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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 March 24, 2000 was approximately $28.0 million. On March 24,
2000, there were 8,778,050 shares of the Registrant's common stock outstanding,
exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CytRx Corporation Proxy Statement for the 2000 Annual Meeting
of Stockholders (the "Proxy Statement") are incorporated by reference into Part
III.
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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.
In addition, on March 14, 2000 the Company received correspondence from
Nasdaq regarding the Company's failure, as of December 31, 1999, to satisfy
certain quantitative criteria of the maintenance standards for listing its
Common Stock with the Nasdaq National Market which provided the Company with
ten business days to respond with its plan to bring the Company back into
compliance with such criteria. The Company has responded within such time
period and is awaiting further notice from Nasdaq as to whether Nasdaq intends
to commence procedures to delist CytRx Common Stock from the Nasdaq National
Market. See Exhibit 99.1 - "Our Common Stock May Be Delisted from the Nasdaq
National Market".
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 devestating 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.
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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
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
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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.
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.
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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
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.
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GOVERNMENT REGULATION
The marketing of pharmaceutical products requires the approval of the FDA
and comparable regulatory authorities in foreign countries. The FDA has
established guidelines and safety standards which apply to the pre-clinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining FDA approval for a new therapeutic product
(drug) generally takes several years and involves the expenditure of
substantial resources. The steps required before such a product can be produced
and marketed for human use in the United States include preclinical studies in
animal models, the filing of an Investigational New Drug ("IND") application,
human clinical trials and the submission and approval of an NDA. The NDA
involves considerable data collection, verification and analysis, as well as
the preparation of summaries of the manufacturing and testing processes,
preclinical studies, and clinical trials. The FDA must approve the NDA before
the drug may be marketed. There can be no assurance that the Company will be
able to obtain the required FDA approvals for any of its products.
The manufacturing facilities and processes for the Company's products,
whether manufactured directly by the Company or by a third party, will be
subject to rigorous regulation, including the need to comply with Federal Good
Manufacturing Practice regulations. The Company is also subject to regulation
under the Occupational Safety and Health Act, the Environmental Protection Act,
the Nuclear Energy and Radiation Control Act, the Toxic Substance Control Act
and the Resource Conservation and Recovery Act.
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.
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<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
COMMON STOCK:
2000
January 1 to March 24 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 March 24, 2000, the closing price of the Common Stock as reported on
The Nasdaq Stock Market, was $3 1/4 and there were approximately 1,500 holders
of record of the Company's Common Stock. The number of record holders does not
reflect the number of beneficial owners of the Company's Common Stock for whom
shares are held by brokerage firms and other institutions. On March 14, 2000
the Company received correspondence from Nasdaq regarding the Company's failure
to satisfy certain quantitative criteria of the maintenance standards for
listing its Common Stock with the Nasdaq National Market which provided the
Company with ten business days to respond with its plan to bring the Company
back into compliance with such criteria. If the Company is unable to satisfy
such criteria or provide Nasdaq with an adequate plan to return to compliance,
Nasdaq may commence delisting procedures. See Exhibit 99.1 - "Our Common Stock
May Be Delisted from the Nasdaq National Market". 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>
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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
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.
9
<PAGE> 10
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
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).
10
<PAGE> 11
<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.
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
Information with respect to this item is incorporated herein by reference
from the Proxy Statement.
11
<PAGE> 12
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated herein by reference
from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated herein by reference
from the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS 10-K:
(1) Financial Statements
The 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 13 of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
None.
12
<PAGE> 13
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
10.4* Amended and Restated Change of Control Employment Agreement between CytRx
Corporation and Jack J. Luchese
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
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule (for SEC use only).
99.1 Safe Harbor Compliance Statement for Forward-looking Statements
</TABLE>
* Indicates a management contract or compensatory plan or arrangement.
- ---------
(a) Incorporated by reference to the Registrant's 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.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CYTRX CORPORATION
By: /s/ Jack J. Luchese
-----------------------------------------
Jack J. Luchese, President
Date: March 29, 2000 and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Jack L. Bowman Director March 29, 2000
- ------------------------------------
Jack L. Bowman
/s/ Raymond C. Carnahan, Jr. Director March 29, 2000
- ------------------------------------
Raymond C. Carnahan, Jr.
/s/ Lyle A. Hohnke Director March 29, 2000
- ---------------------------
Lyle A. Hohnke
/s/ Max Link Chairman of the March 29, 2000
- ------------------------------------ Board of Directors
Max Link
/s/ Jack J. Luchese Director March 29, 2000
- ------------------------------------
Jack J. Luchese President and Chief Executive Officer
(Principal Executive Officer)
/s/ Herbert H. McDade, Jr. Director March 29, 2000
- ------------------------------------
Herbert H. McDade, Jr.
/s/ Mark W. Reynolds VP, Finance March 29, 2000
- ------------------------------------ (Principal Financial Officer)
Mark W. Reynolds
</TABLE>
14
<PAGE> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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 therafter 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> 26
<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> 27
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> 28
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> 29
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> 30
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
<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
BETWEEN CYTRX CORPORATION AND JACK J. LUCHESE
<PAGE> 2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
BETWEEN
CYTRX CORPORATION
AND
JACK J. LUCHESE
This Amended and Restated Employment Agreement ("Agreement") is made
and executed this 1st day of September, 1999 (the "Effective Date"), by and
between CYTRX CORPORATION ("CytRx" or the "Company"), a Delaware Corporation
having its principal place of business at 154 Technology Parkway, Technology
Park/Atlanta, Norcross, Georgia 30092, and JACK J. LUCHESE ("Mr. Luchese") who
currently resides at 3915 River Hollow Run, Duluth, Georgia 30096.
WHEREAS, CytRx originally employed Mr. Luchese as its President and
Chief Executive Officer pursuant to an Employment Agreement dated March 13,
1989. After several amendments, the original Employment Agreement was amended
and restated effective as of January 1, 1995. That amended and restated
agreement was subsequently amended by Amendment No. 1 dated April 16, 1997,
Amendment No. 2 dated August 28, 1997, and Amendment No. 3 dated April 8, 1998
(collectively, the "1995 Agreement").
WHEREAS, the Compensation Committee of the Board of Directors of the
Company at its meeting on September 1, 1999, approved certain changes to the
terms of the employment of Mr. Luchese with the Company.
WHEREAS, as a result of the foregoing, both the Company and Mr. Luchese
concluded that the 1995 Agreement should be amended and restated so as to
incorporate all prior amendments and reflect the most recent amendments.
WHEREAS, this Agreement amends and restates the 1995 Employment
Agreement.
WHEREAS, the Board has authorized the execution of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises
made in this Agreement, the parties do hereby agree as follows:
1. EMPLOYMENT. CytRx agrees to and does hereby engage and employ Mr.
Luchese as President and Chief Executive Officer of CytRx Corporation for the
term and upon the
1
<PAGE> 3
terms and conditions set forth herein, and Mr. Luchese accepts such offer of
employment. It is also understood and agreed that Mr. Luchese will serve as a
director of the Company, without additional compensation, for any term he is
elected to serve. During the term of this Agreement, the Board of Directors will
take such actions as may be required to nominate and recommend Mr. Luchese for
election as a director by the shareholders. Mr. Luchese agrees to discharge his
duties hereunder in accordance with the direction of the Board of Directors of
CytRx and to follow diligently and implement faithfully all management policies
and decisions communicated to him by the Board of Directors. During the
employment of Mr. Luchese by CytRx, Mr. Luchese shall devote his full and
undivided time, attention, energies and loyalty to the Company's business but
the foregoing shall not be construed to prevent Mr. Luchese from making
investments in other businesses or enterprises or engaging in any other business
activity that does not interfere with Mr. Luchese's duties under this Agreement,
or conflict with his obligations under Paragraph 10 hereof or otherwise
represent a conflict of interest with his duties to CytRx. Notwithstanding the
above, Mr. Luchese may serve on the Board of Directors of companies not
affiliated with CytRx, and receive compensation in connection therewith, if such
position is approved by the Board of Directors of CytRx.
2. TERM AND RENEWAL. The term of Mr. Luchese's employment hereunder will
be for a period commencing on the Effective Date and continuing until December
31, 2002 (the "Expiration Date"), unless Mr. Luchese's employment is terminated
by either party pursuant to Paragraph 7 of this Agreement.
3. SALARY.
(a) For services provided hereunder, Mr. Luchese will be paid an
annual base salary. Mr. Luchese's base salary as of the Effective Date is Three
Hundred Fifty Thousand Dollars ($350,000). The base salary shall be reviewed by
the Board of Directors of the Company no less than once each 18 months. The base
salary will be increased from time to time consistent with the average overall
merit increases, if any, granted to all employees as a whole for such year, but
will not be decreased. If the base salary is increased, then the increased
amount shall be deemed the "base salary" for all purposes under this Agreement.
(b) It is understood and contemplated that, in addition to the
foregoing annual base salary, Mr. Luchese will be eligible to receive cash
bonuses in each calendar year during the term of this Agreement in such amounts,
if any, as shall be determined from time to time by the Board of Directors of
the Company in its sole discretion. The bonus for each year shall accrue, and
become due and payable, on January 1 of the following year, or any later time
requested by Mr. Luchese. If this Agreement expires on the Expiration Date, then
the obligation of the Company to pay a bonus to Mr. Luchese on January 1, 2003,
shall survive such expiration, and the Company shall pay such bonus to Mr.
Luchese as if this Agreement remained in full force and effect.
2
<PAGE> 4
4. FRINGE BENEFITS. Mr. Luchese, during the period of his employment
hereunder, will receive fringe benefits such as insurance, vacation leave, sick
leave and participation in any retirement plan as may exist from time to time
for all other executive officers of the Company; provided, however, that, during
the term of this Agreement, the Company shall maintain at its expense a
long-term disability policy for the benefit of Mr. Luchese, which will provide
coverage equal to a percentage of Mr. Luchese's base salary consistent with the
percentage coverage provided to the other executive officers of the Company.
Such insurance shall include any group long-term disability insurance on Mr.
Luchese that the Company maintains for the benefit of its senior executives. Mr.
Luchese will not receive an automobile or automobile expense allowance. Mr.
Luchese shall be entitled to six weeks of vacation leave, annually, which shall
be paid at his base salary, and shall accrue and be used in accordance with the
policies and procedures of the Company.
5. REIMBURSEMENT OF BUSINESS EXPENSES. The Company will promptly reimburse
Mr. Luchese for all business expenses incurred by him in connection with the
business of the Company in accordance with regular Company policy regarding the
nature and amount of expenses and the maintenance and submission of receipts and
records necessary for the Company to document them as proper business expenses.
6. THE EXECUTIVE WARRANTS.
(a) Current Status. Exhibit A hereto contains a list of all of the
warrants to acquire CytRx common stock ("Executive Warrants") held by Mr.
Luchese as of September 1, 1999, including with respect to each such warrant:
the grant date, the expiration date, the number of shares, the exercise price
and the vesting status or schedule.
(b) Other Registration, Vesting and Exercise Rights.
(1) In addition to any other registration rights Mr.
Luchese may have, the Company has filed or shall file with the Securities and
Exchange Commission a registration statement to register the shares of CytRx
common stock to be acquired under Executive Warrants under the Securities Act of
1933, and shall use its best efforts to keep such registration statement
effective and current for as long as Mr. Luchese has the right to exercise the
Executive Warrants and for a period of six (6) months thereafter, if such
additional period is required to allow Mr. Luchese to dispose of the acquired
shares in an orderly fashion.
(2) All rights to purchase CytRx stock pursuant to the
Executive Warrants that have vested prior to or upon the termination of Mr.
Luchese's employment with the Company may be exercised by Mr. Luchese at any
time until the expiration of such rights under the applicable warrant agreement,
even after Mr. Luchese's employment with the Company has been terminated. All
rights to purchase CytRx stock pursuant to the Executive Warrants that by their
terms vest after the termination of Mr. Luchese's
3
<PAGE> 5
employment with the Company shall terminate on the effective date of the
termination of Mr. Luchese's employment.
(3) For all purposes of this Agreement and the Executive
Warrants, (A) in the event of the death of Mr. Luchese, the Executive Warrants
may be exercised by his personal representative, executor, or heirs (whether by
will or by the laws of descent and distribution), and (B) in the event of the
incapacity of Mr. Luchese, the Executive Warrants may be exercised by his duly
appointed attorney-in-fact or other authorized person, in each case, to the same
extent such warrants have vested and are exercisable by the Holder (as defined
in the Executive Warrants) in accordance with the terms thereof.
7. TERMINATION OF EMPLOYMENT AND THIS AGREEMENT.
(a) If Mr. Luchese's employment is terminated by the Company for
cause (as hereinafter defined) or if Mr. Luchese voluntarily leaves the
employment of the Company prior to the Expiration Date, the Company will pay Mr.
Luchese the equivalent of three (3) months' salary at the base salary, and three
(3) months continuation of fringe benefits then being received by Mr. Luchese.
For purposes of this Agreement, termination "for cause" means termination of Mr.
Luchese's employment by action of a majority of the members of the Board of
Directors who are not employees of CytRx or any subsidiary, because of:
(1) material breach of contract,
(2) failure or inability to carry out reasonable
directives of the Board of Directors,
(3) conviction of Mr. Luchese for a felony, even if such
conviction is subject to appeal,
(4) uncontroverted evidence of falsification of records
or statements of the Company,
(5) uncontroverted evidence of intentional misuse of
Company funds or property, or
(6) other substantial misconduct which, in the reasonable
judgment of the Board, results in material adverse effect, discredit or
disrepute to the Company.
A termination of employment for any cause listed in clauses (1), (2) or
(6) above shall be effective only if Mr. Luchese has first been given notice by
the Board of Directors of the alleged breach, failure to perform or misconduct
and such breach, failure to perform or misconduct continues for fifteen days
following the date of such notice.
4
<PAGE> 6
(b) If this Agreement expires on the Expiration Date, or if the
sooner termination of Mr. Luchese's employment and this Agreement is not for
cause, not because of Mr. Luchese's death or disability and not because of his
voluntary termination of employment, then the Company will continue to make
semi-monthly base salary payments for a period of one year after the Expiration
Date or the earlier effective date of termination; provided, however, that (1)
in the case of the expiration of this Agreement on the Expiration Date, the
one-year salary continuation period shall be reduced by the period of time
before the Expiration Date that the Board of Directors gives Mr. Luchese written
notice that it intends to allow the Agreement to expire, or not to pay the full
salary continuation obligation if negotiations to renew the Agreement are
unsuccessful, and (2) in all cases, Mr. Luchese's rights to receive salary
continuation payments are contingent upon his using his best efforts to find a
new job commensurate with his position as the chief executive officer and member
of the Board of Directors of the Company. If Mr. Luchese obtains a position
during the one-year salary continuation period (whether commensurate with his
position with the Company or not) the obligation for salary continuation
hereunder shall be limited to an amount equivalent to the difference, if any,
between the base salary under this Agreement and the base salary paid to him by
his new employer. Fringe benefits provided during employment shall be continued
until Mr. Luchese finds another job as provided for under this Subparagraph or
until the end of the one-year salary continuation period, whichever first
occurs.
(c) If Mr. Luchese's employment and thereby this Agreement is
terminated because of Mr. Luchese's death, CytRx shall pay any compensation then
due him under this Agreement as of the date of his death to his surviving
spouse, or if there is no surviving spouse, to his estate, and shall make to
such spouse or his estate, as above, semi-monthly payments of salary based on
the annual rate which then would have been applicable to Mr. Luchese's
employment for six (6) months after his death, and provide six (6) months'
continuation of fringe benefits available to his dependents covered for such
benefits at the time of Mr. Luchese's death. If Mr. Luchese becomes permanently
disabled or subject to long term disability during the period of his employment
hereunder, and CytRx terminates this Agreement other than pursuant to Paragraph
7(a), Mr. Luchese's employment shall be deemed to have been terminated without
cause pursuant to Paragraph 7(b); provided, however, that (1) Mr. Luchese shall
not be required to find a new job, and (2) instead of the one-year salary
continuation, an amount equal to his base salary for one year shall be paid to
Mr. Luchese in variable monthly installments until such amount is exhausted,
with each installment being equal to the amount that when combined with payments
received during such month by Mr. Luchese from the Company under its short-term
disability policy, or from one or more insurance companies under long term
disability insurance policies maintained by the Company pursuant to Paragraph 4,
equals the amount of base salary (calculated on a pre-tax basis) that Mr.
Luchese would have received during such month if this Agreement had not been
terminated. For example, if (1) CytRx terminates this Agreement because Mr.
Luchese becomes permanently disabled at a time when his annual base salary is
$350,000, (2) Mr. Luchese
5
<PAGE> 7
is eligible immediately to receive monthly short term disability payments from
the Company equal to $29,167 (100% of his base salary) and (3) Mr. Luchese will
be eligible after one month to receive long term disability payments from the
insurance carrier equal to $17,500 (60% of his base salary), then CytRx will not
be obligated to make any payment to Mr. Luchese for the first month and will be
obligated to pay Mr. Luchese $11,667 per month (40% of his base salary) for the
next 2.5 years (30 months). If, in the above example, Mr. Luchese ceased for any
reason to qualify for the insurance company payments after the first 11 months,
then the Company shall be obligated to make monthly payments of $29,167 (100% of
his base salary) for the following 8 months ($350,000 less the $116,668 already
paid divided by $29,167), subject to the salary adjustment described in
Paragraph 7(b) if Mr. Luchese obtains a position during the 8 month period.
It is understood that permanently disabled and subject to long term
disability shall mean such sickness, as well as physical or mental disability,
that qualifies or, with the passage of time (not to exceed 90 calendar days),
will qualify Mr. Luchese to receive benefit payments under at least one of the
long-term disability policies maintained by the Company for Mr. Luchese in
accordance with Paragraph 4. In the event of a dispute as to Mr. Luchese's
ability to perform his duties, the Company may refer Mr. Luchese to a licensed
practicing physician of CytRx's choice and reasonably satisfactory to Mr.
Luchese, and Mr. Luchese agrees to submit to such tests and examinations as such
physician shall deem appropriate. The determination by the physician as to
whether or not Mr. Luchese is unable to perform substantially his normal duties
shall conclusively determine such facts for the purposes of this Paragraph 7(c).
Short term illness or injury not amounting to long term disability shall be
treated in accordance with any benefit provided under Paragraph 4 of this
Agreement.
It is also understood that, if CytRx becomes obligated to make payments
to Mr. Luchese pursuant to this Paragraph 7(c) because of Mr. Luchese's
disability and, within a reasonable period of time after Mr. Luchese's
termination, a majority of the members of the Board of Directors of the Company
who are not employees of CytRx or any subsidiary determine in good faith that
Mr. Luchese should have been terminated for cause in accordance with Paragraph
7(a), then the obligations of the Company under this Paragraph 7(c) shall cease
after the Company has paid to Mr. Luchese an amount equal to the amount due him
pursuant to Paragraph 7(a) and continued Mr. Luchese's fringe benefits for the
period of time required by Paragraph 7(a); provided, however, that in no event
shall Mr. Luchese be required to repay the Company any amounts paid to him under
this Paragraph 7(c).
8. NO RESTRICTIONS ON MR. LUCHESE'S EMPLOYMENT BY CYTRX. Mr. Luchese
represents as a condition of this Agreement that he is not under any existing
employment agreement, noncompetition agreement or other legally binding
agreement which would prohibit or in any manner restrict his employment
hereunder with CytRx.
6
<PAGE> 8
9. EMPLOYEE CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENT. Mr.
Luchese and the Company are parties to a confidentiality and invention
assignment letter agreement dated November 3, 1994, which shall be deemed to be
incorporated into this Agreement as if fully set forth in this Paragraph 9.
10. RESTRICTIONS ON COMPETITION.
(a) During Employment. In order to protect CytRx's investment,
which includes but is not limited to, time, money and proprietary information,
and in recognition of the unique character of the Trade Secrets and other
Confidential Information which are the basis of CytRx's business and future
business opportunities, in recognition of the worldwide geographic scope of
CytRx's business and/or potential business opportunities and Mr. Luchese's
contemplated role, responsibilities and knowledge therefor, for the entire
period of Mr. Luchese's employment by CytRx, Mr. Luchese agrees that he will not
work as a consultant for or directly or indirectly perform services anywhere in
the world for himself or any other person, firm or corporation in competition
with CytRx. A business in competition with CytRx includes any business activity
being actively investigated or contemplated by CytRx during the period of Mr.
Luchese's employment by CytRx. Without limitation on the foregoing, but by way
of example, businesses currently contemplated by CytRx as being in competition
with it include pharmaceutical businesses engaged in or considering engaging in
manufacture, marketing or development of commercial products in any and all of
the following areas:
(1) Immune system stimulating compounds and methods;
(2) Growth stimulation of animals;
(3) all formulations and methods using the surface-active
copolymers described in U.S. Patent No. 4,801,452,
U.S. Patent Application Serial No. 291,925, U.S.
Patent Application Serial No. 107,358, U.S. Patent
Application Serial No. 208,335, and U.S. Patent
Application Serial No. 150,731.
(4) Mycobacterial and antiviral chemotherapy; and
(5) Vaccine adjuvants.
(b) For two (2) years after termination of employment. In order to
protect CytRx's investment, which includes but is not limited to, time, money
and proprietary information and in recognition of the unique character of the
Trade Secrets and other Confidential Information which are the basis of CytRx's
business and future business opportunities, in recognition of the worldwide
geographic scope of CytRx's business and/or potential business opportunities and
Mr. Luchese's contemplated role, responsibilities and knowledge therefor, for a
period of two (2) years following the
7
<PAGE> 9
termination of Mr. Luchese's employment with CytRx, regardless of the reason
therefor, Mr. Luchese agrees that he will not work as a consultant for or
directly or indirectly perform services anywhere in the world for himself or any
other person, firm or corporation in any capacity involving the study,
development, use, manufacture or marketing of all formulations and methods using
the surface-active copolymers described in U.S. Patent No. 4,801,452, U.S.
Patent Application Serial No. 291,925, U.S. Patent Application Serial No.
107,358, U.S. Patent Application Serial No. 208,335, and U.S. Patent Application
Serial No. 150,731.
The foregoing shall not preclude (1) the employment of Mr. Luchese,
whether as a director, officer, employee, consultant or otherwise, by a research
partner, joint venture partner, licensee or other person, or corporation or
entity that at such time is authorized by CytRx to have rights in or to
restricted products, or (2) the ownership by Mr. Luchese of investment
securities representing not more than three (3) per cent of the outstanding
voting securities of company engaged in a pharmaceutical business, whose stock
and/or securities are traded on a national stock exchange or national quotations
system, provided that such investment is passive and not with the intention of
controlling such business.
(c) Mr. Luchese will notify the Company at least three (3) weeks
before he is to begin any employment or activity which is described in
Subparagraph (b) of this Paragraph if such employment or activity would commence
within two (2) years after the termination of his employment with CytRx. Such
notice shall be in writing and shall contain a complete description of such
offer, including the position and the responsibilities involved.
(d) Mr. Luchese agrees and acknowledges that the restrictions on
competition contained herein including their geographic and product scope are
necessary and reasonable to protect the interests of CytRx and that the
Company's Trade Secrets and other Confidential Information of which he will
become acquainted, if used anywhere in the world during the period in which he
has agreed not to use them or to disclose them would cause CytRx serious and
irreparable damage and harm. Mr. Luchese represents and admits that upon the
termination of his employment with CytRx, his experience and capabilities are
such that he can obtain employment engaged in other lines of endeavor and that
the enforcement of this Agreement would not prevent him from earning a
livelihood.
11. ACKNOWLEDGMENTS.
(a) It is understood and contemplated by the parties that if the
obligations undertaken herein in Paragraphs 9 and 10 were breached in any way,
irreparable harm to the Company should be presumed. Damages might be difficult
if not impossible to ascertain, and the faithful observance of the terms of this
Agreement during and after termination of Mr. Luchese's employment is an
essential condition to his employment with the Company. In light of these
considerations, Mr. Luchese agrees that a court of
8
<PAGE> 10
competent jurisdiction may immediately enjoin any breach or threatened breach of
Paragraphs 9 and 10 to this Agreement, without waiver of any other rights and
remedies which the Company may have at law.
(b) The obligations undertaken in Paragraphs 9 and 10 of this
Agreement survive the termination of Mr. Luchese's employment hereunder for the
period specified in each such Paragraph and the termination of this Agreement,
regardless of the reason therefor.
The obligations of CytRx to Mr. Luchese following his termination of
employment as set forth in Paragraphs 3(b), 6, and 7 shall survive the
termination of this Agreement until satisfied in accordance with the terms
thereof.
(c) The rights of Mr. Luchese under this Agreement are in addition
to any other rights or remedies he may have in law or in equity in the event
CytRx breaches this Agreement, all of which rights and remedies are preserved in
full. Without limiting the foregoing, the rights of Mr. Luchese under Paragraph
7 herein do not limit any right he would have upon termination of employment
caused by a breach of CytRx. However, any damages he may sustain shall be
reduced by the payments required to be made under this Agreement.
12. CONSTRUCTION OF AGREEMENT.
(a) It is the intention of the parties to this Agreement that any
construction of this Agreement or Paragraph thereof shall be in favor of its
legality and enforceability and that any construction causing illegality or
unenforceability should yield to a construction favoring legality and
enforceability. Further, the parties agree that should any portion of this
Agreement be judicially held invalid, unenforceable or void, such holding shall
not have the effect of invalidating or voiding any remaining portion of this
Agreement not so declared and that any portion held to be invalid, unenforceable
or void shall, if possible, be deemed amended or reduced in scope, otherwise to
be stricken from this Agreement, but only to the extent required for purposes of
maintaining the legality, validity and enforceability of this Agreement and all
portions thereof in the jurisdiction so holding.
(b) It is understood that use of the word "and" herein included
the disjunctive as well as its injunctive meaning whenever such meaning would
broaden the protection to the Company in the context in which it is used.
13. NO WAIVER. No waiver of any breach of this Agreement may be construed
or deemed as a waiver of any succeeding breach of this Agreement.
14. PERSONAL SERVICES. It is understood and contemplated that this
Agreement provides for personal services of Mr. Luchese to the Company.
9
<PAGE> 11
15. NO INTERFERENCE. For two (2) years following the termination of Mr.
Luchese's employment hereunder, regardless of the reason therefor, Mr. Luchese
will not intentionally disrupt or attempt to disrupt the Company's business
relationship with its customers or suppliers, nor solicit any of the Company's
employees to terminate their employment with CytRx.
16. CERTIFICATION BY EMPLOYEE. Mr. Luchese certifies that he has received a
copy of this Agreement for review and study before being asked to execute it,
that he has read this Agreement carefully, that he has had a sufficient
opportunity before executing this Agreement to ask questions about it and to
receive answers to any such questions and that he understands the obligations
and rights provided hereunder.
17. ENTIRE AGREEMENT. This Agreement hereto supersedes any and all other
agreements, both oral and in writing, between the parties hereto with respect to
the employment and terms and conditions thereof of Mr. Luchese by CytRx, and it
contains all of the parties' representations, covenants and agreements with
respect to such matters. The terms of this Agreement may not be changed orally
but only by a subsequent writing signed by the party against whom enforcement of
such modification is sought.
18. CAPTIONS. Paragraph captions used herein are for convenience of
reference only and shall not change the meaning of the terms of this Agreement.
19. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall inure to the
benefit of any successors and assigns of the Company.
20. GOVERNING LAW. This Agreement shall be construed and governed in
accordance with the laws of the State of Georgia.
21. CORPORATE AUTHORITY. The Company represents and warrants that this
Agreement including the issuance of the warrants (1) has been duly authorized,
executed and delivered by the Company, (2) constitutes a legal, valid and
binding obligation of the Company enforceable in accordance with its terms, and
(3) does not conflict with or result in a violation of the Company's Certificate
of Incorporation, By-laws, or any contract, agreement or instrument to which the
Company is a party or is otherwise bound.
(signatures on following page)
10
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal on the date hereof, to be effective as of the Effective Date.
JACK J. LUCHESE:
----------------------------
Attest: CYTRX CORPORATION:
- ------------------- ----------------------------
Corporate Secretary By: William B. Fleck
(CORPORATE SEAL) Title: Vice President, Human Resources
----------------------------
By: Herbert H. McDade, Jr.
Chairman, CytRx Compensation Committee
<PAGE> 13
EXHIBIT A
Executive Warrants
Mr. Luchese has the following Executive Warrants as of September 1,
1999(1):
<TABLE>
<CAPTION>
WARRANT GRANT EXPIRATION WARRANT EXERCISE VESTING
ID NO. DATE DATE SHARES PRICE STATUS
<S> <C> <C> <C> <C> <C>
WI/II-1 2/20/95(2) 12/31/04 500,000 $ 1.00 100%
WI/II-2 2/20/95(3) 02/22/01 50,000 $ 1.00 100%
WIII-2 2/20/95(4) 03/24/03 32,427 $ 1.00 100%
WIV-2 2/20/95(5) 12/31/04 100,000 $ 1.00 100%
None 3/26/96(6) 03/25/06 200,000 $ 1.00 See schedule
(A) below
None 6/6/97(7) 06/05/07 50,000 $ 1.00 See schedule
(B) below
None 4/8/98(8) 04/07/08 450,000 $ 1.00 100%
None 9/1/99 08/31/09 500,000 $2.125 See schedule
(C) below
</TABLE>
- -----------------------
(1) The Warrant numbers and prices have been adjusted to reflect the reverse
stock split occurring on February 5, 1996.
(2) First amended by Amendment No. 1 on April 16, 1997, to provide that it is
fully vested. Last amended by Amendment No. 2 on September 15, 1998, to reduce
the exercise price from $4.50 to $1.00.
(3) First amended by Amendment No. 1 on April 16, 1997, to provide that it is
fully vested. Last amended by Amendment No. 2 on September 15, 1998, to reduce
the exercise price from $4.50 to $1.00.
(4) First amended by Amendment No. 1 on April 16, 1997, to provide that it is
fully vested. Last amended by Amendment No. 2 on September 15, 1998, to reduce
the exercise price from $7.00 to $1.00.
(5) First amended by Amendment No. 1 on April 16, 1997, to amend vesting
schedule. Now fully vested. Last amended by Amendment No. 2 on September 15,
1998, to reduce the exercise price from $7.00 to $1.00.
(6) First amended by Amendment No. 1 on April 16, 1997 to provide for full
vesting upon a Change in Control, as defined. Later amended by Amendment No. 2
on April 8, 1998 to change the vesting schedule by changing the price target
from $15 to $7.50. Last amended by Amendment No. 2 on September 15, 1998, to
reduce the exercise price from $4.50 to $1.00.
(7) First amended by Amendment No. 1 on April 8, 1998, to change the vesting
schedule by changing the price target from $20 to $12. Last amended by Amendment
No. 2 on September 15, 1998, to reduce the exercise price from $4.125 to $1.00.
(8) Amended by Amendment No. 1 on September 15, 1998, to reduce the exercise
price from $2.9375 to $1.00, and to reduce the vesting target stock prices from
$5 to $1.50, $7.50 to $2.00, and $10 to $2.50, respectively.
<PAGE> 14
SCHEDULE (A) - VESTING SCHEDULE FOR 1996 WARRANTS
25,000 on sale/IPO of Vaxcel by December 31, 1998 EXPIRED
25,000 on sale/IPO of VetLife by December 31, 1998 VESTED
25,000 on sale/IPO of Proceutics by December 31, 1998 VESTED
25,000 on third-party funding of RheothRx by December 31, 1998 EXPIRED
50,000 on significant business transaction by December 31, 1998 EXPIRED
50,000 on market price sustaining $7.50 by December 31, 1998 EXPIRED
OR 100% on a Change in Control, as defined.
SCHEDULE (B) - VESTING SCHEDULE FOR 1997 WARRANTS
6,250 on each of March 31, 1999; June 30, 1999; September 30, 1999 and
December 31, 1999 or earlier on death, disability or termination of
employment without cause before 12/31/99 or upon a Change in Control.
25,000 if on or before December 31, 1999 the stock price averages $12
for 10 days or there is a Change in Control.
SCHEDULE (C) - VESTING SCHEDULE FOR 1999 WARRANTS
25,000 on each of March 31, 2000, June 30, 2000, September 30, 2000;
December 31, 2000, March 31, 2001, June 30, 2001, September 30, 2001; December
31, 2001, March 31, 2002, June 30, 2002, September 30, 2002; and December 31,
2002, or as to all 300,000 shares upon a Change of Control on or before December
31, 2002.
50,000 if the stock price reaches $5.00 on or before July 1, 2000 or
upon a Change of Control on or before July 1, 2000.
75,000 on (i) the successful completion of a significant merger,
acquisition or strategic alliance on or before December 31, 2002, (ii)
successfully raising a total of $15,000,000 on or before December 31, 2000, or
(iii) a Change of Control on or before December 31, 2002.
75,000 on (i) the successful NDA/PLA regulatory (FDA) approval of
FLOCOR on or before December 31, 2002, or (ii) a Change of Control on or before
December 31, 2002.
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EXHIBIT 10.4
AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT
BETWEEN CYTRX CORPORATION AND JACK J. LUCHESE
<PAGE> 2
AMENDED AND RESTATED
CHANGE IN CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between CytRx Corporation, a Delaware corporation (the
"Company") and Jack J. Luchese (the "Executive"), dated as of the 1st day of
September, 1999. This Agreement amends and restates that certain Change in
Control Employment Agreement, dated as of April 16, 1997, by and between the
Executive and the Company.
The Board of Directors of the Company (the "Board"), has determined
that it is in the best interests of the Company and its stockholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is imperative to diminish
the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control and
to encourage the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
(a) The "Effective Date" shall mean the first date during
the Change of Control Period (as defined in Section l(b)) on which a Change of
Control (as defined in Section 2) occurs. Anything in this Agreement to the
contrary notwithstanding, if a Change of Control occurs and if the Executive's
employment with the Company is terminated prior to the date on which the Change
of Control occurs, and if it is reasonably demonstrated by the Executive that
such termination of employment (i) was at the request of a third party who has
taken steps reasonably calculated to effect a Change of Control or (ii)
otherwise arose in connection with or anticipation of a Change of Control, then
for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period
commencing on the date hereof and ending on the third anniversary of the date
hereof; provided, however, that commencing on the date one year after the date
hereof, and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company
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shall give notice to the Executive that the Change of Control Period shall not
be so extended.
(c) The "Employment Agreement" shall mean that certain
Amended and Restated Employment Agreement, dated as of September 1, 1999, as
amended from time to time, by and between the Company and the Executive.
2. Change of Control. For the purposes of this Agreement, a
"Change of Control" shall mean:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 25% or more of the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition by a Person who is on April
1, 1997 the beneficial owner of 25% or more of the Outstanding Company Voting
Securities, (ii) any acquisition directly from the Company, (iii) any
acquisition by the Company, (iv) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (v) any acquisition by any corporation pursuant to
a transaction which complies with clauses (i), (ii) and (iii) of subsection (c)
of this Section 2; or
(b) Individuals who, as of April 1, 1997, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to April 1, 1997 whose election, or nomination for election
by the Company's stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the
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<PAGE> 4
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, (ii) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 25% or more of the combined voting power of the then
outstanding voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination, and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the second anniversary of
such date (the "Employment Period").
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the
Executive's position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date, and (B) the Executive's services shall be
performed at the location where the Executive was employed immediately preceding
the Effective Date or any office or location less than 35 miles from such
location.
(ii) During the Employment Period, and excluding
any periods of vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) engage in other business activities that do not
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<PAGE> 5
represent a conflict of interest with his duties to the Company, and (C) manage
personal investments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the Executive
prior to the Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subsequent to the
Effective Date shall not thereafter be deemed to interfere with the performance
of the Executive's responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period,
the Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to 12 times the highest monthly
base salary paid or payable, including any base salary which has been earned but
deferred, to the Executive by the Company and its affiliated companies in
respect of the 12-month period immediately preceding the month in which the
Effective Date occurs. During the Employment Period, the Annual Base Salary
shall be reviewed no more than 12 months after the last salary increase awarded
to the Executive prior to the Effective Date and thereafter at least annually.
Any increase in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary shall not
be reduced after any such increase and the term Annual Base Salary as utilized
in this Agreement shall refer to Annual Base Salary as so increased. As used in
this Agreement, the term "affiliated companies" shall include any company
controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base
Salary, the Executive shall be awarded, for each fiscal year ending during the
Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal
to the Executive's highest annual bonus for the last three full fiscal years
prior to the Effective Date (annualized in the event that the Executive was not
employed by the Company for the whole of such fiscal year). Each such Annual
Bonus shall be paid no later than the end of the third month of the fiscal year
next following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans.
During the Employment Period, the Executive shall be entitled to participate in
all incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period
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<PAGE> 6
immediately preceding the Effective Date or if more favorable to the Executive,
those provided generally at any time after the Effective Date to other peer
executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment
Period, the Executive and/or the Executive's family, as the case may be, shall
be eligible for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the Company and its
affiliated companies (including, without limitation, medical, prescription,
dental, disability, employee life, group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(v) Expenses. During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most favorable
policies, practices and procedures of the Company and its affiliated companies
in effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment
Period, the Executive shall be entitled to fringe benefits in accordance with
the most favorable plans, practices, programs and policies of the Company and
its affiliated companies in effect for the Executive at any time during the
120-day period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall
terminate automatically upon the Executive's death during the Employment Period.
If the Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 13(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall
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mean the absence of the Executive from the Executive's duties with the Company
on a full-time basis for 180 consecutive days as a result of incapacity due to
mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes of this
Agreement, "Cause" shall mean:
(i) the willful and continued failure of the
Executive to perform substantially the Executive's duties with the Company or
one of its affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief Executive
Officer of the Company which specifically identifies the manner in which the
Board or Chief Executive Officer believes that the Executive has not
substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in
illegal conduct or gross misconduct which is materially and demonstrably
injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be
terminated by the Executive for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean:
(i) the assignment to the Executive of any
duties inconsistent in any respect with the Executive's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this
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<PAGE> 8
Agreement, or any other action by the Company which results in a diminution in
such position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(ii) any failure by the Company to comply with
any of the provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be
based at any office or location other than as provided in Section 4(a)(i)(B)
hereof or the Company's requiring the Executive to travel on Company business to
a substantially greater extent than required immediately prior to the Effective
Date;
(iv) any purported termination by the Company of
the Executive's employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with
and satisfy Section 12(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the Executive for
any reason during the 30-day period immediately following the first anniversary
of the Effective Date shall be deemed to be a termination for Good Reason for
all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company
for Cause, or by the Executive for Good Reason, shall be communicated by Notice
of Termination to the other party hereto given in accordance with Section 13(b)
of this Agreement. For purposes of this Agreement, a "Notice of Termination"
means a written notice which (i) indicates the specific termination provision in
this Agreement relied upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated and
(iii) if the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date shall be not
more than 30 days after the giving of such notice). The failure by the Executive
or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i)
if the Executive's employment is terminated by the Company for Cause, or by the
Executive for
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Good Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination, and (iii) if the Executive's employment is terminated by
reason of death or Disability, the Date of Termination shall be the date of
death of the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability, or the Executive shall terminate
employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum
in cash within 30 days after the Date of Termination the aggregate of the
following amounts:
A. the sum of (1) the Executive's
Annual Base Salary through the Date of Termination to the extent not theretofore
paid, (2) the product of (x) the Annual Bonus paid or payable, including any
bonus or portion thereof which has been earned but deferred, for the most
recently completed fiscal year during the Employment Period, if any (such amount
being referred to as the "Most Recent Annual Bonus") and (y) a fraction, the
numerator of which is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365, and (3) any
compensation previously deferred by the Executive (together with any accrued
interest or earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in clauses (1),
(2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and
B. the amount equal to two times the
sum of (1) the Executive's Annual Base Salary, and (2) the Most Recent Annual
Bonus; and
C. an amount equal to the excess of
(a) the actuarial equivalent of the benefit under the Company's qualified
retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less
favorable to the Executive than those in effect under the Company's Retirement
Plan immediately prior to the Effective Date), and any excess or supplemental
retirement plans in which the Executive participates (together, the "SERP")
which the Executive would receive if the Executive's employment continued for
two years after the Date of Termination, assuming for this purpose that all
accrued benefits are fully vested, and, assuming that the Executive's
compensation in each of such two years is the Annual Base Salary required by
Section 4(b)(i) plus the Most Recent Annual Bonus, over (b) the actuarial
equivalent of the Executive's actual benefit (paid or payable), if any, under
the Retirement Plan and the SERP as of the Date of Termination;
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(ii) for two years after the Executive's Date of
Termination, or such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, the Company shall continue
benefits to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 4(b)(iv) of this Agreement if the
Executive's employment had not been terminated or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies and their families,
provided, however, that if the Executive becomes re-employed with another
employer and is eligible to receive medical or other welfare benefits under
another employer provided plan, the medical and other welfare benefits described
herein shall be secondary to those provided under such other plan during such
applicable period of eligibility. For purposes of determining eligibility (but
not the time of commencement of benefits) of the Executive for retiree benefits
pursuant to such plans, practices, programs and policies, the Executive shall be
considered to have remained employed until two years after the Date of
Termination and to have retired on the last day of such period;
(iii) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to the Executive any other
amounts or benefits required to be paid or provided or which the Executive is
eligible to receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other amounts and
benefits shall be hereinafter referred to as the "Other Benefits").
(iv) Notwithstanding any provision of this
Agreement to the contrary, the Executive shall forfeit his right to receive, or,
to the extent such amounts have previously been paid to the Executive, shall
repay in full to the Company with interest at 8% per annum within thirty (30)
days of a final determination of the Executive's liability therefor as set forth
below, the amount described in Section 6(a)(i)(B) of this Agreement if at any
time during the period of two years after the Date of Termination (the
"Restricted Period") he violates the restrictions on competition set forth in
Section 11 hereof. Any determination of whether the Executive has violated the
such non-competition restrictions shall be made by arbitration in Atlanta,
Georgia under the Rules of Commercial Arbitration (the "Rules") of the American
Arbitration Association, which Rules are deemed to be incorporated by reference
herein.
(b) Death. If the Executive's employment is terminated by
reason of the Executive's death during the Employment Period, this Agreement
shall terminate without further obligations to the Executive's legal
representatives under this Agreement, other than for payment of Accrued
Obligations and the timely payment or provision of Other Benefits. Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 6(b) shall include without limitation, and the
Executive's estate and/or beneficiaries shall be entitled to receive, benefits
at least equal to the most favorable of the following: (1) the death benefits
described in Section 7(c) of the
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Employment Agreement (whether or not superseded by this Agreement), (2) benefits
provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date, or (3) similar benefits in effect on the date of the Executive's
death with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is
terminated by reason of the Executive's Disability during the Employment Period,
this Agreement shall terminate without further obligations to the Executive,
other than for payment of Accrued Obligations and the timely payment or
provision of Other Benefits. Accrued Obligations shall be paid to the Executive
in a lump sum in cash within 30 days of the Date of Termination. With respect to
the provision of Other Benefits, the term Other Benefits as utilized in this
Section 6(c) shall include, and the Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits at least
equal to the most favorable of the following: (1) the post-disability benefits
described in Section 7(c) of the Employment Agreement (whether or not superseded
by this Agreement), (2) disability and other benefits generally provided by the
Company and its affiliated companies to disabled executives and/or their
families in accordance with such plans, programs, practices and policies
relating to disability, if any, as in effect generally with respect to other
peer executives and their families at any time during the 120-day period
immediately preceding the Effective Date, or (3) disability and other benefits
in effect at any time thereafter generally with respect to other peer executives
of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's
employment shall be terminated for Cause during the Employment Period, this
Agreement shall terminate without further obligations to the Executive other
than the obligation to pay to the Executive (x) his Annual Base Salary through
the Date of Termination, (y) the amount of any compensation previously deferred
by the Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this Section 6(d) shall include, and the
Executive shall be entitled after his termination of employment to receive, the
post-termination benefits described in the first sentence of Section 7(a) of the
Employment Agreement (whether or not superseded by this Agreement).
7. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any plan,
program, policy or
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<PAGE> 12
practice provided by the Company or any of its affiliated companies and for
which the Executive may qualify, nor, subject to Section 13(f), shall anything
herein limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated companies at or subsequent
to the Date of Termination shall be payable in accordance with such plan,
policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
9. Certain Adjustments for Excise Tax.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code (the "Excise Tax"), then, prior to the making of any
Payment to the Executive, a calculation shall be made comparing (i) the net
benefit to the Executive of the Payment after payment of the Excise Tax and all
applicable federal, state and local income and other taxes, to (ii) the net
benefit to the Executive if the Payment had been limited to the extent necessary
to avoid being subject to the Excise Tax (but after payment of all other
applicable federal, state and local income and other taxes). If the amount
calculated under (i) above is less than the amount calculated under (ii) above,
then the Payment shall be limited to the extent necessary to avoid being subject
to the Excise Tax, and the Executive may select the component of the Payment to
which such limitation is to be applied.
(b) The determination of whether an Excise Tax would be
imposed, the amount of such Excise Tax, and the calculation of the amounts
referred to in (i) and
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<PAGE> 13
(ii) above shall be made by Ernst & Young LLP or such other
nationally-recognized public accounting firm as may be designated by the
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Payments which the Executive was entitled to, but
did not receive pursuant to this Section 9, could have been made without the
imposition of the Excise Tax ("Underpayment"). In such event, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by the Company to or for the benefit of
the Executive.
10. Confidential Information. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company or any of its
affiliated companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it. In no event shall an asserted violation of the
provisions of this Section 10 constitute a basis for deferring or withholding
any amounts otherwise payable to the Executive under this Agreement.
11. Restriction on Competition. In order to protect the Company's
investment, which includes but is not limited to, time, money and proprietary
information and in recognition of the unique character of the trade secrets and
other confidential information which are the basis of the Company's business and
future business opportunities, in recognition of the worldwide geographic scope
of the Company's business and/or potential business opportunities and the
Executive's contemplated role, responsibilities and knowledge therefor, for a
period of two years following the Date of Termination, regardless of the reason
therefor, the Executive agrees that he will not work as a consultant for or
directly or indirectly perform services anywhere in the world for himself or any
other person, firm or corporation in any capacity involving the study,
development, use, manufacture or marketing of all formulations and methods using
the surface-active copolymers described in U.S. Patent No. 4,801,452, U.S.
Patent
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<PAGE> 14
Application Serial No. 291,925, U.S. Patent Application Serial No. 107,358, U.S.
Patent Application Serial No. 208,335, and U.S. Patent Application Serial No.
150,731. The foregoing shall not preclude (i) the employment of the Executive,
whether as a director, officer, employee, consultant or otherwise, by a research
partner, joint venture partner, licensee or other person, or corporation or
entity that at such time is authorized by the Company to have rights in or to
restricted products, or (ii) the ownership by the Executive of investment
securities representing not more than three per cent of the outstanding voting
securities of company engaged in a pharmaceutical business, whose stock and/or
securities are traded on a national stock exchange or national quotations
system, provided that such investment is passive and not with the intention of
controlling such business.
12. Successors.
(a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
13. Miscellaneous.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than-by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Mr. Jack J. Luchese
3915 River Hollow Run
Duluth, Georgia 30096
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<PAGE> 15
If to the Company:
CytRx Corporation
154 Technology Parkway
Norcross, Georgia 30092
Attention: Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable
under this Agreement such federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist
upon strict compliance with any provision of this Agreement or the failure to
assert any right the Executive or the Company may have hereunder, including,
without limitation, the right of the Executive to terminate employment for Good
Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to
be a waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that,
except as may otherwise be provided under any other written agreement between
the Executive and the Company, the employment of the Executive by the Company is
"at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time prior to the Effective Date, in which case
the Executive shall have no further rights under this Agreement. From and after
the Effective Date, this Agreement shall supersede any other agreement between
the parties with respect to the subject matter hereof, including without
limitation the Employment Agreement; provided, however, that the following shall
expressly survive the Effective Date of this Agreement: (i) Paragraphs 6, 9,
10(a), 10(c), 10(d) and 11(a) of the Employment Agreement, and (ii) any and all
outstanding rights, options and/or warrants to purchase stock of the Company
held by the Executive on the Effective Date.
(signatures on following page)
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<PAGE> 16
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf by its
undersigned officer thereunto, duly authorized, all as of the day and year first
above written.
----------------------------------
Jack J. Luchese
Attest: CYTRX CORPORATION:
- ------------------- ----------------------------
Corporate Secretary By: William B. Fleck
(CORPORATE SEAL) Title: Vice President, Human Resources
----------------------------
By: Herbert H. McDade, Jr.
Chairman, CytRx Compensation Committee
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<PAGE> 1
EXHIBIT 10.12
COMMON STOCK PURCHASE AGREEMENT
DATED MARCH 24, 2000
BY AND BETWEEN CYTRX CORPORATION AND THE INVESTORS SIGNATORY THERETO
<PAGE> 2
COMMON STOCK PURCHASE AGREEMENT
BETWEEN
CYTRX CORPORATION
AND
THE INVESTORS SIGNATORY HERETO
COMMON STOCK PURCHASE AGREEMENT dated as of March 24, 2000 (the
"Agreement"), between the Investors signatory hereto (each an "Investor" and
together the "Investors"), and CytRx Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase 800,000 shares of Common Stock (as defined
below) and 330,891 Warrants (as defined below) and upon the Effective Date
shall purchase an additional 429,000 shares of Common Stock or 286,000 shares
of Common Stock and 143,000 Warrants.
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") and/or 4(6) of the United States Securities
Act and/or Regulation D ("Regulation D") and the other rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in securities to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "Bid Price" shall mean the closing bid price (as reported
by Bloomberg L.P.) of Common Stock on the Principal Market on the date in
question.
Section 1.2. "Capital Shares" shall mean the Common Stock and any shares
of any other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of the
Company.
Section 1.3. "Capital Shares Equivalents" shall mean any securities,
rights, or obligations that are convertible into or exchangeable for or give
any right to subscribe for any Capital Shares of the Company or any warrants,
options or other rights to subscribe for or purchase Capital Shares or any such
convertible or exchangeable securities.
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Section 1.4. "Closing" shall mean each closing of the purchase and
sale of the Common Stock pursuant to Section 2.1.
Section 1.5. "Closing Date" shall mean the date on which all conditions to
the applicable Closing have been satisfied (as defined in Section 2.1 (b)
hereto) and such Closing shall have occurred.
Section 1.6. "Common Stock" shall mean the Company's common stock, $0.001
par value per share.
Section 1.7. "Damages" shall mean any loss, claim, damage, judgment,
penalty, deficiency, liability, costs and expenses (including, without
limitation, reasonable attorney's fees and disbursements and reasonable costs
and expenses of expert witnesses and investigation).
Section 1.8. "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.
Section 1.9. "Escrow Agent" shall have the meaning set forth in the
Escrow Agreement.
Section 1.10. "Escrow Agreement" shall mean the Escrow Agreement in
substantially the form of Exhibit A hereto executed and delivered
contemporaneously with this Agreement.
Section 1.11. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.12. "Legend" shall mean the legend set forth in Section 9.1.
Section 1.13. "Market Price" shall mean seventy-five percent (75%) of the
average of the Bid Prices for the ten (10) Trading Days prior to the Effective
Date.
Section 1.14. "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects or financial condition of the
Company that is material and adverse to the Company and its subsidiaries and
affiliates, taken as a whole, and/or any condition, circumstance, or situation
that would prohibit or otherwise interfere with the ability of the Company to
enter into and perform any of its obligations under this Agreement, the
Registration Rights Agreement, the Escrow Agreement in any material respect.
Section 1.15. "Outstanding" when used with reference to shares of Common
Stock or Capital Shares (collectively the "Shares"), shall mean, at any date as
of which the number of such Shares is to be determined, all issued and
outstanding Shares, and shall include all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that "Outstanding" shall not mean any such Shares
then directly or indirectly owned or held by or for the account of the Company.
Section 1.16. "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
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<PAGE> 4
Section 1.17. "Principal Market" shall mean the American Stock Exchange,
the New York Stock Exchange, the NASDAQ National, SmallCap Markets or the OTC
Bulletin Board, whichever is at the time the principal trading exchange or
market for the Common Stock, based upon share volume.
Section 1.18. "Purchase Price" shall mean $2.25 per share of Common Stock
for adjusted for any splits, reverse splits or Common Stock dividends declared
by the Company after the execution hereof.
Section 1.19. "Registrable Securities" shall mean the Shares and the
Warrant Shares until (i) the Registration Statement has been declared effective
by the SEC, and all Shares and the Warrant Shares have been disposed of
pursuant to the Registration Statement, (ii) all Shares and the Warrant Shares
have been sold under circumstances under which all of the applicable conditions
of Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (iii) all Shares and the Warrant Shares have been
otherwise transferred to holders who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive
legend or (iv) such time as, in the opinion of counsel to the Company, all
Shares and the Warrant Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act.
Section 1.20. "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investors as
of the Closing Date in the form annexed hereto as Exhibit B.
Section 1.21. "Registration Statement" shall mean a registration statement
on Form S-3 (or on such other form promulgated by the SEC for which the Company
then qualifies and which counsel for the Company shall deem appropriate, and
which form shall be available for the resale by the Investors of the
Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement and in
accordance with the intended method of distribution of such securities), for
the registration of the resale by the Investors of the Registrable Securities
under the Securities Act.
Section 1.22. "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.24. "SEC" shall mean the Securities and Exchange Commission.
Section 1.25. "Section 4(2)" and "Section 4(6)" shall have the meanings
set forth in the recitals of this Agreement.
Section 1.26. "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.27. "SEC Documents" shall mean the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 and each report, proxy
statement or registration statement filed by the Company with the SEC pursuant
to the Exchange Act or the Securities Act since the filing of such Annual
Report through the date hereof.
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<PAGE> 5
Section 1.28. "Shares" shall mean the shares of Common Stock purchased
pursuant to this Agreement.
Section 1.29. "Trading Day" shall mean any day during which the Principal
Market shall be open for business.
Section 1.30. "Warrants" shall mean the Common Stock purchase warrants in
the form of Exhibit C hereto.
Section 1.31. "Warrant Shares" shall mean the shares of Common Stock
issuable upon exercise of the Warrants.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK
Section 2.1. Investment.
(a) Upon the terms and subject to the conditions set forth
herein, the Company agrees to sell, and the Investors, severally and not
jointly, agree to purchase the Shares as follows:
(i) First Closing. Upon satisfaction by the Company of
the Closing conditions set forth in Section 2.1(b),
the Investors shall purchase Eight Hundred Thousand
(800,000) Shares of Common Stock at the Purchase
Price and Three Hundred Thirty Thousand Eight
Hundred Ninety One (330,891) Warrants. Upon
execution of this Agreement, the Investors shall
deliver to the Escrow Agent immediately available
funds in their proportionate amount of the Purchase
Price as set forth next on the signature pages
hereto and the Company shall deliver the Common
Stock certificates representing the shares of Common
Stock so purchased to the Escrow Agent, to be held
by the Escrow Agent pursuant to the Escrow
Agreement.
(ii) Second Closing. The Company shall give the Investors
written notice of the Effective Date. Within five
(5) Trading Days of such notice, the Investors
shall, severally and not jointly, advise the Company
whether they will purchase their proportionate share
of (A) 429,000 Shares of Common Stock at the Market
Price or (B) 286,000 Shares of Common Stock at the
Purchase Price and 143,000 Warrants. The Investors
shall be obligated to purchase additional securities
under either (A) or (B) but not both. Within five
(5) Trading Days of the Effective Date, the
Investors shall purchase such securities as they
shall each have elected. The Investors shall deliver
to the Escrow Agent immediately available funds in
their proportionate amount of the aggregate purchase
price, and the
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<PAGE> 6
Company shall deliver the Common Stock certificates
representing the shares so purchased and the
Warrants to the Escrow Agent, to be held by the
Escrow Agent pursuant to the Escrow Agreement.
(iii) Each Closing. Upon satisfaction of the conditions
set forth in Section 2.1(b), each Closing shall
occur at the offices of the Escrow Agent at which
the Escrow Agent (x) shall release the Common Stock
to the Investors and (y) shall release the purchase
price to the Company (after all fees have been paid
as set forth in the Escrow Agreement), pursuant to
the terms of the Escrow Agreement.
(b) Each Closing is subject to the satisfaction or waiver by the
party sought to be benefited thereby of the following conditions:
(i) acceptance and execution by the Company and by the
Investors, of this Agreement and all Exhibits
hereto;
(ii) delivery into escrow by each Investor of immediately
available funds in the amount of the purchase price
of the Common Stock as applicable to each Closing
and as more fully set forth in the Escrow Agreement;
(iii) all representations and warranties of the Investors
contained herein shall remain true and correct as of
each Closing Date (as a condition to the Company's
obligations);
(iv) all representations and warranties of the Company
contained herein shall remain true and correct as of
each Closing Date (as a condition to the Investors'
obligations);
(v) the Company shall have obtained all permits and
qualifications required by any state for the offer
and sale of the Common Stock and Warrants or shall
have the availability of exemptions therefrom;
(vi) the sale and issuance of the Common Stock and
Warrants hereunder shall be legally permitted by all
laws and regulations to which the Investors and the
Company are subject and there shall be no ruling,
judgment or writ of any court prohibiting the
transactions contemplated by this Agreement;
(vii) delivery of the applicable original fully executed
Common Stock certificates and Warrant certificates
to the Escrow Agent;
(viii) as to the first Closing only, delivery to the Escrow
Agent of an opinion of Alston & Bird LLP, counsel to
the Company, in the form of Exhibit D;
(ix) as to the first Closing, delivery to the Escrow
Agent of the Irrevocable Instructions to Transfer
Agent in the form attached hereto as Exhibit E; and
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<PAGE> 7
(x) as to the first Closing only, delivery to the Escrow
Agent of the Registration Rights Agreement; and
(xi) as to the second Closing only, the Registration
Statement shall have been declared effective, there
shall have been no Material Adverse Effect with
respect to the Company since the date of the first
Closing, the Common Stock shall continue to be
listed on the Nasdaq National or SmallCap Market and
the average daily trading volume of the Common Stock
on the Principal Market for the ten (10) consecutive
Trading Days ending on the Effective Date shall have
been at least 300,000.
Section 2.2. Liquidated Damages. The parties hereto acknowledge and agree
that the sums payable pursuant to the Registration Rights Agreement shall
constitute liquidated damages and not penalties. The parties further
acknowledge that (a) the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, (b) the amounts specified in
such Sections bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred by the Investors in
connection with the failure by the Company to timely cause the registration of
the Registrable Securities and (c) the parties are sophisticated business
parties and have been represented by sophisticated and able legal and financial
counsel and negotiated this Agreement at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Each Investor, severally and not jointly, represents and warrants to the
Company that:
Section 3.1. Restricted Securities; Intent.
(a) The Investor acknowledges that the shares of Common
Stock and the Warrants and Warrant Shares delivered hereunder will not be
registered under the Securities Act, or any state securities act and the resale
of such securities will therefore be subject to certain restrictions. Investors
further acknowledge that the Company's reliance upon exemptions under the
Securities Act and under any state's blue sky laws is based in part upon
Investor's representations, warranties and agreements contained in this
Agreement.
(b) The Investor is entering into this Agreement for its
own account and not with a view to or for sale in connection with any
distribution of the Common Stock, the Warrants or the Warrant Shares. The
Investor has no present arrangement (whether or not legally binding) at any
time to sell the securities to or through any person or entity; provided,
however, that by making the representations herein, the Investor does not agree
to hold such securities for any minimum or other specific term and reserves the
right to dispose of the securities at any time in accordance with federal and
state securities laws applicable to such disposition.
Section 3.2. Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it has the
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<PAGE> 8
capacity to protect its own interests in connection with this transaction and
is capable of evaluating the merits and risks of an investment in the
securities. The Investor acknowledges that an investment in the securities is
speculative and involves a high degree of risk.
Section 3.3. Authority. This Agreement and each agreement attached as an
Exhibit hereto which is required to be executed by Investor has been duly
authorized and validly executed and delivered by the Investor and is a valid
and binding agreement of the Investor enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
Section 3.4. Not an Affiliate. The Investor is not an officer,
director or "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company.
Section 3.5. Absence of Conflicts. The execution and delivery of this
Agreement and each agreement which is attached as an Exhibit hereto and
executed by the Investor in connection herewith, and the consummation of the
transactions contemplated hereby and thereby, and compliance with the
requirements hereof and thereof by the Investor, will not violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
Investor or (a) violate any provision of any indenture, instrument or agreement
to which Investor is a party or is subject, or by which Investor or any of its
assets is bound; (b) conflict with or constitute a material default thereunder;
(c) result in the creation or imposition of any lien pursuant to the terms of
any such indenture, instrument or agreement, or constitute a breach of any
fiduciary duty owed by Investor to any third party; or (d) require the approval
of any third-party (which has not been obtained) pursuant to any material
contract, agreement, instrument, relationship or legal obligation to which
Investor is subject or to which any of its assets, operations or management may
be subject.
Section 3.6. Disclosure; Access to Information. The Investor has received
all documents, records, books and other publicly available information
pertaining to Investor's investment in the Company that have been requested by
the Investor. The Company is subject to the periodic reporting requirements of
the Exchange Act, and the Investor has reviewed copies of all SEC Documents
deemed relevant by Investor.
Section 3.7. Manner of Sale. At no time was Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investors that, except as set forth
in the SEC Documents or the Disclosure Schedule prepared by the Company and
attached hereto:
Section 4.1. Organization of the Company. The Company is a corporation
duly incorporated and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted.
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The Company does not have any subsidiaries and does not own more that fifty
percent (50%) of or control any other business entity except as set forth in
the SEC Documents. The Company is duly qualified and is in good standing as a
foreign corporation to do business in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect.
Section 4.2. Authority. (i) The Company has the requisite corporate power
and corporate authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Escrow Agreement and to issue
the Shares and the Warrants pursuant to their respective terms, (ii) the
execution, issuance and delivery of this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Common Stock certificates and the Warrants
by the Company and the consummation by it of the transactions contemplated
hereby have been duly authorized by all necessary corporate action and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required, and (iii) this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Common Stock certificates representing the
Shares and the Warrants have been duly executed and delivered by the Company
and at each Closing shall constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
Section 4.3. Capitalization. As of March 24, 2000, the authorized capital
stock of the Company consists of 18,750,000 shares of Common Stock, $0.001 par
value per share, of which 8,780,050 shares are issued and outstanding, 1,000
shares of preferred stock, $0.01 par value, of which none are issued or
outstanding. Except for (i) outstanding options and warrants as set forth in
the SEC Documents, and (ii) as set forth in the Disclosure Schedule, there are
no outstanding Capital Shares Equivalents nor any agreements or understandings
pursuant to which any Capital Shares Equivalents may become outstanding. The
Company is not a party to any agreement granting registration or anti-dilution
rights to any person with respect to any of its equity or debt securities. All
of the outstanding shares of Common Stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable.
Section 4.4. Common Stock The Company has registered its Common Stock
pursuant to Section 12(b) or (g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company is in
compliance with all requirements for the continued listing or quotation of its
Common Stock, and such Common Stock is currently listed or quoted on, the
Principal Market. As of the date hereof, the Principal Market is the NASDAQ
National Market and the Company has not received any notice regarding, and to
its knowledge there is no threat, of the termination or discontinuance of the
eligibility of the Common Stock for such listing.
Section 4.5. SEC Documents. The Company has made available to the
Investors true and complete copies of the SEC Documents. The Company has not
provided to the Investors any information that, according to applicable law,
rule or regulation, should have been disclosed publicly prior to the date
hereof by the Company, but which has not been so disclosed. As of
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their respective dates, the SEC Documents complied in all material respects
with the requirements of the Exchange Act, and rules and regulations of the SEC
promulgated thereunder and the SEC Documents did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents complied in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto at the time of such inclusion. Such financial statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii)
in the case of unaudited interim statements, to the extent they exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments). Neither the Company nor any of its subsidiaries has any material
indebtedness, obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become due) that would
have been required to be reflected in, reserved against or otherwise described
in the financial statements or in the notes thereto in accordance with GAAP,
which was not fully reflected in, reserved against or otherwise described in
the financial statements or the notes thereto included in the SEC Documents or
was not incurred in the ordinary course of business consistent with the
Company's past practices since the last date of such financial statements.
Section 4.6. Exemption from Registration; Valid Issuances. Subject to the
accuracy of the Investors' representations in Article III, the sale of the
Shares and the Warrants will not require registration under the Securities Act
and/or any applicable state securities law. Neither the sales of the Shares nor
the Company's performance of its obligations under this Agreement, the
Registration Rights Agreement, the Escrow Agreement or the Warrants will (i)
result in the creation or imposition by the Company of any liens, charges,
claims or other encumbrances upon the Shares or, except as contemplated herein,
any of the assets of the Company, or (ii) entitle the holders of Outstanding
Capital Shares to preemptive or other rights to subscribe for or acquire the
Capital Shares or other securities of the Company. The Shares shall not subject
the Investors to personal liability to the Company or its creditors by reason
of the possession thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor, to the
knowledge of the Company, any person acting on its or their behalf (i) has
conducted or will conduct any general solicitation (as that term is used in
Rule 502(c) of Regulation D) or general advertising with respect to the sale of
the Shares or the Warrants, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that would
require registration of the Shares or the Warrants under the Securities Act.
Section 4.8. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Shares and the Warrants, do not and will not (i) result in a violation of
the Company's Certificate of Incorporation or By-Laws or (ii) conflict
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with, or constitute a material default (or an event that with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument, or any "lock-up" or similar provision of
any underwriting or similar agreement to which the Company is a party, or (iii)
result in a violation of any federal, state or local law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or by which any material property or
asset of the Company is bound or affected, nor is the Company otherwise in
violation of, conflict with or default under any of the foregoing (except in
each case for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not have, individually or
in the aggregate, a Material Adverse Effect). The business of the Company is
not being conducted in violation of any law, ordinance or regulation of any
governmental entity, except for possible violations that either singly or in
the aggregate would not have a Material Adverse Effect. The Company is not
required under any Federal, state or local law, rule or regulation to obtain
any consent, authorization or order of, or make any filing or registration
with, any court or governmental agency in order for it to execute, deliver or
perform any of its obligations under this Agreement or issue and sell the
Shares in accordance with the terms hereof (other than any SEC or state
securities filings that may be required to be made by the Company subsequent to
each Closing, any registration statement that may be filed pursuant hereto);
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investors herein.
Section 4.9. No Material Adverse Change. Since September 30, 1999, no
Material Adverse Effect has occurred or exists with respect to the Company.
Section 4.10. No Undisclosed Events or Circumstances. Since September 30,
1999, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which
has not been so publicly announced or disclosed in the SEC Documents.
Section 4.11. No Integrated Offering. Other than pursuant to an effective
registration statement under the Securities Act, or pursuant to the issuance or
exercise of employee stock options, or pursuant to its discussion with the
Investors in connection with the transactions contemplated hereby, the Company
has not issued, offered or sold its Common Stock, or any securities convertible
into or exchangeable or exercisable for Common Stock within the six-month
period next preceding the date hereof, and the Company shall not permit any of
its directors, officers or affiliates directly or indirectly to take, any
action (including, without limitation, any offering or sale to any Person of
the Shares and Warrants), so as to make unavailable the exemption from
Securities Act registration being relied upon by the Company for the offer and
sale to Investors of the Shares and Warrants as contemplated by this Agreement.
Section 4.12. Litigation and Other Proceedings. There are no lawsuits or
proceedings pending or, to the knowledge of the Company, threatened, against
the Company or any subsidiary, nor has the Company received any written or oral
notice of any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. No judgment, order,
writ, injunction or decree or award has been issued by or, to the knowledge of
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the Company, requested of any court, arbitrator or governmental agency which
could result in a Material Adverse Effect.
Section 4.13. No Misleading or Untrue Communication. The Company and, to
the knowledge of the Company, any person representing the Company, or any other
person selling or offering to sell the Shares and Warrants in connection with
the transaction contemplated by this Agreement, have not made, at any time, any
oral communication in connection with the offer or sale of the same which
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.14. Material Non-Public Information. The Company has not
disclosed to the Investors any material non-public information that (i) if
disclosed, would reasonably be expected to have a material effect on the price
of the Common Stock or (ii) according to applicable law, rule or regulation,
should have been disclosed publicly by the Company prior to the date hereof but
which has not been so disclosed.
Section 4.15. Insurance. The Company and each subsidiary maintains
property and casualty, general liability, workers' compensation, environmental
hazard, personal injury and other similar types of insurance with financially
sound and reputable insurers that is adequate, consistent with industry
standards and the Company's historical claims experience. The Company has not
received notice from, and has no knowledge of any threat by, any insurer (that
has issued any insurance policy to the Company) that such insurer intends to
deny coverage under or cancel, discontinue or not renew any insurance policy
presently in force.
Section 4.16. Tax Matters.
(a) The Company and each subsidiary has filed all Tax Returns
which it is required to file under applicable laws; all such Tax Returns are
true and accurate in all material respects and has been prepared in compliance
with all applicable laws in all material respects; the Company has paid all
Taxes due and owing by it or any subsidiary (whether or not such Taxes are
required to be shown on a Tax Return) and have withheld and paid over to the
appropriate taxing authorities all Taxes which it is required to withhold from
amounts paid or owing to any employee, stockholder, creditor or other third
parties; and since December 31, 1998, the charges, accruals and reserves for
Taxes with respect to the Company (including any provisions for deferred income
taxes) reflected on the books of the Company are to the knowledge of the
Company adequate to cover any Tax liabilities of the Company if its current tax
year were treated as ending on the date hereof.
(b) To the knowledge of the Company, no claim has been made by a
taxing authority in a jurisdiction where the Company does not file tax returns
that the Company or any subsidiary is or may be subject to taxation by that
jurisdiction. There are no foreign, federal, state or local tax audits or
administrative or judicial proceedings pending or being conducted with respect
to the Company or any subsidiary; no information related to Tax matters has
been requested by any foreign, federal, state or local taxing authority; and,
except as disclosed above, no written notice indicating an intent to open an
audit or other review has been received by the Company or any subsidiary from
any foreign, federal, state or local taxing authority. There are no material
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unresolved questions or claims concerning the Company's Tax liability. The
Company (A) has not executed or entered into a closing agreement pursuant to
ss. 7121 of the Internal Revenue Code or any predecessor provision thereof or
any similar provision of state, local or foreign law; or (B) has not agreed to
or is required to make any adjustments pursuant to ss. 481 (a) of the Internal
Revenue Code or any similar provision of state, local or foreign law by reason
of a change in accounting method initiated by the Company or any of its
subsidiaries or has any knowledge that the IRS has proposed any such adjustment
or change in accounting method, or has any application pending with any taxing
authority requesting permission for any changes in accounting methods that
relate to the business or operations of the Company. The Company has not been a
United States real property holding corporation within the meaning of ss.
897(c)(2) of the Internal Revenue Code during the applicable period specified
in ss. 897(c)(1)(A)(ii) of the Internal Revenue Code.
(c) The Company has not made an election under ss. 341(f) of the
Internal Revenue Code. The Company is not liable for the Taxes of another
person that is not a subsidiary of the Company (A) under Treas. Reg. ss.
1.1502-6 (or comparable provisions of state, local or foreign law), (B) as a
transferee or successor, (C) by contract or indemnity or (D) otherwise. The
Company is not a party to any tax sharing agreement. The Company has not made
any payments, is obligated to make payments or is a party to an agreement that
could obligate it to make any payments that would not be deductible under ss.
280G of the Internal Revenue Code.
(d) For purposes of this Section 4.16:
"IRS" means the United States Internal Revenue
Service.
"Tax" or "Taxes" means federal, state, county,
local, foreign, or other income, gross receipts, ad
valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental,
communications, real or personal property, capital
stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp,
occupation, alternative or add-on minimum, estimated
and other taxes of any kind whatsoever (including,
without limitation, deficiencies, penalties,
additions to tax, and interest attributable thereto)
whether disputed or not.
"Tax Return" means any return, information report or
filing with respect to Taxes, including any
schedules attached thereto and including any
amendment thereof.
Section 4.17. Property. Neither the Company nor any of its subsidiaries
owns any real property. Each of the Company and its subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects except such as do not materially affect the
value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and to the Company's
knowledge any real property, mineral or water rights, and buildings held under
lease by the Company as tenant are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and intended to be made of such property, mineral
or water rights, and buildings by the Company.
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Section 4.18. Intellectual Property. Each of the Company and its
subsidiaries owns or possesses adequate and enforceable rights to use all
patents, patent applications, trademarks, trademark applications, trade names,
service marks, copyrights, copyright applications, licenses, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures) and other similar rights
and proprietary knowledge (collectively, "Intangibles") necessary for the
conduct of its business as now being conducted. To the Company's knowledge,
neither the Company nor any of its subsidiaries is infringing upon or in
conflict with any right of any other person with respect to any Intangibles. To
the knowledge of the Company, no adverse claims have been asserted by any
person to the ownership or use of any Intangibles and the Company has no
knowledge of any basis for such claim.
Section 4.19. Regulatory Compliance. The Company has all necessary FDA and
European Union permits and licenses and has made all filings to such regulatory
bodies to conduct its business as it is now being conducted, and is not in
material violation of any thereof.
Section 4.20. Internal Controls and Procedures. The Company maintains books
and records and internal accounting controls which provide reasonable assurance
that (i) all transactions to which the Company or any subsidiary is a party or
by which its properties are bound are executed with management's authorization;
(ii) the recorded accounting of the Company's consolidated assets is compared
with existing assets at regular intervals; (iii) access to the Company's
consolidated assets is permitted only in accordance with management's
authorization; and (iv) all transactions to which the Company or any subsidiary
is a party or by which its properties are bound are recorded as necessary to
permit preparation of the financial statements of the Company in accordance
with U.S. generally accepted accounting principles.
Section 4.21. Payments and Contributions. Neither the Company, any
subsidiary, nor any of its directors, officers or, to its knowledge, other
employees has (i) used any Company funds for any unlawful contribution,
endorsement, gift, entertainment or other unlawful expense relating to
political activity; (ii) made any direct or indirect unlawful payment of
Company funds to any foreign or domestic government official or employee; (iii)
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or (iv) made any bribe, rebate, payoff, influence
payment, kickback or other similar payment to any person with respect to
Company matters.
Section 4.22. No Misrepresentation. The representations and warranties of
the Company contained in this Agreement, any schedule, annex or exhibit hereto
and any agreement, instrument or certificate furnished by the Company to the
Investors pursuant to this Agreement, do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
ARTICLE V
COVENANTS OF THE INVESTORS
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Each Investor, severally and not jointly, covenants with the Company
that:
Section 5.1. Compliance with Law. The Investor's trading activities with
respect to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and rules
and regulations of the Principal Market on which the Company's Common Stock is
listed. If so required by the Company, the transfer of the Shares by the
Investor at any time prior to the Effective Date may be conditioned upon the
receipt by the Company of an opinion of competent counsel to the effect that
the proposed transfer will not result in any violation of the Securities Act or
the applicable securities laws of any other United States jurisdiction.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall
comply in all material respects with the terms thereof and shall use best
efforts to timely prepare and file the Registration Statement.
Section 6.2. Reservation of Common Stock. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to issue the Shares at the second Closing
and to honor exercises of the Warrants.
Section 6.3. Listing of Common Stock. The Company hereby agrees to
maintain the listing of the Common Stock on a Principal Market, and as soon as
reasonably practicable following the Closing to list the Shares on the
Principal Market. The Company further agrees, if the Company applies to have
the Common Stock traded on any other Principal Market, it will include in such
application the Shares. The Company will take all action to continue the
listing and trading of its Common Stock on a Principal Market and will comply
in all respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the Principal Market and shall provide Investors
with copies of any correspondence to or from such Principal Market which
questions or threatens delisting of the Common Stock, within three (3) Trading
Days of the Company's receipt thereof, until the Investors have disposed of all
of their Registrable Securities.
Section 6.4. Exchange Act Registration. The Company will cause its Common
Stock to continue to be registered under Section 12(b) or (g) of the Exchange
Act, will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or
suspend its reporting and filing obligations under said Act until the Investors
have disposed of all of their Registrable Securities.
Section 6.5. Legends. The certificates evidencing the Registrable
Securities shall be free of legends, except as set forth in Article IX.
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Section 6.6. Corporate Existence; Conflicting Agreements. The Company will
take all steps necessary to preserve and continue the corporate existence of
the Company. The Company shall not enter into any agreement, the terms of which
agreement would restrict or impair the right or ability of the Company to
perform any of its obligations under this Agreement or any of the other
agreements attached as exhibits hereto.
Section 6.7. Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with
or into, or a transfer of all or substantially all of the assets of the Company
to, another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument or by
operation of law the obligation to deliver to the Investors such shares of
stock and/or securities as the Investors are entitled to receive pursuant to
this Agreement.
Section 6.8. Issuance of Common Stock. The sale of the Shares shall be
made in accordance with the provisions and requirements of Section 4(2), 4(6)
or Regulation D and any applicable state securities law. The Company shall make
any necessary SEC and "blue sky" filings required to be made by the Company in
connection with the sale of the Securities to the Investors as required by all
applicable laws, and shall provide a copy thereof to the Investors promptly
after such filing.
Section 6.9. Limitation on Future Financing. The Company agrees that it
will not enter into any sale of its securities for cash at a discount to its
then current Market Price until the earlier of (A) sixty (60) days after the
effective date of the Registration Statement or (B) the date on which the
Investors have in the aggregate disposed of more than 50% of the Shares
purchased at both Closings, except for any sales (i) pursuant to any placement
arranged through Ladenburg Thalmann & Co. Inc., (ii) pursuant to any presently
existing employee benefit plan which plan has been approved by the Company's
stockholders, (iii) pursuant to any compensatory plan for a full-time employee
or key consultant, or (iv) with the prior approval of a majority in interest of
the Investors, which will not be unreasonably withheld, in connection with a
strategic partnership or other business transaction, the principal purpose of
which is not simply to raise money.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. Survival. The representations, warranties and covenants made
by each of the Company and each Investor in this Agreement, the annexes,
schedules and exhibits hereto and in each instrument, agreement and certificate
entered into and delivered by them pursuant to this Agreement, shall survive
each Closing and the consummation of the transactions contemplated hereby. In
the event of a breach or violation of any of such representations, warranties
or covenants, the party to whom such representations, warranties or covenants
have been made shall have all rights and remedies for such breach or violation
available to it under the provisions of this Agreement, irrespective of any
investigation made by or on behalf of such party on or prior to the first
Closing Date.
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Section 7.2. Indemnity. (a) The Company hereby agrees to indemnify and
hold harmless the Investors, their respective Affiliates and their respective
officers, directors, partners and members (collectively, the "Investor
Indemnitees"), from and against any and all Damages, and agrees to reimburse
the Investor Indemnitees for all reasonable out-of-pocket expenses (including
the reasonable fees and expenses of legal counsel), in each case promptly as
incurred by the Investor Indemnitees and to the extent arising out of or in
connection with:
(i) any misrepresentation, omission of fact or breach of
any of the Company's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by the
Company pursuant to this Agreement; or
(ii) any failure by the Company to perform in any
material respect any of its covenants, agreements, undertakings or
obligations set forth in this Agreement, the annexes, schedules or
exhibits hereto or any instrument, agreement or certificate entered
into or delivered by the Company pursuant to this Agreement; or
(iii) any action instituted against the Investors, or any
of them, by any stockholder of the Company who is not an Affiliate of
an Investor, with respect to any of the transactions contemplated by
this Agreement.
(b) Each Investor, severally and not jointly, hereby agrees to
indemnify and hold harmless the Company, its Affiliates and their respective
officers, directors, partners and members (collectively, the "Company
Indemnitees"), from and against any and all Damages, and agrees to reimburse
the Company Indemnitees for reasonable all out-of-pocket expenses (including
the reasonable fees and expenses of legal counsel), in each case promptly as
incurred by the Company Indemnitees and to the extent arising out of or in
connection with any misrepresentation, omission of fact, or breach of any of
the Investor's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Investor pursuant to this
Agreement or (ii) any failure by the Investor to perform in any material
respect any of its covenants, agreements, undertakings or obligations set forth
in this Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Investor pursuant to
this Agreement. Notwithstanding anything to the contrary herein, the Investor
shall be liable under this Section 7.2(b) for only that amount as does not
exceed the net proceeds to such Investor as a result of the sale of Registrable
Securities pursuant to the Registration Statement.
Section 7.3. Notice. Promptly after receipt by either party hereto seeking
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party from whom indemnification pursuant to Section
7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced by such omission or
delay. In connection with any Claim as to which both
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the Indemnifying Party and the Indemnified Party are parties, the Indemnifying
Party shall be entitled to assume the defense thereof. Notwithstanding the
assumption of the defense of any Claim by the Indemnifying Party, the
Indemnified Party shall have the right to employ separate legal counsel and to
participate in the defense of such Claim, and the Indemnifying Party shall bear
the reasonable fees, out-of-pocket costs and expenses of such separate legal
counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party
shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the
Indemnified Party reasonably shall have concluded that representation of the
Indemnified Party and the Indemnifying Party by the same legal counsel would
not be appropriate due to actual or, as reasonably determined by legal counsel
to the Indemnified Party, potentially differing interests between such parties
in the conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party, or (z) the Indemnifying Party shall
have failed to employ legal counsel reasonably satisfactory to the Indemnified
Party within a reasonable period of time after notice of the commencement of
such Claim. If the Indemnified Party employs separate legal counsel in
circumstances other than as described in clauses (x), (y) or (z) above, the
fees, costs and expenses of such legal counsel shall be borne exclusively by
the Indemnified Party. Except as provided above, the Indemnifying Party shall
not, in connection with any Claim in the same jurisdiction, be liable for the
fees and expenses of more than one firm of legal counsel for the Indemnified
Party (together with appropriate local counsel). Neither the Indemnifying Party
nor the Indemnified Party shall, without the prior written consent of the
Indemnified Party or the Indemnifying Party, as applicable (which consent shall
not unreasonably be withheld), settle or compromise any Claim or consent to the
entry of any judgment that does not include an unconditional release of the
Indemnified Party or the Indemnifying Party, as applicable, from all
liabilities with respect to such Claim or judgment.
All fees and expenses of the Indemnified Party (including
reasonable costs of defense and investigation in a manner not inconsistent with
this Section and all reasonable attorneys' fees and expenses) shall be paid to
the Indemnified Party, as incurred, within ten (10) Trading Days of written
notice thereof to the Indemnifying Party (regardless of whether it is
ultimately determined that an indemnified party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
Section 7.4. Direct Claims. In the event one party hereunder should have a
claim for indemnification that does not involve a claim or demand being
asserted by a third party, the Indemnified Party promptly shall deliver notice
of such claim to the Indemnifying Party. If the Indemnified Party disputes the
claim, such dispute shall be resolved by mutual agreement of the Indemnified
Party and the Indemnifying Party or by binding arbitration conducted in
accordance with the procedures and rules of the American Arbitration
Association as set forth in Article X. Judgment upon any award rendered by any
arbitrators may be entered in any court having competent jurisdiction thereof.
ARTICLE VIII
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DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
Section 8.1. Due Diligence Review. Subject to Section 8.2, the Company
shall make available for inspection and review by the Investors, advisors to
and representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, Nasdaq or other
filing, all SEC Documents and other filings with the SEC, and all other
publicly available corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such publicly available
information reasonably requested by the Investors or any such representative,
advisor or underwriter in connection with such Registration Statement
(including, without limitation, in response to all questions and other
inquiries reasonably made or submitted by any of them), prior to and from time
to time after the filing and effectiveness of the Registration Statement for
the sole purpose of enabling the Investors and such representatives, advisors
and underwriters and their respective accountants and attorneys to conduct
initial and ongoing due diligence with respect to the Company and the accuracy
of the Registration Statement.
Section 8.2. Non-Disclosure of Non-Public Information.
(a) The Company shall not disclose material non-public
information to the Investors, advisors to or representatives of the Investors
unless prior to disclosure of such information the Company identifies such
information as being non-public information and provides the Investors, such
advisors and representatives with the opportunity to accept or refuse to accept
such non-public information for review. Other than disclosure of any comment
letters received from the SEC staff with respect to the Registration Statement,
the Company may, as a condition to disclosing any non-public information
hereunder, require the Investors' advisors and representatives to enter into a
confidentiality agreement in form and content reasonably satisfactory to the
Company and the Investors.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investors or their advisors or representatives,
and the Company represents that it does not disseminate material non-public
information to any Investors who purchase stock in the Company in a public
offering, to money managers or to securities analysts, provided, however, that
notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, promptly notify the advisors and representatives of the
Investors and, if any, underwriters, of any event or the existence of any
circumstance (without any obligation to disclose the specific event or
circumstance) of which it becomes aware, constituting material non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein in light
of the circumstances in which they were made, not misleading. Nothing contained
in this Section 8.2 shall be construed to mean that such persons or entities
other than the Investors (without the written consent of the Investors prior to
disclosure of such
18
<PAGE> 20
information as set forth in Section 8.2(a)) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration Statement contains
an untrue statement of a material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.
ARTICLE IX
LEGENDS; TRANSFER AGENT INSTRUCTIONS
Section 9.1. Legends. Unless otherwise provided below, each certificate
representing Registrable Securities will bear the following legend or
equivalent (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED
OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION.
Section 9.2. Transfer Agent Instructions. Upon the execution and delivery
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions substantially in the form of Exhibit E hereto. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer
agent, as the case may be.
Section 9.3. No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 9.1 has been or shall be placed on the
share certificates representing the Registrable Securities and no instructions
or "stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect
thereto other than as expressly set forth in this Article IX.
Section 9.4. Investors' Compliance. Nothing in this Article shall affect
in any way each Investor's obligations to comply with all applicable securities
laws upon resale of the Common Stock.
19
<PAGE> 21
ARTICLE X
CHOICE OF LAW; ARBITRATION
Section 10.1. Governing Law/Arbitration. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York
applicable to contracts made in New York by persons domiciled in New York City
and without regard to its principles of conflicts of laws. Any dispute under
this Agreement shall be submitted to arbitration under the American Arbitration
Association (the "AAA") in New York City, New York, and shall be finally and
conclusively determined by the decision of a board of arbitration consisting of
three (3) members (hereinafter referred to as the "Board of Arbitration")
selected according to the rules governing the AAA. The Board of Arbitration
shall meet on consecutive business days in New York City, New York, and shall
reach and render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to the amount, if any, which
the losing party is required to pay to the other party in respect of a claim
filed. In connection with rendering its decisions, the Board of Arbitration
shall adopt and follow the laws of the State of New York unless the matter at
issue is the corporation law of the company's state of incorporation, in which
event the corporation law of such jurisdiction shall govern such issue. To the
extent practical, decisions of the Board of Arbitration shall be rendered no
more than thirty (30) calendar days following commencement of proceedings with
respect thereto. The Board of Arbitration shall cause its written decision to
be delivered to all parties involved in the dispute. Any decision made by the
Board of Arbitration (either prior to or after the expiration of such thirty
(30) calendar day period) shall be final, binding and conclusive on the parties
to the dispute, and entitled to be enforced to the fullest extent permitted by
law and entered in any court of competent jurisdiction. The Board of
Arbitration shall be authorized and is hereby directed to enter a default
judgment against any party failing to participate in any proceeding hereunder
within the time periods set forth in the AAA rules. The prevailing party shall
be awarded its costs, including attorneys' fees, from the non-prevailing party
as part of the arbitration award. Any party shall have the right to seek
injunctive relief from any court of competent jurisdiction in any case where
such relief is available. The prevailing party in such injunctive action shall
be awarded its costs, including attorney's fees, from the non-prevailing party.
ARTICLE XI
ASSIGNMENT
Section 11.1. Assignment. Neither this Agreement nor any rights of the
Investors or the Company hereunder may be assigned by either party to any other
person.
ARTICLE XII
NOTICES
Section 12.1. Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise
20
<PAGE> 22
specified herein, shall be (i) hand delivered, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the first business day
following the date of sending by reputable courier service, fully prepaid,
addressed to such address, or (c) upon actual receipt of such mailing, if
mailed. The addresses for such communications shall be:
<TABLE>
<S> <C>
If to the Company: 154 Technology Parkway
Technology Park/Atlanta
Norcross, Georgia 30092
Attention: Jack J. Luchese
Telephone: (770) 368-9500
Facsimile: (770)
with a copy to (shall not constitute Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention:George M. Maxwell, Jr.
Telephone: (404) 881-7000
Facsimile: (404)
if to the Investors: As set forth on the signature pages hereto
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Facsimile: (212) 661-0989
</TABLE>
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 12.1 by giving written notice of such
changed address or facsimile number to the other party hereto as provided in
this Section 12.1.
ARTICLE XIII
MISCELLANEOUS
21
<PAGE> 23
Section 13.1. Counterparts/ Facsimile/ Amendments. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 13.2. Entire Agreement. This Agreement, the agreements attached as
Exhibits hereto, which, include but are not limited the Escrow Agreement, and
the Registration Rights Agreement, set forth the entire agreement and
understanding of the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits to this
Agreement are incorporated herein by this reference and shall constitute part
of this Agreement as is fully set forth herein.
Section 13.3. Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
Section 13.4. Headings. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting
this Agreement.
Section 13.5. Number and Gender. There may be one or more Investors parties
to this Agreement, which Investors may be natural persons or entities. All
references to plural Investors shall apply equally to a single Investor if
there is only one Investor, and all references to an Investor as "it" shall
apply equally to a natural person.
Section 13.6. Replacement of Certificates. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Shares and (ii) in the case of any
such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form to the Company
(which shall not include the posting of any bond) or (iii) in the case of any
such mutilation, on surrender and cancellation of such certificate, the Company
at its expense will execute and deliver, in lieu thereof, a new certificate of
like tenor.
Section 13.7. Fees and Expenses. Each of the Company and the Investors
agrees to pay its own expenses incident to the performance of its obligations
hereunder.
Section 13.8. Brokerage. Each of the parties hereto represents that it has
had no dealings in connection with this transaction with any finder or broker
who will demand payment of any fee or commission from the other party, except
Ladenburg Thalmann & Co. Inc. whose fees shall be paid by the Company. The
Company on the one hand, and the Investors, on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any person claiming brokerage commissions or finder's fees on
account of services purported to
22
<PAGE> 24
have been rendered on behalf of the indemnifying party in connection with this
Agreement or the transactions contemplated hereby.
Section 13.9. Publicity. The Company agrees that, except as required by law
or regulation, it will not issue any press release or other public announcement
of the transactions contemplated by this Agreement without the prior consent of
the Investors, which shall not be unreasonably withheld nor delayed by more
than two (2) Trading Days from their receipt of such proposed release. No
release shall name the Investors without their express consent.
Section 13.10. No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party and their
respective successors or permitted assigns. It is not the intention of the
parties to confer third-party beneficiary rights and this Agreement does not
confer any such rights upon any other person other than a party to this
Agreement.
23
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this Purchase
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
CYTRX CORPORATION
By:
---------------------------------------------
Jack J. Luchese, President and CEO
INVESTORS:
Celeste Trust Reg.
By:
---------------------------------------------
Authorized Signatory
Amount subscribed for: 25% of total
Address for notices:
Fax:
AMRO International, S.A.
By:
---------------------------------------------
H.U. Bachofem,
Authorized Signatory
Amount subscribed for: 50% of total
Address for notices:
C/o Ultra Finanz AG
Grossmuensterplatz 6
Zurich CH-8022 Switzerland
Fax: 011-431-262-5515
24
<PAGE> 26
[Cytrix Purchase Agreement, continued signature
page]
Balmore Funds, S.A.
By:
---------------------------------------------
Francois Morax, Authorized Signatory
Amount subscribed for: 25% of total
Trident Chambers
P.O. Box 146
Road Town
Tortola, BVI
Fax:
25
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 Nos. 33-48706 and 333-31717 pertaining to the CytRx
Corporation 401(k) Profit Sharing Plan, No. 33-93816 pertaining to the CytRx
Corporation 1994 Stock Option Plan, and No. 33-93818 pertaining to the CytRx
Corporation 1995 Stock Option Plan and to the Registration Statements
on Form S-3 Nos. 33-93820, 333-39607, 333-44043, and 333-48837 of
CytRx Corporation and in the related prospectuses of our report dated
March 15, 2000, with respect to the consolidated financial statements and
schedule of CytRx Corporation included in this Annual Report (Form 10-K)
for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,031,893
<SECURITIES> 0
<RECEIVABLES> 174,292
<ALLOWANCES> 0
<INVENTORY> 6,480
<CURRENT-ASSETS> 3,415,275
<PP&E> 3,169,332
<DEPRECIATION> 527,522
<TOTAL-ASSETS> 6,128,063
<CURRENT-LIABILITIES> 2,751,737
<BONDS> 0
0
0
<COMMON> 8,374
<OTHER-SE> 1,024,314
<TOTAL-LIABILITY-AND-EQUITY> 6,128,063
<SALES> 822,523
<TOTAL-REVENUES> 1,891,447
<CGS> 285,215
<TOTAL-COSTS> 285,215
<OTHER-EXPENSES> 16,595,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,989,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,989,433)
<DISCONTINUED> (39,858)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,029,291)
<EPS-BASIC> (1.96)
<EPS-DILUTED> (1.96)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT
FOR
FORWARD-LOOKING STATEMENTS
<PAGE> 2
SAFE HARBOR COMPLIANCE STATEMENT
FOR
FORWARD-LOOKING STATEMENTS
CytRx Corporation ("CytRx") intends to qualify both its written and
oral forward-looking statements for protection under Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and any other similar safe harbor provisions.
Generally, forward-looking statements include expressed expectations
of future events and the assumptions on which the expressed expectations are
based. All forward-looking statements include expressed expectations of future
events and the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected. Due to
those uncertainties and risks, investors are urged not to place undue reliance
on written or oral forward-looking statements of CytRx. CytRx undertakes no
obligation to update or revise this Safe Harbor Compliance Statement for
Forward-Looking Statements to reflect future developments. In addition, CytRx
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
CytRx provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Securities Act of 1933 and the
Securities Exchange Act of 1934 and any other similar safe harbor provisions.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements include the
disclosures contained in the Annual Report on Form 10-K to which this statement
is appended as an exhibit and also include the following:
WE MAY NOT HAVE ADEQUATE FUNDS TO CONTINUE PRODUCT TESTING AND RESEARCH AND
DEVELOPMENT
On December 31, 1999, we had approximately $3 million in cash and cash
equivalents and working capital of $664,000. During the first quarter of 2000
we reached agreement with certain of our trade creditors whereby $2.4 million
of aggregate indebtedness was cancelled in exchange for issuance of 937,592
shares of CytRx Common Stock and the granting of registration rights to such
creditors.
We do not have adequate funds to conduct the required testing and data
collection necessary for the FDA to approve FLOCOR or any of our other products
We will have to either:
1. severely reduce or terminate testing and research and
development activities with respect to some or all of our
products; or
-1-
<PAGE> 3
2. obtain additional financing from third parties to fund the
required testing.
Our reduction in, or termination of, testing and research and
development activities could have a material adverse impact on our business and
future results of operations. If we elect to attempt to obtain additional
financing, we may be unable to obtain funds from any third party or to obtain
such financing on terms that we believe are acceptable. Our inability to obtain
additional financing could have a material adverse effect on our business and
future results of operations. See "We Will Require Additional Financing."
WE HAVE NO SIGNIFICANT SOURCE OF REVENUE FROM OUR OPERATIONS
We will require substantial funds to complete
- research and development activities,
- preclinical studies and testing activities, and
- required data collection and other activities required for
FDA review.
We currently have no significant source of operating revenue. Our inability to
generate revenues in amounts adequate to satisfy our operating needs may have a
material adverse effect on our business and may cause us to depend on raising
funds by borrowing from third parties or by entering into collaborative
relationships with third parties. See "We Will Require Additional Financing."
Our total revenues for 1999 were approximately $1.9 million.
Approximately 49% of our 1999 revenues or $927,000 consisted of non-operating
revenue such as interest income and grants from government agencies.
Approximately 43% of our 1999 revenues or $823,000 was derived from selling our
services and products (mainly consisting of TiterMax).
If the FDA does not approve the commercialization of FLOCOR or one of
our other pharmaceutical products, we may not be able to generate significant
revenues for an extended period of time, which would have a material adverse
effect on our business, financial condition and future results of operations.
WE HAVE OPERATED AT A LOSS FOR OVER FIVE YEARS AND WILL PROBABLY CONTINUE TO
OPERATE AT A LOSS FOR SOME TIME
We have incurred significant net losses for each of the last five
years. Our inability to operate at a profit in the future could have a material
adverse effect on our business and financial condition. Since our inception, we
have primarily conducted research and development of our products. The costs of
our research and development and our lack of operating revenues has resulted in
our net losses. We will continue to
-2-
<PAGE> 4
incur substantial additional losses in the near future because we are
continuing to conduct research and development of our products while we
continue to fail to generate any significant revenues.
We will probably incur losses until one or more of our products is
approved by the FDA and that product has achieved significant sustained
commercial sales. The activities required for the FDA review process of a new
pharmaceutical are extremely costly and usually take several years. See "We May
Incur Substantial Unanticipated Costs If We Have Significant Delays in the
Regulatory Approval of Our Products." Also, we may never obtain FDA approval of
any of our products currently under development.
WE WILL REQUIRE ADDITIONAL FINANCING
We believe that we do not have enough funds (1) to complete the
required testing and data collections necessary to obtain regulatory approval
of FLOCOR or any of our other products currently under development or (2) to
manufacture, market, and distribute any of our products, if we obtain FDA
approval with respect to that product. The continuation of the Phase III
clinical trials and the requirement of additional trials for FLOCOR and the
related activities in preparation for its commercialization has greatly
increased our need for capital.
We may have to raise additional funds through an equity or debt
offering, a third party loan, or a third party collaborative arrangement. We
may be unable to obtain any financing when we need it or on terms that we
believe to be acceptable. Our inability to raise the required additional
financing when we need it could have a material adverse effect on our business
and financial condition, and could result in the termination of our operations.
If we are able to obtain financing when we require it, such financing
may be on terms which may result in dilution to our then-existing stockholders.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET
On March 14, 2000 the we received correspondence from Nasdaq regarding
the Company's failure to satisfy certain quantitative criteria of the
maintenance standards for listing its Common Stock with the Nasdaq National
Market which provided the Company with ten business days to respond with its
plan to bring the Company back into compliance with such criteria. If we are
unable to satisfy such criteria or provide Nasdaq with an adequate plan to
return to compliance, Nasdaq may commence procedures to delist our Common Stock
from the Nasdaq National Market.
WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE OUR PRODUCTS
Our overall success substantially depends on our ability to
successfully develop and commercialize our products. Our inability to
successfully develop and
-3-
<PAGE> 5
commercialize our products could have a material adverse effect on our
business, financial condition and future results of operations.
Our products are in various stages of development and significant
amounts of time and money will be required to develop and commercialize them.
Cost overruns caused by unanticipated regulatory delays or unexpected adverse
side effects could end or substantially delay our development efforts. We also
may be unable to obtain FDA approval of those products, if we are unable to
prove to the FDA that those products are safe and effective.
In December 1999, the Company reported results from its Phase III
clinical study of FLOCOR for treatment of acute sickle cell crisis. The study
did not demonstrate statistical significance in the primary endpoint. In order
to collect adequate information to obtain FDA approval, we will need to conduct
additional studies, which we will not commence unless we are able to raise
additional funds.
Even if we are able to obtain FDA approval of one or more of our
products, we may not have adequate financial or other resources, or the
expertise to successfully commercialize, market and distribute those products.
If we do not have adequate resources or the expertise to successfully
commercialize our products, we may rely on third parties to provide financial
or other resources to help us commercialize those products or we may have such
third parties market and distribute our products for us. In order to enter into
any such arrangements with a third party, we may have to give up some or all of
our rights to some of our products. Also, we may be unable to find a third
party willing to provide us with resources or to market and distribute our
products. Even if we find a willing third party, we may not be able to reach an
agreement on terms that we believe are acceptable. Our inability to
successfully commercialize our products, alone or with the assistance of third
parties, may have a material adverse effect on our business, financial
condition and future results of operations.
WE MAY INCUR SUBSTANTIAL UNANTICIPATED COSTS IF WE HAVE SIGNIFICANT DELAYS IN
THE REGULATORY APPROVAL OF OUR PRODUCTS
Our products are subject to extensive regulation by federal, state and
local governments in the United States, including the FDA, and similar agencies
in other countries where we test and intend to market our current and future
products. Regulatory approval of a product can take several years and requires
the expenditure of substantial resources. If we experience significant delays
in the regulatory approval process of our products, we may incur substantial
unanticipated additional costs. Because we generate insignificant revenues from
operations and we have limited funds, if we incur substantial unanticipated
costs, we may have to seek additional financing earlier than we had
anticipated. At that time, we may be unable to obtain additional financing or
financing on terms that we believe are acceptable. Our inability to obtain
additional financing to complete the regulatory approval process could have a
material adverse effect on our business, financial condition and our ability to
continue to operate.
-4-
<PAGE> 6
In December 1999, the Company reported results from its Phase III
clinical study of FLOCOR for treatment of acute sickle cell crisis. The study
did not demonstrate statistical significance in the primary endpoint. In order
to collect adequate information to obtain FDA approval, we will need to conduct
additional studies, which we will not commence unless we are able to raise
additional funds.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE AGAINST OTHER PHARMACEUTICAL AND
BIOTECHNOLOGY COMPANIES
Our competitors mainly consist of pharmaceutical and biotechnology
companies. Many of those companies have advantages over us, including the
following:
- substantially greater financial resources and research and
development staffs,
- substantially superior facilities,
- more extensive experience regarding FDA and other regulatory
processes,
- greater manufacturing and marketing expertise, and
- alliances with major pharmaceutical companies that may afford
greater resources and other advantages.
If our competitors develop better products than us; or if they develop their
products and obtain regulatory approval faster than us; or if they more
successfully manufacture, market and distribute their products than us, then
that could have a material adverse effect on our business and future results of
operations.
WE MAY BE UNABLE TO ESTABLISH AND MAINTAIN NECESSARY RELATIONSHIPS WITH THIRD
PARTIES
We may have to rely on third parties to enable us to offer our
products to a larger customer base than we could otherwise reach through direct
marketing efforts. Consequently, our success will depend in part on our ability
to enter into relationships with strategic partners and the performance of
those partners. We may be unable to find third parties willing to enter into a
relationship with us or to enter a relationship on terms that are acceptable to
us. Also, we may be unable to maintain any relationships once we have formed
them. Our inability to establish and maintain such third party relationships or
the unsuccessful performance of one or more of our strategic partners could
have a material adverse effect on our business, financial condition and future
results of operations. If we are unable to establish and maintain third party
relationships, or if such third parties are unsuccessful, we may have to
establish our own marketing and distribution channels for our products. We may
not have the available financial or other resources at such time to establish
our own marketing or distribution channels. Our inability to develop our own
marketing and distribution channels in such case could have
-5-
<PAGE> 7
a material adverse effect on our business and financial condition, and could
result in the termination of our operations.
WE DEPEND ON CERTAIN SUPPLIERS FOR AN ADEQUATE SUPPLY OF MATERIALS
We require three suppliers of materials or services to manufacture
FLOCOR. These consist of a supplier of the raw drug substance, a supplier of
the purified drug which is refined from the raw drug and a manufacturer who can
formulate and sterile fill the purified drug substance into the finished drug
product. Our inability to maintain relationships with those suppliers could
result in (1) lengthy delays in the FDA and other regulatory agencies approval
processes, causing us to incur substantial unanticipated costs or (2) our
inability to produce, market and distribute our product. Such delays or
inability could have a material adverse effect on our business, financial
condition and future results of operation.
We have not entered into an agreement with any supplier for the raw
drug substance because we believe that it is widely available.
In August 1999, we entered into a long-term commercial supply contract
with Organichem Corp. of Rensselaer, New York to obtain the purified drug
substance. We have also entered into an agreement with the Hospital Products
Division of Abbott Laboratories for the manufacture of our finished drug
product. Our inability to maintain such relationships on terms acceptable to us
or to replace such suppliers if they fail to adequately perform could have a
material adverse effect on our business, financial condition and future results
of operations.
WE DEPEND ON CERTAIN MEMBERS OF MANAGEMENT FOR FUTURE SUCCESS
We depend to a significant extent on the members of the management
staff, particularly Jack J. Luchese, for our future success. We may be unable
to retain his services or the services of such members of management, or to
replace them with qualified skilled individuals. Our loss of the services of
Mr. Luchese or any of the other members of management could have a material
adverse effect on our business and future results of operations. We have an
employment agreement with Mr. Luchese, however, we would be unable to prevent
him from terminating his employment with us. Also, we carry no key man life
insurance on the life of Mr. Luchese or any other member of the management
team.
WE MAY INCUR SUBSTANTIAL COSTS AND LIABILITY FROM PRODUCT LIABILITY CLAIMS
We may be exposed to claims for personal injury resulting from
allegedly defective products. Even if the commercialization of one or more of
our products is approved by the FDA, users may claim that such product caused
unintended adverse effects. We currently carry product liability insurance
covering the use of our products in human clinical trials and may extend that
coverage to third parties who collaborate with us on the development of our
products. However, if a claim is successfully asserted
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against us and the amount of such claims exceeds our policy limits or is not
covered by our policy, such successful claim may have a material adverse effect
on our business.
Even if claims asserted against us are unsuccessful, they may divert
management's attention from our operations and we may have to incur substantial
costs to defend such claims. If a significant number of claims are asserted
against us, regardless of whether they are successful, they may have a material
adverse effect on our operations and business.
WE DEPEND ON OUR PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS FOR OUR FUTURE
SUCCESS
Our future success, if any, will depend in a substantial part, on our
ability to protect our products by obtaining patents covering them in the
United States and other countries. If we are unable to obtain patents covering
our products, other companies may develop, manufacture, market and distribute
products similar to or the same as our products. Our inability to obtain
patents in each country in which we intend to market our products or our
inability to successfully challenge third party infringement of our patent
claims could have a material adverse effect on our business and future results
of operations.
Third parties may challenge the validity of our patents through
challenges filed with the United States Patent and Trademark Office and its
foreign equivalents or through lawsuits. Third parties may also claim that our
products infringe their rights under their patents. If a third party
successfully asserts an infringement claim against us, we may be prevented from
practicing the subject matter claimed in such third party's patents or we could
be required to obtain licenses or redesign our products to avoid infringement.
If any of our patents are successfully challenged, or any of our products are
determined to infringe on the rights of others, we may incur substantial
additional costs which may have a material adverse effect on our business,
financial condition and future results of operations.
In addition, we depend on our trade secrets, proprietary know-how and
continuing technological innovation, which we seek to protect with
confidentiality agreements with our employees, consultants and collaborators.
However, we may be unable to prevent an employee, consultant or collaborator
from disclosing trade secrets, know-how or other information. If we are unable
to prevent such disclosure, we may have a cause of action against the
disclosing party for only monetary damages, which may not be an adequate remedy
compared to the harm we may have suffered from the disclosure. Our inability to
adequately protect our proprietary information and trade secrets could have a
material adverse effect on our business, financial condition and future results
of operations.
WE MAY BE UNABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF THEIR COSTS ARE NOT
ADEQUATELY REIMBURSED BY GOVERNMENT AND THIRD PARTY PAYORS
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The success of each of our products will depend in part upon the
extent to which a consumer will be able to obtain reimbursement for the cost of
such product from government health administration authorities, private health
insurers and other organizations. We are uncertain as to the reimbursement
status of any of our products that we are currently developing. Government and
other third party payors are increasingly attempting to decrease health care
costs by refusing to provide coverage for products that have not been approved
by the FDA, and by limiting the coverage and reimbursement levels for new
products approved by the FDA. If the government and other third party payors do
not adequately cover our products, the market may not accept our products. The
lack of market acceptance could have a material adverse effect on our business,
financial condition and future results of operations. We have initiated
discussions with consultants and other advisors who will help us to develop a
strategy for seeking adequate reimbursement from the government and other third
party payors for FLOCOR. However, we will be unable to finalize our strategy
until we have obtained all of the required regulatory approvals for FLOCOR and
established its market price.
GOVERNMENT PRICING REGULATION MAY REDUCE OUR FUTURE REVENUES AND PROFITABILITY
Our future revenues and profitability may be affected by the
continuing efforts of governments to decrease or contain the costs of health
care through the regulation of the pricing and profitability of pharmaceutical
products. We are unable to predict whether any federal, state, local or foreign
governments will adopt such regulations. However, if such regulations are
adopted, they could have a material adverse effect on our business and future
results of operations.
WE MAY INCUR SUBSTANTIAL COSTS AND LIABILITY UNDER ENVIRONMENTAL AND HAZARDOUS
MATERIALS LAWS
Our research and development activities involve the use of hazardous
materials, which are subject to federal, state and local laws regarding the
use, manufacture, storage, handling and disposal of such materials. Although we
believe that we comply with applicable environmental laws and regulations, we
are unable to completely eliminate the risk of accidental contamination or
injury from our hazardous materials and other waste products. If an accident or
injury were to occur, we could be liable for any damages that result and any
such liability could exceed our resources, which could have a material adverse
effect on our business.
In addition, we may have to incur substantial costs to comply with
environmental laws and regulations in the future which could also have a
material adverse effect on our business and future results of operations.
WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE
The market price of our common stock may experience significant
volatility from time to time. Such volatility may be affected by factors such
as:
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- our quarterly operating results;
- announcements of regulatory developments, technological
innovations or new therapeutic products;
- developments in patent or other proprietary rights; and
- public concern regarding the safety of our products.
Other factors which may affect our stock price is general changes in the
economy, financial markets or the pharmaceutical or biotechnology industries.
OUR ANTI-TAKEOVER PROVISIONS MAY LIMIT STOCKHOLDER VALUE
We have provisions in our bylaws and in our shareholder protection
rights agreement that may discourage or prevent a person or group from
acquiring us without our board of directors' approval. The intent of these
provisions is to protect shareholders' interests by encouraging anyone seeking
control of the Company to negotiate with the Board of Directors.
The following is a description of these provisions which may reduce
the market value of our shares of common stock.
We have a classified board of directors, which requires that at least
two stockholder meetings, instead of one, will be required to effect a change
in the majority control of our board of directors. This provision applies to
every election of directors, not just an election occurring after a change in
control. The classification of our board increases the amount of time it takes
to change majority control of our board of directors and may cause our
potential purchasers to lose interest in the potential purchase of us,
regardless of whether our purchase would be beneficial to us and our
stockholders.
Our bylaws provide that directors may only be removed for cause by the
affirmative vote of the holders of at least a majority of the outstanding
shares of our capital stock then entitled to vote at an election of directors.
This provision prevents stockholders from removing any incumbent director
without cause.
Our bylaws also provide that a stockholder must give us at least 120
days notice of a proposal or director nomination that such stockholder desires
to present at any annual meeting or special meeting of stockholders. Such
provision prevents a stockholder from making a proposal or director nomination
at a stockholder meeting without us having advance notice of that proposal or
director nomination. This could make a change in control more difficult by
providing our directors with more time to prepare an opposition to a proposed
change in control.
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Under our shareholder protection rights agreement, on May 15, 1997, we
distributed one preferred stock purchase right for each then-outstanding share
of our common stock. Each right entitles registered holders to purchase one
ten-thousandth of a share of our Series A Junior Participating Preferred Stock
at an initial purchase price of $30 per share, subject to adjustment. Our
preferred stock purchase rights are exercisable only if a person or group (1)
announces that they have acquired beneficial ownership of 15% or more of our
common stock, or (2) commences a tender offer for 15% or more of our common
stock. If a person or group announces that they had acquired 15% or more of our
common stock, or commences a tender offer for 15% or more of our common stock,
then, after ten days, each right not owned by the person or group which
acquired 15% or more of our common stock or who commenced a tender offer for
15% or more of our stock entitles its holder to purchase at the purchase price
the number of shares of common stock having a market value equal to twice the
purchase price. We may exchange or terminate the preferred stock purchase
rights at any time before they become exercisable.
The preferred stock purchase rights will cause substantial dilution to
a person or group that attempts to acquire us on terms not approved by our
board of directors, which encourages persons who seek to acquire us to initiate
such an acquisition through negotiations with our board of directors. This
could discourage any potential acquiror of us and could result in the lower
prices of our common stock than may occur during a hostile acquisition attempt.
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