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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-22373
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VAXCEL, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 58-2027283
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
154 Technology Parkway
Norcross, Georgia 30092 30092
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 453-0195
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Securities registered pursuant to Section l2(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 20 1998, the aggregate market value of the Registrant's common stock
held by non-affiliates was approximately $945,000.
On March 20 1998, there were 11,001,070 shares of the Registrant's common stock
outstanding, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Vaxcel, Inc. 1997 Annual Report to Stockholders are
incorporated by reference into Parts II, III and IV. Portions of the Vaxcel,
Inc. Proxy Statement for the 1998 Annual Meeting of Stockholders (the "Proxy
Statement") are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Vaxcel, Inc. ("Vaxcel"), is engaged in the development and
commercialization of vaccine adjuvants and delivery systems and a novel vaccine
for the treatment of cancer.
Vaxcel has four proprietary adjuvant and delivery system technologies
which can be used to increase the effectiveness and/or convenience of both
currently marketed and new vaccines. Vaxcel derives its rights to these four
technologies from the following: (a) the rights to OPTIVAX(R) ("Optivax") are
derived from an exclusive, worldwide license agreement with CytRx Corporation
("CytRx"); (b) the rights to PLG microspheres for oral vaccine delivery are
derived as a result of a May 1997 merger of Zynaxis, Inc. ("Zynaxis"), a
publicly-held biotechnology company, with Vaxcel Merger Sub, a wholly-owned
subsidiary of Vaxcel formed for the purpose of the transaction (such
transaction hereinafter referred to as the "Merger"); (c) the rights to
mucoadhesives for oral vaccine delivery are also derived as a result of the
Merger; and (d) the rights to entrapment techniques for vaccine delivery using
certain water soluble polymers are derived from a Research Agreement and Option
Agreement with Vanderbilt University ("Vanderbilt"). These four technologies
are complementary to each other, thereby providing Vaxcel with a broad
portfolio of technologies for the development of vaccines to be delivered by
the injectable, oral, and mucosal routes of administration. Vaxcel's business
strategy is to sublicense these adjuvant and delivery system technologies on a
vaccine-by-vaccine basis to companies engaged in vaccine development.
Reference herein to "the Company" includes Vaxcel, Vaxcel Merger Sub
and Zynaxis. This Form 10-K contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company. Holders of the Company's capital stock are cautioned that such
statements are only predictions and that actual events or results may differ
materially.
RECENT DEVELOPMENTS
In March 1998, Vaxcel and University College London ("UCL") executed a
definitive license agreement whereby Vaxcel acquired worldwide, exclusive
rights to genetically engineered and mutated (beta)-Human Chorionic
Gonadotropin ((beta)hCG) proteins for use in the treatment and/or prevention of
cancer. UCL retained the rights to these (beta)hCG proteins for therapeutic
applications other than cancer. Under the terms of this license agreement,
Vaxcel paid UCL an upfront license fee upon execution of this license agreement
and will further pay UCL a royalty on net sales of any cancer product that
utilizes the (beta)hCG proteins. Vaxcel also has the right to sublicense the
(beta)hCG proteins, subject to certain conditions and the payment to UCL of a
fixed proportion of the sublicense compensation received by Vaxcel. Vaxcel
believes
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these proteins can be combined with the Company's Optivax adjuvant technology
to develop a next generation (beta)hCG cancer vaccine.
In December 1997, Vaxcel and Vanderbilt executed a Research Agreement
and an Option Agreement to evaluate Vanderbilt's technology for vaccine
delivery by entrapping antigens into the structure of particles composed of
water soluble, biocompatible and/or biodegradable polymers. Under the terms of
these agreements, Vanderbilt will produce experimental vaccines that
incorporate certain antigens into the structure of micrometer and nanometer
particles composed of water-soluble, biocompatible, and/or biodegradable
polymers. Such vaccine formulations will be preclinically evaluated by Vaxcel.
If the preclinical evaluations are successful, Vaxcel has the right to
negotiate an exclusive, worldwide license to further develop and market
Vanderbilt's technology in the vaccine field. Under such license agreement,
Vaxcel shall pay Vanderbilt milestone fees and royalties on sales if Vaxcel
directly markets vaccines utilizing the Vanderbilt technology. Vaxcel also has
the right to sublicense the Vanderbilt technology, subject to certain
conditions and the payment to Vanderbilt of a fixed proportion of the
sublicense compensation received by Vaxcel.
CURRENT FINANCIAL CONDITION AND THE POTENTIAL IMPACT ON OPERATIONS
At December 31, 1997, the Company had cash and cash equivalents of
$691,000 and working capital of $666,000. Current cash resources, augmented by
expected collaborative and other revenues will only be sufficient to fund
current operations into, but not beyond the third quarter of 1998. The ability
of the Company to operate as a going concern with the current portfolio of
technologies under development for the remainder of 1998 and into 1999 will be
determined by the results of ongoing technology licensing efforts and/or the
actual proceeds of any fund-raising activities. In order to fund its operations
and technologies, the Company will consider all available options, including
the possible sale of the Company or merger with another organization.
If the Company is unable to raise significant additional funds, it
will be required to severely reduce or terminate operations. A severe reduction
in operations would limit the ability of the Company to perform under its
current collaborative agreements and would limit the advance of the Company's
technologies under development. Ultimately, the Company may need to obtain
funds through arrangements that require it to relinquish rights to certain or
all of its technologies. The Company may additionally be required to curtail or
further divest research programs or totally cease operations and liquidate
remaining assets, if any. Should the Company determine that it is no longer in
the best interest of its stockholders to continue operations, the ability of
the Company to fund an orderly disposition of assets, pay off its then
outstanding liabilities and return any remaining cash to its stockholders will
be limited by the amount of working capital on hand.
PRODUCT DEVELOPMENT
Vaccine Adjuvants Delivery Systems. Vaccines are one of the most
powerful tools for controlling infectious diseases as routine immunization has
caused a significant reduction in the
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number of cases and associated morbidity and mortality of a wide variety of
diseases. As a result of these past successes, several new vaccines are under
research and development, many of which have the potential to be introduced
within the next decade.
The demand for vaccine adjuvant and delivery system technologies has
emerged in recent years as scientists have recognized the need for compounds
capable of generating potent immune responses. There are several medical /
technical needs for such technologies, including: (a) reducing the number of
injections for vaccines which require multiple doses; (b) increasing the
potency of existing vaccines which are only marginally effective; (c)
increasing the effectiveness of new subpotent vaccines under development; and
(d) allowing the development of oral vaccines which provide mucosal protection
and have greater patient acceptance than vaccines given by needle injections.
To help address these medical / technical needs, Vaxcel has a
portfolio of proprietary adjuvants and delivery systems as shown below.
<TABLE>
<CAPTION>
TECHNOLOGY COMPOSITION ROUTE OF ADMINISTRATION
<S> <C> <C>
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Optivax(R) Block Copolymers Injectable
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Microencapsulation Poly(Lactide-Co-Glycolide) Oral & Mucosal
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Mucoadhesives Mucoadhesive Polymers Oral
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Entrapment Water Soluble Polymers Oral, Mucosal, & Injectable
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</TABLE>
Optivax is the tradename for a family of proprietary nonionic block
copolymers which augment or modify the immune response to vaccines when
administered primarily by injection. Optivax acts both as a delivery system by
targeting vaccines to cells of the immune system and as an adjuvant because of
its ability to augment the immune system's response to vaccines. Vaxcel and its
institutional / corporate collaborators have performed numerous preclinical
studies (including several studies in non-human primates) to characterize the
adjuvant activity of Optivax. Vaxcel also performed a Phase I clinical trial to
help demonstrate that Optivax was safe and effective in humans. In this trial,
the results of which were published in the December 1997 issue of Clinical
Cancer Research, Optivax in combination with a subpotent cancer immunogen
generated potentially beneficial humoral and cellular immune responses in
patients with advanced cancer without evidence of significant local or systemic
toxicity.
The PLG microencapsulation oral technology is based on the use of
lactide and glycolide polymers. The actual encapsulation process involves the
trapping of antigens into pockets or cavities formed within the PLG
microspheres during production. When the final vaccine is administered to
humans, the PLG microspheres degrade and the encapsulated antigen is then
released to the appropriate immunological site in the body. Vaccines using PLG
microencapsulation have been evaluated in animals and humans and such vaccines
have induced systemic and mucosal antibody responses following oral
administration. 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.
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Mucoadhesives are natural or synthetic polymers that bind to mucosal
tissues or the mucin that coats these tissues. Mucoadhesive polymers have been
favorably evaluated by others for oral delivery of drugs and Vaxcel believes
this technology may have application for vaccines. In a recent preclinical
study with influenza vaccine, the lead mucoadhesive polymer induced a stronger
mucosal response than the injected vaccine.
Techniques have been developed by Vanderbilt which entrap antigens
into the structure of particles composed of water soluble, biocompatible and/or
biodegradable polymers. This technology is currently being preclinically
evaluated as both an injectable and oral vaccine delivery system by Vaxcel in
collaboration with Vanderbilt. If such evaluations are positive, Vaxcel has an
option to license this technology for use with vaccines administered by the
injectable, oral, nasal or any other route.
Vaxcel's business strategy is to sublicense its technologies on a
vaccine-by-vaccine basis to companies engaged in vaccine development. Such
sublicense agreements may be either exclusive, co-exclusive, or non-exclusive
in the field depending upon the situation. The sublicensees will combine their
vaccine with Vaxcel's technology and then be responsible for product
development, regulatory approval, and commercialization of the final product at
their expense. In return, Vaxcel will receive licensing fees, milestone
payments, and royalty on sales. At present, Vaxcel has entered into an option
agreement for Optivax with Medeva PLC ("Medeva"), a license agreement for
Optivax with Corixa Corporation ("Corixa"), and a license agreement for PLG
microspheres with ALK A/S ("ALK").
Amounts spent for research and development activities for Vaxcel's
adjuvant and delivery system technologies were $1,165,000, $853,000, and
$895,000 during the years ended December 31, 1997, 1996, and 1995,
respectively.
Current Corporate Collaborations. The Company has three corporate
collaboration agreements for the development of its technologies:
Medeva. In October 1995, Vaxcel signed an option agreement with Medeva
PLC ("Medeva") to evaluate Optivax in combination with a Medeva viral
antigen. Medeva is a London based pharmaceutical company which currently
markets a variety of important vaccines and is also in late-stage
development of a hepatitis B 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 its 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.
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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 publicly-traded Seattle-based biotechnology
company, 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 assumed 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 to evaluate and develop oral technologies for delivery
of bioactive substances for the treatment of allergy.
Vaxcel may receive additional milestone and royalty payments from ALK
if ALK receives FDA or certain other regulatory approvals for allergy
products using the oral 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 oral 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 will aggressively
pursue sublicensing agreements or other arrangements with certain of these
research partners.
Cancer Vaccine. In March 1998, Vaxcel, executed a definitive license
agreement with UCL for acquiring worldwide, exclusive rights to genetically
engineered and mutated (beta)-Human Chorionic Gonadotropin ((beta)hCG) proteins
for use in the treatment and/or prevention of cancer. Vaxcel believes these
genetically engineered and mutated (beta)hCG proteins should be excellent
immunogens for the development of a therapeutic vaccine for a wide variety of
cancers.
Except for pregnant women, healthy individuals do not normally produce
(beta)hCG. However, significant quantities of (beta)hCG are produced by many
different types of cancers including pancreatic, colorectal, breast, lung,
prostate, and others. The highest concentrations of (beta)hCG are secreted by
cancers which have metastasized. Research has indicated that cancer cells may
use (beta)hCG as one of the mechanisms to resist being attacked and killed by
the human immune system.
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By combining these genetically engineered and mutated (beta)hCG
proteins from UCL with the Company's Optivax adjuvant, Vaxcel believes that
both the antigen and adjuvant components of this cancer vaccine should be
superior to a first generation (beta)hCG vaccine being developed with some
encouraging results by a third party. The genetically engineered and mutated
(beta)hCG proteins should be more immunogenic than the first generation vaccine
and the inclusion of the Optivax adjuvant in the vaccine formulation should
help augment anti-tumor cellular immune responses.
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.
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 adjuvant/delivery system.
See Item 13 - "Certain Relationships and Related Transactions." 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 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
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patent applications, and foreign counterparts held by Southern Research
Institute ("SRI") and the University of Alabama at Birmingham ("UAB"). By means
of the Merger with Zynaxis, this microencapsulation technology is exclusively
licensed to Vaxcel in the field of oral vaccine delivery. See Item 13 -
"Certain Relationships and Related Transactions."
Through the Merger, Vaxcel also acquired 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.
Patent applications on the genetically engineered and mutated
(beta)hCG proteins were submitted by UCL in 1995. The claims in these patent
applications are directed to both composition of matter and therapeutic uses of
the recombinant, mutated (beta)hCG proteins.
In 1997, Vanderbilt submitted patent applications on its techniques
for entrapping antigens into the structure of particles composed of water
soluble, biocompatible and/or biodegradable polymers. The claims in these
patent applications are directed to both composition of matter and delivery of
vaccines and other substances.
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
vaccine adjuvants and delivery systems or its (beta)hCG cancer proteins will be
subject to extensive regulation by United States and foreign governmental
authorities. The FDA has established guidelines and safety standards which
apply to the pre-clinical evaluation, clinical testing, manufacture and
marketing of pharmaceutical products. The process of obtaining FDA approval for
a new therapeutic or prophylactic product (drug and/or vaccine) generally takes
several years and involves the expenditure of substantial resources. The steps
required before such a 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, human clinical
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trials 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 the manufacturing and
testing processes, preclinical studies, and clinical trials. The FDA must
approve the PLA before the drug may be marketed. There can be no assurance that
the Company will be able to obtain the required FDA approvals for any of its
products.
The manufacturing facilities and processes for the Company's products,
whether manufactured directly by the Company or by a third party, will be
subject to rigorous regulation, including the need to comply with Federal Good
Manufacturing Practice regulations. The Company is also subject to regulation
under 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.
COMPETITION
Many companies, including large pharmaceutical, chemical and
biotechnology firms with financial resources, research and development staffs,
and facilities that are substantially greater than those of the Company, are
engaged in the research and development of pharmaceutical products that could
compete with the products under development by the Company. The industry is
characterized by rapid technological advances and competitors may develop their
products more rapidly and/or such products may be more effective than those
under development by the Company or its licensees and corporate partners. The
Company competes in this research and development environment by attempting to
develop its products and technologies in an innovative and timely fashion that
would provide the Company with an advantage in the licensing and/or marketing
of its products and technologies.
MANUFACTURING
Vaxcel currently does not have the capabilities to manufacture any of
its vaccine delivery/adjuvant technologies or its (beta)hCG proteins 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 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 Item 13 - "Certain Relationships
and Related 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
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sublicensee. The sublicensees will be responsible for bulk manufacture of the
antigen and for formulation of the final vaccine product.
Vaxcel has no internal manufacturing capabilities and no written
agreement with a contract manufacturer for production of the PLG
microencapsulation 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 at the appropriate
time. 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.
Vaxcel has 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.
Vaxcel has no internal or external capabilities for manufacturing
Vanderbilt's vaccine delivery technology for entrapping antigens into the
structure of particles composed of water soluble, biocompatible and/or
biodegradable polymers. To date, such entrapment techniques have only been
produced at the laboratory level by Vanderbilt in order for the parties to
perform preclinical studies. Assuming such preclinical studies are favorable,
Vaxcel will develop a manufacturing strategy for both additional development
and commercialization of this technology. At present, Vaxcel believes that
Vanderbilt's techniques for entrapping antigens can be produced at commercial
scale under GMP conditions.
Six mutated versions of the (beta)hCG gene and the normal or wild type
have been developed by UCL. Vaxcel believes these genes are available from UCL
in forms that will allow their expression and production in GMP-approved
expression systems by certain third party contract manufacturers. After such
production, these genes will be formulated with Vaxcel's Optivax adjuvant for
preclinical and initial clinical testing. Assuming such preclinical and
clinical studies are favorable, Vaxcel will develop a manufacturing strategy
for both additional development and commercialization of this technology. At
present, Vaxcel believes that UCL's genetically engineered and mutated
(beta)hCG proteins can be produced at commercial scale under GMP conditions.
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ENVIRONMENTAL PROTECTION
During 1997 compliance with federal, state and local regulations
pertaining to environmental standards did not have a material effect upon the
capital expenditures or earnings of the Company.
EMPLOYEES
Vaxcel has a staff of five individuals dedicated to the development of
its vaccine adjuvant/ delivery system technologies, two of whom are Ph.D.s.
None of Vaxcel's employees are represented by a labor union.
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. See
Item 13 - "Certain Relationships and Related Transactions."
ITEM 2. 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 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. In total,
Vaxcel leases approximately 2,500 square feet of space within CytRx's
facilities. Vaxcel believes that these facilities are sufficient for its needs
for the near future.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol VXCL. The following table sets forth the high and low sale prices
for the Common Stock for the periods indicated as reported by the OTC Bulletin
Board. Such prices represent prices between
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dealers without adjustment for retail mark-ups, mark-downs, or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
COMMON STOCK:
1998
January 1 to March 20 5/8 1/2
1997
Fourth Quarter 1 3/8
Third Quarter 1 3/4 5/8
Second Quarter (from May 21) 2 1/8 1 1/4
</TABLE>
On March 20, 1998, the closing bid quotation of the Common Stock as
reported on the OTC Bulletin Board was $.50 and there were approximately 275
holders of record of the Company's Common Stock. The number of record holders
does not reflect the number of beneficial owners of the Company's Common Stock
for whom shares are held by Cede & Co., certain brokerage firms and other
institutions. The Company has not paid any dividends since its inception and
does not contemplate payment of dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Information with respect to this item is incorporated herein by
reference from the Company's 1997 Annual Report to Stockholders. The applicable
portion of the 1997 Annual Report to Stockholders is included in Exhibit 13.1
to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information with respect to this item is incorporated herein by
reference from the Company's 1997 Annual Report to Stockholders. The applicable
portion of the 1997 Annual Report to Stockholders is included in Exhibit 13.1
to this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 for an index of the statements, notes and
schedules. Information with respect to this item is incorporated herein by
reference from the Company's 1997 Annual Report to Stockholders. The applicable
portion of the 1997 Annual Report to Stockholders is included in Exhibit 13.1
to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated herein by
reference from the Proxy Statement, which is expected to be filed pursuant to
Regulation 14A within 120 days after the end of the Company's 1997 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated herein by
reference from the Proxy Statement, which is expected to be filed pursuant to
Regulation 14A within 120 days after the end of the Company's 1997 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated herein by
reference from the Proxy Statement, which is expected to be filed pursuant to
Regulation 14A within 120 days after the end of the Company's 1997 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. The Optivax
Agreement gives 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. Royalties paid to CytRx pursuant to the Optivax Agreement
amounted to $7,500 and $17,250 during 1996 and 1995, respectively. No royalties
were paid pursuant to this agreement during 1997.
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
12
<PAGE> 14
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). Amounts paid to CytRx for production of copolymers were $79,591,
$10,923 and $15,915 during 1997, 1996 and 1995, respectively.
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. Amounts paid to CytRx pursuant to this
agreement were $90,000, $69,963 and $105,246 during 1997, 1996 and 1995,
respectively.
During 1997, Vaxcel contracted with Proceutics, Inc. ("Proceutics"), a
wholly-owned subsidiary of CytRx, for certain analytical services. Before its
divestiture by CytRx in February 1998, Proceutics was a contract research
organization providing pharmaceutical development services to the
pharmaceutical and biopharmaceutical industry. Amounts paid to Proceutics in
1997 pursuant to these contracts were $163,915.
Effective January 1, 1996 and amended October 16, 1996, Vaxcel and
Proceutics entered into a facilities use agreement whereby Proceutics reserved
and made available to Vaxcel certain laboratory, vivarium and related space at
the Proceutics facility in Norcross, Georgia. Amounts paid to Proceutics
pursuant to this agreement were $48,300 and $51,000 during 1997 and 1996,
respectively.
Effective March 15, 1997, in order to provide necessary funding for
certain expenses and operations of Vaxcel pending the Merger, CytRx and Vaxcel
entered into a Loan Agreement (the "Loan"), pursuant to which CytRx agreed to
lend up to $400,000 to Vaxcel. The purpose of the Loan was to provide funding
to Vaxcel for certain expenses directly or indirectly related to the Merger
incurred by either CytRx or Vaxcel and for ongoing operational cash needs prior
to the Merger. The Loan was unsecured and was interest-free until May 1, 1997;
thereafter the interest rate was prime plus 2%. The outstanding Loan balance of
$286,067, together with accrued interest of $1,421 was repaid by Vaxcel upon
the closing of the Merger on May 21, 1997.
13
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this 10-K:
1. Financial Statements
The financial statements listed below are incorporated by reference
from the Company's 1997 Annual Report to Stockholders:
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the Years Ended December 31, 1997, 1996
and 1995
Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1996 and 1997
Statements of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995
Notes to Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995 Page 18
All other schedules are omitted because they are not required, not
applicable, or the information is provided in the financial statements
or notes thereto.
3. Exhibits required by Item 601 of Regulation S-K:
See Exhibit Index on page 15 of this Form 10-K.
(b) Reports on Form 8-K:
None
14
<PAGE> 16
Vaxcel, Inc.
Form 10-K Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C> <C>
2.1 Agreement and Plan of Merger and Contribution dated as of December
6, 1996, by and among CytRx Corporation, Vaxcel, Inc., Vaxcel Merger
Subsidiary, Inc. and Zynaxis, Inc. (a)
3.1 Certificate of Incorporation (a)
3.2 By-Laws (a)
4.1 Warrant to purchase shares of common stock of Vaxcel, Inc.
issued to certain shareholders of Zynaxis, Inc. (a)
4.2 Warrant to purchase shares of common stock of Vaxcel, Inc.
issued to CytRx Corporation (a)
10.1 Amended and Restated License Agreement dated October 10, 1996
by and between Vaxcel, Inc. and CytRx Corporation (a)
10.2 Amended and Restated Supply Agreement dated October 10, 1996
by and between Vaxcel, Inc. and CytRx Corporation (a)
10.3 Services and Facilities Use Agreement dated October 10, 1996 by and
between Vaxcel, Inc. and CytRx Corporation (a)
10.4* Employment Agreement dated August 16, 1993 by and between
Vaxcel, Inc. and Paul J. Wilson (a)
10.5* Amendment No. 1 to Employment Agreement dated March 6, 1994
by and between Vaxcel, Inc. and Paul J. Wilson (a)
10.6* Form of Amendment No. 1 to Non-Qualified Stock Options Agreement
1997 by and between Vaxcel, Inc. and Paul J. Wilson (a)
10.7* Vaxcel, Inc. 1993 Stock Option Plan (a)
10.8 Lease Agreement dated November 23, 1993 by and between Vaxcel, Inc.
and New England Mutual Life Insurance Company (a)
10.9 First Amendment to Lease Agreement dated January 23, 1996 by and
between Vaxcel, Inc. and Regency Holdings, Inc. (a)
10.10 Second Amendment to Lease Agreement dated October 15, 1996 by and
between Vaxcel, Inc. and Regency Holdings, Inc. (a)
10.11 Agreement of sublease dated January 18, 1996 by and between
Vaxcel, Inc. and Sealite Sciences, Inc. (a)
10.12 Amendment to sublease dated October 15, 1996 by and between
Vaxcel, Inc. and Sealite Sciences, Inc. (a)
10.13 Sublease Agreement dated February 16, 1998 by and between
Vaxcel, Inc. and Oread, Inc.
10.14 License Agreement dated April 9, 1996 by and between Vaxcel, Inc.
and Corixa Corporation (a)
10.15 Option Agreement dated October 15, 1995 by and between Vaxcel, Inc.
and Medeva Europe Limited (a)
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C> <C>
13.1 Selected Portions of the Vaxcel, Inc. 1997 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
*Indicates a management contract or compensatory plan or arrangement.
- -------------------
(a) Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-19125) filed on March 26, 1997.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VAXCEL, INC.
By:/s/ Paul J. Wilson
------------------------------
Paul J. Wilson, President
Date: March 26, 1998 and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack L. Bowman Chairman of the March 26, 1998
- -------------------------- Board of Directors
Jack L. Bowman
/s/ Lyle A. Hohnke Director March 26, 1998
- --------------------------
Lyle A. Hohnke
/s/ Jack J. Luchese Director March 26, 1998
- --------------------------
Jack J. Luchese
/s/ Herbert H. McDade, Jr. Director March 26, 1998
- --------------------------
Herbert H. McDade, Jr.
/s/ Mark W. Reynolds Chief Financial Officer March 26, 1998
- -------------------------- (Principal Financial Officer)
Mark W. Reynolds
/s/ Paul J. Wilson Director March 26, 1998
- -------------------------- President and Chief Executive Officer
Paul J. Wilson (Principal Executive Officer)
</TABLE>
17
<PAGE> 19
VAXCEL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additions
--------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
- --------------------------------------- ----------- ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve Deducted in the Balance Sheet
from the Asset to Which it Applies:
Allowance for Deferred Tax Assets
Year ended December 31, 1997 $ 1,776,000 $ 1,474,000 $ -- $ -- $3,250,000
Year ended December 31, 1996 1,300,000 476,000 -- -- 1,776,000
Year ended December 31, 1995 821,000 479,000 -- -- 1,300,000
</TABLE>
18
<PAGE> 1
EXHIBIT 10.13
Sublease Agreement dated February 16, 1998
By and Between Vaxcel, Inc. and Oread, Inc.
<PAGE> 2
SUBLEASE
THIS SUBLEASE is made as of the 16th day of February, 1998, by and
between OREAD, INC., a Delaware corporation ("Oread"), and VAXCEL, INC., a
Delaware corporation ("Subtenant").
RECITALS
A. Oread is the tenant under that certain Lease dated February 16,
1998 (the "Prime Lease"), by and between Proceutics, Inc. ("Prime Landlord")
and Oread covering that certain building ("Building") located on the land
described in Exhibit A attached hereto and having the mailing address of 150
Technology Parkway, Norcross, Georgia 30092.
B. Oread and Subtenant have agreed that Subtenant will sublease a
portion of the Building from Oread on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Sublease of Premises. Oread hereby subleases to Subtenant solely
for scientific research, storage and laboratory use, and Subtenant hereby rents
from Oread solely for scientific research, storage and laboratory uses a
portion of the Building consisting of approximately 1630 square feet as more
particularly shown on Exhibit B attached hereto and incorporated herein by this
reference ("Subleased Premises"). Subtenant shall take the Subleased Premises
in its "as is" condition.
2. Prime Lease.
(a) Except as otherwise provided herein, this Sublease shall be
upon the same terms and conditions as set forth in the Prime Lease, a copy of
which is attached hereto as Exhibit C and incorporated herein by this
reference. Subtenant shall observe and perform all of the covenants and
obligations of the Tenant under the Prime Lease with respect to the use,
operation and occupancy of the Subleased Premises. Without limiting the
generality of the foregoing, the following provisions of the Prime Lease shall
not apply to Subtenant: Sections 1, 2.1.3, 2.1.4, 2.1.5, 2.1.6, 2.1.7(b),
2.1.8, 2.1.10, 3, 5.1, 6.1, 9, and the indemnities in favor of Landlord set
forth in Sections 10.10, 20.1 and 39.1, except to the extent any such claim,
judgment, damages, penalties, fines, costs, liabilities or losses described in
such sections result from the acts, omissions or negligence of Subtenant or its
agents, employees, contractors or guests (the "Subtenant Indemnity
Obligations").
(b) In those instances under the Prime Lease in which the Prime
Landlord
<PAGE> 3
thereunder has reserved certain rights with respect to the Demised Premises (as
defined in the Prime Lease), or with respect to the Tenant under the Prime
Lease, Oread shall be entitled to exercise all of such rights as against the
Subleased Premises and Subtenant with the same force and effect as if all such
rights of the Prime Landlord, as landlord under the Prime Lease, had been
expressly set forth in this Sublease.
(c) With respect to obligations to be performed by the Prime
Landlord under the Prime Lease, Oread shall have no obligation with respect to
the performance of such obligations and shall have no liability to Subtenant by
reason of Prime Landlord's failure to perform the same; however, in the event
Prime Landlord shall breach such obligations, then, upon request by Subtenant,
Landlord agrees to cooperate with Tenant (at Tenant's cost and expense) to
cause Prime Landlord to perform such obligations. Tenant agrees to reimburse
Landlord upon demand, as additional rent, for any costs and expenses incurred
by Landlord at Tenant's direction to enforce compliance with the provisions of
the Prime Lease.
(d) In the event of conflict between the Prime Lease and the
provisions of this Sublease, the applicable provision which is more restrictive
on Subtenant, or which imposes a greater obligation on Subtenant, shall
control.
(e) Capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Prime Lease.
3. Term. The term of this Sublease ("Sublease Term") shall commence on
February 16, 1998 ("Commencement Date") and shall expire on December 31, 1998,
unless sooner terminated in compliance with the terms of this Sublease.
Notwithstanding the foregoing, at any time prior to December 31, 1998,
Subtenant shall have the right to cancel this Sublease by giving to Oread at
least sixty (60) days' prior written notice of the intent to cancel. Said
notice shall specify the cancellation date ("Cancellation Date"), which date
shall not be on a day other than the last day of a month. Each of the parties
hereto shall be responsible for performance of all terms and conditions of this
Sublease which arise on or before the Cancellation Date.
4. Rent.
(a) Subtenant shall pay to Oread as initial annual rent ("Sublease
Annual Rent") an amount equal to the greater of (i) Forty Eight Thousand Nine
Hundred Dollars ($48,900.00), or (ii) that sum which Oread must pay Landlord
pursuant to the Prime Lease as Rent on an annual basis attributable to that
portion of the Demised Premises designated hereunder as the Subleased Premises.
Subtenant shall pay to Oread the Sublease Annual Rent, without abatement,
deduction or offset, in lawful money of the United States of America, at the
address for Landlord set forth in Paragraph 13 of this Sublease. The initial
Sublease Annual Rent shall be paid on the first day of each month during the
Sublease Term in equal monthly installments of Four Thousand Seventy Five
Dollars ($4,075.00). The Sublease Annual Rent
2
<PAGE> 4
is subject to adjustment as hereafter set forth.
(b) The Sublease Annual Rent shall be increased effective each Rent
Adjustment Date under the Prime Lease by eighty cents ($.80) per square foot.
(c) Within ten (10) days after Oread receives from Prime Landlord the
statement described in Section 7.2.1 of the Prime Lease showing the actual
Operating Expenses and Oread's Pro Rata Share of Building Operating Expenses
and Project Operating Expenses, Oread shall furnish to Subtenant a similar
statement showing the additional amount, if any, owed by Subtenant to Oread as
Sublease Annual Rent pursuant to Paragraph 4(a) above. If any additional amount
is owed by Subtenant to Oread, such amount shall be due and payable no later
than five (5) days after delivery to Subtenant of such statement. Subtenant's
obligation to pay any additional amount of Sublease Annual Rent due shall
survive the termination of this Sublease.
(d) Any monthly installment of Sublease Annual Rent due for any period
less than a full month shall be prorated for such fractional month on the basis
of the actual number of days in the month.
5. Security Deposit.
(a) On or before the Sublease Commencement Date, Subtenant shall
deposit with Oread a security deposit (together with all interest thereon, the
"Sublease Security Deposit") in the amount of Four Thousand Seventy Five
Dollars ($4,075.00), in cash, which Sublease Security Deposit shall be held by
Oread as security for the performance by Subtenant of all of the terms,
covenants and conditions of this Sublease to be kept and performed by Subtenant
during the Sublease Term. If a Default shall occur with respect to any
provision of this Sublease, including, without limitation, any provisions
relating to the payment of Sublease Annual Rent or any installment thereof,
Oread may (but shall not be required to) use, apply or retain all or any part
of the Sublease Security Deposit for the payment of any Sublease Annual Rent or
any other sum in Default, or to compensate Oread for any other loss or damage
which Oread may suffer by reason of Subtenant's default. If any portion of the
Sublease Security Deposit is so used or applied, Subtenant shall, upon demand
therefor, deposit cash with Oread in an amount sufficient to restore the
Sublease Security Deposit to its original amount, and Subtenant's failure to do
so shall be a material breach of this Sublease. The Sublease Security Deposit
shall be held in an interest bearing account separate from Oread's general
fund.
(b) In the event of bankruptcy or other debtor-creditor proceedings
against Subtenant, the Sublease Security Deposit shall be deemed to be applied
first to the payment of Sublease Annual Rent and other charges due Oread for
all periods prior to the filing of such proceedings.
(c) Oread shall deliver the Sublease Security Deposit, or any balance
thereof
3
<PAGE> 5
following application of any portion of the Sublease Security Deposit pursuant
to the provisions of Paragraph 5(a) above, to any purchaser of Oread's interest
in the Subleased Premises, and, upon such purchaser's written confirmation of
receipt of the Sublease Security Deposit and assumption of Oread's obligations
under this Sublease, Oread shall be discharged from any further liability with
respect to the Sublease Security Deposit. This provision also shall apply to
any subsequent transfers.
(d) If Subtenant shall fully perform every provision of this Sublease
to be performed by Subtenant, the Sublease Security Deposit, or any balance
thereof following application of any portion of the Sublease Security Deposit
pursuant to the provisions of Paragraph 5(a) above, shall be returned to
Subtenant within thirty (30) days after the expiration or earlier termination
of this Sublease.
6. Indemnities. (a) All indemnity and hold harmless agreements
("Indemnities") made by Oread in favor of Prime Landlord under the Prime Lease
shall be deemed made by Subtenant in favor of Oread under this Sublease,
including, without limitation, the Indemnities contained in Sections 10.10,
20.1 and 39.1 of the Prime Lease, but only to the extent of the Subtenant
Indemnity Obligations. Nothing contained herein, however, shall be deemed to
negate any indemnity obligations of Oread in favor of the Prime Landlord under
the Prime Lease.
(b) Oread hereby indemnifies and agrees to defend, hold and save
Subtenant harmless from and against any and all demands, claims, liabilities,
losses, costs, expenses, actions, causes of action, damages or judgments, and
all reasonable expenses actually incurred in investigating or resisting the
same (including, without limitation, reasonable attorneys' fees, charges and
disbursements actually incurred), for injury or death to person or injury to
property occurring within or about the Building, arising out of the use or
occupancy of the Building by Oread and its employees, agents or guests or a
breach or default by Oread in the performance of any of its obligations under
this Sublease, except to the extent caused by the acts, omissions or negligence
of Subtenant or its employees, agents, contractors or guests (provided that
nothing herein shall be deemed to affect the indemnity obligations of Subtenant
contained in Paragraph 6(a) above).
7. Parking. Subtenant shall not have the right to use the parking
facilities provided to Oread under the Prime Lease. Rather, Subtenant shall use
the parking facilities available to the occupants of the building located at
154 Technology Parkway, Norcross, Georgia.
8. Maintenance and Repair. Oread shall be responsible for all
maintenance with respect to the Subleased Premises in accordance with the
obligations of Tenant under the Prime Lease; provided, however, Subtenant shall
be responsible for the repair of any damage to the Subleased Premises or
Building which is caused by the activity of Subtenant, its employees, agents,
contractors, customers or invitees, and Subtenant also shall be responsible for
keeping the Subleased Premises clean and free of trash and debris. At the
conclusion of the term of the
4
<PAGE> 6
Sublease, Subtenant shall be responsible for the repair of any damage to the
Subleased Premises or Building caused by the removal of Subtenant's property;
provided, however, that Subtenant shall not remove from the Subleased Premises
or Building any property which Oread would be prohibited from removing under
the Prime Lease. In addition, at the conclusion of the term of this Sublease,
Subtenant shall remove from the Subleased Premises and Building all radioactive
materials.
9. Insurance. Subtenant shall maintain the same type of insurance
Oread is required to maintain under the Prime Lease in accordance with Section
21 of the Prime Lease. Subtenant shall provide Oread with a certificate
evidencing the required insurance, which certificate shall show Oread and Prime
Landlord as additional insureds.
10. Default. The terms and provisions of Section 24 of the Prime Lease
shall determine and govern any default by Subtenant under this Sublease. All
late charges, default interest and other charges which Prime Landlord has the
right to recover under the Prime Lease from Tenant can be recovered by Oread
from Subtenant under this Sublease, with such amounts being calculated with
respect to the rent payable by Subtenant for the Subleased Premises only.
11. Assignment or Subletting. Subtenant shall not, either voluntarily
or by operation of law, directly or indirectly, sell, hypothecate, assign,
pledge, encumber or otherwise transfer this Lease or sublet the Subleased
Premises or any part thereof without the prior written consent of Oread and
Prime Landlord in each instance, which consent can be withheld in the sole and
absolute discretion of Oread and/or Prime Landlord.
12. Services by Oread. Subtenant agrees that Oread shall have no
responsibility for the provision of any service which is the responsibility of
Prime Landlord under the Prime Lease, and that Subtenant shall look solely to
Prime Landlord for such services. Subtenant further agrees that Oread has not
agreed to provide any other service or assistance to Subtenant in connection
with this Sublease, except as specifically set forth herein.
13. Notices. All notices and demands which are required to be given
shall be in writing and shall be given in the same manner required by Section
40.11 of the Prime Lease at the addresses of the respective parties set forth
below:
5
<PAGE> 7
Oread: Oread, Inc.
1501 Wakarusa Drive
Lawrence, Kansas 66047
Attention: Legal Department
Subtenant: Vaxcel, Inc.
c/o CytRx Corporation
154 Technology Parkway
Norcross, Georgia 30092
Attention: Jack Luchese
Prime Landlord: At the address set forth in
the Prime Lease
14. Miscellaneous.
(a) This Sublease, together with any exhibits hereto, constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes any prior representations and understandings. This Sublease may
not be amended or modified except in a writing executed by both parties, and
subject to any required consent of the Prime Landlord.
(b) The paragraph captions used in this Sublease are for convenience
and reference only, and the words contained therein shall in no way be held to
explain, modify, amplify or aid in the interpretation, construction or meaning
of the provisions of this Sublease.
(c) Submission of this instrument for examination or signature by
Subtenant does not constitute a reservation of or option for lease, and this
Sublease is not effective as a lease or otherwise until execution by and
delivery to both Landlord and Tenant.
(d) Time is of the essence with respect to the performance of every
provision of this Sublease in which time of performance is a factor.
(e) Each provision of this Sublease performable by Subtenant shall be
deemed both a covenant and a condition.
(f) In the event any of the provisions of this Sublease shall at any
time be held by a court of competent jurisdiction to be illegal, invalid or
unenforceable for any reason, such illegality, invalidity or unenforceability
shall not affect the remaining provisions of this Sublease, and this Sublease
shall be construed and enforced as if all such illegal, invalid or
unenforceable provisions had never been inserted herein.
6
<PAGE> 8
(g) The language in all parts of this Sublease (together with the
Prime Lease) shall be in all cases construed as a whole according to its fair
meaning and not strictly for or against either Oread or Subtenant.
(h) Whenever herein the singular number is used, the same shall
include the plural and vice versa, and the neuter gender shall include the
feminine and masculine genders.
(i) Each of the covenants, conditions and agreements herein contained
shall inure to the benefit of and shall apply to and be binding upon the
parties hereto and their respective successors and assigns or any person who
may come into possession of the Subleased Premises or any part thereof in any
manner whatsoever. Nothing in this Paragraph 14(i), however, shall in any way
alter the prohibition against assignment or subletting contained in this
Sublease.
(j) This Sublease shall be governed by, construed and enforced in
accordance with the laws of the State of Georgia.
(k) All obligations of Oread and Subtenant which by their nature
involve performance, in any particular, after the end of the Sublease Term or
which cannot be ascertained to have been fully performed until after the end of
the Sublease Term shall survive the expiration or sooner termination of this
Sublease.
(l) Oread and Subtenant each represent and warrant to the other that
the person or entity signing this Sublease on behalf of such party is duly
authorized to execute and deliver this Sublease and to legally bind the party
on whose behalf this Sublease is signed to all of the terms, covenants and
conditions contained herein. Subtenant represents and warrants that it is and
shall remain during the Sublease Term in good standing under the laws of the
state in which it was organized and in the state in which the Subleased
Premises are located.
15. WAIVER OF JURY TRIAL AND COUNTERCLAIMS.
THE PARTIES HERETO SHALL AND THEY HEREBY DO WAIVE TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO
AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS SUBLEASE, THE RELATIONSHIP OF OREAD AND SUBTENANT,
SUBTENANT'S USE OR OCCUPANCY OF THE SUBLEASED PREMISES OR ANY CLAIM OF INJURY
OR DAMAGE.
7
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Lease to be
effective as of the date first above written.
LANDLORD: OREAD, INC.,
a Delaware corporation
By:
---------------------------------------
Printed Name:
-----------------------------
Title:
------------------------------------
SUBTENANT: VAXCEL, INC.,
a Delaware corporation
By:
---------------------------------------
Printed Name:
-----------------------------
Title:
------------------------------------
CONSENT TO SUBLEASE
The undersigned, as Prime Landlord under the Prime Lease, hereby
consents to the subletting of the Subleased Premises to Subtenant under the
terms and conditions contained in this Sublease.
PROCEUTICS, INC.,
a Delaware corporation
By:
---------------------------------------
Printed Name:
-----------------------------
Title:
------------------------------------
8
<PAGE> 10
EXHIBIT A
[LAND]
<PAGE> 11
EXHIBIT B
[SUBLEASED PREMISES]
<PAGE> 12
EXHIBIT C
[PRIME LEASE]
<PAGE> 1
EXHIBIT 13.1
Selected Portions of the
Vaxcel, Inc. 1997 Annual Report to Stockholders
<PAGE> 2
FIVE YEAR SELECTED FINANCIAL DATA
- ---------------------------------
Vaxcel, Inc.
<TABLE>
<CAPTION>
Period from inception
(January 6, 1993)
through December 31,
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 288,504 $ 135,563 $ 178,707 $ 508,886 $ 506,317
Net loss (2,599,298) (1,124,183) (1,378,805) (599,843) (1,443,183)
Basic and diluted loss per common share (0.26) (0.14) (0.17) (0.09) (0.24)
Balance Sheet Data:
Total assets $ 5,458,210 $ 377,992 $ 701,868 $ 1,043,575 $ 825,900
Total stockholders' equity (deficit) 5,291,450 159,986 584,169 962,974 (1,437,183)
</TABLE>
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1997, the Company had cash and cash equivalents of
$691,000 and net assets of $5,291,000, compared to $84,000 and $160,000,
respectively, at December 31, 1996. Working capital totaled $666,000 at
December 31, 1997, compared to a deficit of $84,000 at December 31, 1996.
Current cash resources, augmented by expected collaborative and other revenues
will only be sufficient to fund current operations into, but not beyond the
third quarter of 1998. The ability of the Company to operate as a going concern
with the current portfolio of technologies under development for the remainder
of 1998 and into 1999 will be determined by the results of ongoing technology
licensing efforts and/or the actual proceeds of any fund-raising activities. In
order to fund its operations and technologies, the Company will consider all
available options, including the possible sale of the Company to or merger with
another organization.
Vaxcel's primary requirement for capital will be to continue its
development activities for its proprietary adjuvant and delivery system
technologies and to continue its technology licensing efforts. Vaxcel
anticipates substantial losses over the next several years resulting primarily
from research and development expenses. Definitive statements as to the time
required and costs involved in reaching certain objectives for the Company's
technologies are difficult to project due to the uncertainties of the medical
research field. It is generally recognized that the FDA approval process for a
new vaccine from Phase I to commercialization can take seven or more years. For
certain improved versions of existing vaccines, the amount of time may be
reduced if the company only needs to prove safety and increased antibody levels
compared to the original version of the vaccine. It should be noted that
companies which in-license the Company's technolgies for use with their
vaccines will assume responsibility for product development, regulatory
approval and marketing, thereby allowing Vaxcel to maintain a relatively
moderate cash burn rate.
During 1996 and 1997, the Company received federal government funding
for certain research and development activities via several Small Business
Innovative Research (SBIR) grants. The Company intends to continue to seek
government assistance for its product development efforts.
If the Company is unable to raise significant additional funds, it
will be required to severely reduce or terminate operations. A severe reduction
in operations would limit the ability of the Company to perform under its
current collaborative agreements and would limit the advance of the Company's
technologies under development. Ultimately, the Company may need to obtain
funds through arrangements that require it to relinquish rights to certain or
all of its technologies. The Company may additionally be required to curtail or
further divest research programs or totally cease operations and liquidate
<PAGE> 4
remaining assets, if any. Should the Company determine that it is no longer in
the best interest of its shareholders to continue operations, the ability of
the Company to fund an orderly disposition of assets, pay off its then
outstanding liabilities and return any remaining cash to its shareholders will
be limited by the amount of working capital on hand.
At December 31, 1997, the Company had net operating loss carryforwards
for income tax purposes of approximately $9.4 million, which will expire in
2008 through 2012, if not utilized. The Company also has research and
development credits available to reduce income taxes, if any, of approximately
$77,000 which will expire in 2008 through 2011, if not utilized. Based on an
assessment of all available evidence including, but not limited to, the
Company's limited operating history and lack of profitability, uncertainties of
the commercial viability of the Company's technology, the impact of government
regulation and healthcare reform initiatives, and other risks normally
associated with biotechnology companies, the Company has concluded that it is
more likely than not that these net operating loss carryforwards and credits
will not be realized and, as a result, a 100% deferred tax valuation allowance
has been recorded against these assets. Such valuation allowance had no impact
on reported net losses. See Note 7 to Financial Statements.
Results of Operations
The Company recorded net losses of $2,599,000 for the year ended
December 31, 1997 as compared to $1,124,000 for 1996 and $1,379,000 for 1995.
The higher net loss for 1997 versus 1996 is primarily due to a $951,000 charge
for acquired incomplete research and development incurred during the second
quarter of 1997 as a result of the Company's acquisition of Zynaxis, Inc. (see
Note 4 to Financial Statements) and also to higher administrative expenses
subsequent to the merger.
During 1997, 1996 and 1995, Vaxcel recorded collaborative and grant
revenues of $243,000, $78,000 and $7,000, respectively. These amounts relate to
research funding pursuant to Vaxcel's agreement with Medeva and pursuant SBIR
grants to Vaxcel from the National Institutes of Health during 1997 and 1996.
The costs associated with these arrangements approximate the revenues recorded
and are reflected in research and development expense.
Research and development expenditures for year ended December 31, 1997
were $1,165,000, as compared to $853,000 for 1996 and $895,000 for 1995. There
has been no change in the Company's focus on developing its proprietary
technologies during the three years. The acquisition of in-process research and
development from Zynaxis did not significantly impact the Company's ongoing
research and development expenditures during 1997, however the Company
anticipates significant future expenditures will be required to continue
development of these technologies into commercially viable products. Such
expenditures will be limited by the Company's available capital resources. The
increase in research and development expense from 1996 to 1997 is primarily due
to higher expenses associated with the Company's collaborative and grant
arrangements, which were offset by collaborative and grant revenues. Other
fluctuations
<PAGE> 5
in expenditures from year to year are due to the timing and nature of external
studies being performed.
General and administrative expenses for the year ended December 31,
1997 were $772,000, as compared to $407,000 during 1996 and $535,000 during
1995. The increase from 1996 to 1997 is primarily due to non-transaction
expenses associated with the Company's acquisition of Zynaxis and activities
for administration of the combined companies. Management believes that
inflation had no material impact on the Company's operations during the three
year period ended December 31, 1997.
Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
those computer programs having time-sensitive software would recognize a date
using "00" as the year 1900 rather than the year 2000.
Based on a recent assessment, the Company determined that its
accounting software will need to be updated or modified. This should be
accomplished through updates from the software manufacturer. The Company does
not expect any material costs associated with this modification or any
disruptions to its primary operations. The Company anticipates no other year
2000 problems which are reasonably likely to have a material adverse effect on
the Company's operations. There can be no assurance, however, that such
problems will not arise.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. These new standards require that all items recognized as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Statement 130 is
effective for fiscal years beginning after December 15, 1997. The adoption of
Statement 130 will not impact the Company's financial statements.
In June 1997, the FASB issued Statement 131, Disclosures About
Segments of an Enterprise and Related Information ("Statement 131"). Statement
131 changes the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in interim financial reports. Statement 131 is effective
for periods beginning after December 15, 1997. The adoption of Statement 131
will not have a significant impact on the Company's financial statements.
<PAGE> 6
VAXCEL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 690,636 $ 84,481
Accounts receivable 141,898 49,222
Other 500 --
------------ -----------
Total current assets 833,034 133,703
Property and equipment:
Equipment and furnishings 299,172 264,801
Accumulated depreciation (225,017) (169,625)
------------ -----------
Net property and equipment 74,155 95,176
Other assets:
Deferred transaction costs -- 113,439
Notes receivable 400,000 --
Acquired developed technology and other intangibles, net 4,095,347 --
Other 55,674 35,674
------------ -----------
Total other assets 4,551,021 149,113
------------ -----------
Total assets $ 5,458,210 $ 377,992
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,166 $ 32,039
Accrued liabilities 72,880 155,540
Amounts due to affiliates 73,714 30,427
------------ -----------
Total current liabilities 166,760 218,006
Commitments
Stockholders' 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; 11,001,070 and 8,250,004 shares issued and
outstanding at December 31, 1997 and 1996, respectively) 11,001 8,250
Additional paid-in capital 12,425,761 4,697,750
Accumulated deficit (7,145,312) (4,546,014)
------------ -----------
Total stockholders' equity 5,291,450 159,986
------------ -----------
Total liabilities and stockholders' equity $ 5,458,210 $ 377,992
============ ===========
</TABLE>
See accompanying notes.
<PAGE> 7
VAXCEL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Collaborative and grant revenue $ 242,961 $ 78,435 $ 6,709
License fees -- 50,000 115,000
Investment income 45,543 7,128 56,998
----------- ----------- -----------
288,504 135,563 178,707
EXPENSES:
Research and development
Transactions with affiliates 291,806 73,163 79,878
Other 872,959 779,686 814,876
Acquired incomplete research and development 951,017 -- --
Selling, general and administrative
Transactions with affiliates 91,421 70,263 58,533
Other 680,599 336,634 476,009
Write-off of patent costs -- -- 128,216
----------- ----------- -----------
2,887,802 1,259,746 1,557,512
----------- ----------- -----------
Net loss $(2,599,298) $(1,124,183) $(1,378,805)
=========== =========== ===========
Basic and diluted loss per common share $ (0.26) $ (0.14) $ (0.17)
=========== =========== ===========
Basic and diluted weighted average shares outstanding 9,939,680 8,104,782 $ 8,000,000
</TABLE>
See accompanying notes.
<PAGE> 8
VAXCEL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------ Additional
Shares Paid-in Accumulated
Outstanding Amount Capital Deficit Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 common stock to CytRx 250,004 250 374,756 375,006
Capital contribution by CytRx 324,994 324,994
Net loss -- -- -- (1,124,183) (1,124,183)
-------------------------------------------------------------------------------
Balance at December 31, 1996 8,250,004 8,250 4,697,750 (4,546,014) 159,986
Issuance of common stock 5,333 5 8,000 8,005
Pre-merger capital contribution by CytRx 163,396 163,396
Issuance of common stock in connection with
merger, net of transaction costs 2,745,733 2,746 7,556,615 7,559,361
Net loss (2,599,298) (2,599,298)
--------------------------------------------------------------------------------
Balance at December 31, 1997 11,001,070 $ 11,001 $ 12,425,761 $(7,145,312) $ 5,291,450
================================================================================
</TABLE>
See accompanying notes.
<PAGE> 9
VAXCEL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,599,298) $(1,124,183) $(1,378,805)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 55,392 51,600 70,084
Amortization 145,644 -- --
Write-off of patent costs -- -- 128,216
Write-off of fixed assets -- -- 71,503
Charge for acquired incomplete research and development 951,017 -- --
Changes in assets and liabilities:
Receivables 201,384 (44,184) 62,577
Other assets 112,939 (111,674) 6,951
Accounts payable (57,873) (29,347) 36,328
Amounts due to affiliates 43,287 16,010 (18,985)
Other liabilities (176,759) 113,644 19,755
----------- ----------- -----------
Total adjustments 1,275,031 (3,951) 376,429
----------- ----------- -----------
Net cash used in operating activities (1,324,267) (1,128,134) (1,002,376)
Cash flows from investing activities:
Capital expenditures, net (3,371) (2,907) (10,050)
----------- ----------- -----------
Net cash used in investing activities (3,371) (2,907) (10,050)
Cash flows from financing activities:
Pre-merger equity contributions by CytRx 163,396 324,994 1,000,000
Net proceeds from issuance of common stock to CytRx
in connection with acquisition of Zynaxis, Inc. 1,762,392 -- --
Proceeds from sale of common stock 8,005 375,006 --
----------- ----------- -----------
Net cash provided by financing activities 1,933,793 700,000 1,000,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 606,155 (431,041) (12,426)
Cash and cash equivalents at beginning of period 84,481 515,522 527,948
----------- ----------- -----------
Cash and cash equivalents at end of period $ 690,636 $ 84,481 $ 515,522
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE> 10
VAXCEL, INC.
Notes to Financial Statements
1. DESCRIPTION OF BUSINESS
Vaxcel, Inc. ("Vaxcel" or the "Company") is engaged in the development
and commercialization of proprietary vaccine delivery system technologies to
improve the effectiveness and convenience of existing vaccines and contribute
to the development of new vaccines. The Company's core technology is based upon
novel vaccine formulations containing certain biologically active copolymers
licensed exclusively for this purpose by the Company from CytRx Corporation
("CytRx"). In May 1997 the Company acquired certain additional vaccine delivery
technologies pursuant to its merger with Zynaxis, Inc. ("Zynaxis") (see Note
4).
Vaxcel was formed on January 6, 1993 as a wholly-owned subsidiary of
CytRx and has been economically dependent upon CytRx to provide the funding
necessary to conduct its operations since its inception. In May 1997 Vaxcel
completed a merger with Zynaxis, resulting in the issuance of an aggregate of
12.5% of its outstanding (post-merger) shares of common stock to the former
shareholders of Zynaxis. The acquisition also resulted in a significant cash
contribution to the Company from CytRx (see Note 4).
2. CURRENT FINANCIAL CONDITION AND POTENTIAL IMPACT ON OPERATIONS
At December 31, 1997, the Company had cash and cash equivalents of
$690,636 and working capital of $666,274. Current cash resources, augmented by
expected collaborative and other revenues, will only be sufficient to fund
operations into, but not beyond, the third quarter of 1998 based on current
projections. The Company has incurred losses from operations since inception,
and the ability of the Company to operate as a going concern with the current
portfolio of technologies under development for the remainder of 1998 and into
1999 will be determined by the results of ongoing technology licensing efforts
and/or the actual proceeds of any fund-raising activities. In order to fund its
operations and technologies, the Company will consider all available options,
including the possible sale of the Company to or merger with another
organization.
If the Company is unable to raise significant additional funds, it
will be required to severely reduce or terminate operations. A severe reduction
in operations would limit the ability of the Company to perform under its
current collaborative agreements and would limit the advance of the Company's
technologies under development. Ultimately, the Company may need to obtain
funds through arrangements that require it to relinquish rights to certain or
all of its technologies. The Company may additionally be required to curtail or
further divest research programs or totally cease operations and liquidate
remaining assets, if any. Should the Company determine that it is no longer in
the best interest of its shareholders to continue operations, the ability of
the Company to fund an orderly disposition of assets, pay off its then
outstanding
<PAGE> 11
liabilities and return any remaining cash to its shareholders will be limited
by the amount of working capital on hand.
3. 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. At December 31, 1997, the Company has classified corporate debt
securities of $496,000 as held-to-maturity securities and included such
investments in cash and cash equivalents as their original maturity dates were
less than 90 days. At December 31, 1996, the Company did not hold any debt
securities.
Property and Equipment - Property and equipment are stated at cost and
depreciated using the straight-line method based on the estimated useful lives
(five to seven years) of the related assets. Leasehold improvements are
amortized over the remaining term of the related lease using the straight-line
method.
Acquired Developed Technology and other Intangibles - Acquired
developed technology and other intangible assets, primarily goodwill, (See Note
4) are amortized over their estimated useful lives (fifteen years) on a
straight-line basis. Management periodically evaluates the realizability of
recorded acquired developed technology and other intangible assets to determine
whether their carrying values have been impaired. In evaluating the value and
future benefits of the acquired developed technology and other intangible
assets, their carrying values would be reduced by the excess, if any, of their
carrying values over management's best estimate of undiscounted future cash
flows over the remaining amortization periods including any cash flows that
would result from a merger or sale of the Company. The Company believes that the
carrying values of recorded acquired developed technology and other intangible
assets are not impaired.
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 was adopted in recognition of
a possible change in estimated future benefits. Since the effect of this change
in accounting principle was inseparable from the effect of the change in
accounting estimate, such change was accounted for as a change in estimate in
accordance with Opinion No. 20 of the Accounting Principles Board. As a result,
the 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.
<PAGE> 12
Fair Value of Financial Instruments - The carrying amounts reported in
the balance sheet for cash and cash equivalents, accounts and notes receivable
and accounts payable approximate their fair values.
Basic and Diluted Loss per Common Share - In February 1997, the
Financial Accounting Standards Board ("FASB") issued Statement No. 128,
Earnings Per Share ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted loss per share with basic and diluted loss per share.
Unlike primary loss per share, the calculation of basic loss per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
loss per share is very similar to the previously reported fully diluted loss
per share. Loss per share amounts for all periods have been presented in
accordance with Statement 128 requirements.
Basic and diluted loss per share is computed based on the weighted
average number of common shares outstanding. Common share equivalents are
excluded from the computation of diluted loss per share since the effect would
be antidilutive.
Shares Reserved for Future Issuance - The Company has reserved
approximately 1,358,000 of its authorized but unissued shares of common stock
for future issuance pursuant to stock options and warrants.
Revenue Recognition - Revenues from collaborative research
arrangements and grants are generally recorded as the related costs are
incurred. The costs incurred under such arrangements approximated the revenues
reported in the accompanying statements of operations. License fees reported in
the accompanying statements of operations consist entirely of nonrefundable
fees received upon the signing of certain technology license and option
agreements. These fees were recognized as income when they were received. Such
agreements generally contain provisions for additional fees upon the
achievement of certain development milestones by the licensee and upon approval
of the related products, followed by a royalty based upon net sales. Such fees,
if any, will be recognized as income when they become receivable under the
terms of the related contracts.
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 ("APB 25"), 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 ("Statement 123"),
which provides an alternative to APB 25 in accounting for stock-based
compensation issued to employees. However, the Company has continued to account
for stock-based compensation in accordance with APB 25.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash equivalents. The Company maintains cash equivalents 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.
<PAGE> 13
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.
4. ACQUISITION OF ZYNAXIS, INC.
In December 1996 CytRx, Vaxcel, Inc. ("Vaxcel") and Zynaxis, Inc.
("Zynaxis") signed an agreement whereby Zynaxis would be merged with a
wholly-owned subsidiary of Vaxcel. At that time Zynaxis was a publicly-held
biotechnology company engaged in the development of certain vaccine
technologies. The transaction was approved by the Zynaxis stockholders at a
meeting held on May 21, 1997 and was consummated as of that date.
Under the terms of the agreement all of the outstanding shares of
Zynaxis were converted into shares of Vaxcel based upon certain exchange ratios
defined in the agreement, resulting in the issuance of an aggregate of 1.4
million (12.5%) of the outstanding (post-merger) shares of Vaxcel common stock
(at $2.91 per share) to former Zynaxis stockholders at the date of closing. The
merger was treated as a purchase by Vaxcel and constituted a tax-free
reorganization for Zynaxis stockholders. The results of operations of Zynaxis
are included in the Statement of Operations since May 21, 1997.
Pursuant to the agreement, CytRx was to provide up to $2 million to
Zynaxis under a secured credit facility during the period prior to closing of
the merger, at which time the outstanding principal and interest was to be
contributed to the capital of Vaxcel, together with additional equity in the
amount of $4 million less the outstanding principal and interest of the secured
note. At the time of closing the outstanding principal and interest of the
secured note to Zynaxis was approximately $1.7 million, resulting in a net cash
infusion from CytRx to Vaxcel of approximately $2.3 million. In addition, at
the date of closing, Vaxcel issued to CytRx a one-year warrant entitling CytRx
to purchase a number of shares of Vaxcel common stock equal to the amount of
capital which may be necessary for Vaxcel to satisfy requirements for inclusion
in the Nasdaq SmallCap Market, divided by one-half of the $2.91 per share
transaction price at the date of closing.
In accordance with the provisions of APB Nos. 16 and 17, all
identifiable assets acquired, including identified intangible assets and
liabilities assumed, were assigned a portion of the purchase price based on
their respective fair values. The fair values of the acquired developed
technology and incomplete research and development were determined based on an
independent appraisal. A summary of the allocation of the purchase price is a
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets, less outstanding liabilities $ (830)
Acquired developed technology 3,600
Goodwill 641
Acquired incomplete research and development 951
---------
$ 4,362
=========
</TABLE>
<PAGE> 14
The following table presents unaudited pro forma operating results for
the years ended December 31, 1997 and 1996, as if the acquisition of Zynaxis
had occurred on January 1 of each period.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues $ 1,116,538 $ 1,925,642
Net loss (2,342,993) (6,404,583)
Net loss per share (.21) $ (.58)
</TABLE>
5. LEASE COMMITMENTS
Rental expense under operating leases during the years ended December
31, 1997, 1996 and 1995 approximated $61,000, $56,000, and $45,000,
respectively. Minimum annual future obligations for operating leases are
approximately $106,000 and $3,000 during 1998 and 1999, respectively. Aggregate
minimum rentals the Company expects to receive under noncancellable subleases
total approximately $60,000 at December 31, 1997.
6. STOCK OPTIONS AND WARRANTS
The Company has stock option plans pursuant to which key employees,
directors and consultants of the Company are eligible to receive incentive
and/or non-qualified options to purchase shares of the Company's common stock.
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 based upon corporate performance
objectives. Exercise prices are set at the fair market values of the common
stock on the dates of grant.
A summary of the Company's stock option activity, and related
information for the three years ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Weighted Average Exercise Price
-------------------------------- -----------------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of
year 794,453 735,000 531,500 $ 1.50 $ 1.50 $ 1.50
Granted 63,000 73,620 203,500 3.18 1.50 1.50
Exercised (5,333) -- -- 1.50
Forfeited (5,120) (14,167) -- 1.50 1.50
-------- -------- --------
Outstanding - end of year 847,000 794,453 735,000 $ 1.63 $ 1.50 $ 1.50
======== ======== ========
Exercisable at end of year 293,663 184,332 95,498 $ 1.57 $ 1.50 $ 1.50
Weighted average fair value of
options granted during the year $ 1.82 $ 0.83 $ 0.87
</TABLE>
The exercise prices for options outstanding as of December 31, 1997
ranged from $1.00 to $3.25. The weighted average remaining contractual life of
those options is 6.6 years.
The Company has elected to follow APB 25 and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting
<PAGE> 15
provided for under Statement 123 requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net loss and loss per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
weighted-average risk-free interest rates of 7.49% for 1995, 6.34% for 1996 and
6.53% for 1997; dividend yields of 0.0%; volatility factors of the expected
market price of the Company's common stock of .378 for 1995 and 1996 and .585
for 1997; and a weighted average expected life of the option of 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss ($2,692,650) ($1,182,382) ($1,430,572)
Pro forma net loss per share (basic
and diluted) ($.27) ($.15) ($.18)
</TABLE>
Statement 123 is applicable only to options granted subsequent to
December 31, 1994; therefore, its pro forma effect will not be fully reflected
until 1998.
7. INCOME TAXES
Although Vaxcel is a majority-owned subsidiary of CytRx, the Company
has historically filed separate income tax returns. The Company has not
incurred or paid income taxes since its inception. For income tax purposes, as
of December 31, 1997 the Company has an aggregate of approximately $9,423,000
of net operating losses available to offset against future taxable income,
subject to certain limitations. Such losses expire in 2008 through 2012. The
Company also has an aggregate of approximately $77,000 of research and
development credits available for offset against future income taxes which
expire in 2008 through 2011.
Deferred income taxes reflect the net effect of temporary differences
between the financial reporting carrying amounts of assets and liabilities and
income tax carrying amounts of
<PAGE> 16
assets and liabilities. The components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 3,565,586 $ 1,728,415
Tax credit carryforward 77,419 62,758
Other 1,179,238 3,122
------------ -----------
Total deferred tax assets 4,822,243 1,794,295
Deferred tax liabilities:
Acquired developed technology
and other intangibles (1,556,100) --
Depreciation (16,205) (18,631)
------------ -----------
Total deferred tax liabilities (1,572,305) (18,631)
------------ -----------
Net deferred tax assets 3,249,938 1,775,664
Valuation allowance (3,249,938) (1,775,664)
------------ -----------
$ -- $ --
============ ===========
</TABLE>
Based on assessments of all available evidence as of these 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.
The amount of net operating loss carryforwards generated by Zynaxis
prior to the merger was $31,000,000. The use of pre-acquisition operating loss
carryforwards is subject to limitations imposed by the Internal Revenue Code.
The Company anticipates that these limitations will affect utilization of the
carryforwards prior to expiration. Therefore, for financial reporting purposes
the Company has recorded a deferred tax asset of $1,277,000, giving effect to
these limitations with a corresponding valuation allowance of $1,277,000. When
realized, the tax benefit of these loss carryforwards will be applied to reduce
acquired developed technology and other intangibles related to the acquisition
of Zynaxis.
8. RELATED PARTY TRANSACTIONS
LICENSE AGREEMENT
At inception, the Company licensed from CytRx exclusive rights to the
Optivax vaccine delivery system technology. Royalties paid to CytRx pursuant to
this agreement amounted to $7,500 and $17,250, during the years ended December
31, 1996 and 1995, respectively. No royalties were paid to CytRx during 1997.
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 $79,591, $10,923 and $15,915 during the years
ended December 31, 1997, 1996 and 1995, respectively.
SERVICES AND FACILITIES AGREEMENTS
The Company entered into service and facilities agreements with CytRx
and Proceutics, Inc. ("Proceutics"), another wholly-owned subsidiary of CytRx,
whereby CytRx and Proceutics have provided 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 $138,300, $120,963 and $105,246 during the years ended
December 31, 1997, 1996 and 1995, 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 which would have
been incurred on a stand alone basis.
<PAGE> 17
During 1997, Vaxcel contracted with Proceutics for certain analytical
services. Prior to its divestiture by CytRx in February 1998, Proceutics was a
contract research organization, providing pharmaceutical development services
to the pharmaceutical and biopharmaceutical industry. Amounts expensed in 1997
pursuant to these contracts were $163,915.
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Vaxcel, Inc.
We have audited the accompanying balance sheets of Vaxcel, Inc. as of December
31, 1997 and 1996, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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.
As discussed in Note 2 to the financial statements, the Company's recurring
losses from operations and accumulated deficit raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 2. The 1997 financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vaxcel, Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 27, 1998
<PAGE> 1
EXHIBIT 23.1
Consent of Ernst & Young LLP
<PAGE> 2
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Vaxcel, Inc. of our report dated February 27, 1998, included in the 1997
Annual Report to Shareholders of Vaxcel, Inc.
Our audits also included the financial statement schedule of Vaxcel, Inc. listed
in Item 14(a). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
as of the date of our report referred to in the preceding paragraph, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
on Form S-8 No. 333-31733 pertaining to the Vaxcel, Inc. 1993 Stock Option Plan
and the Vaxcel, Inc. Replacement Plan for Zynaxis Options, of our report dated
February 27, 1998, with respect to the financial statements incorporated herein
by reference, and our report included in the preceding paragraph with respect
to the financial statement schedule included in this Annual Report (Form 10-K)
of Vaxcel, Inc.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM SEC FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 690,636
<SECURITIES> 0
<RECEIVABLES> 141,898
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 833,034
<PP&E> 299,172
<DEPRECIATION> 225,017
<TOTAL-ASSETS> 5,458,210
<CURRENT-LIABILITIES> 166,760
<BONDS> 0
0
0
<COMMON> 11,001
<OTHER-SE> 5,280,449
<TOTAL-LIABILITY-AND-EQUITY> 5,458,210
<SALES> 0
<TOTAL-REVENUES> 288,504
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (2,887,802)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,599,298)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,599,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,599,298)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
