transactions contemplated hereby, nor compliance by CytRx, Vaxcel and
Vaxcel Merger Sub with any of the provisions hereof, will (i) conflict with or
result in a breach of any provision of the Certificate of Incorporation or
Bylaws of any of CytRx, Vaxcel or Vaxcel Merger Sub, or any resolution adopted
by the Board of Directors or the Shareholders of any Vaxcel Company, or (ii)
constitute or result in a Default under, or require any Consent pursuant to, or
result in the creation of any Lien on any Asset of any Vaxcel Company under, any
Contract or Permit of any Vaxcel Company, or, (iii) subject to receipt of the
requisite Consents referred to in Section 9.1(b), constitute or result in a
Default under, or require any Consent pursuant to, any Law or Order applicable
to any Vaxcel
A-21
<PAGE> 135
Company or any of their respective material Assets (including any Vaxcel Company
or any Zynaxis Company becoming subject to or liable for the payment of any Tax
or any of the Assets owned by any Vaxcel Company or any Zynaxis Company being
reassessed or revalued by any Taxing authority).
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
no notice to, filing with, or Consent of, any public body or authority is
necessary for the execution, delivery and performance by CytRx, Vaxcel and
Vaxcel Merger Sub of their obligations under this Agreement.
6.3 Capital Stock.
(a) The authorized capital stock of Vaxcel consists of (i) 30,000,000
shares of Vaxcel Common Stock, of which 8,250,004 are issued and outstanding,
and (ii) 2,000,000 shares of Vaxcel Preferred Stock, none of which are issued
and outstanding. All of the issued and outstanding shares of Vaxcel Capital
Stock are, and all of the shares of Vaxcel Common Stock to be issued in exchange
for shares of Zynaxis Common Stock upon consummation of the Merger, when issued
in accordance with the terms of this Agreement, will be, duly and validly issued
and outstanding and fully paid and nonassessable under the DGCL. None of the
outstanding shares of Vaxcel Capital Stock has been, and none of the shares of
Vaxcel Common Stock to be issued in exchange for shares of Zynaxis Common Stock
upon consummation of the Merger will be, issued in violation of any preemptive
rights of the current or past stockholders of Vaxcel.
(b) The authorized capital stock of Vaxcel Merger Sub consists of (i) 1,000
shares of Common Stock, of which 500 shares are issued and outstanding as of the
date of this Agreement. All of the issued and outstanding shares of Vaxcel
Merger Sub Common Stock are duly and validly issued and fully paid and
nonassessable under the GBCC. None of the outstanding shares of Vaxcel Merger
Sub Common Stock has been issued in violation of any preemptive rights of the
current or past shareholders of Vaxcel Merger Sub.
(c) Except as set forth in Sections 6.3(a) and 6.3(b), or as disclosed in
Section 6.3 of the Vaxcel Disclosure Memorandum, there are no shares of capital
stock or other equity securities of Vaxcel or Vaxcel Merger Sub outstanding and
no outstanding Equity Rights relating to Vaxcel or Vaxcel Merger Sub Capital
Stock.
Vaxcel and Vaxcel Merger Sub hereby represent and warrant to Zynaxis as
follows:
6.4 Vaxcel Subsidiaries. Vaxcel has disclosed in Section 6.4 of the Vaxcel
Disclosure Memorandum all of the Vaxcel Subsidiaries as of the date of this
Agreement that are corporations (identifying its jurisdiction of incorporation,
each jurisdiction in which the character of its Assets or the nature or conduct
of its business requires it to be qualified and/or licensed to transact
business, and the number of shares owned and percentage ownership interest
represented by such share ownership) and all of the Vaxcel Subsidiaries that are
general or limited partnerships or other non-corporate entities (identifying the
Law under which such entity is organized, each jurisdiction in which the
character of its Assets or the nature or conduct of its business requires it to
be qualified and/or licensed to transact business, and the amount and nature of
the ownership interest therein). Except as disclosed in Section 6.4 of the
Vaxcel Disclosure Memorandum, Vaxcel or one of its Subsidiaries owns all of the
issued and outstanding shares of capital stock (or other equity interests) of
each Vaxcel Subsidiary. No capital stock (or other equity interest) of any
Vaxcel Subsidiary is or may become required to be issued (other than to another
Vaxcel Company) by reason of any Equity Rights, and there are no Contracts by
which any Vaxcel Subsidiary is bound to issue (other than to another Vaxcel
Company) additional shares of its capital stock (or other equity interests) or
Equity Rights or by which any Vaxcel Company is or may be bound to transfer any
shares of the capital stock (or other equity interests) of any Vaxcel Subsidiary
(other than to another Vaxcel Company). There are no Contracts relating to the
rights of any Vaxcel Company to vote or to dispose of any shares of the capital
stock (or other equity interests) of any Vaxcel Subsidiary. All of the shares of
capital stock (or other equity interests) of each Vaxcel Subsidiary held by a
Vaxcel Company are fully paid and nonassessable under the applicable corporation
Law of the jurisdiction in which such Subsidiary is incorporated or organized
and are owned by the Vaxcel Company free and clear of any Lien. Each Vaxcel
A-22
<PAGE> 136
Subsidiary is duly organized, validly existing, and (as to corporations) in good
standing under the Laws of the jurisdiction in which it is incorporated or
organized, and has the power and authority necessary for it to own, lease and
operate its Assets and to carry on its business as now conducted. Each Vaxcel
Subsidiary is duly qualified or licensed to transact business as a foreign
corporation in good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Vaxcel. The minute book and other organizational documents for each
Vaxcel Subsidiary have been made available to Zynaxis for its review, and are
true and complete in all material respects as in effect as of the date of this
Agreement and accurately reflect in all material respects all amendments thereto
and all proceedings of the Board of Directors and shareholders thereof.
6.5 Vaxcel Financial Statements. The books and records of Vaxcel are
accurate and complete. The Vaxcel Financial Statements have been prepared from
such books and records and reflect, in all material respects and in reasonable
detail, the transactions and assets and liabilities of Vaxcel.
6.6 Absence of Undisclosed Liabilities. No Vaxcel Company has any
Liabilities that are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Vaxcel, except Liabilities which are
accrued or reserved against in the consolidated balance sheets of Vaxcel as of
December 31, 1995 and September 30, 1996, included in the Vaxcel Financial
Statements delivered prior to the date of this Agreement or reflected in the
notes thereto. No Vaxcel Company has incurred or paid any Liability since
September 30, 1996, except for such Liabilities incurred or paid (i) in the
ordinary course of business consistent with past business practice and which are
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Vaxcel or (ii) in connection with the transactions
contemplated by this Agreement. Except as disclosed in the Vaxcel Financial
Statements, no Vaxcel Company is directly or indirectly liable, by guarantee,
indemnity, or otherwise, upon or with respect to, or obligated, by discount or
repurchase agreement or in any other way, to provide funds in respect to, or
obligated to guarantee or assume any Liability of any Person for any amount in
excess of $10,000.
6.7 Absence of Certain Changes or Events. Since December 31, 1995, except
as disclosed in the Vaxcel Financial Statements delivered prior to the date of
this Agreement, (i) there have been no events, changes or occurrences which have
had, or are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Vaxcel, and (ii) the Vaxcel Companies have not taken
any action, or failed to take any action, prior to the date of this Agreement,
which action or failure, if taken after the date of this Agreement, would
represent or result in a material breach or violation of any of the covenants
and agreements of Vaxcel provided in Article 7.
6.8 Tax Matters.
(a) All material Tax Returns required to be filed by or on behalf of any of
the Vaxcel Companies have been timely filed or requests for extensions have been
timely filed, granted, and have not expired for periods ended on or before
December 31, 1995, and on or before the date of the most recent fiscal year end
immediately preceding the Effective Time and all Tax Returns filed are complete
and accurate. All material Taxes shown on filed Tax Returns have been paid. As
of the date of this Agreement, there is no audit examination, deficiency, or
refund Litigation with respect to any Taxes except as reserved against in the
Vaxcel Financial Statements delivered prior to the date of this Agreement. All
Taxes and other Liabilities due with respect to completed and settled
examinations or concluded Litigation have been paid. There are no Liens with
respect to Taxes upon any of the Assets of the Vaxcel Companies, except for such
Liens which are not reasonably likely to have a Material Adverse Effect on
Vaxcel.
(b) None of the Vaxcel Companies has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due (excluding
such statutes that relate to years currently under examination by the Internal
Revenue Service or other applicable taxing authorities) that is currently in
effect.
A-23
<PAGE> 137
(c) The provision for any Taxes due or to become due for any of the Vaxcel
Companies for the period or periods through and including the date of the
respective Vaxcel Financial Statements that has been made and is reflected on
such Vaxcel Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the Vaxcel Companies have been provided for in
accordance with GAAP.
(e) None of the Vaxcel Companies is a party to any Tax allocation or
sharing agreement and none of the Vaxcel Companies has been a member of an
affiliated group filing a consolidated federal income Tax Return (other than a
group the common parent of which was Vaxcel) has any Liability for Taxes of any
Person (other than Vaxcel and its Subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign Law) as a
transferee or successor or by Contract or otherwise.
(f) Each of the Vaxcel Companies is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code.
6.9 Assets.
(a) Except as reserved against in the Vaxcel Financial Statements delivered
prior to the date of this Agreement, the Vaxcel Companies have good and
marketable title, free and clear of all Liens, to all of their respective
Assets, except for any such Liens or other defects of title which are not
reasonably likely to have a Material Adverse Effect on Vaxcel. All tangible
properties used in the businesses of the Vaxcel Companies are in good condition,
reasonable wear and tear excepted, and are usable in the ordinary course of
business consistent with Vaxcel's past practices of the Vaxcel Companies.
(b) The Vaxcel Companies have no Inventory.
(c) The accounts receivable of the Vaxcel Companies as set forth on the
most recent balance sheet included in the Vaxcel Financial Statements delivered
prior to the date of this Agreement or arising since the date thereof are valid
and genuine; have arisen solely out of bona fide sales and deliveries of goods,
performance of services and other business transactions in the ordinary course
of business consistent with past practice; are not subject to valid defenses,
set-offs or counterclaims; and are collectible within 90 days after billing at
the full recorded amount thereof less, in the case of accounts receivable
appearing on the most recent balance sheet included in the Vaxcel Financial
Statements delivered prior to the date of this Agreement, the recorded allowance
for collection losses on such balance sheet. The allowance for collection losses
on such balance sheet has been determined in accordance with GAAP.
(d) All Assets which are material to Vaxcel's business on a consolidated
basis, held under leases or subleases by any of the Vaxcel Companies, are held
under valid Contracts enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other Laws affecting the enforcement of creditors'
rights generally and except that the availability of the equitable remedy of
specific performance or injunctive relief is subject to the discretion of the
court before which any proceedings may be brought), and each such Contract is in
full force and effect.
(e) The Vaxcel Companies currently maintain insurance similar in amounts,
scope and coverage to that maintained by other peer companies. None of the
Vaxcel Companies has received notice from any insurance carrier that (i) such
insurance will be canceled or that coverage thereunder will be reduced or
eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no claims for amounts
exceeding in any individual case $5,000 pending under such policies of insurance
and no notices of claims in excess of such amount have been given by any Vaxcel
Company under such policies.
(f) The Assets of the Vaxcel Companies include all Assets required to
operate the business of the Vaxcel Companies as presently conducted.
A-24
<PAGE> 138
6.10 Intellectual Property. Each Vaxcel Company owns or has a license to
use all of the Intellectual Property used by such Vaxcel Company in the course
of its business. Each Vaxcel Company is the owner of or has a license to any
Intellectual Property sold or licensed to a third party by such Vaxcel Company
in connection with such Vaxcel Company's business operations, and such Vaxcel
Company has the right to convey by sale or license any Intellectual Property so
conveyed. No Vaxcel Company is in Default under any of its Intellectual Property
licenses. No proceedings have been instituted, or are pending or, to the
Knowledge of Vaxcel, threatened, which challenge the rights of any Vaxcel
Company with respect to Intellectual Property used, sold or licensed by such
Vaxcel Company in the course of its business, nor has any person claimed or
alleged any rights to such Intellectual Property. To the knowledge of Vaxcel and
Vaxcel Merger Sub, the conduct of the business of the Vaxcel Companies does not
infringe any Intellectual Property of any other person. Except as disclosed in
Section 6.10 of the Vaxcel Disclosure Memorandum, no Vaxcel Company is obligated
to pay any recurring royalties to any Person with respect to any such
Intellectual Property. Every officer, director, or employee of any Vaxcel
Company is a party to a Contract which requires such officer, director or
employee to assign any interest in any Intellectual Property to a Vaxcel Company
and to keep confidential any trade secrets, proprietary data, customer
information, or other business information of a Vaxcel Company, and to the
Knowledge of Vaxcel and Vaxcel Merger Sub, no such officer, director or employee
is party to any Contract with any Person other than a Vaxcel Company which
requires such officer, director or employee to assign any interest in any
Intellectual Property to any Person other than a Vaxcel Company or to keep
confidential any trade secrets, proprietary data, customer information, or other
business information of any Person other than a Vaxcel Company. To the Knowledge
of Vaxcel and Vaxcel Merger Sub, no officer, director or employee of any Vaxcel
Company is party to any Contract which restricts or prohibits such officer,
director or employee from engaging in activities competitive with any Person,
including any Vaxcel Company.
6.11 Environmental Matters.
(a) Each Vaxcel Company, its Participation Facilities, and its Operating
Properties are, and have been, in compliance with all Environmental Laws.
(b) There is no Litigation pending or, to the Knowledge of Vaxcel and
Vaxcel Merger Sub, threatened before any court, governmental agency, or
authority or other forum in which any Vaxcel Company or any of its Operating
Properties or Participation Facilities (or Vaxcel in respect of such Operating
Property or Participation Facility) has been or, with respect to threatened
Litigation, may be named as a defendant (i) for alleged noncompliance (including
by any predecessor) with any Environmental Law or (ii) relating to the release,
discharge, spillage, or disposal into the environment of any Hazardous Material,
whether or not occurring at, on, under, adjacent to, or affecting (or
potentially affecting) a site owned, leased, or operated by any Vaxcel Company
or any of its Operating Properties or Participation Facilities nor is there any
reasonable basis for any Litigation of a type described in this sentence.
(c) During the period of (i) any Vaxcel Company's ownership or operation of
any of their respective current properties, (ii) any Vaxcel Company's
participation in the management of any Participation Facility, or (iii) any
Vaxcel Company's holding of a security interest in a Operating Property, there
have been no releases, discharges, spillages, or disposals of Hazardous Material
in, on, under, adjacent to, or affecting (or potentially affecting) such
properties. Prior to the period of (i) any Vaxcel Company's ownership or
operation of any of their respective current properties, (ii) any Vaxcel
Company's participation in the management of any Participation Facility, or
(iii) any Vaxcel Company's holding of a security interest in a Operating
Property, to the Knowledge of Vaxcel, there were no releases, discharges,
spillages, or disposals of Hazardous Material in, on, under, or affecting any
such property, Participation Facility or Operating Property.
6.12 Compliance with Laws. Each Vaxcel Company has in effect all Permits
necessary for it to own, lease or operate its material Assets and to carry on
its business as now conducted, except for those Permits the absence of which are
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Vaxcel, and there has occurred no Default under any such
Permit, other than Defaults which are not
A-25
<PAGE> 139
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Vaxcel. None of the Vaxcel Companies:
(a) is in Default under its Certificate of Incorporation or Bylaws (or
other governing instruments); or
(b) is in Default under any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for Defaults which
are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Vaxcel; or
(c) since January 1, 1993, has received any notification or
communication from any agency or department of federal, state, or local
government or any Regulatory Authority or the staff thereof (i) asserting
that any Vaxcel Company is not in compliance with any of the Laws or Orders
which such governmental authority or Regulatory Authority enforces, where
such noncompliance is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Vaxcel, (ii) threatening to revoke
any Permits, the revocation of which is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Vaxcel, or
(iii) requiring any Vaxcel Company to enter into or consent to the issuance
of a cease and desist order, formal agreement, directive, commitment or
memorandum of understanding, or to adopt any Board resolution or similar
undertaking.
6.13 Labor Relations. No Vaxcel Company is the subject of any Litigation
asserting that it or any other Vaxcel Company has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state Law) or seeking to compel it or any other Vaxcel Company to bargain with
any labor organization as to wages or conditions of employment, nor is any
Vaxcel Company party to any collective bargaining agreement, nor is there any
strike or other labor dispute involving any Vaxcel Company, pending or
threatened, nor to the Knowledge of Vaxcel, is there any activity involving any
Vaxcel Company's employees seeking to certify a collective bargaining unit or
engaging in any other organization activity.
6.14 Employee Benefit Plans.
(a) Vaxcel has delivered or made available to Zynaxis prior to the
execution of this Agreement copies in each case of all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus, or other incentive plan, all other written
employee programs, arrangements, or agreements, all medical, vision, dental, or
other health plans, all life insurance plans, and all other employee benefit
plans or fringe benefit plans, including "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any Vaxcel Company or ERISA
Affiliate thereof for the benefit of employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries and under which
employees, retirees, dependents, spouses, directors, independent contractors, or
other beneficiaries are eligible to participate (collectively, the "Vaxcel
Benefit Plans"). Any of the Vaxcel Benefit Plans which is an "employee pension
benefit plan," as that term is defined in Section 3(2) of ERISA, is referred to
herein as a "Vaxcel ERISA Plan." Each Vaxcel ERISA Plan which is also a "defined
benefit plan" (as defined in Section 414(j) of the Internal Revenue Code) is
referred to herein as a "Vaxcel Pension Plan." No Vaxcel Pension Plan is or has
been a multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) All Vaxcel Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Vaxcel. Each Vaxcel ERISA Plan which is
intended to be qualified under Section 401(a) of the Internal Revenue Code has
received a favorable determination letter from the Internal Revenue Service, and
Vaxcel is not aware of any circumstances likely to result in revocation of any
such favorable determination letter. To the Knowledge of Vaxcel, no Vaxcel
Company has engaged in a transaction with respect to any Vaxcel Benefit Plan
that, assuming the taxable period of such transaction expired as of the date
hereof, would subject any Vaxcel Company to a Tax imposed by either Section 4975
of the Internal Revenue Code or Section 502(i) of ERISA that, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect on Vaxcel.
A-26
<PAGE> 140
(c) No Vaxcel Pension Plan has any "unfunded current liability," as that
term is defined in Section 302(d)(8)(A) of ERISA, and the fair market value of
the assets of any such plan exceeds the plan's "benefit liabilities," as that
term is defined in Section 4001(a)(16) of ERISA when determined under actuarial
factors that would apply if the Vaxcel Pension Plan were terminated in
accordance with all applicable legal requirements. Since the date of the most
recent actuarial valuation, there has been (i) no material change in the
financial position of a Vaxcel Pension Plan, (ii) no change in the actuarial
assumptions with respect to any Vaxcel Pension Plan, and (iii) no increase in
benefits under any Vaxcel Pension Plan as a result of plan amendments or changes
in applicable Law which is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Vaxcel or materially adversely affect
the funding status of any such plan. Neither any Vaxcel Pension Plan nor any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any Vaxcel Company, or the single-employer
plan of any ERISA Affiliate has an "accumulated funding deficiency" within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of ERISA. No
Vaxcel Company has provided, or is required to provide, security to a Vaxcel
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to
Section 401(a)(29) of the Internal Revenue Code.
(d) No Liability under Subtitle C or D of Title IV of ERISA has been or is
expected to be incurred by any Vaxcel Company with respect to any ongoing,
frozen or terminated single-employer plan or the single-employer plan of any
ERISA Affiliate. No Vaxcel Company has incurred any withdrawal Liability with
respect to a multiemployer plan under Subtitle B of Title IV of ERISA
(regardless of whether based on contributions of an ERISA Affiliate). No notice
of a "reportable event," within the meaning of Section 4043 of ERISA for which
the 30-day reporting requirement has not been waived, has been required to be
filed for any Vaxcel Pension Plan or by any ERISA Affiliate within the 12-month
period ending on the date hereof.
(e) No Vaxcel Company has any Liability for retiree health and life
benefits under any of the Vaxcel Benefit Plans and there are no restrictions on
the rights of such Vaxcel Company to amend or terminate any such retiree health
or benefit Plan without incurring any Liability thereunder.
(f) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of any Vaxcel Company
from any Vaxcel Company under any Vaxcel Benefit Plan or otherwise, (ii)
increase any benefits otherwise payable under any Vaxcel Benefit Plan, or (iii)
result in any acceleration of the time of payment or vesting of any such
benefit.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any Vaxcel Company and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on the Vaxcel Financial Statements to the extent
required by and in accordance with GAAP.
6.15 Material Contracts. Except as disclosed in Section 6.15 of the Vaxcel
Disclosure Memorandum or otherwise reflected in the Vaxcel Financial Statements,
none of the Vaxcel Companies, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting or retirement
Contract providing for aggregate payments to any Person in any calendar year in
excess of $10,000, (ii) any Contract relating to the borrowing of money by any
Vaxcel Company or the guarantee by any Vaxcel Company of any such obligation
(other than Contracts evidencing trade payables and Contracts relating to
borrowings or guarantees made in the ordinary course of business), (iii) any
Contract which prohibits or restricts any Vaxcel Company from engaging in any
business activities in any geographic area, line of business or otherwise in
competition with any other Person, (iv) any Contract between or among Vaxcel
Companies, (v) any Contract involving Intellectual Property (other than
Contracts entered into in the ordinary course with customers and "shrink-wrap"
software licenses), (vi) any Contract relating to the provision of data
processing, network communication, or other technical services to or by any
Vaxcel Company, and (vii) any Contract relating to the purchase
A-27
<PAGE> 141
or sale of any goods or services (other than Contracts entered into in the
ordinary course of business and involving payments under any individual Contract
not in excess of $20,000) (together with all Contracts referred to in Sections
6.9 and 6.14(a), the "Vaxcel Contracts"). With respect to each Vaxcel Contract:
(i) the Contract is in full force and effect; (ii) no Vaxcel Company is in
Default thereunder; (iii) no Vaxcel Company has repudiated or waived any
material provision of any such Contract; and (iv) no other party to any such
Contract is, to the Knowledge of Vaxcel, in Default in any respect or has
repudiated or waived any material provision thereunder. All of the indebtedness
of any Vaxcel Company for money borrowed is prepayable at any time by such
Vaxcel Company without penalty or premium.
6.16 Legal Proceedings. There is no Litigation instituted or pending, or,
to the Knowledge of Vaxcel, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any Vaxcel Company, or against any director,
employee or employee benefit plan of any Vaxcel Company, or against any Asset,
interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Vaxcel, nor are
there any Orders of any Regulatory Authorities, other governmental authorities,
or arbitrators outstanding against any Vaxcel Company, that are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Vaxcel.
6.17 Reports. Since January 1, 1993, or the date of organization if later,
each Vaxcel Company has timely filed all reports and statements, together with
any amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities (except, in the case of state securities
authorities, failures to file which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Vaxcel). As of
their respective dates, each of such reports and documents, including the
financial statements, exhibits, and schedules thereto, complied in all material
respects with all applicable Laws. As of its respective date, each such report
and document did not, in all material respects, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
6.18 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by any Vaxcel Company or any officer,
director, employee or Subsidiary thereof to Zynaxis pursuant to this Agreement
or any other document, agreement or instrument referred to herein contains or
will contain any untrue statement of material fact or will omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by any Vaxcel Company or any officer,
director, employee or Subsidiary thereof for inclusion in the Registration
Statement to be filed by Vaxcel with the SEC, will, when the Registration
Statement becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein not misleading. None of the information supplied or to be supplied by
any Vaxcel Company or any officer, director, employee or Subsidiary thereof for
inclusion in the Proxy Statement to be mailed to Zynaxis's shareholders in
connection with the Shareholders' Meeting, and any other documents to be filed
by any Vaxcel Company or any officer, director, employee or Subsidiary thereof
with any Regulatory Authority in connection with the transactions contemplated
hereby, will, at the respective time such documents are filed, and with respect
to the Proxy Statement, when first mailed to the shareholders of Zynaxis, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or, in the case of the
Proxy Statement or any amendment thereof or supplement thereto, at the time of
the Shareholders' Meeting, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to correct any statement in
any earlier communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that any Vaxcel Company or any officer,
director, employee or Subsidiary thereof is responsible for filing with any
Regulatory Authority in connection with the transactions contemplated hereby
will comply as to form in all material respects with the provisions of
applicable Law.
6.19 Regulatory Matters. Neither CytRx nor any Vaxcel Company or any
officer, director, employee or Subsidiary thereof has taken or agreed to take
any action or has any Knowledge of any fact or circumstance that is reasonably
likely to materially impede or delay receipt of any Consents of Regulatory
Authorities referred to in Section 9.1(b) or result in the imposition of a
condition or restriction of the type referred to in the last sentence of such
Section.
A-28
<PAGE> 142
ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 Affirmative Covenants of Zynaxis. From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
unless the prior written consent of Vaxcel shall have been obtained, and except
as otherwise expressly contemplated by the Transaction Documents or disclosed in
the Zynaxis Disclosure Memorandum, Zynaxis shall and shall cause each of its
Subsidiaries to (a) operate its business only in the usual, regular, and
ordinary course, (b) preserve intact its business organization and Assets and
maintain its rights and franchises, and (c) take no action which would (i)
materially adversely affect the ability of any Party to obtain any Consents
required for the transactions contemplated hereby without imposition of a
condition or restriction of the type referred to in the last sentences of
Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the ability of any
Party to perform its covenants and agreements under this Agreement.
7.2 Negative Covenants of Zynaxis. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, unless
the prior written consent of Vaxcel shall have been obtained, and except as
otherwise expressly contemplated by the Transaction Documents or disclosed in
the Zynaxis Disclosure Memorandum, Zynaxis covenants and agrees that it will not
do or agree or commit to do, or permit any of its Subsidiaries to do or agree or
commit to do, any of the following:
(a) amend the Articles of Incorporation, as amended, Bylaws, or other
governing instruments of any Zynaxis Company; or
(b) incur any additional debt obligation or other obligation for
borrowed money except in the ordinary course of the business of the Zynaxis
Companies consistent with past practices, or impose, or suffer the
imposition, on any Asset of any Zynaxis Company of any Lien or permit any
such Lien to exist; or
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of
the capital stock of any Zynaxis Company, or declare or pay any dividend or
make any other distribution in respect of Zynaxis's capital stock; or
(d) except as pursuant to the conversion of Zynaxis Preferred Stock or
the exercise of stock options or warrants listed in Section 5.3 of the
Zynaxis Disclosure Memorandum, issue, sell, pledge, encumber, authorize the
issuance of, enter into any Contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding, any
additional shares of capital stock of any Zynaxis Company, or any stock
appreciation rights, or any option, warrant, or other Equity Right; or
(e) adjust, split, combine or reclassify any capital stock of any
Zynaxis Company or issue or authorize the issuance of any other securities
in respect of or in substitution for shares of Zynaxis Capital Stock, or
sell, lease, mortgage or otherwise dispose of or otherwise encumber any
shares of capital stock of any Zynaxis Subsidiary (unless any such shares
of stock are sold or otherwise transferred to another Zynaxis Company); or
(f) sell, lease, mortgage or otherwise dispose of or otherwise
encumber any Asset other than in the ordinary course of business for
reasonable and adequate consideration; or
(g) except for purchases of U.S. Treasury securities or U.S.
Government agency securities, which in either case have maturities of three
years or less, purchase any securities or make any material investment,
either by purchase of stock or securities, contributions to capital, Asset
transfers, or purchase of any Assets, in any Person other than a wholly
owned Zynaxis Subsidiary, or otherwise acquire direct or indirect control
over any Person, other than in connection with foreclosures in the ordinary
course of business; or
(h) grant any increase in compensation or benefits to the employees or
officers of any Zynaxis Company, except in accordance with past practice
disclosed in Section 7.2(h) of the Zynaxis Disclosure
A-29
<PAGE> 143
Memorandum or as required by Law; pay any severance or termination pay or
any bonus other than pursuant to written policies or Contracts in effect on
the date of this Agreement and disclosed in Section 7.2(h) of the Zynaxis
Disclosure Memorandum or as required by Law; and enter into or amend any
severance agreements with officers of any Zynaxis Company; grant any
material increase in fees or other increases in compensation or other
benefits to directors of any Zynaxis Company except in accordance with past
practice disclosed in Section 7.2(h) of the Zynaxis Disclosure Memorandum;
or
(i) enter into or amend any employment Contract between any Zynaxis
Company and any Person (unless such amendment is required by Law) that the
Zynaxis Company does not have the unconditional right to terminate without
Liability (other than Liability for services already rendered), at any time
on or after the Closing; or
(j) adopt any new employee benefit plan of any Zynaxis Company or
terminate or withdraw from, or make any material change in or to, any
existing employee benefit plans of any Zynaxis Company other than any such
change that is required by Law or that, in the opinion of counsel, is
necessary or advisable to maintain the tax qualified status of any such
plan, or make any distributions from such employee benefit plans, except as
required by Law, the terms of such plans or consistent with past practice;
or
(k) make any significant change in any Tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in Tax Laws or regulatory accounting requirements or
GAAP; or
(l) commence any Litigation other than in accordance with past
practice, settle any Litigation involving any Liability of any Zynaxis
Company for material money damages or restrictions upon the operations of
any Zynaxis Company; or
(m) enter into, modify, amend or terminate any material Contract
(including any loan Contract with an unpaid balance exceeding $10,000) or
waive, release, compromise or assign any material rights or claims.
7.3 Covenants of Vaxcel. From the date of this Agreement until the earlier
of the Effective Time or the termination of this Agreement, unless the prior
written consent of Zynaxis shall have been obtained, and except as otherwise
expressly contemplated herein, Vaxcel covenants and agrees that it shall (a)
continue to conduct its business and the business of its Subsidiaries in a
manner designed, in its reasonable judgment, to enhance the long-term value of
the Vaxcel Common Stock and the business prospects of the Vaxcel Companies and
to the extent consistent therewith use all reasonable efforts to preserve intact
the Vaxcel Companies' core businesses and goodwill with their respective
employees and the communities they serve, and (b) take no action which would (i)
materially adversely affect the ability of any Party to obtain any Consents
required for the transactions contemplated hereby without imposition of a
condition or restriction of the type referred to in the last sentences of
Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the ability of any
Party to perform its covenants and agreements under this Agreement; provided,
that the foregoing shall not prevent any Vaxcel Company from acquiring any
Assets or other businesses or from discontinuing or disposing of any of its
Assets or business if such action is, in the reasonable judgment of Vaxcel,
desirable in the conduct of the business of Vaxcel and its Subsidiaries,
provided that such actions shall not materially delay the Effective Time or
materially hinder consummation of the Merger. Vaxcel further covenants and
agrees that it will not, without the prior written consent of Zynaxis, which
consent shall not be unreasonably withheld, amend the Certificate of
Incorporation or Bylaws of Vaxcel or, except as expressly contemplated by this
Agreement or the Transaction Documents, in any manner adverse to the holders of
Zynaxis Capital Stock as compared to rights of holders of Vaxcel Common Stock
generally as of the date of this Agreement.
7.4 Adverse Changes in Condition. Each Party agrees to give written notice
promptly to the other Party upon becoming aware of the occurrence or impending
occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on it or (ii) would cause or constitute a
material breach of any of its representations, warranties, or covenants
contained herein, and to use its reasonable efforts to prevent or promptly to
remedy the same.
A-30
<PAGE> 144
7.5 Reports. Each Party and its Subsidiaries shall file all reports
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other Party copies of
all such reports promptly after the same are filed. If financial statements are
contained in any such reports filed with the SEC, such financial statements will
fairly present the consolidated financial position of the entity filing such
statements as of the dates indicated and the consolidated results of operations,
changes in shareholders' equity, and cash flows for the periods then ended in
accordance with GAAP (subject in the case of interim financial statements to
normal recurring year-end adjustments that are not material). As of their
respective dates, such reports filed with the SEC will comply in all material
respects with the Securities Laws and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Any financial statements contained
in any other reports to another Regulatory Authority shall be prepared in
accordance with Laws applicable to such reports.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Proxy Statement; Shareholder Approval.
(a) As soon as practicable after the date hereof Vaxcel shall prepare and
file the Registration Statement with the SEC to register the issuance of the
Merger Shares and to register for resale by the holders thereof the Affiliate
Shares, the Lock-Up Shares and the Warrant Shares (collectively, the "Resale
Shares"), and shall use its reasonable efforts to cause the Registration
Statement to become effective under the 1933 Act and take any action required to
be taken under the applicable state Blue Sky or securities Laws in connection
with the issuance of the Merger Shares and the resale of the Resale Shares upon
consummation of the transactions contemplated by the Transaction Documents.
Zynaxis shall cooperate in the preparation and filing of the Registration
Statement and shall furnish all information concerning it and the holders of
Zynaxis Capital Stock and Equity Rights of Zynaxis as Vaxcel may reasonably
request in connection with such action. Zynaxis shall call a Shareholders'
Meeting, to be held as soon as reasonably practicable after the Registration
Statement is declared effective by the SEC, for the purpose of voting upon
adoption of this Agreement and such other related matters as it deems
appropriate. In connection with the Shareholders' Meeting, (i) Zynaxis and
Vaxcel shall prepare and file with the SEC a Proxy Statement and mail such Proxy
Statement to the shareholders of Zynaxis, (ii) the Parties shall furnish to each
other all information concerning them that they may reasonably request in
connection with such Proxy Statement, (iii) the Board of Directors of Zynaxis
shall recommend to its shareholders the approval of the matters submitted for
approval (subject to the Board of Directors of Zynaxis, after having consulted
with and considered the advice of outside counsel, reasonably determining in
good faith that the making of such recommendation, or the failure to withdraw or
modify its recommendation, would constitute a breach of fiduciary duties of the
members of such Board of Directors to Zynaxis's shareholders under applicable
Law), and (iv) the Board of Directors and officers of Zynaxis shall use their
reasonable efforts to obtain such shareholders' approval (subject to the Board
of Directors of Zynaxis after having consulted with and considered the advice of
outside counsel, reasonably determining in good faith that the taking of such
actions would constitute a breach of fiduciary duties of the members of such
Board of Directors to Zynaxis's shareholders under applicable Law). Vaxcel and
Zynaxis shall make all necessary filings with respect to the Merger under the
Securities Laws.
(b) Vaxcel shall use its best efforts to maintain the effectiveness of the
Registration Statement until the earlier of (i) the date on which the Resale
Shares may be sold without restriction under the 1933 Act or (ii) the fifth
anniversary of the Closing Date subject to such periods of time when Vaxcel must
suspend the use of the prospectus forming a part of the Registration Statement
until such time as an amendment is filed and declared effective or an
appropriate report is filed by Vaxcel with the SEC.
8.2 Applications. The Parties shall promptly prepare and file, and each of
the Parties shall cooperate with each of the other Parties in the preparation
and, where appropriate, filing of, applications with all Regulatory Authorities
having jurisdiction over the transactions contemplated by this Agreement seeking
the requisite Consents necessary to consummate the transactions contemplated by
this Agreement. The Parties
A-31
<PAGE> 145
shall deliver to each other copies of all filings, correspondence and orders to
and from all Regulatory Authorities in connection with the transactions
contemplated hereby.
8.3 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, Zynaxis and Vaxcel Merger Sub shall execute and
file the Articles of Merger in the Department of State of the Commonwealth of
Pennsylvania and the Certificate of Merger with the Secretary of State of the
State of Georgia in connection with the Merger.
8.4 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
reasonably practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including using its reasonable efforts to lift
or rescind any Order adversely affecting its ability to consummate the
transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article 9; provided, that nothing herein shall preclude either
Party from exercising its rights under this Agreement. Each Party shall use, and
shall cause each of its Subsidiaries to use, its reasonable efforts to obtain
all Consents necessary or desirable for the consummation of the transactions
contemplated by this Agreement.
8.5 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep the other Parties
advised of all material developments relevant to its business and the
consummation of the Merger and shall permit the other Parties to make or cause
to be made such investigation of the business and properties of it and its
Subsidiaries and of their respective financial and legal conditions as the other
Party reasonably requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby and shall not interfere
unnecessarily with normal operations. No investigation by a Party shall affect
the representations and warranties of the other Party.
(b) In addition to the Parties' respective obligations under the
Confidentiality Agreement, which is hereby reaffirmed and adopted, and
incorporated by reference herein each Party shall, and shall cause its advisers
and agents to, maintain the confidentiality of all confidential information
furnished to it by the other Party concerning its and its Subsidiaries'
businesses, operations, and financial positions and shall not use such
information for any purpose except in furtherance of the transactions
contemplated by this Agreement. If this Agreement is terminated prior to the
Effective Time, each Party shall promptly return or certify the destruction of
all documents and copies thereof, and all work papers containing confidential
information received from the other Party.
(c) Each Party agrees to give the other Party notice as soon as practicable
after any determination by it of any fact or occurrence relating to the other
Party which it has discovered through the course of its investigation and which
represents, or is reasonably likely to represent, either a material breach of
any representation, warranty, covenant or agreement of the other Party or which
has had or is reasonably likely to have a Material Adverse Effect on the other
Party.
8.6 Press Releases. Prior to the Effective Time, each of the Parties shall
consult with the other Parties as to the form and substance of any press release
or other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.6
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's disclosure
obligations imposed by Law.
8.7 Certain Actions. Except with respect to the Transaction Documents, no
Zynaxis Company nor any officer, director, employee or Subsidiary thereof nor
any Representatives thereof retained by any Zynaxis Company shall directly or
indirectly solicit any Acquisition Proposal by any Person. Except to the extent
the Board of Directors of Zynaxis, after having consulted with and considered
the advice of outside counsel, reasonably determines in good faith that the
failure to take such actions would constitute a breach of fiduciary duties of
the members of such Board of Directors to Zynaxis's shareholders under
applicable Law, no Zynaxis Company or any officer, director, employee or
Subsidiary or Representative thereof shall furnish any non-
A-32
<PAGE> 146
public information that it is not legally obligated to furnish, negotiate with
respect to, or enter into any Contract with respect to, any Acquisition
Proposal, but Zynaxis may communicate information about such an Acquisition
Proposal to its shareholders if and to the extent that it is required to do so
in order to comply with its legal obligations as advised by outside counsel.
Zynaxis shall promptly advise Vaxcel following the receipt of any Acquisition
Proposal and the details thereof, and advise Vaxcel of any developments with
respect to such Acquisition Proposal promptly upon the occurrence thereof.
Zynaxis shall (i) immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any Persons conducted heretofore
with respect to any of the foregoing, and (ii) direct and use its reasonable
efforts to cause all of its officer, director, employee or Subsidiaries and
Representatives not to engage in any of the foregoing.
8.8 State Antitakeover Laws. Each Zynaxis Company shall exerts its best
efforts to take all necessary and reasonably possible steps to assure that the
entering into of the Transaction Documents will not and, upon performance of the
covenants set forth in the Transaction Documents, no facet of the consummation
of the transactions contemplated by the Transaction Documents will:
(a) be prohibited by any provision of the PBCL, including Chapter 25
of the PBCL (the "Antitakeover Laws");
(b) cause any shareholder of Zynaxis to exercise any right or remedy
under the Antitakeover Laws;
(c) cause the rights of CytRx to vote the shares of Vaxcel Common
Stock issued pursuant to this Agreement or to exercise its rights as a
shareholder of Vaxcel with respect to such shares to be impaired by action
of any provision of the Antitakeover Laws or otherwise;
(d) cause CytRx to be subject to any Liability, including any
obligation or potential obligation to pay money or disgorge profits (other
than an obligation to make payments pursuant to Subchapter E of the
Antitakeover Laws), under the provisions of the Antitakeover Laws; or
(e) cause the termination, impairment, modification, or extension of
any Contract to which Zynaxis is a party by action of the provisions of the
Antitakeover Laws.
8.9 Charter Provisions. Each Zynaxis Company shall take all necessary
action to ensure that the entering into of this Agreement and the consummation
of the Merger and the other transactions contemplated by the Transaction
Documents do not and will not result in the grant of any rights to any Person
under the Articles of Incorporation, as amended, Bylaws or other governing
instruments of any Zynaxis Company, except such rights as exist on the date
hereof, or restrict or impair the ability of Vaxcel or any of its Subsidiaries
to vote, or otherwise to exercise the rights of a shareholder with respect to,
shares of any Zynaxis Company that may be directly or indirectly acquired or
controlled by them.
8.10 Cure of Defaults. Zynaxis shall use proceeds from its initial loan
under the Senior Credit Facility to cure all Defaults under the Secretech
License Agreement and the Malvern Lease by 5:00 p.m. on the earlier of: (i)
November 27, 1996 or (ii) the fifth (5th) business day after Zynaxis first
receives money from CytRx pursuant to the Senior Credit Facility, and after such
cure shall not Default under the Secretech License Agreement.
8.11 Negotiation of Malvern Lease Amendment. Zynaxis shall negotiate in
good faith to obtain an amendment to the Malvern Lease and releases from the
Adolor Sublease that are reasonably satisfactory to CytRx.
8.12 Nasdaq Listing. Vaxcel shall use its reasonable efforts to list,
prior to the Effective Time, on the Nasdaq SmallCap Market, the shares of Vaxcel
Common Stock to be issued pursuant to this Agreement and upon exercise of
outstanding warrants and options to purchase shares of Zynaxis Common Stock that
are assumed by Vaxcel in the Merger, and Vaxcel shall give all notices and make
all required filings with the NASD in connection with the transactions
contemplated herein.
8.13 Agreements of Affiliates. Zynaxis has disclosed in Section 8.13 of
the Zynaxis Disclosure Memorandum all Persons whom it reasonably believes is an
"affiliate" of Zynaxis for purposes of Rule 145 under the 1933 Act. Zynaxis
shall use its reasonable efforts to cause each such Person to deliver to Vaxcel
not
A-33
<PAGE> 147
later than 30 days after the date of this Agreement, a written agreement,
substantially in the form of Exhibit 2, providing that such Person will not
sell, pledge, transfer, or otherwise dispose of the shares of Zynaxis Capital
Stock held by such Person except as contemplated by such agreement or by this
Agreement and will not sell, pledge, transfer, or otherwise dispose of the
shares of Vaxcel Common Stock to be received by such Person upon consummation of
the Merger except in compliance with applicable provisions of the 1933 Act and
the rules and regulations thereunder.
8.14 Use of Proceeds of Senior Credit Facility. Zynaxis shall use proceeds
of loans made under the Senior Credit Facility only in accordance with the
Secured Loan Agreement.
8.15 Registration Rights Agreement. At the Closing CytRx and Vaxcel shall
enter into the Registration Rights Agreement.
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 Conditions to Obligations of Each Party. The respective obligations of
each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated by the Transaction Documents are subject to the
satisfaction of the following conditions, unless waived by both Parties pursuant
to Section 11.6:
(a) Shareholder Approval. The holders of Zynaxis Common Stock voting
together with holders of Zynaxis Preferred Stock (on an as-converted basis)
and the holders of Zynaxis Preferred Stock voting as a separate class of
Zynaxis shall have approved (i) the Charter Amendments, (ii) this Agreement
and the consummation of the transactions contemplated hereby, including the
Merger, as and to the extent required by Law, by the provisions of any
governing instruments or by the rules of the NASD, (iii) the sale of
substantially all of the Assets of Zynaxis as contemplated in the
Liquidation Agreement as and to the extent required by Law, the provisions
of any governing instruments, or by the rules of the NASD, and (iv) such
other related matters deemed necessary by the Parties to assure that the
transactions contemplated by the Transaction Documents are permitted under
the Law as and to the extent required by Law, by the provisions of any
governing instruments, or by the rules of the NASD.
(b) Regulatory Approvals. All Consents of, filings and registrations
with, and notifications to, all Regulatory Authorities required for
consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by Law shall have
expired. No Consent obtained from any Regulatory Authority which is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner (including requirements relating to
the raising of additional capital or the disposition of Assets) which in
the reasonable judgment of the Boards of Directors of either CytRx or
Vaxcel would so materially adversely impact the economic or business
benefits of the transactions contemplated by this Agreement that, had such
condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.
(c) Consents and Approvals. Each Party shall have obtained any and
all Consents required for consummation of the Merger (other than those
referred to in Section 9.1(b)) or for the preventing of any Default under
any Contract or Permit of such Party which, if not obtained or made, is
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on such Party. No Consent so obtained which is necessary to
consummate the transactions contemplated hereby shall be conditioned or
restricted in a manner which in the reasonable judgment of the Boards of
Directors of either CytRx or Vaxcel would so materially adversely impact
the economic or business benefits of the transactions contemplated by this
Agreement that, had such condition or requirement been known, such Party
would not, in its reasonable judgment, have entered into this Agreement.
(d) Legal Proceedings. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any Law or Order (whether temporary,
A-34
<PAGE> 148
preliminary or permanent) or taken any other action which prohibits,
restricts or makes illegal consummation of the transactions contemplated by
this Agreement.
(e) Registration Statement. The Registration Statement shall be
effective under the 1933 Act, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued, no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness thereof
shall have been initiated and be continuing, and all necessary approvals
under state securities Laws or the 1933 Act or 1934 Act relating to the
issuance or trading of the shares of Vaxcel Common Stock issuable pursuant
to the transaction contemplated by this Agreement shall have been received.
(f) Exchange Listing. The shares of Vaxcel Common Stock issuable
pursuant to the Merger shall have been approved for listing on the Nasdaq
SmallCap Market.
(g) Tax Matters. Each Party shall have received a written opinion of
counsel from Alston & Bird, in form reasonably satisfactory to such Parties
(the "Tax Opinion"), to the effect that for federal income tax purposes the
Contributions in exchange for Vaxcel Common Stock will constitute a
transaction described in Section 351 of the Internal Revenue Code. In
rendering such Tax Opinion, such counsel shall be entitled to rely upon
representations of CytRx, Vaxcel, and Zynaxis reasonably satisfactory in
form and substance to such counsel.
(h) Antitakeover Laws. No facet of the consummation of the
transactions contemplated by the Transaction Documents shall have been
found to:
(i) be prohibited by any provision of the PBCL, including the
Antitakeover Laws;
(ii) cause the rights of CytRx to vote the shares of Vaxcel Common
Stock issued pursuant to this Agreement or to exercise its rights as a
shareholder of Vaxcel with respect to such shares to be impaired by
action of any provision of the Antitakeover Laws or otherwise;
(iii) cause CytRx to be subject to any Liability, including any
obligation or potential obligation to pay money or disgorge profits
(other than an obligation to make payments pursuant to Subchapter E of
the Antitakeover Laws), under the provisions of the Antitakeover Laws;
(iv) cause the termination, impairment, modification or extension
of any Contract to which Zynaxis is a party by action of the provisions
of the Antitakeover Laws; or
(v) except as set forth in Section 8.9 of the Zynaxis Disclosure
Memorandum, result in the grant of any rights to any Person under the
Articles of Incorporation, Bylaws, or other governing instruments of any
Zynaxis Company.
9.2 Conditions to Obligations of CytRx, Vaxcel and Vaxcel Merger Sub. The
obligations of CytRx, Vaxcel and Vaxcel Merger Sub to perform this Agreement and
consummate the Merger and the other transactions contemplated hereby are subject
to the satisfaction of the following conditions, unless waived by CytRx, Vaxcel
and Vaxcel Merger Sub pursuant to Section 11.6(a):
(a) Representations and Warranties. For purposes of this Section
9.2(a), the accuracy of the representations and warranties of Zynaxis set
forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). The representations and
warranties made in Sections 5.18 and 5.19 with respect to officers,
directors, employees and Subsidiaries of Zynaxis shall be true and correct
with respect to all Affiliates of Zynaxis. The representations and
warranties set forth in Section 5.3 shall be true and correct (except for
inaccuracies which are de minimus in amount). The representations and
warranties set forth in Sections 5.19 and 5.20 shall be true and correct in
all material respects. There shall not exist inaccuracies in the
representations and warranties of Zynaxis set forth in this Agreement
(including the representations and warranties set forth in Sections 5.3,
5.19 and 5.20) such that the aggregate effect of such inaccuracies has, or
is reasonably likely to have, a Material Adverse Effect on Zynaxis;
provided that, for purposes of this sentence only,
A-35
<PAGE> 149
those representations and warranties which are qualified by references to
"material" or "Material Adverse Effect" or to the "Knowledge" of any Person
shall be deemed not to include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Zynaxis to be performed and complied with
pursuant to, the Transaction Documents prior to the Effective Time shall
have been duly performed and complied with in all material respects.
(c) Certificates. Zynaxis shall have delivered to Vaxcel (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer, to the effect that the conditions set forth in
Section 9.1 as relates to Zynaxis and in Section 9.2(a) and 9.2(b) have
been satisfied, and (ii) certified copies of resolutions duly adopted by
Zynaxis's Board of Directors and shareholders evidencing the taking of all
corporate action necessary to authorize the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, all in such reasonable detail as Vaxcel and its
counsel shall request.
(d) Opinion of Counsel. CytRx and Vaxcel shall have received an
opinion of Morgan, Lewis & Bockius LLP, counsel to Zynaxis, dated as of the
Closing, in form reasonably satisfactory to Vaxcel, as to the matters set
forth in Exhibit 3.
(e) Affiliates Agreements. Vaxcel shall have received from each
affiliate of Zynaxis the affiliates letter referred to in Section 8.13.
(f) Execution of Agreements. The Transaction Documents shall have
been executed and delivered by each of the intended Parties thereto and no
Party shall be in Default thereunder.
(g) Execution of Malvern Lease Amendment. Zynaxis shall have entered
into an amendment to the Malvern Lease that is reasonably satisfactory to
CytRx, Vaxcel and Vaxcel Merger Sub.
(h) Releases from Adolor Lease. Zynaxis shall have obtained releases
from liability under the Adolor Sublease that are satisfactory to CytRx,
Vaxcel and Vaxcel Merger Sub.
(i) Board Resolutions Regarding Zynaxis Options. The Board of
Directors of Zynaxis and all relevant committees thereof shall have adopted
resolutions that in the judgment of CytRx and its counsel are sufficient to
prevent immediate vesting of outstanding Zynaxis Options, to approve the
treatment of outstanding Zynaxis Options in the Merger and to find the
options to be received "comparable" to currently outstanding Zynaxis
Options within the meaning of the Zynaxis Stock Plan.
(j) Dissenters. The holders of shares of Zynaxis Capital Stock having
the right to vote no more than ten percent (10%) of the votes that could be
cast by all holders of Zynaxis Capital Stock voting together as a single
class shall have elected to exercise their statutory dissenters' rights or
their objection rights, if any, under Section 2545 of the PBCL.
(k) Execution of Preferred Stock and Warrant Agreement. Every holder
of shares of Zynaxis Preferred Stock or of Warrants referenced in the
Preferred Stock and Warrant Agreement shall have executed the Preferred
Stock and Warrant Agreement.
9.3 Conditions to Obligations of Zynaxis. The obligations of Zynaxis to
perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by Zynaxis pursuant to Section 11.6(b):
(a) Representations and Warranties. For purposes of this Section
9.3(a), the accuracy of the representations and warranties of Vaxcel set
forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). The representations and
warranties set forth in Section 6.3 shall be true and correct (except for
inaccuracies which are de minimus in amount). There shall not exist
inaccuracies in the representations and warranties of Vaxcel set forth in
this Agreement (including the representations and warranties set forth in
Section 6.3) such that the aggregate effect of such inaccuracies has, or is
reasonably likely to have, a Material Adverse
A-36
<PAGE> 150
Effect on Vaxcel; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to
"material" or "Material Adverse Effect" or to the "Knowledge" of any Person
shall be deemed not to include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Vaxcel to be performed and complied with
pursuant to, the Transaction Documents prior to the Effective Time shall
have been duly performed and complied with in all material respects.
(c) Certificates. Vaxcel shall have delivered to Zynaxis (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer, to the effect that the conditions set forth in
Section 9.1 as relates to Vaxcel and in Section 9.3(a) and 9.3(b) have been
satisfied, and (ii) certified copies of resolutions duly adopted by CytRx's
Board of Directors, Vaxcel's Board of Directors, CytRx as sole shareholder
of Vaxcel, Vaxcel Merger Sub's Board of Directors and Vaxcel as sole
shareholder of Vaxcel Merger Sub evidencing the taking of all corporate
action necessary to authorize the execution, delivery and performance of
this Agreement, and the consummation of the transactions contemplated
hereby, all in such reasonable detail as Zynaxis and its counsel shall
request.
(d) Opinion of Counsel. Zynaxis shall have received an opinion of
Alston & Bird, counsel to CytRx and Vaxcel, dated as of the Effective Time,
in form reasonably acceptable to Zynaxis, as to the matters set forth in
Exhibit 4.
ARTICLE 10
TERMINATION
10.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the shareholders of
Zynaxis, this Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time:
(a) By mutual consent of CytRx and Zynaxis; or
(b) By either CytRx or Zynaxis (provided that the terminating Party is
not then in material breach of any representation, warranty, covenant, or
other agreement contained in this Agreement) in the event of a material
breach by the other Party of any representation or warranty contained in
this Agreement which cannot be or has not been cured within 30 days after
the giving of written notice to the breaching Party of such breach and
which breach is reasonably likely, in the opinion of the non-breaching
Party, to have, individually or in the aggregate, a Material Adverse Effect
on the breaching Party; or
(c) By either CytRx or Zynaxis (provided that the terminating Party is
not then in material breach of any representation, warranty, covenant, or
other agreement contained in this Agreement) in the event of a material
breach by the other Party of any covenant or agreement contained in this
Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach; or
(d) By either CytRx or Zynaxis (provided that the terminating Party is
not then in material breach of any representation, warranty, covenant, or
other agreement contained in this Agreement) in the event (i) any Consent
of any Regulatory Authority required for consummation of the Merger and the
other transactions contemplated hereby shall have been denied by final
nonappealable action of such authority or if any action taken by such
authority is not appealed within the time limit for appeal, or (ii) the
shareholders of Zynaxis fail to vote their approval of the matters relating
to this Agreement and the transactions contemplated hereby at the
Shareholders' Meeting where such matters were presented to such
shareholders for approval and voted upon; or
(e) By any Party in the event that the Merger shall not have been
consummated by March 31, 1997, if the failure to consummate the
transactions contemplated hereby on or before such date is not caused by
any breach of this Agreement by the Party electing to terminate pursuant to
this Section 10.1(e); or
A-37
<PAGE> 151
(f) By either CytRx or Zynaxis (provided that the terminating Party is
not then in material breach of any representation, warranty, covenant, or
other agreement contained in this Agreement) in the event that any of the
conditions precedent to the obligations of such Party to consummate the
Merger cannot be satisfied or fulfilled by the date specified in Section
10.1(e).
10.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.1, this Agreement shall
become void and have no effect, except that (i) the provisions of this Section
10.2 and Article 11 and Section 8.5(b) shall survive any such termination and
abandonment, and (ii) a termination pursuant to Sections 10.1(b), 10.1(c) or
10.1(f) shall not relieve the breaching Party from Liability for an uncured
willful breach of a representation, warranty, covenant, or agreement giving rise
to such termination.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except this Section 10.3 and
Articles 1, 2, 3, 4 and 11.
ARTICLE 11
MISCELLANEOUS
11.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
"1933 ACT" shall mean the Securities Act of 1933, as amended.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as amended.
"ACQUISITION PROPOSAL" with respect to a Party shall mean any tender
offer or exchange offer or any proposal for a merger, acquisition of all of
the stock or assets of, or other business combination involving the
acquisition of such Party or any of its Subsidiaries or the acquisition of
a substantial equity interest in, or a substantial portion of the assets
of, such Party or any of its Subsidiaries.
"ADOLOR SUBLEASE" shall mean that certain Sublease Agreement dated May
15, 1996 between Zynaxis, Inc. and Adolor Corporation, as amended.
"AFFILIATE" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by
or under common control with such Person; (ii) any officer, director,
partner, employer, or direct or indirect beneficial owner of any 10% or
greater equity or voting interest of such Person; or (iii) any other Person
for which a Person described in clause (ii) acts in any such capacity.
"AFFILIATE SHARES" shall mean the shares of Vaxcel Common Stock to be
issued to the holders of Zynaxis Common Stock and Zynaxis Preferred Stock
in accordance with Section 3.1 hereof who are "affiliates" of Zynaxis for
purposes of Rule 145 under the 1933 Act as set forth in Section 8.13 of the
Zynaxis Disclosure Memorandum.
"AGREEMENT" shall mean this Agreement and Plan of Merger and
Contribution, including the Exhibits and Disclosure Memoranda delivered
pursuant hereto and incorporated herein by reference.
"ARTICLES OF MERGER" shall mean the Articles of Merger to be executed
by Zynaxis and filed in the Department of State of the Commonwealth of
Pennsylvania relating to the Merger as contemplated by Section 1.5.
"ASSETS" of a Person shall mean all of the assets, properties,
businesses and rights of such Person of every kind, nature, character and
description, whether real, personal or mixed, tangible or intangible,
accrued or contingent, or otherwise relating to or utilized in such
Person's business, directly or indirectly,
A-38
<PAGE> 152
in whole or in part, whether or not carried on the books and records of
such Person, and whether or not owned in the name of such Person or any
Affiliate of such Person and wherever located.
"CERTIFICATE OF MERGER" shall mean the Certificate of Merger to be
executed by Zynaxis and filed with the Secretary of State of the State of
Georgia relating to the Merger as contemplated by Section 1.5.
"CHARTER AMENDMENTS" shall mean the proposals substantially in the
form attached hereto at Exhibit 5 to be submitted to the shareholders of
Zynaxis in connection with the transactions contemplated by this Agreement.
"CLOSING DATE" shall mean the date on which the Closing occurs.
"CONFIDENTIALITY AGREEMENT" shall mean that certain Confidentiality
Agreement, dated September 18, 1996, between Zynaxis and CytRx.
"CONSENT" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"CONTRACT" shall mean any written or oral agreement, arrangement,
authorization, commitment, contract, indenture, instrument, lease,
obligation, plan, practice, restriction, understanding, or undertaking of
any kind or character, or other document to which any Person is a party or
that is binding on any Person or its capital stock, Assets or business.
"CONTRIBUTIONS" shall mean the contribution of the Cash Payment and
the Senior Credit Facility and conversion of the Zynaxis shares, as
provided in Section 1.1 hereof.
"DEFAULT" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit,
(ii) any occurrence of any event that with the passage of time or the
giving of notice or both would constitute a breach or violation of, default
under, contravention of, or conflict with, any Contract, Law, Order, or
Permit, or (iii) any occurrence of any event that with or without the
passage of time or the giving of notice would give rise to a right of any
Person to exercise any remedy or obtain any relief under, terminate or
revoke, suspend, cancel, or modify or change the current terms of, or
renegotiate, or to accelerate the maturity or performance of, or to
increase or impose any Liability under, any Contract, Law, Order, or
Permit, where, in any such event, such Default is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on a
Party.
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"ENVIRONMENTAL LAWS" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air,
surface water, ground water, land surface, or subsurface strata) and which
are administered, interpreted, or enforced by the United States
Environmental Protection Agency and state and local agencies with
jurisdiction over, and including common law in respect of, pollution or
protection of the environment, including the Comprehensive Environmental
Response Compensation and Liability Act, as amended, 42 U.S.C. 9601 et seq.
("CERCLA"), the Resource Conservation and Recovery Act, as amended, 42
U.S.C. 6901 et seq. ("RCRA"), and other Laws relating to emissions,
discharges, releases, or threatened releases of any Hazardous Material, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of any Hazardous
Material.
"EQUITY RIGHTS" shall mean all arrangements, calls, commitments,
Contracts, options, rights to subscribe to, scrip, understandings,
warrants, or other binding obligations of any character whatsoever relating
to, or securities or rights convertible into or exchangeable for, shares of
the capital stock of a Person or by which a Person is or may be bound to
issue additional shares of its capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"EXCHANGE RATIO" shall mean: (i) the number of shares of Vaxcel Common
Stock held by CytRx immediately prior to the Closing, giving effect to the
issuance of shares to CytRx in connection with the
A-39
<PAGE> 153
Closing pursuant to Section 1.2 of this Agreement, divided by (ii) seven
(7) and further divided by (iii) the sum of (A) the number of shares of
Zynaxis Common Stock outstanding immediately prior to the Closing, giving
effect to all issuances of common stock to which Zynaxis is committed as of
the time of Closing other than issuances to occur upon the exercise of
outstanding stock options and warrants including but not limited to: (I)
the delivery of Thirty Four Thousand Five Hundred Forty-Eight (34,548)
shares of common stock of Zynaxis to John Chappell pursuant to the
settlement agreement set forth in the letter from Zynaxis to John Chappell
dated October 10, 1996, and (II) the issuance of approximately Six Thousand
(6,000) additional shares of Zynaxis common stock to the Zynaxis 401(k)
plan for the fourth quarter of 1996, (B) two times the number of shares of
Zynaxis Preferred Stock outstanding as of the Closing, and (C) 1,320,706.
The number 1,320,706 will be adjusted for splits and reverse splits of
Vaxcel Common Stock, e.g., if Vaxcel effects a 1-for-2 reverse stock split
the number 1,320,706 shall be deemed changed to 660,353, etc. An example
calculation of the Exchange Ratio based on current information is attached
as Exhibit 6.
"EXHIBITS" 1 through 19, inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be
referred to in this Agreement and any other related instrument or document
without being attached hereto.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"GBCC" shall mean the Georgia Business Corporation Code, as amended.
"HAZARDOUS MATERIAL" shall mean (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance, or toxic substance (as
those terms are defined by any applicable Environmental Laws) and (ii) any
chemicals, pollutants, contaminants, petroleum, petroleum products, or oil
(and specifically shall include asbestos requiring abatement, removal, or
encapsulation pursuant to the requirements of governmental authorities and
any polychlorinated biphenyls).
"INTELLECTUAL PROPERTY" shall mean copyrights, patents, trademarks,
service marks, service names, trade names, applications therefor,
technology rights and licenses, computer software (including any source or
object codes therefor or documentation relating thereto), trade secrets,
franchises, know-how, inventions, and other intellectual property rights.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
"INVENTORY" shall mean (a) all inventory of Zynaxis and all goods
intended for sale or lease by Zynaxis, or for display or demonstration; (b)
all work-in-process; (c) all raw materials and other materials and supplies
of every nature and description used or which might be used in connection
with the manufacture, packing, shipping, advertising, selling, leasing or
furnishing of such goods or otherwise used or consumed in Zynaxis's
business; and (d) all documents relating to any of the foregoing.
"KNOWLEDGE" as used with respect to a Person (including references to
such Person being aware of a particular matter) shall mean the personal
knowledge after due inquiry of the chairman, president, chief financial
officer, chief accounting officer, chief operating officer, general
counsel, any assistant or deputy general counsel, or any senior, executive
or other vice president of such Person and the knowledge of any such
persons obtained or which would have been obtained from a reasonable
investigation.
"LAW" shall mean any code, law (including common law), ordinance,
regulation, reporting or licensing requirement, rule, or statute applicable
to a Person or its Assets, Liabilities, or business, including those
promulgated, interpreted or enforced by any Regulatory Authority.
"LIABILITY" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including
costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person (other than endorsements of
notes, bills, checks, and drafts
A-40
<PAGE> 154
presented for collection or deposit in the ordinary course of business) of
any type, whether accrued, absolute or contingent, liquidated or
unliquidated, matured or unmatured, or otherwise.
"LIEN" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title
retention or other security arrangement, or any adverse right or interest,
charge, or claim of any nature whatsoever of, on, or with respect to any
property or property interest, other than (i) Liens for current property
Taxes not yet due and payable, and (iii) Liens which do not materially
impair the use of or title to the Assets subject to such Lien.
"LIQUIDATION AGREEMENT" shall mean that certain agreement in the form
attached hereto as Exhibit 7 being entered into simultaneously with the
execution of this Agreement between Zynaxis and CytRx regarding the sale of
assets and settlement of liabilities of Zynaxis.
"LITIGATION" shall mean any action, arbitration, cause of action,
claim, complaint, criminal prosecution, governmental or other examination
or investigation, hearing, administrative or other proceeding relating to
or affecting a Party, its business, its Assets (including Contracts related
to it), or the transactions contemplated by this Agreement.
"LOCK-UP SHARES" shall mean the shares of Vaxcel Common Stock to be
issued to the holders of Zynaxis Common Stock and Zynaxis Preferred Stock
in accordance with Section 3.1 hereof who are parties to the Shareholder
Voting Agreement.
"MALVERN LEASE" shall mean that certain Agreement of Lease dated
August 30, 1988 between Rouse & Associates and Zynaxis Cell Science, Inc.,
as amended.
"MATERIAL" for purposes of this Agreement shall be determined in light
of the facts and circumstances of the matter in question; provided that any
specific monetary amount stated in this Agreement shall determine
materiality in that instance.
"MATERIAL ADVERSE EFFECT" on a Party shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on (i) the financial position,
business, or results of operations of such Party and its Subsidiaries,
taken as a whole, or (ii) the ability of such Party to perform its
obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement, provided that "Material
Adverse Effect" shall not be deemed to include the impact of (a) changes in
Laws of general applicability or interpretations thereof by courts or
governmental authorities, (b) changes in generally accepted accounting
principles or regulatory accounting principles, (c) actions and omissions
of a Party (or any of its Subsidiaries) taken with the prior informed
written Consent of the other Party in contemplation of the transactions
contemplated hereby, and (d) the direct effects of compliance with this
Agreement on the operating performance of the Parties, including expenses
incurred by the Parties in consummating the transactions contemplated by
this Agreement.
"MERGER SHARES" shall mean the shares of Vaxcel Common Stock to be
issued to the holders of Zynaxis Common Stock and Zynaxis Preferred Stock
in accordance with Section 3.1 hereof.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ SMALLCAP MARKET" shall mean the SmallCap Market System of the
National Association of Securities Dealers Automated Quotations System.
"NOTE EXCHANGE AGREEMENT" shall mean that certain Note Exchange
Agreement on the form attached hereto as Exhibit 8 being entered into
simultaneously with the execution of this Agreement by and among Zynaxis,
CytRx, Vaxcel, Euclid Partners III, L.P. and S.R. One, Ltd.
"OPERATING PROPERTY" shall mean any property owned, leased, or
operated by the Party in question or by any of its Subsidiaries or in which
such Party or Subsidiary holds a security interest or other interest
(including an interest in a fiduciary capacity), and, where required by the
context, includes the owner or operator of such property, but only with
respect to such property.
A-41
<PAGE> 155
"ORDER" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or
writ of any federal, state, local or foreign or other court, arbitrator,
mediator, tribunal, administrative agency, or Regulatory Authority.
"PARTICIPATION FACILITY" shall mean any facility or property in which
the Party in question or any of its Subsidiaries participates in the
management and, where required by the context, said term means the owner or
operator of such facility or property, but only with respect to such
facility or property.
"PARTY" shall mean any of CytRx, Zynaxis, Vaxcel, or Vaxcel Merger
Sub, and "PARTIES" shall mean CytRx, Zynaxis, Vaxcel, and Vaxcel Merger
Sub.
"PBCL" shall mean the Pennsylvania Business Corporation Law, as
amended.
"PERMIT" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing,
franchise, license, notice, permit, or right to which any Person is a party
or that is or may be binding upon or inure to the benefit of any Person or
its securities, Assets, or business.
"PER SHARE PRICE" shall mean: (i) Four Million Dollars
($4,000,000.00), divided by (ii) the sum of (A) the number of shares of
Zynaxis Common Stock outstanding immediately prior to the Closing, giving
effect to all issuances of common stock to which Zynaxis is committed as of
the time of Closing other than issuances to occur upon the exercise of
outstanding stock options and warrants including but not limited to: (I)
the delivery of Thirty Four Thousand Five Hundred Forty-Eight (34,548)
shares of common stock of Zynaxis to John Chappell pursuant to the
settlement agreement set forth in the letter from Zynaxis to John Chappell
dated October 10, 1996, and (II) the issuance of approximately Six Thousand
(6,000) additional shares of Zynaxis common stock to the Zynaxis 401(k)
plan for the fourth quarter of 1996, (B) two times the number of shares of
Zynaxis Preferred Stock outstanding immediately prior to the Closing, and
(C) 1,320,706. The number 1,320,706 will be adjusted for splits and reverse
splits of Vaxcel Common Stock, e.g., if Vaxcel effects a 1-for-2 reverse
stock split the number 1,320,706 shall be deemed changed to 660,353, etc.
"PERSON" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting
in a representative capacity.
"PREFERRED STOCK AND WARRANT AGREEMENT" shall mean the Preferred Stock
and Warrant Agreement in the form attached hereto as Exhibit 9.
"PROXY STATEMENT" shall mean the proxy statement used by Zynaxis to
solicit the approval of its shareholders of the transactions contemplated
by this Agreement, which shall include the prospectus of Vaxcel relating to
the issuance of the Vaxcel Common Stock to holders of Zynaxis Common Stock.
"REGISTRATION RIGHTS AGREEMENT" shall mean that certain Registration
Rights Agreement in the form attached hereto as Exhibit 10 to be entered
into at the Closing between CytRx and Vaxcel, pursuant to which CytRx and
Vaxcel make certain agreements regarding the registration for resale under
the 1933 Act of Shares of Vaxcel Common Stock held by CytRx.
"REGISTRATION STATEMENT" shall mean the Registration Statement(s) on
Form S-4, or other appropriate form, including any pre-effective or
post-effective amendments or supplements thereto, filed with the SEC by
Vaxcel under the 1933 Act to register the issuance of the Merger Shares and
to register the resale of the Resale Shares.
"REGULATORY AUTHORITIES" shall mean, collectively, the SEC, the NASD,
the Federal Trade Commission, the United States Department of Justice, and
all other federal, state, county, local or other governmental or regulatory
agencies, authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction over
the Parties and their respective Subsidiaries.
"REPRESENTATIVE" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a
Person.
A-42
<PAGE> 156
"SEC" shall mean the United States Securities and Exchange Commission.
"SEC DOCUMENTS" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to
be filed, by a Party or any of its Subsidiaries with any Regulatory
Authority pursuant to the Securities Laws.
"SECRETECH LICENSE AGREEMENT" shall mean that certain License
Agreement dated July 1, 1987 between Southern Research Institute and
Molecular Engineering Associates, Ltd.
"SECURED LOAN AGREEMENT" shall mean that certain Secured Loan
Agreement in the form attached hereto as Exhibit 11 being entered into
simultaneously with the execution of this Agreement between CytRx and
Zynaxis.
"SECURITIES LAWS" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisors Act of
1940, as amended, the Trust Indenture Act of 1939, as amended, and the
rules and regulations of any Regulatory Authority promulgated thereunder.
"SENIOR CREDIT FACILITY" shall mean, collectively, the Secured Loan
Agreement, the Senior Secured Note, the Zynaxis Pledge Agreement, the
Zynaxis Security Agreement, the Zynaxis Vaccine Technologies Guaranty, the
Zynaxis Vaccine Technologies Security Agreement and the Zynaxis Vaccine
Technologies Collateral Assignment of License Agreement.
"SENIOR SECURED NOTE" shall mean that certain Secured Promissory Note
in the form attached hereto as Exhibit 12 being entered into simultaneously
with the execution of this Agreement by Zynaxis, as the maker, and CytRx,
as the holder, outlining the terms governing the lending of up to Two
Million Dollars ($2,000,000) by CytRx to Zynaxis.
"SHAREHOLDER VOTING AGREEMENT" shall mean the Shareholder Voting
Agreement in the form attached hereto as Exhibit 13 being entered into
simultaneously with the execution of this Agreement.
"SHAREHOLDERS' MEETING" shall mean the meeting of the shareholders of
Zynaxis to be held pursuant to Section 8.1, including any adjournment or
adjournments thereof.
"STATEMENT WITH RESPECT TO SHARES" shall mean the Statement With
Respect to Shares filed by Zynaxis in the Department of State of the
Commonwealth of Pennsylvania on April 6, 1995.
"SUBSIDIARIES" shall mean all those corporations, associations, or
other business entities of which the entity in question either (i) owns or
controls 50% or more of the outstanding equity securities either directly
or through an unbroken chain of entities as to each of which 50% or more of
the outstanding equity securities is owned directly or indirectly by its
parent (provided, there shall not be included any such entity the equity
securities of which are owned or controlled in a fiduciary capacity), (ii)
in the case of partnerships, serves as a general partner, (iii) in the case
of a limited liability company, serves as a managing member, or (iv)
otherwise has the ability to elect a majority of the directors, trustees or
managing members thereof.
"SURVIVING CORPORATION" shall mean Zynaxis as the surviving
corporation resulting from the Merger.
"TAX RETURN" shall mean any report, return, information return, or
other information required to be supplied to a taxing authority in
connection with Taxes, including any return of an affiliated or combined or
unitary group that includes a Party or its Subsidiaries.
"TAX" or "TAXES" shall mean any federal, state, county, local, or
foreign taxes, charges, fees, levies, imposts, duties, or other
assessments, including income, gross receipts, excise, employment, sales,
use, transfer, license, payroll, franchise, severance, stamp, occupation,
windfall profits, environmental, federal highway use, commercial rent,
customs duties, capital stock, paid-up capital, profits, withholding,
Social Security, single business and unemployment, disability, real
property, personal property, registration, ad valorem, value added,
alternative or add-on minimum, estimated, or other tax or governmental fee
of any kind whatsoever, imposed or required to be withheld by the United
States or any state, county, local or
A-43
<PAGE> 157
foreign government or subdivision or agency thereof, including any
interest, penalties, and additions imposed thereon or with respect thereto.
"TECHNOLOGY DEVELOPMENT AGREEMENT" shall mean that certain Technology
Development Agreement in the form attached hereto as Exhibit 14 being
entered into simultaneously with the execution of this Agreement between
Vaxcel and Zynaxis regarding the joint development of the technology that
is the subject of the Secretech License Agreement by Vaxcel and Zynaxis.
"TRANSACTION DOCUMENTS" shall mean this Agreement and the other
documents executed by any of CytRx, Vaxcel, Vaxcel Merger Sub or Zynaxis
that are referenced by this Agreement.
"VAXCEL CAPITAL STOCK" shall mean, collectively, the Vaxcel Common
Stock and any other class or series of capital stock of Vaxcel.
"VAXCEL COMMON STOCK" shall mean the $0.001 par value common stock of
Vaxcel.
"VAXCEL COMPANIES" shall mean, collectively, Vaxcel and all Vaxcel
Subsidiaries.
"VAXCEL DISCLOSURE MEMORANDUM" shall mean the written information
entitled "Vaxcel, Inc. Disclosure Memorandum" delivered prior to the date
of this Agreement to Zynaxis describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto.
"VAXCEL FINANCIAL STATEMENTS" shall mean (i) the balance sheets of
Vaxcel as of December 31, 1995 and 1994, and the related statements of
operations, changes in shareholders' equity, and cash flows for each of the
three fiscal years ended December 31, 1995, 1994 and 1993, and (ii) the
balance sheet of Vaxcel as of September 30, 1996 and the related statements
of operations, changes in shareholders' equity, and cash flows with respect
to the nine-month period then ended.
"VAXCEL MERGER SUB COMMON STOCK" shall mean the $0.01 par value common
stock of Vaxcel Merger Sub.
"VAXCEL PREFERRED STOCK" shall mean the $.001 par value preferred
stock of Vaxcel.
"VAXCEL SUBSIDIARIES" shall mean the Subsidiaries of Vaxcel, which
shall include the Vaxcel Subsidiaries described in Section 6.4 and any
corporation or other organization acquired as a Subsidiary of Vaxcel in the
future and held as a Subsidiary by Vaxcel at the Effective Time.
"WARRANT SHARES" shall mean the shares of Vaxcel Common Stock issuable
upon the exercise of warrants to purchase Vaxcel Common Stock to be assumed
by Vaxcel or issued by Vaxcel, as the case may be, in accordance with
Sections 3.6 and 3.7 hereof.
"ZYNAXIS CAPITAL STOCK" shall mean, collectively, the Zynaxis Common
Stock, the Zynaxis Preferred Stock, and any other class or series of
capital stock of Zynaxis.
"ZYNAXIS COMMON STOCK" shall mean the $0.01 par value common stock of
Zynaxis.
"ZYNAXIS COMPANIES" shall mean, collectively, Zynaxis and all Zynaxis
Subsidiaries.
"ZYNAXIS DISCLOSURE MEMORANDUM" shall mean the written information
entitled "Zynaxis, Inc. Disclosure Memorandum" delivered prior to the date
of this Agreement to Vaxcel describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto.
"ZYNAXIS FINANCIAL STATEMENTS" shall mean (i) the consolidated balance
sheets (including related notes and schedules, if any) of Zynaxis as of
June 30, 1996, and as of December 31, 1995 and 1994, and the related
statements of operations, changes in stockholders' equity, and cash flows
(including related
A-44
<PAGE> 158
notes and schedules, if any) for the six months ended June 30, 1996, and
for each of the three fiscal years ended December 31, 1995, 1994 and 1993,
as filed by Zynaxis in SEC Documents, and (ii) the consolidated balance
sheets of Zynaxis (including related notes and schedules, if any) and
related statements of operations, changes in shareholders' equity, and cash
flows (including related notes and schedules, if any) included in SEC
Documents filed with respect to periods ended subsequent to June 30, 1996.
"ZYNAXIS PLEDGE AGREEMENT" shall mean that certain Pledge Agreement in
the form attached hereto as Exhibit 15 being entered into simultaneously
with the execution of this Agreement between Zynaxis, as pledgor, and
CytRx, as pledgee, pursuant to which Zynaxis pledges the stock of its
Subsidiaries to CytRx as security in connection with the lending of funds
under the Senior Secured Note.
"ZYNAXIS PREFERRED STOCK" shall mean the no par value Series A
Convertible Preferred Stock of Zynaxis.
"ZYNAXIS SECURITY AGREEMENT" shall mean that certain Security
Agreement in the form attached hereto as Exhibit 16 being entered into
simultaneously with the execution of this Agreement between Zynaxis, as
debtor, and CytRx, as secured party, pursuant to which Zynaxis grants to
CytRx a security interest in certain of Zynaxis assets in connection with
the lending of funds under the Senior Secured Note.
"ZYNAXIS STOCK PLAN" shall mean the Zynaxis, Inc. Amended and Restated
1989 Stock Option Plan.
"ZYNAXIS SUBSIDIARIES" shall mean the Subsidiaries of Zynaxis, which
shall include the Zynaxis Subsidiaries described in Section 5.4 and any
corporation or other organization acquired as a Subsidiary of Zynaxis in
the future and held as a Subsidiary by Zynaxis at the Effective Time.
"ZYNAXIS VACCINE TECHNOLOGIES COLLATERAL ASSIGNMENT OF LICENSE
AGREEMENT" shall mean that certain Collateral Assignment of License
Agreement in the form attached hereto as Exhibit 17 being entered into
simultaneously with the execution of this Agreement between CytRx and
Zynaxis Vaccine Technologies, Inc., pursuant to which Zynaxis Vaccine
Technologies, Inc. grants to CytRx a security interest in its license of
certain technology from Southern Research Institute.
"ZYNAXIS VACCINE TECHNOLOGIES GUARANTY" shall mean that certain
Guaranty in the form attached hereto as Exhibit 18 being entered into
simultaneously with the execution of this Agreement between Zynaxis Vaccine
Technologies, Inc., as guarantor and CytRx Corporation.
"ZYNAXIS VACCINE TECHNOLOGIES SECURITY AGREEMENT" shall mean that
certain Security Agreement in the form attached hereto as Exhibit 19 being
entered into simultaneously with the execution of this Agreement between
Zynaxis Vaccine Technologies, Inc., as guarantor and CytRx Corporation.
A-45
<PAGE> 159
(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
<TABLE>
<S> <C>
Cash Payment Section 1.1
Certificates Section 4.1
Closing Section 1.4
CytRx Warrant Section 1.2
Effective Time Section 1.5
ERISA Affiliate Section 5.14(c)
Exchange Agent Section 4.1
Merger Section 1.3
Non-Financing Warrants Section 3.7
Resale Shares Section 8.1
Tax Opinion Section 9.1(g)
Vaxcel Benefit Plans Section 6.14
Vaxcel Contracts Section 6.15
Vaxcel ERISA Plan Section 6.142
Vaxcel Pension Plan Section 6.14
Zynaxis Benefit Plans Section 5.14
Zynaxis Contracts Section 5.15
Zynaxis ERISA Plan Section 5.14
Zynaxis Options Section 3.5
Zynaxis Pension Plan Section 5.14
Zynaxis SEC Reports Section 5.5(a)
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Any masculine or neuter personal
pronoun shall be considered to mean the corresponding masculine, feminine or
neuter personal pronoun, as the context requires. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each of the Parties
shall bear and pay all direct costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel, except that: (i) each of the Parties shall bear and pay one-half of the
filing fees payable in connection with the Registration Statement and the Proxy
Statement and printing costs incurred in connection with the printing of the
Registration Statement and the Proxy Statement; and (ii) Zynaxis shall pay all
fees and expenses of counsel to CytRx and Vaxcel. Notwithstanding the foregoing,
if this Agreement is terminated for any reason other than as set forth in
Section 11.2(b) below then the amount of fees and expenses of Alston & Bird paid
by Zynaxis through the date of termination shall be deducted from the balance
due under the Senior Credit Facility.
(b) Notwithstanding the foregoing,
(i) if this Agreement is terminated by CytRx pursuant to Section
10.1(d)(ii) (as relates to approval of Zynaxis's shareholders), or
(ii) if the Merger is not consummated as a result of the failure, due
to intentional action or inaction on the part of Zynaxis or any of its
officers, directors, employees or agents of Zynaxis to satisfy any of the
conditions set forth in Section 9.2, other than Section 9.2(d), or,
(iii) if this Agreement is terminated for any reason after the Board
of Directors of Zynaxis takes any action in reliance upon the first clause
of the second sentence of Section 8.7 or either of the parenthetical
phrases in clauses (iii) and (iv) of the penultimate sentence of Section
8.1,
A-46
<PAGE> 160
then Zynaxis shall promptly pay CytRx all the out-of-pocket costs and expenses
of CytRx and its Subsidiaries, including reasonable costs of counsel, investment
bankers, actuaries and accountants, incurred in connection with the transactions
contemplated by this Agreement.
(c) In addition to the foregoing, if, after the date of this Agreement and
within twelve (12) months following
(i) any termination of this Agreement
(1) by CytRx pursuant to Sections 10.1(b), 10.1(c), 10.1(f) (but
only on the basis of the failure of Zynaxis to satisfy any of the
conditions enumerated in Section 9.2, other than Section 9.2(d)), or
(2) by either Party pursuant to Section 10.1(d)(ii) (with respect
to approval of the shareholders of Zynaxis), or
(ii) failure to consummate the Merger by reason of any failure of
Zynaxis to satisfy the conditions enumerated in Section 9.2, other than
Section 9.2(d), or 9.1(a) (as such section relates to approval by the
shareholders of Zynaxis),
any third-party shall acquire, merge with, combine with, purchase a substantial
part of the Assets of, or engage in any other business combination with, or
purchase any equity securities involving an acquisition of 20% or more of the
voting stock of, Zynaxis, or enter into any binding agreement to do any of the
foregoing (collectively, a "Business Combination"), such third-party that is a
party to the Business Combination shall pay to CytRx, prior to the earlier of
consummation of the Business Combination or execution of any letter of intent or
definitive agreement with Zynaxis relating to such Business Combination, an
amount in cash equal to the sum of
(x) the direct costs and expenses or portion thereof referred to in
subsection (a) above incurred by or on behalf of CytRx or Vaxcel in
connection with the transactions contemplated by this Agreement, plus
(y) 5% of the aggregate fair market value of the consideration
received by the shareholders of Zynaxis in such Business Combination, less
(z) any amounts previously paid by Zynaxis to CytRx or Vaxcel pursuant
to subsection (b) of this Section 11.2,
which sum represents additional compensation for CytRx's loss as the result of
the transactions contemplated by this Agreement not being consummated. In the
event such third-party shall refuse to pay such amounts within ten days of
demand therefor by CytRx, the amounts shall be an obligation of Zynaxis and
shall be paid by Zynaxis promptly upon notice to Zynaxis by CytRx.
(d) The Parties acknowledge that the loss to either Party resulting from
breach of this Agreement by the other Party or other failure of the transactions
contemplated by this Agreement to be consummated is not susceptible of ready
measurement and, therefore, that the payments provided in this Section 11.2 are
intended by the Parties to constitute liquidated damages for any breach by a
Party of the terms of this Agreement, and not a penalty.
11.3 Brokers and Finders. With the exception of the agreement established
by a letter dated June 17, 1996 from QED Technologies, L.P., to CytRx
Corporation, as amended by that letter dated November 8, 1996 From Vaxcel, Inc.
to QED Technologies, L.P., for which Vaxcel shall be responsible, each of the
Parties represents and warrants that neither it nor any of its officers,
directors, employees, or Affiliates has employed any broker or finder or
incurred any Liability for any financial advisory fees, investment bankers'
fees, brokerage fees, commissions, or finders' fees in connection with this
Agreement or the transactions contemplated hereby. In the event of a claim by
any broker or finder based upon his or its representing or being retained by or
allegedly representing or being retained by Zynaxis or Vaxcel, each of Zynaxis
and Vaxcel, as the case may be, agrees to indemnify and hold the other Party
harmless of and from any Liability in respect of any such claim.
A-47
<PAGE> 161
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral (except, as to Section
8.5(b), for the Confidentiality Agreement). Nothing in this Agreement expressed
or implied, is intended to confer upon any Person, other than the Parties or
their respective successors, any rights, remedies, obligations, or liabilities
under or by reason of this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of each of the Parties, whether before or after shareholder approval of this
Agreement has been obtained; provided, that after any such approval by the
holders of Zynaxis Capital Stock, there shall be made no amendment that reduces
or modifies in any material respect the consideration to be received by holders
of Zynaxis Capital Stock or pursuant to applicable Law requires the further
approval by such shareholders without the further approval of such shareholders.
11.6 Waivers.
(a) Prior to or at the Effective Time, Vaxcel, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
Zynaxis, to waive or extend the time for the compliance or fulfillment by
Zynaxis of any and all of its obligations under this Agreement, and to waive any
or all of the conditions precedent to the obligations of Vaxcel under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of Vaxcel.
(b) Prior to or at the Effective Time, Zynaxis, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
Vaxcel, to waive or extend the time for the compliance or fulfillment by Vaxcel
of any and all of its obligations under this Agreement, and to waive any or all
of the conditions precedent to the obligations of Zynaxis under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any Law. No such waiver shall be effective unless in writing signed by a duly
authorized officer of Zynaxis.
(c) The failure of any Party at any time or times to require performance of
any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this Agreement
in one or more instances shall be deemed to be or construed as a further or
continuing waiver of such condition or breach or a waiver of any other condition
or of the breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other
A-48
<PAGE> 162
address as may be provided hereunder), and shall be deemed to have been
delivered as of the date so delivered:
Zynaxis: Zynaxis, Inc.
371 Phoenixville Pike
Malvern, Pennsylvania 19355
Telecopy Number: (610) 889-2222
Attention: Martyn D. Greenacre
Chairman, President and
Chief Executive Officer
Copy to Counsel: Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103-6993
Telecopy Number: (215) 963-5299
Attention: Debra J. Poul
CytRx: CytRx Corporation
154 Technology Parkway
Norcross, Georgia 30092
Telecopy Number: (770) 448-3357
Attention: Jack J. Luchese
Chairman, President and
Chief Executive Officer
Copy to Counsel: Alston & Bird
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Telecopy Number: (404) 881-7777
Attention: George M. Maxwell, Jr.
Vaxcel: Vaxcel, Inc.
154 Technology Parkway
Norcross, Georgia 30092
Telecopy Number: (770) 368-9500
Attention: Paul Wilson
Copy to Counsel: Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Telecopy Number: (404) 881-7777
Attention: George M. Maxwell, Jr.
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Georgia, without regard to any
applicable conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions; Articles and Sections. The captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Unless otherwise indicated, all references to particular Articles or Sections
shall mean and refer to the referenced Articles and Sections of this Agreement.
A-49
<PAGE> 163
11.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any Party, whether under
any rule of construction or otherwise. No Party to this Agreement shall be
considered the draftsman. The Parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all Parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all Parties
hereto.
11.13 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed
on its behalf and its corporate seal to be hereunto affixed and attested by
officers thereunto as of the day and year first above written.
<TABLE>
<S> <C>
ATTEST: VAXCEL, INC.
By:
- -------------------------------------------- -----------------------------------------
Secretary Paul J. Wilson, III
President and Chief Executive Officer
[CORPORATE SEAL]
ATTEST: VAXCEL MERGER SUBSIDIARY, INC.
By:
- -------------------------------------------- -----------------------------------------
Secretary Paul J. Wilson, III
President and Chief Executive Officer
[CORPORATE SEAL]
ATTEST: Zynaxis, Inc.
By:
- -------------------------------------------- -----------------------------------------
Secretary Martyn D. Greenacre
Chairman, President and Chief Executive
Officer
[CORPORATE SEAL]
ATTEST: CYTRX CORPORATION
By:
- -------------------------------------------- -----------------------------------------
Secretary
[CORPORATE SEAL]
</TABLE>
A-50
<PAGE> 164
APPENDIX B
December 6, 1996
Mr. Martyn D. Greenacre
Chairman and CEO
Zynaxis, Inc.
371 Phoenixville Pike
Malvern, PA 19355
Dear Martyn:
We understand that the Board of Directors of Zynaxis (the "Company") has
approved the sale of the assets listed in Exhibit A attached hereto (the
"Assets") for prices no less than the values indicated for such assets on
Exhibit A and the settlement of the liabilities listed in Exhibit B attached
hereto (the "Liabilities") for amounts no greater than the amounts indicated on
Exhibit B (collectively, the "Transactions"). We further understand that the
Board of Directors (and any applicable committees thereof) of Zynaxis have
approved: (i) the operating budget attached as Exhibit C for the period between
the date of this letter and the closing of the proposed business combination
transaction between the Company and CytRx Corporation, (ii) the agreements to be
entered into by the Company and CytRx Corporation with Martyn D. Greenacre and
Michael A. Christie attached as Exhibit D and Exhibit E, respectively, and (iii)
the agreement between QED and Zynaxis covering QED's relationship as Zynaxis's
agent for the sale of the Cauldron Division attached as Exhibit F.
1. The Company will exert its commercially reasonable best efforts to sell
the Assets and to cooperate with CytRx Corporation in its efforts to assist you
in selling the Assets. The Company shall approve and execute documents
evidencing and perform any agreement negotiated by the Company or us with any
prospective purchaser of any Asset if (a) the purchase price is no lower than
the amount and is consistent with the terms set forth for such Asset in Exhibit
A, and (b) the other terms and conditions of the Transaction are not less
favorable to the Company in any material respect than the terms and conditions
of similar transactions.
2. The Company will exert its commercially reasonable best efforts to
settle the Liabilities and to cooperate with CytRx Corporation in its efforts to
assist you in settling the Liabilities. The Company shall approve and execute
documents evidencing and perform any agreement negotiated by the Company or us
with any creditor for any Liability, if (a) the cash payment required to be paid
by the Company to such creditor is no greater than the settlement amount and is
consistent with the terms set forth for such Liability in Exhibit B, and (b) the
other terms and conditions of the Transaction are not less favorable to the
Company in any material respect than the terms and conditions of similar
transactions.
3. Subject to approval by the Committee (as defined below), which approval
shall not be unreasonably withheld, the Company shall approve and execute
documents evidencing and perform any agreement negotiated by us with any
counsel, accountants, appraisers, brokers and other advisors in connection with
the Transactions (all for the account of the Company), if (a) such person is not
an affiliate of ours, and (b) the terms and conditions of such agreement, taken
as a whole, are fair to the Company.
4. In connection with our activities on your behalf, the Company agrees to
cooperate with us, to furnish or cause to be furnished to us such information
and data as we may reasonably request, and to give us reasonable access to the
Company's officers, directors, employees, appraisers and independent
accountants. The Company represents that all information made available to us by
the Company will be complete and correct in all material respects and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in light of the
circumstances under which such statements are made.
5. The Board of Directors of the Company (the "Board") shall establish a
committee (the "Committee") of the Board consisting of John Chappell, Stephen
Reidy and Martyn Greenacre, which shall have full
B-1
<PAGE> 165
authority of the Board to authorize the Transactions and the institution and
prosecution of actions (including arbitration proceedings) relating to the
Transactions. The Committee shall confer with us at such times as we reasonably
request.
6. The Company shall reimburse us promptly for all reasonable out-of-pocket
expenses, including reasonable fees and expenses of our counsel, incurred in
connection with the rendering of our services hereunder.
7. The benefits of this Agreement shall inure to the respective successors
and assigns of the parties hereto and of the Indemnified Persons referred to in
the attached indemnification provisions, and the obligations and liabilities
assumed in this Agreement by the parties hereto shall be binding upon their
respective successors and assigns.
8. The Company agrees to indemnify us in accordance with the
indemnification provisions attached as Exhibit G hereto, which are incorporated
herein by reference and made a part hereof.
9. We may terminate this Agreement at any time upon written notice, without
liability or continuing obligation to you. The Company may not terminate this
Agreement unless and until the Agreement and Plan of Merger and Contribution
dated as of the date hereof between us and the Company is terminated. Neither
termination nor completion of this assignment shall affect the provisions of
paragraphs 6 and 8, which shall remain operative and in full force and effect
until 5:00 p.m. Eastern time on the third anniversary of the execution of this
Agreement.
10. The validity and interpretation of this Agreement shall be governed by,
and construed and enforced in accordance with, the substantive laws of the State
of Delaware applicable to agreements made and to be fully performed therein.
This agreement may not be modified or amended except in writing signed by the
parties hereto. Nothing in this Agreement, expressed or implied, is intended to
confer upon any person, other than the parties hereto or their respective
successors, any rights, remedies, obligations or liabilities under or by reason
of this Agreement. The parties acknowledge that this Agreement is not to be
construed as creating a partnership or joint venture between the parties hereto.
If the above terms are in accordance with our understanding, please sign
the enclosed copy of this letter and return it to us.
Very truly yours,
CYTRX CORPORATION
By:
------------------------------------
JACK J. LUCHESE
President and Chief Executive
Officer
Confirmed and Agreed to this
6th day of December, 1996:
ZYNAXIS, INC.
By:
----------------------------------
MARTYN D. GREENACRE
Chairman and Chief Executive
Officer
B-2
<PAGE> 166
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit A -- Assets to be Sold
Exhibit B -- Liabilities to be Settled
Exhibit C -- Operating Budget
Exhibits D and E -- Agreements with Greenacre and Christie
Exhibit F -- Agreement with QED
Exhibit G -- Indemnification Provisions
</TABLE>
<PAGE> 167
APPENDIX C
<TABLE>
<S> <C>
Microfilm Number Filed with the Department of State on
------------------------ ---------
Entity Number
------------------------ -----------------------------------------------
Secretary of the Commonwealth
</TABLE>
ARTICLES OF AMENDMENT -- DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 91)
In compliance with the requirements of 15 Pa.C.S. sec. 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corporation is: Zynaxis, Inc.
----------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) 371 Phoenixville Pike Malvern Pennsylvania 19355 Chester
-------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o:
---------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the
county in (b) shall be deemed the county in which the corporation is located
for venue and official publication purposes.
3. The statute by or under which it was incorporated is: The Pennsylvania
---------------------
Business Corporation Law of 1988, as amended
---------------------------------------------------------------------------
4. The date of its incorporation is: March 5, 1987
-----------------------------------------
5. (CHECK, AND IF APPROPRIATE COMPLETE, ONE OF THE FOLLOWING):
[X] The amendment shall be effective upon filing these Articles of Amendment
in the Department of State.
[ ] The amendment shall be effective on: at
--------------- ------------------
Date Hour
6. (CHECK ONE OF THE FOLLOWING):
[X] The amendment was adopted by the shareholders (or members) pursuant to 15
Pa.C.S. sec. 1914(a) and (b).
[ ] The amendment was adopted by the board of directors pursuant to 15 Pa.C.S.
sec. 1914(c).
7. (CHECK, AND IF APPROPRIATE COMPLETE, ONE OF THE FOLLOWING):
[ ] The amendment adopted by the corporation, set forth in full, is as
follows:
[X] The amendment adopted by the corporation is set forth in full in Exhibit A
attached hereto and made a part hereof.
C-1
<PAGE> 168
8. (CHECK IF THE AMENDMENT RESTATES THE ARTICLES):
[ ] The restated Articles of Incorporation supersede the original Articles and
all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this ______ day
of ______, 19__.
Zynaxis, Inc.
--------------------------------------
(Name of Corporation)
By:
-----------------------------------
Title:
--------------------------------
C-2
<PAGE> 169
EXHIBIT A
ARTICLES OF AMENDMENT
OF
ZYNAXIS, INC.
The Amended and Restated Articles of Incorporation of Zynaxis, Inc., as
amended, are amended to add a new Article 8 to read as follows:
"8. Subchapter E of Chapter 25 of the Business Corporation Law of
1988, as amended, as codified at 15 Pa.C.S. sections 2541-2548, shall not
be applicable to the corporation."
C-3
<PAGE> 170
APPENDIX D
PENNSYLVANIA BUSINESS CORPORATION LAW
SUBCHAPTER D: DISSENTERS RIGHTS
SEC. 1571. APPLICATION AND EFFECT OF SUBCHAPTER.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a
security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting at
which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to
be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the case
of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or solely
into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles, the
plan or the terms of the transaction entitle all shareholders of the class
to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of the
votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares, property
or assets of another corporation by the issuance of shares, obligations or
otherwise, with or without assuming the liabilities of the other corporation and
with or without the intervention of another corporation or other person, shall
not be entitled to the rights and remedies of
D-1
<PAGE> 171
dissenting shareholders provided in this subchapter regardless of the fact, if
it be the case, that the acquisition was accomplished by the issuance of voting
shares of the corporation to be outstanding immediately after the acquisition
sufficient to elect a majority or more of the directors of the corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) A copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
SEC. 1572. DEFINITIONS.
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have the sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects taking into account all
relevant factors, but excluding any appreciation or depreciation in anticipation
of the corporate action.
"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors including the average
rate currently paid by the corporation on its principal bank loans.
SEC. 1573. RECORD AND BENEFICIAL HOLDERS AND OWNERS.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a
D-2
<PAGE> 172
dissenting shareholder under the terms of this subchapter if he submits to the
corporation not later than the time of the assertion of dissenters rights a
written consent of the record holder. A beneficial owner may not dissent with
respect to some but less than all shares of the same class or series owned by
the owner, whether or not the shares so owned by him are registered in his name.
SEC. 1574. NOTICE OF INTENTION TO DISSENT.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed corporate
action shall constitute the written notice required by this section.
SEC. 1575. NOTICE TO DEMAND PAYMENT.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
SEC. 1576. FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC.
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares. If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
D-3
<PAGE> 173
SEC. 1577. RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES.
(a) Failure to effectuate corporate action. Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair market value
of the shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment. If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenter had after
making demand for payment of their fair value.
SEC. 1578. ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES.
(a) General rule. If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) (relating to payment of fair value of shares) and the
dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
(b) Effect of failure to file estimate. Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
D-4
<PAGE> 174
SEC. 1579. VALUATION PROCEEDINGS GENERALLY.
(a) General rule. Within 60 days after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demand for payment under section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
(b) Mandatory joinder of dissenters. All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
SEC. 1580. COSTS AND EXPENSES OF VALUATION PROCEEDINGS.
(a) General rule. The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally), including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are parties
and whose action in demanding supplemental payment under section 1578 (relating
to estimate by dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
D-5
<PAGE> 175
APPENDIX E
PENNSYLVANIA BUSINESS CORPORATION LAW
SUBCHAPTER E. CONTROL TRANSACTIONS
2541 APPLICATION AND EFFECT OF SUBCHAPTER. -- (a) General rule. -- Except
as otherwise provided in this section, this subchapter shall apply to a
registered corporation unless:
(1) the registered corporation is one described in section 2502(i)(ii) or
(2) (relating to registered corporation status):
(2) the bylaws, by amendment adopted either:
(i) by March 23, 1984; or
(ii) on or after March 23, 1988, and on or before June 21, 1988;
and, in either event, not subsequently rescinded by an article amendment,
explicitly provide that this subchapter shall not be applicable to the
corporation in the case of a corporation which on June 21, 1988, did not have
outstanding one or more classes or series of preference shares entitled, upon
the occurrence of a default in the payment of dividends or another similar
contingency, to elect a majority of the members of the board of directors (a
bylaw adopted on or before June 21, 1988, by a corporation excluded from the
scope of this paragraph by the restriction of this paragraph relating to certain
outstanding preference shares shall be ineffective unless ratified under
paragraph (3));
(3) the bylaws of which explicitly provide that this subchapter shall not
be applicable to the corporation by amendment ratified by the board of directors
on or after December 19, 1990, and on or before March 19, 1991, in the case of a
corporation:
(i) which on June 21, 1988, had outstanding one or more classes or series
of preference shares entitled, upon the occurrence of a default in the payment
of dividends or another similar contingency, to elect a majority of the members
of the board of directors; and
(ii) the bylaws of which on that date contained a provision described in
paragraph (2); or
(4) the articles explicitly provide that this subchapter shall not be
applicable to the corporation by a provision included in the original articles,
by an article amendment adopted prior to the date of the control transaction and
prior to or on March 23, 1988, pursuant to the procedures then applicable to the
corporation, or by an article amendment adopted prior to the date of the control
transaction and subsequent to March 23, 1988, pursuant to both:
(i) the procedures then applicable to the corporation; and
(ii) unless such proposed amendment has been approved by the board of
directors of the corporation, in which event this subparagraph shall not be
applicable, the affirmative vote of the shareholders entitled to cast at least
80% of the votes which all shareholders are entitled to cast thereon.
A reference in the articles or bylaws to former section 910 (relating to
right of shareholders to receive payment for shares following a control
transaction) of the act of May 5, 1933 (P.L. 364, No. 106), known as the
Business Corporation Law of 1933, shall be a reference to this subchapter for
the purposes of this section. See section 101(c) (relating to references to
prior statutes).
(b) Inadvertent transactions. -- This subchapter shall not apply to any
person or group that inadvertently becomes a controlling person or group if that
controlling person or group, as soon as practicable, divests itself of a
sufficient amount of its voting shares so that it is no longer a controlling
person or group.
E-1
<PAGE> 176
(c) Certain subsidiaries. -- This subchapter shall not apply to any
corporation that oil December'-?3, 1983, was a subsidiary of any other
corporation. (Last amended by Act 169, L. '92, eff. 2-16-93.)
2542 DEFINITIONS. -- The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Control transaction." The acquisition by a person or group of the status
of a controlling person or group.
"Controlling person or group." A controlling person or group as defined in
section 2543 (relating to controlling person or group).
"Fair value." A value not less than the highest price paid per share by the
controlling person or group at any time during the 90-day period ending on and
including the date of the control transaction plus an increment representing any
value, including, without limitation, any proportion of any value payable for
acquisition of control of the corporation, that may not be reflected in such
price.
"Partial payment amount." The amount per share specified in section
2545(c)(2) (relating to contents of notice).
"Subsidiary." Any corporation as to which any other corporation has or has
the right to acquire, directly or indirectly, through the exercise of all
warrants, options and rights and the conversion of all convertible securities,
whether issued or granted by the subsidiary or otherwise, voting power over
voting shares of the subsidiary that would entitle the holders thereof to cast
in excess of 50% of the votes that all shareholders would be entitled to cast in
the election of directors of such subsidiary, except that a subsidiary will not
be deemed to cease being a subsidiary as long as such corporation remains a
controlling person or group within the meaning of this subchapter.
"Voting shares." The term shall have the meaning specified in section 2552
(relating to definitions). (Last amended by Act 36, L. '89, eff. 4-27-90.)
2543 CONTROLLING PERSON OR GROUP. -- (a) General rule. -- For the purpose
of this subchapter, a "controlling person or group" means a person who has, or a
group of persons acting in concert that has, voting power over voting shares of
the registered corporation that would entitle the holders thereof to cast at
least 20% of the votes that all shareholders would be entitled to cast in an
election of directors of the corporation.
(b) Exceptions generally. -- Notwithstanding subsection (a):
(1) A person or group which would otherwise be a controlling person or
group within the meaning of this section shall not be deemed a controlling
person or group unless, subsequent to the later of March 23, 1988, or the date
this subchapter becomes applicable to a corporation by bylaw or article
amendment or otherwise, that person or group increases the percentage of
outstanding voting, shares of the corporation over which it has voting power to
in excess of the percentage of outstanding voting shares of the corporation over
which that person or group had voting power on such later date, and to at least
the amount specified in subsection (a), as the result of forming or enlarging a
group or acquiring, by purchase, voting power over voting shares of the
corporation.
(2) No person or group shall be deemed to be a controlling person or group
at any particular time if voting power over any of the following voting shares
is required to be counted at such time in order to meet the 20% minimum:
(i) Shares which have been held continuously by a natural person since
January 1, 1983, and which are held by such natural person at such time.
- ---------------
Act 169, L. '92, eff. 2-16-93, deleted "-- (d) Rights cumulative. -- The rights
and remedies provided in this subchapter shall be in addition to, and not in
lieu of, any other rights or remedies provided by this subpart, the articles or
bylaws of the corporation, any, securities'. option rights or obligations of the
corporation or otherwise."
Act 36, L. '89, eff. 4-27-90, added matter in italic.
E-2
<PAGE> 177
(ii) Shares which are held at such time by any natural person or trust,
estate, foundation or other similar entity to the extent the shares were
acquired solely by gift, inheritance, bequest, devise or other testamentary
distribution or series of these transactions, directly or indirectly, from a
natural person who had acquired the shares prior to January 1, 1983.
(iii) Shares which were acquired pursuant to a stock split, stock dividend,
reclassification or similar recapitalization with respect to shares described
under this paragraph that have been held continuously since their issuance by
the corporation by the natural person or entity that acquired them from the
corporation or that were acquired, directly or indirectly, from such natural
person or entity, solely pursuant to a transaction or series of transactions
described in subparagraph (ii), and that are held at such time by a natural
person or entity described in subparagraph (ii).
(iv) Control shares as defined in section 2562 (relating to definitions)
which have not yet been accorded voting rights pursuant to section 2564(a)
(relating to voting rights of shares acquired in a control share acquisition).
(v) Shares, the voting rights of which are attributable to a person under
subsection (d) if:
(A) the person acquired the option or conversion right directly from or
made the contract, arrangement or understanding or has the relationship directly
with the corporation; and
(B) the person does not at the particular time own or otherwise
effectively-possess the voting rights of the shares.
(vi) Shares acquired directly from the corporation or an affiliate or
associate, as defined in section 2552 (relating to definitions), of the
corporation by a person engaged in business as an underwriter of securities who
acquires the shares through his participation in good faith in a firm commitment
underwriting registered under the Securities Act of 1933.
(3) In determining whether a person or group is or would be a controlling
person or group at any particular time, there shall be disregarded voting power
arising from a contingent right of the holders of one or more classes or series
of preference shares to elect one or more members of the board of directors upon
or during the continuation of a default in the payment of dividends on such
shares or another similar contingency.
(c) Certain record holders. -- A person shall not be a controlling person
under subsection (a) if the person holds voting power, in good faith and not for
the purpose of circumventing this subchapter, as an agent, bank, broker, nominee
or trustee for one or more beneficial owners who do not individually or, if they
are a group acting in concert, as a group have the voting power specified in
subsection (a), or who are not deemed a controlling person or group under
subsection (b).
(d) Existence of voting power. -- For the purposes of this subchapter, a
person has voting power over a voting share if the person has or shares,
directly or indirectly, through any option, contract, arrangement,
understanding, conversion right or relationship, or by acting jointly or in
concert or otherwise, the power to vote, or to direct the voting of, the voting
share. (Last amended by Act 198, L. '90, eff. 12-19-(O.)
2544 RIGHT OF SHAREHOLDERS TO RECEIVE PAYMENT FOR SHARES. -- Any holder of
voting shares of a registered corporation that becomes the subject of a control
transaction who shall object to the transaction shall be entitled to the rights
and remedies provided in this subchapter.
2545 NOTICE TO SHAREHOLDERS. -- (a) General rule. -- Prompt notice that a
control transaction has occurred shall be given by the controlling person or
group to:
(1) Each shareholder of record of the registered corporation holding voting
shares.
(2) To the court, accompanied by a petition to the court praying that the
fair value of the voting shares of the corporation be determined pursuant to
section 2547 (relating to valuation procedures) if the court should receive
pursuant to section 2547 certificates from shareholders of the corporation or an
equivalent request for transfer of uncertificated securities.
- ---------------
Act 198, L. '90, eff. 12-19-90, added matter in italic.
E-3
<PAGE> 178
(b) Obligations of the corporation. -- If the controlling person or group
so requests, the corporation shall, at the option of the corporation and at the
expense of the person or group, either furnish a list of all such shareholders
to the person or group or mail the notice to all such shareholders.
(c) Contents of notice. -- The notice shall state that:
(1) All shareholders are entitled to demand that they be paid the fair
value of their shares.
(2) The minimum value the shareholder can receive under this subchapter is
the highest price paid per share by the controlling person or group within the
90-day period ending on and including the date of the control transaction, and
stating that value.
(3) If the shareholder believes the fair value of his shares is higher,
that this subchapter provides an appraisal procedure for determining the fair
value of such shares, specifying the name of the court and its address and the
caption of the petition referenced in subsection (a)(2), and stating that the
information is provided for the possible use by the shareholder in electing to
proceed with a court-appointed appraiser under section 2547. There shall be
included in, or enclosed with, the notice a copy of this subchapter.
(d) Optional procedure. -- The controlling person or group may, at its
option, supply with the notice referenced in subsection (c) a form for the
shareholder to demand payment of the partial payment amount directly from the
controlling person or group without utilizing the court-appointed appraiser
procedure of section 2547, requiring the shareholder to state the number and
class or series, if any, of the shares owned by him, and stating where the
payment demand must be sent and the procedures to be followed.
2546 SHAREHOLDER DEMAND FOR FAIR VALUE. -- (a) General rule. -- after the
occurrence of the control transaction, any holder of voting shares of the
registered corporation may, prior to or within a reasonable time after the
notice required by section 2545 (relating to notice to shareholders) is given,
which time period may be specified in the notice, make written demand on the
controlling person or group for payment of the amount provided in subsection (c)
with respect to the voting shares of the corporation held by the shareholder,
and the controlling person or group shall be required to pay that amount to the
shareholder pursuant to the procedures specified in section 2547 (relating to
valuation procedures).
(b) Contents of demand. -- The demand of the shareholder shall state the
number and class or series, if any, of the shares owned by him with respect to
which the demand is made.
(c) Measure of value. -- A shareholder making written demand under this
section shall be entitled to receive cash for each of his shares in an amount
equal to the fair value of each voting share as of the date on which the control
transaction occurs, taking into account all relevant factors, including an
increment representing a proportion of any value payable for acquisition of
control of the corporation.
(d) Purchases independent of subchapter. -- The provisions of this
subchapter shall not preclude a controlling person or group subject to this
subchapter from offering, whether in the notice required by section 2545 or
otherwise, to purchase voting shares of the corporation at a price other than
that provided in subsection (c), and the provisions of this subchapter shall not
preclude any shareholder from agreeing to sell his voting shares at that or any
other price to any person.
2547 VALUATION PROCEDURES. -- (a) General rule. -- If, within 45 days (or
such other time period, if any, as required by applicable law) after the date of
the notice required by section 2545 (relating to notice to shareholders), or, if
such notice was not provided prior to the date of the written demand by the
shareholder under section 2546 (relating to shareholder demand for fair value),
then within 45 days (or such other time period, if any, required by applicable
law) of the date of such written demand, the controlling person or group and the
shareholder are unable to agree on the fair value of the shares or on a binding
procedure to determine the fair value of the shares, then each shareholder who
is unable to agree on both the fair value and on such a procedure with the
controlling person or group and who so desires to obtain the rights and remedies
provided in this subchapter shall, no later than 30 days after the expiration of
the applicable 45-day or other period, surrender to the court certificates
representing any of the shares that are certificated shares, duly endorsed for
transfer to the controlling person or group, or cause any uncertificated shares
to be transferred to the court as escrow agent under subsection (c) with a
notice stating that the certificates or
E-4
<PAGE> 179
uncertificated shares are being surrendered or transferred, as the case may be,
in connection with the petition referenced in section 2545 or, if no petition
has theretofore been filed, the shareholder may file a petition within the
30-day period in the court praying that the fair value (as defined in this
subchapter) of the shares be determined.
(b) Effect of failure to give notice and surrender certificates. -- Any
shareholder who does not so give notice and surrender any certificates or cause
uncertificated shares to be transferred within such time period shall have no
further right to receive, with respect to shares the certificates of which were
not so surrendered or the uncertificated shares which were not so transferred
under this section, payment under this subchapter from the controlling person or
group with respect to the control transaction giving rise to the rights of the
shareholder under this subchapter.
(c) Escrow and notice. -- The court shall hold the certificates surrendered
and the uncertificated shares transferred to it in escrow for, and shall
promptly, following the expiration of the time period during which the
certificates may be surrendered and the uncertificated shares transferred,
provide a notice to the controlling person or group of the number of shares so
surrendered or transferred.
(d) Partial payment for shares. -- The controlling person or group shall
then make a partial payment for the shares so surrendered or transferred to the
court, within ten business days of receipt of the notice from the court, at a
per-share price equal to the partial payment amount. The court shall then make
payment as soon as practicable, but in any event within ten business days, to
the shareholders who so surrender or transfer their shares to the court of the
appropriate per-share amount received from the controlling person or group.
(e) Appointment of appraiser. -- Upon receipt of any share certificate
surrendered or uncertificated share transferred under this section, the court
shall, as soon as practicable but in any event within 30 days, appoint an
appraiser with experience in appraising share values of companies of like nature
to the registered corporation to determine the fair value of the shares.
(f) Appraisal procedure. -- The appraiser so appointed by the court shall,
as soon as reasonably practicable, determine the fair value of the shares
subject to its appraisal and the appropriate market rate of interest on the
amount then owed by the controlling person or group to the holders of the
shares. The determination of any appraiser so appointed by the court shall be
final and binding on both the controlling person or group and all shareholders
who so surrendered their share certificates or transferred their shares to the
court, except that the determination of the appraiser shall be subject to review
to the extent and within the time provided or prescribed by law in the case of
other appointed judicial officers. See 42 Pa.C.S. sec.sec.5105(a)(3) (relating
to right to appellate review) and 5571(b) (relating to appeals generally).
(g) Supplemental payment. -- Any amount owed, together with interest, as
determined pursuant to the appraisal procedures of this section shall be payable
by the controlling person or group after it is so determined and upon and
Concurrently with the delivery or transfer to the controlling person or group by
the court (which shall make delivery of the certificate or certificates
surrendered or the uncertificated shares transferred to it to the controlling
person or group as soon as practicable but in any event within ten business days
after the final determination of the amount owed) of the certificate or
certificates representing shares surrendered or the uncertified shares
transferred to the court, and the court shall then make payment, as soon as
practicable but in any event within ten business days after receipt of payment
from the controlling person or group, to the shareholders who so surrendered or
transferred their shares to the court of the appropriate per-share amount
received from the controlling person or group.
(h) Voting and dividend rights during appraisal proceedings. --
Shareholders who surrender their shares to the court pursuant to this section
shall retain the right to vote their shares and receive dividends or other
distributions thereon until the Court receives payment in full for each of the
shares so surrendered or transferred of the partial payment amount (and,
thereafter, the controlling person or group shall be entitled to vote such
shares and receive dividends or other distributions thereon). The fair value (as
determined by the appraiser) of any dividends or other distributions so received
by the shareholders shall be subtracted from any amount owing to such
shareholders under this section.
E-5
<PAGE> 180
(i) Powers of the court. -- The court may appoint such agents, including
the transfer agent of the corporation, or any other institution, to hold the
share certificates so surrendered and the shares surrendered or transferred
under this section, to effect any necessary change in record ownership of the
shares after the payment by the controlling person or group to the court of the
amount specified in subsection (h), to receive and disburse dividends or other
distributions, to provide notices to shareholders and to take such other actions
as the court determines are appropriate to effect the purposes of this
subchapter.
(j) Costs and expenses. -- The costs and expenses of any appraiser or other
agents appointed by the court shall be assessed against the controlling person
or group. The costs and expenses of any other procedure to determine fair value
shall be paid as agreed to by the parties agreeing to the procedure.
(k) Jurisdiction exclusive. -- The jurisdiction of the court under this
subchapter is plenary and exclusive and the controlling person or group and all
shareholders who so surrendered or transferred their shares to the court shall
be made a party to the proceeding as in an action against their shares.
(1) Duty of corporation. -- The corporation shall comply with requests for
information, which may be submitted pursuant to procedures maintaining the
confidentiality of the information, made by the court or the appraiser selected
by the court. If any of the shares of the corporation are not represented by
certificates, the transfer, escrow or retransfer of those shares contemplated by
this section shall be registered by the corporation, which shall give the
written notice required by section 1528(f) (relating to uncertificated shares)
to the transferring shareholder, the court and the controlling shareholder or
group, as appropriate in the circumstances.
(m) Payment under optional procedure. -- Any amount agreed upon between the
parties or determined pursuant to the procedure agreed upon between the parties
shall be payable by the controlling person or group after it is agreed upon or
determined and upon and concurrently with the delivery of any certificate or
certificates representing such shares or the transfer of any uncertificated
shares to the controlling person or group by the shareholder.
(n) Title to shares. -- Upon full payment by the controlling person or
group of the amount owed to the shareholder or to the court, as appropriate, the
shareholder shall cease to have any interest in the shares.
2548 COORDINATION WITH CONTROL TRANSACTION. -- (a) General rule. -- A
person or group that proposes to engage in a control transaction may comply with
the requirements of this subchapter in connection with the control transaction,
and the effectiveness of the rights afforded in this subchapter to shareholders
may be conditioned upon the consummation of the control transaction.
(b) Notice. -- The person or group shall give prompt written notice of the
satisfaction of any such condition to each shareholder who has made demand as
provided in this subchapter.
E-6
<PAGE> 181
APPENDIX F
NOTE EXCHANGE AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of December
6, 1996, by and among ZYNAXIS, INC., a Pennsylvania corporation (the "Company"),
CYTRX CORPORATION, a Delaware corporation ("CytRx"), VAXCEL, INC., a Delaware
corporation and a wholly owned subsidiary of CytRx ("Vaxcel"), EUCLID PARTNERS
III, L.P., a Delaware limited partnership, and S.R. ONE, LTD., a Delaware
limited partnership (together with Euclid Partners III, L.P., the
"Noteholders").
W I T N E S S E T H:
WHEREAS, the Noteholders hold certain convertible promissory notes on which
the Company is the obligor.
WHEREAS, simultaneously with the execution of this Agreement the Company is
entering into an Agreement and Plan of Merger and Contribution (the "Agreement
and Plan of Merger and Contribution") with CytRx, Vaxcel, and Vaxcel Merger Sub,
Inc., a Georgia corporation and a newly formed, wholly owned subsidiary of
Vaxcel ("Vaxcel Merger Sub"), and certain other agreements, including, among
other things, a Liquidation Agreement (the "Liquidation Agreement")
contemplating the sale of Assets (as defined therein) of the Company and
documents (the "Secured Loan Documents") relating to a secured loan being
extended to the Company by CytRx (the "Secured Loan"). The Agreement and Plan of
Merger and Contribution provides for the issuance of shares of common stock of
Vaxcel and a warrant to purchase shares of common stock of Vaxcel to CytRx in
exchange for CytRx's contribution of the Secured Loan and cash in an amount
equal to Four Million Dollars ($4,000,000) minus the balance of the Secured Loan
at the time of contribution, subject to adjustment for payments made to
shareholders of Zynaxis pursuant to Section 3.3 of the Agreement and Plan of
Merger and Contribution. The Agreement and Plan of Merger and Contribution also
provides for the issuance of shares of common stock of Vaxcel to the existing
shareholders of the Company in exchange for the contribution to Vaxcel by the
existing shareholders of the Company of all of the outstanding shares of capital
stock of the Company by means of a merger of Vaxcel Merger Sub with and into the
Company (the "Merger"). At the effective time of the Merger, the outstanding
shares of the capital stock of the Company will be converted into the right to
receive shares of the common stock of Vaxcel. As a result, shareholders of the
Company will become shareholders of Vaxcel and the Company will continue to
conduct its business and operations as a wholly owned subsidiary of Vaxcel.
WHEREAS, CytRx is unwilling to enter into the Agreement and Plan of Merger
and Contribution unless the Noteholders agree to exchange their promissory notes
for shares of common stock of Vaxcel upon the terms set forth in this Agreement
in connection with the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
covenants, and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Agreement to Exchange. Upon consummation of the Merger, each
convertible demand promissory note issued by the Company and held by a
Noteholder (each a "Company Demand Note") shall be exchanged for the number of
shares (the "Note Shares") of Vaxcel Common Stock equal to the Exchange Ratio
multiplied by the quotient (rounded down to the nearest whole share) obtained by
dividing the unpaid principal amount of such Company Demand Note, together with
unpaid interest thereon accrued through September 30, 1996, by the Per Share
Price, as such term is defined in the Agreement and Plan of Merger and
Contribution. At the closing of the transactions contemplated by the Agreement
and Plan of Merger and Contribution (the "Closing") each holder of a Company
Demand Note shall deliver to the Company the Company Demand Note, marked "Paid
in Full," and Vaxcel shall deliver to each such holder in exchange therefor a
certificate representing all the Note Shares to be issued in exchange therefor,
duly registered in the name of such holder, free and clear of any liens,
security interests or other defects of title.
F-1
<PAGE> 182
2. Termination of Registration Rights. Each of the undersigned Noteholders
agrees that: (i) upon execution of this Agreement all rights that the Noteholder
may have to require the Company to register securities of the Company for sale
under applicable state and federal securities laws ("Registration Rights") are
suspended pending the Closing, and (ii) upon consummation of the Merger all such
Registration Rights will be terminated and such Noteholder will have such
registration rights as are provided for such Noteholder in the Agreement and
Plan of Merger and Contribution. If the Agreement and Plan of Merger and
Contribution is terminated for any reason, beginning at the time of such
termination the undersigned Noteholder shall have such Registration Rights as
such Noteholder would have had at such time if such Registration Rights had not
been suspended pursuant to the preceding sentence.
3. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice): (i) if to the Company, CytRx
or Vaxcel, to the address set forth in Section 11.8 of the Agreement and Plan of
Merger and Contribution; and (ii) if to a Noteholder, to its address shown below
its signature on the last page hereof.
4. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
5. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement.
6. Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement, and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
7. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Pennsylvania, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
8. Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties. Any assignment in violation of the foregoing shall
be void.
9. Equitable Remedies. Each Noteholder agrees that irreparable damage
would occur and that CytRx, Vaxcel and the Company would not have any adequate
remedy at law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that CytRx, Vaxcel and the Company shall be entitled to an
injunction or injunctions to prevent breaches by a Noteholder of this Agreement
and to enforce specifically the terms and provisions of this Agreement.
10. Severability. If any term, provision, covenant or restriction herein,
or the application thereof to any circumstance, shall, to any extent, be held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions herein and the
application thereof to any other circumstances, shall remain in full force and
effect, shall not in any way be affected, impaired or invalidated, and shall be
enforced to the fullest extent permitted by law.
[Remainder of page intentionally left blank.]
F-2
<PAGE> 183
[SIGNATURE PAGE TO NOTE EXCHANGE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement under
seal as of the day and year first above written.
<TABLE>
<S> <C>
ZYNAXIS, INC. CYTRX CORPORATION
By: By:
--------------------------------------- ---------------------------------------
Name: Name:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------ ------------------------------------
VAXCEL, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
EUCLID PARTNERS III, L.P. S.R. ONE, LTD.
By: By:
--------------------------------------- ---------------------------------------
Name: Name:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------ ------------------------------------
Address: Address:
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
</TABLE>
F-3
<PAGE> 184
APPENDIX G
PREFERRED STOCK AND WARRANT AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of December
6, 1996, by and among ZYNAXIS, INC., a Pennsylvania corporation ("Zynaxis"),
CYTRX CORPORATION, a Delaware corporation ("CytRx"), Vaxcel, Inc., a Delaware
corporation and a wholly owned subsidiary of CytRx ("Vaxcel") and the persons
listed in Exhibit A (the "Securityholders").
W I T N E S S E T H:
WHEREAS, the Securityholders collectively hold all of the outstanding
shares of Series A Convertible Preferred Stock of Zynaxis (the "Series A Stock")
and each Securityholder holds the number of shares of Series A Stock and the
number of warrants to purchase additional shares of Common Stock of Zynaxis set
forth beside such Securityholder's name in Exhibit A (the "Warrants");
WHEREAS, the Series A Stock and the Warrants were issued pursuant to that
certain Preferred Stock and Warrant Purchase Agreement dated March 29, 1995, as
amended (the "Preferred Stock and Warrant Purchase Agreement"), and in
connection with bridge loans extended by certain of the Securityholders to
Zynaxis;
WHEREAS, simultaneously with the execution of this Agreement Zynaxis is
entering into an Agreement and Plan of Merger and Contribution (the "Merger and
Contribution Agreement") with CytRx, Vaxcel, and Vaxcel Merger Sub, Inc., a
Georgia corporation and a newly formed, wholly owned subsidiary of Vaxcel
("Vaxcel Merger Sub"), and certain other agreements, including, among other
things, a Liquidation Agreement (the "Liquidation Agreement") contemplating the
sale of Assets (as defined therein) of Zynaxis and documents (the "Secured Loan
Documents") relating to a secured loan being extended to Zynaxis by CytRx (the
"Secured Loan"). The Merger and Contribution Agreement provides for the issuance
of shares of Vaxcel Common Stock and a warrant to purchase shares of Vaxcel
Common Stock to CytRx in exchange for CytRx's contribution to Vaxcel of the
Secured Loan and a cash payment in an amount equal to Four Million Dollars
($4,000,000) minus the aggregate principal and interest balance outstanding
under the Secured Loan, subject to adjustment for payments made to shareholders
of Zynaxis pursuant to Section 3.3 of the Merger and Contribution Agreement. The
Merger and Contribution Agreement also provides for the issuance of shares of
Vaxcel Common Stock to the existing shareholders of Zynaxis in exchange for the
contribution to Vaxcel by the existing shareholders of Zynaxis of all of the
outstanding shares of capital stock of Zynaxis by means of a merger of Vaxcel
Merger Sub with and into Zynaxis. At the effective time of such merger, the
outstanding shares of the capital stock of Zynaxis will be converted into the
right to receive shares of the common stock of Vaxcel (except as provided
herein). As a result, shareholders of Zynaxis will become shareholders of Vaxcel
and Zynaxis will continue to conduct its business and operations as a wholly
owned subsidiary of Vaxcel.
WHEREAS, CytRx is unwilling to enter into the Merger and Contribution
Agreement unless the rights of the Securityholders are modified as set forth in
this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
covenants, and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Treatment of Transactions. Each of the undersigned elects that the
consummation of the transactions contemplated by the Merger and Contribution
Agreement and the other agreements contemplated by the Merger and Contribution
Agreement, including but not limited to the Liquidation Agreement, will not be
deemed a liquidation for purposes of Sections 3.1 and 3.2 of the Statement with
Respect to Shares filed by Zynaxis in the Department of State of the
Commonwealth of Pennsylvania on April 6, 1995.
G-1
<PAGE> 185
2. Consent to Secured Loan. Each of the undersigned consents to the
Secured Loan and all liens, pledges, mortgages, security interests and other
encumbrances to which the assets or properties of Zynaxis may become subject as
part of the Secured Loan.
3. Exchange of Warrants. Each of the undersigned agrees that upon
consummation of the merger between Zynaxis and Vaxcel Merger Sub pursuant to the
Merger and Contribution Agreement (the "Merger"), each Warrant held by the
undersigned shall be exchanged for a new warrant substantially in the form
attached hereto as Exhibit B to purchase a number of shares of Vaxcel Common
Stock equal to: (i) the number of shares of Common Stock of Zynaxis as the
Warrants held by such undersigned are exercisable to purchase at that time
multiplied by (ii) the Exchange Ratio (the "New Warrant"). Each of the
undersigned Securityholders agrees that such undersigned Securityholder shall
surrender the Warrants held by such undersigned Securityholder and shall receive
in exchange therefor a New Warrant. Zynaxis shall not honor any warrant
agreement representing a Warrant after the Merger.
4. Termination of Preferred Stock and Warrant Purchase Agreement and
Registration Rights. Each of the undersigned agrees that the Preferred Stock
and Warrant Purchase Agreement and all rights of the Securityholders thereunder
shall terminate upon the Merger. Each of the undersigned further agrees that:
(i) upon execution of this Agreement all rights that the undersigned
Securityholder may have to require Zynaxis to register securities of Zynaxis for
sale under applicable state and federal securities laws, whether granted
pursuant to the Preferred Stock and Warrant Agreement or otherwise
("Registration Rights"), are suspended pending the Merger, and (ii) upon
occurrence of the Merger all such Registration Rights will be terminated and
such Securityholder will have such Registration Rights as are provided for such
Securityholder in the Merger and Contribution Agreement. If the Merger and
Contribution Agreement is terminated for any reason, beginning at the time of
such termination the undersigned Securityholder shall have such Registration
Rights as such Securityholder would have had at such time if such Registration
Rights had not been suspended pursuant to the preceding sentence.
5. Accredited Investor Status of Securityholder. Each of the undersigned
Securityholders represents and warrants to CytRx, Vaxcel and Zynaxis that he or
it is an "accredited investor" within the meaning of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), and that he
or it is acquiring New Warrants for himself or itself and not for other persons.
Each Securityholder understands that the New Warrants and any Securities
purchased upon exercise of New Warrants (the "Warrant Securities") have not been
registered under the Securities Act and, therefore, cannot be resold unless such
Warrant Securities are registered under the Securities Act or unless an
exemption from such registration is available.
6. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice): (i) if to Zynaxis, CytRx or
Vaxcel, to the address set forth in Section 11.8 of the Merger and Contribution
Agreement; and (ii) if to a Securityholder, to its address shown below its
signature on the last page hereof.
7. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement.
9. Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement, and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
10. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Pennsylvania, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
G-2
<PAGE> 186
11. Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties. Any assignment in violation of the foregoing shall
be void.
12. Equitable Remedies. Each Securityholder agrees that irreparable damage
would occur and that CytRx and Vaxcel would not have any adequate remedy at law
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that CytRx and Vaxcel shall be entitled to an injunction or
injunctions to prevent breaches by a Securityholder of this Agreement and to
enforce specifically the terms and provisions of this Agreement.
13. Severability. If any term, provision, covenant or restriction herein,
or the application thereof to any circumstance, shall, to any extent, be held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions herein and the
application thereof to any other circumstances, shall remain in full force and
effect, shall not in any way be affected, impaired or invalidated, and shall be
enforced to the fullest extent permitted by law.
14. Defined Terms. Capitalized terms used in this Agreement but not
defined herein shall have the meanings given such terms in the Merger and
Contribution Agreement.
[Remainder of page intentionally left blank.]
G-3
<PAGE> 187
[FIRST OF THREE SIGNATURE PAGES TO PREFERRED STOCK AND WARRANT AGREEMENT DATED
NOVEMBER , 1996]
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement under
seal as of the day and year first above written.
<TABLE>
<S> <C>
ZYNAXIS, INC. CYTRX CORPORATION
By: By:
--------------------------------------- --------------------------------------
Name: Name:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------ -------------------------------------
VAXCEL INC. S.R. ONE, LTD.
By: By:
-------------------------------------- --------------------------------------
Name: Name:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------- ------------------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
EUCLID PARTNERS III, L.P. ALPHI FUND L.P.
By: Alphi Investment Management Company,
By: General Partner
---------------------------------------
Name: Name:
------------------------------------- -------------------------------------
Title: Title:
----------------------------------- ------------------------------------
Address: By:
----------------------------------- -------------------------------------
Name:
----------------------------------- -------------------------------------
Title:
----------------------------------- -----------------------------------
Address:
----------------------------------- ----------------------------------
----------------------------------
----------------------------------
JAVELIN CAPITAL FUND, L.P.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
</TABLE>
G-4
<PAGE> 188
[SECOND OF THREE SIGNATURE PAGES TO PREFERRED STOCK AND WARRANT AGREEMENT DATED
NOVEMBER , 1996]
<TABLE>
<S> <C>
SENMED MEDICAL VENTURES CIP CAPITAL L.P.
By: CIP Capital Management Inc., General
Partner
By: By:
--------------------------------------- ---------------------------------------
Name: Name:
-------------------------------------- -------------------------------------
Title: Title:
------------------------------------ -------------------------------------
Address: Address:
----------------------------------- ----------------------------------
------------------------------------ ----------------------------------
------------------------------------ ----------------------------------
------------------------------------ -----------------------------------
THE WEST COMPANY WILLIAM M. SPENCER, III
By: By:
--------------------------------------- ---------------------------------------
Name: Name:
-------------------------------------- -------------------------------------
Title: Title:
------------------------------------- -------------------------------------
Address: Address:
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
----------------------------------- ----------------------------------
BIOTECHNOLOGY VENTURE
FUND S.A. COMMONWEALTH VENTURE PARTNERS I, L.P.
By: By:
--------------------------------------- ---------------------------------------
Name: Name:
-------------------------------------- -------------------------------------
Title: Title:
------------------------------------ ------------------------------------
Address: Address:
----------------------------------- ----------------------------------
----------------------------------- ----------------------------------
----------------------------------- ----------------------------------
----------------------------------- ----------------------------------
</TABLE>
G-5
<PAGE> 189
[THIRD OF THREE SIGNATURE PAGES TO PREFERRED STOCK AND WARRANT AGREEMENT DATED
NOVEMBER , 1996]
<TABLE>
<S> <C>
PLEXUS VENTURES, INC. PHILADELPHIA VENTURES -- JAPAN I, L.P.
By: By:
------------------------------------------ -------------------------------------------
Name: Name:
---------------------------------------- -----------------------------------------
Title: Title:
---------------------------------------- -----------------------------------------
Address: Address:
-------------------------------------- ---------------------------------------
-------------------------------------- ---------------------------------------
-------------------------------------- ---------------------------------------
-------------------------------------- ---------------------------------------
GROTECH PARTNERS II, L.P. GROTECH PARTNERS III, L.P.
GROTECH III COMPANION FUND, L.P.
By: Mid Atlantic Ventures II, L.P., GROTECH III PENNSYLVANIA FUND, L.P.
General Partner
By: Grotech Capital Group, Inc., By: Grotech Capital Group, Inc.,
General Partner General Partner
By: By:
------------------------------------------- -------------------------------------------
Name: Name:
------------------------------------------ ------------------------------------------
Title: Title:
----------------------------------------- ------------------------------------------
Address: Address:
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
Dr. Gus G. Casten
Address:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
</TABLE>
G-6
<PAGE> 190
EXHIBIT A
HOLDERS OF PREFERRED STOCK AND WARRANTS ISSUED BY ZYNAXIS, INC.
<TABLE>
<CAPTION>
SERIES A
NAME SHARES WARRANTS
- ----------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Euclid Partners III, L.P. ............................................. 260,000 680,775
S.R. One, Ltd.......................................................... 257,500 540,000
Javelin Capital Fund, L.P. ............................................ 250,000 500,000
Alphi Fund L.P. ....................................................... 150,000 300,000
Senmed Medical Ventures................................................ 135,000 270,000
The West Company....................................................... 125,000 250,000
William M. Spencer, III................................................ 55,000 110,000
Biotechnology Venture Fund S.A. ....................................... 50,000 100,000
CIP Capital L.P. ...................................................... 45,000 265,000
Grotech Partners III, L.P. ............................................ 26,490 52,980
Plexus Ventures, Inc. ................................................. 25,000 150,000
Dr. Gus G. Casten...................................................... 12,500 25,000
Commonwealth Venture Partners I, L.P. ................................. 10,000 20,000
Grotech Partners II, L.P. ............................................. 3,455 6,910
Grotech III Companion Fund, L.P. ...................................... 3,155 6,310
Philadelphia Ventures -- Japan I, L.P. ................................ 2,500 5,000
Grotech III Pennsylvania Fund, L.P. ................................... 1,900 3,800
Totals....................................................... 1,412,500 3,285,775
</TABLE>
G-7
<PAGE> 191
EXHIBIT B
[SEE APPENDIX H]
G-8
<PAGE> 192
APPENDIX H
THE WARRANTS REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE WARRANTS MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
THE WARRANTS REPRESENTED HEREBY AND THE RIGHTS OF HOLDERS THEREOF ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND OTHER RESTRICTIONS, AND THE HOLDER OF THE
WARRANTS REPRESENTED HEREBY (INCLUDING ANY HOLDERS) ARE BOUND BY THE TERMS OF A
PREFERRED STOCK AND WARRANT AGREEMENT DATED DECEMBER 6, 1996 AMONG ZYNAXIS,
INC., A PENNSYLVANIA CORPORATION, CYTRX CORPORATION, A DELAWARE CORPORATION,
VAXCEL, INC., A DELAWARE CORPORATION, AND THE HOLDERS OF SHARES OF SERIES A
CONVERTIBLE PREFERRED STOCK OF ZYNAXIS, INC. (THE "PREFERRED STOCK AND WARRANT
AGREEMENT") (COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY).
Void after 5:00 p.m. (Eastern Standard Time), on the last
day of the Warrant Term, as provided herein.
Date: ______, 1996 Warrant to
Purchase ______
Shares of Common Stock
WARRANT
TO PURCHASE COMMON STOCK OF
VAXCEL, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED, ____________ or such person's
registered assigns (herein called "Warrant Holder"), is the holder of a warrant
(this "Warrant") to purchase, subject to the provisions of this Warrant, from
Vaxcel, Inc., a Delaware corporation (the "Company"), at any time and from time
to time during the Warrant Term, ____________ fully paid, validly issued and
nonassessable shares of Common Stock, par value $.001 per share, of the Company
("Common Stock"), at the Warrant Price. The Warrant Price and number and kind of
securities issuable hereunder are subject to adjustment as provided herein.
1. Definitions. For the purpose of this Warrant:
(a) "Additional Shares of Capital Stock" means all shares of capital stock
issued by the Company, except shares of capital stock of the Company issued and
outstanding at the time of issuance of this Warrant or expressly authorized to
be issued in the future pursuant to any contract, option, warrant or benefit or
compensation plan in existence and/or outstanding at the time of issuance of
this Warrant.
(b) "Capital Stock" means the Company's Common Stock, and any other stock
of any class, whether now or hereafter authorized, which has the right to
participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
(c) "Merger and Contribution Agreement" means that certain Agreement and
Plan of Merger and Contribution entered into by and among CytRx Corporation, a
Delaware corporation, the Company, Vaxcel Merger Subsidiary, Inc., a Georgia
corporation, and Zynaxis, Inc., a Pennsylvania corporation.
(d) "Per Share Price" means the Per Share Price as defined in the Merger
and Contribution Agreement.
(e) "Warrants" mean the warrants to purchase Common Stock of the Company
issued by the Company pursuant to the Preferred Stock and Warrant Agreement and
any and all warrants which are issued in exchange or substitution for any
outstanding Warrant pursuant to the terms of that Warrant.
H-1
<PAGE> 193
(f) "Warrant Price" means the price per share at which shares of Common
Stock are purchasable hereunder, as such price may be adjusted from time to time
hereunder. The Warrant Price shall initially be equal to: (i) the Per Share
Price divided by (ii) the Exchange Ratio, and beginning at 5:00 p.m. Eastern
Time on the sixtieth (60th) day following the Closing Date, as such term is
defined in the Merger and Contribution Agreement, shall be equal to two (2)
times the Warrant Price in effect immediately prior to such time.
(g) "Warrant Shares" mean shares of Common Stock or other securities
purchased upon exercise of this Warrant.
(h) "Warrant Term" means a period of one year commencing on the Closing
Date and ending at 5:00 p.m. Eastern Time on the first anniversary of the
Closing Date, as such term is defined in the Merger and Contribution Agreement.
2. Exercise of Warrants. This Warrant may be exercised during the Warrant
Term in whole or in part by the surrender of the Warrant, with the purchase
agreement attached hereto as Exhibit A properly completed and executed, at the
principal office of the Company at 154 Technology Parkway, Norcross, Georgia
30092 or such other location which shall at that time be the principal office of
the Company (the "Principal Office"), and upon payment to it by certified check
or bank draft to the order of the Company for the purchase price for the shares
to be purchased upon such exercise. The persons entitled to the shares so
purchased shall be treated for all purposes as the holders of such shares as of
the close of business on the date of exercise and certificates for the shares of
stock so purchased shall be delivered to the persons so entitled within a
reasonable time, not exceeding thirty (30) days, after such exercise. Unless
this Warrant has expired, a new Warrant of like tenor and for such number of
shares as the holder of this Warrant shall direct, representing in the aggregate
the right to purchase a number of shares with respect to which this Warrant
shall not have been exercised, shall also be issued to the holder of this
Warrant within such time.
3. Exchange. This Warrant is exchangeable from the date hereof until the
expiration of the Warrant Term, upon the surrender thereof by the holder thereof
at the Principal Office, for new Warrants of like tenor registered in such
holder's name and representing in the aggregate the right to purchase the number
of shares purchasable under the Warrant being exchanged, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by said holder at the time of such surrender.
4. Transfer. The transferability of this Warrant and the Warrant Shares
are subject to the restrictions on transfer set forth below:
(a) Registration Restrictions. This Warrant and any Warrant Shares that
may be issued upon exercise thereof have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to the exemption provided in Section 4(2) thereof, and
have not been registered under state securities laws by reason of their issuance
in a transaction exempt from such registration requirements. This Warrant and
such Warrant Shares may not be sold, transferred or otherwise disposed of unless
registered under the Securities Act and applicable state securities laws (the
Company being under no obligation so to register such Warrant or Warrant Shares
except as set forth in the Merger and Contribution Agreement) or exempted from
such registration. Warrant Shares issuable upon exercise of this Warrant will
bear a legend to this effect. The restrictions contained herein shall be binding
on any transferee of this Warrant and the Company may require any such
transferee to execute an instrument agreeing in writing to be so bound by these
restrictions as a condition to transfer.
(b) Notice of Transfer and Opinion of Counsel. Warrant Holder agrees that,
prior to any transfer of this Warrant, such holder will give written notice to
the Company of such holder's intention to effect such transfer and to comply in
all other respects with the provisions of this Section 4. Each such notice shall
contain (i) a statement setting forth the intention of such holder's prospective
transferee with respect to its retention or disposition of this Warrant, and
(ii) unless waived by the Company, an opinion of counsel for such holder (who
may be the inside or staff counsel employed by such holder), as to the necessity
or non-necessity for
H-2
<PAGE> 194
registration under the Securities Act and applicable state securities laws in
connection with such transfer and stating the factual and statutory bases relied
upon by counsel. The following provisions shall then apply:
(A) If in the opinion of counsel for the Company the proposed transfer of
this Warrant may be effected without registration or qualification under the
Securities Act and any applicable state securities laws, then the registered
holder of this Warrant shall be entitled to transfer this Warrant in accordance
with the intended method of disposition specified in the statement delivered by
such holder to the Company.
(B) If in the opinion of counsel for the Company the proposed transfer of
this Warrant may not be effected without registration under the Securities Act
or registration or qualification under any applicable state securities laws, the
registered holder of this Warrant shall not be entitled to transfer this Warrant
until the requisite registration or qualification is effective.
(c) Transfer. Subject to the restrictions on transfer set forth in this
Section 4 and in Section 11 hereof, this Warrant is transferable, in whole or in
part, at the Principal Office by the registered holder thereof, in person or by
duly authorized attorney, upon presentation of this Warrant, properly endorsed,
for transfer. Each holder of this Warrant, by holding it, agrees that this
Warrant, when endorsed in blank, may be deemed negotiable, and that the holder
thereof, when the Warrant shall have been so endorsed, may be treated by the
Company and all other persons dealing with the Warrant as the absolute owner
thereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to the transfer thereof on the books of the
Company, any notice to the contrary notwithstanding.
5. Certain Covenants of the Company. The Company covenants and agrees that
all shares which may be issued upon the exercise of this Warrant, will, upon
issuance, be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof; and without
limiting the generality of the foregoing, the Company covenants and agrees that
it will from time to time take all such action as may be required to assure that
the par value per share of the Common Stock is at all times equal to or less
than the then effective purchase price per share of the Common Stock issuable
pursuant to this Warrant. The Company further covenants and agrees that during
the period within which the rights represented by this Warrant may be exercised,
the Company will at all times have authorized, and reserved for the purpose of
issue upon exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
6. Adjustments of Warrant Price. In the event that the Company at any time
or from time to time after the issuance of the Warrants shall declare any
dividend on the Common Stock payable in Common Stock or in any right to acquire
Common Stock for any consideration less than the Warrant Price, or shall effect
a subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by stock split, reclassification or otherwise than by
payment of a dividend in Common Stock or in any right to acquire Common Stock),
or in the event the outstanding shares of Common Stock shall be combined or
consolidated, by reverse stock split, reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Warrant Price shall,
concurrently with the effectiveness of such event, be proportionately decreased
or increased, as appropriate, to avoid dilution of the exercise rights
hereunder. In the event that the Company shall declare or pay any dividend on
the Common Stock payable in any right to acquire Common Stock for no
consideration, then the Company shall be deemed to have made a dividend payable
in Common Stock in an amount of shares equal to the maximum number of shares
issuable upon exercise of such rights to acquire Common Stock. The Warrant Price
will be adjusted on a weighted-average basis in the event of the sale of
Additional Shares of Capital Stock for consideration less than the Warrant Price
(except in connection with corporate partnership or research and development
agreements). For the purposes of this Section 6, the value of consideration
other than cash received for the issuance of Additional Shares of Capital Stock
shall be computed at the fair value thereof at the time of such issuance, as
determined in good faith by the Board of Directors of the Company.
7. Adjustments for Reclassification and Reorganization. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value or as a result of a subdivision or
combination) or in case of any consolidation or merger of the Company with or
into another corporation or in case of any sale or
H-3
<PAGE> 195
transfer to another corporation of the property of the Company as an entirety or
substantially as an entirety, the Company, or such successor or purchasing
corporation, as the case may be, shall, without payment of any additional
consideration therefor, execute or require the execution of new warrants
providing that the holders of the Warrants shall have the right to exercise such
new warrants (upon terms not less favorable to the holders than those then
applicable to the Warrants) and to receive upon such exercise, in lieu of each
share of Common Stock theretofore issuable upon exercise of the Warrants, the
kind and amount of shares of stock, other securities, money or property
receivable upon such reclassification, change, consolidation, merger, sale or
transfer by the holder of one share of Common Stock issuable upon exercise of
the Warrants had the Warrants been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or transfer. Such new
warrants shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in Section 6 hereof and this
Section 7. The provisions of this Section 7 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales and transfers.
8. Notices. Whenever the Warrant Price shall be adjusted pursuant to
Section 6 hereof, or there shall be a reclassification, reorganization or other
event specified in Section 7 hereof, the Company shall promptly prepare a
certificate signed by its President or a Vice President and by its Treasurer or
Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in
reasonable detail, as the case may be, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
the Warrant Price after giving effect to such adjustment, and information
regarding the execution of new warrants, and shall promptly cause copies of such
certificate to be mailed (by first class mail and postage prepaid) to the
registered holders of the Warrants.
In the event the Company shall take any action which pursuant to Section 6
may result in an adjustment of the Warrant Price, or pursuant to Section 7 may
result in the execution of new warrants, the Company will give to the registered
holders of the Warrants at their last addresses known to the Company written
notice of such action ten (10) days in advance of its effective date in order to
afford to such holders of the Warrants an opportunity to exercise the Warrants
and to purchase shares of Common Stock of the Company prior to such action
becoming effective.
9. Fractional Shares. No fractional shares of Common Stock will be issued
in connection with any purchase hereunder.
10. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
reasonable evidence satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and (in the case of loss, theft or
destruction) of reasonable indemnity and (in case of mutilation) upon surrender
and cancellation thereof, the Company will execute and deliver, in lieu thereof
a new Warrant of like tenor.
11. Restrictions on Transfer. This Warrant is, and any Warrant Shares
issued upon the exercise of this Warrant will be, issued subject to the
restrictions on transfer contained in this Warrant or any certificate for
Warrant Shares issued in exchange or substitution for this Warrant or any
outstanding certificate for Warrant Shares and shall bear the restrictive
legend(s), if any, on this Warrant or such outstanding certificate for Warrant
Shares unless, in the opinion of counsel for the Company, such legend(s) may be
removed therefrom.
12. Headings. The description headings of the several sections of this
Warrant are inserted for convenience only and do not constitute a part of this
Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Warrant.
VAXCEL, INC.
By:
-----------------------------------
As its:
ATTEST:
H-4
<PAGE> 196
EXHIBIT A
PURCHASE AGREEMENT
Date: ____________
TO:
The undersigned, pursuant to the provisions set forth in the attached
Warrant, hereby agrees to purchase shares of Common Stock covered by such
Warrant, and makes payment herewith in full therefor at the price per share
provided by this Warrant.
Signature:
----------------------------
Address:
------------------------------
* * *
ASSIGNMENT
For Value Received, ____________ hereby sells, assigns and transfers all of
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered by such Warrant to:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
, and appoints ____________ Attorney to make such transfer of the books of
Vaxcel, Inc. maintained for such purpose, with full power of substitution in the
premises.
Dated:
Signature:
------------------------
Witness:
--------------------------
H-5
<PAGE> 197
APPENDIX I
VAXCEL, INC.
SHARE WARRANT
NEITHER THIS WARRANT
NOR THE SHARES ISSUABLE UPON THE EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED
, 1997 Warrant to Purchase
Shares of Common Stock
WARRANT
For the Purchase of Shares of the Common Stock,
$0.001 Par Value, of Vaxcel, Inc.,
a Delaware Corporation
This is to certify that, for good and valuable consideration received,
CytRx Corporation, a Delaware corporation ("Investor"), or registered assigns,
is entitled to purchase from Vaxcel, Inc., a Delaware corporation (the
"Company"), a number of shares of common stock of the Company ("Common Stock")
equal to: (i) the amount that the Board of Directors of Investor reasonably
determines is the minimum amount that must be contributed to the capital of the
Company in order for the Company to satisfy or continue to satisfy quantitative
requirements for inclusion or continued inclusion of the Common Stock in the
Nasdaq Small Cap Market divided by (ii) one-half of the Per Share Price and
multiplied by (iii) the Exchange Ratio. This Warrant is subject to the terms and
conditions hereinafter set forth, including, without limitation, the terms
governing exercise of this Warrant set forth in Section 1 below. Unless
otherwise defined herein, capitalized terms that are not defined herein and that
are defined terms in the Agreement and Plan of Merger and Contribution dated
December 6, 1996 among Investor, the Company, Vaxcel Merger Subsidiary, Inc. and
Zynaxis, Inc. (the "Merger and Contribution Agreement") shall have the meanings
given such terms in the Merger and Contribution Agreement.
1. Exercise of Warrant.
1.1 EXERCISE PERIOD.
Investor shall have the right to purchase shares of Common Stock under the
terms of this Warrant from the time that the Board of Directors of Investor
reasonably determines that the Company's total assets and capital and surplus
are insufficient to satisfy the total assets and capital and surplus
requirements for inclusion of the Common Stock in the Nasdaq Small Cap Market
until 5:00 p.m. Eastern time on the date that is one year after the date of this
Warrant.
1.2 EXERCISE PRICE.
The per share price for the shares which may be purchased upon the exercise
of this Warrant (the "Exercise Price") shall be initially equal to: (i) one-half
of the Per Share Price, divided by (ii) the Exchange Ratio, subject to
adjustment from time to time as provided in Section 1.3 hereof.
1.3 ADJUSTMENT.
(a) Upon each adjustment of the Exercise Price, the holder of this Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of shares obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the exercise price resulting from such adjustment, and
rounding down to the nearest whole share.
I-1
<PAGE> 198
(b) If the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, or other similar event, the exercise price in
effect immediately prior to such event shall be proportionately reduced, and
conversely, if the number of outstanding shares of Common Stock is decreased by
a combination or reclassification of shares, or other similar event, the
exercise price in effect immediately prior to such event shall be
proportionately increased.
(c) If the Company shall effect a reorganization, shall merge with or
consolidate into another corporation, or shall sell, transfer or otherwise
dispose of all or substantially all of its property, assets or business and,
pursuant to the terms of such reorganization, merger, consolidation or
disposition of assets, property or assets of the Company, successor or
transferee or an affiliate thereof or cash are to be received by or distributed
to the holders of Common Stock, then the holder of this Warrant shall have the
right thereafter to receive, upon the exercise of this Warrant, the number of
shares of stock or other securities, property or assets of the Company,
successor, transferee or affiliate thereof or cash receivable upon or as a
result of such reorganization, merger, consolidation or disposition of assets by
a holder of the number of shares of Common Stock equal to that to which the
holder of this Warrant upon the exercise thereof immediately prior to such event
would be entitled. The provisions of this paragraph shall similarly apply to
successive reorganizations, mergers, consolidations or dispositions of assets.
Upon any reorganization, consolidation, merger or transfer hereinabove referred
to, this Warrant shall continue in full force and effect and the terms hereof
shall be applicable to the shares of stock and other securities, property,
assets and cash receivable upon the exercise of this Warrant after the
consummation of such reorganization, consolidation, merger or transfer, as the
case may be. The Company shall not effect any such reorganization,
consolidation, merger or transfer, unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting therefrom or the
corporation purchasing such assets shall, by written instrument executed and
mailed to the registered holder hereof at the last address of such holder
appearing on the books of the Company, (i) assume the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to purchase, and (ii)
agree to be bound by all the terms of this Warrant.
1.4 METHOD OF EXERCISE.
In order to exercise this Warrant, the registered owner hereof shall
present this Warrant to the Company at the office of the Company, accompanied by
written notice to the Company that the owner elects to exercise this Warrant, in
form attached hereto as Schedule A. Such notice shall also state the name or
names (with address) in which the certificate or certificates for shares which
shall be issuable on such exercise shall be issued. As soon as practicable after
the receipt of such notice, the presentation of this Warrant, and the receipt by
the Company of the full Exercise Price for such shares in current U.S. funds,
the Company shall issue and deliver to the owner a certificate or certificates
for the number of full shares which the owner seeks the Company to issue upon
that exercise of this Warrant.
Such exercise shall be deemed to have been effected immediately prior to
the close of business on the date on which such notice shall have been received
by the Company and this Warrant shall have been presented as aforesaid, and
exercise shall be at the Exercise Price in effect at such time, and at such time
the rights of the owner of this Warrant as such owner shall cease with respect
to that number of shares, and the person or persons in whose name or names any
certificate or certificates for shares, shall be issuable upon such exercise
shall be deemed to have become the owner(s) of record of the shares represented
thereby.
1.5 NOTICE OF CERTAIN ACTIONS.
In case at any time:
(1) the Company shall declare any discretionary dividend upon any class of
its capital stock payable in securities or make any special dividend or other
distribution;
(2) the Company shall offer for subscription pro rata to the holders of any
class of its capital stock any additional securities of any class or other
rights;
I-2
<PAGE> 199
(3) there shall be any capital reorganization, or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with, or
sale of all of substantially all its assets or stock to, another corporation;
(4) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company; or
(5) the Company shall enter into an agreement or adopt a plan for the
purpose of effecting a consolidation, merger, or sale of all or substantially
all of its assets or stock, other than a merger where the Company is the
surviving corporation and the terms of the Company's capital stock remain
unchanged;
then, in any one or more of said cases, the Company shall give written notice,
by first class mail, postage prepaid, to the registered owner of this Warrant,
of the date on which (a) the books of the Company shall close or a record shall
be taken for such dividend, distribution or subscription rights, or (b) such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up shall take place, as the case may be. Such notice
shall also specify the date as of which the owners of any class of capital stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their capital stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up as the case
may be. Such written notice shall be given at least 30 days prior to the action
in question if practicable and not less than 30 days prior to the record date or
the date on which the Company's transfer books are closed in respect thereto if
practicable.
1.6 RESERVATION OF SHARES.
The Company will at all times reserve and keep available out of its
authorized shares of capital stock, solely for the purpose of issuance upon the
exercise of this Warrant as herein provided, such number of Common Shares as
shall then be issuable upon the exercise of this Warrant. The Company covenants
that all shares which shall be so issuable shall, upon the exercise of this
Warrant as herein provided, be duly and validly issued and fully paid and
nonassessable by the Company.
1.7 TAXES.
The issuance of certificates for shares upon exercise of this Warrant shall
be made without charge to the owner of this Warrant for any issuance tax in
respect thereto, provided that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the registered owner of
this Warrant.
1.8 PARTIAL EXERCISE.
The purchase rights represented by this Warrant are exercisable at the
option of the registered owner hereof in whole at any time, or in part from time
to time, within the period above specified, provided, however, that such
purchase rights shall not be exercisable with respect to a fraction of a share.
In case of the purchase of less than all the shares purchasable under this
Warrant, the Company shall cancel this Warrant upon the surrender hereof and
shall execute and deliver a new Warrant of like tenor and date for the balance
of the shares purchasable hereunder.
2. Shareholder Rights. This Warrant shall not entitle the owner hereof to
any voting rights or other rights as a shareholder of the Company, or to any
other rights whatsoever except the rights herein expressly set forth, and no
dividends shall be payable or accrue in respect of this Warrant or the interest
represented hereby or the shares purchasable hereunder until or unless, and
except to the extent that, this Warrant shall be exercised. No provision hereof,
in the absence of affirmative action by the owner hereof to exercise this
Warrant, and no mere enumeration herein of the rights or privileges of the owner
hereof, shall give rise to any liability of such owner for the exercise price or
as a shareholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
3. Exchange of Warrant. This Warrant is exchangeable upon the surrender
hereof by the registered owner to the Company for a reasonable number of new
Warrants issued to the registered owner of like tenor and date representing in
the aggregate the right to purchase the number of shares purchasable hereunder,
each
I-3
<PAGE> 200
of such new Warrants to represent the right to purchase such number of shares as
shall be designated by the registered owner at the time of such surrender.
4. Transfer. This Warrant and the shares which may be purchased by the
exercise of this Warrant have not been registered under the Securities Act of
1933, as amended, or any applicable state securities laws. By accepting this
Warrant, the owner or any successor or assignee of the owner who may hereafter
become the owner of this Warrant, hereby agrees to be bound by the provisions of
such statutes. Except as otherwise provided above, this Warrant and all rights
hereunder are transferable by the registered owner hereof in person or by duly
authorized attorney on the books of the Company upon surrender of this Warrant,
properly endorsed, to the Company.
5. Investment Representation and Legend. The owner of this Warrant, by
acceptance of this Warrant, represents and warrants to the Company that it is
acquiring this Warrant and the shares (or other securities) issuable upon the
exercise hereof for investment purposes only and not with a view towards the
resale or other distribution thereof and agrees that the Company may affix upon
this Warrant the following legend:
"Neither this Warrant nor the shares issuable upon exercise of this
Warrant have been registered under the Securities Act of 1933, as
amended."
The owner of this Warrant, by acceptance of this Warrant, further agrees that
the Company may affix the following legend (in addition to any other legend(s),
if any, required by applicable state securities laws) to certificates for shares
(or other securities) issued upon exercise of this Warrant ("Warrant Shares"):
"The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of
1933, as amended. None of such shares may be offered, sold or
transferred in the absence of such registration or an exemption
therefrom."
6. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost,
stolen, mutilated or destroyed, the Company may, on such terms as to
indemnification or otherwise as it may in its discretion reasonably impose
(which shall, in the case of a mutilated Warrant, include the surrender
thereof), issue a new Warrant of like denomination and tenor as the Warrant so
lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute a
contractual obligation of the Company, whether or not the allegedly lost,
stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
7. Presentment. Prior to due presentment for registration of transfer of
this Warrant, the Company may deem and treat the registered owner hereof as the
absolute owner of this Warrant, notwithstanding any notation of ownership or
other writing thereon, for the purpose of any exercise thereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
8. Notice. Notice or demand pursuant to this Warrant shall be sufficiently
given or made, if sent by first-class mail, postage prepaid, addressed, if to
the owner of this Warrant, to such owner at its last known address as it shall
appear in the records of the Company, and if to the Company, at Vaxcel, Inc.,
154 Technology Parkway, Norcross, Georgia 30092, Attention: President. The
Company may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provision of this
Section 8 for the giving of notice.
9. Governing Law. The validity, interpretation and performance of this
Warrant shall be governed by the laws of the State of Delaware.
10. Successors, Assigns. All the terms and provisions of this Warrant
shall be binding upon, inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto.
I-4
<PAGE> 201
IN WITNESS WHEREOF, the Company has created this Warrant to be executed by the
signatures of its duly authorized officers and the corporate seal hereunto
affixed.
VAXCEL, INC.
By:
-----------------------------------
Paul J. Wilson, III
President and Chief Executive
Officer
[CORPORATE SEAL]
I-5
<PAGE> 202
SCHEDULE A TO WARRANT
Vaxcel, Inc.
154 Technology Parkway
Norcross, Georgia 30092
Attention: Paul J. Wilson, III
Re: Warrant dated as of , 1997, issued to CytRx Corporation (the
"Warrant")
Gentlemen:
We hereby exercise the Warrant for ______ shares of Common Stock, $0.001 par
value, at the current exercise price of $________ per share. Certificates for
such shares should be issued in the name of CytRx Corporation. Enclosed is a
check in the aggregate amount of $____________.
--------------------------------------
Holder
--------------------------------------
Dated:
I-6
