<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K/A
---------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
APRIL 17, 1998
CYTRX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 000-15327 58-1642740
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification
Incorporation) No.)
154 TECHNOLOGY PARKWAY
NORCROSS, GEORGIA 30092
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (770) 368-9500
<PAGE> 2
ITEM 2 ACQUISITION OR DISPOSITION OF ASSETS
On April 17, 1998, CytRx Corporation (the "Company") and VetLife, Inc.,
an operating subsidiary of the Company ("VetLife") entered into an Acquisition
Agreement (the "Acquisition Agreement") with VetLife L.L.C., a Delaware limited
liability company ("VL LLC"), pursuant to which VL LLC acquired substantially
all of VetLife's assets related to VetLife's business of marketing and
distributing products that improve the value of food animal products to the
cattle industry (collectively, the "Assets") for a total purchase price
consisting of: (i) a cash payment of $3,500,000, subject to certain working
capital adjustments, (ii) an unsecured, subordinated promissory note in the
principal amount of $4,000,000 bearing interest at an annual rate of 12%, and
(iii) certain contingent payments based on future sales of specified products of
VL LLC and its affiliates that, if made in full, could total up to $5,500,000.
The sale of the Assets closed on the same day.
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(b) Pro Forma Financial Information
The Restated Consolidated Financial Statements of the Company
reflecting VetLife as a discontinued operation of the Company are filed as
Exhibit 99.1 and are incorporated herein by reference.
(c) Exhibits
<TABLE>
<CAPTION>
Number Exhibit
<C> <C>
2.1* Acquisition Agreement dated as of April 17, 1998, among the
Company, VetLife and VL LLC.
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule (For SEC Purposes Only)
27.2 Financial Data Schedule (For SEC Purposes Only)
99.1 Restated Consolidated Financial Statements
</TABLE>
* Previously filed.
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CYTRX CORPORATION
Date: July 24, 1998 By: /s/ Mark W. Reynolds
--------------------
Mark W. Reynolds
Chief Financial Officer and Secretary
-3-
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP
<PAGE> 2
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 Nos. 33-48706 and 333-37171 pertaining to the CytRx Corporation 401(k)
Profit-Sharing Plan, 33-93816 pertaining to the CytRx Corporation 1994 Stock
Option Plan, and 33-93818 pertaining to the CytRx Corporation 1995 Stock Option
Plan, and on Form S-3 Nos. 33-93820, 333-39607, 333-44043 and 333-48837 and the
related Prospectuses, of our report dated February 27, 1998 (except for Note 12,
as to which the date is April 17, 1998) with respect to the consolidated
financial statements of CytRx Corporation included in this Current Report on
Form 8-K/A dated July 24, 1998.
Our audit also included the financial statement schedule of CytRx Corporation
included in the Annual Report on Form 10-K for the year ended December 31, 1997.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion, as
of the date of our report referred to in the preceding paragraph, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
July 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,895,008
<SECURITIES> 5,326,647
<RECEIVABLES> 1,939,200
<ALLOWANCES> 22,187
<INVENTORY> 2,272,798
<CURRENT-ASSETS> 10,113,976
<PP&E> 7,367,000
<DEPRECIATION> 2,653,000
<TOTAL-ASSETS> 24,905,995
<CURRENT-LIABILITIES> 3,039,118
<BONDS> 2,000,000
0
0
<COMMON> 7,986
<OTHER-SE> 19,240,409
<TOTAL-LIABILITY-AND-EQUITY> 24,905,995
<SALES> 878,068
<TOTAL-REVENUES> 2,378,287
<CGS> 353,764
<TOTAL-COSTS> 353,764
<OTHER-EXPENSES> 9,050,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293,048
<INCOME-PRETAX> (6,783,103)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,783,103)
<DISCONTINUED> 730,111
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,052,992)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> (.82)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,429,207
<SECURITIES> 15,544,257
<RECEIVABLES> 691,509
<ALLOWANCES> 48,430
<INVENTORY> 9,508
<CURRENT-ASSETS> 12,179,020
<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> 879,902
<TOTAL-REVENUES> 2,485,993
<CGS> 234,633
<TOTAL-COSTS> 234,633
<OTHER-EXPENSES> 5,443,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,192,485)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,192,485)
<DISCONTINUED> (2,599,294)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,791,779)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FIVE YEAR SELECTED FINANCIAL DATA *
- -----------------------------------
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------------- ------------ ------------- ------------ -------------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Net product sales $ 456,029 $ 522,385 $ 512,528 $ 500,814 $ 506,317
Net service revenues 422,039 357,517 -- -- --
Investment and other income 1,500,219 1,606,091 2,030,802 1,987,204 4,038,221
-------------- ------------ ------------- ------------ ------------
Total revenues 2,378,287 2,485,993 2,543,330 2,488,018 4,544,538
============== ============ ============= ============ ============
Loss from continuing operations (6,783,103) (3,192,485) (10,652,582) (7,700,186) (3,228,600)
Income (Loss) from discontinued operations 730,111 (2,599,294) -- -- --
-------------- ------------ ------------- ------------ ------------
Net loss (6,052,992) (5,791,779) (10,652,582) (7,700,186) (3,228,600)
============== ============ ============= ============ ============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.91) $ (0.41) $ (1.35) $ (0.98) $ (0.41)
Income (Loss) from discontinued operations 0.09 (0.34) -- -- --
-------------- ------------ ------------- ------------ ------------
Net loss (0.82) (0.75) (1.35) (0.98) (0.41)
============== ============ ============= ============ ============
Balance Sheet Data:
Total assets $ 24,905,995 $ 24,299,322 $30,959,983 $ 38,660,567 $ 49,760,261
Convertible debentures 2,000,000 -- -- -- --
Total stockholders' equity 19,248,395 22,337,734 29,770,485 38,026,347 47,685,269
</TABLE>
*Restated for discontinued operations.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1997 the Company had cash and short-term investments of
$5.9 million and net assets of $19.2 million, compared to $11.0 million and
$22.3 million, respectively, at December 31, 1996. Working capital totaled $7.1
million at December 31, 1997, compared to $10.2 million at December 31, 1996.
Management believes that cash and investments on hand, combined with
interest income, operating revenues and the proceeds from the transactions
discussed below, will be sufficient to satisfy the Company's projected liquidity
and working capital needs through late 1999, but it is likely that additional
funding will 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. CytRx anticipates that it may raise funds through equity
offerings. Additional funding for research and development expenditures may be
obtained through joint ventures and product licensing arrangements with other
companies.
During 1996 and 1997, the Company received federal government funding
for certain research and development activities via several Small Business
Innovative Research (SBIR) grants. Most recently, the Company received a grant
from the U.S. Food and Drug Administration's Division of Orphan Drug Development
to support CytRx's Phase III clinical trial of FLOCOR. This grant will provide
approximately $400,000 over two years to help defray the overall costs of the
study. The Company intends to continue to seek government assistance for its
product development efforts.
In October 1997, CytRx sold $2.0 million of convertible notes through a
private placement, realizing approximately $1.8 million in net proceeds. (See
Note 6 to Financial Statements.) CytRx has the option to sell an additional $2.0
million to the same investors under certain conditions.
In February 1998, CytRx's wholly-owned subsidiary, Proceutics, Inc.
consummated a sale of substantially all of its non-real estate assets to Oread
Laboratories, Inc. ("Oread") for approximately $2.1 million. (See Note 12 to
Financial Statements.) Also, in February 1998, the Company entered into an
agreement with Alexandria Real Estate Equities, Inc. ("Alexandria") pursuant to
which Alexandria will purchase the building owned by Proceutics and assume the
existing lease with Oread. CytRx will also sell its building to Alexandria and
simultaneously
<PAGE> 3
execute a ten year lease. Total proceeds from this transaction, which is
expected to be consummated in the second quarter of 1998 will be $4.5 million.
(See Note 13 to Financial Statements.)
On April 17, 1998, the Company and VetLife entered into an Acquisition
Agreement (the "Acquisition Agreement") with VetLife L.L.C., a Delaware limited
liability company ("VL LLC"), pursuant to which VL LLC acquired substantially
all of VetLife's assets related to VetLife's business of marketing and
distributing products that improve the value of food animal products to the
cattle industry (collectively, the "Assets") for a total purchase price
consisting of: (i) a cash payment of $3,500,000, subject to certain working
capital adjustments, (ii) an unsecured, subordinated promissory note in the
principal amount of $4,000,000 bearing interest at an annual rate of 12%, and
(iii) certain contingent payments based on future sales of specified products of
VL LLC and its affiliates that, if made in full, could total up to $5,500,000.
The sale of the Assets closed on the same day.
The Company has consulting agreements with various individuals and
companies for routine business activities including assistance with regulatory,
marketing, investor relations, and research and development activities. As of
December 31, 1997, there were no significant firm commitments pursuant to any of
such agreements and none of such agreements are with affiliates of the Company.
At December 31, 1997 the Company had net operating loss carryforwards
for income tax purposes of approximately $44.6 million, which will expire in
2000 through 2012 if not utilized. The Company also has research and development
credits available to reduce income taxes, if any, of approximately $1.1 million
which will expire in 2000 through 2010 if not utilized. Based on an assessment
of all available evidence including, but not limited to, the Company's limited
operating history and lack of profitability, uncertainties of the commercial
viability of the Company's technology, the impact of government regulation and
healthcare reform initiatives, and other risks normally associated with
biotechnology companies, the Company has concluded that it is more likely than
not that these net operating loss carryforwards and credits will not be realized
and, as a result, a 100% deferred tax valuation allowance has been recorded
against these assets.
The above statements regarding the Company's plans and expectations for
future financing are forward-looking statements that are subject to a number of
risks and uncertainties. The Company's ability to obtain future financings
through joint ventures, product licensing arrangements, equity financings or
otherwise is subject to market conditions and the Company's ability to identify
parties that are willing and able to enter into such arrangements on terms that
are satisfactory to the Company. There can be no assurance that the Company will
be able to obtain future financing from these sources. Additionally, depending
upon the outcome of the Company's fund raising efforts via its subsidiaries
discussed above, the accompanying financial information may not necessarily be
indicative of future operating results or future financial condition.
Results of Operations
The following table presents the breakdown of consolidated results of
operations by operating unit for 1997, 1996 and 1995. 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.
<PAGE> 4
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
(in thousands) 1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
CytRx $(4,184) $(2,068) $ (9,267)
Vaxcel (2,599) (1,124) (1,386)
------- ------- --------
Net loss from continuing operations $(6,783) $(3,192) $(10,653)
Vetlife (discontinued operations) 868 (1,151) -
Proceutics (discontinued operations) (138) (1,448) -
------- ------- --------
Income (loss) from discontinued operations $ 730 $(2,599) -
------- ------- --------
Net loss $(6,053) $(5,792) $(10,653)
======= ======= ========
</TABLE>
Net product sales from continuing operations, which consist primarily
of sales of TiterMax(R) research adjuvant, were $456,000 during 1997, $522,000
in 1996 and $513,000 in 1995. Cost of product sales was $40,000 in 1997,
$63,000 in 1996 and $50,000 in 1995, or 9%, 12% and 10% of net product sales,
respectively. During 1996 the Company began marketing the services of its small
group of human resources professionals to third parties under the name of
Spectrum Recruitment Research ("Spectrum") as a way of offsetting the Company's
cost of maintaining this function. Net service revenues from continuing
operations related to Spectrum were $422,000 during 1997 and $357,000 in 1996.
Cost of service revenues was $242,000 in 1997 and $171,000 in 1996, or 57% and
48% of net service revenues, respectively. Although the TiterMax and Spectrum
operations are profitable, the Company is not dependent on the cash flow
generated by these operations.
Investment income from continuing operations was $797,000 in 1997, as
compared to $1,169,000 in 1996 and $1,804,000 in 1995. 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 January 1, 1995, 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 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.
Research and development expenditures from continuing operations during
1997 were $4,690,000 versus $2,867,000 in 1996 and $7,071,000 in 1995. The
decrease from 1995 to 1996 was primarily due to a shift of personnel and capital
resources from the Company's internal research efforts to Proceutics, where such
resources were devoted to the contract research activities of Proceutics
(included in discontinued operations). Research and development expenditures
increased in 1997 as a result of the Company's development activities for
<PAGE> 5
FLOCOR, including the completion of a Phase II clinical trial and preparation
for a Phase III trial which was initiated in March 1998. The Company also
devoted significant resources toward addressing manufacturing issues for FLOCOR.
In 1997, the Company recognized a $951,000 charge for acquired in-process
research and development as a result of Vaxcel's acquisition of Zynaxis (See
Note 5 to Financial Statements). The acquisition of this in-process research and
development did not significantly impact the Company's ongoing research and
development expenditures during 1997; however, the Company anticipates
significant future expenditures will be required to continue development of
these technologies into commercially viable products. Such expenditures will be
limited by Vaxcel's available capital resources.
Selling, general and administrative expenses from continuing operations
during 1997 were $3,187,000 as compared to $2,577,000 in 1996 and $3,575,000 in
1995. As with research and development expense, the decrease in selling, general
and administrative expense from 1995 to 1996 was primarily due to a shift of
resources to Proceutics, where such resources were devoted to contract research
activities (included in discontinued operations). The increase during 1997 was
due to increased costs as a result of Vaxcel's merger with Zynaxis, higher
operating costs of Vaxcel as a publicly-held corporation and other general
activities in support of the Company's FLOCOR development efforts. Management
believes that inflation had no material impact on the Company's operations
during the three year period ended December 31, 1997.
Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
those computer programs having time-sensitive software would recognize a date
using "00" as the year 1900 rather than the year 2000.
Based on a recent assessment, the Company determined that its
accounting software will need to be updated or modified. This should be
accomplished through updates from the software manufacturer. The Company does
not expect any material costs associated with this modification or any
disruptions to its primary operations. The Company anticipates no other year
2000 problems which are reasonably likely to have a material adverse effect on
the Company's operations. There can be no assurance, however, that such problems
will not arise.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
These new standards require that all items recognized as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 is effective
for fiscal years beginning after December 15, 1997. The adoption of Statement
130 will not impact the Company's consolidated financial statements.
In June 1997, the FASB issued Statement 131, Disclosures About Segments
of an Enterprise and Related Information ("Statement 131"). Statement 131
changes the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports. Statement 131 is effective for periods
beginning after December 15, 1997. The adoption of Statement 131 will not have a
significant impact on the Company's consolidated financial statements.
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31,
-------------------------------
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,895,008 $ 1,429,207
Short-term investments - 9,564,827
Accounts receivable 1,917,013 643,079
Inventories 2,272,798 9,508
Other current assets 29,157 532,399
------------ ------------
Total current assets 10,113,976 12,179,020
Property and equipment, net 4,713,586 5,012,809
Other assets:
Long-term investments (restricted) 5,326,647 5,979,430
Notes receivable 400,000 975,000
Acquired developed technology, net 3,454,356 -
Other assets 897,430 153,063
------------ ------------
Total other assets 10,078,433 7,107,493
------------ ------------
Total assets $ 24,905,995 $ 24,299,322
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,273,303 $ 586,920
Accrued liabilities 1,599,628 1,123,476
Unearned revenue 166,187 251,192
------------ ------------
Total current liabilities 3,039,118 1,961,588
6% Convertible debentures 2,000,000 -
Minority interest in Vaxcel,Inc. 618,482 -
Commitments
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000 shares authorized,
including 1,000 shares of Series A Junior Participating Preferred
Stock; no shares issued and outstanding - -
Common stock, $.001 par value, 18,750,000 shares authorized;
7,986,441 and 7,945,203 shares issued at December 31, 1997
and 1996, respectively 7,986 7,945
Additional paid-in capital 65,793,491 62,653,015
Treasury stock, at cost (555,154 and 507,750 shares held at
December 31, 1997 and 1996, respectively) (2,198,533) (2,021,669)
Accumulated deficit (44,354,549) (38,301,557)
------------ ------------
Total stockholders' equity 19,248,395 22,337,734
------------ ------------
Total liabilities and stockholders' equity $ 24,905,995 $ 24,299,322
============ ============
</TABLE>
See accompanying notes.
<PAGE> 7
CONSOLIDATED STATEMENTS OF OPERATIONS
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
Revenues:
Net product sales $ 456,029 $ 522,385 $ 512,528
Net service revenues 422,039 357,517 -
Investment income 797,069 1,168,641 1,803,988
Collaborative, grant and license fee income 337,438 187,667 115,000
Other 365,712 249,783 111,814
------------ ------------ ------------
2,378,287 2,485,993 2,543,330
Expenses:
Cost of product sales 39,941 63,171 49,789
Cost of service revenues 242,343 171,462 -
Research and development 4,690,582 2,866,827 7,070,600
Acquired incomplete research and development 951,017 - -
Selling, general and administrative 3,186,946 2,577,018 3,574,651
Write-off of patent costs - - 1,395,476
Realized loss on short-term investments - - 1,102,622
Interest 293,048 - 2,774
------------ ------------ ------------
9,403,877 5,678,478 13,195,912
------------ ------------ ------------
Loss from continuing operations before minority interest (7,025,590) (3,192,485) (10,652,582)
Minority interest (242,487) - -
------------ ------------ ------------
Loss from continuing operations (6,783,103) (3,192,485) (10,652,582)
Income (loss) from discontinued operations 730,111 (2,599,294) -
------------ ------------ ------------
Net loss $ (6,052,992) $ (5,791,779) $(10,652,582)
============ ============ ============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.91) $ (0.41) $ (1.35)
Income (loss) from discontinued operations 0.09 (0.34) -
============ ============ ============
Net loss $ (0.82) $ (0.75) $ (1.35)
============ ============ ============
Basic and diluted weighted average shares outstanding 7,424,372 7,737,949 7,905,364
</TABLE>
See accompanying notes.
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional Net Unrealized
Shares Paid-in Accumulated Loss on
Issued Amount Capital Deficit Investments
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,893,962 $ 7,894 $ 62,350,926 $(21,857,196) $(2,475,277)
Issuance of common stock upon
exercise of stock options and other 21,346 21 163,765
Reduction of unrealized loss
on investments 2,475,277
Purchase of treasury stock
Net loss (10,652,582)
----------------------------------------------------------------------
Balance at December 31, 1995 7,915,308 7,915 62,514,691 (32,509,778) -
Issuance of common stock 29,895 30 138,324
Purchase of treasury stock
Net loss (5,791,779)
----------------------------------------------------------------------
Balance at December 31, 1996 7,945,203 7,945 62,653,015 (38,301,557) -
Issuance of common stock 41,238 41 169,373
Purchase of treasury stock
Unrealized gain on sale of shares
of subsidiary 2,706,397
Beneficial conversion feature of
convertible debentures 264,706
Net loss (6,052,992)
----------------------------------------------------------------------
Balance at December 31, 1997 7,986,441 $ 7,986 $65,793,491 $(44,354,549) $ -
======================================================================
<CAPTION>
Treasury
Stock Total
------------------------------
<S> <C> <C>
Balance at December 31, 1994 $ - $ 38,026,347
Issuance of common stock upon
exercise of stock options and other 163,786
Reduction of unrealized loss
on investments 2,475,277
Purchase of treasury stock (242,343) (242,343)
Net loss (10,652,582)
------------------------------
Balance at December 31, 1995 (242,343) 29,770,485
Issuance of common stock 138,354
Purchase of treasury stock (1,779,326) (1,779,326)
Net loss (5,791,779)
------------------------------
Balance at December 31, 1996 (2,021,669) 22,337,734
Issuance of common stock 169,414
Purchase of treasury stock (176,864) (176,864)
Unrealized gain on sale of shares
of subsidiary 2,706,397
Beneficial conversion feature of
convertible debentures 264,706
Net loss (6,052,992)
------------------------------
Balance at December 31, 1997 $(2,198,533) $ 19,248,395
==============================
</TABLE>
See accompanying notes.
<PAGE> 9
Consolidated Statements of Cash Flows
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,052,992) $ (5,791,779) $(10,652,582)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 607,349 655,006 568,542
Amortization 145,644 - -
Charge for acquired incomplete research and development 951,017 - -
Charge for beneficial conversion feature of
convertible debentures 264,706 - -
Write-off of patent costs - - 1,395,476
Write-off of fixed assets - - 136,647
Minority interest in net loss of subsidiary (242,487) - -
Changes in assets and liabilities:
Receivables (979,874) (552,002) (22,487)
Inventories (2,263,290) (3,190) 333
Note receivable - (975,000) -
Other assets 537,902 (162,443) 168,299
Accounts payable 640,383 320,795 (18,054)
Unearned revenue (85,005) 251,192 -
Other liabilities 382,053 200,103 573,332
------------ ------------ ------------
Total adjustments (41,602) (265,539) 2,802,088
------------ ------------ ------------
Net cash used in operating activities (6,094,594) (6,057,318) (7,850,494)
Cash flows from investing activities:
Purchases of held-to-maturity securities (22,103,140) (12,024,022) (9,632,312)
Sales of available-for-sale securities - - 26,437,732
Maturities of held-to-maturity securities 32,399,348 5,036,000 4,625,000
Net cash paid for acquisition (1,257,974) - -
Capital expenditures, net (273,755) (530,051) (251,773)
------------ ------------ ------------
Net cash provided (used) by investing activities 8,764,479 (7,518,073) 21,178,647
Cash flows from financing activities:
Net proceeds from issuance of common stock 169,414 138,354 163,786
Purchase of treasury stock (176,864) (1,779,326) (242,343)
Proceeds from issuance of debt, net of issuance costs 1,803,366 - -
------------ ------------ ------------
Net cash provided (used) by financing activities 1,795,916 (1,640,972) (78,557)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 4,465,801 (15,216,363) 13,249,596
Cash and cash equivalents at beginning of year 1,429,207 16,645,570 3,395,974
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,895,008 $ 1,429,207 $ 16,645,570
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 23,342 $ - $ 2,774
============ ============ ============
</TABLE>
See accompanying notes
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CYTRX CORPORATION AND SUBSIDIARIES
1. NATURE OF BUSINESS
CytRx Corporation and its subsidiaries (Proceutics, Inc., Vaxcel, Inc.
and Vetlife, Inc.) (collectively the "Company") are engaged in the development
of pharmaceutical products including FLOCOR to treat acute sickle cell crisis
and other vascular diseases and technologies to improve the effectiveness of
vaccines. Prior to its divestiture in April 1998 (see Note 12), Vetlife also
marketed and distributed products to enhance food animal growth.
The Company's product sales from continuing operations consist
primarily of sales of TiterMax(R) research adjuvant. TiterMax is currently sold
worldwide through both distributor and direct channels. The Company also
markets the services of its small group of human resources professionals to
third parties under the name of Spectrum Recruitment Research ("Spectrum") as a
way of offsetting the Company's cost of maintaining this function. Spectrum's
services are marketed primarily within metropolitan Atlanta, Georgia. The
Company's operational focus is on the development and commercialization of
pharmaceutical products; the TiterMax and Spectrum operations were formed as
ancillary activities. Although the TiterMax and Spectrum operations are
profitable, the Company is not dependent on the cash flow generated by these
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include
the accounts of CytRx Corporation ("CytRx") together with those of its
majority-owned subsidiaries. All significant intercompany transactions have been
eliminated. Certain prior year amounts have been reclassified to conform to the
1997 financial statement presentation. As more thoroughly discussed in Note 12,
Proceutics, Inc. ("Proceutics") and Vetlife, Inc. ("Vetlife") are presented as
discontinued operations for all periods presented.
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.
Restricted Cash - In January 1996 Vetlife signed an agreement with IVY
Laboratories, Inc. ("IVY") to market and distribute IVY's line of FDA-approved
cattle growth products and devices in North America. In connection with the
agreement, Vetlife was required to obtain a letter of credit in the amount of $5
million in favor of IVY. Such unused letter of credit is collateralized by
approximately $5.3 and $5.9 million in cash equivalents and investments at
December 31, 1997 and 1996, respectively. Such collateral is presented as
long-term investments in the accompanying consolidated balance sheet. (See Note
12).
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
<PAGE> 11
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 3).
Fair Value of Financial Instruments - The carrying amounts reported in
the balance sheet for cash and cash equivalents, investments (see Note 3),
accounts receivable, note receivable, accounts payable and convertible
debentures approximate their fair values. The carrying amount reported in the
balance sheet for long-term debt approximates its fair value. The fair value of
such long-term debt is estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rate for similar types of borrowing
arrangements.
Inventories - Inventories, which are comprised primarily of finished
cattle growth promotant products, are valued at the lower of cost or market
using the first-in, first-out (FIFO) method.
Property and Equipment - Property and equipment are stated at cost and
depreciated using the straight-line method based on the estimated useful lives
(twenty years for buildings and five to seven years for equipment and furniture)
of the related assets.
Acquired Developed Technology and Other Intangibles - Acquired
developed technology and other intangible assets, primarily goodwill, (See
Note 5) are amortized over their estimated useful lives (fifteen years) on a
straight-line basis. Management continuously monitors and evaluates the
realizability of recorded acquired developed technology and other intangible
assets to determine whether their carrying values have been impaired. In
accordance with Financial Accounting Standards Board ("FASB") Statement No.
121, Accounting for the Impairment of Long-Lived Assets, the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the
carrying amount of those assets. During 1997, continued losses at Vaxcel
indicated that acquired developed technology of $3.5 million and goodwill of
$600,000 might be impaired. However, the Company's estimate of undiscounted
cash flows indicated that such carrying amounts were expected to be recovered.
Nonetheless, it is reasonably possible that the estimate of undiscounted cash
flows may change in the future resulting in the need to write-down those assets
to fair value.
Patents and Patent Application Costs - Prior to 1995 the Company
capitalized the costs associated with obtaining patents on its technologies.
During the first quarter of 1995 the Company changed from deferring and
amortizing such costs to recording them as expenses when incurred because, even
though the Company believes the patents and underlying technology have
continuing value, the amount of future benefits to be derived therefrom is
uncertain. Accordingly, the new accounting method was adopted in recognition of
a possible change in estimated future benefits. Since the effect of this change
in accounting principle was inseparable from the effect of the change in
accounting estimate, such change was accounted for as a change in estimate in
accordance with Opinion No. 20 of the Accounting Principles Board. As a result,
the Company recorded a non-cash write-off of $1.4 million during 1995 ($.18 per
share). Future patent costs are expected to be expensed since the benefits to be
derived therefrom are likely to be uncertain.
Basic and Diluted Loss per Common Share - In February 1997, the FASB
issued Statement No. 128, Earnings Per Share ("Statement 128"). Statement 128
replaced the calculation of primary and fully diluted loss per share with basic
and diluted loss per share. Unlike primary loss per share, the calculation of
basic loss per share
<PAGE> 12
excludes any dilutive effects of options, warrants and convertible securities.
Diluted loss per share is very similar to the previously reported fully diluted
loss per share. Loss per share amounts for all periods have been presented in
accordance with Statement 128 requirements.
Basic and diluted loss per share are computed based on the weighted
average number of common shares outstanding. Common share equivalents (which may
consist of options, warrants and convertible debentures) are excluded from the
computation of diluted loss per share since the effect would be antidilutive.
Shares Reserved for Future Issuance - The Company has reserved
approximately 2,238,000 of its authorized but unissued shares of common stock
for future issuance pursuant to stock options and warrants, convertible debt and
employee benefit plans.
Revenue Recognition - Sales are recognized at the time the products are
shipped or services rendered. The Company does not require collateral or other
securities for sales made on credit. Revenues from collaborative research
arrangements and grants are generally recorded as the related costs are
incurred. The costs incurred under such arrangements approximated the revenues
reported in the accompanying statements of operations. License fees reported in
the accompanying statements of operations consist entirely of nonrefundable fees
received upon the signing of certain technology license and option agreements.
These fees were recognized as income when they were received. Such agreements
generally contain provisions for additional fees upon the achievement of certain
development milestones by the licensee and upon approval of the related
products, followed by a royalty based upon net sales. Such fees, if any, will be
recognized as income when they become receivable under the terms of the related
contracts.
Sale of Stock by a Subsidiary - The Company does not recognize gains on
the sale of previously unissued stock of subsidiaries when there are significant
uncertainties regarding the Company's ability to ultimately realize its
investment in the subsidiary. Such gains are reflected as additional paid-in
capital in the Company's consolidated financial statements.
Stock-based Compensation - The Company grants stock options for a fixed
number of shares to key employees and directors 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 8).
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-based Compensation ("Statement 123"),
which provides an alternative to APB 25 in accounting for stock-based
compensation issued to employees. However, the Company has continued to account
for stock-based compensation in accordance with APB 25.
The Company also has granted a limited number of stock options to
consultants and certain third parties. These stock options generally expire
after ten years from the date of grant and have exercise prices equal to the
fair market value of the underlying common stock at the date of grant. The fair
value of the stock options granted to consultants and certain third parties was
immaterial.
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 large well-capitalized financial
<PAGE> 13
institutions and the Company's investment policy disallows investment in any
debt securities rated less than "investment-grade" by national ratings services.
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.
3. Investments
At January 1, 1995 the Company 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, 1997 and 1996 the Company has classified all of its
investments as held-to-maturity, as summarized below (in thousands):
<TABLE>
<CAPTION>
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1997:
- ------------------
Corporate debt securities $10,541 $ 1 $ - $10,542
December 31, 1996:
- ------------------
U.S. government debt securities $ 598 $ 1 $ - $ 599
Corporate debt securities 15,645 - 64 15,581
------- ------- ------- -------
Total $16,243 $ 1 $ 64 $16,180
======= ======= ======= =======
</TABLE>
On December 31, 1997 and 1996, investments were included in the
following captions on the consolidated balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents $ 5,214 $ 699
Short-term investments - 9,565
Long-term investments 5,327 5,979
------- -------
$10,541 $16,243
======= =======
</TABLE>
The contractual maturities of securities held at December 31, 1997 are
one year or less. Actual maturities may differ from contractual maturities
because the issuers of the securities may have the right to prepay obligations
with or without prepayment penalties.
<PAGE> 14
4. Property and Equipment
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 220 $ 220
Buildings and improvements 4,184 4,188
Equipment and furnishings 2,963 2,651
------- ------
7,367 7,059
Less accumulated depreciation and amortization (2,653) (2,046)
------- ------
$ 4,714 $5,013
======= ======
</TABLE>
5. Acquisition of Zynaxis, Inc.
In December 1996 CytRx, Vaxcel, Inc. ("Vaxcel") and Zynaxis, Inc.
("Zynaxis") signed an agreement whereby Zynaxis would be merged with a
wholly-owned subsidiary of Vaxcel. At that time Zynaxis was a publicly-held
biotechnology company engaged in the development of certain vaccine
technologies. The transaction was approved by the Zynaxis stockholders at a
meeting held on May 21, 1997 and was consummated as of that date.
Under the terms of the agreement all of the outstanding shares of
Zynaxis were converted into shares of Vaxcel based upon certain exchange ratios
defined in the agreement, resulting in the issuance of an aggregate of 1.4
million (12.5%) of the outstanding (post-merger) shares of Vaxcel common stock
(at $2.91 per share) to former Zynaxis stockholders at the date of closing. The
merger was treated as a purchase by Vaxcel and constituted a tax-free
reorganization for Zynaxis stockholders. The results of operations of Zynaxis
are included in the statement of operations since May 21, 1997.
Pursuant to the agreement, CytRx was to provide up to $2 million to
Zynaxis under a secured credit facility during the period prior to closing of
the merger, at which time the outstanding principal and interest was to be
contributed to the capital of Vaxcel, together with additional equity in the
amount of $4 million less the outstanding principal and interest of the secured
note. At the time of closing the outstanding principal and interest of the
secured note to Zynaxis was approximately $1.7 million, resulting in a net cash
infusion from CytRx to Vaxcel of approximately $2.3 million. In addition, at the
date of closing, Vaxcel issued to CytRx a one-year warrant entitling CytRx to
purchase a number of shares of Vaxcel common stock equal to the amount of
capital which may be necessary for Vaxcel to satisfy requirements for inclusion
in the Nasdaq SmallCap Market, divided by one-half of the $2.91 per share
transaction price at the date of closing.
In accordance with the provisions of APB Nos. 16 and 17, all
identifiable assets acquired, including identified intangible assets and
liabilities assumed, were assigned a portion of the purchase price based on
their respective fair values. The fair values of the acquired developed
<PAGE> 15
technology and incomplete research and development were determined based on an
independent appraisal. A summary of the allocation of the purchase price is a
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets, less outstanding liabilities $ (830)
Acquired developed technology and other intangibles 4,241
Acquired incomplete research and development 951
------
$4,362
======
</TABLE>
As a result of this transaction, CytRx owns 87.5% of the outstanding
Vaxcel common stock and former Zynaxis stockholders own the remaining 12.5%. An
unrealized gain of $2,706,000 relating to the sale of 12.5% of Vaxcel common
stock is reflected in stockholders' equity. The change to equity reflecting
CytRx's proportionate share of the increase in Vaxcel's equity related to the
shares issued in connection with the acquisition of Zynaxis was recorded as an
equity transaction since realization of the gain was not assured.
The following table presents unaudited pro forma operating results for
the years ended December 31, 1997 and 1996, as if the acquisition of Zynaxis had
occurred on January 1 of each period (in thousands, except for per share data).
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Revenues $ 3,206 $4,276
Loss from continuing operations
before minority interest (6,769) (8,473)
Minority interest (293) (800)
Loss from continuing operations (6,476) (7,673)
Net loss (5,746) (10,272)
Basic and diluted loss per share from
continuing operations (.87) (.99)
Basic and diluted net loss per share (.77) (1.33)
</TABLE>
6. 6% CONVERTIBLE DEBENTURES
On October 22, 1997, the Company privately placed (the "Note Sale")
with certain investors (the "Investors") $2,000,000 of convertible notes (the
"Debentures") which mature in October, 2001. The Debentures may be converted
into CytRx common stock on and after December 21, 1997 at a price equal to the
lesser of 85% of the average closing bid price for the 10 days preceding the
conversion, or $5.68 per share (the "Conversion Price"). Such beneficial
conversion feature was determined to have a fair value of $265,000 at the date
of issuance and has been amortized to interest expense from the date of issuance
through the date the Debentures first became convertible. The Debentures were
sold at par and bear interest at a rate of 6% per annum. The terms of the
Debentures grant CytRx the right to redeem the Debentures at 110% of par if the
Conversion Price falls below $4. Also in connection with the Note Sale, the
Investors were issued two year warrants to purchase 40,000 shares of CytRx
common stock at an exercise price of $5.68. The fair value of such warrants was
determined to be insignificant.
<PAGE> 16
In February 1998, $400,000 of the Debentures were converted into
161,608 shares of common stock, and an additional $400,000 of Debentures were
redeemed by the Company.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments - Rental expense under operating leases during 1997,
1996 and 1995 approximated $74,000, $70,000 and $69,000, respectively. Minimum
annual future obligations for operating leases are $167,000, $50,000 and $45,000
in 1998, 1999 and 2000, respectively. Aggregate minimum future subrentals the
Company expects to receive under noncancellable subleases through January 2000
total approximately $60,000 at December 31, 1997.
Purchase Commitments - At December 31, 1997, the Company had
outstanding firm purchase commitments for inventory of approximately $46.0
million related to minimum annual purchase volumes under certain contracts
covering a period of four years. Such contracts are with the supplier of the
Company's cattle growth promotant products. Purchases from this supplier totaled
$7,270,000 and $2,000 in the years ended December 31, 1997 and 1996,
respectively. As of April 17, 1998, these purchase commitments were dissolved
(See Note 12).
8. STOCK OPTIONS AND WARRANTS
The Company and its subsidiary, Vaxcel, have stock option plans
pursuant to which certain key employees and directors are eligible to receive
incentive and/or nonqualified stock options to purchase shares of the Company's
or the subsidiary's common stock. 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 shown below. In January
1995 the Company repriced certain
<PAGE> 17
employee stock options and warrants, resulting in the net cancellation of 91,060
options and warrants.
<TABLE>
<CAPTION>
Options and Warrants Weighted Average Exercise Price
--------------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 1,237,031 1,018,289 1,084,731 $ 5.00 $ 6.08 $ 10.08
Granted 221,700 275,688 151,611 4.35 3.72 6.19
Exercised - - (3,926) - - 7.00
Forfeited (19,434) (56,946) (214,127) 6.64 20.44 15.36
Expired - - - - - -
--------- --------- --------- ------ ------ -------
Outstanding - end of year 1,439,297 1,237,031 1,018,289 $ 4.87 $ 5.00 $ 6.08
========= ========= ========= ====== ====== =======
Exercisable at end of year 940,541 874,946 842,992 $ 5.22 $ 5.22 $ 5.81
Weighted average fair value of
options and warrants granted
during the year: $3.97 $3.39 $6.07
</TABLE>
The following table summarizes additional information concerning
options and warrants outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number of Shares Contractual Average Number Average
Exercise Prices Life (years) Exercise Price Exercisable Exercise Price
- -------------------- ----------------- ---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 2.75 - 4.81 1,131,060 7.6 $ 4.24 665,437 $ 4.39
5.00 - 7.00 278,689 5.9 6.98 252,439 6.97
7.50 - 10.00 26,047 7.0 8.47 19,164 8.63
15.75 - 31.00 3,501 6.4 17.41 3,501 17.41
--------- -------
1,439,297 7.3 4.88 940,541 5.22
========= =======
</TABLE>
A summary of CytRx's subsidiary's stock option activity and the
related information for the years ended December 31 is shown below.
<TABLE>
<CAPTION>
Options Weighted Average Exercise Price
-------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 794,453 735,000 531,500 $1.50 $1.50 $1.50
Granted 63,000 73,620 203,500 3.18 1.50 1.50
Exercised (5,333) -- -- 1.50
Forfeited (5,120) (14,167) -- 1.50 1.50
------- ------- -------
Outstanding - end of year 847,000 794,453 735,000 $1.63 $1.50 $1.50
======= ======= =======
Exercisable at end of year 293,663 184,332 95,498 $1.57 $1.50 $1.50
Weighted average fair value of
options granted during the year $ 1.82 $ 0.83 $ 0.87
</TABLE>
The exercise prices for options outstanding as of December 31, 1997
ranged from $1.00 to $3.25. The weighted average remaining contractual life of
those options is 6.6 years.
The Company and its subsidiary have elected to follow APB 25 and
related Interpretations in accounting for their 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
prices of the Company's and its subsidiary's employee stock options equal the
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized. Stock options granted to consultants and certain other
third parties are valued at their fair value on the date of grant and have been
immaterial to date.
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 and its subsidiary had accounted for their employee stock options
granted subsequent to December 31, 1994 under the fair value method of
<PAGE> 18
that Statement.
The fair value for the Company's options was estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Weighted average risk free interest rate 6.22% 6.30% 6.79%
Dividend yields 0% 0% 0%
Volatility factors of the expected market price
of the Company's common stock 1.055 1.12 1.12
Weighted average life of the option 8 8 8
</TABLE>
The fair value for the subsidiary's options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Weighted average risk free interest rate 6.53% 6.34% 7.49%
Dividend yields 0% 0% 0%
Volatility factors of the expected market price
of the Company's common stock 0.585 0.378 0.378
Weighted average life of the option 8 8 8
</TABLE>
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 and its subsidiary'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 their
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 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss ($6,969) ($6,343) ($10,936)
Pro forma net loss per share (basic
and diluted) ($.94) ($.82) ($1.38)
</TABLE>
Statement 123 is applicable only to options granted subsequent to
December 31, 1994; therefore, its proforma effect will not be fully reflected
until 1998.
9. ADOPTION OF SHAREHOLDER PROTECTION RIGHTS PLAN
Effective April 16, 1997, the Company's Board of Directors declared a
distribution of one Right for each outstanding share of the Company's common
stock to stockholders of record at the close of business on May 15, 1997 and for
each share of common stock issued by the Company thereafter and prior to a
Flip-in Date (as defined below). Each Right entitles the registered holder to
purchase from the Company one ten-thousandth (1/10,000th) of a share of Series A
Junior Participating Preferred Stock, at an exercise price of $30. The Rights
are generally not exercisable until 10 business days after an announcement by
the Company that a person or group of affiliated persons (an "Acquiring Person")
has acquired beneficial ownership of 15% or more of the Company's then
outstanding shares of common stock (a "Flip-in Date").
In the event the Rights become exercisable as a result of the
acquisition of shares, each Right will enable the owner, other than the
Acquiring Person, to purchase at the Right's then current exercise price a
number of shares of common stock with a market value equal to twice the exercise
price. In addition, unless the Acquiring Person owns more than 50% of the
outstanding shares of common stock, the Board of Directors may elect to exchange
all outstanding Rights (other than those owned by such Acquiring Person) at an
exchange ratio of
<PAGE> 19
one share of common stock per Right. All Rights that are owned by any person on
or after the date such person becomes an Acquiring Person will be null and void.
The Rights have been distributed to protect the Company's stockholders
from coercive or abusive takeover tactics and to give the Board of Directors
more negotiating leverage in dealing with prospective acquirers.
10. RETIREMENT PLAN
The Company maintains a defined contribution retirement plan (the
"Plan") covering employees of the Company. Historically, at the Board of
Directors' discretion, the Company has matched 50% of the participant's
contribution with common stock. The Company's matching contribution vests over 3
years. Total expense for the Plan for the years ended December 31, 1997, 1996
and 1995 was $164,000, $143,000 and $139,000, respectively, of which $105,000,
$77,000 and $-0- related to the discontinued operations of Proceutics and
Vetlife for the years ended December 31, 1997, 1996 and 1995, respectively.
11. INCOME TAXES
For income tax purposes, CytRx and its subsidiaries have an aggregate
of approximately $44.6 million of net operating losses available to offset
against future taxable income, subject to certain limitations. Such losses
expire in 2000 through 2012. 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 taxes reflect the net effect of temporary differences
between the financial reporting carrying amounts of assets and liabilities and
income tax carrying amounts of assets and liabilities. The components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $16,942,006 $13,965,378
Tax credit carryforward 1,095,762 1,075,455
Other 1,395,900 334,389
----------- -----------
Total deferred tax assets 19,433,668 15,375,222
Deferred tax liabilities:
Acquired developed technology and other intangibles (1,556,100) -
Depreciation (194,065) (183,542)
----------- -----------
Total deferred tax liabilities (1,750,165) (183,542)
----------- -----------
Net deferred tax assets 17,683,503 15,191,680
Valuation allowance (17,683,503) (15,191,680)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
<PAGE> 20
Based on assessments of all available evidence as of December 31, 1997
and 1996, 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.
The amount of net operating loss carryforwards generated by Zynaxis
prior to the merger was $31,000,000. The use of pre-acquisition operating loss
carryforwards is subject to limitations imposed by the Internal Revenue Code.
The Company anticipates that these limitations will affect utilization of the
carryforwards prior to expiration. Therefore, for financial reporting purposes
the Company has recorded a deferred tax asset of $1,277,000, giving effect to
these limitations with a corresponding valuation allowance of $1,277,000. When
realized, the tax benefit of these loss carryforwards will be applied to
reduce acquired developed technology and other intangibles related to the
acquisition of Zynaxis.
12. DISCONTINUED OPERATIONS
Sale of Proceutics
On February 16, 1998, the Company consummated a sale of substantially
all of the assets of Proceutics other than real estate to Oread Laboratories,
Inc. ("Oread") for approximately $2.1 million. Proceutics retained its real
estate assets consisting of a laboratory building which it is leasing to Oread.
The Company expects a gain related to the sale of Proceutics which will be
recognized in 1998.
Net losses associated with Proceutics included in income (loss) from
discontinued operations were approximately $(138,000), $(1,448,000) and $-0- for
the years ended December 31, 1997, 1996 and 1995 respectively. (See Note 14). A
summary of the assets and liabilities of Proceutics which were sold, and which
are included in the consolidated balance sheets at December 31, 1997 and 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current assets $ 721 $ 674
Property and equipment, net 696 721
------ ------
Total assets $1,417 $1,395
====== ======
Total liabilities $ 228 $ 637
====== ======
</TABLE>
Sale of VetLife
On April 17, 1998, the Company and VetLife, entered into an Acquisition
Agreement with VL LLC pursuant to which VL LLC acquired substantially all of
VetLife's Assets for a total purchase price consisting of: (i) a cash payment of
$3,500,000, subject to certain working capital adjustments, (ii) an unsecured,
subordinated promissory note in the principal amount of $4,000,000 bearing
interest at a annual rate of 12%, and (iii) certain contingent payments based on
future sales of specified products of VL LLC and its affiliates that, if made in
full, could total up to $5,500,000. The sale of the Assets closed on the same
day. The Company will retain the $5.3 million in investing that were pledged to
secure a letter of credit (See Note 2). The Company expects a gain related to
this transaction which will be recognized in 1998.
Included in income (loss) from discontinued operations were
approximately $868,000, $(1,151,000) and $-0- related to VetLife's cattle
marketing operations for the years ended December 31, 1997, 1996 and 1995
respectively. (See Note 14). A summary of the assets and liabilities of VetLife
being sold which are included in the consolidated balance sheets at December 31,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current assets $3,695 $ 619
Property and equipment, net 100 116
------ ------
Total assets $3,795 $ 735
====== ======
Total liabilities $2,048 $ 414
====== ======
</TABLE>
<PAGE> 21
The results of operations of Proceutics and VetLife have been
reclassified from income (loss) from continuing operations to discontinued
operations for the two years ended December 31, 1997 (see Note 14).
13. POTENTIAL SALE OF REAL ESTATE
On February 23, 1998, the Company entered into an agreement with
Alexandria Real Estate Equities, Inc. ("Alexandria") pursuant to which CytRx and
Proceutics would sell the two buildings owned by them at 150 and 154 Technology
Parkway, Norcross, Georgia, to Alexandria for $4,500,000. Under the terms of the
Agreement, Proceutics' rights and obligations under the lease to Oread (See Note
12) would be assigned to Alexandria and CytRx would lease the build at 154
Technology Parkway from Alexandria. The Company expects that this transaction
will be consummated in the second quarter of 1998 and will result in a gain
which will be recognized in 1998.
14. SEGMENT REPORTING
Commencing in 1996 the Company's operating revenues have been generated
from three primary industry segments: cattle marketing operations (Vetlife),
pharmaceutical development services (Proceutics) and research products (CytRx -
Titermax). Financial information for operations by industry segment at December
31, 1997 and 1996 and for the years then ended is presented below.
<TABLE>
<CAPTION>
1997: Continuing Operations Discontinued Operations
- ----- ----------------------------------- ----------------------------------------------
General Total Cattle Total
Research Corporate Continuing Marketing Pharmaceutical Discontinued
(in thousands) Products and Other Operations Operations Services Operations
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $456 $ 422 $ 878 $13,469 $1,984 $15,453
Intersegment sales 853 853
Profit (loss) from continuing
operations 193 (6,976) (6,783)
Profit (loss) from discontinued
operations 868 (138) 730
Identifiable assets - 16,935 16,935 3,795 4,176 7,971
Capital expenditures - 98 98 11 165 176
Depreciation and amortization - 372 372 16 365 381
<CAPTION>
1996: Continuing Operations Discontinued Operations
- ----- ----------------------------------- ----------------------------------------------
General Total Cattle Total
Research Corporate Continuing Marketing Pharmaceutical Discontinued
(in thousands) Products and Other Operations Operations Services Operations
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $522 $ 358 $ 880 $ 711 $1,004 $ 1,715
Intersegment sales 627 627
Profit (loss) from continuing
operations 173 (3,365) (3,192)
Loss from discontinued
operations (1,151) (1,448) (2,599)
Identifiable assets - 19,247 19,247 735 4,317 5,052
Capital expenditures - 79 79 115 336 451
Depreciation and amortization - 203 203 15 437 452
</TABLE>
Identifiable 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.
<PAGE> 22
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, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 27, 1998, except for Note 12,
as to which the date is April 17, 1998.
