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 [FEE REQUIRED].
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 0-15327
CYTRX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 58-1642740
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
154 Technology Parkway
Norcross, Georgia 30092 30092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 368-9500
__________________________
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 [ ]
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. [X]
On March 19, 1996, the aggregate market value of the Registrant's common stock
held by non-affiliates was approximately $27,453,000.
On March 19, 1996, there were 7,860,803 shares of the Registrant's common stock
outstanding, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CytRx Corporation 1995 Annual Report to Stockholders are
incorporated by reference into Parts I, II, III and IV. Portions of the CytRx
Corporation Proxy Statement for the 1996 Annual Meeting of Stockholders are
incorporated by reference into Part III.
<PAGE>
PART I
Item 1. Business
Overview
CytRx Corporation was founded in 1985 and is engaged in the development and
commercialization of pharmaceutical related products and services including
human therapeutics focused on high-value critical-care therapies. In addition
to its development work in human therapeutics, CytRx has also created three
wholly-owned subsidiaries to broaden the development of its technologies without
losing focus on its core critical-care strategy. Vaxcel, Inc. is developing its
Optivax delivery system to enhance the effectiveness of vaccines. Vetlife, Inc.
is developing products to enhance food animal growth. Proceutics, Inc. provides
preclinical development services to the pharmaceutical industry. Reference
herein to "the Company" includes CytRx and its wholly-owned subsidiaries.
The Company presently has no product that is approved by a regulatory agency for
commercial use in human or veterinary applications.
Product Development
CytRx's human therapeutics product development efforts are focused on critical-
care products providing target opportunities for high-value breakthrough
products to address unmet medical needs. Projects include RheothRx which has
the potential to alleviate the pain and suffering associated with sickle cell
crisis.
In 1995, results from a 2,900 patient RheothRx trial indicated unacceptable side
effects at doses that provided therapeutic benefit to heart attack victims. As
a result, CytRx's licensee, Glaxo Wellcome PLC, returned rights to the Company.
CytRx believes that RheothRx still offers opportunity in treating sickle cell
disease. RheothRx has shown promise in reducing crisis duration, pain and
length of hospitalization in patients suffering acute crisis. Scientists are
currently exploring the feasibility of continuing development in this area.
In June 1989, the FDA informed CytRx of its decision to grant RheothRx "Orphan
Drug" designation for the treatment of sickle cell crisis. In March 1990,
RheothRx also received Orphan Drug designation for the treatment of severe
burns. The Orphan Drug Act of 1983, as amended, provides incentive to drug
manufacturers to develop drugs for the treatment of rare diseases (e.g. diseases
that affect less than 200,000 individuals in the United States, or diseases that
<PAGE>
affect more than 200,000 individuals in the United States where the sponsor does
not reasonably anticipate that its product will become profitable). As a result
of the designation of RheothRx as an Orphan Drug, if the Company is the first
manufacturer to obtain FDA approval to market RheothRx for treatment of sickle
cell crisis or severe burns, the Company will obtain a seven-year period of
marketing exclusivity beginning from the date of its approval. During this
period, the FDA cannot approve the same drug for the same use from another
sponsor. There can be no assurance that the Company will receive approval to
market RheothRx for the treatment of sickle cell crisis or severe burns.
CytRx is also developing Protox as a treatment for tuberculosis as well as for
use in combination with certain antibiotic and anti-viral compounds to enhance
their uptake and resulting effectiveness.
VAXCEL'S Optivax System represents a novel approach to improving the
effectiveness of vaccines including the potential to enable single-dose
formulations for vaccines that currently require multiple injections. Phase I
human clinical trials were initiated in January 1996 to study the Optivax System
in combination with a cancer vaccine. Vaxcel is focusing on building corporate
partnerships with vaccine producers. The company recently entered into option
agreements with Connaught Laboratories and Medeva PLC to combine the Optivax
System with high priority vaccine development projects at these firms. The
Optivax System is being made available to other vaccine companies on an antigen
by antigen basis.
VETLIFE is engaged in the development, licensing and marketing of technologies
to improve the value of food animal products to the cattle, poultry, swine and
dairy industries. In January 1996, Vetlife entered into an agreement to market
and distribute a line of FDA-approved cattle growth products in North America.
The Vetlife Cattle Marketing Group projects sales, profits and positive cash
flow beginning in 1997. Vetlife products under development are targeted at
improving product benefits or reducing cost without compromising safety or
quality. Projects include a non-antibiotic growth promoter for poultry and
swine, adjuvants to enhance animal vaccines and antibiotic potentiators to
overcome antibiotic resistance or reduce required doses.
Regulations imposed by the United States government and other countries require
a demonstration of the safety and efficacy of new therapeutic agents through
studies in animals and controlled clinical testing in human beings prior to
marketing. See "Government Regulation." There can be no assurance that any
particular development program of the Company will lead to the development of a
marketable product or that any such product will be profitable.
<PAGE>
Consolidated expenditures for research and development activities were $7.1
million, $6.8 million and $4.7 million during the years ended December 31, 1995,
1994 and 1993, respectively.
Other Products and Services
PROCEUTICS was formed in 1995 and commenced formal operations in January 1996.
Proceutics is targeting a growing need within biopharmaceutical companies by
providing high-value, high-quality pharmaceutical development services to
supplement pre-IND activities. Proceutics services include analytical methods
development and testing, formulations, clinical supply manufacturing,
pharmacokinetic studies, protocol preparation and other services to the
preclinical development of new drug candidates.
CytRx also manufactures, markets and distributes TiterMax, an adjuvant used to
produce cell mediated and humoral responses in research animals. The keys to
the potency of TiterMax lie in its immunostimulatory activity and the formation
of stable water-in-oil emulsions. TiterMax aids in the antigen's effective
presentation to the immune system without the toxic effects of other research
adjuvants.
Manufacturing
The Company has converted a portion of its Norcross, Georgia headquarters into a
pilot manufacturing facility in order to produce the bulk clinical supply
ingredients for its product development programs. See "Product Development."
Production of the final dosage form of materials for use in clinical trials will
be performed by third party manufacturers. The Company's pilot facility is
intended for manufacture of investigational supplies of certain of the Company's
products under development and is generally not large enough to produce
quantities of product adequate for commercial purposes. The process used in the
pilot facility also may require modification to achieve commercial scale. If
the Company modifies its manufacturing process or changes the source or location
of product supply, regulatory authorities will require the Company to
demonstrate that the material produced from the modified or new process or
facility is equivalent to the material used in the Company's clinical trials.
Further, any manufacturing facility and the quality control and manufacturing
procedures used by the Company for the commercial supply of a product must
comply with applicable OSHA, EPA, and FDA standards, including Good
Manufacturing Practice regulations.
<PAGE>
Patents and Proprietary Technology
CytRx considers the protection of its discoveries and inventions important to
its business. The Company seeks patent protection for its technology when
deemed appropriate and has filed patent applications in the United States and
selected foreign countries covering several general product areas, including
technology licensed from Emory University (see below) and others.
There can be no assurance that patent applications which have been or will in
the future be filed by the Company will result in the issuance of any patents,
or, if issued, that such patents will provide sufficient protection or be of
commercial benefit to CytRx and its licensees.
Pursuant to an agreement with Emory University ("Emory") whereby certain basic
research was performed by the Company utilizing the research facilities and
support staff at Emory, Emory will be assigned the rights to all patents
acquired as a result of discovery activities conducted at Emory on behalf of
CytRx. Emory has granted CytRx exclusive worldwide licenses to these patents.
Emory is entitled to receive royalty payments on sales made by CytRx of products
covered by the licensed patents, and on payments received by CytRx as a result
of sales of such products made by a third party. In the event that patents are
not issued with respect to a particular class of products, the Company's license
with respect to that class of products will terminate.
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.
Government Regulation
The marketing of pharmaceutical products requires the approval of the FDA and
comparable regulatory authorities in foreign countries. The FDA has established
guidelines and safety standards which apply to the pre-clinical evaluation,
clinical testing, manufacture and marketing of pharmaceutical products. The
<PAGE>
process of obtaining FDA approval for a new therapeutic product (drug) 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 trials and the
submission and approval of a New Drug Application ("NDA"). The NDA 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 NDA 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 process 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.
Environmental Protection
The Company's pharmaceutical development center is exempt from the CFR (40-Part
370) hazardous chemical reporting. The facility is classified as a small
quantity generator of hazardous waste, which includes radio-isotopes, biological
and chemical hazards. Such waste is removed by a qualified waste hauler. The
Company has established a Corporate Safety Committee to oversee its Health and
Safety Policy which defines procedures for identification of risks posed to
employees from hazardous material and training of employees in the proper
handling and disposal of such materials.
During 1993 and 1994 the Company incurred approximately $2.6 million to expand
and renovate its pharmaceutical development facility. These expenditures
included amounts related to the installation of a single pass air handling
system with HEPA filters for the exhaust air from Biosafety Level III and
radiological hoods. Also included were the installation of backflow prevention
devices and acid dilution basins to neutralize waste water leaving the facility.
During 1995 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.
<PAGE>
Number of Employees
As of December 31, 1995, the Company had 59 full-time and 1 part-time employees.
Item 2. Properties
The Company's executive offices and operational facilities, consisting of an
aggregate of approximately 30,700 square feet, are located on property owned by
the Company at 150 and 154 Technology Parkway, Norcross, Georgia. These
facilities include approximately 20,000 square feet of laboratories, pilot
manufacturing, and associated space.
The above-mentioned facilities are in satisfactory condition and suitable for
the particular purposes for which they were acquired or constructed and are
adequate for present operations.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
On December 22, 1995, the Registrant mailed a Proxy Statement to its
stockholders of record as of December 7, 1995 pertaining to a Special Meeting of
Stockholders held on February 5, 1996. The only item of business acted upon at
the Special Meeting was a proposal to amend the Registrant's Certificate of
Incorporation to effect a recapitalization through a one-for-four reverse stock
split. At the meeting approximately 26.6 million votes were cast (either by
person or by proxy) in favor of the proposal, 1.6 million against the proposal,
with 128,000 abstentions. There were 3.1 million nonvoted shares. Accordingly,
the reverse stock split was effected February 6, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded on the The Nasdaq Stock Market under the
symbol CYTR. The following table sets forth the high and low closing prices for
the Common Stock for the periods indicated as reported by Nasdaq. Such prices
represent prices between dealers without adjustment for retail mark-ups, mark-
downs, or commissions and may not necessarily represent actual transactions.
Such prices have been adjusted to reflect the one-for-four reverse stock split
effected February 6, 1996.
<PAGE>
High Low
COMMON STOCK:
1996
January 1 to March 19 6 3 11/16
1995
Fourth quarter 12 5/8 3 1/2
Third quarter 13 1/2 6 1/2
Second quarter 10 3/4 5 3/4
First quarter 10 3/8 5 1/4
1994
Fourth quarter 10 3/4 5
Third quarter 18 1/2 8 1/2
Second quarter 26 1/2 16
First quarter 33 22 1/2
On March 19, 1996, the closing price of the Common Stock as reported on The
Nasdaq Stock Market, was $4.00. As of December 31, 1995 there were
approximately 1,500 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
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
The information required by Items 6-8 is incorporated by reference to the
applicable portions from the Company's 1995 Annual Report to Stockholders. See
Part IV, Item 14 for an index of the statements, notes and schedules.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by Items 10-12 is incorporated by reference from the
Company's definitive proxy statement for the Company's 1996 Annual Meeting of
Stockholders, which is expected to be filed pursuant to Regulation 14A within
120 days after the end of the Company's 1995 fiscal year.
<PAGE>
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a) Documents filed as part of this 10-K:
1. The consolidated financial statements listed below are
incorporated by reference from the Company's 1995 Annual
Report to Stockholders:
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Auditors dated February 19, 1996
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for
the years ended December 31, 1995, 1994 and 1993 Page 9
All other schedules are omitted because they are either not
applicable or the related information is provided in the notes
to the financial statements.
3. Exhibits required by Item 601 of Regulation S-K:
See Exhibit Index on page 10 of this Form 10-K.
(b) Reports on Form 8-K:
On November 7, 1995 a Current Report on Form 8-K was filed
pertaining to the termination of a license agreement
between CytRx Corporation and Glaxo Wellcome PLC (see
"RheothRx License Agreement").
On October 30, 1995 a Current Report on Form 8-K was filed
pertaining to the adoption of a stock buy-back program by
the Company.
<PAGE>
<TABLE>
CYTRX CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1994 and 1993
<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, 1995 $9,200,000 $4,400,000 $0 $0 $13,600,000
Year ended December 31, 1994 $6,700,000 $2,500,000 $0 $0 $9,200,000
Year ended December 31, 1993 $4,400,000 $2,300,000 $0 $0 $6,700,000
Marketable Securities Valuation Reserve
Year ended December 31, 1995 $2,475,277 $0 $0 $2,475,277 $0
Year ended December 31, 1994 $131,329 $0 $2,475,277 $131,329 $2,475,277
Year ended December 31, 1993 $127,015 $4,314 $0 $0 $131,329
</TABLE>
<PAGE>
CytRx Corporation
Form 10-K Exhibit Index
Exhibit Number Page
3.1 Articles of Incorporation, as Amended and Restated
3.2 By-Laws (a)
10.1 Agreement with Emory University, as amended (a)
10.2 Agreement with BASF Corporation, as amended (a)
10.3 Exclusive License Agreement with Burroughs Wellcome Co. (e)
10.4 Letter Agreement between the Registrant and Burroughs Wellcome Co.
extending the Exclusive License Agreement dated April 19, 1990
to Japan (c)
Executive Compensation Plans and Arrangements
10.3 Employment Agreement dated March 24, 1989, with Jack J. Luchese,
as amended (c)
10.4 1995 Employment Agreement, dated January 1, 1995, with
Jack J. Luchese (d)
10.5 1986 Stock Option Plan, as amended and restated as of May 30,1991 (b)
10.6 1994 Stock Option Plan (d)
10.7 1995 Stock Option Plan (f)
11.1 Computation of Income (Loss) Per Share
13.1 Selected Portions from the CytRx Corporation 1995 Annual Report to
Stockholders
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
___________________
(a) Incorporated by reference to the Registrant's Registration Statement on Form
S-l (File No. 33-8390) filed on November 5, 1986.
(b) Incorporated by reference to the Registrant's Registration Statement on Form
S-3 (File No. 33-38206) filed on June 25, 1991.
(c) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed as of March 20, 1989.
(d) Incorporated by reference to the Registrant's Registration Statement on Form
S-8 (File No. 33-93816) filed on June 22, 1995.
(e) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed as of April 25, 1991.
(f) Incorporated by reference to the Registrant's Registration Statement on Form
S-8 (File No. 33-93818) filed on June 22, 1995.
<PAGE>
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.
CYTRX CORPORATION
By: /s/ Jack J. Luchese
Jack J. Luchese, President
Date: March 27, 1996 and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Jack Bowman Director March 27, 1996
Jack Bowman
/s/ Raymond C. Carnahan, Jr. Director March 27, 1996
Raymond C. Carnahan, Jr.
/s/ Jack J. Luchese Chairman of the March 27, 1996
Jack J. Luchese Board of Directors, President,
Chief Executive Officer,
(Principal Executive Officer)
/s/ Herbert H. McDade, Jr. Director March 27, 1996
Herbert H. McDade, Jr.
Director
Selvi Vescovi
/s/ James M. Yahres Vice President of Finance March 27, 1996
James M. Yahres Secretary
(Principal Financial Officer)
/s/ Mark W. Reynolds Corporate Controller March 27, 1996
Mark W. Reynolds (Principal Accounting Officer)
Exhibit 3.1
CERTIFICATE OF INCORPORATION OF CYTRX CORPORATION
As Amended and Restated February 21, 1996
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the "Corporation") is
CytRx Corporation
SECOND: The address, including street, number, city, and county, of the
registered office of the corporation in the State of Delaware is 229 South State
Street, City of Dover, County of Kent; and the name of the registered agent of
the corporation in the State of Delaware at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The nature of the business and of the purposes to be conducted and
promoted by the corporation are as follows:
To manufacture, prepare, compound, refine, distill, produce, invent,
discover, devise, develop, conduct scientific researches in respect of and
exploit the findings therefrom, acquire, assign, and transfer formulae,
concentrates, compounds, and processes for, apply, buy, sell, import and export,
and generally deal in and with at wholesale and retail and as principal, agent,
broker, distributor, sales, financial, and special representative, licensor,
licensee, and in any other lawful capacity, pharmaceuticals, drugs and
nutritional aspects for animals and humans.
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock that the
corporation shall have the authority to issue is Eighteen Million Seven Hundred
Fifty-One Thousand (18,751,000), of which Eighteen Million Seven Hundred Fifty
Thousand (18,750,000) shall be common stock, par value $.001 per share (the
"Common Stock") and One Thousand (1,000) shall be preferred stock, par value
$.01 per share (the "Preferred Stock").
The Board of Directors is hereby authorized, subject to any limitations
prescribed by law, to provide for the issuance of the Shares of Preferred Stock
<PAGE>
in series, and by filing a Certificate pursuant to the applicable law of the
State of Delaware (hereinafter referred to as a "Preferred Stock Designation"),
to establish from time to time the number of shares to be included in each such
series, and to fix the designations, powers, preferences, and rights of the
shares of each such series, and any qualifications, limitations or restrictions
thereof.
FIFTH: The name and the mailing address of the incorporator are as follows:
Name Mailing Address
R. G. Dickerson 229 South State Street, Dover, Delaware
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such a manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
EIGHTH: For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and regulation
of the powers of the corporation and of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total
number of directors" shall be deemed to have the same meaning, to wit, the total
number of directors which the corporation would have if there were no vacancies.
No election of directors need be by written ballot.
2. After the original or other By-Laws of the corporation have been adopted,
amended, or repealed, as the case may be, in accordance with the provisions of
Section 109 of the General Corporation Law of the State of Delaware, and, after
the corporation has received any payment for any of its stock, the power to
adopt, amend, or repeal the By-Laws of the corporation may be exercised by the
Board of Directors of the corporation; provided, however, that any provision for
the classification of directors of the corporation for staggered terms pursuant
to the provisions of subsection (d) of Section 141 of the General Corporation
<PAGE>
Law of the State of Delaware shall be set forth in an initial By-Law or in a By-
Law adopted by the stockholders entitled to vote of the corporation unless
provisions for such classification shall be set forth in this certificate of
incorporation.
3. Whenever the corporation shall be authorized to issue only one class of
stock, each outstanding share shall entitle the holder thereof to notice of, and
the right to vote at, any meeting of stockholders. Whenever the corporation
shall be authorized to issue more than one class of stock, no outstanding share
of any class of stock which is denied voting power under the provisions of the
certificate of incorporation shall entitle the holder thereof to the right to
vote at any meeting of stockholders except as the provisions of paragraph (b)(2)
of section 242 of the General Corporation Law of the State of Delaware shall
otherwise require; provided, that no share of any such class which is otherwise
denied voting power shall entitle the holder thereof to vote upon the increase
or decrease in the number of authorized shares of said class.
NINTH: The corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested directors, or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
TENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the corporation by this
certificate of incorporation are granted subject to the provisions of this
Article TENTH.
ELEVENTH: A director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the corporation shall not adversely affect any right or protection of a director
of the corporation existing at the time of such repeal or modification.
Exhibit 11.1
<TABLE>
CytRx Corporation
Computation of Loss Per Share
For the Years Ended December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
COMPUTATION OF NET LOSS PER SHARE - PRIMARY
Net loss $(10,652,582) $(7,700,186) $(3,228,600)
========== ========= =========
Average number of common shares outstanding 7,905,364 7,893,962 7,878,415
Common shares issuable assuming exercise of
stock options and warrants <F1> 0 0 0
---------- --------- ---------
Total shares 7,905,364 7,893,962 7,878,415
========== ========= =========
Net loss per share $(1.35) $(0.98) $(0.41)
========== ========= =========
COMPUTATION OF NET LOSS PER SHARE - FULLY DILUTED
Net loss $(10,652,582) $(7,700,186) $(3,228,600)
========== ========= =========
Average number of common shares outstanding 7,905,364 7,893,962 7,878,415
Common shares issuable assuming exercise of
stock options and warrants <F1> 0 0 0
---------- --------- ---------
Total shares 7,905,364 7,893,962 7,878,415
========== ========= =========
Net loss per share $(1.35) $(0.98) $(0.41)
========== ========= =========
<FN>
<F1>
Stock options and warrants outstanding are excluded from the computation of
net loss per share since their effect would be anti-dilutive.
<FN>
</TABLE>
EXHIBIT 13.1
CYTRX CORPORATION
FORM 10-K
SELECTED PORTIONS FROM THE
CYTRX CORPORATION 1995 ANNUAL REPORT TO STOCKHOLDERS
Five Year Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Auditors dated February 19, 1996
<PAGE>
<TABLE>
FIVE YEAR SELECTED FINANCIAL DATA
CytRx Corporation and Subsidiaries
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Net Sales $ 512,528 $ 500,814 $ 506,317 $ 539,700 $ 282,671
License Fees 115,000 - 1,500,000 2,000,000 4,500,000
Investment and Other Income 1,915,802 1,987,204 2,538,221 2,444,408 308,779
Total Revenues 2,543,330 2,488,018 4,544,538 4,984,108 5,091,450
Net Income (Loss) (10,652,582) (7,700,186) (3,228,600) (67,656) 2,519,321
Net Income (Loss) per Common Share (1.35) (0.98) (0.41) (0.01) 0.47
Balance Sheet Data:
Total Assets $30,959,983 $38,660,567 $49,760,261 $52,802,211 $23,784,642
Total Stockholders' Equity 29,770,485 38,026,347 47,685,269 51,248,001 22,692,833
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At December 31, 1995 the Company had cash and short-term investments of $25.2
million and net assets of $29.8 million, compared to $30.8 million and $38.0
million, respectively, at December 31, 1994. Working capital totaled $24.4
million at December 31, 1995, compared to $30.7 million at December 31, 1994.
In October 1995 Glaxo Wellcome PLC ("GW") informed the Company of its decision
to cease development of the Company's RheothRx copolymer and its intention to
terminate its license. Since May 1994 RheothRx was under evaluation in a multi-
national Phase II/III study in patients with acute myocardial infarction. The
trial was planned to eventually enroll more than 9,000 patients. In July, GW
completed patient enrollment in Stage 1 of the trial, involving 2,948 patients.
An analysis of Stage 1 by GW indicated that RheothRx showed benefit only in
certain clinical evaluations which were limited to high dose levels associated
with unacceptable toxicity. Lower dosages of the drug were not associated with
clinical benefit. Pursuant to CytRx's 1990 license agreement with GW (then
Burroughs Wellcome Co.), the Company received a cumulative total of $9 million
under the agreement during 1990 to 1993. Subsequent to the termination of its
license, GW has no further financial obligations to CytRx. The termination of
the RheothRx license by GW had no impact on the accompanying consolidated
financial statements.
During 1995 the Company formed a new subsidiary, Proceutics, Inc., to provide
preclinical development services to the pharmaceutical industry. CytRx
contributed existing property and staff resources to the venture which commenced
formal operations in January 1996. Management believes that while Proceutics
will continue to provide services to its affiliates, revenue derived from third
party sources will contribute to CytRx's consolidated liquidity and capital
resources commencing in 1996.
In January 1996 Vetlife signed an agreement with Ivy Laboratories, Inc. to
market and distribute Ivy's line of FDA approved cattle growth products and
devices in North America. No revenues related to this agreement are anticipated
during 1996; marketing activities are expected to begin by January 1997.
Management expects that revenue generated from this arrangement will support
Vetlife's other development programs.
Although GW's termination of the RheothRx license agreement has negatively
impacted CytRx's long-term cash flow potential, management believes that cash
and short-term investments, combined with investment income, revenues generated
by Proceutics and Vetlife, and sales of TiterMax, will be sufficient to satisfy
the Company's working capital needs for the next several years. The Company
will consider additional sources of funding as appropriate and available.
<PAGE>
Results of Operations
The following table presents the breakdown of consolidated results of operations
by operating unit for 1995, 1994 and 1993. Although the subsequent discussion
addresses the consolidated results of operations for CytRx and its subsidiaries,
management believes this presentation of net results by operating unit is
important to an understanding of the consolidated financial statements taken as
a whole. No results are shown for Proceutics, Inc. as this subsidiary did not
commence formal operations until 1996.
Year ended December 31,
(in thousands) 1995 1994 1993
------- ------- -------
CytRx $ (8,441) $(6,656) $(1,655)
Vaxcel (1,386) (600) (1,443)
Vetlife (826) (444) (131)
-------- ------- -------
Net Loss $(10,653) $(7,700) $(3,229)
Net sales of TiterMax were $513,000 in 1995, as compared to $501,000 in 1994 and
$506,000 in 1993. During 1995 selling and marketing expenses were $229,000, as
compared to $182,000 in 1994 and $445,000 in 1993. In December 1994 the rights
to Titermax were transferred from Vaxcel to CytRx concurrent with the payment of
$500,000 from CytRx to Vaxcel. This payment is reflected in the net results by
operating unit above, but is eliminated in the consolidated statement of
operations. The fluctuations in selling and marketing expenses are due to
variances in promotional expenditures as well as personnel resources devoted to
the Titermax marketing effort.
License fee revenues of $1.5 million recorded in 1993 were composed solely of
$500,000 quarterly payments from GW, which were discontinued during the third
quarter of 1993 pursuant to the Company's agreement with GW. As discussed
earlier this contract was terminated by Glaxo Wellcome during 1995 (see Note 8
to Consolidated Financial Statements).
Investment income was $1.8 million in 1995, as compared to $1.9 million in 1994
and $2.5 million in 1993. In 1995 CytRx chose to convert the majority of its
short-term investments into cash equivalents. At December 31, 1994 the Company
had $2.5 million in unrealized losses as a result of 1994's dramatic increase in
interest rates. By taking advantage of strength in the bond market during the
second quarter of 1995, CytRx reduced its unrealized losses by $1.4 million,
recording non-cash charges of $1.1 million during 1995. These charges are shown
as a separate line item in the Consolidated Statements of Operations. The
Company believes that during the period in which these losses were incurred and
then recognized (February 1994 to June 1995), total investment income, net of
realized losses, exceeded the amount of potential investment income which would
have been realized had the Company invested in shorter-term securities. During
the first quarter of 1994 the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (see Note 2 to Consolidated Financial Statements).
Consolidated research and development expenditures during 1995 were $7.1 million
versus $6.8 million in 1994 and $4.7 million in 1993. The increase from 1993 to
<PAGE>
1994 is primarily attributable to additional scientific staff and resulting
laboratory operational expenditures in support of expanded preclinical
development efforts on the Company's human therapeutic compounds. The increase
from 1994 to 1995 is due to continued clinical development activities for CRL-
1336 in early 1995 as well was additional staff and development activities for
Vaxcel and Vetlife. Vaxcel and Vetlife together represented approximately 20%,
10% and 18% of consolidated research and development expenses during 1995, 1994
and 1993, respectively.
Consolidated general, administrative and business development expenses during
1995 were $3.3 million as compared to $3.3 million in 1994 and $2.6 million in
1993. The increase from 1993 to 1994 is due to an overall increase in staffing
levels and other administrative costs in support of expanded research and
development facilities and activities. There were no significant changes in
general and administrative costs from 1994 to 1995. Vaxcel and Vetlife together
represented approximately 31%, 28% and 25% of consolidated general and
administrative expenses during 1995, 1994 and 1993, respectively. Management
believes that inflation had no material impact on the Company's operations
during the three year period ending December 31, 1995.
Impact of Recently Issued Accounting Standards
In March 1995 the FASB issued Statement of Financial Accounting Standards No.
121 which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. The Company will adopt
Statement 121 in the first quarter of 1996 and, based on current circumstances,
does not believe the effect of adoption will be material.
In October 1995 the FASB issued Statement of Financial Accounting Standards No.
123 which provides an alternative to APB Opinion No. 25 in accounting for stock-
based compensation issued to employees. For companies that continue to account
for stock-based compensation arrangements under APB Opinion No. 25, Statement
No. 123 requires disclosure of the pro forma effect on net income and earnings
per share of its fair value based accounting for those arrangements, effective
for fiscal years beginning after December 15, 1995. The Company plans to
continue accounting for stock option grants in accordance with APB Opinion No.
25 and, accordingly, recognizes no compensation expense for the stock option
grant. The Company will make the additional disclosures required by Statement
123 beginning in 1996.
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
CytRx Corporation and Subsidiaries
<CAPTION>
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,645,570 $ 3,395,974
Short-term investments (Note 2) 8,556,235 27,453,502
Receivables 91,077 68,590
Inventories (Note 3) 6,318 6,651
Other current assets 267,420 447,165
---------- ----------
Total current assets 25,566,620 31,371,882
Property and equipment, net (Note 4) 5,137,764 5,649,056
Other assets:
Patents and patent application costs, less accumulated
amortization of $113,100 at December 31, 1994 - 1,395,476
Other 255,599 244,153
---------- ----------
Total other assets 255,599 1,639,629
---------- ----------
Total assets $30,959,983 $38,660,567
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 266,125 $ 284,179
Accrued liabilities 923,373 350,041
---------- ---------
Total current liabilities 1,189,498 634,220
Commitments (Notes 5 and 9)
Stockholders' equity (Notes 2 and 6):
Common stock, $.001 par value, 18,750,000 shares
authorized; 7,915,308 and 7,893,962 shares issued
at December 31, 1995 and 1994, respectively 7,915 7,894
Additional paid-in capital 62,514,691 62,350,926
Treasury stock, at cost (58,750 shares
at December 31, 1995) (242,343) -
Net unrealized loss on investments - (2,475,277)
Accumulated deficit (32,509,778) (21,857,196)
---------- ----------
Total stockholders' equity 29,770,485 38,026,347
---------- ----------
Total liabilities and stockholders' equity $30,959,983 $38,660,567
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CytRx Corporation and Subsidiaries
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales $ 512,528 $ 500,814 $ 506,317
License fees (Note 8) 115,000 - 1,500,000
Investment income, net (Note 2) 1,803,988 1,890,425 2,514,244
Other 111,814 96,779 23,977
--------- --------- ---------
2,543,330 2,488,018 4,544,538
Expenses:
Cost of sales 49,789 57,572 53,741
Research and development 7,070,600 6,769,171 4,719,912
Selling and marketing 228,794 181,542 444,512
General, administrative and business development 3,345,857 3,281,324 2,554,973
Write-off of patent costs (Note 1) 1,395,476 - -
Realized loss on short-term investments (Note 2) 1,102,622 - -
Interest 2,774 29,924 -
---------- ---------- ---------
13,195,912 10,319,533 7,773,138
---------- ---------- ---------
Loss before cumulative effect of change in accounting principle (10,652,582) (7,831,515) (3,228,600)
Cumulative effect of change in accounting principle (Note 2) - 131,329 -
---------- --------- ---------
Net loss $(10,652,582) $(7,700,186) $(3,228,600)
========== ========= =========
Per share amounts:
Loss before cumulative effect of change in accounting principle $(1.35) $(.99) $(.41)
Cumulative effect of change in accounting principle (Note 2) - .01 -
---------- --------- ---------
Net loss per common share $(1.35) $(.98) $(.41)
========== ========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CytRx Corporation and Subsidiaries
<CAPTION>
Common Stock<F1>
------------------- Additional Net Unrealized
Shares Paid-in Accumulated Loss on Treasury
Outstanding Amount Capital Deficit Investments Stock Total
---------- ------ ----------- ------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 7,869,987 $7,870 $62,168,541 $(10,928,410) $ - $ - $51,248,001
Issuance of common stock:
Exercise of stock options 12,791 13 61,861 61,874
Other 2,873 3 53,293 53,296
Preferred stock redemption (793,851) (793,851)
Stock option extensions 344,549 344,549
Net loss (3,228,600) (3,228,600)
--------- ----- ---------- ---------- ---------- ------- ----------
Balance at December 31, 1993 7,885,651 7,886 61,834,393 (14,157,010) - - 47,685,269
Cumulative effect of change
in accounting principle 131,329 131,329
Issuance of common stock:
Exercise of stock options 3,333 3 37,075 37,078
Other 4,978 5 100,183 100,188
Net unrealized loss on investments (2,606,606) (2,606,606)
Stock option extensions 379,275 379,275
Net loss (7,700,186) (7,700,186)
--------- ----- ---------- ---------- --------- ------- ----------
Balance at December 31, 1994 7,893,962 7,894 62,350,926 (21,857,196) (2,475,277) - 38,026,347
Issuance of common stock:
Exercise of stock options 3,926 4 27,476 27,480
Other 17,420 17 136,289 136,306
Reduction of unrealized loss
on investments 2,475,277 2,475,277
Purchase of treasury stock (242,343) (242,343)
Net loss (10,652,582) (10,652,582)
--------- ----- ---------- ---------- --------- ------- ----------
Balance at December 31, 1995 7,915,308 $7,915 $62,514,691 $(32,509,778) $ - $(242,343 $29,770,485
========= ===== ========== ========== ========= ======= ==========
<FN>
See accompanying notes.
<F1>
* Adjusted for 1-for-4 reverse stock split in February 1996 (see Note 1).
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CytRx Corporation
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(10,652,582) $(7,700,186) $(3,228,600)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 568,542 388,330 211,519
Change in market value of investments - - 4,314
Compensation expense on option extensions - 379,275 344,549
Cumulative effect of change in accounting principle - (131,329) -
Write-off of patent costs 1,395,476 - -
Write-off of fixed assets 136,647 - -
Change in assets and liabilities:
Receivables (22,487) 164,093 (152,816)
Inventories 333 4,242 (2,088)
Other assets 168,299 (182,041) (497,953)
Accounts payable (18,054) (561,407) 691,141
Other liabilities 573,332 (879,365) (170,352)
--------- --------- ---------
Total adjustments 2,802,088 (818,202) 428,314
--------- --------- ---------
Net cash used by operating activities (7,850,494) (8,518,388) (2,800,286)
Cash flows from investing activities:
Sale of short-term investments, net - - 8,829,556
Purchases of available-for-sale securities - (34,126,236) -
Purchases of held-to-maturity securities (9,632,312) - -
Sales of available-for-sale securities 26,437,732 37,279,206 -
Maturities of available-for-sale securities - 4,620,000 -
Maturities of held-to-maturity securities 4,625,000 - -
Capital expenditures, net (251,773) (2,851,347) (3,140,887)
---------- --------- ---------
Net cash provided by investing activities 21,178,647 4,921,623 5,688,669
Cash flows from financing activities:
Net proceeds from issuance of common stock 163,786 137,266 115,168
Purchase of treasury stock (242,343) - -
Preferred stock redemption - - (793,856)
---------- --------- ---------
Net cash provided (used) by financing activities (78,557) 137,266 (678,688)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents 13,249,596 (3,459,499) 2,209,695
Cash and cash equivalents at beginning of year 3,395,974 6,855,473 4,645,778
---------- --------- ---------
Cash and cash equivalents at end of year $ 16,645,570 $ 3,395,974 $ 6,855,473
========== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,774 $ 29,924 $ -
========== ========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CytRx Corporation and Subsidiaries
_____________________________________________________________________
1. Summary of Significant Accounting Policies
Description of Business - CytRx Corporation and its subsidiaries are engaged in
the development of pharmaceutical products. Reference herein to "the Company"
includes CytRx and its wholly-owned subsidiaries -- Vaxcel, Inc., Vetlife, Inc.
and Proceutics, Inc. Vaxcel is developing the Optivax vaccine delivery system.
Vetlife is developing products to enhance food animal growth. Proceutics
provides high quality preclinical development services to the pharmaceutical
industry.
Basis of Presentation - The consolidated financial statements include the
accounts of CytRx Corporation together with those of its wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the 1995
financial statement presentation.
Reverse Stock Split - All share and per share information in the accompanying
consolidated financial statements and notes thereto has been retroactively
adjusted to reflect a one-for-four reverse stock split approved on February 5,
1996 by the Company's stockholders, effective February 6, 1996.
Cash Equivalents - The Company considers all highly liquid debt instruments with
an original maturity of 90 days or less to be cash equivalents. Cash
equivalents consist primarily of auction-market preferred stock, commercial
paper, and amounts invested in money market accounts.
Short-term Investments - Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Marketable
equity securities and debt securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses reported in a separate
component of shareholders' equity. Realized gains and losses are included in
investment income and are determined on a first-in, first-out basis (see Note
2).
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and Equipment - Property and equipment are stated at cost and
depreciated using the straight-line method based on the estimated useful lives
of the related assets. Leasehold improvements are amortized over the remaining
term of the related lease using the straight-line method.
<PAGE>
Patents and Patent Application Costs - Prior to 1995, the Company capitalized
the costs associated with obtaining patents on its technologies. During the
first quarter of 1995 the Company changed from deferring and amortizing such
costs to recording them as expenses when incurred because, even though the
Company believes the patents and underlying technology have continuing value,
the amount of future benefits to be derived therefrom is uncertain.
Accordingly, the new accounting method has been adopted in recognition of a
possible change in estimated future benefits. Since the effect of this change
in accounting principle is inseparable from the effect of the change in
accounting estimate, such change has been accounted for as a change in estimate
in accordance with Opinion No. 20 of the Accounting Principles Board. As a
result, the Company recorded a non-cash write-off of $1.4 million during 1995
($.18 per share). Future patent costs are expected to be expensed since the
benefits to be derived therefrom are likely to be uncertain.
Loss Per Common Share - Loss per common share is based on the weighted average
number of common shares and common share equivalents outstanding during each
period. Stock options and warrants outstanding are excluded from the
computation of net loss per share since the effect is antidilutive.
Revenue Recognition - Sales are recognized at the time the products are shipped.
License fees are recognized as income when they become receivable under the
terms of the related contracts (see Note 8), either by the passage of time or
upon the occurrence of certain events.
Stock Based Compensation - The Company grants stock options for a fixed number
of shares to key employees, directors and consultants with an exercise price
equal to the fair market value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and, accordingly, recognizes no
compensation expense for the stock option grants (see Note 6).
Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
New Accounting Standard - Statement of Financial Accounting Standards No. 121
("SFAS 121") establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. This statement was
issued in 1995 and is required to be adopted January 1, 1996. The Company will
adopt SFAS 121 in the first quarter of 1996 and, based on current circumstances,
does not believe the effect of adoption will be material.
2. Short-term Investments
Effective January 1, 1994, CytRx adopted Statement of Financial Accounting
Standards No 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). In accordance with SFAS 115, the Company did not
restate prior period financial statements. The cumulative effect of adopting
SFAS 115 decreased net loss by $131,329 in 1994.
<PAGE>
At December 31, 1995 and 1994, the Company has classified all of its short-term
investments as held-to-maturity and available-for-sale, respectively. Proceeds
from sales of available-for-sale securities during 1995 and 1994 were $25.3
million and $37.2 million, respectively. Net realized losses on sales of
available-for-sale securities during 1995 and 1994 were $1.1 million and
$80,000, respectively.
A summary of held-to-maturity and available-for-sale securities at December 31,
1995 and 1994 is presented below. The cost of held-to-maturity securities at
December 31, 1995 includes $15.8 million of securities classified as cash
equivalents in the accompanying consolidated balance sheet.
December 31, 1995
Held-to-Maturity Securities
--------------------------------------
Gross Gross Fair
Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
------ ------ ----- ------
U.S. government debt securities $ 1,579 $ 16 $ - $ 1,595
Corporate debt securities 22,809 11 4 22,816
------ ------ ----- ------
Total $24,388 $ 27 $ 4 $24,411
December 31, 1994
Available-for-Sale Securities
--------------------------------------
Gross Gross Fair
Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
------ ------ ----- ------
U.S. government debt securities $21,122 $ - $1,518 $19,604
Mortgage-backed securities 6,656 - 701 5,955
Corporate debt securities 2,151 - 256 1,895
------ ------ ----- ------
Total $29,929 $ - $2,475 $27,454
The cost and estimated fair market values of held-to-maturity securities at
December 31, 1995, by contractual maturities, are shown below. Actual
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations with or without prepayment
penalties.
Fair
(in thousands) Cost Market Value
------ ------
Due in one year or less $19,949 $19,959
Due in one to five years 4,439 4,452
------ ------
Total $24,388 $24,411
Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments. The Company maintains cash equivalents and short-term
investments in several 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>
3. Inventories
Inventories at December 31 consist of the following:
1995 1994
----- -----
Finished goods $ 4,068 $ 2,392
Raw materials 2,250 4,259
----- -----
Total $ 6,318 $ 6,651
4. Property and Equipment
Property and equipment at December 31 consist of the following:
1995 1994
--------- ---------
Land $ 220,000 $ 220,000
Buildings and improvements 4,070,497 3,999,216
Equipment and furnishings 2,241,426 2,277,864
Leasehold improvements - 95,263
--------- ---------
6,531,923 6,592,343
Less accumulated depreciation and amortization (1,394,159) (943,287)
--------- ---------
$5,137,764 $5,649,056
5. Lease Commitments
Rental expense under operating leases during 1995, 1994 and 1993 approximated
$69,000, $73,000 and $96,000, respectively. Minimum future obligations for
operating leases are shown below. Minimum future subrentals the Company expects
to receive under noncancellable subleases total approximately $144,000 at
December 31, 1995.
1996 $ 68,000
1997 70,000
1998 56,000
1999 4,000
-------
$198,000
6. Stock Options and Warrants
The Company has stock option plans under which an aggregate of 1,175,000 shares
of the Company's common stock are reserved for grant. Pursuant to the plans,
certain key employees, directors and consultants are eligible to receive
incentive and/or nonqualified stock options. The options granted under the
plans generally become exercisable over a three year period from the dates of
grant and have lives of ten years. Exercise prices are set at the fair market
values of the common stock on the dates of grant.
Stock option activity during 1993, 1994, and 1995 was as follows:
<PAGE>
Shares
Under Option Price
------- -------------
Balance, December 31, 1992 231,486 $2.64 - $31.00
Granted 163,531 15.00 - 22.00
Exercised (12,791) 2.64 - 8.24
Cancelled (516) 17.52 - 23.00
-------
Balance, December 31, 1993 381,710 2.76 - 31.00
Granted 80,975 7.00 - 25.52
Exercised (3,333) 4.00 - 17.52
Cancelled (74,621) 16.00 - 23.00
-------
Balance, December 31, 1994 384,731 2.76 - 31.00
Granted 126,611 2.76 - 9.12
Exercised (3,926) 7.00
Cancelled (171,554) 2.76 - 31.00
-------
Balance, December 31, 1995 335,862 2.76 - 25.52
At December 31, 1995, options as to 235,565 shares were exercisable and options
as to 515,886 shares were available for future grants.
In addition to the above stock options, the Company has granted warrants to
purchase an aggregate of 682,427 shares of the Company's common stock (at
exercise prices ranging from $4.50 to $7.00 per share) to its President and
Chief Executive Officer subject to vesting criteria as set forth in his
employment agreement. As of December 31, 1995, 607,427 of such warrants were
vested. Effective January 1995 the employment agreement was amended, resulting
in the repricing of certain warrants and the net cancellation of 17,573
warrants.
In September 1993 and December 1994 the exercise periods of certain stock option
and warrant contracts issued prior to 1990 were extended. The Company
recognized compensation expense of approximately $345,000 and $379,000 in 1993
and 1994, respectively, related to these extensions. In January 1995 the
Company repriced certain employee stock options and warrants, resulting in the
net cancellation of 73,487 options and warrants.
7. Income Taxes
The Company and its subsidiaries file separate income tax returns. For income
tax purposes, the Company and its subsidiaries have an aggregate of
approximately $31.2 million of net operating losses available to offset against
future taxable income, subject to certain limitations. Such losses expire in
2000 through 2010. They also have an aggregate of approximately $1.2 million of
research and development credits available for offset against future income
taxes which expire in 2000 through 2010.
<PAGE>
Deferred income tax assets of approximately $13.6 million and $9.2 million exist
at December 31, 1995 and 1994, respectively, principally with respect to the net
operating losses. Based on assessments of all available evidence as of December
31, 1995 and 1994, management has concluded that the respective deferred income
tax assets should be reduced by valuation allowances equal to the amounts of the
deferred income tax assets.
8. License Agreements
In October 1995 Glaxo Wellcome PLC ("GW") informed the Company of its decision
to cease development of the Company's RheothRx copolymer and its intention to
terminate its license. Pursuant to CytRx's 1990 license agreement with GW (then
Burroughs Wellcome Co.), the Company received a cumulative total of $9 million
during 1990 to 1993. Subsequent to the termination of its license, GW has no
further financial obligations to CytRx.
9. Marketing and Distribution Agreement
In January 1996 Vetlife signed an agreement with Ivy Laboratories, Inc. to
market and distribute Ivy's line of FDA approved cattle growth products and
devices in North America. The newly created Vetlife Cattle Marketing Group will
begin marketing products by January 1997. In connection with the agreement,
Vetlife arranged for letter of credit in the amount of $5 million in favor of
Ivy Laboratories. The letter of credit is collateralized by approximately $6
million of short-term investments.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG LLP
The Board of Directors and Stockholders
CytRx Corporation
We have audited the accompanying consolidated balance sheets of CytRx
Corporation as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CytRx
Corporation at December 31, 1995 and 1994 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for certain investments in debt and
equity securities to comply with Statement of Financial Accounting Standards No.
115.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 19, 1996
Exhibit 21.1
CYTRX CORPORATION
Subsidiaries of the Registrant
Percentage
Name of Subsidiary State of Incorporation of Ownership
- ---------------------- ---------------------- ------------
Custom Adjuvants, Inc. Georgia 100%
Proceutics, Inc. Delaware 100%
Vetlife, Inc. Delaware 100%
Vaxcel, Inc. Delaware 100%
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of CytRx Corporation of our report dated February 19, 1996, included in the 1995
Annual Report to Shareholders of CytRx Corporation.
Our audits also included the financial statement schedule of CytRx Corporation
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, 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 Statements
on Form S-8 Nos. 33-48706 pertaining to the 401(k) Plan Interests of CytRx
Corporation Common Stock, 33-93816 pertaining to the 1994 Stock Option Plan of
CytRx Corporation, and 33-93818 pertaining to the 1995 Stock Option Plan of
CytRx Corporation, and on Form S-3 No. 33-93820 and the related prospectus of
CytRx Corporation for the registration of 57,427 shares of its Common Stock,
with respect to the consolidated 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
CytRx Corporation.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial 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-31-1995
<PERIOD-END> DEC-31-1995
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<RECEIVABLES> 91077
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<INVENTORY> 6318
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