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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended December 31, 1996
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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
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(Exact name of Registrant as specified in its charter)
Delaware 58-1642740
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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) 368-9500
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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. [X]
On March 13 1997, the aggregate market value of the Registrant's common stock
held by non-affiliates was approximately $28,626,000.
On March 13 1997, there were 7,444,471 shares of the Registrant's common stock
outstanding, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CytRx Corporation 1996 Annual Report to Stockholders are
incorporated by reference into Parts II, III and IV.
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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
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(R) delivery system to enhance the effectiveness
of vaccines. Vetlife, Inc. is developing products to enhance food animal
growth. Vetlife also recently created its new Cattle Business Unit to market
and distribute cattle growth promotant products to beef producers. Proceutics,
Inc. provides preclinical development services to the pharmaceutical industry.
Reference herein to "the Company" includes CytRx and its wholly owned
subsidiaries.
Certain financial information concerning the industry segments in which
the Company operates can be found in Note 11 to the Company's Consolidated
Financial Statements.
On December 6, 1996, CytRx, Vaxcel and Vaxcel Merger Subsidiary, Inc., a
Georgia corporation and wholly owned subsidiary of Vaxcel formed for the
purpose of the transaction ("Vaxcel Merger Sub"), entered into a definitive
Agreement and Plan of Merger and Contribution (the "Agreement and Plan of
Merger and Contribution") with Zynaxis, Inc., a Pennsylvania corporation and
publicly held biotechnology company engaged in the development of certain
vaccine technologies ("Zynaxis").
The Agreement and Plan of Merger and Contribution provides for (i) the
issuance of shares of common stock of Vaxcel to the existing shareholders of
Zynaxis in exchange for the contribution to Vaxcel by such shareholders of all
of the outstanding shares of capital stock of Zynaxis by means of a merger of
Vaxcel Merger Sub and with and into Zynaxis (the "Merger") and (ii) the
issuance to CytRx of shares of common stock of Vaxcel and a warrant to purchase
shares of common stock of Vaxcel in exchange for CytRx's contribution to Vaxcel
of a secured loan being extended by Zynaxis by CytRx plus cash in the amount of
$4,000,000 minus the balance of the secured loan at the time of contribution,
subject to certain adjustments.
Subject to the approval of the shareholders of Zynaxis, and subject to the
satisfaction of other terms and conditions of the Agreement and Plan of Merger
and Contribution, at the effective time of the Merger (i) Vaxcel Merger Sub
will be merged with and into Zynaxis and (ii) the outstanding shares of capital
stock of Zynaxis will be converted into the right to receive shares of common
stock of Vaxcel and Zynaxis will continue to conduct its business as a wholly
owned subsidiary of Vaxcel.
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This Form 10-K contains certain Statements of a foward-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.
PRODUCT DEVELOPMENT
Consolidated expenditures for research and development activities were
$3.1 million, $7.1 million, and $6.8 million during the years ended December
31, 1996, 1995, and 1994, respectively.
CytRx
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. CytRx's current product
development focus is RheothRx(pf), which the Company believes has the potential
to alleviate the pain and suffering associated with sickle cell crisis.
In June 1989, the FDA informed CytRx of its decision to grant RheothRx
"Orphan Drug" designation for the treatment of sickle cell crisis. 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 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, 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. In
March 1990, RheothRx also received Orphan Drug designation for the treatment of
severe burns.
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
the rights to RheothRx to the Company. CytRx believes that RheothRx still
offers opportunity in treating sickle cell disease. In June 1996, CytRx was
awarded a composition of matter patent on RheothRx(pf), a new purified form of
RheothRx.
RheothRx(pf) is an intravenous solution that has the unique property of
improving blood flow. The Company believes that RheothRx(pf) has significant
potential in treating a variety of vascular-occlusive diseases where blood
flow is restricted. CytRx has chosen the painful vascular-occlusive crisis
associated with sickle cell anemia as its first development priority.
Currently there is no effective treatment to alleviate the pain and suffering
sickle cell anemia patients in crisis must endure.
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Sickle cell anemia primarily affects African-Americans. It is an
inherited abnormality of hemoglobin, the oxygen-carrying molecule in red blood
cells. Under conditions of low blood oxygen, which is generally caused by
dehydration or stress, the sickle cell victim's hemoglobin becomes rigid. This
causes red blood cells to lose their normal flexibility. The cells become
rough, sticky and irregularly shaped, often looking like sickles, which gives
the disease its name.
These deformed cells cannot easily flow through the smaller blood vessels
of the body and tend to clump together, forming occlusions which impede blood
flow. The occlusions deprive tissues of vital oxygen which can result in
tissue death, inflammation and intense throbbing pain. Patients suffering from
sickle cell disease may experience several crisis episodes each year.
Hospitalization is required when pain becomes too much to bear. As there is
currently no effective treatment to alleviate the crisis, patients only receive
injectable morphine, fluids and rest. Aside from causing considerable pain and
suffering, these crisis episodes slowly destroy vital organs as they are
deprived of oxygen. As a result, the life expectancy of sickle cell victims is
about twenty years shorter than those without the disease.
Estimates place the number of persons suffering from sickle cell anemia in
the U.S. at about 60,000. There are about 100,000 hospital admissions
annually to treat sickle cell patients undergoing acute vascular-occlusive
crisis caused by the disease. On average, these patients require in-patient
treatment for 7.2 days, resulting in significant healthcare costs. A recent
study indicated that each year an average sickle cell patient consumes about
$25,000 in hospital goods and services while seeking treatment for his or her
pain.
RheothRx's unique surface-active properties decrease blood viscosity and
enable the rigid sickled cells to become more flexible, thus allowing easier
passage of blood cells through narrow blood vessels.
A Phase II human clinical trial conducted by Burroughs Wellcome Co. has
indicated trends towards reducing the duration of sickle cell crisis and
associated hospital stay when RheothRx is used. Also, the trial indicated that
RheothRx significantly reduced use of medication required to alleviate the
severe pain. CytRx will conduct small safety and dose ranging studies with the
new purified material before proceeding to a larger Phase II/III trial toward
the end of 1997, assuming the initial studies do not encounter any unforeseen
problems.
The Company believes that RheothRx has the potential to be an effective
treatment for other vascular-occlusive diseases as well. Once the sickle cell
program is underway, CytRx currently plans to explore the opportunities in
significant diseases such as Acute Respiratory Distress Syndrome (ARDS) and
stroke. However, CytRx's current strategy is to focus its efforts and
resources on gaining approval for the acute crisis of sickle cell anemia.
CytRx is also developing Protox (TM) 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. Protox is currently in
preclinical development.
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Vaxcel
VAXCEL is currently engaged in the development and commercialization of
Optivax(R), the tradename for a family of proprietary nonionic block copolymers
which may augment or modulate the immune response to vaccines when administered
injectably. Vaxcel believes Optivax may improve the effectiveness and/or
convenience of existing vaccines and may contribute to the development of new
vaccines. Vaxcel and its institutional/corporate collaborators have conducted
preclinical studies in which Optivax appears to act both as a delivery system
and as a vaccine adjuvant. In addition, a Phase I human clinical trial was
initiated by Vaxcel in early 1996 and completed in February 1997 which
indicated both safety and adjuvant activity of Optivax in humans.
Vaxcel's business strategy is to license Optivax on a vaccine-by-vaccine
basis to pharmaceutical and biotechnology companies engaged in vaccine research
and development. Under such arrangements, these companies would combine
Optivax with their vaccines and assume responsibility for product development,
regulatory approval and marketing at their expense. In return, Vaxcel would
receive license fees, milestone payments, and royalties on sales. At present,
Vaxcel has entered into option agreements for the development of Optivax with
Medeva PLC and Connaught Laboratories, Inc. and a license agreement with Corixa
Corporation.
On December 6, 1996, CytRx, Vaxcel and Vaxcel Merger Subsidiary, Inc., a
Georgia corporation and wholly owned subsidiary of Vaxcel formed for the
purpose of the transaction ("Vaxcel Merger Sub"), entered into a definitive
Agreement and Plan of Merger and Contribution (the "Agreement and Plan of
Merger and Contribution") with Zynaxis, Inc., a Pennsylvania corporation and
publicly held biotechnology company engaged in the development of certain
vaccine technologies ("Zynaxis").
The Agreement and Plan of Merger and Contribution provides for (i) the
issuance of shares of common stock of Vaxcel to the existing shareholders of
Zynaxis in exchange for the contribution to Vaxcel by such shareholders of all
of the outstanding shares of capital stock of Zynaxis by means of a merger of
Vaxcel Merger Sub and with and into Zynaxis (the "Merger") and (ii) the
issuance to CytRx of shares of common stock of Vaxcel and a warrant to purchase
shares of common stock of Vaxcel in exchange for CytRx's contribution to Vaxcel
of a secured loan being extended by Zynaxis by CytRx plus cash in the amount of
$4,000,000 minus the balance of the secured loan at the time of contribution,
subject to certain adjustments.
Subject to the approval of the shareholders of Zynaxis, and subject to the
satisfaction of other terms and conditions of the Agreement and Plan of Merger
and Contribution, at the effective time of the Merger (i) Vaxcel Merger Sub will
be merged with and into Zynaxis and (ii) the outstanding shares of capital stock
of Zynaxis will be converted into the right to receive shares of common stock of
Vaxcel and Zynaxis will continue to conduct its business as a wholly owned
subsidiary of Vaxcel. After closing, assuming that no holder of Zynaxis stock
exercises its appraisal or objection rights and assuming no exercise of any
options or warrants to purchase Vaxcel
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Common Stock, it is anticipated that CytRx will own approximately 87.5% of the
outstanding common shares of Vaxcel, with the remaining 12.5% held by the
former shareholders of Zynaxis. The merger will be treated as a purchase by
Vaxcel and is expected to constitute a tax-free reorganization for Zynaxis
shareholders. The merger is subject to approval by the Zynaxis shareholders at
a meeting expected to be held during the second quarter of 1997 and is also
subject to the satisfaction of other terms and conditions of the Agreement and
Plan of Merger and Contribution.
In connection with the execution of the Agreement and Plan of Merger and
Contribution: (i) CytRx and Zynaxis entered into a secured loan agreement
pursuant to which CytRx agreed to loan up to $2,000,000 to Zynaxis on a secured
basis; (ii) CytRx and Zynaxis entered into a letter agreement that provides for
CytRx to serve as Zynaxis' agent and assist Zynaxis in conducting the sale or
transfer of substantially all of Zynaxis' assets prior to the Merger, subject
to the approval of Zynaxis' shareholders; (iii) CytRx, Vaxcel, Zynaxis and the
holders of all the outstanding shares of Zynaxis preferred stock, who also hold
certain warrants to purchase Zynaxis common stock, entered into an agreement,
conditioned upon consummation of the Merger, making certain agreements with
respect to their rights, and converting their Zynaxis warrants, upon
consummation of the Merger, into warrants for the purchase of Vaxcel common
stock; (iv) CytRx, Vaxcel and Zynaxis entered into an agreement with holders of
convertible notes issued by Zynaxis pursuant to which such noteholders agreed
that, conditioned upon consummation of the Merger, that their notes would be
converted into the right to receive shares of Vaxcel common stock; (v) CytRx
and certain Zynaxis shareholders entered into shareholder voting agreements
pursuant to which each of such shareholders granted CytRx an irrevocable proxy
to vote shares of Zynaxis common stock held by such shareholder in favor of the
Agreement and Plan of Merger and the transactions contemplated thereby; and
(vi) Vaxcel and Zynaxis entered into a technology development agreement
concerning the development by Vaxcel of certain technologies owned by or
licensed to Zynaxis.
As a result of the Merger, Vaxcel will acquire the PLG microencapsulation
and mucoadhesive vaccine technologies of Zynaxis. These technologies appear to
be complementary to Vaxcel's current technology, as Optivax is primarily
focused on enhancing the effectiveness of injectable vaccines, while the
Zynaxis technologies are primarily targeted toward development of vaccines for
oral and mucosal delivery. CytRx and Vaxcel believe the Zynaxis oral delivery
technologies may have commercial application for many marketed vaccines
currently administered by parenteral injection, as well as certain new vaccines
under development. In addition, the Zynaxis technologies can be administered
alone or in combination with other vaccine carriers, delivery systems, and
adjuvants. Similar to Optivax, Vaxcel's business strategy for the Zynaxis
technologies will be to license these technologies to companies engaged in
vaccine research and development. In September 1995, ALK A/S, a Danish
company, executed a development and licensing agreement with Zynaxis which
granted ALK exclusive, worldwide rights to evaluate and develop the Zynaxis
technologies for oral delivery of bioactive substances for the treatment of
allergy. ALK is a world leader in the preparation and standardization of
allergen extracts for allergy immunotherapy. ALK is currently conducting a
Phase II human clinical trial.
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Vetlife
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. Vetlife's products under development are
targeted at improving food animal production 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 animal drugs in the
target animal as well as human food safety 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, that any
such product will be approved by the appropriate regulatory agencies or that
any approved product will be profitable.
VETLIFE CATTLE BUSINESS UNIT
Vetlife's Cattle Business Unit is focused on the customer. Its objective
is to assist each customer in optimizing the quality of beef being raised while
at the same time lowering production costs. To accomplish this, Vetlife has
built a team of dedicated and highly experienced professionals. These
individuals are dedicated to providing superior sales support, nutrition
management and quality control to Vetlife's customers.
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
began marketing IVY's products in January 1997. In September 1996, Vetlife
signed an agreement with Elanco Animal Health, a division of Eli Lilly and
Company, whereby Vetlife became the exclusive U.S. supplier of Elanco's
Compudose cattle growth promotant products, effective October 1, 1996.
Though the Vetlife-IVY agreement was signed in January 1996, Vetlife's
Cattle Business Unit could not begin marketing and distribution activities
until 1997 due to previous IVY contract commitments. Thus 1996 became a year
of preparation: recruiting and training the Vetlife Cattle Business Unit team,
discussions with future customers and the development of strategies and
detailed plans to meet the needs of customers and prospects alike.
Vetlife's activities attracted the interest of Eli Lilly's Elanco animal
health division. This resulted in Vetlife becoming Elanco's exclusive U.S.
distributor of its Compudose(R) cattle growth promotant product. Marketing
activities which began in October served as an excellent testing period prior
to the January 1997 launch of Vetlife's Component(R) line of growth promotant
products.
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PRECLINICAL DEVELOPMENT SERVICES - PROCEUTICS
PROCEUTICS was formed in 1995 and commenced formal operations in January
1996. Proceutics is targeting a growing need within biopharmaceutcal companies
by providing high-value, high-quality pharmaceutical development services to
supplement pre-IND activities. Proceutics provides a wide range of client
services including analytical method development and analysis, quality control
testing, pharmaceutics, stability program management, regulatory compliance and
consultation, manufacturing, packaging and labeling of clinical supplies, and
bioanalytical method development and analysis.
Proceutics' customer base targets three distinct drug development
segments. First are large pharmaceutical companies that simply have more
compounds under development than available people or facilities. The second
customer target is small biotechnology and drug development startup companies
that do not have the money and time to construct validated facilities to carry
out their testing requirements. The third group is generic drug distributors
that need to do testing in support of generic drug development.
Proceutics has found established pharmaceutical companies to be a good
customer base since they have so much work to do, need reliable outsourcing
alternatives and, when satisfied with the work, they keep sending new business.
Proceutics' business philosophy is quality service at a fair price that is
delivered on time. This is meeting with success as Proceutics continues to add
new clients, and, more importantly, the company is now generating repeat
business from satisfied clients.
OTHER PRODUCTS AND SERVICES
CytRx manufactures, markets and distributes TiterMax(R), 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.
CytRx also has a small group of human resource professionals who, in
addition to their services to the Company, provide recruiting services to third
parties under the name of Spectrum Recruitment Research.
MANUFACTURING
The Company maintains a portion of its Norcross, Georgia headquarters as a
pilot manufacturing facility in order to produce the bulk clinical supply
ingredients for its product
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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.
Cattle growth products marketed and distributed by Vetlife are
manufactured under contract by IVY Laboratories, Inc. and the Elanco Animal
Health division of Eli Lilly and Company.
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
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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 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 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.
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
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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 1996 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
As of December 31, 1996, the Company had 72 full-time and 5 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 Company also leases approximately 3,500 square feet of office and
warehouse space in Winterset, Iowa and 600 square feet of office space in
Overland Park, Kansas in support of Vetlife's Cattle Business Unit activities.
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
On September 27,1996, American Home Products Corporation ("AHP"), through
its Fort Dodge Animal Health Division, filed a complaint (the "Complaint") in
the District Court of Johnson County, Kansas alleging claims against CytRx
Corporation, Vetlife, Inc., and certain of Vetlife's employees ("the
"Employees").
The Employees are former employees of AHP who executed confidentiality
agreements with AHP. The Complaint alleges breach of contract and
misappropriation of trade secrets by the Employees and tortious interference by
CytRx and Vetlife. The Complaint seeks an unspecified amount of damages from
the Employees and seeks damages in excess of $50,000 from CytRx and Vetlife.
The Complaint also seeks a restraining order enjoining the Employees from
working for Vetlife in any capacity that concerns or relates to cattle growth
implant products.
The case is now in discovery. At this stage, evaluation of the outcome
and potential loss is not possible.
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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 Nasdaq Stock Market under the
symbol CYTR. The following table sets forth the high and low sale 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.
<TABLE>
<CAPTION>
High Low
------- ------
COMMON STOCK:
<S> <C> <C>
1997
January 1 to March 13 4 15/16 3 5/16
1996
Fourth Quarter 4 9/16 3 5/16
Third Quarter 4 13/16 3 5/8
Second Quarter 6 1/8 3 7/8
First Quarter 6 3 3/8
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
</TABLE>
On March 13, 1997, the closing price of the Common Stock as reported on
The Nasdaq Stock Market, was $3 7/8 and there were approximately 1500 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 1996 Annual Report to Stockholders. The applicable portion
of the 1996 Annual Report to Stockholders is included in Exhibit 13.1 to this
report.
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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 1996 Annual Report to Stockholders. The applicable portion
of the 1996 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 1996 Annual Report to Stockholders. The applicable portion of
the 1996 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.
PART III
RIDER 1
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The following table lists the names and ages of all directors of the
registrant and all persons nominated or chosen to become directors, all
positions and offices with the registrant held by each such person, the
business experience during the past five years of each such person, and any
other directorships held by such person in companies that are subject to the
reporting requirements of the Securities Exchange Act of 1934 or in any
company registered as an investment company under the Investment Company Act
of 1940. Each of the following directors has served continuously as a director
since the year in which he was first elected a director, and the term of each
of the following directors ends with the 1997 Annual Meeting of Stockholders
of the registrant. None of the following persons serves as a director or is
nominated to be elected a director pursuant to any arrangement or understanding
between him and any other person(s).
12
<PAGE> 14
<TABLE>
<CAPTION>
Name and Year Positions with the Company, Business Experience
First Elected Director Age During at Least the Past Five Years, and Other Directorships
- ---------------------- --- ------------------------------------------------------------
<S> <C> <C>
Jack L. Bowman 64 Prior to his retirement at the end of 1993, Mr. Bowman was
(1994) Company Group Chairman at Johnson & Johnson Company, a
position he held from 1987. From 1991 to 1993, Mr. Bowman was
responsible for Johnson & Johnson Company's diagnostic, blood
glucose monitoring, and certain over-the-counter pharmaceutical
businesses. Prior to that assignment at Johnson & Johnson, he was
responsible for a major portion of Johnson & Johnson's global
pharmaceutical businesses. From 1983 to 1987, he was Executive
Vice President of American Cyanamid Company where he was
responsible for the pharmaceutical, medical device and over-the-
counter and toiletry businesses. Mr. Bowman has also served as
President, Lederle Laboratories Division and Executive Vice
President, CIBA-GEIGY Pharmaceutical Division. Mr. Bowman
serves as a director of NeoRx Corporation, Pharmagenics, Inc.,
Cell Therapeutics, Inc. and Coating Technologies International.
He also is a director of Proceutics, Inc., Vaxcel, Inc. and Vetlife,
Inc., wholly-owned subsidiaries of CytRx Corporation, and is a
former member of the Johns Hopkins University Board of Trustees.
Raymond C. Carnahan, Jr. 71 Mr. Carnahan has over 39 years of experience in cost controls and
(1991) operational systems in a variety of industries. Prior to his
retirement in 1991, Mr. Carnahan served as Manager,
International Cost Analysis planning for Johnson & Johnson
International from 1974 to 1991. Mr. Carnahan is an arbitrator for
the American Arbitration Association and has provided consulting
services to Waterford-Wedgewood Corporation in England and to
Torf Pharmaceutical Corporation in Portland. Mr. Carnahan also
serves as the Treasurer for the Morristown Memorial Hospital
Chaplaincy Service in Morristown, New Jersey, and is a director of
Proceutics, Inc., Vaxcel, Inc. and Vetlife, Inc., wholly-owned
subsidiaries of CytRx Corporation.
Max Link 56 Dr. Link joined the Board of Directors in November 1996. From
(1996) May 1993 to June 1994, Dr. Link served as the Chief Executive
Officer of Corange U.S. Holdings, Inc. (the holding company for
Boehringer Mannheim Therapeutics, Boehringer Mannheim
Diagnostics and DePuy International). From 1992 to 1993, Dr.
Link was Chairman of Sandoz Pharma. From 1990 to 1992, Dr.
Link was the Chief Executive Officer of Sandoz and from 1987 to
1989, he was head of the Pharmaceutical Division and a member of
the Executive Board of Sandoz, Ltd., Basel. Prior to 1987, Dr.
Link served in various capacities with the United States operations
of Sandoz, including President and Chief Operating Officer. Dr.
Link also serves on the Boards of Directors of Protein Design
Laboratories, Alexion Pharmaceuticals, Human Genome Sciences
and Procept.
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C> <C>
Jack J. Luchese 48 Mr. Luchese was named President and Chief Executive Officer of
(1989) the Company in March, 1989 and became Chairman of the Board
in June, 1995. Prior to joining the Company, Mr. Luchese served
as Vice President and General Manager of the Armour
Pharmaceutical Corporation, and as Vice President, Corporate
Business Development and a member of the Management
Committee of Rorer Group, Inc. (now Rhone-Poulenc Rorer).
Prior to joining Rorer Group, Inc., Mr. Luchese was with Johnson
& Johnson Company for 15 years where he held various positions
in business development, licensing, sales, new products marketing,
and finance. Mr. Luchese also serves as a director of Proceutics,
Inc., Vaxcel, Inc. and Vetlife, Inc., wholly-owned subsidiaries of
CytRx Corporation.
Herbert H. McDade, Jr. 70 From 1989 to 1996 Mr. McDade was Chairman, President and
(1990) Chief Executive Officer of Chemex Pharmaceuticals, Inc.,
becoming Chairman of Access Pharmaceutical Co. (the successor
corporation to Chemex) in January, 1996. From 1986 to 1989 he
was Chairman and President of Armour Pharmaceutical
Corporation, a wholly-owned subsidiary of Rorer Group, Inc. (now
Rhone-Poulenc Rorer). Prior to 1986, Mr. McDade served as Vice
President of the Revlon Corporation. Mr. McDade also serves as a
director of Proceutics, Inc., Vaxcel, Inc. and Vetlife, Inc., wholly-
owned subsidiaries of CytRx Corporation, and is a member of the
Board of Trustees of Thomas Acquinas College.
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Except for Jack J. Luchese, discussed above under "Directors of the
Registrant", The following table lists the names and ages of all executive
officers of the registrant and all persons chosen to become executive officers,
all positions and offices with the registrant held by each such person, the
period(s) during which such person has held such positions and offices and the
business experience during the past five years of each such person. Each of
the following executive officers serves until his successor is elected and
qualifies or until his earlier death, resignation or removal. None of the
following persons serves as an officer or is to be selected as an officer
pursuant to any arrangement or understanding between him and any other
person(s).
14
<PAGE> 16
<TABLE>
<CAPTION>
POSITIONS WITH THE COMPANY AND
NAME AGE BUSINESS EXPERIENCE DURING AT LEAST THE PAST FIVE YEARS
- ---- --- -------------------------------------------------------
<S> <C> <C>
R. Martin Emanuele, 42 Dr. Emanuele has been Vice President of Development of the
Ph.D. Company since June 1990. Previously, Dr. Emanuele served as the
RheothRx project director at the Company. Before joining CytRx in
1988, he worked as a clinical research scientist at DuPont Critical Care
and as a visiting scientist at Institute Choay.
William B. Fleck 39 Mr. Fleck joined CytRx in April 1993 as Vice President, Human
Resources. From 1992 to 1993 Mr. Fleck served as Director, Human
Resources and Training for Central Health Services (CHS). During
1991, he was Director, Human Resources for Knowledgeware, Inc.
Prior to joining Knowledgeware, Mr. Fleck held senior human
resources management positions with MCI Communications from
1989 to 1991 and Harris/3M from 1984 to 1989.
Mark W. Reynolds 35 Mr. Reynolds joined CytRx in 1988 as Controller, becoming Chief
Financial Officer and Corporate Secretary in November 1996. Prior to
joining CytRx, Mr. Reynolds was employed as a certified public
accountant with Arthur Andersen LLP in Atlanta, Georgia.
</TABLE>
SECTION 16(a) REPORTING
Section 16(a) of the Securities Exchange Act of 1934 requires the
registrant's directors and executive officers, and persons who own more than
ten percent of the registrant's common stock, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the registrant.
Directors, executive officers and greater than ten percent shareholders are
required by Securities and Exchange Commission regulation to furnish the
registrant with copies of all Section 16(a) reports they file. To the
registrant's knowledge, based solely on review of the copies of such reports
furnished to the registrant and written representations that no other reports
were required, during the year ended December 31, 1996 all Section 16(a) filing
requirements applicable to directors, executive officers and greater than ten
percent beneficial owners were complied with by such persons.
ITEM 11. EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities during the fiscal years ended December 31, 1994, 1995 and 1996 for
(i) the President and Chief Executive Officer of the Company; (ii) each of the
other most highly compensated executive officers of the Company who were serving
as executive officers at December 31, 1996 and whose total salary and bonus
exceeded $100,000; and (iii) one additional individual who would have been one
of the registrant's four most highly compensated executive officers other than
the President and Chief Executive Officer but for the fact that the individual
was not serving as an executive officer of
15
<PAGE> 17
the registrant at December 31, 1996 (determined as of December 31, 1996 and
collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
- --------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Jack J. Luchese 1996 $307,000 $ 80,000 200,000 $ 4,750(2)
President and Chief 1995 295,000 75,000 132,427(1) 4,620(2)
Executive Officer 1994 64,500 100,000 75,000 4,620(2)
R. Martin Emanuele 1996 162,500 15,000 5,000 4,750(2)
Vice President, 1995 157,500 25,000 50,265(1) 4,620(2)
Preclinical Research & 1994 146,250 17,500 6,250 4,620(2)
Development
William B. Fleck 1996 113,500 -- 20,000 4,750(2)
Vice President, 1995 110,000 15,000 17,912(1) 4,620(2)
Human Resources 1994 105,000 25,000 3,750 4,620(2)
Mark W. Reynolds 1996 82,333 25,000 25,000 4,750(2)
Chief Financial Officer 1995 76,000 8,000 36,877(1) 4,620(2)
Corporate Secretary 1994 71,000 8,000 1,875 4,620(2)
James M. Yahres 1996 151,000 5,000 -- 4,750(2)
Former Vice President, 1995 146,500 15,000 27,031(1) 4,620(2)
Finance & 1994 141,000 25,000 3,750 4,620(2)
Administration
</TABLE>
- ------------------
(1) Includes shares underlying options and warrants which were reissued
and repriced concurrent with the cancellation of previously issued
options and warrants
(2) Amounts represent matching contributions by the Company under the
Company's 401(k) Profit Sharing Plan.
16
<PAGE> 18
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes the stock options and warrants granted
during the fiscal year ended December 31, 1996 to each of the Named Executive
Officers.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------
Potential Realizable
Number of % of Total Value at Assumed Annual
Securities Options Rates of Stock Price
Underlying Granted to Exercise or Appreciation for Option Term($)
Options Employees Base Price Expiration -------------------------------
Name Granted (#) in Fiscal Year ($/Share) Date 5% 10%
- ---- ----------- -------------- --------- ---- -- ----
<S> <C> <C> <C> <C> <C> <C>
Jack J. Luchese 200,000 (1) 78.4% $3.69 3/27/06 $463,810 $1,175,385
R. Martin Emanuele 5,000 (2) 2.0 3.63 12/5/06 11,399 28,887
William B. Fleck 20,000 (2) 7.8 3.63 12/5/06 45,595 115,546
Mark W. Reynolds 20,000 (2) 7.8 3.63 12/5/06 45,595 115,546
5,000 (2) 2.0 4.00 11/1/06 12,578 31,875
</TABLE>
- ----------------------------------
(1) Warrants granted to Mr. Luchese are subject to the terms described
under "Employment Agreement."
(2) These options vest in equal annual installations over a three year
period and are exercisable for ten years from the date of grant.
Exercise price is based on the market price of CytRx Common Stock as
of the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES AT DECEMBER
31, 1996
The following table sets forth the number and total value of
unexercised in-the-money options at December 31, 1996 for each of the Named
Executive Officers using the price per share of the Common Stock of $3.44 on
December 31, 1996. No stock options were exercised during 1996 by any of the
Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1996(#) at December 31, 1996($)
----------------------- -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jack J. Luchese 632,427 250,000 $ -- $ --
R. Martin Emanuele 77,764 8,334 8,594 --
William B. Fleck 17,912 23,750 -- --
Mark W. Reynolds 21,043 26,875 5,781 --
James M. Yahres 27,031 3,750 -- --
</TABLE>
EMPLOYMENT AGREEMENT
Jack J. Luchese was named President and Chief Executive Officer of the
Company in March 1989. Mr. Luchese's current employment agreement was amended
and restated in February 1995 (the "Agreement") to extend his employment with
the Company until December
17
<PAGE> 19
31, 1998, subject to earlier termination. The Agreement also consolidates
(through cancellation and reissuance) all warrants previously granted to Mr.
Luchese. Under the Agreement, Mr. Luchese is paid an annual base salary of
$295,000 (effective January 1, 1995), adjusted annually in proportion to the
average annual merit increases for all other employees. In addition to his
annual base salary, Mr. Luchese is eligible to receive cash bonuses with
respect to each calendar year during the term of the Agreement as determined
from time to time by the Board of Directors of the Company in its sole
discretion. The Agreement also contains confidentiality and noncompetition
provisions.
The Agreement also grants Mr. Luchese warrants to purchase an
aggregate of 682,427 shares of CytRx Common Stock (the "Warrants") subject to
the exercise requirements set forth in the agreement. Warrants to purchase
50,000 shares at $4.50 per share expire on February 22, 2001. Warrants to
purchase 32,427 shares at $7.00 per share expire on March 24, 2003. Warrants to
purchase 100,000 shares at $7.00 per share expire on December 31, 2004.
Warrants to purchase 500,000 shares at $4.50 per share expire on December 31,
2004. As of April 28, 1997, 644,927 of the Warrants are vested. The remaining
Warrants vest at the rate of 6,250 shares at the beginning of each calendar
quarter until October 1, 1998. All of the Warrants that have vested on the
termination of the Agreement may be exercised by Mr. Luchese at any time until
the expiration of the Warrants. In March 1996 Mr. Luchese was granted an
additional warrant to purchase an aggregate of 200,000 shares at $3.69 per
share (the "1996 Warrants"). The 1996 Warrants will vest upon the achievement
of certain corporate financing milestones as set forth in the agreement. As of
April 28, 1997, none of the 1996 Warrants are vested. The shares of stock that
may be acquired upon exercise of the Warrants and 1996 Warrants have been or
will be registered by the Company under the Securities Act of 1933, as amended.
The Warrants contain certain anti-dilution provisions and provide for
accelerated vesting in the event that Mr. Luchese's employment is terminated by
the Board of Directors without cause, in the event of his death or disability
or in the event of a change of control.
In April 1997, the Company again amended the Agreement in order to
delete the provisions relating to a change in control of the Company. In
consideration of that amendment, the Company has entered into a separate Change
in Control Employment Agreement (the "Change in Control Agreement") with Mr.
Luchese. The Change in Control Agreement will become effective if and when a
Change in Control (as defined) occurs during the three-year period following
the date of the Change in Control Agreement or during any of the one-year
annual renewal periods (the "Change of Control Period"), or if Mr. Luchese's
employment is terminated in connection with or in anticipation of a Change of
Control (in either case, the "Effective Date").
A Change in Control is defined in the Change in Control Agreement to
include the following: (i) an acquisition (other than directly from the
Company) by an individual, entity or group (excluding the Company or an
employee benefit plan of the Company or a corporation controlled by the
Company's shareholders) of 25% or more of the Company's Common Stock or the
Company's then outstanding voting securities; (ii) a change in a majority of
the current Board of Directors (the "Incumbent Board") (excluding any persons
approved by a vote of at least a majority of the Incumbent Board other than in
connection with an actual or threatened proxy
18
<PAGE> 20
contest); (iii) consummation of a reorganization, merger, consolidation or sale
of all or substantially all of the Company's assets (collectively, a "Business
Combination") other than a Business Combination in which all or substantially
all of the shareholders of the Company prior to such transaction own, in the
same proportion, more than 60% of the voting power of the entity resulting from
the Business Combination, at least a majority of the board of directors of the
resulting entity were members of the Incumbent Board, and after which no person
(other than the resulting entity and certain affiliates) beneficially owns 25%
or more of the voting power of the resulting entity, except to the extent such
ownership existed prior to the Business Combination; or (iv) the approval by
the Company's stockholders of a complete liquidation or dissolution of the
Company.
Mr. Luchese's employment period under the Change in Control Agreement
begins on the Effective Date and continues for two years. During the employment
period, Mr. Luchese's position, authority, duties and responsibilities will be
at least commensurate in all material respects with those held by him during
the 120-day period prior to the Change in Control and he will receive (i) a
monthly base salary equal to or greater than the highest monthly base salary
paid to him by the Company during the previous year; (ii) an annual cash bonus
at least equal to the highest bonus paid to him in any of the three fiscal
years prior to the Effective Date, and (iii) the ability to participate in all
incentive, savings, welfare benefit, fringe benefit and retirement plans of the
Company.
If Mr. Luchese's employment terminates during the employment period he
will receive certain severance benefits under the Change in Control Agreement.
If his employment terminates by reason of his death or disability, he will
receive certain obligations accrued through the date of termination (e.g.,
salary, prorata bonus, deferred compensation and vacation pay) plus the normal
death and disability benefits, if any, to which he is otherwise entitled,
including those under the Agreement. If he is terminated by the Company for
cause (as defined), or if he voluntarily resigns without good reason (as
defined) other than during the 30-day period beginning on the first anniversary
of the Effective Date, he will receive only his accrued benefits through the
termination date and any previously-deferred benefits, plus any other
post-termination benefits, if any, to which he is otherwise entitled, including
those under the Agreement. If he is terminated by the Company (i) without
cause, (ii) resigns voluntarily for good reason, or (iii) resigns for any
reason during the 30-day period beginning on the first anniversary of the
Effective Date, he will receive a lump sum cash payment equal to: (a) his base
salary through the date of termination, (b) a prorata bonus for the year of
termination, based upon his actual bonus earned in the prior year ("Most Recent
Bonus"), (c) an amount equal to two times the sum of his base salary and Most
Recent Bonus, and (d) any unpaid deferred compensation and vacation pay. In
addition, Mr. Luchese would be entitled to continued employee welfare benefits
for two years after the date of termination, and a lump sum payment equal to
the actuarial value of the service and compensation credit under the Company's
qualified and supplemental retirement plans that he would have received had he
remained employed for two years after the date of his termination. Mr. Luchese
will be required to repay to the Company, with interest, the lump-sum benefit
equal to two times the sum of his base salary and Most Recent Bonus if, during
the two-year employment period, he violates a certain non-competition covenant
in the Change in Control Agreement.
19
<PAGE> 21
If the total payments to Mr. Luchese under the Change in Control
Agreement and from any other source would result in the imposition of an excise
tax under Section 4999 of the Code, the payments will be reduced to the extent
necessary to avoid the imposition of such excise tax, but only if such
reduction would result in a net after-tax benefit to Mr. Luchese. The Change in
Control Agreement further provides that Mr. Luchese has no obligation to
mitigate severance payments, the Company will reimburse Mr. Luchese for all
legal fees incurred in enforcing or contesting the Change in Control Agreement,
and Mr. Luchese will hold for the benefit of the Company all confidential
information concerning the Company obtained over the course of his employment.
The Company will require its successors to expressly assume its obligations
under the Change in Control Agreement.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
their services as directors or as members of committees. Effective in March
1996, the Board compensation structure was revised to eliminate the quarterly
retainers as well as fees for service as a director of wholly-owned
subsidiaries. Non-employee directors now receive a fee of $3,000 for each
two-day Board meeting attended and $500 for each committee meeting attended.
Non-employee directors who chair a Board committee will receive an additional
$250 for each committee meeting attended. Prior to March 1996, non-employee
members of the Board of Directors received a quarterly retainer of $1,000. The
non-employee Chairman of the Board and directors who chaired a Board committee
received an additional quarterly retainer of $250. The non-employee directors
also were eligible to receive fees of $500 and $250 for each
regularly-scheduled Board meeting and committee meeting attended, respectively,
and a fee of $1,000 for each special Board meeting attended. Non-employee
directors who also served on the Board of one of the Company's wholly-owned
subsidiaries also received a quarterly retainer of $1,000 and a fee of $500 for
each subsidiary Board meeting attended.
Pursuant to the CytRx Corporation 1994 Stock Option Plan (the "Plan"),
non-employee directors receive an initial stock option grant to purchase 5,000
shares upon the date he or she first becomes a member of the Board. Options to
purchase 1,875 shares of Common Stock are granted to each non-employee
director annually. Stock option grants to directors pursuant to the Plans
contain the same terms and provisions as stock option grants to employees,
except that options granted to directors are considered Non-Qualified Stock
Options for income tax reporting purposes. Non-employee directors who also
serve as a director of one of the Company's wholly-owned subsidiaries receive
an initial stock option grant to purchase 5,000 shares of the subsidiary's
common stock upon the date he or she first becomes a member of the subsidiary's
Board and an annual stock option grant to purchase 2,500 shares.
During 1996, Mr. Raymond C. Carnahan, Jr. performed certain
consultation services for the Company for which he received a fee of $2,000.
20
<PAGE> 22
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no "interlocks," as defined by the Securities and Exchange
Commission, with respect to any member of the Compensation Committee. During
1995, Messrs. Bowman, Carnahan, McDade and Vescovi served on the Compensation
Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based solely upon information made available to the Company, the
following table sets forth certain information with respect to the beneficial
ownership of Common Stock as of April 28, 1997 by (i) each person who is known
by the Company to beneficially own more than five percent of the Common Stock;
(ii) each director and nominee for director of the Company; (iii) each of the
Named Executive Officers (as defined in Item 11 above); and (iv) all executive
officers and directors as a group. Except as otherwise indicated, the holders
listed below have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
---------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE (1)
------------------------------------ ------ --------------
<S> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS (2):
Jack L. Bowman (3) 5,379 *
Raymond C. Carnahan, Jr. (4) 4,440 *
R. Martin Emanuele (5) 89,066 1.2%
William B. Fleck (6) 24,073 *
Max Link - -
Jack J. Luchese (7) 678,988 8.4
Herbert H. McDade, Jr. (8) 10,333 *
Mark W. Reynolds (9) 24,715 *
All executive officers and directors as a group (8 persons)
(10) 846,994 10.4
OTHER 5% STOCKHOLDERS:
Robert L. Hunter, Jr. 515,428 7.0
3640 Churchwell Court
Tucker, Georgia 30084
</TABLE>
- ----------------------------------
* Less than 1%.
(1) Based on 7,397,067 shares of Common Stock outstanding on April 28,
1997.
(2) The business address of all such persons is: c/o CytRx Corporation,
154 Technology Parkway, Norcross, Georgia 30092.
(3) Includes options to purchase 4,654 shares of Common Stock exercisable
within 60 days.
(4) Includes options to purchase 4,190 shares of Common Stock exercisable
within 60 days.
(5) Includes options to purchase 77,764 shares of Common Stock exercisable
within 60 days.
(6) Includes options to purchase 17,912 shares of Common Stock exercisable
within 60 days.
(7) Includes warrants to purchase 644,927 shares of Common Stock
exercisable within 60 days.
(8) Includes options to purchase 7,333 shares of Common Stock exercisable
within 60 days.
(9) Includes options to purchase 21,043 shares of Common Stock exercisable
within 60 days.
(10) Includes options to purchase 779,823 shares of Common Stock
exercisable within 60 days.
21
<PAGE> 23
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 1996 Annual
Report to Stockholders:
Consolidated Balance Sheets as of December 31, 1996
and 1995
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors dated February 19, 1997
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for
the years ended December 31, 1996, 1995 and 1994 Page 25
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 23 of this Form 10-K.
(b) Reports on Form 8-K:
On December 6, 1996 a Current Report on Form 8-K was filed
pertaining to a proposed business combination transaction with
Zynaxis, Inc.
22
<PAGE> 24
CytRx Corporation
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, among CytRx
Corporation, Vaxcel, Inc., Vaxcel Merger
Subsidiary, Inc. and Zynaxis, Inc. (a)
3.1 Amended and Restated of Incorporation (b)
3.2 By-Laws (c)
10.1 Agreement with Emory University,as amended (c)
10.2 Agreement with BASF Corporation, as amended (c)
*10.3 Employment Agreement dated March 24, 1989, with
Jack J. Luchese, as amended (b)
*10.4 1995 Employment Agreement, dated January 1, 1995, with
Jack J. Luchese (e)
*10.5 1986 Stock Option Plan, as amended and restated as of
May, 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 Portions of the CytRx Corporation 1996 Annual Report
to Stockholders that are incorporated by reference
into this report.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
* Indicates a management contract or compensatory plan or arrangement.
___________________
(a) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on December 6, 1996.
(b) Incorporated by reference to the Registrant's Annual Report on Form 10-K
filed on March 27, 1996.
(c) Incorporated by reference to the Registrant's Registration Statement on
Form S-l (File No. 33-8390) filed on November 5, 1986.
(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 Registration Statement on
Form S-3 (File No. 33-38206) filed on June 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.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to its
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: April 28, 1997 and Chief Executive Officer
(Principal Executive Officer)
24
<PAGE> 26
CYTRX CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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 Bad Debts
Year ended December 31, 1996 $ - $ 2,516 $ 45,914 $ - $ 48,430
Year ended December 31, 1995 - - - - -
Year ended December 31, 1994 - - - - -
Allowance for Deferred Tax Assets
Year ended December 31, 1996 $ 13,600,000 $ 1,600,000 $ - $ - $15,200,000
Year ended December 31, 1995 9,200,000 4,400,000 - - 13,600,000
Year ended December 31, 1994 6,700,000 2,500,000 - - 9,200,000
Marketable Securities Valuation Reserve
Year ended December 31, 1996 $ - $ - $ - $ - $ -
Year ended December 31, 1995 2,475,277 - - 2,475,277 -
Year ended December 31, 1994 131,329 - 2,475,277 131,329 2,475,277
</TABLE>
25
<PAGE> 1
EXHIBIT 11.1
CYTRX CORPORATION
COMPUTATION OF NET LOSS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
COMPUTATION OF NET LOSS PER SHARE - PRIMARY
Net loss $(5,791,779) $(10,652,582) $(7,700,186)
=========== ============ ===========
Average number of common shares outstanding 7,737,949 7,905,364 7,893,962
Common shares issuable assuming exercise of
stock options and warrants (1) 0 0 0
----------- ------------ -----------
Total shares 7,737,949 7,905,364 7,893,962
=========== ============ ===========
Net loss per share $ (0.75) $ (1.35) $ (0.98)
=========== ============ ===========
COMPUTATION OF NET LOSS PER SHARE - FULLY DILUTED
Net loss $(5,791,779) $(10,652,582) $(7,700,186)
=========== ============ ===========
Average number of common shares outstanding 7,737,949 7,905,364 7,893,962
Common shares issuable assuming exercise of
stock options and warrants (1) 0 0 0
----------- ------------ -----------
Total shares 7,737,949 7,905,364 7,893,962
=========== ============ ===========
Net loss per share $ (0.75) $ (1.35) $ (0.98)
=========== ============ ===========
</TABLE>
(1) Stock options and warrants outstanding are excluded from the
computation of net loss per share since their effect would be
anti-dilutive.
All per share data has been retroactively restated to reflect a 1-for-4 reverse
stock split in February 1996.
<PAGE> 1
EXHIBIT 13.1
CYTRX CORPORATION
1996 FORM 10-K
SELECTED PORTIONS FROM THE
CYTRX CORPORATION 1996 ANNUAL REPORT TO STOCKHOLDERS
Five Year Selected Financial Data (incorporated by reference into Item 6)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (incorporated by reference into Item 7)
Consolidated Balance Sheets as of December 31, 1996 and 1995 (incorporated by
reference into Item 8)
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994 (incorporated by reference into Item 8)
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1994, 1995 and 1996 (incorporated by reference into Item 8)
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994 (incorporated by reference into Item 8)
Notes to Consolidated Financial Statements (incorporated by reference into Item
8)
Report of Independent Auditors dated February 19, 1997 (incorporated by
reference into Item 8)
<PAGE> 2
FIVE YEAR SELECTED FINANCIAL DATA
CYTRX CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Net Sales $ 2,595,009 $ 512,528 $ 500,814 $ 506,317 $ 539,700
License Fees 50,000 115,000 - 1,500,000 2,000,000
Investment and Other Income 1,380,170 1,915,802 1,987,204 2,538,221 2,444,408
Total Revenues 4,025,179 2,543,330 2,488,018 4,544,538 4,984,108
Net Loss (5,791,779) (10,652,582) (7,700,186) (3,228,600) (67,656)
Net Loss per Common Share (0.75) (1.35) (0.98) (0.41) (0.01)
Balance Sheet Data:
Total Assets $ 24,299,322 $30,959,983 $38,660,567 $49,760,261 $52,802,211
Total Stockholders' Equity 22,337,734 29,770,485 38,026,347 47,685,269 51,248,001
</TABLE>
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At December 31, 1996 the Company had cash and investments of $17 million
and net assets of $22.3 million, compared to $25.2 million and $29.8 million,
respectively, at December 31, 1995. Working capital totaled $11.1 million at
December 31, 1996, compared to $24.4 million at December 31, 1995. Working
capital at December 31, 1996 excludes $5.1 million of investments classified as
"held-to-maturity" which mature in early 1998. During 1996 the Company
repurchased 449,000 shares of its common stock for $1.8 million.
Management believes that cash and investments on hand, combined with
interest income and operating revenues, will be sufficient to satisfy the
Company's liquidity and working capital needs for the next several years, but
it is possible that additional funding may be required to accomplish the
necessary testing and data collection procedures prescribed by the U.S. Food
and Drug Administration for the commercialization of any products for human
use. Definitive statements as to the time required and costs involved in
reaching certain objectives for the Company's products are difficult to project
due to the uncertainties of the medical research field. Requirements could
vary depending upon the results of research, competitive and technological
developments, and the time and expense required for governmental approval of
products, some of which factors are beyond management's control.
During 1996 the Company received federal government funding for certain
research and development activities via several Small Business Innovative
Research (SBIR) grants, and will continue to seek government assistance for its
product development efforts as appropriate and available. Additional funding
for research and development expenditures is expected to be obtained through
joint ventures and product licensing arrangements with other companies. CytRx
also anticipates that it may raise funds through equity financings of one or
more of its subsidiaries, either directly by the subsidiary through issuance of
the subsidiary's stock, or through sale by CytRx of a portion of its ownership
in a subsidiary.
In December 1996 CytRx, Vaxcel and Zynaxis, Inc. signed an agreement to
merge Zynaxis with a wholly-owned subsidiary of Vaxcel (see Note 10 to Financial
Statements). The merger is subject to approval by the Zynaxis shareholders at a
meeting expected to be held in April 1997. Pursuant to the agreement, CytRx has
committed to provide $4 million in equity funding to Vaxcel, less the
outstanding principal and interest drawn on a $2 million secured credit facility
by Zynaxis during the period prior to closing of the merger. Subsequent to the
merger, CytRx will own approximately 87.5% of Vaxcel, with the remaining 12.5%
held by the former Zynaxis shareholders. It is expected that the Vaxcel common
stock will be publicly traded on the Nasdaq SmallCap Market subsequent to the
merger.
During 1995 the Company formed a new subsidiary, Proceutics, Inc., to
provide preclinical development services to the pharmaceutical industry. CytRx
contributed existing
<PAGE> 4
property and staff resources to the venture, which commenced formal operations
in January 1996. Although Proceutics continues to provide services to its
affiliates, revenues derived from third party sources are contributing to the
Company's consolidated liquidity and capital resources.
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 beginning January 1, 1997. In September 1996 Vetlife
signed an agreement with Elanco Animal Health, a division of Eli Lilly and
Company, whereby Vetlife became the exclusive U.S. supplier of Elanco's
Compudose cattle growth promotant products, effective October 1, 1996.
Management expects that revenue generated from these arrangements will offset
Vetlife's product development efforts and will contribute to the Company's
consolidated liquidity and capital resources. As of December 31, 1996 the
Company had outstanding firm purchase commitments of $55.4 million related to
minimum annual purchase volumes under these contracts (See Note 5 and 8 to
Financial Statements).
At December 31, 1996 the Company has net operating loss carryforwards for
income tax purposes of approximately $37 million, which will expire at various
dates through 2011 if not utilized. The Company also has research and
development credits available to reduce income taxes, if any, of approximately
$1.1 million. 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 following table presents the breakdown of consolidated results of
operations by operating unit for 1996, 1995 and 1994. 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.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
(in thousands) 1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
CytRx $(2,255) $(8,441) $(6,656)
Proceutics (1,398) - -
Vaxcel (1,124) (1,386) (600)
Vetlife (1,015) (826) (444)
------- -------- -------
Net Loss $(5,792) $(10,653) $(7,700)
======= ======== =======
</TABLE>
<PAGE> 5
Consolidated net sales for 1996 were $2,595,000, as compared to $513,000
in 1995 and $501,000 in 1994. The significant components of net sales are
shown below.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
(in thousands) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales of Titermax (CytRx) $ 522 $ 513 $ 501
Sales of Cattle Implants (Vetlife) 711 - -
Service Revenues (Proceutics) 1,004 - -
Service Revenues (CytRx) 358 - -
-------- -------- --------
Total Net Sales $ 2,595 $ 513 $ 501
======== ======== ========
</TABLE>
Cost of sales was $2,300,000 in 1996, $50,000 in 1995 and $58,000 in 1994.
The increase from 1995 to 1996 is directly attributable to the sales
activities of Proceutics and Vetlife, which both initiated sales and marketing
activities during 1996. Management believes that cost of sales as a percentage
of revenues during 1996 (87%) is high due to inefficiencies associated with the
startup of Proceutics' operations, and that gross margins will improve in the
future as Proceutics' third party revenue base increases and greater
efficiencies are realized.
Investment income was $1.2 million in 1996, as compared to $1.8 million in
1995 and $1.9 million in 1994. The decrease for each year is attributable to
declining cash and investment balances. 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. Due to the higher yield on its longer-term investments, 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 avoided such losses by investing 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 1996 were $3.1
million versus $7.1 million in 1995 and $6.8 million in 1994. The increase
from 1994 to 1995 was due to clinical development activities for CRL-1336 in
early 1995 as well as additional staff and development activities for Vaxcel
and Vetlife. The decrease from 1995 to 1996 is primarily due to a shift of
personnel and capital resources to Proceutics, coupled with a broader base of
selling and administrative activities in Proceutics and Vetlife to which
overall facilities costs and shared services are allocated, thereby reducing
such allocations to research and development. Significant research and
development activities ongoing during 1996 included continued preclinical
development and regulatory activities for the purified version of RheothRx in
preparation for human clinical studies in early 1997, activities in support of
the ongoing Phase I
<PAGE> 6
human clinical trial utilizing Vaxcel's Optivax vaccine
delivery system, and preclinical activities associated with Vetlife's animal
growth promotant technology.
Consolidated selling, general and administrative expenses during 1996 were
$4.5 million as compared to $3.6 million in 1995 and $3.5 million in 1994. The
increase from 1995 to 1996 is primarily due to the initiation of selling
activities for Proceutics and Vetlife, which includes both startup costs and
recurring expenses, together with the resulting increased allocation of
overhead expenses as discussed above. Management believes that inflation had
no material impact on the Company's operations during the three year period
ended December 31, 1996.
Impact of Recently Issued Accounting Standards
In March 1995 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("Statement 121"), which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. The Company adopted Statement
121 in the first quarter of 1996, and such adoption had no material effect on
its consolidated financial statements.
In October 1995 the FASB issued Statement of Financial Accounting
Standards No. 123 ("Statement 123"), which provides an alternative to
Accounting Principles Board Opinion No. 25 ("APB 25") in accounting for
stock-based compensation issued to employees. For companies that continue to
account for stock-based compensation arrangements under APB 25, Statement 123
requires disclosure of the pro forma effect on net income and earnings per
share of its "fair value" based accounting for those arrangements. The Company
plans to continue accounting for stock option grants in accordance with APB 25
and, accordingly, recognizes no compensation expense for stock option grants.
The additional disclosures required by Statement 123 are contained in Note 6 to
the financial statements.
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
CYTRX CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
-------------------------------------
ASSETS 1996 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,604,003 $16,645,570
Short-term investments 10,273,108 8,556,235
Accounts receivable 643,079 91,077
Inventories 9,508 6,318
Other current assets 532,399 267,420
------------ -----------
Total current assets 13,062,097 25,566,620
Property and equipment, net 5,012,809 5,137,764
Other assets:
Long-term investments 5,096,353 -
Note receivable 975,000 -
Other 153,063 255,599
------------ -----------
Total other assets 6,224,416 255,599
------------ -----------
Total assets $24,299,322 $30,959,983
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 586,920 $ 266,125
Accrued liabilities 1,123,476 923,373
Unearned revenue 251,192 -
------------ -----------
Total current liabilities 1,961,588 1,189,498
Commitments
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.001 par value, 18,750,000 shares authorized;
7,945,203 and 7,915,308 shares issued at December 31, 1996
and 1995, respectively 7,945 7,915
Additional paid-in capital 62,653,015 62,514,691
Treasury stock, at cost (507,750 and 58,750 shares held at
December 31, 1996 and 1995, respectively) (2,021,669) (242,343)
Accumulated deficit (38,301,557) (32,509,778)
------------ -----------
Total stockholders' equity 22,337,734 29,770,485
------------ -----------
Total liabilities and stockholders' equity $24,299,322 $30,959,983
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
CYTRX CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales $ 2,595,009 $ 512,528 $ 500,814
License fees 50,000 115,000 -
Investment income 1,170,930 1,803,988 1,890,425
Collaborative and grant income 137,667 - -
Other 71,573 111,814 96,779
------------ ------------ ------------
4,025,179 2,543,330 2,488,018
Expenses:
Cost of sales 2,255,201 49,789 57,572
Research and development 3,108,477 7,070,600 6,769,171
Selling, general and administrative 4,453,280 3,574,651 3,462,866
Write-off of patent costs - 1,395,476 -
Realized loss on short-term investments - 1,102,622 -
Interest - 2,774 29,924
------------ ------------ ------------
9,816,958 13,195,912 10,319,533
------------ ------------ ------------
Loss before cumulative effect of change in accounting principle (5,791,779) (10,652,582) (7,831,515)
Cumulative effect of change in accounting principle - - 131,329
------------ ------------ ------------
Net loss $ (5,791,779) $(10,652,582) $ (7,700,186)
============ ============ ============
Per share amounts:
Loss before cumulative effect of change in accounting principle $ (0.75) $ (1.35) $ (0.99)
Cumulative effect of change in accounting principle - - 0.01
------------ ------------ ------------
Net loss per common share $ (0.75) $ (1.35) $ (0.98)
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CYTRX CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Stock *
---------------------
Additional
Shares Paid-in
Issued Amount Capital
-------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 7,885,651 $ 7,886 $ 61,834,393
Cumulative effect of change
in accounting principle
Issuance of common stock:
Exercise of stock options 3,333 3 37,075
Other 4,978 5 100,183
Net unrealized loss on investments
Stock option extensions 379,275
Net loss
-------------------------------------
Balance at December 31, 1994 7,893,962 7,894 62,350,926
Issuance of common stock:
Exercise of stock options 3,926 4 27,476
Other 17,420 17 136,289
Reduction of unrealized loss
on investments
Purchase of treasury stock
Net loss
-------------------------------------
Balance at December 31, 1995 7,915,308 7,915 62,514,691
Issuance of common stock:
Other 29,895 30 138,324
Purchase of treasury stock
Net loss
-------------------------------------
Balance at December 31, 1996 7,945,203 $ 7,945 $62,653,015
=====================================
<CAPTION>
Net Unrealized
Accumulated Loss on Treasury
Deficit Investments Stock Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ (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 37,078
Other 100,188
Net unrealized loss on investments (2,606,606) (2,606,606)
Stock option extensions 379,275
Net loss (7,700,186) (7,700,186)
----------- ---------- ---------- ----------
Balance at December 31, 1994 (21,857,196) (2,475,277) - 38,026,347
Issuance of common stock:
Exercise of stock options 27,480
Other 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 (32,509,778) - (242,343) 29,770,485
Issuance of common stock:
Other 138,354
Purchase of treasury stock (1,779,326) (1,779,326)
Net loss (5,791,779) (5,791,779)
------------------------------------------------------------------
Balance at December 31, 1996 $ (38,301,557) $ - $ (2,021,669) $22,337,734
==================================================================
</TABLE>
* Adjusted for 1-for-4 reverse stock split in February 1996 (see Note 1).
See accompanying notes.
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
CYTRX CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,791,779)$(10,652,582) $ (7,700,186)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 655,006 568,542 388,330
Compensation expense on option extensions - - 379,275
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 (552,002) (22,487) 164,093
Inventories (3,190) 333 4,242
Note receivable (975,000) - -
Other assets (162,443) 168,299 (182,041)
Accounts payable 320,795 (18,054) (561,407)
Unearned Revenue 251,192 - -
Other liabilities 200,103 573,332 (879,365)
------------ ----------- ------------
Total adjustments (265,539) 2,802,088 (818,202)
------------ ----------- ------------
Net cash used by operating activities (6,057,318) (7,850,494) (8,518,388)
Cash flows from investing activities:
Purchases of available-for-sale securities - - (34,126,236)
Purchases of held-to-maturity securities (11,849,226) (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 5,036,000 4,625,000 -
Capital expenditures, net (530,051) (251,773) (2,851,347)
------------ ----------- ------------
Net cash provided (used) by investing activities (7,343,277) 21,178,647 4,921,623
Cash flows from financing activities:
Net proceeds from issuance of common stock 138,354 163,786 137,266
Purchase of treasury stock (1,779,326) (242,343) -
------------ ----------- ------------
Net cash provided (used) by financing activities (1,640,972) (78,557) 137,266
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents (15,041,567) 13,249,596 (3,459,499)
Cash and cash equivalents at beginning of year 16,645,570 3,395,974 6,855,473
------------ ----------- ------------
Cash and cash equivalents at end of year $ 1,604,003 $16,645,570 $ 3,395,974
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ - $ 2,774 $ 29,924
============ =========== ============
</TABLE>
See accompanying notes.
<PAGE> 11
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(TM)
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 1996
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.
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 Stockholders' equity. Realized gains and
losses are included in investment income and are determined on a first-in,
first-out basis (see Note 2).
Fair Value of Financial Instruments - The carrying amounts reported in the
balance sheets for cash and cash equivalents, accounts receivable, note
receivable and accounts payable approximate their fair values.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined using the first-in, first-out method.
<PAGE> 12
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.
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 or services rendered. 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 (see Note 9). 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 plans to continue to
account for stock-based compensation in accordance with APB 25.
<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.
New Accounting Standard - Statement of Financial Accounting Standards No.
121, Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
("Statement 121") establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill. The Company
adopted Statement 121 in the first quarter of 1996, and such adoption had no
material effect on the accompanying financial statements.
2. INVESTMENTS
Effective January 1, 1994, CytRx adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement 115"). In accordance with Statement 115, the Company
did not restate prior period financial statements. The cumulative effect of
adopting Statement 115 decreased net loss by $131,329 in 1994.
At December 31, 1994 the Company had classified all of its investments as
available-for-sale. Proceeds from sales of available-for-sale securities
during 1995 were $25.3 million. Net realized losses on sales of
available-for-sale securities during 1995 were $1.1 million.
At December 31, 1996 and 1995 the Company has classified all of its
investments as held-to-maturity, as summarized below. The cost of
held-to-maturity securities at December 31, 1996 and 1995 shown below includes
$.9 million and $15.8 million, respectively, of securities classified as cash
equivalents in the accompanying consolidated balance sheets.
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------
Gross Gross Fair
Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. government debt securities $ 598 $1 $ - $ 599
Corporate debt securities 15,645 - 64 15,581
------- ---------- ---------- -------
Total $16,243 $1 $64 $16,180
======= ========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------
Gross Gross Fair
Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
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
======= ========== ========== =======
</TABLE>
<PAGE> 14
The contractual maturities of securities held at December 31, 1996 are one
year or less with the exception of $5.1 million of corporate debt securities
which mature in January 1998. Actual maturities may differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations with or without prepayment penalities.
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
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.
3. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Finished goods $6,144 $4,068
Raw materials 3,364 2,250
------ ------
Total $9,508 $6,318
====== ======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Land $ 220,000 $ 220,000
Buildings and improvements 4,188,329 4,070,497
Equipment and furnishings 2,650,772 2,241,426
---------- -----------
7,059,101 6,531,923
Less accumulated depreciation and amortization (2,046,292) (1,394,159)
---------- -----------
$5,012,809 $5,137,764
========== ===========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments - Rental expense under operating leases during 1996,
1995 and 1994 approximated $96,000, $69,000 and $73,000, respectively.
Minimum future obligations for operating leases are shown below.
<TABLE>
<S> <C>
1997 $101,000
1998 73,000
1999 5,000
--------
$179,000
========
</TABLE>
<PAGE> 15
Aggregate minimum future subrentals the Company expects to receive under
noncancellable subleases through January 1999 total approximately $114,000 at
December 31, 1996.
Purchase Commitments - At December 31, 1996, the Company had outstanding
firm purchase commitments of approximately $55.4 million related to minimum
annual purchase volumes under certain contracts covering a period of five
years.
Contingent Liabilities - The Company is a defendant in various legal
actions in the ordinary course of business. In the opinion of management, such
actions will not materially affect the consolidated financial position or
results of operations of the Company.
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. Additionally, the Company has granted
warrants to purchase shares of the Company's common stock to its President and
Chief Executive Officer subject to vesting criteria as set forth in his
employment agreement; such warrants have lives of ten years from the dates of
grant. Exercise prices of all options and warrants are set at the fair market
values of the common stock on the dates of grant.
A summary of the Company's stock option and warrant activity, and related
information for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
Options and Warrants Weighted Average Exercise Price
---------------------------------- -------------------------------------
1994 1995 1996 1994 1995 1996
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 1,006,710 1,084,731 1,018,289 $ 8.54 $10.08 $ 6.08
Granted 155,975 151,611 275,688 14.85 6.19 3.72
Exercised (3,333) (3,926) - 11.12 7.00 -
Forfeited (74,621) (214,127) (56,946) 16.95 15.36 20.44
Expired - - - - - -
--------- --------- ---------
Outstanding - end of year 1,084,731 1,018,289 1,237,031 $10.08 $ 6.08 $ 5.00
========= ========= =========
Exercisable at end of year 820,666 842,992 874,946 $ 7.88 $ 5.81 $ 5.22
Weighted average fair
value of options and
warrants granted during
the year $ 6.07 $ 3.39
</TABLE>
Exercise prices for options and warrants outstanding as of December 31,
1996 ranged from $2.75 to $31.00. The weighted average remaining contractual
life of those options is 7.9 years.
In December 1994 the exercise periods of certain stock option and warrant
contracts issued prior to 1990 were extended. The Company recognized
compensation expense of
<PAGE> 16
approximately $379,000 in 1994 related to these extensions. In January 1995 the
Company repriced certain employee stock options and warrants, resulting in the
net cancellation of 91,060 options and warrants.
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 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 had 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 6.79% for 1995 and 6.30% for 1996,
dividend yields of 0.0%, volatility factors of the expected market price of the
Company's common stock of 1.12, 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>
1996 1995
---------- -----------
<S> <C> <C>
Pro forma net loss $6,241,519 $10,857,189
Pro forma net loss per share $ .81 $ 1.37
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.
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 $36.8 million of net operating losses available to offset against
future taxable income, subject to certain
<PAGE> 17
limitations. Such losses expire in 2000 through 2011. They also have an
aggregate of approximately $1.1 million of research and development credits
available for offset against future income taxes which expire in 2000 through
2010.
Deferred income tax assets of approximately $15.2 million and $13.6
million exist at December 31, 1996 and 1995, respectively, principally with
respect to the net operating losses. Based on assessments of all available
evidence as of December 31, 1996 and 1995, 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. MARKETING AND DISTRIBUTION AGREEMENTS
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
began marketing products in January 1997. In connection with the agreement,
Vetlife arranged for a 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 investments.
In September 1996 Vetlife signed an agreement with Elanco Animal Health,
a division of Eli Lilly and Company, whereby Vetlife became the exclusive U.S.
supplier of Elanco's Compudose cattle growth promotant products, effective
October 1, 1996.
9. LICENSE AND OPTION AGREEMENTS
In August 1995 Vaxcel signed an option agreement with Connaught
Laboratories, Inc. that gives Connaught exclusive rights to evaluate OPTIVAX
with a vaccine currently under development at Connaught through Phase I human
clinical trials. Under the terms of this agreement, Vaxcel received an upfront
cash payment and Connaught will assume responsibility for all preclinical,
clinical and regulatory activities. If the Phase I trials are successful,
Connaught will have the right to negotiate an exclusive license to further
develop and market OPTIVAX in the specific disease field. Under such a
licensing arrangement, Vaxcel will receive further milestone payments,
royalties on sales, and payments under a supply agreement for having OPTIVAX
manufactured for Connaught.
In October 1995 Vaxcel signed an option agreement with Medeva PLC which
gives Medeva rights to evaluate OPTIVAX with a viral antigen in both
preclinical and Phase I human clinical testing. Under the terms of this
agreement, 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
<PAGE> 18
payments, royalties on sales, and payments under a supply agreement for having
OPTIVAX manufactured for Medeva.
In April 1996 Vaxcel signed a definitive license agreement with Corixa
Corporation that gives Corixa 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.
Under the terms of this agreement, Vaxcel received an upfront cash payment and,
if vaccines are successfully developed, will receive milestone payments,
royalties on sales, and payments under a supply agreement for having OPTIVAX
manufactured for Corixa or its sublicensees.
The Company has recognized $50,000 and $115,000 in revenues associated
with these agreements during 1996 and 1995, respectively.
10. POTENTIAL MERGER OF VAXCEL
In December 1996 CytRx, Vaxcel and Zynaxis, Inc. ("Zynaxis") signed an
agreement whereby Zynaxis will be merged with a wholly-owned subsidiary of
Vaxcel. Zynaxis is a publicly-held biotechnology company engaged in the
development of certain vaccine technologies. Under the terms of the agreement,
all of the outstanding shares of Zynaxis will be converted into shares of
Vaxcel based upon certain exchange ratios defined in the agreement. After
closing, it is anticipated that CytRx will own approximately 87.5% of the
outstanding common shares of Vaxcel, with the remaining 12.5% held by the
former Stockholders of Zynaxis. The merger will be treated as a purchase by
Vaxcel and is expected to constitute a tax-free reorganization for Zynaxis
stockholders.
Pursuant to the agreement, CytRx will provide up to $2 million to Zynaxis
under a secured credit facility bearing interest at prime plus 2% during the
period prior to the closing of the merger, at which time the outstanding
principal and interest will be contributed to the capital of Vaxcel, together
with additional equity in the amount of $4 million less the outstanding
principal and interest of the secured note. At December 31, 1996 the
outstanding principal balance under this credit facility was $975,000.
It is anticipated that the proposed transaction will be submitted for the
approval of the Zynaxis stockholders in early 1997. The transaction is also
subject to effectiveness of a registration statement filed with the Securities
and Exchange Commission on December 31, 1996 and certain other conditions.
<PAGE> 19
11. SEGMENT REPORTING
Commencing in 1996 the Company's operating revenues are generated from
three primary industry segments: cattle growth promotant products (Vetlife),
pharmaceutical development services (Proceutics) and research products (CytRx -
Titermax). Financial information by industry segment at December 31, 1996 and
for the year then ended is presented below.
<TABLE>
<CAPTION>
Pharmaceutical Cattle Growth Research General Consolidated
(in thousands) Services Products Products Other Corporate Total
---------------- --------------- ----------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 1,004 $ 711 $522 $358 $ - $ 2,595
Intersegment sales 627 - - - - 627
Operating profit (loss) (1,448) (672) 173 29 (3,874) (5,792)
Indentifiable assets 4,317 6,714 - - 13,268 24,299
Capital expenditures 336 115 - - 79 530
Depreciation and amortization 437 15 - - 203 655
</TABLE>
Intersegment sales are recorded on the basis of intercompany prices
established by the Company which approximate arms-length market prices.
Indentifiable assets are assets used in the operations of each segment. The
Company has no foreign operations and operating revenues derived from foreign
sources are immaterial to the consolidated total. During 1996 two customers
each contributed significant portions (greater than 10%) of the Company's
consolidated net sales in the Cattle Growth Products segment (approximately 12%
each).
<PAGE> 20
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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CytRx Corporation at December 31, 1996 and 1995 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, 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, 1997
<PAGE> 1
EXHIBIT 21.1
CYTRX CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage
Name of Subsidiary State of Incorporation of Ownership
---------------------- ---------------------- ------------
<S> <C> <C>
Custom Adjuvants, Inc. Georgia 100%
Proceutics, Inc. Delaware 100%
Vetlife, Inc. Delaware 100%
Vaxcel, Inc. Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K/A Amendment No. 1) of CytRx Corporation of our report dated February
19, 1997, included in the 1996 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, of
our report dated February 19, 1997, 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/A Amendment No. 1) of CytRx Corporation.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FOR 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,604,003
<SECURITIES> 15,369,461
<RECEIVABLES> 682,509
<ALLOWANCES> 48,430
<INVENTORY> 9,508
<CURRENT-ASSETS> 13,062,097
<PP&E> 7,059,101
<DEPRECIATION> 2,046,292
<TOTAL-ASSETS> 24,299,322
<CURRENT-LIABILITIES> 1,961,588
<BONDS> 0
0
0
<COMMON> 7,945
<OTHER-SE> 22,329,789
<TOTAL-LIABILITY-AND-EQUITY> 24,299,322
<SALES> 259,009
<TOTAL-REVENUES> 4,025,179
<CGS> 2,225,201
<TOTAL-COSTS> 2,225,201
<OTHER-EXPENSES> 7,561,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,791,779)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,791,779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,791,779)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
