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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(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, 1998
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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 March 22, 1999, the aggregate market value of the Registrant's common stock
held by non-affiliates was approximately $20,740,000.
On March 22, 1999, there were 7,630,249 shares of the Registrant's common stock
outstanding, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CytRx Corporation 1998 Annual Report to Stockholders are
incorporated by reference into Parts II and IV. Portions of the CytRx
Corporation Proxy Statement for the 1999 Annual Meeting of Stockholders (the
"Proxy Statement") are incorporated by reference into Part III.
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THIS FORM 10-K 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 SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND SECTION 21E OF 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
CONTEMPLATED 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, 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, a Delaware 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"). The Company's lead product is FLOCOR, now in pivotal Phase III
clinical trials for the treatment of acute sickle cell crisis. CytRx is also
developing FLOCOR for acute respiratory disorders and has plans to expand its
development for other vascular disorders such as shock and stroke over time.
CytRx is also currently engaged in research in the areas of infectious disease,
gene and drug delivery, vaccines, and animal feed additives.
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 sale of the operations of
its subsidiaries to fund its Core Business. Vaxcel, Inc. ("Vaxcel") is
developing technologies to enhance the effectiveness of vaccines. Prior to the
divestiture of substantially all of its assets related to its cattle marketing
operations in April 1998, CytRx Animal Health, Inc. ("CytRx Animal Health")
(formerly VetLife, Inc.) was engaged in developing technologies to enhance food
animal growth and marketing and distributing products to enhance North American
beef cattle productivity. Before the divestiture of substantially all of its
non-real estate assets in February 1998, Proceutics, Inc. ("Proceutics")
provided preclinical development services to the pharmaceutical industry (see
"New Business Developments"). 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 13 to the Company's Consolidated
Financial Statements.
NEW BUSINESS DEVELOPMENTS
Divestiture of Subsidiaries and Sale of Real Estate
During the first half of 1998, CytRx divested itself of its real estate
assets and substantially all of the assets of two operating subsidiaries to
allow CytRx to focus its activities on its Core Business and, specifically, to
raise capital to undertake Phase III testing of FLOCOR. See "Product
Development."
Proceutics - In February 1998, CytRx's wholly-owned subsidiary,
Proceutics consummated a sale of substantially all of its non-real estate assets
to Oread Laboratories, Inc. ("Oread") for approximately $2.1 million. The
Company recorded a gain of approximately $782,000 related to such sale. Prior to
consummation of this transaction, Proceutics provided
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preclinical development services to the pharmaceutical industry. Proceutics
retained its real estate assets consisting solely of a laboratory building which
it leased to Oread. The laboratory building was subsequently sold in May 1998.
CytRx Animal Health - In April 1998, CytRx's wholly-owned subsidiary,
CytRx Animal Health, consummated a sale of substantially all of its assets
related to its cattle marketing operations to VetLife, LLC ("VL LLC") (an
unaffiliated company) for a total purchase price of $7,500,000, subject to
certain working capital adjustments, plus certain contingent payments based on
certain events and future sales of specified products of VL LLC and its
affiliates that, if made in full, could total up to $5,500,000. CytRx Animal
Health retained $5.3 million in investments that were pledged to secure a
letter-of-credit, as well as the rights to certain technologies licensed from
CytRx. The Company recorded a gain of approximately $6,230,000 related to the
sale. Prior to consummation of this transaction, CytRx Animal Health was engaged
in marketing and distributing products to enhance North American beef cattle
productivity.
Sale of Real Estate - In May 1998, CytRx and Proceutics consummated the
sale of the two buildings owned by them at 150 and 154 Technology Parkway,
Norcross, Georgia, to Alexandria Real Estate Equities, Inc. ("Alexandria") for
$4.5 million. Proceutics' rights and obligations under the lease to Oread were
assigned to Alexandria, and CytRx began leasing the building at 154 Technology
Parkway from Alexandria. The CytRx lease is for a period of ten years, with base
annual rent of $148,500, escalating 4% annually. CytRx will also be responsible
for all operating expenses for the property. The Company recorded a gain of
$434,000 for the sale of the Proceutics building which was recognized during the
second quarter of 1998. A gain of $279,000 on the sale/leaseback of the CytRx
building was deferred and will be amortized over the ten year lease period.
Vaxcel - During 1998, Vaxcel's Board of Directors retained an
investment banking firm to introduce Vaxcel and its technology licenses to the
trade with the purpose of concluding a strategic transaction for the benefit of
the Vaxcel shareholders. The Company was considering all available options for
the disposition of Vaxcel, including license or sale of specific technologies
and possible merger with another organization. Based on the results of the
investment banking firm's efforts and management's reevaluation of CytRx's
strategic direction, in the fourth quarter of 1998 the Company adopted a plan to
dispose of the research and development activities in which Vaxcel is engaged.
The Company intends to complete the plan during 1999. As a result of adopting
such a plan, the operations of Vaxcel are presented as discontinued operations
in the consolidated statements of operations.
In January 1999, Vaxcel entered into an agreement with a third party
giving the third party the option to purchase the rights to certain of its
technologies for an aggregate purchase price of $600,000. The third party paid a
nonrefundable option fee of $200,000, with an additional $400,000 due upon the
exercise of the option. The initial option period expired on March 22, 1999, but
was extended to April 1 upon the payment of additional fees by the third party.
PRODUCT DEVELOPMENT
FLOCOR
General. 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, a novel, intra-vascular agent with pharmacological
properties that can be characterized as rheologic, cytoprotective and
anti-adhesive / anti-thrombotic. FLOCOR is an intravenous solution that has the
unique property of improving blood flow. Extensive preclincial and clinical
studies suggest FLOCOR may be of significant benefit in acute ischemic vascular
disorders such as stroke, heart attack, and vaso-occlusive crisis of sickle cell
disease. FLOCOR may also provide benefit in acute care situations such as
circulatory shock and acute respiratory distress syndromes where it's favorable
effects on microvascular blood flow may improve recovery from widespread
ischemic / reperfusion injury.
The active agent in FLOCOR is a highly purified form of poloxamer 188
which is a synthetic block copolymer composed of polyoxyethylene and
polyoxypropylene. A commercial grade of poloxamer 188 was originally synthesized
in the 1950's as a surfactant / emulsifying agent, and was extensively used as a
food additive and excipient in pharmaceutical products. Commercial grade
poloxamer 188 has also been extensively used as an anti-hemolytic agent in the
priming fluid of cardiopulmonary bypass pump oxygenators.
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The safety profile of FLOCOR is well established. It has been
investigated in 13 clinical studies representing administration to more than
2,400 patients and healthy volunteers. A pivotal phase III study investigating
FLOCOR for the treatment of acute vaso-occlusive crisis of sickle cell disease
is currently in progress.
The use of poloxamer 188 as a intravascular therapeutic for obstructive
vascular disorders was discovered and patented by CytRx in the mid 1980's. At
that time, CytRx utilized a formulation of commercial grade poloxamer 188 which
it referred to as RheothRx(R) Copolymer For Injection ("RheothRx"). CytRx began
clinical testing on RheothRx in 1989. Following the completion of phase I
studies in 1990, CytRx licensed RheothRx to the former Burroughs Wellcome
Company on a exclusive world wide basis. Between 1990 and 1996, Burroughs
Wellcome conducted nine clinical studies. In phase II studies in sickle cell
crisis and acute myocardial infarction (AMI),RheothRx was well tolerated and
achieved statistical significance in the primary efficacy endpoints. However, in
larger trials in AMI patients, RheothRx was associated with mild to moderate,
but reversible elevations in creatinine in a small percentage of patients. The
elevations in creatinine resulted in discontinuation of the dose that was
effective in phase II studies and the outcome of the larger AMI studies were
equivocal. Following the merger between Glaxo and Burroughs Wellcome,
Glaxo-Wellcome terminated the license and all rights to RheothRx were returned
to CytRx in 1996.
Scientists at CytRx discovered that small amounts of impurities present
in commercial grade poloxamer 188 (RheothRx) were contributing to the renal
toxicity observed in clinical studies. More importantly, CytRx discovered a
process for removing the nephrotoxic impurities without altering the beneficial
properties of the compound. CytRx refers to the purified form of poloxamer 188
as FLOCOR. When compared in a standard model of renal failure, FLOCOR is 63%
less nephrotoxic compared to RheothRx. Consistent with that observation, no
elevation in creatinine was observed following 48 hour continuous infusion of
FLOCOR in sickle cell patients (n = 15) at doses up to 33% higher than those
that were previously discontinued due to elevated creatinine. CytRx believes
that the therapeutic index of FLOCOR is significantly improved compared to
RheothRx and for this reason, the development of RheothRx was discontinued by
CytRx in favor of FLOCOR.
CytRx has met with the U.S. Food and Drug Administration concerning the
switch from RheothRx to FLOCOR. Specifically, CytRx inquired whether the
existing pharmacology, toxicology, and human safety data for RheothRx could be
used to support a New Drug Application ("NDA") submission for FLOCOR. CytRx was
informed that data generated with RheothRx would support an NDA for FLOCOR.
FLOCOR for Sickle Cell Crisis. 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.
Sickle cell disease 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. Estimates place the
number of persons suffering from sickle cell anemia in the U.S. at about 72,000,
or roughly one in 400 African-Americans. It is also estimated that complications
from sickle cell disease results in healthcare expenditures of from $1.0 to $1.5
billion annually in the U.S.
The most common problem sickle cell patients face is episodic pain
(also referred to as vaso-occlusive crisis, or VOC). These episodes can last
anywhere from five minutes to days or weeks, and can vary significantly in their
severity. The deformed sickle 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 that 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. 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.
Currently there is no effective treatment to alleviate the pain and
suffering sickle cell anemia patients in crisis must endure. 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.
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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. In a Phase II human
clinical trial, FLOCOR demonstrated positive results, reducing the duration of
crisis by 16 to 45%, the need for pain medication by 2.8 to 4.3 fold, pain
intensity by 40 to 45%, and the duration of hospital stay by 1 to 2 days.
CytRx is currently conducting a Phase III double-blind
placebo-controlled multicenter trial to assess the efficacy and safety of FLOCOR
in vaso-occlusive crisis of sickle cell disease. The trial will involve 224
patients, ages 10 to 65, and is expected to be completed by the end of 1999. In
January 1999, the Company announced a favorable review from an independent
Safety and Data Monitoring Board following examination of data from the first 50
patients enrolled in the trial. As of March 22, 1999 a total of 129 patients
have been enrolled in the trial.
The Company is also currently conducting a Phase I study in patients
with Acute Chest Syndrome (ACS), a life-threatening condition associated with
sickle cell disease, and is planning follow-on studies on the recurrent use of
FLOCOR in sickle cell patients.
FLOCOR for Other Indications. CytRx believes that FLOCOR has the
potential to be an effective treatment for other vascular-occlusive diseases as
well. CytRx plans to explore the opportunities with FLOCOR in significant
diseases such as Acute Lung Injury (ALI), shock 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.
Orphan Drug Status. In June 1989, the FDA informed CytRx of its
decision to grant RheothRx "Orphan Drug" designation for the treatment of sickle
cell crisis and this designation applies to FLOCOR as well. 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 FLOCOR's approval. During this period,
the FDA may not 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.
Other Product Development Efforts
Vaccine Adjuvants / Delivery Systems -- CytRx has discovered the use of
certain non-ionic block copolymers (poloxamers) both alone and in a variety of
emulsion systems as vaccine delivery systems - immunoadjuvants. The
adjuvant-delivery systems have potential for use in both injectable and oral
vaccines. CytRx's subsidiary, Vaxcel, has the rights for the human therapeutic
use of these compounds while CytRx holds the rights for veterinary use.
Anti-Microbial -- CRL-1072 is a highly purified poloxamer that has
demonstrated potent activity against a wide range of infectious agents. In
animal models of fatal Mycobacterium tuberculosis, Mycobacterium avium, and
Toxoplasmosis infection, CRL-1072 results in significantly improved survival
rates. More importantly, the compound is active against drug resistant isolates
of M.tuberculosis. CRL-1072 has also been shown to reduce viral load and viral
reactivation in models of chronic hepatitis B infection.
P-Glycoprotein Inhibitor -- CytRx has identified a series of novel
non-toxic inhibitors of the drug efflux pump P-glycoprotein. These compounds
have potential therapeutic use as (a) chemosensitizers for drug resistant
bacteria, (b) oral bioavailability enhancers for antibiotics or
chemotherapeutics, and (c) chemosensitizers for drug resistant cancer.
Gene Delivery -- CytRx has discovered the use of certain poloxamers for
oligionucleotide delivery. Poloxamers are as effective as cationic liposomes but
are significantly less toxic and are not metabolized. CytRx believes there is
potential use for this technology in (a) gene-based vaccines, (b) gene
replacement therapy, and (c) ribozyme and anti-sense delivery.
Animal Growth Promotant -- CytRx's growth promotant has been shown to
have a consistent effect to improve the rate of weight gain and feed efficiency
in well-controlled studies in poultry and swine.
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Expenditures for research and development activities related to
continuing operations were $7.3 million, $3.6 million, and $2.0 million during
the years ended December 31, 1998, 1997, and 1996, 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.
Spectrum Recruitment Research - 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 requires three suppliers of materials or services to
manufacture FLOCOR; (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. The Company entered into an agreement with a French
company to obtain the purified drug substance for use in clinical studies, and
is currently negotiating with another supplier for a longer-term commercial
supply contract. 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.
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 an
NDA/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.
If the Company modifies its manufacturing process or changes the source
or location of product supply, regulatory authorities will require the Company
to demonstrate that the material produced from the modified or new process or
facility is equivalent to the material used in the Company's clinical trials.
Further, any manufacturing facility and the quality control and manufacturing
procedures used by the Company for the commercial supply of a product must
comply with applicable Occupational Safety and Health Administration,
Environmental Protection Agency, and FDA standards, including Good Manufacturing
Practice regulations. See "Government Regulation".
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 ever be issued in the United
States or any other country.
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.
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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 FLOCOR or other products under development by the Company. The
industry is characterized by rapid technological advances and competitors may
develop their products more rapidly and/or such products may be more effective
than those under development by the Company or its licensees and corporate
partners. The Company competes in this research and development environment by
attempting to develop its products and technologies in an innovative and timely
fashion that would provide the Company with an advantage in the licensing and/or
marketing of its products and technologies.
GOVERNMENT REGULATION
The marketing of pharmaceutical products requires the approval of the
FDA and comparable regulatory authorities in foreign countries. The FDA has
established guidelines and safety standards which apply to the pre-clinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining FDA approval for a new therapeutic product
(drug) generally takes several years and involves the expenditure of substantial
resources. The steps required before such a product can be produced and marketed
for human use in the United States include preclinical studies in animal models,
the filing of an Investigational New Drug ("IND") application, human clinical
trials and the submission and approval of an 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 1998 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, 1998, the Company had sixteen full-time and four
part-time employees, ten of which were directly involved in the conduct of
scientific or research and development activities for the Company.
ITEM 2. PROPERTIES
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." These facilities are in satisfactory
condition and suitable for purposes of the Company's present operations.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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.
<TABLE>
<CAPTION>
High Low
COMMON STOCK: ---------- ---------
1999
<S> <C> <C>
January 1 to March 22 3 3/8 1
1998
Fourth Quarter 1 1/4 3/4
Third Quarter 2 1/8 29/32
Second Quarter 3 7/16 2 1/16
First Quarter 3 5/8 2 9/16
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
</TABLE>
On March 22, 1999, the closing price of the Common Stock as reported on
The Nasdaq Stock Market, was $2 3/4 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.
ITEM 6. SELECTED FINANCIAL DATA
Information with respect to this item is incorporated herein by
reference from the Company's 1998 Annual Report to Stockholders. The applicable
portion of the 1998 Annual Report to Stockholders is included in Exhibit 13.1 to
this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information with respect to this item is incorporated herein by
reference from the Company's 1998 Annual Report to Stockholders. The applicable
portion of the 1998 Annual Report to Stockholders is included in Exhibit 13.1 to
this report.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to this item is incorporated herein by
reference from "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Company's 1998 Annual Report to
Stockholders. The applicable portion of the 1998 Annual Report to Stockholders
is included in Exhibit 13.1 to this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is incorporated herein by
reference from the Company's 1998 Annual Report to Stockholders. The applicable
portion of the 1998 Annual Report to Stockholders is included in Exhibit 13.1 to
this report.
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ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 The financial statements listed below are
incorporated by reference from the Company's 1998 Annual
Report to Stockholders:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997 and 1996
9
<PAGE> 10
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 11 of this Form 10-K.
(b) Reports on Form 8-K:
None
10
<PAGE> 11
CYTRX CORPORATION
FORM 10-K EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C> <C>
2.1 Agreement and Plan of Merger and Contribution dated as of
December 6, 1996, among CytRx Corporation, Vaxcel, Inc.,
Vaxcel Merger Subsidiary, Inc. and Zynaxis, Inc. (a)
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)
3.1 Certificate of Incorporation (c)
3.2 By-Laws (d)
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 (l)
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 * 1998 Long-Term Incentive Plan
10.11 Asset Purchase Agreement dated February 10, 1998 by and
between Proceutics, Inc. and Oread Laboratories, Inc. (l)
10.12 Sublease Agreement dated February 16, 1998 by and between
CytRx Corporation and Oread, Inc. (l)
10.13 Purchase and Sale Agreement dated February 23, 1998 by and
between CytRx Corporation and Alexandria Real Estate Equities,
Inc. (l)
10.14 Purchase and Sale Agreement dated February 23, 1998 by and
between Proceutics, Inc. and Alexandria Real Estate Equities,
Inc. (l)
10.15 Acquisition Agreement dated April 17, 1998 by and among CytRx,
VetLife, Inc. and VetLife, L.L.C. (k)
13.1 Selected Portions of the 1998 CytRx Corporation Annual Report
to Shareholders
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).
27.3 Financial Data Schedule - 1997 Restatement (for SEC use only).
99.1 Safe Harbor Compliance Statement for Forward-looking Statements
</TABLE>
*Indicates a management contract or compensatory plan or arrangement.
- -------------------
(a) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on December 6, 1996.
(b) Incorporated by reference to the Registrant's 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.
11
<PAGE> 12
(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 Current Report on Form 8-K
filed on April 21, 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 13, 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.
(l) Incorporated by reference to the Registrant's Annual Report on Form 10-K
filed on March 30, 1998.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CYTRX CORPORATION
By: /s/ Jack J. Luchese
--------------------------
Jack J. Luchese, President
Date: March 30, 1999 and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Jack L. Bowman Director March 30, 1999
- ------------------------------
Jack L. Bowman
/s/ Raymond C. Carnahan, Jr. Director March 30, 1999
- ------------------------------
Raymond C. Carnahan, Jr.
/s/ Lyle A. Hohnke Director March 30, 1999
- ------------------------------
Lyle A. Hohnke
/s/ Max Link Chairman of the March 30, 1999
- ------------------------------ Board of Directors
Max Link
/s/ Jack J. Luchese Director March 30, 1999
- ------------------------------ President and Chief Executive Officer
Jack J. Luchese (Principal Executive Officer)
/s/ Herbert H. McDade, Jr. Director March 30, 1999
- ------------------------------
Herbert H. McDade, Jr.
/s/ Mark W. Reynolds Chief Financial Officer March 30, 1999
- ------------------------------- (Principal Financial Officer)
Mark W. Reynolds
</TABLE>
13
<PAGE> 14
CYTRX CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 1998 $ 22,187 $ -- $ -- $ 22,187 $ --
Year ended December 31, 1997 48,430 44,850 -- 71,093 22,187
Year ended December 31, 1996 -- 2,516 45,914 -- 48,430
Allowance for Deferred Tax Assets
Year ended December 31, 1998 $ 17,684,000 $3,085,000 $ $ $ 20,769,000
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
</TABLE>
14
<PAGE> 1
EXHIBIT 10.10
CYTRX CORPORATION
1998 LONG-TERM INCENTIVE PLAN
<PAGE> 2
CYTRX CORPORATION
1998 LONG-TERM INCENTIVE PLAN
ARTICLE I
PURPOSE
1.1 GENERAL. The purpose of the CytRx Corporation 1998 Long-Term
Incentive Plan (the "Plan") is to promote the success, and enhance the value, of
CytRx Corporation (the "Corporation"), by linking the personal interests of its
employees, officers, consultants and directors to those of Corporation
shareholders and by providing such persons with an incentive for outstanding
performance. The Plan is further intended to provide flexibility to the
Corporation in its ability to motivate, attract, and retain the services of
employees, officers, consultants and directors upon whose judgment, interest,
and special effort the successful conduct of the Corporation's operation is
largely dependent. Accordingly, the Plan permits the grant of incentive awards
from time to time to selected employees, officers, consultants and directors.
ARTICLE 2
EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan shall be effective as of the date
upon which it shall be approved by the Board. However, the Plan shall be
submitted to the shareholders of the Corporation for approval within 12 months
of the Board's approval thereof. No Incentive Stock Options granted under the
Plan may be exercised prior to approval of the Plan by the shareholders and if
the shareholders fail to approve the Plan within 12 months of the Board's
approval thereof, any Incentive Stock Options previously granted hereunder shall
be automatically converted to Non-Qualified Stock Options without any further
act. In the discretion of the Committee, Awards may be made to Covered Employees
which are intended to constitute qualified performance-based compensation under
Code Section 162(m). Any such Awards shall be contingent upon the shareholders
having approved the Plan.
ARTICLE 3
DEFINITIONS
3.1 DEFINITIONS. When a word or phrase appears in this Plan with
the initial letter capitalized, and the word or phrase does not commence a
sentence, the word or phrase shall generally be given the meaning ascribed to it
in this Section or in Section 1.1 unless a clearly different meaning is required
by the context. The following words and phrases shall have the following
meanings:
(a) "Award" means any Option, Stock Appreciation Right,
Restricted Stock Award, Performance Unit Award, Dividend Equivalent
Award, or Other Stock-Based Award, or any other right or interest
relating to Stock or cash, granted to a Participant under the Plan.
-2-
<PAGE> 3
(b) "Award Agreement" means any written agreement,
contract, or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the
Corporation.
(d) "Change in Control" means and includes each of the
following:
(1) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 25% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that for
purposes of this subsection (1), the following acquisitions
shall not constitute a Change of Control: (i) any acquisition
by a Person who is on April 1, 1998 the beneficial owner of
25% or more of the Outstanding Company Voting Securities, (ii)
any acquisition directly from the Company, (iii) any
acquisition by the Company, (iv) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company, or (v) any acquisition by any corporation pursuant to
a transaction which complies with clauses (i), (ii) and (iii)
of subsection (3) of this definition; or
(2) Individuals who, as of April 1, 1998,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to April 1, 1998 whose election, or nomination for
election by the Company's stockholders, was approved by a vote
of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors
or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(3) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or
substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals
and entities who were the beneficial owners of the Outstanding
Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more
than 60% of the combined
-3-
<PAGE> 4
voting power of the then outstanding voting securities
entitled to vote generally in the election of directors of the
corporation resulting from such Business Combination
(including, without limitation, a corporation which as a
result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Voting
Securities, and (ii) no Person (excluding any corporation
resulting from such Business Combination or any employee
benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 25% or more of the
combined voting power of the then outstanding voting
securities of such corporation except to the extent that such
ownership existed prior to the Business Combination, and (iii)
at least a majority of the members of the board of directors
of the corporation resulting from such Business Combination
were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(4) Approval by the stockholders of the Company
of a complete liquidation or dissolution of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(f) "Committee" means the committee of the Board
described in Article 4.
(g) "Corporation" means CytRx Corporation, a Delaware
corporation.
(h) "Covered Employee" means a covered employee as
defined in Code Section 162(m)(3).
(i) "Disability" shall mean any illness or other physical
or mental condition of a Participant that renders the Participant
incapable of performing his customary and usual duties for the
Corporation, or any medically determinable illness or other physical or
mental condition resulting from a bodily injury, disease or mental
disorder which, in the judgment of the Committee, is permanent and
continuous in nature. The Committee may require such medical or other
evidence as it deems necessary to judge the nature and permanency of
the Participant's condition.
(j) "Dividend Equivalent" means a right granted to a
Participant under Article 11.
-4-
<PAGE> 5
(k) "Effective Date" has the meaning assigned such term
in Section 2.1.
(l) "Fair Market Value", on any date, means (i) if the
Stock is listed on a securities exchange or is traded over the Nasdaq
National Market, the closing sales price on such exchange or over such
system on such date or, in the absence of reported sales on such date,
the closing sales price on the immediately preceding date on which
sales were reported, or (ii) if the Stock is not listed on a securities
exchange or traded over the Nasdaq National Market, the mean between
the bid and offered prices as quoted by Nasdaq for such date, provided
that if it is determined that the fair market value is not properly
reflected by such Nasdaq quotations, Fair Market Value will be
determined by such other method as the Committee determines in good
faith to be reasonable.
(m) "Incentive Stock Option" means an Option that is
intended to meet the requirements of Section 422 of the Code or any
successor provision thereto.
(n) "Non-Qualified Stock Option" means an Option that is
not an Incentive Stock Option.
(o) "Option" means a right granted to a Participant under
Article 7 of the Plan to purchase Stock at a specified price during
specified time periods. An Option may be either an Incentive Stock
Option or a Non-Qualified Stock Option.
(p) "Other Stock-Based Award" means a right, granted to a
Participant under Article 12, that relates to or is valued by reference
to Stock or other Awards relating to Stock.
(q) "Parent" means a corporation which owns or
beneficially owns a majority of the outstanding voting stock or voting
power of the Corporation. For Incentive Stock Options, the term shall
have the same meaning as set forth in Code Section 424(e).
(r) "Participant" means a person who, as an employee,
officer, consultant or director of the Corporation or any Subsidiary,
has been granted an Award under the Plan.
(s) "Performance Unit" means a right granted to a
Participant under Article 9, to receive cash, Stock, or other Awards,
the payment of which is contingent upon achieving certain performance
goals established by the Committee.
(t) "Plan" means the CytRx Corporation 1998 Long-Term
Incentive Plan, as amended from time to time.
-5-
<PAGE> 6
(u) "Restricted Stock Award" means Stock granted to a
Participant under Article 10 that is subject to certain restrictions
and to risk of forfeiture.
(v) "Retirement" means a Participant's voluntary
termination of employment with the Corporation, Parent or Subsidiary
after attaining age 55.
(w) "Stock" means the $0.001 par value common stock of
the Corporation and such other securities of the Corporation as may be
substituted for Stock pursuant to Article 14.
(x) "Stock Appreciation Right" or "SAR" means a right
granted to a Participant under Article 8 to receive a payment equal to
the difference between the Fair Market Value of a share of Stock as of
the date of exercise of the SAR over the grant price of the SAR, all as
determined pursuant to Article 8.
(y) "Subsidiary" means any corporation, limited liability
company, partnership or other entity of which a majority of the
outstanding voting stock or voting power is beneficially owned directly
or indirectly by the Corporation. For Incentive Stock Options, the term
shall have the meaning set forth in Code Section 424(f).
(z) "1933 Act" means the Securities Act of 1933, as
amended from time to time.
(z) "1934 Act" means the Securities Exchange Act of 1934,
as amended from time to time.
ARTICLE 4
ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board or, at the discretion of the Board from time to time, by
the Board. The Committee shall consist of two or more members of the Board. It
is intended that the directors appointed to serve on the Committee shall be
"non-employee directors" (within the meaning of Rule 16b-3 promulgated under the
1934 Act) and "outside directors" (within the meaning of Code Section 162(m) and
the regulations thereunder) to the extent that Rule 16b-3 and, if necessary for
relief from the limitation under Code Section 162(m) and such relief is sought
by the Company, Code Section 162(m), respectively, are applicable. However, the
mere fact that a Committee member shall fail to qualify under either of the
foregoing requirements shall not invalidate any Award made by the Committee
which Award is otherwise validly made under the Plan. The members of the
Committee shall be appointed by, and may be changed at any time and from time to
time in the discretion of, the Board. During any time that the Board is acting
as administrator of the Plan, it shall have all the powers of the Committee
hereunder, and any reference herein to the Committee (other than in this Section
4.1) shall include the Board.
-6-
<PAGE> 7
4.2 ACTION BY THE COMMITTEE. For purposes of administering the
Plan, the following rules of procedure shall govern the Committee. A majority of
the Committee shall constitute a quorum. The acts of a majority of the members
present at any meeting at which a quorum is present, and acts approved
unanimously in writing by the members of the Committee in lieu of a meeting,
shall be deemed the acts of the Committee. Each member of the Committee is
entitled to, in good faith, rely or act upon any report or other information
furnished to that member by any officer or other employee of the Corporation or
any Parent or Subsidiary, the Corporation's independent certified public
accountants, or any executive compensation consultant or other professional
retained by the Corporation to assist in the administration of the Plan.
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted
to each Participant;
(c) Determine the number of Awards to be granted and the
number of shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award
granted under the Plan, including but not limited to, the exercise
price, grant price, or purchase price, any restrictions or limitations
on the Award, any schedule for lapse of forfeiture restrictions or
restrictions on the exercisability of an Award, and accelerations or
waivers thereof, based in each case on such considerations as the
Committee in its sole discretion determines;
(e) Accelerate the vesting or lapse of restrictions of
any outstanding Award, based in each case on such considerations as the
Committee in its sole discretion determines;
(f) Determine whether, to what extent, and under what
circumstances an Award may be settled in, or the exercise price of an
Award may be paid in, cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(g) Prescribe the form of each Award Agreement, which
need not be identical for each Participant;
-7-
<PAGE> 8
(h) Decide all other matters that must be determined in
connection with an Award;
(i) Establish, adopt or revise any rules and regulations
as it may deem necessary or advisable to administer the Plan;
(j) Make all other decisions and determinations that may
be required under the Plan or as the Committee deems necessary or
advisable to administer the Plan; and
(k) Amend the Plan or any Award Agreement as provided
herein.
4.4. DECISIONS BINDING. The Committee's interpretation of the Plan,
any Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5
SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section
14.1, the aggregate number of shares of Stock reserved and available for Awards
or which may be used to provide a basis of measurement for or to determine the
value of an Award (such as with a Stock Appreciation Right or Performance Unit
Award) shall be 500,000, of which not more than 10% may be granted as Awards of
Restricted Stock or unrestricted Stock Awards.
5.2. LAPSED AWARDS. To the extent that an Award is canceled,
terminates, expires or lapses for any reason, any shares of Stock subject to the
Award will again be available for the grant of an Award under the Plan and
shares subject to SARs or other Awards settled in cash will be available for the
grant of an Award under the Plan.
5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award
may consist, in whole or in part, of authorized and unissued Stock, treasury
Stock or Stock purchased on the open market.
5.4. LIMITATION ON AWARDS. Notwithstanding any provision in the
Plan to the contrary, the maximum number of shares of Stock with respect to one
or more Options and/or SARs that may be granted during any one calendar year
under the Plan to any one Covered Employee shall be 175,000. The maximum fair
market value (measured as of the date of grant) of any Awards other than Options
and SARs that may be received by a Covered Employee (less any consideration paid
by the Participant for such Award) during any one calendar year under the Plan
shall be $500,000.
-8-
<PAGE> 9
ARTICLE 6
ELIGIBILITY
6.1. GENERAL. Awards may be granted only to individuals who are
employees, officers, consultants or directors of the Corporation or a Parent or
Subsidiary.
ARTICLE 7
STOCK OPTIONS
7.1. GENERAL. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under an Option shall be determined by the Committee, provided that the
exercise price for any Incentive Stock Option shall not be less than
the Fair Market Value as of the date of the grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part. The Committee also shall determine the performance or
other conditions, if any, that must be satisfied before all or part of
an Option may be exercised. The Committee may waive any exercise
provisions at any time in whole or in part based upon factors as the
Committee may determine in its sole discretion so that the Option
becomes exerciseable at an earlier date.
(c) PAYMENT. The Committee shall determine the methods by
which the exercise price of an Option may be paid, the form of payment,
including, without limitation, cash, shares of Stock, or other property
(including "cashless exercise" arrangements), and the methods by which
shares of Stock shall be delivered or deemed to be delivered to
Participants; provided that if shares of Stock surrendered in payment
of the exercise price were themselves acquired otherwise than on the
open market, such shares shall have been held by the Participant for at
least six months.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by
a written Award Agreement between the Corporation and the Participant.
The Award Agreement shall include such provisions, not inconsistent
with the Plan, as may be specified by the Committee.
7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock
Options granted under the Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock
shall be set by the Committee, provided that the exercise price for any
Incentive Stock Option shall not be less than the Fair Market Value as
of the date of the grant.
-9-
<PAGE> 10
(b) EXERCISE. In no event may any Incentive Stock Option
be exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall
lapse under the earliest of the following circumstances; provided,
however, that the Committee may, prior to the lapse of the Incentive
Stock Option under the circumstances described in paragraphs (3), (4)
and (5) below, provide in writing that the Option will extend until a
later date, but if Option is exercised after the dates specified in
paragraphs (3), (4) and (5) below, it will automatically become a
Non-Qualified Stock Option:
(1) The Incentive Stock Option shall lapse as of
the option expiration date set forth in the Award Agreement.
(2) The Incentive Stock Option shall lapse ten
years after it is granted, unless an earlier time is set in
the Award Agreement.
(3) If the Participant terminates employment for
any reason other than as provided in paragraph (4) or (5)
below, the Incentive Stock Option shall lapse, unless it is
previously exercised, three months after the Participant's
termination of employment; provided, however, that if the
Participant's employment is terminated by the Company for
cause or by the Participant without the consent of the
Company, the Incentive Stock Option shall (to the extent not
previously exercised) lapse immediately.
(4) If the Participant terminates employment by
reason of his Disability, the Incentive Stock Option shall
lapse, unless it is previously exercised, one year after the
Participant's termination of employment.
(5) If the Participant dies while employed, or
during the three-month period described in paragraph (3) or
during the one-year period described in paragraph (4) and
before the Option otherwise lapses, the Option shall lapse one
year after the Participant's death. Upon the Participant's
death, any exercisable Incentive Stock Options may be
exercised by the Participant's beneficiary, determined in
accordance with Section 13.6.
If a Participant exercises an Option after termination of
employment, the Option may be exercised only with respect to the shares
that were otherwise vested on the Participant's termination of
employment.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair
Market Value (determined as of the time an Award is made) of all shares
of Stock
-10-
<PAGE> 11
with respect to which Incentive Stock Options are first exercisable by
a Participant in any calendar year may not exceed $100,000.00.
(e) TEN PERCENT OWNERS. No Incentive Stock Option shall
be granted to any individual who, at the date of grant, owns stock
possessing more than ten percent of the total combined voting power of
all classes of stock of the Corporation or any Parent or Subsidiary
unless the exercise price per share of such Option is at least 110% of
the Fair Market Value per share of Stock at the date of grant and the
Option expires no later than five years after the date of grant.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an
Incentive Stock Option may be made pursuant to the Plan after the day
immediately prior to the tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime,
an Incentive Stock Option may be exercised only by the Participant or,
in the case of the Participant's Disability, by the Participant's
guardian or legal representative.
(h) DIRECTORS. The Committee may not grant an Incentive
Stock Option to a non-employee director. The Committee may grant an
Incentive Stock Option to a director who is also an employee of the
Corporation or Parent or Subsidiary but only in that individual's
position as an employee and not as a director.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1. GRANT OF SARs. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock
Appreciation Right, the Participant to whom it is granted has the right
to receive the excess, if any, of:
(1) The Fair Market Value of one share of Stock
on the date of exercise; over
(2) The grant price of the Stock Appreciation
Right as determined by the Committee, which shall not be less
than the Fair Market Value of one share of Stock on the date
of grant.
(b) OTHER TERMS. All awards of Stock Appreciation Rights
shall be evidenced by an Award Agreement. The terms, methods of
exercise, methods of settlement, form of consideration payable in
settlement, and any other terms and conditions of any Stock
Appreciation Right shall be determined by the Committee at the time of
the grant of the Award and shall be reflected in the Award Agreement.
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<PAGE> 12
ARTICLE 9
PERFORMANCE UNITS
9.1. GRANT OF PERFORMANCE UNITS. The Committee is authorized to
grant Performance Units to Participants on such terms and conditions as may be
selected by the Committee. The Committee shall have the complete discretion to
determine the number of Performance Units granted to each Participant. All
Awards of Performance Units shall be evidenced by an Award Agreement.
9.2. RIGHT TO PAYMENT. A grant of Performance Units gives the
Participant rights, valued as determined by the Committee, and payable to, or
exercisable by, the Participant to whom the Performance Units are granted, in
whole or in part, as the Committee shall establish at grant or thereafter. The
Committee shall set performance goals and other terms or conditions to payment
of the Performance Units in its discretion which, depending on the extent to
which they are met, will determine the number and value of Performance Units
that will be paid to the Participant.
9.3. OTHER TERMS. Performance Units may be payable in cash, Stock,
or other property, and have such other terms and conditions as determined by the
Committee and reflected in the Award Agreement.
ARTICLE 10
RESTRICTED STOCK AWARDS
10.1. GRANT OF RESTRICTED STOCK. The Committee is authorized to make
Awards of Restricted Stock to Participants in such amounts and subject to such
terms and conditions as may be selected by the Committee. All Awards of
Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject
to such restrictions on transferability and other restrictions as the Committee
may impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, upon the satisfaction of performance
goals or otherwise, as the Committee determines at the time of the grant of the
Award or thereafter.
10.3. FORFEITURE. Except as otherwise determined by the Committee at
the time of the grant of the Award or thereafter, upon termination of employment
during the applicable restriction period or upon failure to satisfy a
performance goal during the applicable restriction period, Restricted Stock that
is at that time subject to restrictions shall be forfeited and reacquired by the
Corporation; provided, however, that the
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<PAGE> 13
Committee may provide in any Award Agreement that restrictions or forfeiture
conditions relating to Restricted Stock will be waived in whole or in part in
the event of terminations resulting from specified causes, and the Committee may
in other cases waive in whole or in part restrictions or forfeiture conditions
relating to Restricted Stock.
10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted
under the Plan may be evidenced in such manner as the Committee shall determine.
If certificates representing shares of Restricted Stock are registered in the
name of the Participant, certificates must bear an appropriate legend referring
to the terms, conditions, and restrictions applicable to such Restricted Stock.
ARTICLE 11 DIVIDEND EQUIVALENTS
11.1 GRANT OF DIVIDEND EQUIVALENTS. The Committee is authorized to
grant Dividend Equivalents to Participants subject to such terms and conditions
as may be selected by the Committee. Dividend Equivalents shall entitle the
Participant to receive payments equal to dividends with respect to all or a
portion of the number of shares of Stock subject to an Award, as determined by
the Committee. The Committee may provide that Dividend Equivalents be paid or
distributed when accrued or be deemed to have been reinvested in additional
shares of Stock, or otherwise reinvested.
ARTICLE 12
OTHER STOCK-BASED AWARDS
12.1. GRANT OF OTHER STOCK-BASED AWARDS. The Committee is
authorized, subject to limitations under applicable law, to grant to
Participants such other Awards that are payable in, valued in whole or in part
by reference to, or otherwise based on or related to shares of Stock, as deemed
by the Committee to be consistent with the purposes of the Plan, including
without limitation shares of Stock awarded purely as a "bonus" and not subject
to any restrictions or conditions, convertible or exchangeable debt securities,
other rights convertible or exchangeable into shares of Stock, and Awards valued
by reference to book value of shares of Stock or the value of securities of or
the performance of specified Parents or Subsidiaries. The Committee shall
determine the terms and conditions of such Awards.
ARTICLE 13
PROVISIONS APPLICABLE TO AWARDS
13.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution for, any other Award
granted under the Plan. If an Award is granted in substitution for another
Award, the Committee may require the surrender of such other Award in
consideration of the grant of the new Award. Awards granted in addition to or in
tandem with other Awards may be granted either at the same time as or at a
different time from the grant of such other Awards.
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<PAGE> 14
13.2. EXCHANGE PROVISIONS. The Committee may at any time offer to
exchange or buy out any previously granted Award for a payment in cash, Stock,
or another Award (subject to Section 14.1), based on the terms and conditions
the Committee determines and communicates to the Participant at the time the
offer is made.
13.3. TERM OF AWARD. The term of each Award shall be for the period
as determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with the
Incentive Stock Option exceed a period of ten years from the date of its grant
(or, if Section 7.2(e) applies, five years from the date of its grant).
13.4. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan
and any applicable law or Award Agreement, payments or transfers to be made by
the Corporation or a Parent or Subsidiary on the grant or exercise of an Award
may be made in such form as the Committee determines at or after the time of
grant, including without limitation, cash, Stock, other Awards, or other
property, or any combination, and may be made in a single payment or transfer,
in installments, or on a deferred basis, in each case determined in accordance
with rules adopted by, and at the discretion of, the Committee.
13.5. LIMITS ON TRANSFER. No right or interest of a Participant in
any unexercised or restricted Award may be pledged, encumbered, or hypothecated
to or in favor of any party other than the Corporation or a Parent or
Subsidiary, or shall be subject to any lien, obligation, or liability of such
Participant to any other party other than the Corporation or a Parent or
Subsidiary. No unexercised or restricted Award shall be assignable or
transferable by a Participant other than by will or the laws of descent and
distribution or, except in the case of an Incentive Stock Option, pursuant to a
domestic relations order that would satisfy Section 414(p)(1)(A) of the Code if
such Section applied to an Award under the Plan; provided, however, that the
Committee may (but need not) permit other transfers where the Committee
concludes that such transferability (i) does not result in accelerated taxation,
(ii) does not cause any Option intended to be an incentive stock option to fail
to be described in Code Section 422(b), and (iii) is otherwise appropriate and
desirable, taking into account any factors deemed relevant, including without
limitation, any state or federal tax or securities laws or regulations
applicable to transferable Awards.
13.6 BENEFICIARIES. Notwithstanding Section 13.5, a Participant
may, in the manner determined by the Committee, designate a beneficiary to
exercise the rights of the Participant and to receive any distribution with
respect to any Award upon the Participant's death. A beneficiary, legal
guardian, legal representative, or other person claiming any rights under the
Plan is subject to all terms and conditions of the Plan and any Award Agreement
applicable to the Participant, except to the extent the Plan and Award Agreement
otherwise provide, and to any additional restrictions deemed necessary or
appropriate by the Committee. If no beneficiary has been designated or survives
the Participant, payment shall be made to the Participant's estate. Subject to
the foregoing, a
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<PAGE> 15
beneficiary designation may be changed or revoked by a Participant at any time
provided the change or revocation is filed with the Committee.
13.7. STOCK CERTIFICATES. All Stock certificates delivered under the
Plan are subject to any stop-transfer orders and other restrictions as the
Committee deems necessary or advisable to comply with federal or state
securities laws, rules and regulations and the rules of any national securities
exchange or automated quotation system on which the Stock is listed, quoted, or
traded. The Committee may place legends on any Stock certificate to reference
restrictions applicable to the Stock.
13.8. ACCELERATION UPON A CHANGE IN CONTROL. Except as otherwise
provided in the Award Agreement, upon the occurrence of a Change in Control, all
outstanding Options, Stock Appreciation Rights, and other Awards in the nature
of rights that may be exercised shall become fully exercisable and all
restrictions on outstanding Awards shall lapse; provided, however that such
acceleration will not occur if, in the opinion of the Company's accountants,
such acceleration would preclude the use of "pooling of interest" accounting
treatment for a Change in Control transaction that (a) would otherwise qualify
for such accounting treatment, and (b) is contingent upon qualifying for such
accounting treatment. To the extent that this provision causes Incentive Stock
Options to exceed the dollar limitation set forth in Section 7.2(d), the excess
Options shall be deemed to be Non-Qualified Stock Options.
13.9. ACCELERATION UPON CERTAIN EVENTS NOT CONSTITUTING A CHANGE IN
CONTROL. In the event of the occurrence of any circumstance, transaction or
event not constituting a Change in Control (as defined in Section 3.1) but which
the Board of Directors deems to be, or to be reasonably likely to lead to, an
effective change in control of the Company of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of the 1934 Act, the
Committee may in its sole discretion declare all outstanding Options, Stock
Appreciation Rights, and other Awards in the nature of rights that may be
exercised to be fully exercisable, and/or all restrictions on all outstanding
Awards to have lapsed, in each case, as of such date as the Committee may, in
its sole discretion, declare, which may be on or before the consummation of such
transaction or event. To the extent that this provision causes Incentive Stock
Options to exceed the dollar limitation set forth in Section 7.2(d), the excess
Options shall be deemed to be Non-Qualified Stock Options.
13.10. ACCELERATION FOR ANY OTHER REASON. Regardless of whether an
event has occurred as described in Section 13.8 or 13.9 above, the Committee may
in its sole discretion at any time determine that all or a portion of a
Participant's Options, Stock Appreciation Rights, and other Awards in the nature
of rights that may be exercised shall become fully or partially exercisable,
and/or that all or a part of the restrictions on all or a portion of the
outstanding Awards shall lapse, in each case, as of such date as the Committee
may, in its sole discretion, declare. The Committee may discriminate among
Participants and among Awards granted to a Participant in exercising its
discretion pursuant to this Section 13.10.
-15-
<PAGE> 16
13.11 EFFECT OF ACCELERATION. If an Award is accelerated under
Section 13.8 or 13.9, the Committee may, in its sole discretion, provide (i)
that the Award will expire after a designated period of time after such
acceleration to the extent not then exercised, (ii) that the Award will be
settled in cash rather than Stock, (iii) that the Award will be assumed by
another party to the transaction giving rise to the acceleration or otherwise be
equitably converted in connection with such transaction, or (iv) any combination
of the foregoing. The Committee's determination need not be uniform and may be
different for different Participants whether or not such Participants are
similarly situated.
13.12. PERFORMANCE GOALS. The Committee may (but need not) determine
that any Award granted pursuant to this Plan to a Participant (including, but
not limited to, Participants who are Covered Employees) shall be determined
solely on the basis of (a) the achievement by the Corporation or a Parent or
Subsidiary of a specified target return, or target growth in return, on equity
or assets, (b) the Corporation's, Parent's or Subsidiary's stock price, (c) the
achievement by an individual or a business unit of the Corporation, Parent or
Subsidiary of a specified target, or target growth in, revenues, net income or
earnings per share, (d) the achievement of objectively determinable goals with
respect to (i) product development milestones, (ii) corporate financings, (iii)
merger and acquisition activities, (iv) licensing transactions, (v) development
of strategic partnerships or alliances, or (vi) acquisition or development of
new technologies, or (e) any combination of the goals set forth in (a) through
(d) above. If an Award is made on such basis, the Committee shall establish
goals prior to the beginning of the period for which such performance goal
relates (or such later date as may be permitted under Code Section 162(m) or the
regulations thereunder) and the Committee may for any reason reduce (but not
increase) any Award, notwithstanding the achievement of a specified goal. Any
payment of an Award granted with performance goals shall be conditioned on the
written certification of the Committee in each case that the performance goals
and any other material conditions were satisfied.
13.13. TERMINATION OF EMPLOYMENT. Whether military, government or
other service or other leave of absence shall constitute a termination of
employment shall be determined in each case by the Committee at its discretion,
and any determination by the Committee shall be final and conclusive. A
termination of employment shall not occur in a circumstance in which a
Participant transfers from the Corporation to one of its Parents or
Subsidiaries, transfers from a Parent or Subsidiary to the Corporation, or
transfers from one Parent or Subsidiary to another Parent or Subsidiary.
ARTICLE 14
CHANGES IN CAPITAL STRUCTURE
14.1. GENERAL. In the event a stock dividend is declared upon the
Stock, the shares of Stock then subject to each Award shall be increased
proportionately without any change in the aggregate purchase price therefor. In
the event the Stock shall be changed
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<PAGE> 17
into or exchanged for a different number or class of shares of stock or
securities of the Corporation or of another corporation, whether through
reorganization, recapitalization, reclassification, stock split-up, combination
of shares, merger or consolidation, there shall be substituted for each such
share of Stock then subject to each Award the number and class of shares into
which each outstanding share of Stock shall be so exchanged, all without any
change in the aggregate purchase price for the shares then subject to each
Award.
ARTICLE 15
AMENDMENT, MODIFICATION AND TERMINATION
15.1. AMENDMENT, MODIFICATION AND TERMINATION. The Board or the
Committee may, at any time and from time to time, amend, modify or terminate the
Plan without shareholder approval; provided, however, that the Board or
Committee may condition any amendment or modification on the approval of
shareholders of the Company if such approval is necessary or deemed advisable
with respect to tax, securities or other applicable laws, policies or
regulations.
15.2 AWARDS PREVIOUSLY GRANTED. At any time and from time to time,
the Committee may amend, modify or terminate any outstanding Award without
approval of the Participant; provided, however, that such amendment,
modification or termination shall not, without the Participant's consent, reduce
or diminish the value of such Award determined as if the Award had been
exercised, vested, cashed in or otherwise settled on the date of such amendment
or termination. No termination, amendment, or modification of the Plan shall
adversely affect any Award previously granted under the Plan, without the
written consent of the Participant.
ARTICLE 16
GENERAL PROVISIONS
16.1. NO RIGHTS TO AWARDS. No Participant or employee, officer,
consultant or director shall have any claim to be granted any Award under the
Plan, and neither the Corporation nor the Committee is obligated to treat
Participants and employees, officers, consultants or directors uniformly.
16.2. NO SHAREHOLDER RIGHTS. No Award gives the Participant any of
the rights of a shareholder of the Corporation unless and until shares of Stock
are in fact issued to such person in connection with such Award.
16.3. WITHHOLDING. The Corporation or any Parent or Subsidiary shall
have the authority and the right to deduct or withhold, or require a Participant
to remit to the Corporation, an amount sufficient to satisfy federal, state, and
local taxes (including the Participant's FICA obligation) required by law to be
withheld with respect to any taxable event arising as a result of the Plan. With
respect to withholding required upon any taxable event under the Plan, the
Committee may, at the time the Award is granted or
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<PAGE> 18
thereafter, require that any such withholding requirement be satisfied, in whole
or in part, by withholding shares of Stock having a Fair Market Value on the
date of withholding equal to the amount to be withheld for tax purposes, all in
accordance with such procedures as the Committee establishes.
16.4. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. Nothing in the Plan or
any Award Agreement shall interfere with or limit in any way the right of the
Corporation or any Parent or Subsidiary to terminate any Participant's
employment or status as a consultant or director at any time, nor confer upon
any Participant any right to continue as an employee, officer, consultant or
director of the Corporation or any Parent or Subsidiary.
l6.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award Agreement shall give the Participant any rights that
are greater than those of a general creditor of the Corporation or any Parent or
Subsidiary.
16.6. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan
shall be taken into account in determining any benefits under any pension,
retirement, savings, profit sharing, group insurance, welfare or benefit plan of
the Corporation or any Parent or Subsidiary unless provided otherwise in such
other plan.
16.7. EXPENSES. The expenses of administering the Plan shall be
borne by the Corporation and its Parents or Subsidiaries.
16.8. TITLES AND HEADINGS. The titles and headings of the Sections
in the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
16.9. GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
16.10. FRACTIONAL SHARES. No fractional shares of Stock shall be
issued and the Committee shall determine, in its discretion, whether cash shall
be given in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up.
16.11. GOVERNMENT AND OTHER REGULATIONS. The obligation of the
Corporation to make payment of awards in Stock or otherwise shall be subject to
all applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Corporation shall be under no obligation to
register under the 1933 Act, or any state securities act, any of the shares of
Stock paid under the Plan. The shares paid under the Plan may in certain
circumstances be exempt from registration under the
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<PAGE> 19
1933 Act, and the Corporation may restrict the transfer of such shares in such
manner as it deems advisable to ensure the availability of any such exemption.
16.12. GOVERNING LAW. To the extent not governed by federal law, the
Plan and all Award Agreements shall be construed in accordance with and governed
by the laws of the State of Georgia.
16.13 ADDITIONAL PROVISIONS. Each Award Agreement may contain such
other terms and conditions as the Committee may determine; provided that such
other terms and conditions are not inconsistent with the provisions of this
Plan.
The foregoing is hereby acknowledged as being the CytRx Corporation
1998 Long-Term Incentive Plan as adopted by the Board of Directors of the
Company on April 8, 1998 and approved by the shareholders of the Company on June
10, 1998.
CytRx Corporation
By:
---------------------------
Its:
---------------------------
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<PAGE> 1
EXHIBIT 13.1
SELECTED PORTIONS OF THE CYTRX CORPORATION
1998 ANNUAL REPORT TO SHAREHOLDERS
<PAGE> 2
FIVE YEAR SELECTED FINANCIAL DATA *
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Net product sales $ 481,495 $ 456,029 $ 522,385 $ 512,528 $ 500,814
Net service revenues 350,789 422,039 357,517 -- --
Investment and other income 1,762,747 1,381,306 1,558,914 1,990,506 2,236,751
----------------------------------------------------------------------------
Total revenues 2,595,031 2,259,374 2,438,816 2,503,034 2,737,565
============================================================================
Loss from continuing operations (7,506,060) (4,426,292) (2,068,302) (9,273,777) (7,100,343)
Income (loss) from discontinued operations 2,712,701 (1,626,700) (3,723,477) (1,378,805) (599,843)
Extraordinary item (325,120) -- -- -- --
----------------------------------------------------------------------------
Net loss $(5,118,479) $(6,052,992) $(5,791,779) $(10,652,582) $(7,700,186)
============================================================================
Basic and diluted loss per common share:
Loss from continuing operations $ (0.99) $ (0.60) $ (0.27) $ (1.17) $ (0.90)
Income (loss) from discontinued operations 0.36 (0.22) (0.48) (0.18) (0.08)
Extraordinary item (0.04) -- -- -- --
----------------------------------------------------------------------------
Net loss $ (0.67) $ (0.82) $ (0.75) $ (1.35) $ (0.98)
============================================================================
Balance Sheet Data:
Total assets $16,641,568 $24,905,995 $24,299,322 $ 30,959,983 $38,660,567
Convertible debentures -- 2,000,000 -- -- --
Total stockholders' equity 14,688,548 19,248,395 22,337,734 29,770,485 38,026,347
</TABLE>
* Restated for the reclassification of the results of operations of Vaxcel, Inc.
from continuing operations to discontinued operations for the four years ended
December 31, 1997
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CytRx Corporation and Subsidiaries
Liquidity and Capital Resources
At December 31, 1998, the Company had cash equivalents and investments
of $15.3 million and net assets of $14.7 million, compared to $11.2 million and
$19.2 million, respectively, at December 31, 1997. Working capital totaled $13.7
million at December 31, 1998, compared to $7.1 million at December 31, 1997.
Management believes that cash and investments on hand, combined with
interest income and operating revenues will be sufficient to satisfy the
Company's projected liquidity and working capital needs through the first
quarter of 2000, but it is likely that additional funding will be required 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, $200,000 of which was received during
1998, to help defray the overall costs of the study. The Company intends to
continue to seek government assistance for its product development efforts.
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 10 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, an affiliate
of Alexandria Real Estate Equities, Inc. ("Alexandria") 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. (See Notes 11 and 12 to Financial
Statements.)
In April 1998, the Company and its wholly-owned subsidiary, CytRx
Animal Health, Inc. ("CytRx Animal Health") (formerly VetLife, Inc.) 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 CytRx Animal Health's assets related to its
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. VL LLC repaid the $4
million note to CytRx Animal Health in December 1998.
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, 1998 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, 1998 the Company and its subsidiaries had net operating
loss carryforwards for income tax purposes of approximately $49.2 million, which
will expire in 2000 through 2018 if not utilized. The Company also has research
and development credits available to reduce income taxes, if any, of
approximately $1.2 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
<PAGE> 4
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 Company recorded a net loss of $5,118,000 for the year ended
December 31, 1998 as compared to net losses of $6,053,000 for 1997 and
$5,792,000 for 1996. Loss from continuing operations before extraordinary items
was $7,506,000, $4,426,000 and $2,068,000 in 1998, 1997 and 1996, respectively.
Net product sales from continuing operations, which consist primarily
of sales of TiterMax research adjuvant, were $481,000 in 1998, $456,000 in 1997
and $522,000 in 1996. Cost of product sales was $36,000 in 1998, $40,000 in 1997
and $63,000 in 1996, or 7%, 9% and 12% of net product sales, respectively.
During 1996, the Company began marketing the services of its small group of
human resource professionals to third parties under the name of Spectrum
Recruitment Research ("Spectrum") as a way of offsetting the Company's cost of
maintaining this function. Net service revenues from continuing operations
related to Spectrum were $351,000 in 1998, $422,000 in 1997 and $357,000 in
1996. Cost of service revenues was $187,000 in 1998, $242,000 in 1997 and
$171,000 in 1996, or 53%, 57% and 48% of net service revenues, respectively.
Although the TiterMax and Spectrum operations are profitable, the Company is not
dependent on the cash flow which they generate.
Interest income from continuing operations was $1,007,000 in 1998 as
compared to $752,000 in 1997 and $1,162,000 in 1996. The variances between years
is directly attributable to fluctuating cash and investment balances.
Collaborative, grant and license fee income was $511,000 in 1998 versus $94,000
in 1997 and $59,000 in 1996. The increase during 1998 is due to a $200,000 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, as well as certain
additional Small Business Innovative Research (SBIR) grants for the Company's
additional research programs. Other income was $244,000, $535,000 and $338,000
in 1998, 1997 and 1996, respectively, and primarily relates to administrative
and facilities costs allocated by CytRx to its discontinued subsidiaries. The
related costs are included in selling, general and administrative expenses. The
decrease from 1997 to 1998 is reflective of the discontinuance of the Proceutics
and CytRx Animal Health operations in early 1998.
Research and development expenditures from continuing operations during
1998 were $7,306,000 versus $3,605,000 in 1997 and $2,032,000 in 1996. Research
and development expenditures have increased during the three year period
primarily as a result of the Company's development activities for FLOCOR,
including the completion of a Phase II clinical trial in 1997 and initiation of
a pivotal Phase III trial in March 1998. The Company expects patient enrollment
in the Phase III trial to be completed during the second half of 1999, with the
final statistical analysis of the study completed by the end of 1999. During
1997 and 1998, the Company also devoted significant resources toward addressing
manufacturing issues for FLOCOR.
Selling, general and administrative expenses from continuing operations
during 1998 were $2,527,000 as compared to $2,505,000 in 1997 and $2,240,000 in
1996. The overall increase during the three year period is due to general
corporate activities in support of the Company's FLOCOR development efforts.
Interest expense was $46,000, $293,000 and $0 in 1998, 1997 and 1996,
respectively. Included in the 1997 amount is $265,000 related to the beneficial
conversion feature of $2,000,000 of convertible notes issued in 1997. (See Note
5 to Financial Statements.)
The extraordinary loss in 1998 relates to the early extinguishment of
6% convertible notes which resulted in payment of premiums of $150,000 and
expensing of capitalized debt issuance costs of $175,000.
<PAGE> 5
Discontinued Operations - Net income (loss) from the discontinued
operations of Proceutics, CytRx Animal Health and Vaxcel (net of minority
interest) was $2,713,000, $(1,627,000) and $(3,723,000) in 1998, 1997 and 1996.
As discussed above, the assets of Proceutics and CytRx Animal Health were sold
during 1998, thus the results of their operations have been presented as
discontinued operations. During 1998, the Company adopted a plan to dispose of
the research and development activities of Vaxcel and has also presented its
results of operations as discontinued operations. The following table presents
the breakdown of net income (loss) from discontinued operations (see Notes 11
and 13 to Financial Statements).
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Proceutics:
Gain on sale of business $ 782,000 $ -- $ --
Gain on sale of real estate 434,000 -- --
Operations 171,000 (138,000) (1,448,000)
----------- ----------- -----------
1,387,000 (138,000) (1,448,000)
CytRx Animal Health:
Gain on sale of business 6,230,000 -- --
Operations (585,000) 868,000 (1,151,000)
----------- ----------- -----------
5,645,000 868,000 (1,151,000)
Vaxcel:
Impairment loss (3,213,000) -- --
Operations (1,721,000) (2,599,000) (1,124,000)
Minority interest 615,000 242,000 --
----------- ----------- -----------
(4,319,000) (2,357,000) (1,124,000)
----------- ----------- -----------
Net income (loss) from discontinued operations $ 2,713,000 $(1,627,000) $(3,723,000)
=========== =========== ===========
</TABLE>
The impairment charge recorded by Vaxcel in 1998 relates to acquired
developed technology and goodwill. See Note 11 to Financial Statements.
Inflation - Management believes that inflation had no material impact
on the Company's operations during the three year period ended December 31,
1998.
Market Risk - The Company's financial instruments that are sensitive to
changes in interest rates are its investments. The principal amount of
investments, which are all classified as held-to-maturity, was $14,874,000 at
December 31, 1998. All of the investments are zero coupon notes and mature in
early 1999. The weighted average yield-to-maturity of the investments at
December 31, 1998 was 5.18%. The fair value of investments at December 31, 1998
was $14,839,000. The Company is not subject to any other material market risks.
Year 2000 Issue
Introduction
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
State of Readiness
The Company has developed and is implementing a comprehensive plan (the
"Year 2000 Plan") for the Company to become Year 2000 ready by the middle of the
fourth quarter 1999. The Year 2000 Plan covers the following Company systems
(collectively, the "Systems"):
- the Company's business-critical information technology and
operating systems ("Critical IT Systems") which are comprised
substantially of commercial off-the-shelf software and other third
party software and hardware relating primarily to financial operations
and reporting, including accounts payable,
- the Company's non-critical information technology and
operating systems ("Non-Critical IT Systems") which also are
substantially comprised of commercial off-the-shelf software and other
third party software and hardware relating to, among others,
spreadsheet, word processing, and supporting and related operating
systems;
<PAGE> 6
- the systems of the Company's major vendors and other material
service providers ("Third Party Systems"); and
- the Company's non-information technology systems, including
embedded technology ("Non-IT Systems") relating to, among others,
security systems and HVAC.
The Year 2000 Plan consists of four phases: (i) awareness, (ii)
assessment, (iii) remediation, and (iv) creation of contingency plans in the
event of year 2000 failures. The Company has completed the awareness and
assessment phases of its Year 2000 Plan for all of its Systems, and is well
under way toward completing the remediation phase. As part of the assessment
phase, the Company has polled substantially all of the third parties who provide
material services to the Company regarding each third party's Year 2000
compliance plan and state of readiness. The Company has received responses
regarding Year 2000 compliance from most of such third parties, all of whom have
assured the Company that their hardware and/or software is or will be Year 2000
compliant. The Company is actively seeking responses from the remainder of such
third parties.
The initial actions in the remediation phase have already commenced in
that the Company, during 1998, replaced a significant portion of its desktop
computer systems. The Company intends to schedule any additional required
upgrades or replacements regarding its Systems beginning in the second quarter
of 1999 and ending during the fourth quarter of 1999.
Costs
To date, the Company has not incurred significant costs in connection
with the implementation of its Year 2000 Plan. Future costs may include, among
others, the engagement of outside consultants, upgrades or replacements of
hardware and software, and implementation of viable contingency plans. The
Company estimates such future costs will not exceed $25,000. The Company
expenses costs associated with the Year 2000 Plan as they are incurred.
Risks and Contingency Plans
The failure to remediate a material Year 2000 problem or develop and
implement a viable contingency plan could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect the Company's business, financial
condition and results of operations. Due to the general uncertainty inherent in
the Year 2000 issue, the Company is currently unable to determine the most
reasonably likely worst case Year 2000 scenarios or whether the Year 2000 issue
will have a material impact on the Company. The Company is creating contingency
plans intended to address perceived risks.
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,855,375 $ 5,895,008
Short-term investments 6,417,066 --
Accounts receivable 83,249 1,917,013
Note receivable 300,000 --
Inventories 10,935 2,272,798
Other current assets 10,377 29,157
----------- -----------
Total current assets 15,677,002 10,113,976
Property and equipment, net 195,030 4,713,586
Other assets:
Long-term investments (restricted) -- 5,326,647
Notes receivable -- 400,000
Acquired developed technology, net 600,000 3,454,356
Other assets 169,536 897,430
----------- -----------
Total other assets 769,536 10,078,433
----------- -----------
Total assets $16,641,568 $24,905,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 540,089 $ 1,273,303
Accrued expenses and other current liabilities 1,409,034 1,765,815
----------- -----------
Total current liabilities 1,949,123 3,039,118
6% Convertible debentures -- 2,000,000
Minority interest in Vaxcel, Inc. 3,897 618,482
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;
8,236,926 and 7,986,441 shares issued at December 31, 1998
and 1997, respectively 8,237 7,986
Additional paid-in capital 66,423,577 65,793,491
Treasury stock, at cost (625,816 and 555,154 shares held at
December 31, 1998 and 1997, respectively) (2,270,238) (2,198,533)
Accumulated deficit (49,473,028) (44,354,549)
----------- -----------
Total stockholders' equity 14,688,548 19,248,395
----------- -----------
Total liabilities and stockholders' equity $16,641,568 $24,905,995
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
----------- ----------- -----------
(restated) (restated)
<S> <C> <C> <C>
Revenues:
Net product sales $ 481,495 $ 456,029 $ 522,385
Net service revenues 350,789 422,039 357,517
Interest income 1,007,019 751,526 1,161,513
Collaborative, grant and license fee income 511,375 94,477 59,232
Other 244,353 535,303 338,169
----------- ----------- -----------
2,595,031 2,259,374 2,438,816
Expenses:
Cost of product sales 35,749 39,941 63,171
Cost of service revenues 187,047 242,343 171,462
Research and development 7,305,835 3,605,408 2,032,101
Selling, general and administrative 2,526,572 2,504,926 2,240,384
Interest 45,888 293,048 --
----------- ----------- -----------
10,101,091 6,685,666 4,507,118
----------- ----------- -----------
Loss from continuing operations before extraordinary item (7,506,060) (4,426,292) (2,068,302)
Income (loss) from discontinued operations 2,098,116 (1,869,187) (3,723,477)
Minority interest in discontinued operations (614,585) (242,487) --
----------- ----------- -----------
Loss before extraordinary item (4,793,359) (6,052,992) (5,791,779)
Extraordinary item:
Loss on early extinguishment of debt (325,120) -- --
----------- ----------- -----------
Net loss $(5,118,479) $(6,052,992) $(5,791,779)
=========== =========== ===========
Basic and diluted income (loss) per common share:
Continuing operations $ (0.99) $ (0.60) $ (0.27)
Discontinued operations 0.36 (0.22) (0.48)
Extraordinary item (0.04) -- --
----------- ----------- -----------
Net loss $ (0.67) $ (0.82) $ (0.75)
=========== =========== ===========
Basic and diluted weighted average shares outstanding 7,625,578 7,424,372 7,737,949
</TABLE>
See accompanying notes.
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional
Shares Paid-in Accumulated Treasury
Issued Amount Capital Deficit Stock Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,915,308 $7,915 $62,514,691 $(32,509,778) $ (242,343) $29,770,485
Issuance of common stock 29,895 30 138,324 138,354
Purchase of treasury stock (1,779,326) (1,779,326)
Net loss (5,791,779) (5,791,779)
--------------------------------------------------------------------------------
Balance at December 31, 1996 7,945,203 7,945 62,653,015 (38,301,557) (2,021,669) 22,337,734
Issuance of common stock 41,238 41 169,373 169,414
Purchase of treasury stock (176,864) (176,864)
Unrealized gain on sale of shares
of subsidiary 2,706,397 2,706,397
Beneficial conversion feature of
convertible debentures 264,706 264,706
Net loss (6,052,992) (6,052,992)
--------------------------------------------------------------------------------
Balance at December 31, 1997 7,986,441 7,986 65,793,491 (44,354,549) (2,198,533) 19,248,395
Issuance of common stock 250,485 251 630,086 630,337
Purchase of treasury stock (71,705) (71,705)
Net loss (5,118,479) (5,118,479)
--------------------------------------------------------------------------------
Balance at December 31, 1998 8,236,926 $8,237 $66,423,577 $(49,473,028) $(2,270,238) $14,688,548
================================================================================
</TABLE>
See accompanying notes.
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
CytRx Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,118,479) $ (6,052,992) $ (5,791,779)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 216,811 607,349 655,006
Amortization 282,732 145,644 --
Gain on sales of subsidiary operations (7,012,305) -- --
Gain on sale of real estate (433,786) -- --
Charge for acquired incomplete research and development -- 951,017 --
Charge for beneficial conversion feature of
convertible debentures -- 264,706 --
Impairment loss (discontinued operations) 3,212,615 -- --
Extraordinary loss on early extinguishment of debt 325,120
Minority interest in net loss of subsidiary (614,585) (242,487) --
Changes in assets and liabilities:
Receivables 1,082,390 (979,874) (552,002)
Inventories 1,037,197 (2,263,290) (3,190)
Notes receivable 100,000 -- (975,000)
Other assets 98,545 537,902 (162,443)
Accounts payable 208,884 640,383 320,795
Unearned revenue 172,380 (85,005) 251,192
Other liabilities (495,323) 382,053 200,103
----------- ------------ ------------
Total adjustments (1,819,325) (41,602) (265,539)
----------- ------------ ------------
Net cash used in operating activities (6,937,804) (6,094,594) (6,057,318)
Cash flows from investing activities:
Purchases of held-to-maturity securities (6,417,066) (22,103,140) (12,024,022)
Maturities of held-to-maturity securities -- 32,399,348 5,036,000
Decrease in long-term investments 5,326,647 -- --
Net proceeds from sales of subsidiary operations 8,336,985 -- --
Net proceeds from sale of real estate 4,260,747 -- --
Net cash paid for acquisition -- (1,257,974) --
Capital expenditures, net (13,317) (273,755) (530,051)
----------- ------------ ------------
Net cash provided by (used in) investing activities 11,493,996 8,764,479 (7,518,073)
Cash flows from financing activities:
Net proceeds from issuance of common stock 125,880 169,414 138,354
Redemption of debt (1,650,000) -- --
Purchase of treasury stock (71,705) (176,864) (1,779,326)
Proceeds from issuance of debt, net of issuance costs -- 1,803,366 --
----------- ------------ ------------
Net cash provided by (used in) financing activities (1,595,825) 1,795,916 (1,640,972)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,960,367 4,465,801 (15,216,363)
Cash and cash equivalents at beginning of year 5,895,008 1,429,207 16,645,570
----------- ------------ ------------
Cash and cash equivalents at end of year $ 8,855,375 $ 5,895,008 $ 1,429,207
=========== ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 45,888 $ 23,342 $ --
=========== ============ ============
</TABLE>
See accompanying notes
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CytRx Corporation and Subsidiaries
1. Nature of Business
CytRx Corporation ("CytRx" or "the Company") is a biopharmaceutical
company focused on the development and commercialization of high-value human
therapeutics. The Company's lead product is FLOCOR, now in pivotal Phase III
clinical trials for the treatment of acute sickle cell crisis. CytRx is also
developing FLOCOR for acute respiratory disorders and plans to expand its
development for other vascular disorders such as shock and stroke. CytRx is also
currently engaged in research in the areas of infectious disease, gene and drug
delivery, vaccines, and animal feed additives.
The Company's product sales from continuing operations include sales of
TiterMax research adjuvant. Titermax is currently sold worldwide through both
distributor and direct channels. The Company also markets the services of its
small group of human resources professionals under the name of Spectrum
Recruitment Research ("Spectrum") as a way of offsetting the Company's cost of
maintaining this function. Spectrum's services are marketed primarily within
metropolitan Atlanta, Georgia. The Company's operational focus is on the
development and commercialization of pharmaceutical products; the TiterMax and
Spectrum operations were formed as ancillary activities, and, while these
operations are profitable, the Company is not dependent on the cash flows which
they generate.
2. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include
the accounts of CytRx together with those of its majority-owned subsidiaries.
Certain prior year amounts have been reclassified to conform to the 1998
financial statement presentation. As more thoroughly discussed in Note 11, the
operations of Proceutics, Inc. ("Proceutics") and CytRx Animal Health, Inc.
("CytRx Animal Health") (formerly VetLife, Inc.), and Vaxcel, Inc. ("Vaxcel")
are presented as discontinued operations for all periods presented.
Reverse Stock Split - All share and per share information in the
accompanying consolidated financial statements and notes thereto has been
retroactively adjusted to reflect a one-for-four reverse stock split effected in
February 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 connection with a marketing and distribution
agreement, CytRx Animal Health was required to obtain a letter of credit in the
amount of $5 million in favor of the other party. Such unused letter of credit
was collateralized by approximately $5.3 million in cash equivalents and
investments at December 31, 1997. Such collateral was presented as long-term
investments in the accompanying consolidated balance sheet. (See Note 11).
Investments - Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Marketable
equity securities and debt securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses reported in a separate
component of stockholders' equity. Realized gains and losses are included in
investment income and are determined on a first-in, first-out basis (see Note
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, notes 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 are valued at the lower of cost or market
using the first-in, first-out (FIFO) method.
<PAGE> 12
Property and Equipment - Property and equipment are stated at cost and
depreciated using the straight-line method based on the estimated useful lives
(twenty years for buildings and five 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
11) 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. Any impairment loss is measured by comparing the fair
value of the asset to its carrying amount. As more fully discussed in Note 11,
management evaluated these assets during 1998 and has recorded a provision for
impairment of such assets.
Patents and Patent Application Costs - Although the Company believes
that its patents and underlying technology have continuing value, the amount of
future benefits to be derived therefrom is uncertain. Patent costs are therefore
expensed rather than capitalized.
Accrued Expenses and Other Current Liabilities - Accrued expenses and
other current liabilities at December 31 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Clinical research grants $ 370 $ --
Deferred revenue 261 166
Employee incentives 87 350
Distributor incentives -- 641
Other 691 609
------ ------
$1,409 $1,766
====== ======
</TABLE>
Basic and Diluted Loss per Common Share - 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 2,453,000 of its authorized but unissued shares of common stock
for future issuance pursuant to stock options and warrants and employee benefit
plans.
Revenue Recognition - Sales are recognized at the time 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 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 and
warrants 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 and warrants 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
and warrants for which the terms are fixed. For stock option grants and warrants
which vest based on certain corporate performance criteria, compensation expense
is recognized to the extent that the quoted market price per share exceeds the
exercise price on the date such criteria are achieved or are probable. 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. Stock
<PAGE> 13
options granted to consultants and certain third parties are valued at their
fair market value on the date the options vest and have been immaterial to date.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-based Compensation ("Statement 123"), which provides
an alternative to APB 25 in accounting for stock-based compensation issued to
employees. However, the Company has continued to account for stock-based
compensation in accordance with APB 25.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments. The Company maintains cash equivalents and
investments in large well-capitalized financial institutions and the Company's
investment policy disallows investment in any debt securities rated less than
"investment-grade" by national ratings services.
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.
Segment Information - Effective January 1, 1998, the Company adopted
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information ("Statement 131"). Statement 131 superceded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See Note 13.
3. Investments
At December 31, 1998 $8,457,000 and $6,417,000 of investments were
included in cash and cash equivalents and short-term investments, respectively,
in the accompanying consolidated balance sheets. At December 31, 1997,
$5,214,000 and $5,327,000 of investments were included in cash and cash
equivalents and long-term investments, respectively. The contractual maturities
of securities held at December 31, 1998 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. At
December 31, 1998 and 1997, the Company has classified all of its investments
(consisting entirely of corporate debt securities) as held-to-maturity, as
summarized below (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cost $14,874 $10,541
Gross Unrealized Gains 3 1
Gross Unrealized Losses (38) --
------- -------
Fair Market Value $14,839 $10,542
======= =======
</TABLE>
4. Property and Equipment
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----- -------
<S> <C> <C>
Land $ -- $ 220
Buildings and improvements -- 4,184
Equipment and furnishings 799 2,963
----- -------
799 7,367
Less accumulated depreciation (604) (2,653)
----- -------
$ 195 $ 4,714
===== =======
</TABLE>
5. 6% Convertible Debentures
In October 1997, the Company privately placed with certain investors
$2,000,000 of convertible notes (the "Debentures") maturing in October, 2001.
The Debentures were convertible on and after December 31, 1997 into shares of
CytRx Common Stock at a price of the lesser of (a) 85% of the average closing
bid price for the 10 days preceding the conversion, or (b) $5.68 per share. Such
beneficial conversion feature was determined to have a fair value of $265,000 at
the date of issuance and was amortized to interest expense from the date of
issuance through the date the Debentures first became convertible. The
Debentures were sold at par and bore interest at a rate of 6% per annum. The
provisions for
<PAGE> 14
conversion of the Debentures allowed the Company, at its discretion, to disallow
conversions below $4.00 per share by redeeming the amount attempted to be
converted at a 10% premium. Also in connection with the issuance of the
Debentures, 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 February and March 1998, $500,000 of the Debentures were converted
into 204,104 shares of common stock. In February and May 1998, $1,500,000 of the
Debentures were redeemed by the Company and total redemption premiums of
$150,000 were paid. In addition, $175,000 of previously capitalized debt issue
costs were expensed. The redemption premiums and debt issue costs are reflected
as an extraordinary item in the statement of operations as loss on early
extinguishment of debt. At December 31, 1998 there were no remaining outstanding
Debentures.
6. Commitments and Contingencies
Rental expense from continuing operations under operating leases
during 1998, 1997 and 1996 approximated $154,000, $13,000 and $14,000,
respectively. Minimum annual future obligations for operating leases are
$164,000, $163,000, $167,000, $171,000, $178,000 and $863,000 in 1999, 2000,
2001, 2002, 2003, and 2004 and beyond, respectively. Aggregate minimum future
subrentals the Company expects to receive under noncancellable subleases total
approximately $38,000 at December 31, 1998.
7. Stock Options and Warrants
CytRx and Vaxcel have stock option plans pursuant to which certain key
employees and directors are eligible to receive incentive and/or nonqualified
stock options to purchase shares of CytRx's or Vaxcel'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. Certain options
granted to the Company's executive officers and others contain alternative or
additional vesting provisions based on the achievement of corporate objectives.
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 warrant agreements; 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. During 1998, the Company repriced all outstanding options and warrants
held by current employees to the then current market value. No compensation
expense was recorded for the three years ended December 31, 1998; however, as of
March 9, 1999, the vesting criteria for 680,238 options and warrants had been
achieved, resulting in $735,500 of compensation expense which will be recorded
in the first quarter of 1999.
A summary of the Company's stock option and warrant activity and
related information for the years ended December 31 is shown below.
<TABLE>
<CAPTION>
Options and Warrants Weighted Average Exercise Price
------------------------------------ -------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 1,439,297 1,237,031 1,018,289 $4.87 $5.00 $ 6.08
Granted 902,488 221,700 275,688 2.65 4.35 3.72
Exercised -- -- -- -- -- --
Forfeited (83,477) (19,434) (56,946) 4.37 6.64 20.44
Expired -- -- -- -- -- --
---------- ---------- ---------- ----- ----- ------
Outstanding - end of year 2,258,308 1,439,297 1,237,031 $1.17 $4.87 $ 5.00
========== ========== ==========
Exercisable at end of year 1,104,620 940,541 874,946 $1.33 $5.22 $ 5.22
Weighted average fair value
of options and warrants
granted during the year: $ 2.30 $ 3.97 $ 3.39
</TABLE>
The following table summarizes additional information concerning
options and warrants outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------- -----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Number Average
Exercise Prices Number of Shares Life (years) Exercise Price Exercisable Exercise Price
--------------- ---------------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .75 - 1.00 2,189,206 7.3 $ .99 1,045,518 $ 1.00
2.75 - 5.00 23,750 4.8 3.96 16,750 4.25
6.50 - 7.75 34,414 5.2 7.27 29,414 7.19
9.125 - 31.00 10,938 5.7 12.01 10,938 12.01
--------- ---------
2,258,308 7.3 1.17 1,104,620 1.33
========= =========
</TABLE>
<PAGE> 15
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
--------------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 847,000 794,453 735,000 $1.63 $1.50 $1.50
Granted 510,000 63,000 73,620 .63 3.18 1.50
Exercised -- (5,333) -- -- 1.50 --
Forfeited (281,500) (5,120) (14,167) 1.73 1.50 1.50
--------- ------- --------
Outstanding - end of year 1,075,500 847,000 794,453 $1.12 $1.63 $1.50
========= ======= ========
Exercisable at end of year 160,661 293,663 184,332 $1.68 $1.57 $1.50
Weighted average fair value of
options granted during the year $ .42 $ 1.82 $ 0.83
</TABLE>
The exercise prices for Vaxcel's options outstanding as of December 31,
1998 ranged from $.63 to $3.25. The weighted average remaining contractual life
of those options is 6.2 years.
The Company and Vaxcel have elected to follow APB 25 and related
Interpretations in accounting for their employee stock options and warrants
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.
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 Vaxcel had accounted for their employee stock options granted
and warrants issued subsequent to December 31, 1994 under the fair value method
of that Statement. The fair value for the Company's options and warrants was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Weighted average risk free interest rate 5.64% 6.22% 6.30%
Dividend yields 0% 0% 0%
Volatility factors of the expected market
price of the Company's common stock 1.026 1.055 1.12
Weighted average life of the option 8 8 8
(years)
</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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average risk free interest rate 5.83% 6.53% 6.34%
Dividend yields 0% 0% 0%
Volatility factors of the expected market
price of the subsidiary's common stock .563 .585 .378
Weighted average life of the option 8 8 8
(years)
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's and its subsidiary's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options and warrants 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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Pro forma net loss $(6,521) $(6,969) $(6,343)
Pro forma net loss per share
(basic and diluted) $ (.86) $ (.94) $ (.82)
</TABLE>
<PAGE> 16
8. 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 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 acquirors.
9. 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, 1998, 1997
and 1996 was approximately $110,000, $176,000 and $156,000, respectively, of
which $44,000, $120,000 and $95,000 related to discontinued operations for the
years ended December 31, 1998, 1997 and 1996, respectively.
10. Income Taxes
For income tax purposes, CytRx and its subsidiaries have an aggregate
of approximately $49.2 million of net operating losses available to offset
against future taxable income, subject to certain limitations. Included in this
amount is $3,360,000 of net operating losses generated by Zynaxis prior to the
merger. See discussion below. Such losses expire in 2000 through 2018. They also
have an aggregate of approximately $1.2 million of research and development
credits available for offset against future income taxes which expire in 2000
through 2010.
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,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 18,677,000 $ 16,942,000
Tax credit carryforward 1,245,000 1,096,000
Other 1,218,000 1,396,000
------------ ------------
Total deferred tax assets 21,140,000 19,434,000
Deferred tax liabilities:
Acquired developed technology and other (228,000) (1,556,000)
intangibles
Depreciation and other (143,000) (194,000)
------------ ------------
Total deferred tax liabilities (371,000) (1,750,000)
------------ ------------
Net deferred tax assets 20,769,000 17,684,000
Valuation allowance (20,769,000) (17,684,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
Based on assessments of all available evidence as of December 31, 1998
and 1997, 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.
<PAGE> 17
The total amount of net operating loss carryforwards generated by
Zynaxis, Inc. prior to its merger with Vaxcel (see Note 11) 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 related only to $3,360,000 of net operating losses not
anticipated to be affected by these limitations. A corresponding valuation
allowance of $1,277,000 has been recorded. 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.
11. Discontinued Operations
Vaxcel, Inc.
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. The warrant expired unexercised.
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.
In accordance with the provisions of APB Nos. 16 and 17, all
identifiable assets acquired, including identified intangible assets and
liabilities assumed, were assigned a portion of the purchase price based on
their respective fair values. The fair values of the acquired developed
technology and incomplete research and development were determined based on an
independent appraisal. A summary of the allocation of the purchase price is as
follows (in thousands):
<TABLE>
<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>
Presentation as Discontinued Operations - During 1998, Vaxcel's Board
of Directors retained an investment banking firm to introduce Vaxcel and its
technology licenses to the trade with the purpose of concluding a strategic
transaction for the benefit of the Vaxcel shareholders. The Company was
considering all available options for the disposition of Vaxcel, including
license or sale of specific technologies and possible merger with another
organization. Based on the results of the investment banking firm's efforts and
management's reevaluation of CytRx's strategic direction, in the fourth quarter
of 1998 the Company adopted a plan to dispose of the research and development
activities in which Vaxcel is engaged. The Company intends to complete the plan
during 1999. As a result of adopting such a plan, the operations of Vaxcel are
presented as discontinued operations in the accompanying consolidated statements
of operations. The results of operations
<PAGE> 18
of Vaxcel have been reclassified from income (loss) from continuing operations
to discontinued operations for the two years ended December 31, 1997.
Net losses (net of minority interest) associated with Vaxcel included
in income (loss) from discontinued operations were approximately $(4,319,000),
$(2,357,000) and $(1,124,000) for the years ended December 31, 1998, 1997 and
1996, respectively. See discussion below regarding the 1998 impairment loss. A
summary of the assets and liabilities of Vaxcel which are included in the
consolidated balance sheets at December 31, 1998 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current assets $314 $ 833
Property and equipment, net 7 74
Other assets 655 4,551
---- ------
Total assets $976 $5,458
==== ======
Total liabilities $618 $ 167
==== ======
</TABLE>
Impairment Loss - In its efforts to raise additional capital, Vaxcel has been
soliciting bids for the sublicense or purchase of Vaxcel's acquired developed
technology, either together with or separately from Vaxcel's other technologies.
During the fourth quarter, the results of the investment firms's efforts
indicated to management that the acquired developed technology might be
impaired. As a result of this indication, Vaxcel performed an evaluation to
determine, in accordance with Statement 121, whether future cash flows
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of the acquired developed technology would be less than its
aggregate carrying amount and an allocation of goodwill resulting from the
Zynaxis merger. Statement 121 requires that when a group of assets being tested
for impairment was acquired as part of a business combination accounted for
using the purchase method of accounting, any goodwill that arose as part of the
transaction must be included as part of the asset grouping. As a result of the
evaluation, management determined that the estimated future cash flows expected
to be generated by the acquired developed technology would be less than its
carrying amount and allocated goodwill, and therefore the asset is impaired as
defined by Statement 121. Consequently, the original cost basis of the acquired
developed technology and allocated goodwill were reduced to reflect the fair
market value at the date the evaluation was made, resulting in a $3,213,000
impairment loss. In determining the fair market value of the asset, management
considered the transaction described below, among other factors.
Potential Sale of Technology - In January 1999, Vaxcel entered into an agreement
with a third party giving the third party the option to purchase the rights to
certain of its technologies for an aggregate purchase price of $600,000. The
third party paid a nonrefundable option fee of $200,000, with an additional
$400,000 due upon the exercise of the option. The initial option period expires
on March 22, 1999, subject to extension upon payment of additional fees by the
third party.
Proceutics, Inc.
In February 1998, CytRx's wholly-owned subsidiary, Proceutics
consummated a sale of substantially all of its non-real estate assets to Oread
Laboratories, Inc. ("Oread") for approximately $2.1 million. Proceutics retained
its real estate assets consisting of a laboratory building which it leased to
Oread. The laboratory building was subsequently sold in May 1998 (see Note 12).
Prior to consummation of this transaction, Proceutics provided preclinical
development services to the pharmaceutical industry.
Net income (loss) associated with Proceutics included in income (loss)
from discontinued operations was approximately $1,387,000, $(138,000) and
$(1,448,000) for the years ended December 31, 1998, 1997 and 1996, respectively
(see Note 13). A $782,000 gain related to the sale of non-real estate assets is
included in income from discontinued operations for 1998, as well as a $434,000
gain on the sale of Proceutics' real estate assets (see Note 12). A summary of
the assets and liabilities of Proceutics which were sold and which are included
in the consolidated balance sheet at December 31, 1997 is as follows (in
thousands):
<TABLE>
<S> <C>
Current assets $ 721
Property and equipment, net 696
------
Total assets $1,417
------
Total liabilities $ 228
======
</TABLE>
CytRx Animal Health, Inc.
In April 1998, CytRx's wholly-owned subsidiary, CytRx Animal Health,
consummated the sale of substantially all of its assets related to its cattle
marketing operations to VetLife, LLC ("VL LLC") (an unaffiliated company) for a
total
<PAGE> 19
purchase price of $7,500,000, subject to certain working capital adjustments,
plus contingent payments based on certain events and future sales of specified
products of VL LLC and its affiliates that, if made in full, could total up to
$5,500,000. CytRx Animal Health retained $5.3 million in investments that were
pledged to secure a letter-of-credit, as well as the rights to certain
technologies licensed from CytRx. Prior to consummation of this transaction,
CytRx Animal Health was engaged in marketing and distributing products to
enhance North American beef cattle productivity.
Net income (loss) associated with CytRx Animal Health included in
income (loss) from discontinued operations was approximately $5,645,000,
$868,000 and $(1,151,000) for the years ended December 31, 1998, 1997 and 1996,
respectively (see Note 13). A gain related to the sale of $6,230,000 is included
in income from discontinued operations for 1998. A summary of the assets and
liabilities of CytRx Animal Health which were sold and which are included in the
consolidated balance sheet at December 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Current assets $3,695
Property and equipment, net 100
------
Total assets $3,795
======
Total liabilities $2,048
======
</TABLE>
12. Sale of Real Estate
In May 1998, CytRx and Proceutics consummated the sale of the two
buildings owned by them at 150 and 154 Technology Parkway, Norcross, Georgia, to
Alexandria Real Estate Equities, Inc. ("Alexandria") for $4.5 million.
Proceutics' rights and obligations under the lease to Oread (See Note 11) were
assigned to Alexandria, and CytRx leases the building at 154 Technology Parkway
from Alexandria. CytRx will also be responsible for all operating expenses for
the property. Proceutics recorded a gain of $434,000 for the sale of the its
building. A gain of $279,000 on the sale/leaseback of the CytRx building was
deferred and will be amortized over the ten year lease period.
13. Segment Reporting
The Company has six reportable segments: Research Products (TiterMax),
Recruiting Services (Spectrum), Product Development (core business of
development and commercialization of pharmaceutical-related products), Cattle
Marketing Operations (CytRx Animal Health), Vaccine Development (Vaxcel) and
Pharmaceutical Services (Proceutics). See Notes 1 and 11 for a description of
these operations.
The Company adopted FASB Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information, in 1998 which changes the way the
Company reports information about its operating segments. The information for
1997 and 1996 has been restated from the prior year's presentation in order to
conform to the 1998 presentation. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies (see Note 1). The Company evaluates performance of its
operating segments based primarily on profit or loss from operations before
income taxes. Summarized financial information concerning the Company's
reportable segments is shown in the following table.
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
----------------------------------------------- -------------------------------------------------
Total Cattle Pharma- Total
Research Recruiting Product Continuing Marketing ceutical Vaccine Discontinued
(in thousands) Products Services Development Operations Operations Services Development Operations
- --------------------------- -------- -------- ----------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Sales to external customers $481 $351 $ -- $ 832 $ 4,383 $ 419 $ -- $ 4,802
Intersegment sales -- -- -- -- -- 131 -- 131
Collaborative, grant & other -- -- 756 756 -- -- 167 167
revenue
Interest income -- -- 1,007 1,007 -- 22 13 35
Interest expense -- -- 46 46 -- 3 7 10
Depreciation and amortization -- -- 120 120 8 78 294 380
Unusual Items:
Gain on sale of business -- -- -- -- 6,230 782 -- 7,012
Gain on sale of real estate -- -- -- -- -- 434 -- 434
Provision for asset impairment -- -- -- -- -- -- 3,213 3,213
Loss on early debt
extinguishment -- -- 325 325 -- -- -- --
Segment profit (loss) 231 114 (8,176) (7,831) 5,645 1,387 (4,319) 2,713
Total assets -- -- 15,666 15,666 -- -- 976 976
Capital expenditures -- -- 112 112 -- 12 4 16
1997:
Sales to external customers 456 422 -- 878 13,469 1,984 -- 15,453
Intersegment sales -- -- -- -- -- 853 -- 853
Collaborative, grant & other
revenue -- -- 630 630 -- -- 243 243
Interest income -- -- 752 752 -- 2 46 48
Interest expense -- -- 293 293 -- 36 1 37
Depreciation and amortization -- -- 171 171 16 365 201 582
Segment profit (loss) 193 77 (4,696) (4,426) 868 (138) (2,357) (1,627)
Total assets -- -- 11,477 11,477 3,795 4,176 5,458 13,429
Capital expenditures -- -- 98 98 11 165 -- 176
1996:
Sales to external customers 522 358 -- 880 711 1,004 -- 1,715
Intersegment sales -- -- -- -- -- 627 -- 627
Collaborative, grant & other
revenue -- -- 397 397 -- -- 128 128
Interest income -- -- 1,162 1,162 -- 2 7 9
Interest expense -- -- -- -- -- 25 -- 25
Depreciation and amortization -- -- 151 151 15 437 52 504
Segment profit (loss) 173 28 (2,269) (2,068) (1,151) (1,448) (1,124) (3,723)
Total assets -- -- 18,869 18,869 735 4,317 378 5,430
Capital expenditures -- -- 76 76 115 336 3 454
</TABLE>
<PAGE> 20
Report of Independent Auditors
The Board of Directors and Stockholders
CytRx Corporation
We have audited the accompanying consolidated balance sheets of CytRx
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 9, 1999
<PAGE> 1
EXHIBIT 21.1
CYTRX CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage
Name of Subsidiary State of Incorporation of Ownership
------------------------- ---------------------- ------------
<S> <C> <C>
Custom Adjuvants, Inc. Georgia 100%
Proceutics, Inc. Delaware 100%
CytRx Animal Health, Inc. Delaware 100%
Vaxcel, Inc. Delaware 87.5%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of CytRx Corporation of our report dated March 9, 1999, included in the 1998
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 333-31717 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
March 9, 1999, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of CytRx Corporation.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,855,375
<SECURITIES> 6,417,066
<RECEIVABLES> 383,249
<ALLOWANCES> 0
<INVENTORY> 10,935
<CURRENT-ASSETS> 15,677,002
<PP&E> 799,439
<DEPRECIATION> 604,409
<TOTAL-ASSETS> 16,641,568
<CURRENT-LIABILITIES> 1,949,123
<BONDS> 0
0
0
<COMMON> 8,237
<OTHER-SE> 14,680,311
<TOTAL-LIABILITY-AND-EQUITY> 16,641,568
<SALES> 481,495
<TOTAL-REVENUES> 2,595,031
<CGS> 35,749
<TOTAL-COSTS> 222,796
<OTHER-EXPENSES> 9,878,295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,888
<INCOME-PRETAX> (7,506,060)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,506,060)
<DISCONTINUED> 2,712,701
<EXTRAORDINARY> (325,120)
<CHANGES> 0
<NET-INCOME> (5,118,479)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CYTRX
CORPORATION'S SEC FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,429,207
<SECURITIES> 9,564,827
<RECEIVABLES> 643,079
<ALLOWANCES> 0
<INVENTORY> 9,508
<CURRENT-ASSETS> 12,179,020
<PP&E> 7,059,101
<DEPRECIATION> 2,046,292
<TOTAL-ASSETS> 24,299,322
<CURRENT-LIABILITIES> 1,961,588
<BONDS> 0
0
0
<COMMON> 7,945
<OTHER-SE> 22,329,789
<TOTAL-LIABILITY-AND-EQUITY> 24,299,322
<SALES> 522,385
<TOTAL-REVENUES> 2,438,816
<CGS> 63,171
<TOTAL-COSTS> 234,633
<OTHER-EXPENSES> 4,272,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,068,302)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,068,302)
<DISCONTINUED> (3,723,477)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,791,779)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CYTRX
CORPORATION'S SEC FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,895,008
<SECURITIES> 0
<RECEIVABLES> 1,917,013
<ALLOWANCES> 0
<INVENTORY> 2,272,798
<CURRENT-ASSETS> 10,113,976
<PP&E> 7,367,227
<DEPRECIATION> 2,653,641
<TOTAL-ASSETS> 24,905,995
<CURRENT-LIABILITIES> 3,039,118
<BONDS> 2,000,000
0
0
<COMMON> 7,986
<OTHER-SE> 19,240,409
<TOTAL-LIABILITY-AND-EQUITY> 24,905,995
<SALES> 456,029
<TOTAL-REVENUES> 2,259,374
<CGS> 39,941
<TOTAL-COSTS> 282,284
<OTHER-EXPENSES> 6,403,382
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293,048
<INCOME-PRETAX> (4,426,292)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,426,292)
<DISCONTINUED> (1,626,700)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,052,992)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> (.82)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT
FOR
FORWARD-LOOKING STATEMENTS
CytRx Corporation ("CytRx") intends to qualify both its written and oral
forward-looking statements for protection under Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and any other similar safe harbor provisions.
Generally, forward-looking statements include expressed expectations of
future events and the assumptions on which the expressed expectations are
based. All 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, investors are urged not to place undue reliance
on written or oral forward-looking statements of CytRx. CytRx undertakes no
obligation to update or revise this Safe Harbor Compliance Statement for
Forward-Looking Statements to reflect future developments. In addition, CytRx
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.
CytRx 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 Securities Act of 1933 and the Securities
Exchange Act of 1934 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 to which this statement is appended
as an exhibit and also include the following:
WE MAY NOT HAVE ADEQUATE FUNDS TO CONTINUE PRODUCT TESTING AND RESEARCH AND
DEVELOPMENT
On December 31, 1998, we had approximately $8,850,000 in cash and cash
equivalents and $6,400,000 in short-term investments. We believe that our
current funds will satisfy our projected liquidity and working capital needs
through the first quarter of 2000. However, we may not have adequate funds to
conduct the required testing and data collection for the FDA to approve FLOCOR
or any of our other products. If we have insufficient funds, we will have to
either:
1. severely reduce or terminate testing and research and development
activities with respect to some or all of our products; or
2. obtain additional financing from third parties to fund the required
testing.
<PAGE> 2
Our reduction in, or termination of, testing and research and development
activities could have a material adverse impact on our business and future
results of operations. If we elect to attempt to obtain additional financing,
we may be unable to obtain funds from any third party or to obtain such
financing on terms that we believe are acceptable. Our inability to obtain
additional financing could have a material adverse effect on our business and
future results of operations. See "We Will Require Additional Financing."
WE HAVE NO SIGNIFICANT SOURCE OF REVENUE FROM OUR OPERATIONS
We will require substantial funds to complete
- research and development activities,
- preclinical studies and testing activities, and
- required data collection and other activities required for FDA review.
We currently have no significant source of operating revenue. Our inability to
generate revenues in amounts adequate to satisfy our operating needs may have a
material adverse effect on our business and may cause us to depend on raising
funds by borrowing from third parties or by entering into collaborative
relationships with third parties. See "We Will Require Additional Financing."
During the first half of 1998, we sold substantially all of the assets of
two of our operating subsidiaries to raise capital, which we plan to use for
funding the clinical trials and continued research and development for FLOCOR
and our other pharmaceutical products. Those two subsidiaries accounted for
substantially all of our operating revenues for 1997.
Our total revenues for 1998 were approximately $2.6 million. Approximately
47% of our 1998 revenues or $1.2 million consisted of non-operating revenue such
as interest income and grants from government agencies. Approximately 32% of
our 1998 revenues or $830,000 was derived from selling our services and products
(mainly consisting of TiterMax).
If the FDA does not approve the commercialization of FLOCOR or one of our
other pharmaceutical products, we may not be able to generate significant
revenues for an extended period of time, which would have a material adverse
effect on our business, financial condition and future results of operations.
WE HAVE OPERATED AT A LOSS FOR OVER FIVE YEARS AND WILL PROBABLY CONTINUE TO
OPERATE AT A LOSS FOR SOME TIME
- 2 -
<PAGE> 3
We have incurred significant net losses for each of the last five years.
Our inability to operate at a profit in the future could have a material adverse
effect on our business and financial condition. Since our inception, we have
primarily conducted research and development of our products. The costs of our
research and development and our lack of operating revenues has resulted in our
net losses. We will continue to incur substantial additional losses in the near
future because we are continuing to conduct research and development of our
products while we continue to fail to generate any significant revenues.
We will probably incur losses until one or more of our products is
approved by the FDA and that product has achieved significant sustained
commercial sales. The activities required for the FDA review process of a new
pharmaceutical are extremely costly and usually take several years. See "We
May Incur Substantial Unanticipated Costs If We Have Significant Delays in the
Regulatory Approval of Our Products." Also, we may never obtain FDA approval
of any of our products currently under development.
WE WILL REQUIRE ADDITIONAL FINANCING
We believe that are current funds are adequate to satisfy our projected
liquidity and working capital needs until the first quarter of 2000. However,
we believe that we do not have enough funds (1) to complete the required
testing and data collections necessary to obtain regulatory approval of FLOCOR
or any of our other products currently under development or (2) to manufacture,
market, and distribute any of our products, if we obtain FDA approval with
respect to that product. The initiation of the Phase III clinical trials for
FLOCOR and the related activities in preparation for its commercialization has
greatly increased our need for capital.
We may have to raise additional funds through an equity or debt offering,
a third party loan, or a third party collaborative arrangement. We may be
unable to obtain any financing when we need it or on terms that we believe to
be acceptable. Our inability to raise the required additional financing when
we need it could have a material adverse effect on our business and financial
condition, and could result in the termination of our operations.
In addition, if we are able to obtain financing when we require it, such
financing may be on terms which may result in dilution to our then-existing
stockholders.
WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE OUR PRODUCTS
Our overall success substantially depends on our ability to successfully
develop and commercialize our products. Our inability to successfully develop
and commercialize our products could have a material adverse effect on our
business, financial condition and future results of operations.
Our products are in various stages of development and significant amounts
of time and money will be required to develop and commercialize them. Cost
overruns
- 3 -
<PAGE> 4
caused by unanticipated regulatory delays or unexpected adverse side effects
could end or substantially delay our development efforts. We also may be
unable to obtain FDA approval of those products, if we are unable to prove to
the FDA that those products are safe and effective.
Even if we are able to obtain FDA approval of one or more of our products,
we may not have adequate financial or other resources, or the expertise to
successfully commercialize, market and distribute those products. If we do not
have adequate resources or the expertise to successfully commercialize our
products, we may rely on third parties to provide financial or other resources
to help us commercialize those products or we may have such third parties
market and distribute our products for us. In order to enter into any such
arrangements with a third party, we may have to give up some or all of our
rights to some of our products. Also, we may be unable to find a third party
willing to provide us with resources or to market and distribute our products.
Even if we find a willing third party, we may not be able to reach an agreement
on terms that we believe are acceptable. Our inability to successfully
commercialize our products, alone or with the assistance of third parties, may
have a material adverse effect on our business, financial condition and future
results of operations.
WE MAY INCUR SUBSTANTIAL UNANTICIPATED COSTS IF WE HAVE SIGNIFICANT DELAYS IN
THE REGULATORY APPROVAL OF OUR PRODUCTS
Our products are subject to extensive regulation by federal, state and
local governments in the United States, including the FDA, and similar agencies
in other countries where we test and intend to market our current and future
products. Regulatory approval of a product can take several years and requires
the expenditure of substantial resources. If we experience significant delays
in the regulatory approval process of our products, we may incur substantial
unanticipated additional costs. Because we generate insignificant revenues
from operations and we have limited funds, if we incur substantial
unanticipated costs, we may have to seek additional financing earlier than we
had anticipated. At that time, we may be unable to obtain additional financing
or financing on terms that we believe are acceptable. Our inability to obtain
additional financing to complete the regulatory approval process could have a
material adverse effect on our business, financial condition and our ability to
continue to operate.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE AGAINST OTHER PHARMACEUTICAL AND
BIOTECHNOLOGY COMPANIES
Our competitors mainly consist of pharmaceutical and biotechnology
companies. Many of those companies have advantages over us, including the
following:
- substantially greater financial resources and research and
development staffs,
- substantially superior facilities,
- more extensive experience regarding FDA and other regulatory
processes,
- 4 -
<PAGE> 5
- greater manufacturing and marketing expertise, and
- alliances with major pharmaceutical companies that may afford
greater resources and other advantages.
If our competitors develop better products than us; or if they develop their
products and obtain regulatory approval faster than us; or if they more
successfully manufacture, market and distribute their products than us, then
that could have a material adverse effect on our business and future results of
operations.
WE MAY BE UNABLE TO ESTABLISH AND MAINTAIN NECESSARY RELATIONSHIPS WITH THIRD
PARTIES
We may have to rely on third parties to enable us to offer our products to
a larger customer base than we could otherwise reach through direct marketing
efforts. Consequently, our success will depend in part on our ability to enter
into relationships with strategic partners and the performance of those
partners. We may be unable to find third parties willing to enter into a
relationship with us or to enter a relationship on terms that are acceptable to
us. Also, we may be unable to maintain any relationships once we have formed
them. Our inability to establish and maintain such third party relationships
or the unsuccessful performance of one or more of our strategic partners could
have a material adverse effect on our business, financial condition and future
results of operations. If we are unable to establish and maintain third party
relationships, or if such third parties are unsuccessful, we may have to
establish our own marketing and distribution channels for our products. We may
not have the available financial or other resources at such time to establish
our own marketing or distribution channels. Our inability to develop our own
marketing and distribution channels in such case could have a material adverse
effect on our business and financial condition, and could result in the
termination of our operations.
WE DEPEND ON CERTAIN SUPPLIERS FOR AN ADEQUATE SUPPLY OF MATERIALS
We require three suppliers of materials or services to manufacture FLOCOR.
These consist of a supplier of the raw drug substance, a supplier of the
purified drug which is refined from the raw drug and a manufacturer who can
formulate and sterile fill the purified drug substance into the finished drug
product. Our inability to maintain relationships with those suppliers could
result in (1) lengthy delays in the FDA and other regulatory agencies approval
processes, causing us to incur substantial unanticipated costs or (2) our
inability to produce, market and distribute our product. Such delays or
inability could have a material adverse effect on our business, financial
condition and future results of operation.
We have not entered into an agreement with any supplier for the raw drug
substance because we believe that it is widely available.
- 5 -
<PAGE> 6
We have entered into an agreement with a French company to obtain the
purified drug substance for use in clinical trials and we are negotiating with
another supplier for a commercial supply contract. If our current supply is
inadequate to complete the FDA approval process, we may be unable to obtain the
necessary additional purified drug substance or to obtain it on terms
acceptable to us.
We have also entered into an agreement with the Hospital Products Division
of Abbott Laboratories for the manufacture of our finished drug product. Our
inability to maintain such relationship on terms acceptable to us or to replace
such supplier if it fails to adequately perform could have a material adverse
effect on our business, financial condition and future results of operations.
WE DEPEND ON CERTAIN MEMBERS OF MANAGEMENT FOR FUTURE SUCCESS
We depend to a significant extent on the members of the management staff,
particularly Jack J. Luchese, for our future success. We may be unable to
retain his services or the services of such members of management, or to
replace them with qualified skilled individuals. Our loss of the services of
Mr. Luchese or any of the other members of management could have a material
adverse effect on our business and future results of operations. We have an
employment agreement with Mr. Luchese, however, we would be unable to prevent
him from terminating his employment with us. Also, we carry no key man life
insurance on the life of Mr. Luchese or any other member of the management
team.
WE MAY INCUR SUBSTANTIAL COSTS AND LIABILITY FROM PRODUCT LIABILITY CLAIMS
We may be exposed to claims for person injury resulting from allegedly
defective products. Even if the commercialization of one or more of our
products is approved by the FDA, users may claim that such product caused
unintended adverse effects. We currently carry product liability insurance
covering the use of our products in human clinical trials and may extend that
coverage to third parties who collaborate with us on the development of our
products. However, if a claim is successfully asserted against us and the
amount of such claims exceeds our policy limits or is not covered by our
policy, such successful claim may have a material adverse effect on our
business.
Even if claims asserted against us are unsuccessful, they may divert
management's attention from our operations and we may have to incur substantial
costs to defend such claims. If a significant number of claims are asserted
against us, regardless of whether they are successful, they may have a material
adverse effect on our operations and business.
WE DEPEND ON OUR PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS FOR OUR FUTURE
SUCCESS
- 6 -
<PAGE> 7
Our future success, if any, will depend in a substantial part, on our
ability to protect our products by obtaining patents covering them in the
United States and other countries. If we are unable to obtain patents covering
our products, other companies may develop, manufacture, market and distribute
products similar to or the same as our products. Our inability to obtain
patents in each country in which we intend to market our products or our
inability to successfully challenge third party infringement of our patent
claims could have a material adverse effect on our business and future results
of operations.
Third parties may challenge the validity of our patents through challenges
filed with the United States Patent and Trademark Office and its foreign
equivalents or through lawsuits. Third parties may also claim that our
products infringe their rights under their patents. If a third party
successfully asserts an infringement claim against us, we may be prevented from
practicing the subject matter claimed in such third party's patents or we could
be required to obtain licenses or redesign our products to avoid infringement.
If any of our patents are successfully challenged, or any of our products are
determined to infringe on the rights of others, we may incur substantial
additional costs which may have a material adverse effect on our business,
financial condition and future results of operations.
In addition, we depend on our trade secrets, proprietary know-how and
continuing technological innovation, which we seek to protect with
confidentiality agreements with our employees, consultants and collaborators.
However, we may be unable to prevent an employee, consultant or collaborator
from disclosing trade secrets, know-how or other information. If we are unable
to prevent such disclosure, we may have a cause of action against the
disclosing party for only monetary damages, which may not be an adequate remedy
compared to the harm we may have suffered from the disclosure. Our inability
to adequately protect our proprietary information and trade secrets could have
a material adverse effect on our business, financial condition and future
results of operations.
WE MAY BE UNABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF THEIR COSTS ARE NOT
ADEQUATELY REIMBURSED BY GOVERNMENT AND THIRD PARTY PAYORS
The success of each of our products will depend in part upon the extent to
which a consumer will be able to obtain reimbursement for the cost of such
product from government health administration authorities, private health
insurers and other organizations. We are uncertain as to the reimbursement
status of any of our products that we are currently developing. Government and
other third party payors are increasingly attempting to decrease health care
costs by refusing to provide coverage for products that have not been approved
by the FDA, and by limiting the coverage and reimbursement levels for new
products approved by the FDA. If the government and other third party payors
do not adequately cover our products, the market may not accept our products.
The lack of market acceptance could have a material adverse effect on our
business, financial condition and future results of operations. We have
initiated discussions with consultants and other advisors who will help us to
develop a strategy for seeking adequate reimbursement from the government and
other third party payors for
- 7 -
<PAGE> 8
However, we will be unable to finalize our strategy until we have obtained all
of the required regulatory approvals for Flocor and established its market
price.
GOVERNMENT PRICING REGULATION MAY REDUCE OUR FUTURE REVENUES AND PROFITABILITY
Our future revenues and profitability may be affected by the continuing
efforts of governments to decrease or contain the costs of health care through
the regulation of the pricing and profitability of pharmaceutical products. We
are unable to predict whether any federal, state, local or foreign governments
will adopt such regulations. However, if such regulations are adopted, they
could have a material adverse effect on our business and future results of
operations.
WE MAY INCUR SUBSTANTIAL COSTS AND LIABILITY UNDER ENVIRONMENTAL AND HAZARDOUS
MATERIALS LAWS
Our research and development activities involve the use of hazardous
materials, which are subject to federal, state and local laws regarding the
use, manufacture, storage, handling and disposal of such materials. Although
we believe that we comply with applicable environmental laws and regulations,
we are unable to completely eliminate the risk of accidental contamination or
injury from our hazardous materials and other waste products. If an accident
or injury were to occur, we could be liable for any damages that result and any
such liability could exceed our resources, which could have a material adverse
effect on our business.
In addition, we may have to incur substantial costs to comply with
environmental laws and regulations in the future which could also have a
material adverse effect on our business and future results of operations.
WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE
The market price of our common stock may experience significant volatility
from time to time. Such volatility may be affected by factors such as:
- our quarterly operating results;
- announcements of regulatory developments, technological innovations
or new therapeutic products;
- developments in patent or other proprietary rights; and
- public concern regarding the safety of our products.
Other factors which may affect our stock price is general changes in the
economy, financial markets or the pharmaceutical or biotechnology industries.
- 8 -
<PAGE> 9
OUR ANTI-TAKEOVER PROVISIONS MAY LIMIT STOCKHOLDER VALUE
We have provisions in our bylaws and in our shareholder protection rights
agreement that may discourage or prevent a person or group from acquiring us
without our board of directors' approval. A stockholder may not receive as
much in exchange for their shares of common stock as they could without these
provisions. The following is a description of these provisions which may
reduce the market value of our shares of common stock.
We have a classified board of directors, which requires that at least two
stockholder meetings, instead of one, will be required to effect a change in
the majority control of our board of directors. This provision applies to
every election of directors, not just an election occurring after a change in
control. The classification of our board increases the amount of time it takes
to change majority control of our board of directors and may cause our
potential purchasers to lose interest in the potential purchase of us,
regardless of whether our purchase would be beneficial to us and our
stockholders.
Our 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 our capital stock then entitled to vote at an election of directors.
This provision prevents stockholders from removing any incumbent director
without cause.
Our bylaws also provide that a stockholder must give us at least 120 days
notice of a proposal or director nomination that such stockholder desires to
present at any annual meeting or special meeting of stockholders. Such
provision prevents a stockholder from making a proposal or director nomination
at a stockholder meeting without us having advance notice of that proposal or
director nomination. This could make a change in control more difficult by
providing our directors with more time to prepare an opposition to a proposed
change in control.
Under our shareholder protection rights agreement, on May 15, 1997, we
distributed one preferred stock purchase right for each then-outstanding share
of our common stock. Each right entitles registered holders to purchase one
ten-thousandth of a share of our Series A Junior Participating Preferred Stock
at an initial purchase price of $30 per share, subject to adjustment. Our
preferred stock purchase rights are exercisable only if a person or group (1)
announces that they have acquired beneficial ownership of 15% or more of our
common stock, or (2) commences a tender offer for 15% or more of our common
stock. If a person or group announces that they had acquired 15% or more of
our common stock, or commences a tender offer for 15% or more of our common
stock, then, after ten days, each right not owned by the person or group which
acquired 15% or more of our common stock or who commenced a tender offer for
15% or more of our stock entitles its holder to purchase at the purchase price
the number of shares of common stock having a market value equal to twice the
purchase price. We may exchange or terminate the preferred stock purchase
rights at any time before they become exercisable.
- 9 -
<PAGE> 10
The preferred stock purchase rights will cause substantial dilution to a
person or group that attempts to acquire us on terms not approved by our board
of directors, which encourages persons who seek to acquire us to initiate such
an acquisition through negotiations with our board of directors. This could
discourage any potential acquiror of us and could result in the lower prices of
our common stock than may occur during a hostile acquisition attempt.
- 10 -
