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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-15327
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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 May 20, 1998, the aggregate market value of the Registrant's common stock
held by non-affiliates was approximately $20,828,000.
On May 20, 1998, there were 7,662,095 shares of the Registrant's common stock
outstanding, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CytRx Corporation Proxy Statement for the 1998 Annual Meeting of
Stockholders filed on April 30, 1998 (the "Proxy Statement") are incorporated by
reference into Part III.
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THIS FORM 10-K/A AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME
BY CYTRX CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF CYTRX CORPORATION AND MEMBERS OF ITS
MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES,
AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE COMPLETED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
FORWARD-LOOKING STATEMENTS ARE INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-K/A,
AND ARE HEREBY INCORPORATED BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION
TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS,
THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS
OVER TIME.
PART I
ITEM 1. BUSINESS
GENERAL
CytRx Corporation ("CytRx") was founded in 1985 and is engaged in the
development and commercialization of pharmaceutical-related products and
services primarily involving human therapeutics focused on high-value
critical-care therapies (the "Core Business").
CytRx has in the past, and may in the future, create operating
subsidiaries to develop its technologies for indications outside of its Core
Business. CytRx intends to use the proceeds from the operation or sale of its
subsidiaries to fund its Core Business. Vaxcel, Inc. ("Vaxcel") is developing
technologies to enhance the effectiveness of vaccines. Prior to its divestiture
in April 1998, Vetlife, Inc. ("VetLife") was engaged in developing technologies
to enhance food animal growth and marketing and distributing products to enhance
North American beef cattle productivity. Before its divestiture by CytRx in
February 1998 (see "New Business Developments"), Proceutics, Inc. ("Proceutics")
provided preclinical development services to the pharmaceutical industry.
Reference herein to "the Company" includes CytRx and its majority-owned
subsidiaries.
Certain financial information concerning the industry segments in
which the Company operates can be found in Note 14 to the Company's
Consolidated Financial Statements.
NEW BUSINESS DEVELOPMENTS
Acquisition of Zynaxis, Inc.
Effective May 21, 1997, Zynaxis, Inc. ("Zynaxis"), a publicly-held
biotechnology company engaged in the development of certain vaccine
technologies, merged with Vaxcel Merger Sub, a wholly-owned subsidiary of
Vaxcel formed for the purpose of the transaction (such transaction hereinafter
referred to as the "Vaxcel Merger"). As a result of the Vaxcel Merger, Zynaxis
became a wholly-owned subsidiary of Vaxcel.
As part of the Vaxcel Merger (i) shares of common stock of Vaxcel were
issued to the existing shareholders of Zynaxis in exchange for all of the
outstanding shares of capital stock of Zynaxis and (ii) Vaxcel issued to CytRx
shares of common stock of Vaxcel and a warrant to purchase additional shares of
common stock of Vaxcel in exchange for CytRx's contribution to Vaxcel of $4
million, less the outstanding principal and interest under a secured loan
extended to Zynaxis by CytRx.
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As a result of the Vaxcel Merger, CytRx owns approximately 87.5% of
the outstanding common shares of Vaxcel, with the remaining 12.5% held by the
former shareholders of Zynaxis. The Vaxcel Merger was treated as a purchase by
Vaxcel and constituted a tax-free reorganization for the former Zynaxis
shareholders. Also in connection with the Vaxcel Merger (i) options and
warrants to purchase Zynaxis common stock were converted into options and
warrants for the purchase of Vaxcel common stock, and (ii) convertible notes
issued by Zynaxis were converted into the right to receive shares of Vaxcel
common stock.
As a result of the Vaxcel Merger, Vaxcel acquired the PLG
microencapsulation and mucoadhesive vaccine technologies of Zynaxis. The
Company believes that the Zynaxis technologies will be complementary to
Vaxcel's current technologies, which are 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.
Issuance of 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"). The Debentures may be converted into CytRx Common Stock at a
price of 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"). 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.
In addition, CytRx has the option to sell to the Investors an
additional $2,000,000 in value of the Debentures at any time between 90 and 270
days after the effective date of the Shelf Registration (as defined in that
certain Registration Rights Agreement dated October 22, 1997), subject to
certain conditions, including, without limitation, (i) that the 10 day average
closing price of the Company's common stock is not below $3.50 per share on the
day that the Company gives the Investor notice of the Company's election to
exercise the Option and the day before the closing of the Option, (ii) that the
Company is not in default under any material borrowings from any financial
institutions or other persons, (iii) that the class of common stock into which
the Debentures are convertible shall continue to be listed by Nasdaq and (iv)
that the Company has not been convicted of any fraud in the sale of its
securities. Also in connection with the Note Sale, CytRx filed a registration
statement in connection with the shares of CytRx Common Stock into which the
Debentures are convertible (the "Securities"), and agreed to keep such
registration statement effective until October 22, 1999 (or such earlier date
when the holders of the Securities are able to sell all such securities
immediately without restriction pursuant to Rule 144(k) under the Securities Act
of 1933 or any successor rule thereunder or otherwise).
In February and March 1998, an aggregate of $500,000 of the Debentures
were converted into 204,104 shares of Common Stock. In February 1998, $400,000
of the Debentures were redeemed by the Company and in May 1998, the Company
redeemed an additional $200,000 of the Debentures. In addition, in May 1998
the Company received notice from an Investor of its intent to convert the
remaining $900,000 of Debentures. The Company intends to exercise its rights
to redeem such $900,000 of Debentures in accordance with their terms.
Divestiture of Subsidiaries and Sale of Real Estate
During the first two calender quarters of 1998, CytRx divested itself
of two operating subsidiaries and its real estate assets to allow the Company to
focus its activities on its Core Business and, specifically, to raise capital to
undertake Phase III testing of FLOCOR. See "Product Development." The Company
expects these transactions to make an additional $12 million cash available in
1998, which should be sufficient to fund the Company's operations, including the
commencement of the Phase III testing of FLOCOR, through late 1999.
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 and leased the laboratory building at 150
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Technology Parkway, Norcross, Georgia to Oread. The Company expects a gain
related to this transaction which will be recognized in 1998.
On April 17, 1998, CytRx and VetLife consummated a sale of
substantially all of the assets of VetLife for approximately $3.5 million in
cash, an unsecured subordinated promissory note in the principal amount of $4.0
million, and certain payments contingent upon the sales of certain of the
purchaser's products of up to $5.5 million. The Company expects to recognize a
gain related to this transaction in 1998. Vetlife had earnings in only one year,
1997. The Company could not be certain that Vetlife would remain profitable.
The majority of Vetlife's revenues were realized from the distribution of a
line of cattle food implants and value added services to three customers. A
loss of any one of these customers could have had a material adverse impact on
the Company. In addition, under its distribution agreements with its supplier,
Vetlife could have been required to make purchases up to $10 million of
implants for each of the next five years regardless of whether Vetlife could
sell the purchased product.
On May 11, 1998, CytRx and Proceutics consummated the sale of the two
buildings owned by them at 150 and 154 Technology Parkway, Norcross, Georgia, to
ARE - 150/154 Technology Parkway, LLC ("Alexandria"), an affiliate of Alexandria
Real Estate Equities, Inc., for an aggregate of $4.5 million. Proceutics'
rights and obligations under the lease to Oread was assigned to Alexandria and
CytRx entered into a ten year lease with Alexandria regarding the building at
154 Technology Parkway. The Company expects a gain related to this transaction
which will be recognized in 1998.
PRODUCT DEVELOPMENT
FLOCOR(TM)
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 FLOCOR (TM), which the Company believes has the potential
to alleviate pain and suffering associated with sickle cell crisis.
In 1995, results from a 2,900 patient RheothRx(R) trial indicated a
rise in creatinine, a marker of kidney toxicity, in a small percentage of heart
attack patients, at doses that provided a therapeutic benefit. As a result,
CytRx's licensee, Glaxo Wellcome PLC ("GW"), returned the rights to RheothRx to
the Company. Following GW's termination of the license, CytRx completed a
purification process that removed certain impurities in the compound, and
conducted experiments that showed higher toleration in models of renal failure.
The purified form of RheothRx is now named FLOCOR, and a composition of matter
patent was issued for the new compound in June 1996. CytRx believes that FLOCOR
provides an opportunity to satisfy unmet medical needs in treating sickle cell
crisis and other vascular-occlusive disorders.
FLOCOR is an intravenous solution that has the unique property of
improving blood flow. The Company believes that FLOCOR has significant potential
in treating a variety of vascular-occlusive diseases where blood flow is
restricted. CytRx has chosen the painful vaso-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. 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.
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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
narcotics, 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.
FLOCOR'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 FLOCOR is used. Also, the trial indicated that
FLOCOR significantly reduced use of medication required to alleviate the severe
pain. CytRx has completed a small safety and dose ranging study with the new
purified material. A Phase III double-blind placebo-controlled multicenter study
is currently enrolling patients to assess the efficacy and safety of FLOCOR in
vaso-occlusive crisis of sickle cell disease.
The Company believes that FLOCOR has the potential to be an effective
treatment for other vascular-occlusive diseases as well. Once the sickle cell
program is underway, CytRx plans to explore the opportunities with FLOCOR 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.
In June 1989, the FDA informed CytRx of its decision to grant
RheothRx(R) "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/FLOCOR as an Orphan
Drug, if the Company is the first manufacturer to obtain FDA approval to market
FLOCOR 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.
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Vaccine Delivery Technologies
Vaxcel has four proprietary adjuvant and delivery system technologies
which can be used to increase the effectiveness and/or convenience of both
currently marketed and new vaccines. Vaxcel derives its rights to these four
technologies from the following: (a) the rights to OPTIVAX(R) ("Optivax") are
derived from an exclusive, worldwide license agreement with CytRx; (b) the
rights to PLG microspheres for oral vaccine delivery are derived as a result of
the Vaxcel Merger; (c) the rights to mucoadhesives for oral vaccine delivery are
also derived as a result of the Vaxcel Merger; and (d) the rights to entrapment
techniques for vaccine delivery using certain water soluble polymers are derived
from a Research Agreement and Options Agreement with Vanderbilt University
("Vanderbilt"). These technologies are complementary to each other, thereby
providing Vaxcel with a broad portfolio of technologies for the development of
vaccines to be delivered by the injectable, oral, and mucosal routes of
administration.
Optivax is the tradename for a family of proprietary nonionic block
copolymers which augment or modify the immune response to vaccines when
administered primarily by injection. Optivax acts both as a delivery system by
targeting vaccines to cells of the immune system and as an adjuvant because of
its ability to augment the immune system's response to vaccines. Vaxcel and its
institutional / corporate collaborators have performed numerous preclinical
studies (including several studies in non-human primates) to characterize the
adjuvant activity of Optivax. Vaxcel also performed a Phase I clinical trial to
help demonstrate that Optivax was safe and effective in humans. In this trial,
the results of which were published in the December 1997 issue of Clinical
Cancer Research, Optivax in combination with a subpotent cancer immunogen
generated potentially beneficial humoral and cellular immune responses in
patients with advanced cancer without evidence of significant local or systemic
toxicity.
Vaxcel's business strategy is to sublicense its technologies on a
vaccine-by-vaccine basis to companies engaged in vaccine development. Such
sublicense agreements may be either exclusive, co-exclusive, or non-exclusive
in the field depending upon the situation. The sublicensees will combine their
vaccine with Vaxcel's technology and then be responsible for product
development, regulatory approval, and commercialization of the final product at
their expense. In return, Vaxcel will receive licensing fees, milestone
payments, and royalty on sales. At present, Vaxcel has entered into an option
agreement for Optivax with Medeva PLC ("Medeva"), a license agreement for
Optivax with Corixa Corporation ("Corixa"), and a license agreement for PLG
microspheres with ALK A/S ("ALK").
Other Product Development Efforts
CytRx is also developing its copolymer technology for use 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. These products are is currently in preclinical development.
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Consolidated expenditures for research and development activities were
$4.6 million, $2.8 million, and $7.1 million during the years ended December
31, 1997, 1996, and 1995, respectively.
PRODUCTS AND SERVICES CURRENTLY MARKETED
Titermax(R)
CytRx manufactures, markets and distributes TiterMax, an adjuvant used
to produce cell mediated and humoral responses in research animals. The keys to
the potency of TiterMax lie in its immunostimulatory activity and the formation
of stable water-in-oil emulsions. TiterMax aids in the antigen's effective
presentation to the immune system without the toxic effects of other research
adjuvants.
Other
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 has maintained a portion of Proceutics' Norcross, Georgia
facility as a pilot manufacturing facility. The 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. The pilot
facility is contained within the building leased to Oread (see "New Business
Developments"). Oread has agreed to maintain Good Manufacturing Practices
("GMP") conditions in the facility for a minimum of two years from the date of
their lease and to allow the Company reasonable usage of the facility.
Management believes that the Company has an adequate supply of
materials on hand to meet the Company's needs for 2 to 3 years (both drug
substance and formulated drug product) which management anticipates to be
sufficient to complete the anticipated studies necessary for filing a New Drug
Application/Product License Application with the FDA. However, there can be no
assurance that delays and complications, among other factors, could make the
Company's current supply inadequate.
The Company requires three suppliers of materials or services to
manufacture its product; (i) a supplier of the raw drug substance, (ii) a
supplier of the purified drug which is refined from the raw drug substance and
(iii) a manufacturer who can formulate and sterile fill the purified drug
substance into the finished drug product. The raw drug substance is currently
widely available at commercial scales from numerous manufacturers. The Company
has not entered into a formal agreement with any supplier for the raw drug
substance because of its wide availability. To obtain the purified drug
substance, the Company has entered into an agreement with a French company.
Management believes that such agreement provides for adequate material to meet
the Company's needs for the next 2 to 3 years. There can be no assurance that
the Company's relationship with such supplier will continue or that the Company
will be able to obtain additional purified drug substance if the Company's
current supply is inadequate. Such inability to obtain additional purified drug
substance in amounts and at prices acceptable to the Company could have a
material adverse effect on the Company's business. To meet the need for
manufacture of the Company's finished drug product, the Company has entered
into a supply agreement with the Hospital Products Division of Abbott
Laboratories. The inability of the Company to maintain such relationship on
terms acceptable to the Company could have a material adverse effect on the
Company's business.
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
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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.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company actively seeks patent protection for its technologies,
processes, uses, and ongoing improvements and considers its patents and other
intellectual property to be critical to its business.
The Company continually evaluates the patentability of new inventions
and improvements developed by its employees and collaborators. Whenever
appropriate, the Company will endeavor to file United States and international
patent applications to protect these new inventions and improvements. However,
there can be no assurance that any of the current pending patent applications
or any new patent applications that may be filed will result in issued United
States or foreign patents.
The Company also attempts to protect its proprietary products,
processes and other information by relying on trade secrets and non-disclosure
agreements with its employees, consultants and certain other persons who have
access to such products, processes and information. Under the agreements, all
inventions conceived by employees are the exclusive property of the Company.
Nevertheless, there can be no assurance that these agreements will afford
significant protection against misappropriation or unauthorized disclosure of
the Company's trade secrets and confidential information.
COMPETITION
Many companies, including large pharmaceutical, chemical and
biotechnology firms with financial resources, research and development staffs,
and facilities that are substantially greater than those of the Company, are
engaged in the research and development of pharmaceutical products that could
compete with the products under development by the Company. The industry is
characterized by rapid technological advances and competitors may develop their
products more rapidly and/or such products may be more effective than those
under development by the Company or its licensees and corporate partners. The
Company competes in this research and development environment by attempting to
develop its products and technologies in an innovative and timely fashion that
would provide the Company with an advantage in the licensing and/or marketing
of its products and technologies.
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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
During 1997 compliance with federal, state and local regulations
pertaining to environmental standards did not have a material effect upon the
capital expenditures or earnings of the Company.
EMPLOYEES
As of December 31, 1997, the Company had 72 full-time and 2 part-time
employees, 40 of which were involved in the conduct of scientific or research
and development activities either for the Company or under contract by third
parties.
ITEM 2. PROPERTIES
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The Company currently subleases laboratory and related space from Oread
at 150 Technology Parkway, Norcross, Georgia, and leases administrative office
space from Alexandria at 154 Technology Parkway, Norcross, Georgia. See
"Business - New Business Developments."
The above-mentioned facilities are in satisfactory condition and
suitable for the particular purposes for which they were acquired or
constructed and are adequate for present operations.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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
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<S> <C> <C>
COMMON STOCK:
1998
January 1 to May 20 3 5/8 2 1/2
1997
Fourth Quarter 5 5/8 2 7/8
Third Quarter 5 3 5/32
Second Quarter 4 1/4 3 1/4
First Quarter 5 3 1/4
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
</TABLE>
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On May 20, 1998, the closing price of the Common Stock as reported on
The Nasdaq Stock Market, was $2.75 and there were approximately 1,500 holders of
record of the Company's Common Stock. The number of record holders does not
reflect the number of beneficial owners of the Company's Common Stock for whom
shares are held by Cede & Co., certain brokerage firms and other institutions.
The Company has not paid any dividends since its inception and does not
contemplate payment of dividends in the foreseeable future.
On October 22, 1997, the Company sold $2,000,000 of convertible notes
(the "Debentures") to the Investors in reliance upon exemptions from
registration under Section 4(2) of the Securities Act of 1933, as amended, and
Regulation D promulgated thereunder. The Debentures are convertible into common
stock of the Company at a price of the lesser of (i) 85% of the average closing
bid price for the 10 days preceding the conversion or (ii) $5.68 per share (the
"Conversion Price"). The Company has the right to redeem the Debentures at 110%
of par if the Conversion Price falls below $4. In connection with the sale of
the Debentures, the Investors were issued warrants to purchase an aggregate of
40,000 shares of the Company's common stock at an exercise price of $5.68. Such
warrants are exercisable for two years. See "Business - New Business
Developments - Issuance of Convertible Debentures."
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SELECTED FINANCIAL DATA *
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CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Net Sales $ 14,347,461 $ 1,591,123 $ 512,528 $ 500,814 $ 506,317
Investment and other income 1,439,419 1,452,867 2,030,802 1,987,204 4,038,221
-------------- ------------ ------------- ------------ ------------
Total revenues 15,786,880 3,043,990 2,543,330 2,488,018 4,544,538
Loss from continuing operations (5,915,060) (4,343,812) (10,652,582) (7,700,186) (3,228,600)
Loss from discontinued operations (137,932) (1,447,967) -- -- --
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 (0.80) $ (0.56) $ (1.35) $ (0.98) $ (0.41)
Loss from discontinued operations (0.02) (0.19) -- -- --
-------------- ------------ ------------- ------------ ------------
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.
10
<PAGE> 12
ITEM 7. 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.
("Proceutics") 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 May 1998, CytRx and Proceutics
consummated a sale of the two buildings owned by them at 150 and 154 Technology
Parkway, Norcross, Georgia to ARE-150/154 Technology Parkway, LLC
("Alexandria"), an affiliate of Alexandria Real Estate Equities, Inc. for
approximately $4.5 million. Alexandria assumed the existing lease with Oread. In
addition, CytRx entered into a 10 year lease with Alexandria for administrative
office space at the 154 Technology Parkway building.
11
<PAGE> 13
(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.
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 during the
years ended December 31, 1997 and 1996, respectively. As of April 17, 1998,
these purchase commitments were dissolved.
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.
12
<PAGE> 14
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
(in thousands) 1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
CytRx $(4,462) $(2,205) $ (8,441)
Vaxcel (2,599) (1,124) (1,386)
Vetlife 1,146 (1,015) (826)
------- ------- --------
Net loss from Continuing Operations $(5,915) $(4,344) $(10,653)
Proceutics (discontinued operations) (138) (1,448) -
------- ------- --------
Net loss $(6,053) $(5,792) $(10,653)
======= ======= ========
</TABLE>
Consolidated net sales from continuing operations for 1997 were
$14,347,000, as compared to $1,591,000 in 1996 and $513,000 in 1995. Cost of
sales from continuing operations was $7,206,000 in 1997, $652,000 in 1996,and
$50,000 in 1995. The dramatic increase in net sales was due to the initiation of
sales and marketing activities by Vetlife during the fourth quarter of 1996. The
significant components of net sales are shown below.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
(in thousands) 1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Product Sales (Vetlife) $13,469 $711 $ -
Product Sales (CytRx) 456 522 513
Services (CytRx) 422 358 -
------- ------ ------
Net Sales from Continuing Operations $14,347 $1,591 $ 513
====== ====== ======
</TABLE>
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 $4,649,000 versus $2,806,000 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, 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. Research and
development expenditures increased in 1997 as a result of the Company's
development activities for
13
<PAGE> 15
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 $8,846,000 as compared to $3,929,000 in 1996 and $3,575,000 in
1995. The increase from 1996 to 1997 is primarily due to the initiation of
selling activities for Vetlife. 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
14
<PAGE> 16
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.
15
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
16
<PAGE> 18
CONSOLIDATED STATEMENTS OF OPERATIONS
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales $ 14,347,461 $ 1,591,123 $ 512,528
Investment income 797,069 1,168,641 1,803,988
Collaborative, grant and license fee income 337,438 187,667 115,000
Other 304,912 96,559 111,814
------------ ------------ ------------
15,786,880 3,043,990 2,543,330
Expenses:
Cost of sales 7,205,522 652,465 49,789
Research and development 4,648,555 2,806,216 7,070,600
Acquired incomplete research and development 951,017 - -
Selling, general and administrative 8,846,285 3,929,121 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
------------ ------------ ------------
21,944,427 7,387,802 13,195,912
------------ ------------ ------------
Loss from continuing operations before minority interest (6,157,547) (4,343,812) (10,652,582)
Minority interest (242,487) - -
------------ ------------ ------------
Loss from continuing operations (5,915,060) (4,343,812) (10,652,582)
Loss from discontinued operations (137,932) (1,447,967) -
============ ============ ============
Net loss $ (6,052,992) $ (5,791,779) $(10,652,582)
============ ============ ============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.80) $ (0.56) $ (1.35)
Loss from discontinued operations (0.02) (0.19) -
============ ============ ============
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.
17
<PAGE> 19
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.
18
<PAGE> 20
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
19
<PAGE> 21
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 the divestiture of VetLife, Inc. in April 1998, the Company
also marketed and distributed products to enhance food animal growth.
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") is presented as a discontinued operation 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, Inc. ("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.
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
20
<PAGE> 22
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
21
<PAGE> 23
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 has also 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
22
<PAGE> 24
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.
23
<PAGE> 25
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
24
<PAGE> 26
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 $16,615 $4,834
Loss from continuing operations
before minority interest (5,901) (9,624)
Minority interest (293) (800)
Loss from continuing operations (5,608) (8,824)
Net loss (5,746) (10,272)
Basic and diluted loss per share from
continuing operations (.76) (1.14)
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.
25
<PAGE> 27
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 $118,000, $96,000 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.
8. STOCK OPTIONS AND WARRANTS
The Company and its subsidiaries, Vaxcel and VetLife, 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 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
26
<PAGE> 28
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 Vaxcel'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.
A summary of VetLife'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 895,150 598,150 420,150 $1.50 $1.50 $1.50
Granted 115,000 767,000 178,000 1.50 1.50 1.50
Exercised - - - - - -
Forfeited (20,000) (470,000) - 1.50 1.50 -
------- -------- -------
Outstanding - end of year 990,150 895,150 598,150 $1.50 $1.50 $1.50
======= ======== =======
Exercisable at end of year 199,030 127,116 79,832 $1.50 $1.50 $1.50
Weighted average fair value of
options granted during the year $.60 $.60 $.66
</TABLE>
The exercise price for all options outstanding as of December 31, 1997
was $1.50. The weighted average remaining contractual life for options
outstanding at December 31, 1997 was 8.4 years.
The Company and its subsidiaries 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
price of the Company's and its subsidiaries' 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 dates 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 subsidiaries had accounted for their employee stock options
granted subsequent to December 31, 1994 under the fair value method of
27
<PAGE> 29
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 Vaxcel's common stock 1.055 1.12 1.12
Weighted average life of the option 8 8 8
</TABLE>
The fair value for Vaxcel'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 Vaxcel's common stock .585 .378 .378
Weighted average life of the option 8 8 8
</TABLE>
The fair value for VetLife's options was estimated at the date of
grant using a minimum value option pricing model, which is appropriate for
nonpublic companies, with the assumptions as shown below. The minimum value
method assumes no volatility in the stock price.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average risk free interest rate 6.41% 6.36% 7.27%
Dividend yields 0% 0% 0%
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 subsidiaries' 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 (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
28
<PAGE> 30
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 $53,000,
$52,000 and $-0- related to the discontinued operations of Proceutics 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>
29
<PAGE> 31
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
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.
Revenues from the discontinued operations of Proceutics approximated
$1,984,000, $1,004,000 and $-0- for the years ended December 31, 1997, 1996 and
1995, respectively. In addition, capital expenditures and depreciation expense
for the years ended December 31, 1997 and 1996 were $165,000 and $365,000; and
$336,000 and $437,000, respectively. 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>
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 building at 154
Technology Parkway from Alexandria. The Company expects that this transaction
will be consummated in April, 1998 and will result in a gain which will be
recognized in 1998.
14. SEGMENT REPORTING
Commencing in 1996 the Company's continuing operating revenues have
been generated from two primary industry segments: cattle growth promotant
products (Vetlife), and research
30
<PAGE> 32
products (CytRx - Titermax). Financial information for continuing operations by
industry segment at December 31, 1997 and 1996 and for the years then ended is
presented below.
<TABLE>
<CAPTION>
1997:
- -----
Cattle
Growth Research General Consolidated
(in thousands) Products Products Other Corporate Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $13,469 $456 $422 $ - $14,347
Operating profit (loss) 1,504 193 77 (7,689) (5,915)
Identifiable assets 9,122 - - 11,608 20,730
Capital expenditures 11 - - 98 109
Depreciation and amortization 16 - - 372 388
1996:
- -----
Cattle
Growth Research General Consolidated
(in thousands) Products Products Other Corporate Total
- ------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 711 $522 $358 $ - $1,591
Operating profit (loss) (672) 173 29 (3,874) (4,344)
Identifiable assets 6,714 - - 13,268 19,982
Capital expenditures 115 - - 79 194
Depreciation and amortization 15 - - 203 218
</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.
During 1997, three customers of the cattle growth promotant products
segment each contributed significant portions (greater than 10%) of the
Company's consolidated net sales from continuing operations. These three
customers comprise approximately 49.8%, 34.9% and 10.1% of consolidated net
sales from continuing operations. During 1996, two customers each contributed
significant portions (greater than 10%) of the Company's consolidated net sales
(approximately 12% each). Also, during 1997 and 1996, the Company's cattle
growth promotant products were supplied to the Company by two vendors.
31
<PAGE> 33
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
32
<PAGE> 34
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated herein by
reference from the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated herein by
reference from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated herein by
reference from the Proxy Statement.
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. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
34
<PAGE> 36
Consolidated Notes to Financial Statements
Report of Independent Auditors dated February 27, 1998
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1997, 1996 and 1995 Page 17
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 14 of this Form 10-K.
(b) Reports on Form 8-K:
On November 6, 1997, the Registrant filed a Current Report on Form 8-K
related to its issuance of $2 million of convertible debentures.
35
<PAGE> 37
CytRx Corporation
Form 10-K Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <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)
2.2 Preferred Stock and Warrant Agreement dated as of December 6, 1996,
among CytRx Corporation, Zynaxis, Inc., Vaxcel, Inc. and each of
the holders of Zynaxis, Inc. warrants signatory thereto (a)
2.3 Private Securities and Subscription Agreements dated October 22, 1997
between CytRx Corporation and various investors (b)
3.1 Certificate of Incorporation (c)
3.2 By-Laws (d)
3.3 CytRx Corporation 6% Converible Debentures dated as of October 22, 1997
in favor of various investors (b)
4.1 Shareholder Protection Rights Agreement dated April 16, 1997
between CytRx Corporation and American Stock Transfer & Trust
Company as Rights Agent (e)
4.2 CytRx Corporation Stock Purchase Warrants dated as of October 22, 1997
in favor of various investors (b)
10.1 Agreement with Emory University, as amended (f)
10.2 Agreement with BASF Corporation, as amended (f)
10.3** 1995 Employment Agreement between CytRx Corporation
and Jack J. Luchese
10.4* Amendment No. 1 to 1995 Employment Agreement between
CytRx Corporation and Jack J. Luchese (g)
10.5* Amendment No. 2 to 1995 Employment Agreement between
CytRx Corporation and Jack J. Luchese (h)
10.6* Change of Control Employment Agreement between CytRx Corporation
and Jack J. Luchese (h)
10.7* 1986 Stock Option Plan, as amended and restated (i)
10.8* 1994 Stock Option Plan, as amended and restated (h)
10.9* 1995 Stock Option Plan (j)
10.10** Asset Purchase Agreement dated February 10, 1998 by and between
Proceutics, Inc. and Oread Laboratories, Inc.
10.11** Lease Agreement dated February 16, 1998 by and between
Proceutics, Inc. and Oread, Inc.
10.12** Sublease Agreement dated February 16, 1998 by and between CytRx
Corporation and Oread, Inc.
10.13** Purchase and Sale Agreement dated February 23, 1998 by and between
CytRx Corporation and Alexandria Real Estate Equities, Inc.
10.14** Purchase and Sale Agreement dated February 23, 1998 by and between
</TABLE>
36
<PAGE> 38
See Prior Page From Placement
<TABLE>
<S> <C>
Proceutics, Inc. and Alexandria Real Estate Equities, Inc.
10.15 Acquisition Agreement dated April 17, 1998 by and among CytRx,
VetLife and VetLife, L.L.C. (k)
21.1** Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1** Financial Data Schedule (for SEC use only).
27.2** Financial Data Schedule - 1996 Restatement (for SEC use only).
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-looking Statements
</TABLE>
* Indicates a management contract or compensatory plan or arrangement.
**Indicates previously filed with Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997 filed on March 30, 1998.
- -------------------
(a) Incorporated by reference to the Registrant's Current Report on Form
8-K filed on May 21, 1997.
(b) Incorporated by reference to the Registrant's Current Report on
Form 8-K filed on November 6, 1997.
(c) Incorporated by reference to the Registrant's Registration Statement
on Form S-3 (File No. 333-39607) filed on November 5, 1997.
(d) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 333-37171) filed on July 21, 1997.
(e) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997.
(f) Incorporated by reference to the Registrant's Registration Statement
on Form S-l (File No. 33-8390) filed on November 5, 1986.
(g) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q filed on August 14, 1997.
(h) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q filed on November 6, 1997.
(i) Incorporated by reference to the Registrant's Annual Report on
Form 10-K filed on March 27, 1996.
(j) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 33-93818) filed on June 22, 1995.
(k) Incorporated by reference to the Registrant's Current Report on Form
8-K filed on May 1, 1998.
37
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 and in accordance with Rule 12b-15 promulgated thereunder,
the Registrant has duly caused this amended 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: May 26, 1998 and Chief Executive Officer
(Principal Executive Officer)
38
<PAGE> 40
CYTRX CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
- --------------------------------------- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve Deducted in the Balance Sheet
from the Asset to Which it Applies:
Allowance for Bad Debts
Year ended December 31, 1997 $ 48,430 $ 44,850 $ -- $ 71,093 $ 22,187
Year ended December 31, 1996 -- 2,516 45,914 -- 48,430
Year ended December 31, 1995 -- -- -- -- --
Allowance for Deferred Tax Assets
Year ended December 31, 1997 $15,200,000 $2,484,000 $ -- $ -- $17,684,000
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
Marketable Securities Valuation Reserve
Year ended December 31, 1997 $ -- $ -- $ -- $ -- $ --
Year ended December 31, 1996 -- -- -- -- --
Year ended December 31, 1995 2,475,277 -- -- 2,475,277 --
</TABLE>
39
<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 27, 1998,
included in the 1997 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, as of the date of our report referred to in the preceding
paragraph, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements on Form S-8 Nos. 33-48706 and 333-37171 pertaining to the CytRx
Corporation 401(k) Profit Sharing Plan, No. 33-93816 pertaining to the CytRx
Corporation 1994 Stock Option Plan, and No. 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, 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.
ERNST & YOUNG LLP
Atlanta, Georgia
May 18, 1998
<PAGE> 1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. CytRx Corporation (the "Company") intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of the Company. The
Company undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, the Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results
over time.
The Company provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the disclosures contained in the Annual
Report on Form 10-K/A to which this statement is appended as an exhibit and also
include the following:
<PAGE> 2
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY
The Company incurred net losses for each of the fiscal years ended December
31, 1995, 1996 and 1997. For the year ended December 31, 1997, the Company had
consolidated net operating losses of approximately $6.1 million. Since its
inception, the Company has been primarily engaged in the research and
development of pharmaceutical products. The Company's consolidated net operating
losses to date have been generated primarily from such research and development
activities and the Company's lack of significant operating revenues. The Company
will incur substantial additional losses until such time, if any, that its
primary products, including, but not limited to Flocor and Optivax, have
achieved significant sustained commercial sales, which will be dependent upon a
number of factors including, but not limited to, receipt of regulatory approval
for the sale of such products. Such approval is not likely to occur for a number
of years. There can be no assurance that such products of the Company under
development will be approved for sale by regulatory authorities, that Flocor,
Optivax or any other product of the Company under development can be
successfully commercialized or that the Company will achieve significant
revenues from sales of Flocor, Optivax or any other product. In addition, there
can be no assurance that the Company will achieve or sustain profitability in
the future. Failure to achieve significant revenues or profitability would have
a material adverse effect on the Company's business, financial condition and
results of operations. In view of the prior operating history of Company, there
can be no assurance that the Company will ever be able to achieve profitability
on a quarterly or annual basis or that it will be able to sustain or increase
its revenue growth in future periods.
DISPOSITION OF CERTAIN OPERATING SUBSIDIARIES; SUBSTANTIAL DECREASE IN COMPANY'S
REVENUES
On February 16, 1998 the Company sold substantially all of the non-real
estate assets of Proceutics for approximately $2.1 million. On April 17, 1998,
CytRx and VetLife sold substantially all of the assets of VetLife for
approximately $3.5 million in cash, an unsecured subordinated promissory note in
the principal amount of $4.0 million, and contingent payments of up to $5.5
million based on the sales of certain of the purchaser's products. On May 11,
1998, CytRx and Proceutics sold two buildings that they owned at 150 and 154
Technology Parkway, Norcross, Georgia for approximately $4.5 million. The sales
were consummated to increase the capital available for funding the clinical
trials and continued research and development for the Company's pharmaceutical
products, including FLOCOR. The Company's divested businesses accounted for
substantially all of the Company's revenues for the year ended December 31,
1997. The lack of future revenues from these services may require the Company to
obtain additional financing to fund the necessary testing and data collection
procedures prescribed by the U.S. Food and Drug Administration ("FDA") for the
commercialization of any products for human use. There can be no assurance that
the Company will be able to obtain additional financing on terms satisfactory to
it. The inability to obtain such funds and to continue the Company's clinical
-1-
<PAGE> 3
trials and research and development activities could have a material adverse
effect on the Company's business.
NO ASSURANCE OF SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS AND
TECHNOLOGIES
The Company's products and technologies are in various stages of
development and significant amounts of money and time will be required to
develop and commercialize them. Research and development activities, by their
nature, preclude definitive statements as to the time required and costs
involved in reaching certain objectives. Therefore, actual research and
development costs could exceed budgeted amounts, and estimated time frames may
require extension. Cost overruns due to unanticipated regulatory delays or
demands, unexpected adverse side effects or insufficient therapeutic efficacy
would prevent or substantially slow development efforts and ultimately could
have a material adverse effect on the Company and its partners. If the Company
or its partners encounter technical problems in the further development of the
Company's products or technologies, the Company could be required either to
abandon or substantially modify its development programs. There can be no
assurance that any of the Company's products or technologies will prove to be
safe and effective and there can be no assurance that any of the Company's
products or technologies will be approved by the U.S. FDA or equivalent foreign
authorities or that, if approved, such products or technologies will be accepted
in the market or can be commercialized in a profitable manner. Furthermore, the
Company's products and technologies could produce adverse side effects after
commercialization. There can be no assurance that the Company will be able to
overcome all of these obstacles and successfully develop and commercialize any
of its products or technologies.
NEED FOR FUTURE FINANCING
The Company's financial resources are limited and the amount of funding
that it will require to develop and commercialize its products and technologies
is highly uncertain. Adequate funds may not be available when needed or on terms
satisfactory to the Company. Lack of funds may cause the Company to delay,
reduce and/or abandon certain or all aspects of its research and development
programs. The initiation of the Phase III clinical trail for FLOCOR and related
activities in preparation for commercialization has greatly increased the
Company's need for capital. Management believes that cash and investments on
hand, combined with interest income, operating revenues and the proceeds from
the Company's divestitures of its non-core businesses and the sale of its real
estate assets 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. FDA 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. The Company may
seek additional funding for its research and development activities through a
variety of financing mechanisms, including the issuance of equity securities.
Any such financing could dilute the Company's existing shareholders.
GOVERNMENT REGULATION
The Production and marketing of the Company's products and its ongoing
research and development activities, including preclinical studies and clinical
trials, are subject to extensive regulation
-2-
<PAGE> 4
by numerous federal, state and local governmental authorities in the United
states and by similar regulatory agencies in other countries where the Company
tests and markets, or intends to test and market, its current or future
products. There can be no assurance that the Company will obtain further
regulatory approvals to conduct clinical trials or to market its current
products or that the Company will obtain on a timely basis, or at all,
regulatory approvals to conduct clinical trials or to market products that may
be developed in the future. Prior to marketing any product developed by the
Company, or marketed under license, the Company must undergo an extensive
regulatory approval process by the FDA and comparable regulatory authorities in
foreign countries. The regulatory process can take many years and require the
expenditure of substantial resources.
The Company must demonstrate through preclinical studies and clinical
trials that its products are safe and efficacious for use in each proposed
application. The results from preclinical animal studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the clinical trials will demonstrate
the safety and efficacy of any products or will result in marketable products. A
number of companies in the therapeutics industry have suffered significant
setbacks in advanced clinical trials, even after experiencing promising results
in early animal and human testing. In addition, the rate of completion of the
Company's clinical trials is dependent upon, among other factors, the rate of
patient enrollment. Patient enrollment is a function of many factors, including
the size of the patient population, the nature of the protocol, the ability of
the Company to manage the clinical trial, the proximity of patients to clinical
sites and the eligibility criteria for the study. Several factors, such as
delays in planned patient enrollment, may result in increased costs and delays
or termination of clinical trials prior to completion, which could have a
material adverse effect on the Company. Preclinical studies must also be
conducted in conformity with the FDA's good laboratory practice regulations.
Clinical trials generally must meet requirements for institutional review board
oversight and informed consent, as well as regulatory agency prior review,
oversight and good clinical practice requirements.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
In addition, delays or rejections may be encountered based upon changes in the
policies of regulatory authorities for new product approval during the period of
product development and regulatory review of each submitted pre-market approval
application, new drug application or other required approval application. There
can be no assurance that, even after such time and expenditures, regulatory
approvals will be obtained for any products developed by the Company. Moreover,
if FDA approval of a product is granted, such approval will entail limitations
on the indicated uses for which it may be marketed and may impose labeling
requirements which may adversely affect the Company's ability to market its
products.
The products of the Company may be regulated in other countries by foreign
agencies comparable in authority to the FDA. The process of obtaining regulatory
approval in other countries is often as costly, time-consuming and uncertain as
it is in the United States. In addition, foreign agencies may apply different or
more stringent standards than the FDA and require additional or different
clinical studies. Foreign agencies also may fail to approve the products even if
the FDA has done so.
Failure to comply with applicable regulatory requirements can result in,
among other things, fines, suspension of regulatory approvals, product recalls,
seizure of products, imposition of operating restrictions or civil penalties,
FDA refusal to approve marketing applications, and criminal prosecutions.
Further, FDA policy or similar policies of regulatory agencies in other
countries may change and additional government regulations may be established
that could prevent or delay regulatory approval of the company's products in
such countries. The failure of the Company to obtain the necessary regulatory
approval would have a material adverse effect on the Company's business,
financial condition and results of operations.
-3-
<PAGE> 5
INTELLECTUAL PROPERTY RISKS
The Company's success will depend, in part, upon its ability to develop
patentable products and technologies and to obtain effective patent protection
for its products and technologies both in the United States and in other
countries. The Company believes that its patents are critical to its prospects
for success and that the Company has perfected its patent and trademark rights
in those jurisdictions where it anticipated selling and marketing its
technologies. There can be no assurance that the Company's United States and
foreign issued or pending applications will offer any protection or that they
will not be challenged, invalidated or circumvented. In addition, there can be
no assurance that competitors will not obtain patents that will prevent, limit
or interfere with the Company's ability to make, use or sell its products either
in the United States or in international markets.
The Company's patent estate is subject to numerous potential threats.
Critical patent applications may not issue or may issue with limitations that
materially reduce their coverage; competitors may challenge the validity of the
Company's patents through challenges within the United States Patent and
Trademark Office and its foreign equivalents or through lawsuits in the courts;
or competitors may claim that the Company's products infringe competitors'
patents. Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are maintained
in secrecy for a period after filing. Accordingly, there can be no assurance
that current and potential competitors or other third parties have not filed or
will not file applications for, or have not received or will not receive,
patents and will not obtain additional proprietary rights relating to materials
or processes used or proposed to be used by the Company.
It is possible that the Company's products or processes will infringe, or
will be found to infringe, patents not owned or controlled by the Company. If
any relevant claims of third-party patents are upheld as valid and enforceable,
the Company could be prevented from practicing the subject matter claimed in
such patents, or could be required to obtain licenses or to redesign its
products or processes to avoid infringement. There can be no assurance that such
licenses would be available at all or on terms acceptable to the Company or that
the Company could redesign its products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to enforce
patents issued to the Company or to protect trade secrets and could result in a
substantial cost to and diversion of efforts by the Company or any of its
subsidiaries.
The Company also relies on trade secrets, proprietary know-how and
continuing technological innovation, which it seeks to protect with
confidentiality agreements with collaborators, employees and consultants. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach or that the Company's trade secrets
and proprietary know-how will not otherwise become known to or be independently
discovered by competitors.
COMPETITION
Many companies, including large pharmaceutical, chemical and biotechnology
firms with financial resources, research and development staffs, and facilities
that are substantially greater than those of the Company, are engaged in the
research and development of pharmaceutical products that could compete with the
products under development by the Company. Furthermore, many of the Company's
existing or potential competitors have extensive experience in research,
preclinical testing, human clinical trials, obtaining FDA and other regulatory
approvals, and manufacturing and marketing their products, or are allied with
major pharmaceutical companies that can afford them these advantages. 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.
-4-
<PAGE> 6
The Company's products and potential products are in various stages of
development, and no assurance can be given that any of these products or
potential products will perform better than or as well as products that may be
being developed by the Company's competitors, or that the Company's competitors
will not develop products or technologies that will render the Company's
products and technologies obsolete or less competitive.
In general, competition in the pharmaceutical, chemical and biotechnology
field is based on such factors as product performance and safety, product
acceptance by physicians, patent protection, manner of delivery, ease of use,
price, distribution and marketing. Any product developed by the Company that
gains regulatory approval will have to compete for market acceptance and market
share. An important factor in such competition may be the timing of market
introduction of competitive products. Accordingly, the relative speed with which
the Company can develop products, complete clinical testing and the regulatory
approval process, gain reimbursement acceptance and supply commercial quantities
of the product for distribution to the market are expected to be important
competitive factors. The failure of the Company's products to generate adequate
commercial demand, or the failure of the Company's products to gain substantial
market acceptance and market share, could have a material adverse effect on the
Company's business, financial condition or results of operations.
LACK OF MARKETING EXPERIENCE
It is anticipated that the Company will market and sell a significant
portion of its products directly. The Company has limited experience in sales,
marketing and distribution of pharmaceutical products and its success in
marketing its products will be based on a number of factors including market
size and concentration in the Company's designated markets, the size and
expertise of the Company's sales force in such designated markets and the
Company's overall strategic objectives. There can be no assurance that the
factors necessary to successfully market the Company's products will be
favorable, or that the Company will be able to obtain the expertise necessary to
successfully market its products.
LACK OF NEEDED STRATEGIC THIRD PARTY RELATIONSHIPS
A principal element of the Company's strategy is the creation and
maintenance of strategic relationships that will enable the Company to offer its
services, products and technologies to a larger customer base than the Company
could otherwise reach through its direct marketing efforts. Vaxcel's business
strategy is to license its products to pharmaceutical and biotechnology
companies engaged in vaccine research and development. Indeed, at the present
time Vaxcel does not own or have the right to any vaccines or antigens that can
be used with Optivax or the Zynaxis technologies and Vaxcel's success is
dependent upon its ability to license its technologies to vaccine manufacturers
for use with their vaccines. Although the Company intends to continue to expand
its direct marketing channels, the Company believes that strategic partner
relationships may offer a potentially more effective and efficient marketing
channel. Consequently, the Company's success depends in part on its ability to
enter into relationships with strategic partners and the ultimate performance of
the strategic partners. There can be no assurance that the Company will be able
to negotiate needed strategic relationships in the future or that once those
strategic relationships have been formed, they will not be terminated. With
respect to the products of Vaxcel and Zynaxis, the inability of the Company to
form relationships with strategic partners would cause the Company to establish
marketing and distribution channels for its products.
Although the Company views strategic relationships as a key factor in its
overall business strategy and in the development and commercialization of its
products, there can be no assurance that strategic partners would view their
relationships with the Company as significant for their own businesses or that
they would not reassess their commitment to the Company after entering into the
relationship. The Company's arrangements with
-5-
<PAGE> 7
strategic partners may not establish minimum performance requirements
for the Company's strategic partners, but instead may rely on the voluntary
efforts of these partners in pursuing joint goals. In addition, even if not
restricted by the contract, the Company may be restrained by business
considerations from pursuing alternative arrangements, or the reassessment of
the strategic partners' business goals which do not correlate with the business
goals of the Company. The Company's inability to comply with the terms of
strategic partner arrangements could result in strategic partners seeking
alternative arrangements with other pharmaceutical or biotechnology companies,
which could have a material adverse impact on the Company.
IMPACT OF TECHNOLOGY TRANSFER ACT OF 1986; BAYH-DOLE ACT
The Company has a wide variety of copolymers available for its use, some of
which were in-licensed from Emory University and others which were developed by
the Company. Optivax is the tradename for a family of proprietary nonionic
block copolymers that augment or modify the immune response to vaccines when
administered primarily by injections. Optivax copolymers act both as a delivery
system by targeting vaccines to cells of the immune system and as an adjuvant
because of its ability to augment the immune system's response to vaccines. The
development of certain Optivax copolymers in-licensed from Emory University was
supported with federal funds. Federal funds were not used, however, to support
the development of certain other Optivax copolymers developed by the Company.
At present, the Company is only developing Optivax copolymers that have not been
supported by federal funds. If Vaxcel were to pursue commercialization of
Optivax copolymers that utilized federal funds during development, such Optivax
copolymers would be subject to the Technology Transfer Act of 1986 or the Bayh-
Dole Act, whereby the federal government retains a non-exclusive right to make,
have made, or sell any invention that results from the activities of the federal
government or the use of federal funds. If the federal government were to
exercise any of such rights in the future, the business and financial condition
of Vaxcel could be materially adversely affected.
HEALTH CARE REFORM INITIATIVES
Health care reform remains an area of increasing national and international
attention. Several proposals to modify the current health care system in the
United States to improve access and control costs currently are being considered
by both federal and state governments. Any such reform measures could adversely
affect the amount of reimbursement available from governmental or private payers
or could affect the ability to set prices for newly approved products. Similar
proposals are being considered by governmental officials in other significant
pharmaceutical markets, including Europe. It is uncertain what proposals will be
adopted or what actions governmental or private payers for health care goods and
services may take in response to proposed or actual legislation in the United
States or other important markets. Any such health care reform proposals may
materially adversely affect the business of the Company.
NO ASSURANCE OF ADEQUATE REIMBURSEMENT
The success of the Company's products and technologies in the United States
and other significant markets will depend in part upon the extent to which a
consumer will be able to obtain reimbursement for the cost of such products from
government health administration authorities, private health insurers and other
organizations. Uncertainty exists as to the reimbursement status of any newly
approved product. Government and other third-party payors are increasingly
attempting to contain health care costs by refusing, in some cases, to provide
any coverage for uses of approved products for disease indications for which the
FDA has not granted marketing approval and by limiting both coverage and the
level of reimbursement for new technologies approved for marketing by the FDA.
If adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of the Company's products or technologies, the market
acceptance of such products or technologies would be adversely affected. Even if
a product is approved for marketing, there can be no assurance that patients
will have sufficient resources to pay for the therapy or that governmental or
private payers will provide adequate reimbursement for such product, if at all.
The Company has initiated discussions with consultants or other advisors but
will assist the Company in identifying targeting and communicating with
government and other third-party payors, to develop the Company's strategy for
seeking adequate reimbursement from such payors. The Company will not be able to
finalize its strategy for any product until it has obtained all of the required
regulatory approvals for the product, and established the market price at the
product.
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UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of and availability of capital for
biotechnology and pharmaceutical companies may be affected by the continuing
efforts of governmental and third-party payors to contain or reduce the costs of
health care through various means. For example, in certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. While the Company cannot predict
whether any such legislative or regulatory proposals will be adopted, the
announcement or adoption of such proposals could have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS RELATED TO INADEQUATE SUPPLY OF MATERIALS; DEPENDENCE ON SUPPLIERS AND
MANUFACTURERS
Management believes that the Company has an adequate supply of materials on
hand to meet the Company's needs for 2 to 3 years (both drug substance and
formulated drug product) which management anticipates to be sufficient to
complete the anticipated studies necessary for filing a New Drug
Application/Product License Application with the FDA. However, there can be no
Company's current supply inadequate. If the Company is unable to obtain
additional materials, such inability could have a material adverse effect on the
Company's business.
The Company requires three suppliers of materials or services to
manufacture its product; (i) a supplier of the raw drug substance, (ii) a
supplier of the purified drug which is refined from the raw drug substance and
(iii) a manufacturer who can formulate and sterile full the purified drug
substance into the finished drug product. The raw drug substance is currently
widely available at commercial scales from numerous manufacturers. The Company
has not entered into a formal agreement with any supplier for the raw drug
substance because of its wide availability. To obtain the purified drug
substance, the Company has entered into an agreement with a French company.
Management believes that such agreement provides for adequate material to meet
the Company's needs for the next 2 to 3 years. There can be no assurance that
the Company's relationship with such supplier will continue or that the Company
will be able to obtain additional purified drug substance if the Company's
current supply is inadequate. Such inability to obtain additional purified drug
substance in amounts and at prices acceptable to the Company could have a
material adverse effect on the Company's business. To meet the need for
manufacture of the Company's finished drug product, the Company has entered into
a supply agreement with the Hospital Products Division of Abbott Laboratories.
The inability of the Company to maintain such relationship on terms acceptable
to the Company could have a material adverse effect on the Company's business.
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on
the members of its management and scientific staff, particularly its Chief
Executive Officer, Jack J. Luchese. The Company has an employment contract with
Mr. Luchese which expires at the end of 1998. As the Company continues to grow,
it will continue to hire, appoint or otherwise change senior management and
members of its scientific staff. There can be no assurance that the Company will
be able to retain its executive officers and key personnel or attract additional
qualified members to management in the future. The loss of services of Mr.
Luchese or of any other key employee could have a material adverse effect upon
the Company's business.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research and development activities involve the controlled
use of hazardous materials. The Company is subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
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for any damages that result and any such liability could exceed the resources of
the Company. The Company may be required to incur significant costs to comply
with environmental laws and regulations in the future. The Company's operations,
business, financial condition and results of operations may be materially
adversely affected by current or future environmental laws or regulations.
POTENTIAL PRODUCT LIABILITY EXPOSURE
The Company could be exposed to possible claims for personal injury
resulting from allegedly defective products or technologies. Even if a product
is approved for commercial use by an appropriate governmental agency, there can
be no assurance that users will not claim that effects other than those intended
may result from such products. While to date no material adverse claim for
personal injury resulting from allegedly defective products or technologies has
been successfully maintained against the Company, a substantial claim, if
successful, could have a material adverse effect on the Company. The Company
maintains product liability insurance covering the use of its products in human
clinical trials equal may extend coverage under this insurance to institutions
or individuals who are collaborating with the Company for the development of its
products. The Company will obtain product liability coverage to protect
third-party manufacturers of the Company's products only if required by the
agreement with such manufacturer.
VOLATILITY OF STOCK PRICE
The Common Stock is quoted on the Nasdaq National Market. The market prices
for securities of pharmaceutical and biotechnology companies (including CytRx)
have historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
the Company's
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operating results, announcements of regulatory developments, technological
innovations or new therapeutic products, developments in patent or other
proprietary rights, public concern as to the safety of products developed by the
Company or other biotechnology and pharmaceutical companies, and general market
conditions may have a significant effect on the market price of the Common
Stock.
BUSINESS ACQUISITION
Effective May 21, 1997, Zynaxis, a publicly-held biotechnology company
engaged in the development of certain vaccine technologies, merged with Vaxcel
Merger Sub, a wholly-owned subsidiary of Vaxcel formed for the purpose of the
transaction. As a result of the Merger, Zynaxis became a wholly-owned subsidiary
of Vaxcel. Also as a result of the Merger, Vaxcel acquired the PLG
microencapsulation and mucoadhesive vaccine technologies of Zynaxis. Neither of
such technologies are final product. They were designed to be combined with a
vaccine to formulate a final product for oral delivery. Based on their current
stage of development, it will take several additional years to generate
sufficient data for FDA approval of oral vaccines containing either technology.
The Company deems such Zynaxis technologies to be complementary to Vaxcel's
technologies, including Optivax. However, there can be no assurance that the
Company can successfully market, sell or distribute the Zynaxis technologies, or
that the Zynaxis technologies will function in accordance with the Company's
expectations. Failure to market, sell or distribute the Zynaxis technologies, or
the failure of the Zynaxis technologies to meet the expectations of the Company,
may have a material adverse effect on the Company's business, financial
condition and results of operations.
ANTI-TAKEOVER PROTECTIONS
At its 1997 annual meeting, the stockholders of the Company voted to
classify its board of directors. As a result of the classification of the board
of directors, at least two stockholder meetings, instead of one, will be
required to effect a change in the majority control of the Company board, except
in the event of vacancies resulting from removal for cause (in which case the
remaining directors would fill the vacancies so created). It should also be
noted that the classification provision will apply to every election of
directors, rather than only an election occurring after a change in control. The
classification of directors has the effect of making it more time-consuming to
change majority control of the Company's Board of Directors, and accordingly may
cause potential purchasers of the Company to lose interest in any potential
purchase of the Company, regardless of whether such purchase would be beneficial
to the Company and its stockholders.
The Restated Bylaws of the Company provide that the number of directors
will be fixed from time to time with the approval of two-thirds of the Board of
Directors or the affirmative vote of at least 80% of the issued and outstanding
shares of the Company's Common Stock. Moreover, the Restated Bylaws provide that
directors may only be removed for cause by the affirmative vote of the holders
of at least a majority of the outstanding shares of capital stock of the Company
then entitled to vote at an election of directors. This provision prevents
stockholders from removing any incumbent director without cause and allows
two-thirds of the incumbent directors to add additional directors without
approval of stockholders until the next annual meeting of stockholders at which
directors of that class are elected.
The Company's Restated Bylaws contain a provision requiring a stockholder
to give notice, not later than the number of days specified in Rule 14a-8(a)(4)
promulgated under the Exchange Act or any amendment or successor to such rule
(currently 120 days), of a proposal or director nomination that such stockholder
desires to present at any annual or special meeting of stockholders. Such
provision prevents a stockholder from making a proposal or a director nomination
at a stockholder meeting without the Company having advance notice of the
proposal or director nomination. This provision could make a change in control
more difficult by providing the directors of the Company with more time to
prepare an opposition to a proposed change in control.
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Pursuant to a Shareholder Protection Rights Agreement dated as of April 16,
1997 by and between American Stock Transfer & Trust Company, as rights agent,
and the Company (the "Rights Agreement"), on May 15, 1997 the Company
distributed a dividend with respect to each share of Common Stock outstanding on
such date of one right (a "Right") which entitles the registered holder to
purchase from the Company 1/10,000th of a share (a "Unit") of Series A Junior
Participating Preferred Stock (the "Series A Participating Preferred Stock"), at
a purchase price of $30 per Unit (the "Exercise Price"), subject to adjustment.
Until the Separation Time, the Rights are unexercisable and attach to and
transfer with the Common Stock certificates. The "Separation Time" will occur
upon the earlier of ten business days (unless changed by the Board of Directors
as provided in the Rights Agreement) after an announcement of the acquisition by
a third party (an "Acquiring Person") of 15% or more of the Common Stock, or ten
business days (unless changed by the Board of Directors as provided in the
Rights Agreement) after the commencement of a tender offer for 15% or more of
the Common Stock. If a Flip-In Date occurs (i.e., the close of business ten days
following announcement by the Company that a person has become an Acquiring
Person), Rights owned by the Acquiring Person or any affiliate or associate
thereof or any transferee thereof will automatically become void and, subject to
the right of the Board of Directors to cause the Company to exchange shares of
Common Stock for the Rights or to terminate the Rights, each other Right will
automatically become a right to buy, for the Exercise Price, that number of
shares of Common Stock having a market value equal to twice the Exercise Price.
After a Flip-In Date occurs, the Company may not consolidate or merge with, or
sell 50% or more of its assets or earning power to, any person, if the Company's
Board of Directors is controlled by the Acquiring Person, unless proper
provision is made so that each Right would thereafter become a right to buy, for
the Exercise Price, that number of shares of common stock of such other person
having a market value of twice the Exercise Price.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors of the Company unless the offer
is conditioned on a substantial number of rights being acquired. However, the
Rights should not interfere with any merger, statutory share exchange or other
business combination approved by a majority of the directors since the Rights
may be terminated by the Board of Directors at any time on or prior to the close
of business ten business days after announcement by the Company that a person
has become an Acquiring Person. Thus, the Rights are intended to encourage
persons who may seek to acquire control of the Company to initiate such an
acquisition through negotiations with the Board of Directors.
The existence of the foregoing provisions in the Company's bylaws, and the
existence of the Rights Agreement, could adversely affect the market price of
the Common Stock, as the market may be willing to pay less for shares of Common
Stock as a result of a decreased probability of a change in control. Impediments
to a change in control could cause potential purchasers of the Company to lose
interest in any potential purchase of the Company, regardless of whether such
purchase would be beneficial to the Company and its stockholders. Further, the
foregoing provisions could have the effect of preserving encumbent management in
office.
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends in the past on its Common Stock
and does not anticipate paying any such cash dividends in the foreseeable
future. Earnings, if any, will be retained to finance future growth.
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