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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
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, 1999
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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
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 [ ].
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]
The aggregate market value of the Registrant's common stock held by
non-affiliates on April 21, 2000 was approximately $15.3 million. On April 24,
2000, there were 9,580,050 shares of the Registrant's common stock outstanding,
exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
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.
GENERAL
CytRx Corporation, a Delaware corporation ("CytRx" or the "Company"), was
incorporated 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 Company's
primary focus is on FLOCOR(TM), initially being developed for the treatment of
acute sickle cell crisis. CytRx plans to expand the development of FLOCOR to
other vascular disorders such as shock and stroke over time. CytRx is also
engaged in research or has technology available for license in the areas of
infectious disease, gene delivery, vaccine adjuvants, and animal feed additives.
See "Product Development".
Certain financial information concerning the industry segments in which
the Company operates can be found in Note 15 to the Company's Consolidated
Financial Statements.
RECENT DEVELOPMENTS
Results of FLOCOR Phase III Trial.
As more fully discussed under "Product Development - FLOCOR" below, on
December 21, 1999, the Company reported results from its Phase III clinical
study of FLOCOR for treatment of acute sickle cell crisis. Although the study
did not demonstrate statistical significance in the primary endpoint,
statistically significant and clinically important benefits associated with
FLOCOR were observed in certain subgroups. In addition, among the entire
patient population, treatment with FLOCOR resulted in a statistically
significant increase in the percent of patients achieving resolution of their
crisis. Based on these encouraging efficacy results and a good safety profile
the Company's independent Data and Safety Monitoring Board (DSMB) and other
thought leaders in the area of sickle cell disease have recommended that the
Company continue with clinical development of FLOCOR in sickle cell disease.
The Company intends to present the results of the Phase III trial at the
National Sickle Cell Disease Meeting in Philadelphia on April 9 - 12.
Prior to the announcement of the Phase III results, the Company had been
discussing potential licensing arrangements for FLOCOR with third parties.
Currently, CytRx is continuing these discussions and is seeking other possible
licensees. The terms of any potential license are unknown at the present time
and there is no assurance that such a license will be consummated. CytRx does
not plan to begin additional clinical studies for FLOCOR until such a license
is put in place or the Company raises additional capital.
Current Financial Condition and Need for Additional Capital
At December 31, 1999, the Company had net assets of $1,033,000 and working
capital of $664,000,. During the first quarter of 2000, the Company terminated
the services of twelve of its employees as part of its efforts to conserve its
cash resources. See "Employees". The Company has further reduced its operations
by suspending most of its technology development efforts requiring significant
expenditures.
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During the first quarter of 2000 CytRx reached agreement with certain of
its trade creditors whereby an aggregate of $2.3 million of indebtedness was
cancelled in exchange for the issuance of 937,592 shares of CytRx Common Stock
and the granting of registration rights to such creditors. See Note 7 to the
Company's Consolidated Financial Statements.
Effective March 24, 2000, the Company entered into a Stock Purchase
Agreement with certain investors (the "Investors") whereby the Investors agreed
to purchase 800,000 shares of the Company's Common Stock for an aggregate
purchase price of $1.8 million and the issuance of warrants to purchase an
additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The
Investors were granted registration rights for the shares issued to them and the
shares underlying the warrants. In addition, the Investors will, upon effective
registration of the shares, purchase an additional 286,000 shares at $2.25 per
share and simultaneously receive an additional three-year warrant to purchase
143,000 shares at $2.25 per share. In lieu of these additional shares and
warrants, the Investors have the option to purchase 429,000 shares at a price
equal to 75% of a trailing average market price of the Company's Common Stock,
as defined in the Stock Purchase Agreement.
As discussed under "Product Development - Other Product Development
Efforts", in March 2000 CytRx entered into an Evaluation Agreement for its Gene
Delivery technology. CytRx is also pursuing the sale of its TiterMax research
adjuvant as well as the license or sale of certain of its other technologies.
There is no assurance that any such transactions will be consummated.
Without an infusion of additional working capital from the sale of equity
securities, license/sale of technology assets, or a combination of these, the
Company has limited ability to advance its existing technologies.
PRODUCT DEVELOPMENT
FLOCOR
General. CytRx's primary focus is on FLOCOR(TM), purified poloxamer 188, 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
micro-vascular blood flow. Extensive preclinical 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 its favorable effects on
micro-vascular blood flow may improve recovery from widespread ischemic /
reperfusion injury.
The safety profile of FLOCOR is well established. It has been investigated
in over 17 clinical studies representing administration to approximately 3,000
patients and healthy volunteers.
FLOCOR for Sickle Cell Crisis. The Company believes FLOCOR has significant
potential in treating a variety of vascular-occlusive diseases, however, CytRx
has chosen vaso-occlusive crisis associated with sickle cell anemia as its
first development priority.
Sickle cell disease is a devastating disorder originating from 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
causing red blood to 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 result 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 days to 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. 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. 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
75,000 hospital admissions annually to treat sickle cell patients undergoing
acute vascular-occlusive crisis caused by the disease. On average, these
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patients require in-patient treatment for four to seven days. Currently there is
no disease modifying treatment for acute crisis of sickle cell disease and
treatment is limited to narcotics, fluids, and bed rest.
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.
FLOCOR for Other Indications. CytRx believes that FLOCOR has the potential
to be an effective treatment for other vascular-occlusive diseases such as
heart attack 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.
Status of Clinical Trials. On December 21, 1999, the Company reported
results from its Phase III clinical study of FLOCOR for treatment of acute
sickle cell crisis. The study demonstrated treatment benefits in favor of
FLOCOR, however, it did not achieve statistical significance in the primary
study endpoint. After thorough review of the data, the Company and its clinical
consultants believe that a key assumption concerning the length of crisis may
have negatively affected the outcome of the primary endpoint. The study assumed
(based on historical data and supported by physician experiences) that most
patients would resolve their crisis within one week (168 hours). Accordingly,
the study used that time period to collect data concerning the primary endpoint
of crisis duration. Patients not resolving their crisis within this time frame
were assigned a "default" value of 168 hours. In the final study results, less
than 40% of patients treated with placebo and about 52% of patients treated with
FLOCOR resolved their crisis within 168 hours. Thus, the majority of patients in
the study were assigned the default value of 168 hours. Consequently, it was not
possible to detect a statistical difference in the primary endpoint defined as
duration of crisis. However, the study did detect a highly statistically
significant and clinically meaningful treatment effect in duration of crisis in
the subgroup of patients fifteen years of age and less (p = 0.01) and patients
concurrently treated with hydroxyurea (p = 0.02). More importantly, across the
entire study population 51.6 % of patients treated with FLOCOR achieved
resolution of their crisis compared to 36.6 % of patients treated with placebo.
This treatment effect was highly statistically significant (p = 0.02). The Phase
III study also demonstrated that FLOCOR is well tolerated. Based on the outcome
of the Phase III trial, CytRx management and key thought leaders in the area of
sickle cell disease believe a second pivotal clinical trial is warranted to
confirm the treatment benefits of FLOCOR.
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). 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.
Other Product Development Efforts
CytRx also is focusing its efforts on the sale or license of its
"non-FLOCOR" technologies and is conducting minimal product development
activities in order to conserve its cash resources. There is no assurance that
any such sale or license of the Company's technologies will be consummated.
Gene Delivery -- CytRx has discovered and patented the use of certain
poloxamers for gene delivery. The Company believes that its delivery system is
as effective as conventional non-viral gene delivery systems such as cationic
liposomes but is significantly less toxic and is not metabolized. In addition,
recent concern over the safety of viral gene delivery systems is likely to
result in increased interest in non-viral delivery systems. 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.
In January 2000, CytRx entered into an evaluation agreement with a major
worldwide pharmaceutical company (the "Potential Licensee") for the purpose of
enabling the Potential Licensee to evaluate this technology in a gene-based
vaccine for HIV. The agreement provides the Potential Licensee a one year
exclusive option to license the technology for use in the aforementioned
vaccine. Pursuant to the agreement, CytRx will provide material and consulting
services during the evaluation period in exchange for certain payments. The
agreement also prevents either party from naming the other party in any public
or private disclosure, except as each may be legally required. There is no
assurance that any sale or license of the Company's gene delivery technology to
the Potential Licensee will result from this agreement.
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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. Companies currently are evaluating the safety and efficacy of this
technology for potential license under material transfer agreements.
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
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.
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. CytRx is currently seeking a
partner to purchase or license this technology.
Expenditures for research and development activities related to continuing
operations were $12.8 million, $7.3 million and $3.6 million during the years
ended December 31, 1999, 1998, and 1997, respectively.
SUBSIDIARY OPERATIONS AND DIVESTITURES
Titermax(TM) - 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.
Vaxcel, Inc. - In July 1999, CytRx terminated its license of its
Optivax(R) vaccine adjuvant technology to Vaxcel due to Vaxcel's cessation of
operations within the meaning of the license agreement. Concurrently with the
termination of the Optivax license, all of Vaxcel's rights and obligations
pursuant to its license of the Optivax technology to Corixa Corporation were
assigned to CytRx. On June 2, 1999, CytRx entered into a Stock Acquisition
Agreement with A-Z Professional Consultants, Inc. ("A-Z") for the sale of
CytRx's equity interest in Vaxcel. The sale was consummated on September 9,
1999. Pursuant to the agreement, A-Z purchased 9,625,000 shares of common stock
of Vaxcel from CytRx for a cash purchase price of $319,000. After consummation
of this transaction, CytRx has no further equity interest in Vaxcel.
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. In August 1999, the Company entered into a
long-term commercial supply contract with Organichem, Corp., located in
Rennselaer, New York for production of the purified drug substance. 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
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of Abbott Laboratories. The inability of the Company to maintain such
relationship on terms acceptable to the Company could have a material adverse
effect on the Company's business.
If the Company modifies its manufacturing process or changes the source or
location of product supply, regulatory authorities will require the Company to
demonstrate that the material 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.
FLOCOR Patent. On November 23, 1999 the U.S. Patent Office issued patent
No. 5,990,241 "Polyoxypropylene/Polyoxyethylene Copolymers With Improved
Biological Activity" to CytRx Corporation. The Company believes the issue of
this patent provides important exclusivity since it contains composition of
matter claims for "purified" poloxamer 188, the active ingredient in FLOCOR.
The patent will remain in effect until July 8, 2017.
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.
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.
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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.
EMPLOYEES
As of December 31, 1999, the Company had fifteen full-time and three
part-time employees, nine of which were directly involved in the conduct of
scientific or research and development activities for the Company. In the first
quarter of 2000, CytRx terminated the services of twelve of its employees as
part of its overall reduction in operations in order to conserve its cash
resources. As of March 24, 2000, the Company has six full-time employees and
utilizes the services of two former employees on a contract basis.
ITEM 2. PROPERTIES
The Company currently subleases laboratory and related space from Oread at
150 Technology Parkway, Norcross, Georgia, and leases administrative office
space at 154 Technology Parkway, Norcross, Georgia. These facilities are in
satisfactory condition and suitable for purposes of the Company's present
operations. The Company has historically made use of contract lab facilities
for additional research and development purposes.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol CYTR. The following table sets forth the high and low sale prices for
the Common Stock for the periods indicated as reported by Nasdaq. Such prices
represent prices between dealers without adjustment for retail mark-ups,
mark-downs, or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
COMMON STOCK:
2000
January 1 to April 21 6 7/16 29/32
1999
Fourth Quarter 3 3/4
Third Quarter 3 1 7/8
Second Quarter 3 1/8 1 27/32
First Quarter 3 7/16 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
</TABLE>
On April 21, 2000, the closing price of the Common Stock as reported on
The Nasdaq Stock Market, was $1.625 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
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shares are held by 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
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Net product sales $ 499,987 $ 481,495 $ 456,029 $ 522,385 $ 512,528
Net service revenues 322,536 350,789 422,039 357,517 --
Interest and other income 1,068,924 1,762,747 1,381,306 1,558,914 1,990,506
--------------------------------------------------------------------------------
Total revenues 1,891,447 2,595,031 2,259,374 2,438,816 2,503,034
================================================================================
Loss from continuing operations (14,989,433) (7,506,060) (4,426,292) (2,068,302) (9,273,777)
Income (loss) from discontinued operations (39,858) 2,712,701 (1,626,700) (3,723,477) (1,378,805)
Extraordinary item -- (325,120) -- -- --
--------------------------------------------------------------------------------
Net loss $(15,029,291) $ (5,118,479) $ (6,052,992) $ (5,791,779) $(10,652,582)
================================================================================
Basic and diluted loss per common share:
Loss from continuing operations $ (1.96) $ (0.99) $ (0.60) $ (0.27) $ (1.17)
Income (loss) from discontinued operations -- 0.36 (0.22) (0.48) (0.18)
Extraordinary item -- (0.04) -- -- --
--------------------------------------------------------------------------------
Net loss $ (1.96) $ (0.67) $ (0.82) $ (0.75) $ (1.35)
================================================================================
Balance Sheet Data:
Total assets $ 6,128,063 $ 16,641,568 $ 24,905,995 $ 24,299,322 $ 30,959,983
Long-term debt 650,000 -- -- -- --
Other long-term liabilities 1,693,638 -- -- -- --
Convertible debentures -- -- 2,000,000 -- --
Total stockholders' equity 1,032,688 14,688,548 19,248,395 22,337,734 29,770,485
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with Selected Financial Data
and the audited Consolidated Financial Statements of the Company included in
this report.
Liquidity and Capital Resources
At December 31, 1999, the Company had cash, cash equivalents and
investments of $3.0 million and net assets of $1.0 million, compared to $15.3
million and $14.7 million, respectively, at December 31, 1998. The Company had
working capital of $664,000 at December 31, 1999 compared to $13.7 million at
December 31, 1998.
During the first quarter of 2000, CytRx reached agreement with certain of
its trade creditors whereby an aggregate of $2.3 million of indebtedness was
cancelled in exchange for issuance of 937,592 shares of CytRx Common Stock and
the granting of registration rights to such creditors.
Effective March 24, 2000, the Company entered into a Stock Purchase
Agreement with certain investors (the "Investors") whereby the Investors agreed
to purchase 800,000 shares of the Company's Common Stock for an aggregate
purchase price of $1.8 million and the issuance of warrants to purchase an
additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The
Investors were granted registration rights for the shares issued to them and the
shares underlying the warrants. In addition, the Investors will, upon effective
registration of the shares, purchase an additional 286,000 shares at $2.25 per
share and simultaneously receive an additional three-year warrant to purchase
143,000 shares at $2.25 per share. In lieu of these additional shares and
warrants, the Investors have the option to purchase 429,000 shares at a price
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equal to 75% of a trailing average market price of the Company's Common Stock,
as defined in the Stock Purchase Agreement.
The Company will require additional funds to finance operations and
currently is seeking private or public equity investments and future
collaborative arrangements with third parties to meet such needs. 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 is no assurance that such funding will be available for the Company to
finance its operations on acceptable terms, if at all. Insufficient funding may
require the Company to delay, reduce or eliminate some or all of its research
and development activities, planned clinical trials and administrative
programs.
The Company's future expenditures and capital requirements depend on
numerous factors including the progress and focus of its research and
development programs, the progress and results of pre-clinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the
costs of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments, the ability of the Company to establish collaborative
arrangements, the initiation of commercialization activities, the purchase of
capital equipment and the availability of other financing.
At December 31, 1999 the Company and its subsidiaries had net operating
loss carryforwards for income tax purposes of approximately $53.1 million,
which will expire in 2000 through 2019 if not utilized. The Company also has
research and development tax credits and orphan drug tax credits available to
reduce income taxes, if any, of approximately $6.3 million which will expire in
2000 through 2014 if not utilized. Based on an assessment of all available
evidence including, but not limited to, the Company's limited operating history
and lack of profitability, uncertainties of the commercial viability of the
Company's technology, the impact of government regulation and healthcare reform
initiatives, and other risks normally associated with biotechnology companies,
the Company has concluded that it is more likely than not that these net
operating loss carryforwards and credits will not be realized and, as a result,
a 100% deferred tax valuation allowance has been recorded against these assets.
Results of Operations
The Company recorded a net loss of $15,029,000 for the year ended December
31, 1999 as compared to net losses of $5,118,000 for 1998 and $6,053,000 for
1997. Loss from continuing operations before extraordinary items was
$14,989,000, $7,506,000 and $4,426,000 in 1999, 1998 and 1997, respectively.
Net product sales from continuing operations, which consist primarily of
sales of TiterMax research adjuvant, were $500,000 in 1999, $481,000 in 1998
and $456,000 in 1997. Cost of product sales was $45,000 in 1999, $36,000 in
1998 and $40,000 in 1997, or 9%, 7% and 9% of net product sales, respectively.
The Company also markets 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 $323,000 in 1999, $351,000 in 1998 and $422,000 in 1997. Cost of service
revenues was $240,000 in 1999, $187,000 in 1998 and $242,000 in 1997, or 74%,
53% and 57% of net service revenues, respectively.
Interest income from continuing operations was $463,000 in 1999 as compared
to $1,007,000 in 1998 and $752,000 in 1997. The variances between years is
attributable to fluctuating cash and investment balances. Collaborative, grant
and license fee income was $464,000 in 1999 versus $511,000 in 1998 and $94,000
in 1997. The increase during 1998 and 1999 is due to a $445,000 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 $142,000, $244,000 and $535,000
in 1999, 1998 and 1997, respectively, and primarily relates to subrental fees
to certain third parties, as well as administrative and facilities costs
allocated by CytRx to its discontinued subsidiaries. The related costs are
included in selling, general and administrative expenses. The decrease during
the three year period is reflective of the discontinuance of the Proceutics and
CytRx Animal Health operations in early 1998 and Vaxcel during 1999.
Research and development expenditures from continuing operations during
1999 were $12,812,000 versus $7,306,000 in 1998 and $3,605,000 in 1997.
Research and development expenditures have increased during the three year
9
<PAGE> 10
period primarily as a result of the Company's development activities for
FLOCOR. The Company's pivotal Phase III trial of FLOCOR for treatment of acute
sickle cell crisis, which was initiated in March 1998 was completed in December
1999. During 1999 the Company also continued its Phase I trial of FLOCOR for
treatment of Acute Chest Syndrome in sickle cell patients and initiated two
additional clinical trials of FLOCOR - a Phase III study investigated repeat
use of FLOCOR in patients with acute sickle cell crisis and a Phase I/II study
for treatment of Acute Lung Injury.
Selling, general and administrative expenses from continuing operations
during 1999 were $3,784,000 as compared to $2,527,000 in 1998 and $2,505,000 in
1997. The increase from 1998 to 1999 is primarily due to $1,044,000 of non-cash
charges related to issuance of stock warrants to certain consultants and
certain vesting events for management stock options.
Interest expense was $0, $46,000 and $293,000 in 1999, 1998 and 1997,
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.
Discontinued Operations - Net income (loss) from the discontinued
operations of Proceutics, CytRx Animal Health and Vaxcel (net of minority
interest) was $(40,000), $2,713,000 and $(1,627,000) in 1999, 1998 and 1997.
The following table presents the breakdown of net income (loss) from
discontinued operations (see Notes 13 and 15 to Financial Statements).
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<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)
------------ ------------ ------------
-- 1,387,000 (138,000)
CytRx Animal Health:
Gain on sale of business -- 6,230,000 --
Operations -- (585,000) 868,000
------------ ------------ ------------
-- 5,645,000 868,000
Vaxcel:
Impairment loss -- (3,213,000) --
Operations (44,000) (1,721,000) (2,599,000)
Minority interest 4,000 615,000 242,000
------------ ------------ ------------
(40,000) (4,319,000) (2,357,000)
------------ ------------ ------------
Net income (loss) from discontinued operations $ (40,000) $ 2,713,000 $ (1,627,000)
============ ============ ============
</TABLE>
Inflation - Management believes that inflation had no material impact on
the Company's operations during the three year period ended December 31, 1999.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes
those systems successfully responded to the Year 2000 date change. The Company
expensed less than $25,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products
and services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters are
addressed promptly.
10
<PAGE> 11
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments that are sensitive to changes in
interest rates are its investments. As of December 31, 1999, the Company held
no investments other than amounts invested in money market accounts. The
Company is not subject to any other material market risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplemental schedule of the
Company and the notes thereto as of December 31, 1999 and 1998, and for each of
the three years ended December 31, 1999, together with the independent
auditors' report thereon, are set forth on pages F-1 to F-16 of this Annual
Report on Form 10-K.
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
Directors
Listed below are the names and ages of all current directors of the
Company, the business experience during the past five years of each such person,
and any other directorships held by such person in companies that are subject to
the reporting requirements of the Securities Exchange Act of 1934 or in any
company registered as an investment company under the Investment Company Act of
1940. Each of the following directors has served continuously as a director
since the year in which he was first elected a director. None of the following
persons serves as a director pursuant to any arrangement or understanding
between him and any other person(s).
CLASS I - TERM EXPIRING AT THE 2001 ANNUAL MEETING
LYLE A. HOHNKE (57) first became a director of CytRx in 1996. Since
1994, Dr. Hohnke has served as a member of Javelin Capital Fund, LLC, a general
partner of Javelin Ventures, LP, a company engaged in venture capital
investments. From 1991 to 1994 Dr. Hohnke was General Partner for Heart Land
Seed Capital Fund. Dr. Hohnke also serves as a director of Heska Corporation as
well as a number of privately-held companies.
JACK J. LUCHESE (51) has been President and Chief Executive
Officer and a director of the Company since March 1989. Prior to joining the
Company, Mr. Luchese served as Vice President and General Manager of the Armour
Pharmaceutical Corporation, and as Vice President, Corporate Business
Development and a member of the Management Committee of Rorer Group, Inc. (now
Rhone-Poulenc Rorer). Prior to joining Rorer Group, Inc., Mr. Luchese was with
Johnson & Johnson Company for 15 years where he held various positions in
business development, licensing, sales, new product marketing, and finance.
CLASS II - TERM EXPIRING AT THE 2002 ANNUAL MEETING
RAYMOND C. CARNAHAN, JR. (74) first become a director of CytRx in 1991.
Mr. Carnahan has over 39 years of experience in cost controls and operational
systems in a variety of industries. Prior to his retirement in 1991, Mr.
Carnahan served as Manager, International Cost Analysis planning for Johnson &
Johnson International from 1974 to 1991. Mr. Carnahan has provided consulting
services to Waterford-Wedgewood Corporation in England and to Torf
Pharmaceutical Corporation in Poland and serves as President for the Morristown
Memorial Hospital Chaplaincy Service in Morristown, New Jersey.
11
<PAGE> 12
HERBERT H. MCDADE, JR. (73) first became a director of CytRx in 1990.
From 1989 to 1996 Mr. McDade has served as Chairman, President and Chief
Executive Officer of Chemex Pharmaceuticals, Inc. (now Access Pharmaceuticals,
Inc.). From 1986 to 1989 he was Chairman and President of Armour Pharmaceutical
Corporation, a wholly-owned subsidiary of Rorer Group, Inc. (now Rhone-Poulenc
Rorer). Prior to 1986, Mr. McDade served as Vice President of the Revlon
Corporation. Mr. McDade serves as a director of Access Pharmaceuticals, Inc.,
Discovery Laboratories, Inc. and CellPath, Inc.
CLASS III - TERM EXPIRING AT THE 2000 ANNUAL MEETING
JACK L. BOWMAN (67) first became a director of CytRx in 1994. Prior to
his retirement at the end of 1993, Mr. Bowman was Company Group Chairman at
Johnson & Johnson Company, a position he held from 1987. From 1983 to 1987, he
was Executive Vice President of American Cyanamid Company where he was
responsible for the pharmaceutical, medical device and over the counter and
toiletry businesses. Mr. Bowman has also served as President, Lederle
Laboratories Division and Executive Vice President, CIBA-GEIGY Pharmaceutical
Division. Mr. Bowman also serves as a director of Celgene Corporation, Cell
Therapeutics, Inc., Cellegy Pharmaceuticals, Inc., NeoRx Corporation and
Targeted Genetics, Inc.
MAX LINK (59) first became a director of CytRx in 1996. From May 1993
to June 1994, Dr. Link served as the Chief Executive Officer of Corange U.S.
Holdings, Inc. (the holding company for Boehringer Mannheim Therapeutics,
Boehringer Mannheim Diagnostics and DePuy International). From 1992 to 1993, Dr.
Link was Chairman of Sandoz Pharma. From 1987 to 1992, Dr. Link was the Chief
Executive Officer of Sandoz Pharma, Ltd. and a member of the Executive Board of
Sandoz, Ltd., Basel. Prior to 1987, Dr. Link served in various capacities with
the United States operations of Sandoz, including President and Chief Executive
Officer. Dr. Link also serves as a director of Access Pharmaceuticals, Alexion
Pharmaceuticals, Inc., Cell Therapeutics, Inc., Discovery Laboratories, Inc.,
Human Genome Sciences, Inc. and Protein Design Laboratories, Inc.
Executive Officers
Except for Jack J. Luchese, discussed above under "Directors", listed
below are the names and ages of all executive officers of the Company, all
positions and offices with the Company held by each such person, the period(s)
during which such person has held such positions and offices and the business
experience during the past five years of each such person. Each of the following
executive officers serves until his successor is elected and qualifies or until
his earlier death, resignation or removal. None of the following persons serves
as an officer or is to be selected as an officer pursuant to any arrangement or
understanding between him and any other person(s).
R. MARTIN EMANUELE, PH.D. (45) joined CytRx in 1988 as the project
director for the Company's RheothRx(R) project (now FLOCOR(TM)). Dr. Emanuele
assumed the duties of Vice President, Preclinical Development in June 1990 and
became Vice President, Research and Business Development in October 1997. Before
joining CytRx, he worked as a clinical research scientist at DuPont Critical
Care and as a visiting scientist at Institute Choay.
WILLIAM B. FLECK (42) joined CytRx in April 1993 as Vice President,
Human Resources. From 1992 to 1993 Mr. Fleck served as Director, Human Resources
and Training for Central Health Services (CHS). During 1991, he was Director,
Human Resources for Knowledgeware, Inc. Prior to joining Knowledgeware, Mr.
Fleck held senior human resources management positions with MCI Communications
from 1989 to 1991 and Harris/3M from 1984 to 1989.
J. MICHAEL GRINDEL, PH.D. (53) joined CytRx in October 1997 as Vice
President, Drug Development. From 1994 to 1997 Dr. Grindel served as Vice
President, Preclinical Development for Hybridon, Inc. in Cambridge, MA. From
1989 to 1994 Dr. Grindel was Vice President for Project Planning and Management
at the R. W. Johnson Pharmaceutical Research Institute (a subsidiary of Johnson
& Johnson) in Raritan, NJ. Prior to that Dr. Grindel served in various research
and development management positions with McNeil Pharmaceutical from 1976 to
1989 and the Walter Reed Army Institute of Research from 1973 to 1976.
MARK W. REYNOLDS (38) joined CytRx in 1988 as Controller, becoming
Chief Financial Officer and Corporate Secretary in 1996 and Vice President,
Finance in 1999. Prior to joining CytRx, Mr. Reynolds was employed as a
certified public accountant with Arthur Andersen LLP in Atlanta, Georgia.
12
<PAGE> 13
Section 16(a) Reporting
Section 16(a) of the Securities Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's common stock, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of the Company. Directors, executive officers and
greater than ten percent stockholders are required by Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
reports they file. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and written representations that
no other reports were required, during the year ended December 31, 1999 all
Section 16(a) filing requirements applicable to directors, executive officers
and greater than ten percent beneficial owners were complied with by such
persons.
ITEM 11. EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities during the fiscal years ended December 31, 1997, 1998 and 1999 for
(i) the President and Chief Executive Officer of the Company; and (ii) each of
the four other most highly compensated executive officers of the Company whose
total salary and bonus exceeded $100,000 (determined as of December 31, 1999 and
collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Securities
----------------------- Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jack J. Luchese 1999 $342,125 $75,000 500,000 $ 5,000(2)
President and Chief 1998 334,250 65,750 1,382,427(1) 5,000(2)
Executive Officer 1997 321,000 37,500 50,000 4,750(2)
R. Martin Emanuele 1999 174,200 15,000 32,500 5,000(2)
Vice President, 1998 170,850 15,000 154,098(1) 5,000(2)
Research & Business 1997 167,500 7,500 5,000 4,750(2)
Development
William B. Fleck 1999 127,650 15,000 25,000 5,000(2)
Vice President, 1998 84,375 42,500 112,162(1) 5,000(2)
Human Resources 1997 120,000 40,000 7,500 4,750(2)
J. Michael Grindel 1999 199,150 30,000 20,000 5,000(2)
Vice President, 1998 195,000 20,000 173,000(1) 81,172(3)
Drug Development 1997 40,000 20,000 100,000 1,200(2)
Mark W. Reynolds 1999 115,000 20,000 32,500 5,000(2)
Vice President, Finance 1998 101,000 25,000 118,418(1) 5,000(2)
and Secretary 1997 94,000 12,500 7,500 4,750(2)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares underlying previously issued options and warrants which
were repriced during 1998.
(2) Represents matching contributions by the Company under the Company's
401(k) Profit Sharing Plan.
(3) Amount shown includes $5,000 in matching contributions by the Company
under the Company's 401(k) Profit-Sharing Plan and $76,172 in costs
associated with the officer's relocation.
13
<PAGE> 14
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes the stock options and warrants granted
during the fiscal year ended December 31, 1999 to each of the Company's
executive officers named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Potential Realized Value at
Number of % of Total Assumed Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise or for Option Term($)
Options Employees Base Price Expiration -----------------------------
Name Granted(#) in Fiscal Year ($/Share) Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jack J. Luchese 500,000(1)(3) 79.8% $2.125 8/30/09 $668,201 $1,693,351
R. Martin Emanuele 32,500(2)(3) 5.2 2.125 8/30/09 43,433 110,068
William B. Fleck 25,000(2)(3) 4.0 2.125 8/30/09 33,410 84,668
J. Michael Grindel 20,000(2)(3) 3.2 2.125 8/30/09 26,728 67,734
Mark W. Reynolds 32,500(2)(3) 5.2 2.125 8/30/09 43,433 110,068
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Warrants granted to Mr. Luchese are subject to the terms as described
under "Employment Agreement."
(2) These options vest upon a combination of tenure and the achievement of
company performance criteria. As of December 31, 1999 none of these
options were vested.
(3) All options and warrants were granted at an exercise price equal to the
fair market value of the underlying shares at the date of grant, and
are exercisable for ten years from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AT DECEMBER 31, 1999
The following table sets forth the number and total value of
unexercised in-the-money options at December 31, 1999 for each of the executive
officers of the Company named in the Summary Compensation Table above, using the
price per share of the Common Stock of $.90625 on December 31, 1999. No stock
options were exercised during 1999 by any of the Company's Named Executive
Officers.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1999(#) at December 31, 1999($)
------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack J. Luchese 1,332,427 550,000 $ -- $ --
R. Martin Emanuele 142,514 42,834 -- --
William B. Fleck 100,995 36,167 -- --
J. Michael Grindel 99,333 93,667 -- --
Mark W. Reynolds 107,251 43,667 -- --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENT
Jack J. Luchese was named President and Chief Executive Officer of the
Company in March 1989. His current employment agreement with the Company was
amended and restated as of September 1, 1999 (the "Agreement") and terminates on
December 31, 2002. Under the Agreement, Mr. Luchese is paid an annual base
salary of $350,000. The base salary will be reviewed no less than once each 18
months and will be adjusted from time to time consistent with average overall
merit increases for all other employees. In addition to his annual base salary,
Mr. Luchese is eligible to receive cash bonuses with respect to each calendar
year during the term of the Agreement as determined from time to time by the
Board of Directors of the Company in its sole discretion. The Agreement also
contains confidentiality and noncompetition provisions.
14
<PAGE> 15
Pursuant to the original Agreement, and subsequent amendments, Mr.
Luchese has been granted warrants to purchase an aggregate of 1,882,427 shares
of Common Stock. Warrants as to 1,332,427 shares have an exercise price of $1.00
and warrants as to 500,000 shares have an exercise price of $2.125. The vesting
criteria of such warrants include a combination of tenure and achievement of
defined corporate objectives. As of April 24, 2000, 1,332,427 of the 1,882,427
warrants held by Mr. Luchese are vested. The shares of stock that may be
acquired upon exercise of warrants held by Mr. Luchese have been or will be
registered by the Company under the Securities Act of 1933, as amended. The
warrants contain certain anti-dilution provisions and provide for accelerated
vesting in the event that Mr. Luchese's employment is terminated by the Board of
Directors without cause, in the event of his death or disability or in the event
of a change of control.
In April 1997, the Company entered into a separate Change in Control
Agreement (the "Change in Control Agreement") with Mr. Luchese which was amended
and restated in September 1999 merely to conform references to his amended and
restated Employment Agreement. The Change in Control Agreement will become
effective if and when a Change in Control (as defined) occurs during the
three-year period following the date of the Change in Control Agreement or
during any of the one-year annual renewal periods (the "Change of Control
Period"), or if Mr. Luchese's employment is terminated in connection with or in
anticipation of a Change of Control (in either case, the "Effective Date").
Mr. Luchese's employment period under the Change in Control Agreement
begins on the Effective Date and continues for two years. During the employment
period, Mr. Luchese's position, authority, duties and responsibilities will be
at least commensurate in all material respects with those held by him during the
120-day period prior to the Change in Control and he will receive (i) a monthly
base salary equal to or greater than the highest monthly base salary paid to him
by the Company during the previous year; (ii) an annual cash bonus at least
equal to the highest bonus paid to him in any of the three fiscal years prior to
the Effective Date, and (iii) the ability to participate in all incentive,
savings, welfare benefit, fringe benefit and retirement plans of the Company.
If Mr. Luchese's employment terminates during the employment period he
will receive certain severance benefits under the Change in Control Agreement.
If his employment terminates by reason of his death or disability, he will
receive certain obligations accrued through the date of termination (e.g.,
salary prorata bonus, deferred compensation and vacation pay) plus the normal
death and disability benefits, if any, to which he is otherwise entitled,
including those under the Agreement. If he is terminated by the Company for
cause (as defined), or if he voluntarily resigns without good reason (as
defined) other than during the 30-day period beginning on the first anniversary
of the Effective Date, he will receive only his accrued benefits through the
termination date and any previously-deferred benefits, plus any other
post-termination benefits, if any, to which he is otherwise entitled, including
those under the Agreement. If he (i) is terminated by the Company without cause,
(ii) resigns voluntarily with good reason, or (iii) resigns for any reason
15
<PAGE> 16
during the 30-day period beginning on the first anniversary of the Effective
Date, he will receive a lump sum cash payment equal to: (a) his base salary
through the date of termination, (b) a prorata bonus for the year of
termination, based upon his actual bonus earned in the prior year ("Most Recent
Bonus"), (c) an amount equal to two times the sum of his base salary and Most
Recent Bonus, and (d) any unpaid deferred compensation and vacation pay. In
addition, Mr. Luchese would be entitled to continued employee welfare benefits
for two years after the date of termination, and a lump sum payment equal to the
actuarial value of the service and compensation credit under the Company's
qualified and supplemental retirement plans that he would have received had he
remained employed for two years after the date of his termination. Mr. Luchese
will be required to repay to the Company, with interest, the lump-sum benefit
equal to two times the sum of his base salary and Most Recent Bonus if, during
the two-year employment period, he violates a certain non-competition covenant
in the Change in Control Agreement.
If the total payments to Mr. Luchese under the Change in Control
Agreement and from any other source would result in the imposition of an excise
tax under Section 4999 of the Code, the payments will be reduced to the extent
necessary to avoid the imposition of such excise tax, but only if such reduction
would result in a net after-tax benefit to Mr. Luchese. The Change in Control
Agreement further provides that Mr. Luchese has no obligation to mitigate
severance payments, the Company will reimburse Mr. Luchese for all legal fees
incurred in enforcing or contesting the Change in Control Agreement, and Mr.
Luchese will hold for the benefit of the Company all confidential information
concerning the Company obtained over the course of this employment. The Company
will require its successors to expressly assume its obligations under the Change
in Control Agreement.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
their services as directors or as members of committees. Non-employee directors
receive a fee of $2,000 for each Board meeting attended ($750 for meetings
attended by teleconference) and $500 for each committee meeting attended.
Non-employee directors who chair a Board committee receive an additional $250
for each committee meeting attended.
Each non-employee director receives an initial stock option grant to
purchase 5,000 shares upon the date he or she first becomes a member of the
Board. Options to purchase 2,500 shares of Common Stock are granted to each
non-employee director annually. Stock option grants to directors pursuant to the
Plan discussed above contain the same terms and provisions as stock option
grants to employees, except that options granted to directors are considered
Non-Qualified Stock Options for income tax reporting purposes.
During 1999, Mr. Raymond C. Carnahan, Jr. performed certain
consultation services for the Company for which he received a fee of $2,500.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no "interlocks," as defined by the Securities and Exchange
Commission, with respect to any member of the Compensation Committee.
16
<PAGE> 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based solely upon information made available to the Company, the
following table sets forth certain information with respect to the beneficial
ownership of Common Stock as of April 24, 2000 by (i) each person who is known
by the Company to beneficially own more than five percent of the Common Stock;
(ii) each director of the Company; (iii) each of the Named Executive Officers;
and (iv) all officers and directors as a group. Except as otherwise indicated,
the holders listed below have sole voting and investment power with respect to
all shares of Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE
------------------------------------ --------- ------------
<S> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
Jack L. Bowman(1) 17,078 *
Raymond C. Carnahan, Jr.(2) 16,299 *
R. Martin Emanuele(3) 164,835 1.7%
William B. Fleck (4) 124,844 1.3%
J. Michael Grindel(5) 110,010 1.1%
Lyle A. Hohnke(6) 4,165 *
Max Link(7) 23,748 *
Jack J. Luchese(8) 1,402,908 12.9%
Herbert H. McDade(9) 24,929 *
Mark W. Reynolds(10) 131,545 1.4%
All executive officers and directors as a group (10 persons) 1,934,142 17.0%
(11)
OTHER 5% STOCKHOLDERS:
Robert L. Hunter, Jr. 497,087 5.2%
University of Texas Medical School
Department of Pathology
6431 Fannin MSB2136
Houston, Texas 77030
AMRO International, S.A.(12) 565,445 5.8%
C/o Ultra Finanz AG
Grosmuensterplatz 6
Zurich CH-8022 Switzerland
</TABLE>
- ----------------------------------
* Less than 1%.
(1) Includes options to purchase 16,353 shares of Common Stock exercisable
within 60 days.
(2) Includes options to purchase 16,049 shares of Common Stock exercisable
within 60 days.
(3) Includes options to purchase 147,389 shares of Common Stock exercisable
within 60 days.
(4) Includes options to purchase 103,995 shares of Common Stock exercisable
within 60 days.
(5) Includes options to purchase 101,083 shares of Common Stock exercisable
within 60 days.
(6) Includes options to purchase 4,165 shares of Common Stock exercisable
within 60 days.
(7) Includes options to purchase 6,207 shares of Common Stock exercisable
within 60 days.
(8) Includes warrants to purchase 1,332,427 shares of Common Stock
exercisable within 60 days. Mr. Luchese's business address is c/o CytRx
Corporation, 154 Technology Pkwy, Norcross, GA 30092.
(9) Includes options to purchase 23,096 shares of Common Stock exercisable
within 60 days.
(10) Includes options to purchase 112,126 shares of Common Stock exercisable
within 60 days.
(11) Includes options and warrants to purchase 1,863,723 shares of Common
Stock exercisable within 60 days.
(12) Includes warrants to purchase 165,445 shares of Common Stock
exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
17
<PAGE> 18
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 consolidated financial statements of the Company and the related
report of independent auditors thereon are set forth on pages F-1 to
F-15 of this Annual Report on Form 10-K. These consolidated financial
statements are as follows:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
(2) Financial Statement Schedules
The following financial statement schedule is set forth on page F-16 of
this Annual Report on Form 10-K.
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1999, 1998 and 1997
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
See Exhibit Index on page 19 of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
None.
18
<PAGE> 19
CYTRX CORPORATION
FORM 10-K EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C> <C>
3.1 Certificate of Incorporation (a)
3.2 By-Laws (b)
4.1 Shareholder Protection Rights Agreement dated April 16, 1997
between CytRx Corporation and American Stock Transfer & Trust
Company as Rights Agent (c)
10.1 Agreement with Emory University, as amended (d)
10.2 Agreement with BASF Corporation, as amended (d)
10.3* Amended and Restated Employment Agreement between CytRx Corporation
and Jack J. Luchese (i)
10.4* Amended and Restated Change of Control Employment Agreement between CytRx
Corporation and Jack J. Luchese (i)
10.7* 1986 Stock Option Plan, as amended and restated (f)
10.8* 1994 Stock Option Plan, as amended and restated (e)
10.9* 1995 Stock Option Plan (g)
10.10* 1998 Long-Term Incentive Plan (h)
10.11 Purchase and Sale Agreement dated February 23, 1998 by and between CytRx
Corporation and Alexandria Real Estate Equities, Inc. (h)
10.12 Common Stock Purchase Agreement dated March 24, 2000 by and between CytRx
Corporation and the Investors Signatory Thereto (i)
27.1 Financial Data Schedule (for SEC use only). (i)
99.1 Safe Harbor Compliance Statement for Forward-looking Statements (i)
</TABLE>
* Indicates a management contract or compensatory plan or arrangement.
- ---------
(a) Incorporated by reference to the Registrant's Registration Statement
on Form S-3 (File No. 333-39607) filed on November 5, 1997.
(b) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 333-37171) filed on July 21, 1997.
(c) Incorporated by reference to the Registrant's Current Report on Form
8-K filed on April 21, 1997.
(d) Incorporated by reference to the Registrant's Registration Statement
on Form S-l (File No. 33-8390) filed on November 5, 1986.
(e) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q filed on November 13, 1997.
(f) Incorporated by reference to the Registrant's Annual Report on Form
10-K filed on March 27, 1996.
(g) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 33-93818) filed on June 22, 1995.
(h) Incorporated by reference to the Registrant's Annual Report on Form
10-K filed on March 30, 1998.
(i) Incorporated by reference to the Registrant's Annual Report on Form
10-K filed on March 30, 2000.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CYTRX CORPORATION
By: /s/ Jack J. Luchese
-----------------------------------------
Jack J. Luchese, President
Date: April 25, 2000 and Chief Executive Officer
(Principal Executive Officer)
20
<PAGE> 21
CYTRX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Auditors F-15
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts F-16
</TABLE>
F-1
<PAGE> 22
CYTRX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,031,893 $ 8,855,375
Short-term investments -- 6,417,066
Accounts receivable 174,292 83,249
Note receivable -- 300,000
Inventories 6,480 10,935
Other current assets 202,610 10,377
------------ ------------
Total current assets 3,415,275 15,677,002
Property and equipment, net 2,641,810 195,030
Other assets:
Acquired developed technology, net -- 600,000
Other assets 70,978 169,536
------------ ------------
Total other assets 70,978 769,536
------------ ------------
Total assets $ 6,128,063 $ 16,641,568
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 629,738 $ 540,089
Accrued expenses and other current liabilities 2,121,999 1,409,034
------------ ------------
Total current liabilities 2,751,737 1,949,123
Long-term debt 650,000 --
Other long-term liabilities 1,693,638 --
Minority interest in Vaxcel, Inc. -- 3,897
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;
8,373,853 and 8,236,926 shares issued at December 31, 1999
and 1998, respectively 8,374 8,237
Additional paid-in capital 67,805,871 66,423,577
Treasury stock, at cost (633,816 and 625,816 shares held at
December 31, 1999 and 1998, respectively) (2,279,238) (2,270,238)
Accumulated deficit (64,502,319) (49,473,028)
------------ ------------
Total stockholders' equity 1,032,688 14,688,548
------------ ------------
Total liabilities and stockholders' equity $ 6,128,063 $ 16,641,568
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 23
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net product sales $ 499,987 $ 481,495 $ 456,029
Net service revenues 322,536 350,789 422,039
Interest income 462,634 1,007,019 751,526
Grant revenue 464,442 511,375 94,477
Other 141,848 244,353 535,303
------------ ------------ ------------
1,891,447 2,595,031 2,259,374
Expenses:
Cost of product sales 45,375 35,749 39,941
Cost of service revenues 239,840 187,047 242,343
Research and development 12,811,925 7,305,835 3,605,408
Selling, general and administrative 3,783,740 2,526,572 2,504,926
Interest -- 45,888 293,048
------------ ------------ ------------
16,880,880 10,101,091 6,685,666
------------ ------------ ------------
Loss from continuing operations before extraordinary item (14,989,433) (7,506,060) (4,426,292)
Income (loss) from discontinued operations (43,755) 2,098,116 (1,869,187)
Minority interest in discontinued operations (3,897) (614,585) (242,487)
------------ ------------ ------------
Loss before extraordinary item (15,029,291) (4,793,359) (6,052,992)
Extraordinary item:
Loss on early extinguishment of debt -- (325,120) --
------------ ------------ ------------
Net loss $(15,029,291) $ (5,118,479) $ (6,052,992)
============ ============ ============
Basic and diluted income (loss) per common share:
Continuing operations $ (1.96) $ (0.99) $ (0.60)
Discontinued operations -- 0.36 (0.22)
Extraordinary item -- (0.04) --
------------ ------------ ------------
Net loss $ (1.96) $ (0.67) $ (0.82)
============ ============ ============
Basic and diluted weighted average shares outstanding 7,652,227 7,625,578 7,424,372
</TABLE>
See accompanying notes.
F-3
<PAGE> 24
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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, 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
Issuance of common stock 136,927 137 339,078 -- -- 339,215
Issuance of stock options/warrants -- -- 1,043,216 -- -- 1,043,216
Purchase of treasury stock -- -- -- -- (9,000) (9,000)
Net loss -- -- -- (15,029,291) -- (15,029,291)
-------------------------------------------------------------------------------------
Balance at December 31, 1999 8,373,853 $ 8,374 $ 67,805,871 $(64,502,319) $ (2,279,238) $ 1,032,688
=====================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 25
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(15,029,291) $ (5,118,479) $ (6,052,992)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 68,377 216,811 607,349
Amortization -- 282,732 145,644
Gain on sales of subsidiary operations (240,196) (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 (3,897) (614,585) (242,487)
Stock option expense 1,043,216 -- --
Changes in assets and liabilities:
Receivables (91,043) 1,082,390 (979,874)
Inventories 4,455 1,037,197 (2,263,290)
Notes receivable 300,000 100,000 --
Other assets (93,675) 98,545 537,902
Accounts payable 546,019 208,884 640,383
Unearned revenue -- 172,380 (85,005)
Other liabilities 1,950,233 (495,323) 382,053
------------ ------------ ------------
Total adjustments 3,483,489 (1,819,325) (41,602)
------------ ------------ ------------
Net cash used in operating activities (11,545,802) (6,937,804) (6,094,594)
Cash flows from investing activities:
Purchases of held-to-maturity securities -- (6,417,066) (22,103,140)
Maturities of held-to-maturity securities 6,417,066 -- 32,399,348
Decrease in long-term investments -- 5,326,647 --
Net proceeds from sales of subsidiary operations 240,196 8,336,985 --
Net proceeds from sale of technology 600,000 -- --
Net proceeds from sale of real estate -- 4,260,747 --
Net cash paid for acquisition -- -- (1,257,974)
Capital expenditures, net (2,515,157) (13,317) (273,755)
------------ ------------ ------------
Net cash provided by investing activities 4,742,105 11,493,996 8,764,479
Cash flows from financing activities:
Net proceeds from issuance of common stock 339,215 125,880 169,414
Redemption of debt -- (1,650,000) --
Purchase of treasury stock (9,000) (71,705) (176,864)
Proceeds from issuance of debt, net of issuance costs 650,000 -- 1,803,366
------------ ------------ ------------
Net cash provided by (used in) financing activities 980,215 (1,595,825) 1,795,916
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (5,823,482) 2,960,367 4,465,801
Cash and cash equivalents at beginning of year 8,855,375 5,895,008 1,429,207
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,031,893 $ 8,855,375 $ 5,895,008
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ -- $ 45,888 $ 23,342
============ ============ ============
</TABLE>
See accompanying notes
F-5
<PAGE> 26
CYTRX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Need for Additional Capital
CytRx Corporation ("CytRx" or "the Company") is a biopharmaceutical company
engaged in the development and commercialization of high-value human
therapeutics. The Company's current research and development focus is on
vascular-occlusive disorders. CytRx also has a research pipeline with
opportunities in the areas of acute respiratory disorders, 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.
At December 31, 1999, the Company had net assets of $1,033,000 and working
capital of $664,000. During the first quarter of 2000, the Company terminated
the services of twelve of its employees as part of its efforts to conserve its
cash resources and has further reduced its operations by suspending most of its
technology development efforts requiring significant expenditures. The Company
has incurred losses from operations since inception, and the ongoing ability of
the Company to operate as a going concern with the current portfolio of
technologies under development will be determined by the results of technology
licensing efforts and/or the actual proceeds of any fund-raising activities. If
the Company is unable to raise significant additional funds, it will be limited
in its ability to advance its technologies under development.
During the first quarter of 2000, the Company took certain steps to improve
its financial condition (see Notes 7 and 16). The Company believes that the
proceeds of these transactions will allow the Company to operate throughout the
remainder of 2000, but that additional funds will be needed to significantly
advance any of the Company's technologies under development.
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.
As more thoroughly discussed in Note 13, the operations of Proceutics, Inc.
("Proceutics"), CytRx Animal Health, Inc. ("CytRx Animal Health") (formerly
VetLife, Inc.), and Vaxcel, Inc. ("Vaxcel") are presented as discontinued
operations for all periods presented.
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 commercial paper and amounts invested in money
market accounts.
Investments - Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Marketable equity
securities and debt securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses reported in a separate
component of stockholders' equity. Realized gains and losses are included in
investment income and are determined on a first-in, first-out basis (see Note
3).
F-6
<PAGE> 27
Fair Value of Financial Instruments - The carrying amounts reported in the
balance sheet for cash and cash equivalents, investments, accounts receivable,
notes receivable and accounts payable 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.
Property and Equipment - Property and equipment are stated at cost and
depreciated using the straight-line method based on the estimated useful lives
(five years for equipment and furniture) of the related assets. Leasehold
improvements are amortized over the term of the related lease or other
contractual arrangement. As of December 31, 1999, the Company had capitalized
approximately $2.5 million of equipment and leasehold improvements which were
not placed in service as of that date.
Acquired Developed Technology and Other Intangibles - Acquired developed
technology and other intangible assets, primarily goodwill, (see Note 13) 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 13, during 1998 management
evaluated these assets and 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 Liabilities - Accrued expenses and other
liabilities at December 31 are summarized below (in thousands). The headings
correspond to the captions on the accompanying Balance Sheet.
<TABLE>
<CAPTION>
Accrued Expenses and Other
Current Liabilities Other Long-Term Liabilities
-------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Clinical research activities $ 631 $ 455 $ 966 $ --
Scientific and regulatory activities 564 83 460 --
Chemical plant construction 146 -- 228 --
Deferred revenue 233 261 -- --
Employee incentives & severance 233 142 -- --
Other miscellaneous 315 468 40 --
-------- -------- -------- ------
Total $ 2,122 $ 1,409 $ 1,694 $ --
======== ======== ======== ======
</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 and warrants) are
excluded from the computation of diluted loss per share since the effect would
be antidilutive.
Shares Reserved for Future Issuance - As of December 31, 1999, the Company
has reserved approximately 3,200,000 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.
F-7
<PAGE> 28
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. 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 (See Note 9). The
Company has also granted stock options and warrants to certain consultants and
other third parties. Stock options and warrants granted to consultants and
other third parties are valued at the fair market value of the options and
warrants granted or the services received, whichever is more reliably
measurable. Expense is recognized in the period in which the services are
received.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents. The Company maintains cash and cash
equivalents 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 15.
3. Investments
At December 31, 1999, the Company held no investments. At December 31,
1998, the Company had classified all of its investments (consisting entirely of
corporate debt securities) as held-to-maturity, of which $8,457,000 and
$6,417,000 were included in cash and cash equivalents and short-term
investments, respectively, in the accompanying consolidated balance sheets.
Investments held at December 31, 1998 are summarized below (in thousands):
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Cost $ 14,874
Gross Unrealized Gains 3
Gross Unrealized Losses (38)
--------
Fair Market Value $ 14,839
========
</TABLE>
4. Property and Equipment
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment and furnishings $ 2,200 $ 799
Leasehold improvements 969 --
-------- --------
3,169 799
Less accumulated depreciation (527) (604)
--------- --------
$ 2,642 $ 195
======== ========
</TABLE>
F-8
<PAGE> 29
5. 6% Convertible Debentures
In October 1997, the Company privately placed with certain investors
$2,000,000 of convertible notes (the "Debentures") with an original maturity of
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 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. The warrants
expired unexercised in 1999.
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 ($325,000
total) are reflected as an extraordinary item in the statement of operations as
loss on early extinguishment of debt. At December 31, 1998 and 1999 there were
no remaining outstanding Debentures.
6. Long Term Debt
In June 1999, the Company entered into a Purchase Agreement for the design
and construction of manufacturing equipment for commercial production of
FLOCOR(TM). The Purchase Agreement called for, among other things, certain
progress payments to be made, with the final payment of $650,000 due 18 months
after installation of the equipment or 12 months after FDA approval of
FLOCOR(TM) (the "Note"). The Note bears interest of 12% annually, payable
monthly beginning in the first month after installation of the equipment. CytRx
accepted installed delivery of the equipment in February 2000; the Note is
reflected in the accompanying Balance Sheet as Long Term Debt. In February 2000,
the Note was cancelled in exchange for a cash payment of $200,000 and the
issuance of Common Stock (see Note 7).
7. Exchange of Common Stock for Cancellation of Accounts Payable, Accrued
Expenses and Debt
During the first quarter of 2000, the Company reached agreements with
certain of its trade creditors whereby an aggregate of $1,894,000 of trade
payables was cancelled in exchange for issuance of approximately 758,000 shares
of CytRx Common Stock. Of this amount, $1,694,000 existed at December 31, 1999,
and has accordingly been classified as long-term liabilities on the
accompanying Balance Sheet. The Company also cancelled $650,000 of long-term
debt (see Note 6) in exchange for a cash payment of $200,000 and the issuance
of 180,000 shares of CytRx Common Stock.
8. Commitments and Contingencies
Rental expense from continuing operations under operating leases during
1999, 1998 and 1997 approximated $212,000, $154,000 and $13,000, respectively.
Minimum annual future obligations for operating leases are $160,000, $165,000,
$171,000, $178,000, $185,000 and $678,000 in 2000, 2001, 2002, 2003, 2004 and
2005 and beyond, respectively. Aggregate minimum future subrentals the Company
expects to receive under noncancellable subleases total approximately $43,000
at December 31, 1999.
9. Stock Options and Warrants
CytRx has 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 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 for employees and
F-9
<PAGE> 30
directors are set at the fair market values of the common stock on the dates of
grant. During 1998, the Company repriced all outstanding options held by
current employees to the then current market value. No compensation expense was
recorded for employees or directors for the three years ended December 31,
1998; however, during 1999 the vesting criteria for 680,238 options and
warrants was achieved, resulting in $689,000 of compensation expense which was
recorded in the first quarter of 1999. During 1999, services were received in
exchange for options and warrants issued to certain consultants. Aggregate
non-cash charges of $355,000 were recognized in 1999 for the services received.
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
---------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 2,258,308 1,439,297 1,237,031 $ 1.17 $ 4.87 $ 5.00
Granted 961,750 902,488 221,700 2.25 2.65 4.35
Exercised (12,103) -- -- 1.00 -- --
Forfeited (70,103) (83,477) (19,434) 5.91 4.37 6.64
Expired -- -- -- -- -- --
---------- ---------- ----------
Outstanding - end of year 3,137,852 2,258,308 1,439,297 $ 1.43 $ 1.17 $ 4.87
========== ========== ==========
Exercisable at end of year 2,170,107 1,104,620 940,541 $ 1.25 $ 1.33 $ 5.22
Weighted average fair value of
options and warrants granted
during the year: $ 1.59 $ 2.30 $ 3.97
</TABLE>
The following table summarizes additional information concerning options
and warrants outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted Number Weighted
Range of Contractual Average Of Shares Average
Exercise Prices Number of Shares Life (years) Exercise Price Exercisable Exercise Price
---------------- ---------------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 2,126,102 6.3 $ 1.00 1,830,107 $ 1.00
2.13 - 2.75 999,250 6.9 2.27 332,500 2.50
7.75 12,500 5.2 7.75 7,500 7.75
---------- --------
3,137,852 6.5 1.43 2,170,107 1.25
========== =========
</TABLE>
The Company has elected to follow APB 25 and related Interpretations in
accounting for 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 had accounted for 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 to employees was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Weighted average risk free interest 6.27% 5.64% 6.22%
rate
Dividend yields 0% 0% 0%
Volatility factors of the expected
market price of the Company's common stock 1.046 1.026 1.055
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 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.
F-10
<PAGE> 31
For purposes of pro forma disclosures, the estimated fair value of the
employee 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>
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Pro forma net loss $(16,505) $ (6,521) $ (6,969)
Pro forma net loss per share (basic
and diluted) $ (2.16) $ (.86) $ (.94)
</TABLE>
10. 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.
11. 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, 1999, 1998 and 1997 was
approximately $69,000, $110,000 and $176,000, respectively, of which $1,000,
$44,000 and $120,000 related to discontinued operations for the years ended
December 31, 1999, 1998 and 1997, respectively. During the first quarter of
2000, the Company terminated the Plan.
12. Income Taxes
For income tax purposes, CytRx and its subsidiaries have an aggregate of
approximately $53.1 million of net operating losses available to offset against
future taxable income, subject to certain limitations. Such losses expire in
2000 through 2019. CytRx also has an aggregate of approximately $6.3 million of
research and development and orphan drug credits available for offset against
future income taxes which expire in 2000 through 2014.
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:
F-11
<PAGE> 32
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 20,163,000 $ 18,677,000
Tax credit carryforward 6,278,000 1,245,000
Other 108,000 1,218,000
------------ ------------
Total deferred tax assets 26,549,000 21,140,000
Deferred tax liabilities:
Acquired developed technology and other -- (228,000)
intangibles
Depreciation and other (185,000) (143,000)
------------ ------------
Total deferred tax liabilities (185,000) (371,000)
------------ ------------
Net deferred tax assets 26,364,000 20,769,000
Valuation allowance (26,364,000) (20,769,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
Based on assessments of all available evidence as of December 31, 1999 and
1998, 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.
13. Discontinued Operations
Vaxcel, Inc.
On June 2, 1999, CytRx entered into a Stock Acquisition Agreement with A-Z
Professional Consultants, Inc. ("A-Z") for the sale of CytRx's equity interest
in Vaxcel. The sale was consummated on September 9, 1999. Pursuant to the
agreement, A-Z purchased 9,625,000 shares of common stock of Vaxcel from CytRx
for a cash purchase price of $319,000. After consummation of this transaction,
CytRx has no further equity interest in Vaxcel.
Net losses (net of minority interest) associated with Vaxcel included in
income (loss) from discontinued operations were approximately $(40,000),
$(4,319,000) and $(2,357,000) for the years ended December 31, 1999, 1998 and
1997, respectively. A summary of the assets and liabilities of Vaxcel which are
included in the consolidated balance sheets at December 31, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
1998
------
<S> <C>
Current assets $ 314
Property and equipment, net 7
Other assets 655
------
Total assets $ 976
======
Total liabilities $ 618
======
</TABLE>
Termination of Optivax(R) License by CytRx -- In July 1999, CytRx
terminated its license of Optivax(R) to Vaxcel due to Vaxcel's cessation of
operations within the meaning of the license agreement. Concurrently with the
termination of the Optivax(R) license, all of Vaxcel's rights and obligations
pursuant to its license of the Optivax(R) technology to Corixa Corporation were
assigned to CytRx.
Impairment Loss - In its efforts to raise additional capital during 1998
and 1999, Vaxcel solicited 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 of 1998, the results of these
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 was 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
F-12
<PAGE> 33
impairment loss included in discontinued operations for the year ended December
31, 1998. In determining the fair market value of the asset, management
considered the transaction described below, among other factors.
Sale of Technology by Vaxcel -- In January 1999, Vaxcel entered into an
agreement with Innovax Corporation ("Innovax") giving Innovax the option to
purchase the rights to Vaxcel's PLG microencapsulation technology for an
aggregate purchase price of $600,000. Innovax paid a nonrefundable option fee
of $200,000, with an additional $400,000 due upon the exercise of the option.
Innovax also paid a total of $20,000 for extensions of the option period. On
April 1, 1999 Innovax exercised its option and the rights to such technology
were assigned by Vaxcel to Innovax. The Company recorded this transaction in
the second quarter of 1999 as a sale of its Acquired Developed Technology,
valued at $600,000, and therefore did not record a gain or loss on the
transaction.
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 14). 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 and $(138,000) for the
years ended December 31, 1998 and 1997, respectively (see Note 15). 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 14).
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 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. 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 associated with CytRx Animal Health included in income (loss) from
discontinued operations was approximately $5,645,000 and $868,000 for the years
ended December 31, 1998 and 1997, respectively (see Note 15). A gain related to
the sale of $6,230,000 is included in income from discontinued operations for
1998.
14. 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 13) were
assigned to Alexandria, and CytRx leases the building at 154 Technology Parkway
from Alexandria. The lease term extends 10 years and contains escalating rent
payments over the term. CytRx will also be responsible for all operating
expenses for the property. Proceutics recorded a gain of $434,000 for the sale
of 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.
15. 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 13 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 accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting
F-13
<PAGE> 34
policies (see Note 2). 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 Total
Research Recruiting Product Continuing Marketing Pharmaceutical Vaccine Discontinued
(in thousands) Products Services Development Operations Operations Services Development Operations
- --------------------------- -------- -------- ----------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
- -----
Sales to external customers $ 500 $ 323 $ -- $ 823 $ -- $ -- $ -- $ --
Intersegment sales -- -- -- -- -- -- -- --
Collaborative, grant & other -- -- 606 606 -- -- 134 134
revenue
Interest income -- -- 463 463 -- -- 7 7
Interest expense -- -- -- -- -- -- 4 4
Depreciation and amortization -- -- 62 62 -- -- 6 6
Segment profit (loss) 284 75 (15,348) (14,989) -- -- (40) (40)
Total assets -- -- 6,128 6,128 -- -- -- --
Capital expenditures -- -- 2,515 2,515 -- -- -- --
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 -- -- 325 325 -- -- -- --
extinguishment
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 -- -- 630 630 -- -- 243 243
revenue
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
</TABLE>
16. Subsequent Event (Unaudited)
Effective March 24, 2000, the Company entered into a Stock Purchase
Agreement with certain investors (the "Investors") whereby the Investors agreed
to purchase 800,000 shares of the Company's Common Stock for an aggregate
purchase price of $1.8 million and the issuance of warrants to purchase an
additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The
Investors were granted registration rights for the shares issued to them and
the shares underlying the warrants. In addition, the Investors will, upon
effective registration of the shares, purchase an additional 286,000 shares at
$2.25 per share and simultaneously receive an additional three-year warrant to
purchase 143,000 shares at $2.25 per share. In lieu of these additional shares
and warrants, the Investors have the option to purchase 429,000 shares at a
price equal to 75% of a trailing average market price of the Company's Common
Stock, as defined in the Stock Purchase Agreement.
F-14
<PAGE> 35
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 15, 2000
F-15
<PAGE> 36
CYTRX CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
------------------------------------- ------------ ------------- ---------- ------------ ----------
Reserve Deducted in the Balance Sheet
from the Asset to Which it Applies:
<S> <C> <C> <C> <C> <C>
Allowance for Bad Debts
Year ended December 31, 1999 $ -- $ -- $ -- $ -- $ --
Year ended December 31, 1998 22,187 -- -- 22,187 --
Year ended December 31, 1997 48,430 44,850 -- 71,093 22,187
Allowance for Deferred Tax Assets
Year ended December 31, 1999 $ 20,769,000 $ 5,595,000 $ -- $ -- $ 26,364,000
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
</TABLE>
F-16
