<PAGE>
As filed with the Securities and Exchange Commission on January 10, 2001
Registration No. 333-39816
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
CYTRX CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 325410 58-1642740
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer
Incorporation or organization) Classification Code Number) Identification number)
</TABLE>
154 TECHNOLOGY PARKWAY
NORCROSS, GEORGIA 30092
(770) 368-9500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
________________________________________
JACK J. LUCHESE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CYTRX CORPORATION
154 TECHNOLOGY PARKWAY
NORCROSS, GEORGIA 30092
(770)368-9500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
W. THOMAS CARTER III, ESQ. MARK W. REYNOLDS
ALSTON & BIRD LLP VICE PRESIDENT, FINANCE
ONE ATLANTIC CENTER CYTRX CORPORATION
1201 WEST PEACHTREE STREET 154 TECHNOLOGY PARKWAY
ATLANTA, GEORGIA 30309-3424 NORCROSS, GEORGIA 30092
(404) 881-7000 (770) 368-9500
_______________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_] ___________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
_______________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of each Proposed
class of Proposed maximum
securities to be Amount to be maximum offering aggregate offering Amount of
registered registered price per share price Registration Fee
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.001 par value Up to
per share 6,010,244(1) (2) $5,000,000.00(3) $1,320.00
---------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.001 par value
per share 150,000(4) $2.25 $ 337,500.00 $ 90.00
---------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.001 par value
per share 101,803(5) $3.438 $ 349,999.00 $ 93.00
---------------------------------------------------------------------------------------------------------------------------
Total $5,687,499.00 $1,503.00*
===========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). The shares of common stock issued will vary based
on the purchase price per share.
(2) The price per common share will vary based on the daily volume weighted
average price of our common stock during the valuation periods provided in
the private equity line of credit agreement described in the registration
statement. The purchase price will be equal to 90% of the average of the
nine lowest daily volume weighted average prices during the valuation
period. The agreement allows for us, under certain circumstances, to sell
shares to Majorlink Holdings Limited over a period of 30 months from the
effective date of this registration statement.
(3) This represents the maximum purchase price that majorlink Holdings Limited
may pay to us under the private equity line of credit agreement. The
maximum net proceeds we can receive is $5,000,000 less a 7% placement fee
payable to our placement agent, Ladenburg Thalman & Co. Inc. and $750 in
escrow fees and expenses per drawdown.
(4) This represents shares issuable upon the exercise of a warrant issued to
Majorlink Holdings Limited under the private equity line of credit
agreement. The exercise price of this warrant is $2.25 and the proposed
maximum offering price per share has been calculated pursuant to Rule
457(g). The warrants may be exercised until April 28, 2003.
(5) This represents shares issuable upon the exercise of a warrant issued to
Ladenburg Thalmann & Co. Inc. as a placement fee. The exercise price of
this warrant is $3.438 and the proposed maximum offering price per share
has been calculated pursuant to Rule 457(g). The warrants may be exercised
until April 28, 2003.
* Registration fee previously paid.
<PAGE>
_________________________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
-2-
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and we are not soliciting offers to buy these securities, in
any state where the offer or sale is not permitted.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED [ ], 2001
PROSPECTUS
CYTRX CORPORATION
Up to 6,262,047 Shares of
Common Stock
Using this prospectus, Majorlink Holdings Limited and Ladenburg Thalman &
Co., Inc. may sell these shares.
Our common stock is listed on The Nasdaq National Market under the symbol
"CYTR."
Majorlink Holdings Limited is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with its sales.
______________________
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 3.
______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the common stock or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
______________________
The date of this Prospectus is [ ], 2001
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................................................... 2
The Offering........................................................... 3
Risk Factors........................................................... 3
Dilution............................................................... 7
Use of Proceeds........................................................ 7
Dividend Policy........................................................ 7
Capitalization......................................................... 8
Price Range of Common Stock............................................ 9
Selected Consolidated Financial Data................................... 10
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 11
Business............................................................... 14
Management............................................................. 21
Principal Stockholders................................................. 28
Description of Capital Stock........................................... 29
Private Equity Line of Credit Agreement................................ 31
Selling Stockholders................................................... 34
Plan of Distribution................................................... 35
Legal Matters.......................................................... 37
Experts................................................................ 37
Additional Information................................................. 38
</TABLE>
______________________
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" and the
financial statements and related notes, carefully before making an investment
decision.
CYTRX CORPORATION
We were founded in 1985 and we are engaged in the development and
commercialization of pharmaceutical products. Our current research and
development focus is on disorders affecting the vascular system, specifically
those conditions caused by a blockage in the vascular system, commonly referred
to as vascular-occlusive disorders. Our principal executive offices are located
at 154 Technology Parkway, Norcross, Georgia 30092, telephone number: (770) 368-
9500.
-2-
<PAGE>
THE OFFERING
We signed a private equity line of credit agreement with Majorlink Holdings
Limited dated April 26, 2000, and supplemented November 28, 2000, for the future
issuance and purchase of shares of our common stock. The private equity line of
credit agreement establishes what is sometimes termed an equity line of credit
or an equity drawdown facility. In general, the drawdown facility operates like
this: the investor, Majorlink Holdings Limited, has committed up to a maximum of
$5 million to purchase shares of our common stock over a thirty (30) month
period. Majorlink's obligation to purchase the shares of our common stock is
subject to the satisfaction of the conditions included in "Necessary Conditions
Before Majorlink will Purchase our Shares" on page 33 of this prospectus. Once
every sixteen (16) trading days, we may request a draw, the amount of which is
subject to a formula based on a percentage of the weighted average common stock
price for the three (3) months prior to the request multiplied by the total
trading volume for the same three (3) month period. At the end of a ten (10) day
trading period following the drawdown request, we will calculate the number of
shares we will issue to Majorlink in return for the money requested, based on
the formula in the private equity line of credit agreement.
Majorlink will receive a ten percent (10%) discount to the average of the
nine (9) lowest daily volume weighted average prices of our common stock over
the fifteen (15) trading days beginning nine (9) trading days before the
drawdown request and ending five (5) trading days after the drawdown request. We
will receive the amount of the drawdown less an escrow agent fee of $750 and a
seven percent (7%) cash placement fee payable to the placement agent, Ladenburg
Thalmann & Co., Inc., which introduced Majorlink to us. Ladenburg Thalmann is
not obligated to purchase any of our shares, but as an additional placement fee,
we have issued to Ladenburg Thalmann warrants to purchase 101,803 shares of our
common stock at an exercise price of $3.438. We also issued to Majorlink
warrants to purchase 150,000 shares of our common stock at an exercise price of
$2.25, in lieu of a minimum drawdown commitment. The common stock issuable upon
exercise of those warrants is included in the registration statement of which
this prospectus is a part.
RISK FACTORS
You should carefully consider the following risks before deciding to
purchase shares of our common stock. If any of the following risks actually
occur, the trading price of our common stock could decline, and you could lose
all or part of your investment. You should also refer to the other information
in this prospectus and the information incorporated into this registration
statement by reference, including our financial statements and the related
notes.
We May Not Be Able to Obtain Adequate Funds to Continue Product Testing and
Research and Development, Which Will Severely Reduce or Terminate Our Operations
and Could Negatively Impact Our Future Profitability and Growth
On September 30, 2000, we had approximately $2.2 million in cash and cash
equivalents and working capital of $1.2 million.
Our products are governed by extensive U.S. regulation and foreign
regulation in other countries where we test and intend to market our current and
future products. Approval of a product can take several years and requires
substantial capital resources. We do not currently have adequate funds to
conduct the required testing and data collection necessary for the FDA to
approve FLOCOR or any of our other products. As a result, we must either
severely reduce or terminate testing and research and development activities, or
obtain additional financing from third parties to fund the required testing.
-3-
<PAGE>
If we elect to attempt to obtain additional financing, we may be unable to
obtain funds from any third party on terms that we believe are acceptable. Our
inability to obtain additional financing would require us to severely reduce or
terminate testing and research and development activities and could result in
the termination of our operations.
We do not currently have enough funds 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 to manufacture, market, and
distribute any products that may obtain FDA approval. Our need for capital has
greatly increased due to additional FDA-required testing of FLOCOR. Delays in
regulatory approval will cause substantial unanticipated costs.
We need to raise additional funds through equity or debt financing, or a
combination of both. We may be unable to obtain any financing or financing on
acceptable terms. Any financing may be on terms that dilute our stockholders.
A lack of financing would require us to severely reduce or terminate testing and
research and development activities and could result in the termination of our
operations.
We Have No Significant Source of Revenue From Our Operations and If We Are
Unable to Generate Revenues From Our Operations We May Have to Depend on Third
Parties to Raise Funds
We currently have no significant source of operating revenue. Our total
revenues for 1999 were approximately $1.4 million. Approximately 77% of our
1999 revenues, or $1,069,000, came from non-operating sources such as interest
income, grants from government agencies and subleases. Approximately 23% of our
1999 revenues, or $323,000, came from selling our services (Spectrum Recruitment
Research).
If the FDA does not approve, for commercial sale, FLOCOR or one of our
other products, we may not be able to generate significant revenues for an
extended period of time. Lack of revenues adequate to satisfy our operating
needs will cause us to depend on equity or debt financing, or a combination of
both.
Because the maximum amount of any drawdown request is subject to a formula
based on a percentage of the weighted average common stock price for the three
(3) months prior to the request multiplied by the total trading volume for the
same three (3) month period, a decline in the trading volume and/or price of our
common stock may reduce the amount we can draw down under the private equity
line of credit agreement. In addition, business and economic conditions may not
make it feasible to draw down under the private equity line of credit agreement
at every opportunity, and drawdowns are available only every 16 trading days. We
may need to raise additional capital to fund more rapid expansion, to develop
new and enhance existing services to respond to competitive pressures, and/or to
acquire complementary businesses or technologies. Majorlink may also decline to
purchase shares under a draw request under the private equity line of credit
agreement if the conditions included in "Necessary Conditions Before Majorlink
will Purchase our Shares" are not met.
Our placement agreement with Ladenburg Thalman Co. Inc. restricts us from
raising investment capital during the term of the placement agreement except
through Ladenburg. If we need capital but are unable to drawdown under the
private equity line of credit agreement for any reason, we will need to
separately negotiate with Ladenburg and Majorlink to lift those restrictions so
we can obtain the capital from other sources.
We may not be able to obtain additional financing on terms favorable to us,
if at all. If adequate funds are not available or are not available on terms
favorable to us, we may not be able to effectively execute our business plan.
We Have Operated at a Loss For Over Five Years and Will Likely Continue to
Operate at a Loss For Some Time
We incurred significant net losses for each of the last five years. 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 probably incur losses until one or more of our products is approved
by the FDA and that product has achieved significant sales volume. The
activities required for the FDA review process of a new pharmaceutical are
extremely costly and usually take several years. We may never obtain FDA
approval of any of our products currently under development.
The Nasdaq National Market May Delist Our Common Stock and If We Are Delisted
There May Not Be an Active Trading Market for Our Common Stock
-4-
<PAGE>
Our ability to remain listed on the Nasdaq National Market will depend on
our ability to satisfy applicable Nasdaq criteria including our ability to
maintain at least $4 million in "net tangible assets" (defined as Total Assets
minus Total Liabilities minus Goodwill minus Redeemable Securities) and
maintaining a minimum bid price of $1.00. Our net tangible assets and minimum
bid price have recently been near the minimum threshold for these tests, and if
we are unable to continue to satisfy these criteria, Nasdaq may begin procedures
to remove our common stock from the Nasdaq National Market. If we are delisted
from the Nasdaq National Market, an active trading market for our common stock
may no longer exist.
We May Be Unable to Successfully Develop or Commercialize Our Products, Which
Would Severely Reduce or Terminate Our Operations
Our continued operations substantially depend on our ability to
successfully develop and commercialize our products.
In a Phase III clinical study, a drug is tested in a large patient
population to provide a thorough understanding of the drug's effectiveness,
benefits and the range of possible side effects. A Phase III study must be
successfully completed before a company can request FDA approval for marketing
the drug.
In December 1999, we reported results from our Phase III clinical study of
FLOCOR for treatment of sickle cell disease patients experiencing an acute vaso-
occlusive crisis (a blockage of blood flow caused by deformed, or "sickled" red
blood cells). Overall, the study did not achieve the statistical target for its
primary objective, which was to decrease the length of vaso-occlusive crisis for
the study population as a whole. To collect adequate information for FDA
approval, we will need to conduct additional clinical studies, which we will not
begin 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 expertise to
commercialize, market and distribute those products successfully. If we do not
have adequate resources or the expertise to commercialize our products
successfully, 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. 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.
We Depend on a Limited Number of Suppliers For an Adequate Supply of Materials,
Which May Negatively Affect Our Ability to Manufacture Our Products
We require three suppliers of materials or services to manufacture FLOCOR.
These consist of a supplier of poloxamer 188, which is the raw material used to
manufacture FLOCOR (the raw drug substance), a manufacturer who can refine the
raw drug substance to our specifications (the purified drug substance), and a
manufacturer who can mix the purified drug substance with other inactive
ingredients in a sterile environment to produce the final dosage form of FLOCOR.
Our inability to maintain relationships with those suppliers could result in
lengthy delays in the FDA and other regulatory agencies approval processes,
causing us to incur substantial unanticipated costs or our inability to produce,
market and distribute our product.
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. If we are unable
to maintain those relationships on terms acceptable to us or to replace such
suppliers if they fail to adequately perform, we will experience delays in
clinical trials or commercialization of our products.
-5-
<PAGE>
We May Incur Substantial Costs and Liability From Product Liability Claims
If any of our products are alleged defective, they may expose us to claims
for personal injury. 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 someone asserts a claim against us and the amount of such
claim exceeds our policy limits or is not covered by our policy, such successful
claim may exceed our financial resources and cause us to discontinue operations.
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.
We May Experience Volatility in Our Stock Price, Which May Negatively Impact
Your Investment
The market price of our common stock has experienced significant volatility
in the past and may continue to experience significant volatility from time to
time. Our stock price has ranged from $0.75 to $13.50 over the past five years.
Factors such as the following may affect such volatility:
. our quarterly operating results;
. announcements of regulatory developments or technological innovations by us
or our competitors;
. government regulation of drug pricing;
. developments in patent or other technology ownership rights; and
. public concern regarding the safety of our products.
Other factors which may affect our stock price are general changes in the
economy, financial markets or the pharmaceutical or biotechnology industries.
We will have broad discretion in the use of the proceeds from the sale of our
common stock under the private equity line of credit agreement, and any failure
to apply the proceeds effectively could negatively affect our business
prospects.
We expect to use the net proceeds from the draw downs under the private
equity line of credit agreement with Majorlink Holdings for general corporate
purposes. We will have significant flexibility in applying the net proceeds. You
will not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the net proceeds. If we
fail to apply the net proceeds effectively, our business could be negatively
affected.
Our stock price may be negatively affected and you will experience dilution if
we raise additional funds by issuing shares of our common stock under the
Private Equity Line of Credit Agreement.
We may raise funds by issuing shares of our common stock under the private
equity line of credit agreement. According to the private equity line of credit
agreement, any shares of our common stock we sell to Majorlink, the investor,
will be at 90% of the average market price over the nine lowest days of a
fifteen-day valuation period. This discount to Majorlink may place downward
pressure on our stock price and will dilute your ownership of our common stock.
Additionally, a decrease in our stock price could damage our capital structure
and make it difficult or impossible to raise additional financing (See Risk
Factor "We May Not Be Able to Obtain Adequate Funds to Continue Product
Testing and Research and Development, Which Will Severely Reduce or Terminate
Our Operations and Could Negatively Impact Our Future Profitability and
Growth"
Our stock price may be negatively affected if we raise additional funds by
issuing shares of our common stock under the Private Equity Line of Credit
Agreement and if our stock price is negatively affected, the Nasdaq National
Market may delist our common stock.
If we raise additional funds by issuing shares of our common stock under
the Private Equity Line of Credit Agreement, our stock price may be negatively
affected (see Risk Factor "Our stock price may be negatively affected and you
will experience dilution if we raise additional funds by issuing shares of our
common stock under the Private Equity Line of Credit Agreement"). If our stock
price is negatively affected, the Nasdaq National Market may delist our common
stock (See Risk Factor "The Nasdaq National Market may delist our common stock
and if we are delisted there may not be an active trading market for our common
stock").
Our Anti-Takeover Provisions May Limit Stockholder Value
We have a shareholder rights plan and provisions in our bylaws that may
discourage or prevent a person or group from acquiring us without our board of
directors' approval. The intent of the shareholder rights plan and our bylaw
provisions is to protect our shareholders' interests by encouraging anyone
seeking control of our Company to negotiate with our Board of Directors.
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.
-6-
<PAGE>
DILUTION
The issuance of further shares and the eligibility of issued shares for
resale will dilute our common stock and may lower the price of our common stock.
If you invest in our common stock, your interest will be diluted to the extent
of the difference between the price per share you pay for the common stock and
the pro forma as adjusted net tangible book value per share of our common stock
at the time of sale. We calculate net tangible book value per share by
calculating the total assets less intangible assets and total liabilities, and
dividing it by the number of outstanding shares of common stock.
The net tangible book value of our common stock at September 30, 2000 was
$4,271,450, or approximately $0.42 per share. Assuming that -
- we issued on September 30, 2000 a total of 8,888,889 shares to Majorlink
under the private equity line of credit agreement at $0.56 per share, which
is 90% of the closing price of our common stock on December 27, 2000 and
reflects Majorlink's 10% discount, and
- on September 30, 2000, you purchased shares under this prospectus for
$0.63, which is the closing price for our common stock on December 27,
2000,
our pro forma net tangible book value as of September 30, 2000 would have been
$8,821,450 or $0.47 per share. This would represent an immediate increase in the
pro forma net tangible book value of $0.05 per share to existing shareholders on
September 30, 2000 and would represent immediate dilution to you of
approximately $0.16 per share. The actual dilution to you may be greater or less
than in this example, depending on the actual price you pay for shares and the
actual prices at which we issue shares to Majorlink under the private equity
line of credit agreement.
Forward-Looking Statements
--------------------------
This registration statement and other statements issued or made from time
to time by us or our 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 (the "Exchange Act"), as amended. Those statements include
statements regarding our intent, belief or current expectations and those of
members of our 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. We undertake 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.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Majorlink Holdings Limited that it has obtained under the private equity line of
credit agreement described in this prospectus. However, we will receive the sale
price, less an escrow agent fee of $750 and a seven percent (7%) cash placement
fee, of any common stock we sell to Majorlink Holdings Limited under the private
equity line of credit agreement and upon the exercise for cash of warrants held
by Majorlink Holdings Limited and Ladenburg Thalmann. We expect to use the
proceeds of any such sales for general working capital purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the near
future. Our board of directors has sole discretion to pay cash dividends based
on our financial condition, results of operation, capital requirements,
contractual obligations and other relevant factors.
-7-
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at September 30, 2000:
(1) on a historical basis and (2) as adjusted to give effect to the sale of an
assumed 8,888,889 shares of common stock which may be offered by Majorlink
Holdings Limited in this offering and the application of the net proceeds we may
receive for our shares from Majorlink under the private equity line of credit
agreement. The 8,888,889 shares assumes that $5,000,000 is raised at a per
common stock share price of $0.56 (the market price of the common stock as of
December 27, 2000, $0.63, less Majorlink's 10% discount per the private equity
line of credit agreement). The actual change in common stock and additional paid
in capital will depend on the actual amount raised and the market price of our
common stock at that time. In addition, we will pay Ladenburg Thalmann a
placement fee of seven percent (7%) of the draw See "Use of Proceeds." This
table should be read in conjunction with our financial statements and related
notes, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the other financial data appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Actual As Adjusted
------------- ---------------
<S> <C> <C>
Shareholders' equity:
Common stock, $.001 par value, 50,000,000 shares
authorized: 10,696,512* shares issued
(actual), 18,951,585 shares issued (as adjusted)...................... $ 10,696 $ 19,585
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............................... - -
Additional paid-in-capital .............................................. 72,551,195 77,092,306
Treasury stock, at cost (633,816 shares held at September 30, 2000)...... (2,279,238) (2,279,238)
Accumulated deficit...................................................... (66,011,203) (66,011,203)
------------- ---------------
Total shareholders' equity........................................... 4,271,450 8,821,450
------------- ---------------
Total capitalization................................................ $ 4,271,450 $ 8,821,450
============= ===============
</TABLE>
----------------------------
* Common stock issued does not include 3,665,933 of our shares subject to
outstanding options and warrants as of September 30, 2000.
-8-
<PAGE>
PRICE RANGE OF COMMON STOCK
Our 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.
High Low
--------- ---------
COMMON STOCK:
2000
Fourth Quarter 1 9/16 9/16
Third Quarter 1 1/2 13/16
Second Quarter 2 3/4 15/16
First Quarter 6 1/4 31/32
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
On December 27, 2000, the closing price of the common stock as reported on
The Nasdaq Stock Market, was $0.63 and there were approximately 1200 holders of
record of our common stock. The number of record holders does not reflect the
number of beneficial owners of our common stock for whom shares are held by
brokerage firms and other institutions. We have not paid any dividends since our
inception and do not contemplate paying dividends in the foreseeable future.
-9-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from our
consolidated financial statements which have been audited by Ernst & Young LLP,
independent auditors. Our financial statements as of December 31, 1999 and 1998,
and for each of the years in the three year period ended December 31, 1999, and
the report on those financial statements are included in this prospectus, and
the information below for those periods is qualified by reference to that
report.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
(Restated)* (Restated)* (Restated)* (Restated)* (Restated)*
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
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 1,391,460 2,113,536 1,803,345 1,916,431 1,990,506
=================================================================================
Loss from continuing operations (15,269,918) (7,737,296) (4,618,867) (2,241,795) (9,507,722)
Income (loss) from discontinued operations 240,627 2,943,937 (1,434,125) (3,549,984) (1,144,860)
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 $ (1.99) $ (1.01) $ (0.62) $ (0.29) $ (1.20)
Income (loss) from discontinued operations 0.03 0.38 (0.20) (0.46) (0.15)
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>
The following selected financial data have been derived from our condensed
consolidated financial statements as of September 30, 2000 and for the nine
month periods ended September 30, 2000 and 1999 (unaudited).
2000 1999
(Restated)*
----------------------------
Statement of Operations Data:
Revenues:
Net sales $ 353,370 $ 239,728
Interest and other income 684,042 929,560
----------------------------
Total revenues 1,037,412 1,169,288
============================
Loss from continuing operations (2,308,212) (10,992,160)
Income from discontinued operations 799,328 165,184
----------------------------
Net loss $ (1,508,884) $(10,826,976)
============================
Basic and diluted loss per common share:
Loss from continuing operations $ (0.25) $ (1.44)
Income from discontinued operations .09 0.02
----------------------------
Net loss $ (0.16) $ (1.42)
============================
Balance Sheet Data:
Total assets $ 5,506,824 $6,766,322
Long-term debt - -
Other long-term liabilities - -
Total stockholders' equity 4,271,450 4,975,126
----------------------
*Restated to treat our sale of our Titermax business segment in June 2000 as a
discontinued operation.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion includes "forward-looking" statements that reflect our current
views with respect to future events and financial performance. We use words such
as we "expect", "anticipate", "believe" and "intend" and similar expressions to
identify forward-looking statements. Investors should be aware that actual
results may differ materially from our expressed expectations because of risks
and uncertainties inherent in future events, particularly those risks identified
in the "Risk Factors" section of this prospectus, and should not unduly rely on
these forward looking statements. We will not necessarily update the information
in this discussion if any forward-looking statement later turns out to be
inaccurate.
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 September 30, 2000, we had cash and cash equivalents of $2.2 million and
net assets of $4.3 million, compared to $3.0 million and $1.0 million,
respectively, at December 31, 1999 and $15.3 million and $14.7 million,
respectively, at December 31, 1998. Working capital totaled $1.2 million at
September 30, 2000, compared to $664,000 at December 31, 1999 and $13.7 million
at December 31, 1998.
During the first quarter of 2000, we took steps to improve our financial
condition, including (i) agreements with certain trade creditors whereby they
cancelled indebtedness of $2.3 million in exchange for issuance of approximately
938,000 shares of our common stock, and (ii) a Stock Purchase Agreement with
investors whereby they agreed to purchase 800,000 shares of our common stock for
an aggregate purchase price of $1.8 million and the issuance of warrants. As
part of our efforts to conserve cash resources, we also reduced our staff and
our clinical development program for FLOCOR pending further analysis of results
from a recently completed Phase III clinical study (see discussion under
"Results of Operations--Three and Nine Months Ended September 30, 2000 and
1999").
In April 2000, we entered into a private equity line of credit agreement
where we have the right to put shares of our common stock to an investor from
time to time to raise up to $5,000,000, subject to the conditions and
restrictions included in "Private Equity Line of Credit Agreement" on page 31 of
this prospectus.
Effective June 15, 2000, we entered into a Purchase Agreement with Titermax
USA, Inc. (an unaffiliated company) whereby we sold the worldwide rights to
market and distribute Titermax, including all accounts receivable, inventory and
other assets used in the Titermax business. The gross purchase price was
$750,000, consisting of $100,000 in cash and a $650,000 five-year secured
promissory note bearing interest of 10% annually.
In November 2000, we entered into an exclusive, worldwide license agreement
(the "License Agreement") with Merck & Co., Inc. ("Merck") whereby we granted to
Merck right to use our TranzFect technology in DNA-based vaccines targeted to
four infectious diseases. For the license to the TranzFect technology
to treat the first disease target, Merck has paid us a signature payment of $2
million, and will pay us milestone and product approval payments of up to $4
million. Additionally, if certain conditions are met regarding patent protection
and Merck's competitive position, Merck may pay a royalty to us of 1% on net
sales of products incorporating TranzFect for the first disease target. For each
of the licenses to the TranzFect technology to treat the three additional
disease targets, Merck will make a series of milestone and product approval
payments to us totaling up to $2,850,000 each. If and when sales of products
incorporating TranzFect for the three additional disease targets commence, we
will receive royalties of between 2 and 4% of the net sales from such products.
Additionally, if certain conditions are met regarding patent protection and
Merck's competitive position, Merck may pay a royalty of 1% on net sales of
products incorporating TranzFect for these additional disease targets. Merck
will also pay an annual fee of between $50,000 and $100,000 until the first
product approval for one of the three additional disease targets. Merck may
terminate the License Agreement at any time, upon 90 days written notice. All
amounts paid to us are non-refundable upon termination.
We believe that the proceeds of the transactions discussed above will allow
us to operate at least through the end of 2001, but that additional funds will
be needed to significantly advance any of our technologies under development. We
are continuing to seek corporate partnerships for FLOCOR, and are also seeking
government support for additional clinical studies. In 2001 we also plan to
focus attention on obtaining additional licenses for our TranzFect technology.
Some of our additional capital requirements may be provided by the Private
Equity Line of Credit Agreement. The results of our technology licensing efforts
and/or the actual proceeds of any fund-raising activities will determine our
ongoing ability to operate as a going concern with the current portfolio of
technologies under development. Both our technology licensing efforts and our
fund-raising activities are subject to market conditions and our ability to
identify parties that are willing and able to enter into such arrangements on
terms that are satisfactory to us. There is no assurance that such funding will
be available to finance our operations on acceptable terms, if at all.
Insufficient funding may require us to delay, reduce or eliminate some or all
of our research and development activities, planned clinical trials and
administrative programs.
At December 31, 1999 we and our subsidiaries had net operating loss
carryforwards for income tax purposes of approximately $54.6 million, which will
expire in 2000 through 2019 if not utilized. We also have research and
development tax credits and orphan drug tax credits available to reduce income
taxes, if any, of approximately $4.6 million which will expire in 2000 through
2014 if not utilized. Based on an assessment of all available evidence
including, but not limited to, our limited operating history and lack of
profitability, uncertainties of the commercial viability of our technology, the
impact of government regulation and healthcare reform initiatives, and other
risks normally associated with biotechnology companies, we have 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.
-11-
<PAGE>
The above statements regarding our plans and expectations for future
financing are forward-looking statements that are subject to a number of risks
and uncertainties. Our ability to obtain future financings through joint
ventures, product licensing arrangements, equity financings or otherwise is
subject to market conditions and our ability to identify parties that are
willing and able to enter into such arrangements on terms that are satisfactory
to us. There can be no assurance that we will be able to obtain future financing
from these sources. Additionally, depending upon the outcome of our fund raising
efforts via the subsidiaries discussed above, the accompanying financial
information may not necessarily be indicative of future operating results or
future financial condition.
Result of Operations - Years Ended December 31, 1999, 1998 and 1997
-------------------------------------------------------------------
We 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 $15,270,000,
$7,737,000 and $4,619,000 in 1999, 1998 and 1997, respectively.
We market the services of our small group of human resource professionals
to third parties under the name of Spectrum Recruitment Research as a way of
offsetting our 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 our Phase III clinical trial of FLOCOR, as well as certain additional
Small Business Innovative Research (SBIR) grants for our 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 us to our
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 our development activities for FLOCOR. Our 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, we also
continued our 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 $3,610,000 as compared to $2,312,000 in 1998 and $2,281,000 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.
The extraordinary loss in 1998 relates to the early extinguishment of 6%
convertible notes which resulted in payment of premiums of $150,000 and
expense of capitalized debt issuance costs of $175,000.
-12-
<PAGE>
Discontinued Operations - Net income (loss) from the discontinued
operations of Proceutics, CytRx Animal Health, Vaxcel (net of minority
interest) and Titermax was $240,000, $2,944,000 and $(1,434,000) in 1999, 1998
and 1997. The following table presents the breakdown of net income (loss) from
discontinued operations.
<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)
Titermax 280,000 231,000 193,000
---------- ----------- -----------
Net income (loss) from discontinued operations $ 240,000 $ 2,944,000 $(1,434,000)
========== =========== ===========
</TABLE>
Inflation - Our management believes that inflation had no material impact
on our operations during the three year period ended December 31, 1999.
Impact of Year 2000
-------------------
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and we believe those systems
successfully responded to the Year 2000 date change. We expensed less than
$25,000 during 1999 in connection with remediating its systems. We are not aware
of any material problems resulting from Year 2000 issues, either with our
products, internal systems, or the products and services of third parties. We
will continue to monitor our mission critical computer applications and those of
our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters are addressed promptly.
Results of Operations - Three and Nine Month Periods Ended September 30, 2000
-----------------------------------------------------------------------------
and 1999
--------
We recorded net losses of $606,000 and $1,509,000 for the three month and
nine month periods ended September 30, 2000 as compared to $4,886,000 and
$10,827,000 for the same periods in 1999. Loss from continuing operations was
$606,000 and $2,308,000 for the three month and nine month periods ended
September 30, 2000 as compared to $5,138,000 and $10,992,000 in 1999. The
overall reduction in net loss is due primarily to changes in the Company's
research and development expenditures, discussed below.
Net sales from continuing operations, which consist solely of service
revenues from Spectrum Recruitment Research, were $168,000 and $353,000 during
the three month and nine month periods ended September 30, 2000 as compared to
$75,000 and $240,000 in 1999. The increase in sales for the three month period
ended September 30, 2000 over the comparable period in 1999 is primarily due to
increased revenues from a single customer and is not necessarily indicative of a
continuing trend. Cost of sales were $82,000 and $179,000 for the three month
and nine month periods ended September 30, 2000 as compared to $52,000 and
$158,000 in 1999.
Interest income was $48,000 and $117,000 during the three month and nine
month periods ended September 30, 2000, as compared to $96,000 and $407,000 in
1999. The variance between years generally corresponds to fluctuating cash and
investment balances.
Grant income was $107,000 and $317,000 during the three month and nine
month periods ended September 30, 2000, as compared to $150,000 and $404,000 in
1999. Costs related to grant income are included in research development expense
and generally approximate the amount of revenue recognized.
Other income was $81,000 and $250,000 during the three month and nine month
periods ended September 30, 2000 as compared to $30,000 and $118,000 in 1999.
Other income for the nine month period in 2000 includes $125,000 in fees paid
by Merck during the first quarter pursuant to an Evaluation Agreement for the
Company's TranzFect technology.
-13-
<PAGE>
Research and development expenditures were $388,000 and $1,616,000 during
the three month and nine month periods ended September 30, 2000, as compared to
$4,541,000 and $9,334,000 in 1999. Research and development expenditures are
higher in prior periods due to our clinical development activities for FLOCOR.
During 1999, we conducted four separate human clinical studies of FLOCOR,
including a Phase III clinical trial of FLOCOR for treatment of acute sickle
cell crisis which was completed in December 1999. Subsequent to the completion
of that study, we reduced our clinical development activities for FLOCOR pending
further analysis of the Phase III results. Our development activities during
2000 have consisted primarily of analysis of the Phase III results, consultation
with our scientific and regulatory advisors and meetings with regulatory
authorities. The Phase III study did not achieve the high level of statistical
significance required by the FDA for the study as a whole; the results in
children, however, were statistically significant and our planned future studies
will focus on the pediatric sickle cell population. Based on our recent
conversations with the FDA, it is likely that either two small additional
pivotal trails or one large trail will be required for approval, along with one
to two additional safety studies. We believe there is a reasonable possibility
of obtaining government funding to support one or more of the remaining trials,
which will minimize, but not eliminate our expenditures. If we are successful in
these discussions, we would anticipate earliest funding approval in the fourth
quarter of 2001. The additional studies would take approximately two years to
complete patient enrollment, which might begin in the second or third quarter of
2002.
Beyond sickle cell disease, the potential uses of FLOCOR in critical care
applications are quite extensive and represent large, high-value markets. Some
of the potential applications include stroke, shock and cancer (drug delivery).
Dependent upon our ability to obtain additional funding, we plan to conduct
"proof of concept" studies in each field. Our strategy then will be to identify
potential partners to fund the clinical development of FLOCOR in these
indications.
During 2000, we turned some of our attention to our TranzFect gene delivery
technology, although this effort has mostly involved personnel time and has not
required significant expenditures. Subsequent to completion of the first license
of this technology, we intend to work toward obtaining additional licenses and
in 2001 we plan to conduct additional physical chemistry and biological studies
with TranzFect to support our licensing efforts.
Selling, general and administrative expenditures were $541,000 and
$1,551,000 during the three and nine month periods ended September 30, 2000, as
compared to $896,000 and $2,669,000 in 1999. During each of the periods, certain
vesting criteria of employee and consultant options and warrants were achieved,
resulting in aggregate non-cash charges of $-0- and $218,000, during the three
and nine month periods ended September 30, 2000 and $307,000 and $1,068,000
during the same periods in 1999. Excluding these charges, selling, general and
administrative expenditures were $541,000 and $1,333,000 during the 2000 periods
and $589,000 and $1,601,000 during the 1999 periods. The overall decrease from
1999 to 2000 reflects our staff reductions and other steps we've taken to
conserve our cash resources.
Net income from discontinued operations, net of minority interest, was $-0-
and $799,000 during the three and nine month periods ended September 30, 2000,
as compared to $252,000 and $165,000 in 1999. Income from discontinued
operations relates to the operations of a former subsidiary, Vaxcel, Inc., which
we sold in September 1999 and the operations of Titermax, which we sold in June
2000 (see Note 5 to Financial Statements). Net income from discontinued
operations for the nine month period of 2000 includes a gain of $680,000 from
our sale of Titermax.
Our financial instruments that are sensitive to changes in interest rates
are our investment. As of September 30, 2000, we held no investments other than
amounts invested in money market accounts. We are not subject to any other
material market risks.
BUSINESS
Glossary of Terms
-----------------
Acute Sickle Cell Crisis - An acute event characterized by severe pain occurring
in sickle cell disease, where the abnormal sickle shaped red blood cells
cause a blockage to the flow of blood. The blockage causes in a lack of
oxygen delivery to tissues resulting in tissue and organ damage.
Adjuvant - See "Vaccine Adjuvant."
Antigen - Any substance that stimulates the production of a specific immune
response.
Copolymer - A polymer is a large molecule composed of many small identical
molecules joined in a chain-like fashion. A copolymer is a polymer compound
of two or more different types of identical small molecule chains. Nearly
all of our projects are based on block copolymers synthesized primarily
from polyoxyethy-lene and polyoxypropylene. Polyoxyethylene is hydrophilic
(water-attracting) and polyoxypropylene is hydrophobic (water-repelling).
These copolymers are surface active agents and have the ability to modify
the interactions between cells.
DNA - Deoxyribonucleic acid. The genetic material or building blocks of genes.
Gene - A functional unit of DNA.
Gene Delivery - A technique to insert a foreign gene into a cell.
Immuno-adjuvant - See "Adjuvant".
-14-
<PAGE>
In vitro - In an artificial environment. Refers to experiments or procedures
performed outside a living animal (e.g. in test tube culture systems).
In vivo - Refers to experiments or procedures performed in a living animal.
Metabolize - To breakdown or utilize by a living system
Parenteral - Intravenous
Poloxamer - A generic name for block copolymers consisting of a central core of
polyoxypropolene flanked by chains of polyoxyethylene.
Vaccine Adjuvants - Substances that increase immune responses to specific
antigens and make vaccines more effective by increasing the response of the
immune system to the antigen in the vaccine.
Vaso-occlusive Crisis - See "Acute Sickle Cell Crisis".
General
-------
We are a Delaware corporation, incorporated in 1985 and are engaged in the
development and commercialization of pharmaceutical products. Our current
research and development focus is on disorders affecting the vascular system,
specifically those conditions caused by a blockage in the vascular system,
commonly referred to as vascular-occlusive disorders. The Company's primary
focus is on FLOCOR, initially being developed for the treatment of acute sickle
cell crisis. We plan to expand the development of FLOCOR to other vascular
disorders such as shock and stroke over time. We are also engaged in research,
or have technology available for licensing, 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.
-15-
<PAGE>
Current Financial Condition and Need for Additional Capital
-----------------------------------------------------------
At December 31, 1999, we had cash and cash equivalents of $3 million and
working capital of $664,000. At September 30, 2000, we had cash and cash
equivalents of $2.2 million and working capital of $1.2 million.
During the first quarter of 2000, we took steps to improve our financial
condition, including (i) agreements with trade creditors whereby an aggregate of
$2.3 million of indebtedness was cancelled in exchange for issuance of
approximately 938,000 shares of CytRx Common Stock, and (ii) 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. As part of our efforts to
conserve our cash resources we also reduced our staff and reduced our clinical
development program for FLOCOR.
In April 2000, the we entered into a Private Equity Line of Credit
Agreement (the "ELC Agreement") pursuant to which the Company has the right to
put shares of its Common Stock to the ELC Investor from time to time to raise up
to $5,000,000, subject to certain conditions and restrictions.
Effective June 15, 2000, we entered into a Purchase Agreement with Titermax
USA, Inc. (an unaffiliated company) whereby we sold the worldwide rights to
market and distribute Titermax, including all accounts receivable, inventory and
other assets used in the Titermax business. The gross purchase price was
$750,000, consisting of $100,000 in cash and a $650,000 five-year secured
promissory note bearing interest of 10% annually.
In November 2000, we entered into an exclusive, worldwide license agreement
(the "License Agreement") with Merck & Co., Inc. ("Merck") whereby we granted to
Merck right to use our TranzFect technology in DNA-based vaccines targeted to
four infectious diseases. For the license to the TranzFect technology
to treat the first disease target, Merck has paid us a signature payment of $2
million and will pay us milestone and product approval payments of up to $4
million. Additionally, if certain conditions are met regarding patent protection
and Merck's competitive position, Merck may pay a royalty to us of 1% on net
sales of products incorporating TranzFect for the first disease target. For each
of the licenses to the TranzFect technology to treat the three additional
disease targets, Merck will make a series of milestone and product approval
payments to us totaling up to $2,850,000 each. If and when sales of products
incorporating TranzFect for the three additional disease targets commence, we
will receive royalties of between 2 and 4% of the net sales from such products.
Additionally, if certain conditions are met regarding patent protection and
Merck's competitive position, Merck may pay a royalty of 1% on net sales of
products incorporating TranzFect for these additional disease targets. Merck
will also pay an annual fee of between $50,000 and $100,000 until the first
product approval for one of the three additional disease targets. Merck may
terminate the License Agreement at any time, upon 90 days written notice. All
amounts paid to us are non-refundable upon termination.
We believe that the proceeds of the transactions discussed above will allow
us to operate at least through the end of 2001, but that additional funds will
be needed to significantly advance any of our technologies under development. We
are continuing to seek corporate partnerships for FLOCOR, and are also seeking
government support for additional clinical studies. In 2001 we also plan to
focus attention on obtaining additional licenses for our TranzFect technology.
Some of our additional capital requirements may be provided by the Private
Equity Line of Credit Agreement. The results of our technology licensing efforts
and/or the actual proceeds of any fund-raising activities will determine our
ongoing ability to operate as a going concern with the current portfolio of
technologies under development. Both our technology licensing efforts and our
fund-raising activities are subject to market conditions and our ability to
identify parties that are willing and able to enter into such arrangements on
terms that are satisfactory to us. There is no assurance that such funding will
be available to finance our operations on acceptable terms, if at all.
Insufficient funding may require us to delay, reduce or eliminate some or all
of our research and development activities, planned clinical trials and
administrative programs.
Without an infusion of additional working capital from the sale of equity
securities, license/sale of technology assets, or a combination of these, the
Company has limited ability to advance its existing technologies.
Product Development
-------------------
FLOCOR
------
General. Our primary focus is on FLOCOR, 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.
<PAGE>
is also estimated that complications from sickle cell disease result in
healthcare expenditures of from $1.0 to $1.5 billion annually in the U.S.
The most common problem sickle cell patients face is episodic pain (also
referred to as vaso-occlusive crisis, or VOC). These episodes can last anywhere
from days to weeks, and can vary significantly in their severity. The deformed
sickle cells cannot easily flow through the smaller blood vessels of the body
and tend to clump together, forming occlusions which impede blood flow. The
occlusions deprive tissues of vital oxygen that can result in tissue death,
inflammation and intense throbbing pain. Aside from causing considerable pain
and suffering, these crisis episodes slowly destroy vital organs as they are
deprived of oxygen. As a result, the life expectancy of sickle cell victims is
about twenty years shorter than those without the disease. Patients suffering
from sickle cell disease may experience several crisis episodes each year.
Hospitalization is required when pain becomes too much to bear. There are about
75,000 hospital admissions annually to treat sickle cell patients undergoing
acute vascular-occlusive crisis caused by the disease. On average, these
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. We believe that FLOCOR has the potential to
be an effective treatment for other vascular-occlusive diseases such as heart
attack and stroke. However, our current strategy is to focus our efforts and
resources on gaining approval for the acute crisis of sickle cell anemia.
Status of Clinical Trials. On December 21, 1999, we reported results from
our 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. The Phase III study also demonstrated that FLOCOR is well tolerated.
Based on the encouraging efficacy results and a good safety profile our
independent Data and Safety Monitoring Board (DSMB) and other thought leaders in
the area of sickle cell disease have recommended that we continue with clinical
development of FLOCOR in sickle cell disease. We presented the results of the
Phase III trial at the 24th Annual Meeting of the National Sickle Cell Disease
Program in Philadelphia on April 12, 2000. Based on our recent conversations
with the FDA, it is likely that either two small additional pivotal trials or
one large trial will be required for approval, along with one to two additional
safety studies. We believe there is a reasonable possibility of obtaining
government funding to support one or more of the remaining trials, which will
minimize, but not eliminate our expenditures. If we are successful in these
discussions, we would anticipate earliest funding approval in the fourth quarter
of 2001. The additional studies would take approximately two years to complete
patient enrollment, which might begin in the second or third quarter of 2002.
Prior to the announcement of the Phase III results, we had been discussing
potential licensing arrangements for FLOCOR with third parties. Currently, we
are continuing these discussions and are 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. We do not plan to begin
additional clinical studies for FLOCOR until such a license is put in place or
we raise additional capital.
Orphan Drug Status. In June 1989, the FDA informed us 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 we are the first manufacturer to obtain
FDA approval to market FLOCOR for treatment of sickle cell crisis, we 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.
Gene Delivery Technology
------------------------
Gene therapy and / or gene based vaccines are mediated through the delivery
of DNA containing selected genes into cells by a process known as transfection.
A common class of materials used to enhance the transfection
-17-
<PAGE>
process are the cationic lipids. This type of lipid can associate with and alter
the integrity of a cell membrane, thus increasing the uptake of the complexed
DNA. Unfortunately, cationic lipids are toxic to cells and are readily
metabolized. Thus the effect of these agents in transfection protocols is not
readily reproducible when used in vivo.
We have identified a series of non ionic block copolymers known as
poloxamers that share several physico-chemical traits with the cationic lipids
in that they associate with DNA and cell membranes. However, the block
copolymers are significantly less toxic than the cationic lipids and are not
metabolized in vivo. In addition, the poloxamer family of non ionic block
copolymers have a significant history of being safely used in a wide variety of
oral, injectable, and topical pharmaceutical products. Importantly, a poloxamer
known as CRL 1005 which is among the most active in transfection protocols and
is adjuvant active, has been studied in a Phase I clinical trial. In that trial,
CRL 1005 was well tolerated at doses significantly higher than those anticipated
to be useful in gene therapy or DNA vaccine studies.
In addition to the ability of poloxamers to enhance transfection, these
compounds have significant immuno-adjuvant activity. Accordingly, we believe
that an optimal application for this technology may be in the field of DNA
vaccines. We believe that in this application, the activity of poloxamers will
be two-fold. First, the poloxamers will act as delivery / transfection agents to
facilitate the intracellular delivery and protection of the DNA from enzymatic
digestion. Second the poloxamer will act as an immuno-adjuvant. Since the
poloxamer is not metabolized and has surface active properties, it is likely to
remain on the surface of the transfected cell awaiting expression of the gene.
When the gene product is excreted from the cell, the poloxamer is likely to
associate with the antigen and exert immuno-adjuvant actions. Numerous
preclinical and clinical studies have demonstrated that conventional vaccines
adjuvanted with poloxamers are well tolerated and result in significantly
enhanced antibody and cellular immune responses.
We believe that recent concern over the safety of viral gene delivery
systems is likely to result in increased interest in non-viral delivery systems.
We believe there is potential use for our technology in (a) gene-based vaccines,
(b) gene replacement therapy, and (c) ribozyme and anti-sense delivery.
In November 2000, we entered into an exclusive, worldwide license agreement
(the "License Agreement") with Merck & Co., Inc. ("Merck") whereby we granted to
Merck rights to use our TranzFect technology in DNA-based vaccines targeted to
four infectious diseases. For the license to the TranzFect technology
to treat the first disease target, Merck has paid us a signature payment of $2
million and will pay us milestone and product approval payments of up to $4
million. Additionally, if certain conditions are met regarding patent protection
and Merck's competitive position, Merck may pay a royalty to us of 1% on net
sales of products incorporating TranzFect for the first disease target. For each
of the licenses to the TranzFect technology to treat the three additional
disease targets, Merck will make a series of milestone and product approval
payments to us totaling up to $2,850,000 each. If and when sales of products
incorporating TranzFect for the three additional disease targets commence, we
will receive royalties of between 2 and 4% of the net sales from such products.
Additionally, if certain conditions are met regarding patent protection and
Merck's competitive position, Merck may pay a royalty of 1% on net sales of
products incorporating TranzFect for these additional disease targets. Merck
will also pay an annual fee of between $50,000 and $100,000 until the first
product approval for one of the three additional disease targets. Merck may
terminate the License Agreement at any time, upon 90 days written notice. All
amounts paid to us are non-refundable upon termination.
Other Product Development Efforts
---------------------------------
Vaccine Adjuvants / Delivery Systems -- We have 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 -- We have 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.
-18-
<PAGE>
Animal Growth Promotant -- Our 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. We are 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
--------------------------------------
Spectrum Recruitment Research - We also have a small group of human
resource professionals who, in addition to their services to us, provide
recruiting services to third parties under the name of Spectrum Recruitment
Research.
Titermax (TM) - Since 1987 we have manufactured, marketed and distributed
Titermax, an adjuvant used to produce immune responses in research animals.
Effective June 15, 2000, we entered into a Purchase Agreement with Titermax USA,
Inc. (an unaffiliated company) whereby we sold the worldwide rights to market
and distribute Titermax, including all accounts receivable, inventory and other
assets used in the Titermax business. The gross purchase price was $750,000,
consisting of $100,000 in cash and a $650,000 five-year secured promissory note
bearing interest of 10% annually.
Vaxcel, Inc. - In July 1999, we terminated our license of our Optivax
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 us. On
June 2, 1999, we entered into a Stock Acquisition Agreement with A-Z
Professional Consultants, Inc. ("A-Z") for the sale of our 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 us for
a cash purchase price of $319,000. After consummation of this transaction, we
have no further equity interest in Vaxcel.
Manufacturing
-------------
We require 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. We have not entered into a formal agreement
with any supplier for the raw drug substance because of its wide availability.
In August 1999, we 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 our relationship with
such supplier will continue or that we will be able to obtain additional
purified drug substance if our 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 our business. To meet the
need for manufacture of our finished drug product, we have entered into a supply
agreement with the Hospital Products Division of Abbott Laboratories. Our
inability to maintain such relationship on terms acceptable to us could have a
material adverse effect on our business.
If we modify our manufacturing process or change the source or location of
product supply, regulatory authorities will require us to demonstrate that the
material produced from the modified or new process or facility is equivalent to
the material used in our clinical trials. Further, any manufacturing facility
and the quality control and manufacturing procedures used by us 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".
-19-
<PAGE>
Patents and Proprietary Technology
----------------------------------
We actively seek patent protection for our technologies, processes, uses,
and ongoing improvements and consider our patents and other intellectual
property to be critical to our business.
We continually evaluate the patentability of new inventions and
improvements developed by our employees and collaborators. Whenever appropriate,
we 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.
We also attempt to protect our proprietary products, processes and other
information by relying on trade secrets and non-disclosure agreements with our
employees, consultants and certain other persons who have access to such
products, processes and information. Under the agreements, all inventions
conceived by employees are our exclusive property. Nevertheless, there can be
no assurance that these agreements will afford significant protection against
misappropriation or unauthorized disclosure of our trade secrets and
confidential information.
We believe we have worldwide comprehensive intellectual property covering
the use of poloxamers in a number of therapeutic areas. Patents claiming broad
areas of the use of these compounds are currently pending or have issued in
Canada, Japan, South Korea, the EPO and the United States. On November 23, 1999
the U.S. Patent Office issued patent No. 5,990,241
"Polyoxypropylene/Polyoxyethylene Copolymers With Improved Biological Activity"
to us. We believe the issue of this patent provides important exclusivity since
it contains composition of matter claims for purified poloxamers used in our
products and technologies, including purified poloxamer 188, the active
ingredient in FLOCOR. This patent will expire in 2017. We also own a
comprehensive group of patents that broadly claim the use of poloxamers as
vaccine adjuvants that will provide additional coverage for DNA vaccines.
Competition
-----------
Many companies, including large pharmaceutical, chemical and biotechnology
firms with financial resources, research and development staffs, and facilities
that are substantially greater than ours, are engaged in the research and
development of pharmaceutical products that could compete with FLOCOR or other
products under development by us. 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 us or
our licensees and corporate partners. We compete in this research and
development environment by attempting to develop its products and technologies
in an innovative and timely fashion that would provide us with an advantage in
the licensing and/or marketing of our products and technologies.
Government Regulation
---------------------
The marketing of pharmaceutical products requires the approval of the FDA
and comparable regulatory authorities in foreign countries. The FDA has
established guidelines and safety standards which apply to the pre-clinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining FDA approval for a new therapeutic product
(drug) generally takes several years and involves the expenditure of substantial
resources. The steps required before such a product can be produced and marketed
for human use in the United States include preclinical studies in animal models,
the filing of an Investigational New Drug ("IND") application, human clinical
trials and the submission and approval of an NDA. The NDA involves considerable
data collection, verification and analysis, as well as the preparation of
summaries of the manufacturing and testing processes, preclinical studies, and
clinical trials. The FDA must approve the NDA before the drug may be marketed.
There can be no assurance that we will be able to obtain the required FDA
approvals for any of our products.
-20-
<PAGE>
The manufacturing facilities and processes for our products, whether
manufactured directly by us or by a third party, will be subject to rigorous
regulation, including the need to comply with Federal Good Manufacturing
Practice regulations. We are 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, 2000, we have four full-time employees and one part-time
employee.
Property
--------
We currently lease administrative office space at 154 Technology Parkway,
Norcross, Georgia. These facilities are in satisfactory condition and suitable
for our purposes and present operations. We also use contract lab facilities for
research and development purposes.
Legal Proceedings
-----------------
We are not a party to any material litigation.
MANAGEMENT
Directors and Executive Officers
Directors
Listed below are the names and ages of all of our current directors, the
business experience during the past five years of each such person, and any
other directorships held by such person in companies that are subject to the
reporting requirements of the Securities Exchange Act of 1934 or in any company
registered as an investment company under the Investment Company Act of 1940.
Each of the following directors has served continuously as a director since the
year in which he was first elected a director. None of the following persons
serves as a director pursuant to any arrangement or understanding between him
and any other person(s).
Class I - Term Expiring at the 2001 Annual Meeting
LYLE A. HOHNKE (57) first became our director in 1996. Since 1994, Dr.
Hohnke has served as a member of Javelin Capital Fund, LLC, a general partner of
Javelin Ventures, LP, a company engaged in venture capital investments. From
1991 to 1994 Dr. Hohnke was General Partner for Heart Land Seed Capital Fund.
Dr. Hohnke also serves as a director of Heska Corporation as well as a number of
privately-held companies.
JACK J. LUCHESE (52) has been President and Chief Executive Officer and our
director since March 1989. Prior to joining us, Mr. Luchese served as Vice
President and General Manager of the Armour Pharmaceutical Corporation, and as
Vice President, Corporate Business Development and a member of the Management
Committee of Rorer Group, Inc. (now Rhone-Poulenc Rorer). Prior to joining Rorer
Group, Inc. , Mr. Luchese was with Johnson & Johnson Company for 15 years where
he held various positions in business development, licensing, sales, new product
marketing, and finance.
-21-
<PAGE>
Class II - Term Expiring at the 2002 Annual Meeting
RAYMOND C. CARNAHAN, JR. (74) first become our director in 1991. Mr.
Carnahan has over 39 years of experience in cost controls and operational
systems in a variety of industries. Prior to his retirement in 1991, Mr.
Carnahan served as Manager, International Cost Analysis planning for Johnson &
Johnson International from 1974 to 1991. Mr. Carnahan has provided consulting
services to Waterford-Wedgewood Corporation in England and to Torf
Pharmaceutical Corporation in Poland and serves as President for the Morristown
Memorial Hospital Chaplaincy Service in Morristown, New Jersey.
HERBERT H. MCDADE, JR. (73) first became our director in 1990. From 1989 to
1996 Mr. McDade has served as Chairman, President and Chief Executive Officer of
Chemex Pharmaceuticals, Inc. (now Access Pharmaceuticals, Inc.). From 1986 to
1989 he was Chairman and President of Armour Pharmaceutical Corporation, a
wholly-owned subsidiary of Rorer Group, Inc. (now Rhone-Poulenc Rorer). Prior to
1986, Mr. McDade served as Vice President of the Revlon Corporation. Mr. McDade
serves as a director of Access Pharmaceuticals, Inc., Discovery Laboratories,
Inc. and CellPath, Inc.
Class III - Term Expiring at the 2003 Annual Meeting
MAX LINK (60) first became our director in 1996. From May 1993 to June
1994, Dr. Link served as the Chief Executive Officer of Corange U.S. Holdings,
Inc. (the holding company for Boehringer Mannheim Therapeutics, Boehringer
Mannheim Diagnostics and DePuy International). From 1992 to 1993, Dr. Link was
Chairman of Sandoz Pharma. From 1987 to 1992, Dr. Link was the Chief Executive
Officer of Sandoz Pharma, Ltd. and a member of the Executive Board of Sandoz,
Ltd., Basel. Prior to 1987, Dr. Link served in various capacities with the
United States operations of Sandoz, including President and Chief Executive
Officer. Dr. Link also serves as a director of Access Pharmaceuticals, Alexion
Pharmaceuticals, Inc., Cell Therapeutics, Inc., Discovery Laboratories, Inc.,
Human Genome Sciences, Inc. and Protein Design Laboratories, Inc.
ALEXANDER L. CAPPELLO (45) first became our director effective January 1,
2001. Mr. Cappello is Chairman & CEO of Cappello Group, Inc. and has been since
__________. Mr. Cappello has been active in the investment banking, merchant
banking, project finance and venture capital arena since 1975. Prior to his
current role with Cappello Group, Inc., he was the founder of both Swiss
American Financial and Euro American Financial Corp., two merchant and
investment banking firms that progressively expanded operations throughout North
American and Europe. Mr. Cappello's early career experience was in sales with
IBM and corporate finance with Union Bank of California. Mr. Cappello also
serves as a director of Advanced Biotherapeutics, Inc.
Executive Officers
Except for Jack J. Luchese, discussed above under "Directors", listed below
are the names and ages of all of our executive officers, all positions and
offices with us held by each such person, the period(s) during which such person
has held such positions and offices and the business experience during the past
five years of each such person. Each of the following executive officers serves
until his successor is elected and qualifies or until his earlier death,
resignation or removal. None of the following persons serves as an officer or
is to be selected as an officer pursuant to any arrangement or understanding
between him and any other person(s).
R. MARTIN EMANUELE, PH.D. (46) joined us in 1988 as the project director
for our RheothRx project (now FLOCOR(TM)). Dr. Emanuele assumed the duties of
Vice President, Preclinical Development in June 1990 and became Vice President,
Research and Business Development in October 1997. Before joining us, he worked
as a clinical research scientist at DuPont Critical Care and as a visiting
scientist at Institute Choay.
WILLIAM B. FLECK (42) joined us in April 1993 as Vice President, Human
Resources. From 1992 to 1993 Mr. Fleck served as Director, Human Resources and
Training for Central Health Services (CHS). During 1991, he was Director, Human
Resources for Knowledgeware, Inc. Prior to joining Knowledgeware, Mr. Fleck held
senior human resources management positions with MCI Communications from 1989 to
1991 and Harris/3M from 1984 to 1989.
-22-
<PAGE>
J. MICHAEL GRINDEL, PH.D. (53) joined us in October 1997 as Vice President,
Drug Development. From 1994 to 1997 Dr. Grindel served as Vice President,
Preclinical Development for Hybridon, Inc. in Cambridge, MA. From 1989 to 1994
Dr. Grindel was Vice President for Project Planning and Management at the R. W.
Johnson Pharmaceutical Research Institute (a subsidiary of Johnson & Johnson) in
Raritan, NJ. Prior to that Dr. Grindel served in various research and
development management positions with McNeil Pharmaceutical from 1976 to 1989
and the Walter Reed Army Institute of Research from 1973 to 1976.
MARK W. REYNOLDS (39) joined us in 1988 as Controller, becoming Chief
Financial Officer and Corporate Secretary in 1996 and Vice President, Finance in
1999. Prior to joining CytRx, Mr. Reynolds was employed as a certified public
accountant with Arthur Andersen LLP in Atlanta, Georgia.
Board Committees
Board of Directors. The property, affairs and business of the Company are
under the general management of its Board of Directors as provided by the laws
of Delaware and the Bylaws of the Company. The Company has standing Audit and
Compensation Committees of the Board of Directors.
The Board of Directors held seven meetings during 2000. Each director
attended at least 75% of the total meetings of the Board and the committees on
which they served during 2000.
Audit Committee. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls. The current members of the Audit Committee are Raymond C.
Carnahan, Jr. (Chairman), Lyle A. Hohnke and Herbert H. McDade. The Audit
Committee held one meeting during 2000.
Compensation Committee. The Compensation Committee is authorized to review
annual salaries and bonuses and has the authority to determine the recipients of
options, the time or times at which options shall be granted, the exercise price
of each option, and the number of shares to be issuable upon the exercise of
each option. The Committee also is authorized to interpret the CytRx Corporation
1986, 1994 and 1995 Stock Option Plans and the CytRx Corporation 1998 and 2000
Long-Term Incentive Plans (collectively, "the Plans"), to prescribe, amend and
rescind rules and regulations relating to the Plans, to determine the term and
provisions of the respective option agreements, and to make all other
determinations deemed necessary or advisable for the administration of the
Plans. Its current members are Herbert H. McDade, Jr. (Chairman), Raymond C.
Carnahan, Jr. and Lyle A. Hohnke. The Compensation Committee held three meetings
during 2000.
Compensation of Directors
Directors who are employees of the Company receive no compensation for
their services as directors or as members of committees. Non-employee directors
receive a fee of $2,000 for each Board meeting attended ($750 for meetings
attended by teleconference) and $500 for each committee meeting attended. Non-
employee directors who chair a Board committee receive an additional $250 for
each committee meeting attended.
Each non-employee director receives an initial stock option grant to
purchase 5,000 shares upon the date he or she first becomes a member of the
Board. Options to purchase 5,000 shares of Common Stock are granted to each non-
employee director annually. Stock option grants to directors pursuant to the
Plan discussed above contain the same terms and provisions as stock option
grants to employees, except that options granted to directors are considered
Non-Qualified Stock Options for income tax reporting purposes.
During 1999, Mr. Raymond C. Carnahan, Jr. performed certain consultation
services for the Company for which he received a fee of $2,500.
-23-
<PAGE>
Executive Compensation
The following table presents certain summary information concerning
compensation we paid or accrued by us for services rendered in all capacities
during the fiscal years ended December 31, 1998, 1999 and 2000 for (i) our
President and Chief Executive Officer; and (ii) each of our four other most
highly compensated executive officers whose total salary and bonus exceeded
$100,000 (determined as of December 31, 2000 and collectively, the "Named
Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Securities
-------------------- Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jack J. Luchese 2000 $350,000 $17,500 100,000 $ --
President and Chief 1999 342,125 75,000 500,000 5,000/2/
Executive Officer 1998 334,250 65,750 1,382,427/1/ 5,000/2/
R. Martin Emanuele 2000 $181,000 $ 7,500 111,250 --
Vice President, 1999 174,200 15,000 32,500 5,000/2/
Research & Business 1998 170,850 15,000 154,098/1/ 5,000/2/
Development
William B. Fleck 2000 $121,442 $ 5,000 -- --
Vice President, 1999 127,650 15,000 25,000 5,000/2/
Human Resources 1998 84,375 42,500 112,162/1/ 5,000/2/
J. Michael Grindel 2000 $203,300 $ 5,000 -- --
Vice President, 1999 199,150 30,000 20,000 5,000/2/
Drug Development 1998 195,000 20,000 173,000/1/ 81,172/3/
Mark W. Reynolds 2000 $125,000 $12,500 105,250 --
Vice President, Finance 1999 115,000 20,000 32,500 5,000/2/
and Secretary 1998 101,000 25,000 118,418/1/ 5,000/2/
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares underlying previously issued options and warrants which
were repriced during 1998.
(2) Represents matching contributions by the Company under the Company's 401(k)
Profit Sharing Plan.
(3) Amount shown includes $5,000 in matching contributions by the Company under
the Company's 401(k) Profit-Sharing Plan and $76,172 in costs associated
with the officer's relocation.
-24-
<PAGE>
Option Grants in Last Fiscal Year
The following table summarizes the stock options and warrants granted
during the fiscal year ended December 31, 2000 to each of our executive officers
named in the Summary Compensation Table above.
<TABLE>
<CAPTION> Potential Realized Value at
Number of % of Total Assumed Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise or for Option Term($)
Options Employees Base Price Expiration ------------------------------
Name Granted (#) in Fiscal Year ($/Share) Date 5% 10%
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jack J. Luchese 100,000/1/ /3/ 31.6% $1.03125 10/20/10 $64,855 $164,355
R. Martin Emanuele 5,000/3/ 1.6 1.00 6/24/10 3,144 7,969
100,000/2/ /3/ 31.6 1.00 8/24/10 62,889 159,374
6,250/3/ 2.0 1.00 12/5/10 3,931 9,961
Mark W. Reynolds 100,000/2/ /3/ 31.6 1.00 8/24/10 62,889 159,374
5,000/3/ 1.6 1.00 12/5/10 3,144 7,969
</TABLE>
-----------------------
(1) Warrants and options granted to Mr. Luchese are subject to the terms as
described under "Employment Agreement."
(2) These options vest upon a combination of tenure and the achievement of
company performance criteria.
(3) All options and warrants were granted at an exercise price equal to the
fair market value of the underlying shares at the date of grant, and are
exercisable for ten years from the date of grant.
Aggregated Option Exercises in Last Fiscal Year and Option Value at December 31,
2000
The following table sets forth the number and total value of unexercised
in-the-money options at December 31, 2000 for each of our executive officers
named in the Summary Compensation Table above, using the price per share of the
Common Stock of $.625 on December 27, 2000. No stock options were exercised
during 2000 by any of our Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 2000(#) at December 31, 2000($)
---------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack J. Luchese 1,432,437 425,000 $ - $ -
R. Martin Emanuele 158,972 127,626 - -
William B. Fleck 115,161 22,001 - -
J. Michael Grindel 127,249 65,751 - -
Mark W. Reynolds 123,292 127,626 - -
----------------------------------------------------------------------------------------------------------
</TABLE>
Employment Agreement
Jack J. Luchese was named our President and Chief Executive Officer in
March 1989. His Employment Agreement with us was amended and restated as of
September 1, 1999 (the "Agreement") and terminates on December 31, 2002. Under
the Agreement, Mr. Luchese is paid an annual base salary of $350,000. The base
salary will be reviewed no less than once each 18 months and will be adjusted
from time to time consistent with average overall merit increases for all other
employees. In addition to his annual base salary, Mr. Luchese is eligible to
receive cash bonuses with respect to each calendar year during the term of the
Agreement as determined from time to time by our Board of Directors in its sole
discretion. The Agreement also contains confidentiality and noncompetition
provisions.
-25-
<PAGE>
Pursuant to the original Agreement, and subsequent amendments, Mr. Luchese
has been granted options and warrants to purchase an aggregate of 1,857,427
shares of Common Stock. Warrants as to 1,257,427 shares have an exercise price
of $1.00, warrants as to 500,000 shares have an exercise price of $2.125 and
options as to 100,000 shares have an exercise price of $1.03125. The vesting
criteria of such options and warrants include a combination of tenure and
achievement of defined corporate objectives. As of December 31, 2000, 1,432,427
of the 1,857,427 warrants held by Mr. Luchese are vested. The shares of stock
that may be acquired upon exercise of warrants held by Mr. Luchese have been or
will be registered by us under the Securities Act of 1933, as amended. The
warrants contain certain anti-dilution provisions and provide for accelerated
vesting in the event that Mr. Luchese's employment is terminated by the Board of
Directors without cause, in the event of his death or disability or in the event
of a change of control.
In April 1997, we entered into a separate Change in Control Agreement (the
"Change in Control Agreement") with Mr. Luchese, which was amended and restated
in September 1999 merely to conform references to his amended and restated
Employment Agreement. The Change in Control Agreement will become effective if
and when a Change in Control (as defined) occurs during the three-year period
following the date of the Change in Control Agreement or during any of the one-
year annual renewal periods (the "Change of Control Period"), or if Mr.
Luchese's employment is terminated in connection with or in anticipation of a
Change of Control (in either case, the "Effective Date").
Mr. Luchese's employment period under the Change in Control Agreement
begins on the Effective Date and continues for two years. During the employment
period, Mr. Luchese's position, authority, duties and responsibilities will be
at least commensurate in all material respects with those held by him during the
120-day period prior to the Change in Control and he will receive (i) a monthly
base salary equal to or greater than the highest monthly base salary paid to him
by us during the previous year; (ii) an annual cash bonus at least equal to the
highest bonus paid to him in any of the three fiscal years prior to the
Effective Date, and (iii) the ability to participate in all of our incentive,
savings, welfare benefit, fringe benefit and retirement plans of the Company.
If Mr. Luchese's employment terminates during the employment period he will
receive certain severance benefits under the Change in Control Agreement. If
his employment terminates by reason of his death or disability, he will receive
certain obligations accrued through the date of termination (e.g., salary
prorata bonus, deferred compensation and vacation pay) plus the normal death and
disability benefits, if any, to which he is otherwise entitled, including those
under the Agreement. If he is terminated by us for cause (as defined), or if he
voluntarily resigns without good reason (as defined) other than during the 30-
day period beginning on the first anniversary of the Effective Date, he will
receive only his accrued benefits through the termination date and any
previously-deferred benefits, plus any other post-termination benefits, if any,
to which he is otherwise entitled, including those under the Agreement. If he
(i) is terminated by us without cause, (ii) resigns voluntarily with good
reason, or (iii) resigns for any reason during the 30-day period beginning on
the first anniversary of the Effective Date, he will receive a lump sum cash
payment equal to: (a) his base salary through the date of termination, (b) a
prorata bonus for the year of termination, based upon his actual bonus earned in
the prior year ("Most Recent Bonus"), (c) an amount equal to two times the sum
of his base salary and Most Recent Bonus, and (d) any unpaid deferred
compensation and vacation pay. In addition, Mr. Luchese would be entitled to
continued employee welfare benefits for two years after the date of termination,
and a lump sum payment equal to the actuarial value of the service and
compensation credit under our qualified and supplemental retirement plans that
he would have received had he remained employed for two years after the date of
his termination. Mr. Luchese will be required to repay to us, with interest,
the lump-sum benefit equal to two times the sum of his base salary and Most
Recent Bonus if, during the two-year employment period, he violates a certain
non-competition covenant in the Change in Control Agreement.
If the total payments to Mr. Luchese under the Change in Control Agreement
and from any other source would result in the imposition of an excise tax under
Section 4999 of the Code, the payments will be reduced to the extent necessary
to avoid the imposition of such excise tax, but only if such reduction would
result in a net after-tax benefit to Mr. Luchese. The Change in Control
Agreement further provides that Mr. Luchese has no obligation to mitigate
severance payments, we will reimburse Mr. Luchese for all legal fees incurred in
enforcing or contesting the Change in Control Agreement, and Mr. Luchese will
hold for the benefit of us all confidential information
-26-
<PAGE>
concerning us obtained over the course of this employment. We will require its
successors to expressly assume its obligations under the Change in Control
Agreement.
Compensation Committee Interlocks and Insider Participation
There are no "interlocks," as defined by the Securities and Exchange
Commission, with respect to any member of the Compensation Committee.
Indemnification and Limitation of Liability
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we must indemnify our directors, officers,
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in this capacity, regardless of
whether the bylaws would permit indemnification. We have purchased directors and
officers liability insurance, which provides coverage against specified
liabilities.
-27-
<PAGE>
PRINCIPAL STOCKHOLDERS
Based solely upon information made available to us, the following table
sets forth certain information with respect to the beneficial ownership of
Common Stock as of January 1, 2001 by (i) each person who is known by us to
beneficially own more than five percent of the Common Stock; (ii) each of our
directors; (iii) each of the Named Executive Officers; and (iv) all officers and
directors as a group. Except as otherwise indicated, the holders listed below
have sole voting and investment power with respect to all shares of Common Stock
beneficially owned by them.
<TABLE>
<CAPTION>
Shares of Common Stock
-------------------------------------
Name and Address of Beneficial Owner Number Percentage
------------------------------------ ------ ----------
<S> <C> <C>
Named Executive Officers and Directors:
Alexander L. Cappello /1/ 530,205 5.2%
Raymond C. Carnahan, Jr./2/ 17,133 *
R. Martin Emanuele/3/ 176,418 1.7%
William B. Fleck/4/ 136,010 1.3%
J. Michael Grindel/5/ 136,176 1.3%
Lyle A. Hohnke/6/ 4,999 *
Max Link/7/ 24,582 *
Jack J. Luchese/8/ 1,432,427 13.1%
Herbert H. McDade/9/ 25,763 *
Mark W. Reynolds/10/ 142,711 1.3%
All executive officers and directors as a group (10 persons)/11/ 2,697,104 22.3%
</TABLE>
------------------------------------
* Less than 1%.
(1) Includes warrants to purchase 530,205 Shares of Common Stock exercisable
within 60 days held by Cappello Capital Corp.
(2) Includes options to purchase 16,883 shares of Common Stock exercisable
within 60 days.
(3) Includes options to purchase 152,972 shares of Common Stock exercisable
within 60 days.
(4) Includes options to purchase 108,328 shares of Common Stock exercisable
within 60 days.
(5) Includes options to purchase 105,416 shares of Common Stock exercisable
within 60 days.
(6) Includes options to purchase 4,999 shares Common Stock exercisable within
60 days.
(7) Includes options to purchase 7,041 shares of Common Stock exercisable
within 60 days.
(8) Includes warrants to purchase 1,357,427 shares of Common Stock exercisable
within 60 days. Mr. Luchese's business address is c/o CytRx Corporation,
154 Technology Parkway, Norcross, Georgia 30092.
(9) Includes options to purchase 24,763 shares of Common Stock exercisable
within 60 days.
(10) Includes options to purchase 116,459 shares of Common Stock exercisable
within 60 days.
(11) Includes options and warrants to purchase 2,540,992 shares of Common
Stock exercisable within 60 days.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 2001, we entered into an agreement with Cappello
Capital Corp. ("Cappello") in which Cappello will serve as our exclusive
financial advisor. In this capacity, Cappello will assist us with analysis of
potential transactions and strategic alternatives. The types of transactions
that Cappello may assist us with include private placement of equity, debt or
convertible securities, strategic alliances, sale of all or a portion of the
Company, recapitalization or strategic acquisitions. As compensation for its
services, we granted Cappello a ten-year warrant to purchase 1,413,880 shares of
our common stock (subject to downward adjustment under certain conditions) with
an exercise price of $1.00. Additionally, if we proceed with any of the
transactions described in the agreement, we will pay Cappello a cash fee of
between 3% and 7.5%, depending upon the nature of the transaction and the dollar
amount involved. Alexander L. Cappello, one of our directors, is Chairman and
CEO of Cappello Group, Inc., parent of Cappello Capital Corp.
-28-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 50,000,000 shares of common stock, $.001
par value per share, and 1,000 shares of preferred stock, $.01 par value per
share. As of December 27, 2000, 10,100,196 shares of common stock were issued
and outstanding. We have no preferred stock outstanding. All of the outstanding
capital stock is and will be, fully paid and non-assessable.
Common Stock
Holders of common stock are entitled to one vote per share. All actions
submitted to a vote of stockholders are voted on by holders of common stock
voting together as a single class. Holders of common stock are not entitled to
cumulative voting in the election of directors.
Holders of common stock are entitled to receive dividends in cash or in
property on an equal basis, if and when dividends are declared on the common
stock by our board of directors, subject to any preference in favor of
outstanding shares of preferred stock, if there are any.
In the event of liquidation of our company, all holders of common stock
will participate on an equal basis with each other in our net assets available
for distribution after payment of our liabilities and payment of any liquidation
preferences in favor of outstanding shares of preferred stock, if there are any.
Holders of common stock are not entitled to preemptive rights and the
common stock is not subject to redemption.
The rights of holders of common stock are subject to the rights of holders
of any preferred stock that we designate or have designated. The rights of
preferred stockholders may adversely affect the rights of the common
stockholders.
Preferred Stock
Our board of directors has the ability to issue up to 1,000 shares of
Series A Junior Participating Preferred Stock without stockholder approval.
Holders of Series A Junior Participating Preferred Stock are entitled to
vote on any matter with the common stock. The number of votes per whole share of
Series A Junior Participating Preferred Stock is equivalent to the number of
votes a holder of 100 shares, as adjusted from time to time, of our common stock
would receive (see Common Stock above).
Holders of Series A Junior Participating Preferred Stock are entitled to
receive dividends on each date dividends are paid to the holders of common stock
in an amount per whole share of Series A Junior Participating Preferred Stock
equivalent to the amount a holder of 100 shares, as adjusted from time to time,
of our common stock would receive (see Common Stock above). Holders of Series A
Junior Participating Preferred Stock are also entitled to receive an additional
quarterly dividend in an amount per whole share equal to the excess (if any) of
$1.00 over the aggregate dividends paid per whole share during the quarter.
Dividends paid to the holders of Series A Junior Participating Preferred Stock
shall be cumulative.
As long as any shares of Series A Junior Participating Preferred Stock
remain outstanding, no dividend (other than a dividend in common stock or other
stock ranking junior to Series A Junior Participating Preferred Stock) shall be
paid, unless the full cumulative dividends on all outstanding shares of Series A
Junior Participating Preferred Stock has been paid.
In the event of a merger, consolidation, reclassification or other
transaction where common stock is exchanged for other stock, securities, cash,
or any other property, the shares of Series A Junior Participating Preferred
Stock shall similarly be exchanged in an amount per whole share equal to the
aggregate amount of stock, securities, cash, or other property a holder of 100
shares, as adjusted from time to time, of common stock would receive.
In the event of a liquidation of our company, before any distribution or
payment is made to the holders of common stock or to any other stock ranking
junior to the Series A Junior Participating Preferred Stock, a holder of Series
A Junior Participating Preferred Stock is entitled to, per whole share of Series
A Junior Participating Preferred Stock, the greater of $1.00 or the equivalent
of the aggregate amount distributed or to be distributed to the holder of 100
shares, as adjusted from time to time, of common stock.
The Series A Junior Participating Preferred Stock is not redeemable.
The issuance of Series A Junior Participating Preferred Stock could
adversely affect the voting power, liquidation rights or other rights held by
owners of common stock or other series of preferred stock.
-29-
<PAGE>
The board of directors' authority to issue preferred stock without
shareholder approval could make it more difficult for a third party to acquire
control of our company, and could discourage any such attempt.
Shareholder Protection Rights Agreement
On April 16, 1997, our Board of Directors declared a distribution of one
right for each outstanding share of our common stock, to shareholders of record
at the close of business on May 15, 1997 and for each share of common stock
issued (including shares distributed from Treasury) by us thereafter and prior
to the earlier of (i) ten business days (unless otherwise accelerated or delayed
by the Board) following public announcement that a person or group of affiliated
or associated persons has acquired, obtained the right to acquire, or otherwise
obtained beneficial ownership of 15% or more of the then outstanding shares of
our common stock, or (ii) ten business days (unless otherwise delayed by the
Board) following the commencement of a tender offer or exchange offer that would
result in the person or group beneficially owning 15% or more of our then
outstanding shares of common stock.
Each right entitles the registered holder to purchase from us one
ten-thousandth (1/10,000th) of a share of Series A Participating Preferred
Stock, par value $0.01 per share, at a purchase price of $30 per share, subject
to adjustment. The description and terms of the rights are set forth in a
Shareholder Protection Rights Agreement between us and American Stock Transfer &
Trust Company, as Rights Agent, dated April 16, 1997.
Generally, the rights only become exercisable the earlier of (i) ten
business days (unless otherwise accelerated or delayed by the Board) following
public announcement that a person or group of affiliated or associated persons
has acquired, obtained the right to acquire, or otherwise obtained beneficial
ownership of 15% or more of the then outstanding shares of our common stock, or
(ii) ten business days (unless otherwise delayed by the Board) following the
commencement of a tender offer or exchange offer that would result in the person
or group beneficially owning 15% or more of our then outstanding shares of
common stock. A total of 1,000 shares of preferred stock has been reserved for
issuance upon the exercise of the rights. The rights expire at the close of
business on the tenth anniversary of the Rights Agreement unless we terminate
them earlier.
The provisions of the shareholder protection rights plan could have the
effect of preventing, hindering or delaying our change in control or change in
management.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to our Current Report on Form 8-K dated April
16, 1997 and is incorporated into this registration statement by reference. The
above summary description of the rights does not purport to be complete and is
qualified in its entirety by reference to such exhibit.
Options and Warrants
The common stock being registered pursuant to this Form S-1 include 150,000
shares issuable upon the exercise of a warrant held by Majorlink Holdings
Limited under the private equity line of credit agreement, and 101,803 shares
issuable upon the exercise of a warrant issued to Ladenburg Thalmann & Co., Inc.
as a placement fee. The exercise price of these warrants is $2.25 and $3.438,
respectively, and they may be exercised until April 28, 2003.
As of December 31, 2000, 1,119,203 options for shares were outstanding
under our stock option plans and 844,639 shares were available for future grants
under our stock option plans. Additionally, we have granted warrants to purchase
an aggregate of 1,757,427 shares of our common stock to Jack J. Luchese,
pursuant to his employment contract. In addition to options granted through the
stock option plans and warrants granted to Mr. Luchese, as of December 31, 2000
there were outstanding warrants to purchase 1,139,303 of our common stock held
by consultants and investors.
Holders of options and warrants do not have any of the rights or privileges
of our stockholders, including voting rights, prior to exercise of the options
and warrants. We have reserved sufficient shares of authorized common stock to
cover the issuance of common stock subject to the options and warrants.
Antitakeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the following more difficult:
. the acquisition of our capital stock by means of a tender offer;
. the acquisition of our capital stock by means of a proxy contest or
otherwise; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of
us to negotiate first with our board. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging these proposals because negotiation of any
proposals of this type could result in an improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three year term,
with our stockholders electing one class each year. This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us, because it generally
makes it more difficult for stockholders to replace a majority of the directors.
Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board or the president may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures for stockholder
proposals and for the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee of the board.
Delaware Antitakeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an antitakeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a business combination
with an interested stockholder for a period of three years following the date
the person became an interested stockholder, unless the business combination or
the transaction in which the person became an interested stockholder is approved
in the manner specified in Section 203. Generally, a business combination
includes a merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested
-30-
<PAGE>
stockholder. Generally, an interested stockholder is a person who, together with
affiliates and associates, owns or within three years prior to the determination
of interested stockholder status did own 15% or more of a corporation's voting
stock. The existence of this provision may have an antitakeover effect by
discouraging takeover attempts not approved in advance by the board of
directors, that might result in a premium over the market price for the shares
of common stock held by stockholders.
Transfer Agent and Registrar
The transfer agent for our common stock is American Stock Transfer & Trust
Co., 40 Wall Street, New York, New York 10005.
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
Overview
Majorlink Holdings Limited, a British Virgin Islands corporation, and we
signed a private equity line of credit agreement dated April 26, 2000, and
supplemented on November 28, 2000, for the future issuance and purchase of
shares of our common stock. The private equity line of credit agreement
establishes what is sometimes termed an equity line of credit or an equity
drawdown facility. In general, the drawdown facility operates like this: the
investor, Majorlink, has committed, subject to the satisfaction of certain
conditions, up to $5 million to purchase shares of our common stock over a
thirty (30) month period beginning on the effective date of this registration
statement. Once every sixteen (16) trading days, we may request a draw of that
money, subject to a formula based on the average common stock price over a three
(3) month period and the total trading volume for the same three (3) month
period. Each draw down must be for at least $100,000. At the end of a ten (10)
day trading period following the drawdown request (or "Put Notice"), Majorlink
will provide us with the amount of money in our request, subject to limitations
described below, and we will calculate the amount of shares we will issue to
Majorlink in return for that money, based on the formula in the private equity
line of credit agreement.
Majorlink will receive a ten percent (10%) discount to the average of the
nine (9) lowest average daily market prices of our common stock over a 15-day
valuation period, weighted by trading volume. We will receive the amount of the
drawdown less an escrow agent fee of $750 and a 7% placement fee payable to the
placement agent, Ladenburg Thalmann & Co. Inc., which introduced Majorlink to
us. Ladenburg Thalmann is not obligated to purchase any of our shares.
In lieu of providing Majorlink with a minimum aggregate drawdown
commitment, we have issued to them a stock purchase warrant to purchase 150,000
shares of our common stock with an exercise price of $3.438. Such exercise
price was the volume-weighted average share price of our common stock on April
25, 2000, the day prior to the closing date. The warrant expires April 28, 2003.
-31-
<PAGE>
The listing requirements of The Nasdaq National Market prohibit us from
issuing 20% or more of our issued and outstanding common shares in a single
transaction if the shares may be issued for less than the greater of market
value or book value. The private equity line of credit agreement provides that
unless we obtain shareholder approval, we may not issue more than 19.9% of the
number of shares of our common stock issued and outstanding on the closing date
of the private equity line of credit agreement. The 19.9% is calculated in the
aggregate of all draws made under the agreement as well as the common stock
issued to Majorlink upon the exercise of the warrants issued under the private
equity line of credit agreement. Based on shares of common stock issued and
outstanding on April 26, 2000, the date of the private equity line of credit
agreement, we may not issue more than 1,916,010 shares under that agreement and
the Majorlink warrant without the approval of our shareholders. Because 150,000
shares are committed to the Majorlink warrant, if we wish to draw amounts under
the private equity line of credit agreement which would cause an issuance of
more 1,766,010 shares under that agreement, we must receive shareholder approval
prior to any such drawdown. On June 27, 2000, at the annual meeting of
stockholders, our stockholders voted to approve issuances of up to 5,000,000
shares of our common stock, to Majorlink under the private equity line of credit
agreement, at a price lower than book or market value. This vote was specific to
the private equity line of credit agreement. Consequently, we will have to go
back to our shareholders to issue any shares in excess of 5,000,000 under the
private equity line of credit agreement. In the event we have such a vote,
pursuant to Section 2.1(b) of the private equity line of credit as amended,
Majorlink will not be able to vote any shares they have previously purchased
under the private equity line of credit agreement.
The Drawdown Procedure and the Stock Purchases
We may request a drawdown by delivering a Put Notice to Majorlink, stating
the investment amount we intend to sell to Majorlink. The period beginning 9
trading days before the date the Put Notice is delivered and ending 5 trading
days after the date the Put Notice is delivered is used to determine the
purchase price Majorlink will pay for the shares and the number of shares of our
common stock we will provide to Majorlink in exchange for the investment amount.
Amount of the Draw
The amount of the drawdown may not exceed 4.125% of the weighted average
price for the three (3) month period prior to the date the Put Notice is deemed
delivered (the "Put Date") multiplied by the total trading volume for the same
three (3) month period.
Number of Shares
To determine the number of shares of common stock we must issue in
connection with a drawdown, take the drawdown amount (or "Investment Amount"),
divide it by 90% of the average of the nine (9) lowest average daily market
prices of our common stock, weighted by trading volume, over a 15-day valuation
period beginning nine (9) trading days before the Put Date and ending five (5)
trading days after the Put Date. The 90% accounts for Majorlink's 10% discount.
Sample Calculation of Stock Purchases
The following is an example of the calculation of the Investment Amount and
the number of shares we would issue to Majorlink in connection with that
drawdown based on hypothetical assumptions.
Sample drawdown amount calculation.
We deliver a Put Notice to Majorlink on December 1, 2001, the Put Date. The
weighted average price for the three (3) month period prior to the Put Date is
$1.00 and the total trading volume for that same three month period is 2,500,000
shares. Therefore, the maximum Investment Amount we can request is 4.125% of
$2,500,000 or $103,125.00.
Sample Calculation of Number of Shares
Assume that the Investment Amount we request is the maximum Investment
Amount calculated above, $103,125.00. Further assume that the average of the (9)
lowest average daily market prices for our common stock, weighted by trading
volume over a 15-day valuation period beginning nine (9) trading days before the
Put Date and ending five (5) trading days after the Put Date is $0.75. The
number of shares to be issued would be $103,125.00 divided by 90% of $0.75 or
152,778 shares.
We would receive $103,125.00 less the 7% fee to the placement agent, less a
$750 escrow fee, or $95,156.25. The delivery of the requisite number of shares
and payment of the draw will take place through an escrow agent, Epstein, Becker
& Green, P.C. of New York. The escrow agent pays 93% of the draw to us, after
subtracting its
-32-
<PAGE>
escrow fee, and 7% to Ladenburg Thalmann & Co. Inc., our placement agent, in
satisfaction of placement agent fees. Only one drawdown can occur every sixteen
(16) trading days.
Necessary Conditions Before Majorlink will Purchase our Shares
The following conditions must be satisfied before Majorlink will purchase
the common shares that we wish to sell from time to time:
. All representations and warranties we made in the private equity line of
credit agreement shall remain true and correct as of each Closing as
though we made such representation and warranty on the date of Closing;
. We shall have obtained all permits and qualifications required by any
state for the offer and sale of our common stock to Majorlink;
. We shall have delivered into escrow or to DTC the common shares being
purchased;
. We shall have delivered to Majorlink an opinion of counsel as described
in the private equity line of credit agreement;
. We shall have delivered to our transfer agent instructions reasonably
satisfactory to Majorlink;
. This registration statement shall have become and remain effective and
available for resales of the common shares by Majorlink and neither we
nor Majorlink shall have received notice that the SEC has issued or
intends to issue a stop order or has otherwise suspended or withdrawn
the effectiveness of this registration statement and no other suspension
or withdrawal of the effectiveness of this registration statement or
related prospectus shall exist;
. We shall have satisfied all laws and regulations pertaining to the sale
and issuance of the common shares to Majorlink;
. We shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by the private
equity line of credit agreement, registration rights agreement and
escrow agreement, to be performed, satisfied or complied with by us.
. No court or governmental authority of competent jurisdiction shall have
acted to prohibit any of the transactions under the private equity line
of credit agreement;
. No event shall have occurred which has a material adverse effect on us;
. The trading of our common stock shall not have been suspended and shall
not have been delisted from a principal market;
. We shall not have had knowledge of any event likely to effect this
registration statement being suspended or otherwise ineffective within
thirty (30) trading days following the notice of such event.
. Sixteen (16) trading days shall have elapsed since the last drawdown
request; and
. Majorlink has received and is reasonably satisfied with other customary
closing documents as they may reasonably request.
A further condition is that Majorlink may not purchase more than 19.9% of
our common shares issued and outstanding as of April 26, 2000, the date of the
private equity line of credit agreement, without us obtaining approval from our
shareholders for such excess issuance. Majorlink may not vote any shares they
receive under the private equity line of credit agreement in a vote for such
excess issuance. In addition, the private equity line of credit agreement
-33-
<PAGE>
does not permit us to draw down funds if the issuance of shares of common stock
to Majorlink pursuant to the drawdown would result in Majorlink owning more than
9.9% of our outstanding common stock on the drawdown exercise date.
Costs of Closing the Transaction
At the closing of the transaction on April 26, 2000, we delivered the
requisite opinion of counsel to Majorlink and paid the escrow agent, Epstein
Becker & Green P.C., $10,000 for Majorlink's legal, administrative and escrow
costs and for the ordinary services of the escrow agent for the closing of
future draw downs. We also issued to Ladenburg Thalmann & Co. Inc. a warrant to
purchase 101,803 shares of our common stock at an exercise price of $3.438 as a
placement fee.
Termination of the Private Equity Line of Credit Agreement
Majorlink may terminate the equity draw down facility under the private
equity line of credit agreement if any of the following events occur:
. Any stop order or suspension of the effectiveness of this registration
statement issues for an aggregate of thirty (30) trading days during the
30 month term of the private equity line of credit agreement, with some
exceptions.
. Our common shares are delisted from The Nasdaq National Market unless
such delisting is in connection with the listing of such shares on a
comparable stock exchange in the United States;
. Our common shares are no longer registered under Section 12(g) or 12(b)
of the Exchange Act; or
. We cease to continue our corporate existence.
Indemnification of Majorlink
Majorlink is entitled to customary indemnification from us for any losses
or liabilities suffered by it based upon material misstatements or omissions
from the registration statement and the prospectus, except as they relate to
information supplied by Majorlink to us for inclusion in the registration
statement and prospectus.
SELLING STOCKHOLDERS
Overview
Common shares registered for resale under this prospectus constitute 61.3%
of our issued and outstanding common shares as of March 31, 2000. The number of
shares we are registering is based in part on our good faith estimate of the
maximum number of shares we will issue to Majorlink under the private equity
line of credit agreement. Accordingly, the number of shares we are registering
for issuance under the private equity line of credit agreement may be higher
than the number we actually issue under the private equity line of credit
agreement.
Majorlink Holdings Limited
Majorlink Holdings Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Majorlink's principal
offices are located at Aeulestrasse 74, FL-9490 Vaduz, Liechtenstein. Investment
decisions for Majorlink are made by its board of directors. The members of
Majorlink's board of directors are Mr. Hans Gassner, Dr. Kurt Alig, and Dr. Alex
Wiederkehr. Other than the warrants we issued to Majorlink in connection with
closing the common stock purchase agreement, they do not currently own any of
our securities as of the date of this prospectus. Other than its obligation to
purchase common shares under the private equity line of credit agreement, it has
no other commitments or arrangements to purchase or sell any of our securities.
There are no business relationships between Majorlink and us other than the
private equity line of credit agreement. Ladenburg Thalmann, the placement
agent, is a broker-dealer headquartered in New York.
Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann & Co. Inc. has acted as placement agent in connection
with the common stock purchase agreement. Ladenburg Thalmann introduced us to
Majorlink and assisted us with structuring the equity line of credit with
Majorlink. Ladenburg Thalmann's duties as placement agent were undertaken on a
reasonable best efforts basis only. It made no commitment to purchase shares
from us and did not ensure us of the successful placement of any securities.
This prospectus covers 101,803 shares of common stock issuable upon
exercise of warrants we have issued to Ladenburg Thalmann as a placement fee for
introducing us to Majorlink. Those warrants are exercisable at $3.438 per share
and expire April 28, 2003. The decision to exercise any warrants issued, and the
decision to sell the common stock issued pursuant to the warrants, will be made
by Ladenburg Thalmann's officers and board of directors. Other than the
warrants, Ladenburg Thalmann does not currently own any of our securities as
of the date of this prospectus. Our agreement with Ladenburg Thalmann provides
Ladenburg Thalmann with a right of first refusal for one year after completion
of the offering under the common stock purchase agreement, as underwriter or
placement agent, all of our financing arrangements at terms no less favorable
than we could obtain in the market.
-34-
<PAGE>
PLAN OF DISTRIBUTION
General
The number of shares being registered include up to 6,010,244 shares which
may be issued to Majorlink Holdings Limited in accordance with the private
equity line of credit agreement, 150,000 shares which may be issued to Majorlink
upon the exercise of a warrant issued to Majorlink in accordance with the
private equity line of credit agreement, and 101,803 shares which may be issued
to Ladenburg Thalmann & Co., Inc., upon the exercise of a warrant issued to
Ladenburg as a replacement fee. The 6,010,244 shares represents the number of
shares we would issue to Majorlink assuming a share price of $0.63 (our closing
share price on December 27, 2001) plus a cushion to account for decreases in the
market price of our common stock. On June 27, 2000, at the annual meeting of
stockholders, our stockholders voted to approve the issuance of up to 5,000,000
shares of Majorlink under the private equity line of credit agreement.
Therefore, we would have to get additional shareholder approval to issue greater
than 5,000,000 to Majorlink under the private equity line of credit agreement.
Majorlink and Ladenburg are offering the common shares for their accounts,
and not for our account. Majorlink is offering the common shares as statutory
underwriter. We will not receive any proceeds from the sale of common shares by
Majorlink or Ladenburg. Majorlink may be offering for sale the shares of our
common stock acquired by it pursuant to the terms of the private equity line of
credit agreement more fully described under the section above entitled "The
Private Equity Line of Credit Agreement". Both Majorlink and Ladenburg may be
offering for sale the shares of our common stock acquired by them pursuant to
the warrants we issued to them in connection with the transaction. Majorlink has
agreed to be named as a statutory underwriter within the meaning of the
Securities Act of 1933 in connection with such sales of common shares and will
be acting as an underwriter in its resales of the common shares under this
prospectus. Majorlink has, prior to any sales, agreed not to effect any offers
or sales of the common shares in any manner other than as specified in the
prospectus and not to purchase or induce others to purchase common shares in
violation of any applicable state and federal securities laws, rules and
regulations and the rules and regulations of The Nasdaq National Market.
As of April 28, 2000, we had approximately 9,580,050 shares of common stock
outstanding. The following table shows the number of shares we would issue to
Majorlink and the price it would pay for those shares given the hypothetical
variable shown in the table, if
. we requested drawdowns of the maximum amount under the private equity
line of credit agreement;
. we set a minimum per share price of $1.00;
. we do not issue more shares to Majorlink under private equity line of
credit agreement than we are currently registering for resale of the
shares issued under the common stock purchase agreement.
<TABLE>
<CAPTION>
Volume-Weighted Average Number of Shares Issuable to Majorlink under Price per share paid
Daily Price the Private Equity Line of Credit Agreement(d) by Majorlink
------------------------ ---------------------------------------------- --------------------
<S> <C> <C>
$1.0000(a) 5,555,556 $0.9000
$1.5106(b) 3,677,822 $1.3595
$2.2659(c) 2,451,821 $2.0393
</TABLE>
-----------------------------------
(a) Represents the lowest price at which our shares can remain listed on the
Nasdaq National Market.
(b) Represents the average closing price for our common stock for the nine (9)
lowest closing prices of our common stock for the period beginning nine (9)
trading days before April 28, 2000 and ending five (5) trading days after
April 28, 2000.
(c) Represents 150% of the average closing price for our common stock for the
nine (9) lowest closing prices of our common stock for the period beginning
nine (9) trading days before April 28, 2000 and ending five (5) trading
days after April 28, 2000.
(d) The number of shares we would issue could be limited by a provision of the
private equity line of credit agreement that prevents us from issuing
shares to Majorlink to the extent Majorlink would beneficially own more
than 9.9% of our then outstanding stock.
To permit Majorlink to resell the common shares issued to it under the
private equity line of credit agreement, we agreed to register those shares and
to maintain that registration. To that end, we have agreed with Majorlink that
we will prepare and file such amendments and supplements to the registration
statement and the prospectus as may be necessary in accordance with the
Securities Act and the rules and regulations promulgated thereunder, in order to
keep it effective until the earliest of any of the following dates:
. the date that none of the common shares are or may become issued and
outstanding;
. the date that all of the common shares have been sold pursuant to the
Registration Statement;
. the date the holders of the common shares receive an opinion of our
counsel that the common shares may be sold under the provisions of Rule
144 promulgated under the Securities Act (note that Majorlink, as a
statutory underwriter, will not be able to sell the common shares under
the provisions of Rule 144);
. the date after which all common shares have been transferred to persons
who may trade such shares without restriction under the Securities Act,
and we have delivered a new certificate or other evidence of ownership
not bearing a restrictive legend; or
. the date after which all of the common shares may be sold, in the
opinion of our counsel, without limitation pursuant to Rule 144(k)
promulgated under the Securities Act.
Shares of common stock offered through this prospectus may be sold from
time to time by Majorlink or Ladenburg. Such sales may be made on The Nasdaq
National Market, on the over-the-counter market or otherwise at prices and at
terms then prevailing or at prices related to the then current market price, or
in negotiated private transactions, or in a combination of these methods. The
selling stockholders will act independently of us in making decisions with
respect to the form, timing, manner and size of each sale. There is no existing
arrangement between any selling stockholder, any other stockholder, broker,
dealer, underwriter or agent relating to the sale or distribution of shares of
common stock which may be sold by selling stockholders through this prospectus.
The common shares may be sold in one or more of the following manners:
. a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
. purchases by a broker or dealer for its account under this prospectus;
or
. ordinary brokerage transactions and transactions in which the broker
solicits purchases.
-35-
<PAGE>
In effecting sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Except as disclosed in
a supplement to this prospectus, no broker-dealer will be paid more than a
customary brokerage commission in connection with any sale of the common shares
by the selling stockholders. Brokers or dealers may receive commissions,
discounts or other concessions from the selling stockholders in amounts to be
negotiated immediately prior to the sale. The compensation to a particular
broker-dealer may be in excess of customary commissions. Profits on any resale
of the common shares as a principal by such broker-dealers and any commissions
received by such broker-dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. Any broker-dealer participating
in such transactions as agent may receive commissions from the selling
stockholders (and, if they act as agent for the purchaser of such common shares,
from such purchaser).
Broker-dealers may agree with the selling stockholders to sell a specified
number of common shares at a stipulated price per share, and, to the extent such
a broker dealer is unable to do so acting as agent for the selling stockholders,
to purchase as principal any unsold common shares at price required to fulfill
the broker-dealer commitment to the selling stockholders. Broker-dealers who
acquire common shares as principal may thereafter resell such common shares from
time to time in transactions (which may involve crosses and block transactions
and which may involve sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market, in
negotiated transactions or otherwise at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such resales may pay to or
receive from the purchasers of such common shares commissions computed as
described above. Such brokers or dealers and any other participating brokers or
dealers may be deemed to be underwriters in connection with such sales.
We will not receive any of the proceeds from the sale of these common
shares, although we have paid the expenses of preparing this prospectus and the
related registration statement of which it is a part, and have reimbursed
Majorlink $10,000 for its legal, administrative and escrow costs.
Majorlink is subject to the applicable provisions of the Exchange Act,
including without limitation, Rule 10b-5 and Regulation M thereunder. Under
applicable rules and regulations under the Exchange Act, any person engaged in a
distribution of the common shares may not simultaneously engage in market making
activities with respect to such securities for a period beginning when such
person becomes a distribution participant and ending upon such person's
completion of participation in a distribution, including stabilization
activities in the common shares to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition, in connection
with the transactions in the common shares, Majorlink and we will be subject to
applicable provisions of the Exchange Act and the rules and regulations under
that Act, including, without limitation, the rules set forth above. These
restrictions may affect the marketability of the common shares.
The selling stockholders will pay all commissions and certain other
expenses associated with the sale of the common shares.
The price at which we will issue the common shares to Majorlink under the
private equity line of credit agreement will be 90% of the average of the nine
(9) lowest average daily market prices of our common stock over a 15-day
valuation period, weighted by trading volume on The Nasdaq National Market.
Assuming we use the entire $5 million of financing available under the private
equity line of credit agreement, underwriting compensation for Majorlink based
on the discounted purchase price will be $500,000, plus 150,000 warrants to
purchase common stock at $2.25 per share issued April 26, 2000.
Limited Grant of Registration Rights
We granted registration rights to Majorlink to enable it to sell the common
stock it purchases under the common stock purchase agreement. In connection with
any such registration, we will have no obligation -
-36-
<PAGE>
. to assist or cooperate with Majorlink in the offering or disposition of
such shares;
. to indemnify or hold harmless the holders of any such shares (other than
Majorlink) or any underwriter designated by such holders;
. to obtain a commitment from an underwriter relative to the sale of any
such shares; or
. to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine a
method of disposition for such shares or to otherwise include such shares within
the confines of any registered offering other than the registration statement
of which this prospectus is a part.
We will use our best efforts to file, during any period during which we are
required to do so under our registration rights agreement with Majorlink, one or
more post-effective amendments to the registration statement of which this
prospectus is a part to describe any material information with respect to the
plan of distribution not previously disclosed in this prospectus or any material
change to such information in this prospectus. This obligation may include, to
the extent required under the Securities Act of 1933, that a supplemental
prospectus be filed, disclosing
. the name of any broker-dealers;
. the number of common shares involved;
. the price at which the common shares are to be sold;
. the commissions paid or discounts or concessions allowed to broker-
dealers, where applicable;
. that broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, as
supplemented; and
. any other facts material to the transaction.
Our registration rights agreement with Majorlink permits us to restrict the
resale of the shares Majorlink has purchased from us under the private equity
line of credit agreement for a period of time sufficient to permit us to amend
or supplement this prospectus to include material information. We may restrict
Majorlink for up to 30 consecutive days without penalty.
LEGAL MATTERS
The validity of the shares of common stock issued in this offering will
be passed upon for us by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, as set forth in their
report. We've included our financial statements and schedule in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
-37-
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement (of which this prospectus is a part) under the Securities Act of 1933,
as amended, relating to the common stock we are offering. This prospectus does
not contain all the information that is in the Registration Statement. Portions
of the Registration Statement have been omitted as allowed by the rules and
regulations of the Securities and Exchange Commission. Statements in this
prospectus that summarize documents are not necessarily complete, and in each
case you should refer to the copy of the document filed as an exhibit to the
Registration Statement.
For further information regarding our company and our common stock, please
see the Registration Statement and its exhibits and schedules. You may examine
the Registration Statement free of charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission at
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade
Center, Thirteenth Floor, New York, New York 10048. Copies of the Registration
Statement may also be obtained from the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or by calling the
Commission at 1-800-SEC-0330, at prescribed rates.
In addition, the Registration Statement and other public filings can be
obtained from the Commission's Web site at http://www.sec.gov. We intend to
furnish our stockholders written annual reports containing audited financial
statements certified by an independent public accounting firm.
-38-
<PAGE>
CYTRX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Consolidated Financial Statements as of December 31, 1999
---------------------------------------------------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations (restated)
for the Years Ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 1998 and 1997 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
Condensed Consolidated Financial Statements as of
September 30, 2000
-------------------------------------------------
Condensed Consolidated Balance Sheets
as of September 30, 2000 (unaudited) and December 31, 1999 F-17
Condensed Consolidated Statements of Operations (restated)
(unaudited) for the Three Month and Nine Month Periods
Ended September 30, 2000 and 1999 F-18
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Month Periods Ended September 30, 2000 and
1999 F-19
Notes to Condensed Consolidated Financial Statements F-20
</TABLE>
F-1
<PAGE>
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>
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997
(restated) (restated) (restated)
------------------- ------------------- ------------------
<S> <C> <C> <C>
Revenues:
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
------------------- ------------------- ------------------
1,391,460 2,113,536 1,803,345
Expenses:
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 3,609,613 2,312,062 2,281,413
Interest - 45,888 293,048
------------------- ------------------- ------------------
16,661,378 9,850,832 6,422,212
------------------- ------------------- ------------------
Loss from continuing operations before extraordinary item (15,269,918) (7,737,296) (4,618,867)
Income (loss) from discontinued operations 236,730 2,329,352 (1,676,612)
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 $ (1.99) $ (1.01) $ (.62)
Discontinued operations 0.03 0.38 (.20)
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>
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>
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>
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 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 Spectrum operations were formed as an ancillary
activity.
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 Company's activities with regard to
its Titermax product line, as well as 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. The Company has restated all periods
presented to give effect to the treatment of the sale of its Titermax product
line in June 2000 as a discontinued operation.
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).
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-
F-6
<PAGE>
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.
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
F-7
<PAGE>
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>
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
F-8
<PAGE>
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
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.
F-9
<PAGE>
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>
Warrants and Options 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 rate 6.27% 5.64% 6.22%
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 (years) 8 8 8
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's 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>
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:
<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 intangibles - (228,000)
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.
F-11
<PAGE>
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
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).
F-12
<PAGE>
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.
Titermax
--------
Since 1987 CytRx has manufactured, marketed and distributed Titermax, an
adjuvant used to produce immune responses in research animals. Effective June
15, 2000, the Company entered into a Purchase Agreement with Titermax USA, Inc.
(an unaffiliated company) whereby Titermax USA purchased the worldwide rights to
market and distribute Titermax, including all accounts receivable, inventory and
other assets used in the Titermax business. The gross purchase price was
$750,000, consisting of $100,000 in cash and a $650,000 five-year secured
promissory note bearing interest of 10% annually.
Net income associated with the Titermax activities included in income (loss)
from discontinued operations was approximately $280,000, $231,000 and $193,000
for the years ended December 31, 1999, 1998 and 1997, respectively (see Note
15). A gain related to the sale of approximately $685,000 will be recorded in
the second quarter of 2000 and classified as discontinued operations.
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 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
Recruiting Product Continuing Research Marketing Pharmaceutical Vaccine Discontinued
(in thousands) Services Development Operations Products Operations Services Development Operations
----------------------------- ---------- ----------- ----------- -------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
-----
Sales to external customers $323 $ - $ 323 $500 $ - $ - $ - $ 500
Intersegment sales - - - - - - - -
Collaborative, grant & other
revenue - 606 606 - - - 134 134
Interest income - 463 463 - - - 7 7
Interest expense - - - - - - 4 4
Depreciation and amortization - 62 62 - - - 6 6
Segment profit (loss) 75 (15,344) (15,269) 280 - - (40) 240
Total assets - 6,128 6,128 - - - - -
Capital expenditures - 2,515 2,515 - - - - -
</TABLE>
F-13
<PAGE>
15. Segment Reporting (continued)
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
--------------------------------- -------------------------------------------------------------------
Total Cattle Total
Recruiting Product Continuing Research Marketing Pharmaceutical Vaccine Discontinued
(in thousands) Services Development Operations Products Operations Services Development Operations
--------------------------- ------- ----------- ----------- ----------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
----
Sales to external customers $351 $ - $ 351 481 $ 4,383 $ 419 $ - $ 5,283
Intersegment sales - - - - - 131 - 131
Collaborative, grant & other
revenue - 756 756 - - - 167 167
Interest income - 1,007 1,007 - - 22 13 35
Interest expense - 46 46 - - 3 7 10
Depreciation and amortization - 120 120 - 8 78 294 380
Unusual Items:
Gain on sale of business - - - - 6,230 782 - 7,012
Gain on sale of real estate - - - - - 434 - 434
Provision for asset impairment - - - - - - 3,213 3,213
Loss on early debt
extinguishment - 325 325 - - - - -
Segment profit (loss) 114 (8,176) (8,062) 231 5,645 1,387 (4,319) 2,944
Total assets - 15,666 15,666 - - - 976 976
Capital expenditures - 112 112 - - 12 4 16
1997:
---------------------------- --
Sales to external customers 422 - 422 456 13,469 1,984 - 15,909
Intersegment sales - - - - - 853 - 853
Collaborative, grant & other
revenue - 630 630 - - - 243 243
Interest income - 752 752 - - 2 46 48
Interest expense - 293 293 - - 36 1 37
Depreciation and amortization - 171 171 - 16 365 201 582
Segment profit (loss) 77 (4,696) (4,619) 193 868 (138) (2,357) (1,434)
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>
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, except for Note 13,
paragraphs 10 and 11, as to
which the date is
June 15, 2000
F-15
<PAGE>
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
------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserve Deducted in the Balance Sheet
from the Asset to Which it Applies:
Allowance for Bad Debts
Year ended December 31, 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>
CYTRX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,172,799 $ 3,031,893
Accounts receivable 169,102 174,292
Other current assets 54,211 209,090
-------------- -------------
Total current assets 2,396,112 3,415,275
Property and equipment, net 2,425,127 2,641,810
Note receivable 624,608 -
Other assets 60,977 70,978
-------------- -------------
Total assets $ 5,506,824 $ 6,128,063
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 476,067 $ 629,738
Accrued liabilities 759,307 2,121,999
-------------- -------------
Total current liabilities 1,235,374 2,751,737
Long-term debt - 650,000
Other long-term liabilities - 1,693,638
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;
10,696,512 and 8,373,853 shares issued at September 30, 2000
and December 31, 1999, respectively 10,696 8,374
Additional paid-in capital 72,551,195 67,805,871
Treasury stock, at cost (633,816 shares held at September 30, 2000
and December 31, 1999) (2,279,238) (2,279,238)
Accumulated deficit (66,011,203) (64,502,319)
-------------- -------------
Total stockholders' equity 4,271,450 1,032,688
-------------- -------------
Total liabilities and stockholders' equity $ 5,506,824 $ 6,128,063
============== =============
</TABLE>
See accompanying notes.
F-17
<PAGE>
CYTRX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
-------------- --------------- ---------------- ---------------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 168,086 $ 75,397 $ 353,370 $ 239,728
Interest income 47,993 95,505 116,901 406,837
Grant income 107,269 150,077 316,741 404,367
Other 80,594 29,958 250,400 118,356
-------------- --------------- ---------------- ---------------
403,942 350,937 1,037,412 1,169,288
Expenses:
Cost of sales 82,035 51,710 178,736 157,820
Research and development 387,516 4,541,104 1,615,934 9,334,165
Selling, general and administrative 540,583 896,321 1,550,954 2,669,463
-------------- --------------- ---------------- ---------------
1,010,134 5,489,135 3,345,624 12,161,448
-------------- --------------- ---------------- ---------------
Loss from continuing operations (606,192) (5,138,198) (2,308,212) (10,992,160)
Income from discontinued operations - 252,385 799,328 161,287
Minority interest - - - (3,897)
-------------- --------------- ---------------- ---------------
Net loss $ (606,192) $ (4,885,813) $ (1,508,884) $ (10,826,976)
============== =============== ================ ===============
Basic and diluted income (loss) per common share:
Continuing operations $ (0.06) $ (0.67) $ (0.25) $ (1.44)
Discontinued operations - 0.03 0.09 0.02
-------------- --------------- ---------------- ---------------
Net loss $ (0.06) $ (0.64) $ (0.16) $ (1.42)
============== =============== ================ ===============
Basic and diluted
weighted average shares outstanding 9,937,838 7,635,625 9,198,725 7,627,983
</TABLE>
See accompanying notes.
F-18
<PAGE>
CYTRX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period Ended September 30,
----------------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,508,884) $ (10,826,976)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 153,241 83,097
Gain on sale of Titermax (679,784) -
Gain of sale of subsidiary - (240,196)
Stock option and warrant expense 217,875 1,067,766
Minority interest in net loss of subsidiary - (3,897)
Net change in assets and liabilities (1,190,777) 605,256
-------------- ---------------
Total adjustments (1,499,445) 1,512,026
-------------- ---------------
Net cash used by operating activities (3,008,329) (9,314,950)
Cash flows from investing activities:
Decrease in short-term investments - 6,417,066
Capital expenditures/retirements, net 63,442 (886,100)
Net proceeds from sale of Titermax 100,000 -
Net proceeds from sale of subsidiary - 240,196
-------------- ---------------
Net cash provided by investing activities 163,442 5,771,162
Cash flows from financing activities:
Net proceeds from issuance of common stock 2,185,793 54,788
Retirement of debt (200,000) -
Purchase of treasury stock - (9,000)
-------------- ---------------
Net cash provided by financing activities 1,985,793 45,788
-------------- ---------------
Net increase (decrease) in cash and cash equivalents (859,094) (3,498,000)
Cash and cash equivalents at beginning of period 3,031,893 8,855,375
-------------- ---------------
Cash and cash equivalents at end of period $ 2,172,799 $ 5,357,375
============== ===============
</TABLE>
See accompanying notes.
F-19
<PAGE>
CYTRX CORPORATION
-----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
------------------
(Unaudited)
-----------
1. Description of Company and Basis of Presentation
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 accompanying condensed consolidated financial statements at September
30, 2000 and for the three month and nine month periods ended September 30, 2000
and 1999 include the accounts of CytRx together with those of its subsidiaries
and are unaudited, but include all adjustments, consisting of normal recurring
entries, which the Company's management believes to be necessary for a fair
presentation of the periods presented. Interim results are not necessarily
indicative of results for a full year. The financial statements should be read
in conjunction with the Company's audited financial statements in its Form 10-K
for the year ended December 31, 1999. The Company has restated all prior periods
presented to give effect to the treatment of the sale of its TiterMax product
line in June 2000 as a discontinued operation (see Note 5).
2. 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 was accordingly classified as long-term liabilities on the Balance Sheet at
that date. The Company also cancelled $650,000 of long-term debt in exchange for
a cash payment of $200,000 and the issuance of 180,000 shares of CytRx Common
Stock.
3. Private Placement of Common Stock
In March 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
F-20
<PAGE>
underlying the warrants. Subject to certain conditions, the Investors were also
required, upon effective registration of the shares, to either (a) 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, or
(b) 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.
In July 2000, the Investors exercised their rights to purchase 429,000
additional shares at a net price of $.77 per share, resulting in net proceeds of
$330,000 to the Company.
4. Equity Line of Credit
In April 2000, the Company entered into a Private Equity Line of Credit
Agreement (the "ELC Agreement") with Majorlink Holdings Limited ("Majorlink"),
pursuant to which the Company has the right to put shares of Common Stock to
Majorlink from time to time during the "commitment period" to raise up to
$5,000,000, subject to certain conditions and restrictions. The "commitment
period" begins on the effective date of a registration statement filed by the
Company to register the resale by Majorlink of the shares of Common Stock that
Majorlink purchases under the ELC Agreement and ends on the earliest of (1) the
date thirty months from such date, (2) the date on which Majorlink shall have
purchased $5,000,000 of Common Stock under the ELC Agreement or (3) the date
either party terminates the ELC Agreement in accordance with its terms.
Each time the Company desires to raise a specific amount of cash under the
ELC Agreement, the Company will issue to Majorlink a number of shares of Common
Stock determined by (1) dividing the amount of cash desired to be raised by the
Company by (2) 90% of a trailing market average price of the Company's Common
Stock, as defined in the ELC Agreement.
In connection with the ELC Agreement, the Company issued Majorlink a
warrant (as amended in June 2000) to purchase up to 150,000 shares of Common
Stock at a per share exercise price of $2.25. The warrant is exercisable for a
period of three years.
5. Sale of Titermax
Since 1987 CytRx has manufactured, marketed and distributed Titermax(R), an
adjuvant used to produce immune responses in research animals. Effective June
15, 2000, the Company entered into a Purchase Agreement with Titermax USA, Inc.
(an unaffiliated company) whereby Titermax USA purchased the worldwide rights to
market and distribute Titermax, including all accounts receivable, inventory and
other assets used in the Titermax business. The gross purchase price was
$750,000, consisting of $100,000 in cash and a $650,000 five-year secured
promissory note bearing interest of 10% annually.
Net income associated with the Titermax activities included in income
(loss) from discontinued operations was approximately $120,000 and $201,000 for
the nine months ended
F-21
<PAGE>
September 30, 2000 and 1999, respectively. A gain related to the sale of
$680,000 was recorded in the second quarter of 2000 and is classified as
discontinued operations.
7. Segment Reporting
<TABLE>
<CAPTION>
Continuing Operations
------------------------------------------------------
Total
Recruiting Product Continuing Discontinued
(in thousands) Services Development Operations Operations
-------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Three Months Ended September 30, 2000:
Sales to external customers $ 168 $ - $ 168 $ -
Intersegment sales - - - -
Segment profit (loss) 69 (675) (606) -
Total assets - 5,507 5,507 -
Three Months Ended September 30, 1999
Sales to external customers 75 - 75 98
Intersegment sales - - - -
Segment profit (loss) 7 (5,145) (5,138) 252
Total assets - 6,702 6,702 64
Nine Months Ended September 30, 2000:
Sales to external customers 353 - 353 170
Intersegment sales - - - -
Segment profit (loss) 148 (2,456) (2,308) 799
Total assets - 5,507 5,507 -
Nine Months Ended September 30, 1999:
Sales to external customers 240 - 240 363
Intersegment sales - - - -
Segment profit (loss) 52 (11,044) (10,992) 165
Total assets - 6,702 6,702 64
</TABLE>
F-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table provides the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the
securities being registered. All amounts except the Securities and Exchange
Commission registration fee and the NASD filing fee are estimated. No portions
of these fees will be borne by the selling shareholders
Securities and Exchange Commission Registration Fee............. $ 1,594
Nasdaq National Market Listing Fee.............................. $ 62,621*
Accountants' Fees and Expenses.................................. $ 10,000**
Legal Fees and Expenses......................................... $ 15,000**
Total......................................................... $ 89,215
---------------------------
*The maximum amount to be paid to Nasdaq if all shares are issued
**Estimated
ITEM 14. Indemnification of Directors and Officers.
The Certificate of Incorporation of the Registrant was amended in 1986 so
as to eliminate personal liability of the members of the Board of Directors to
the fullest extent permitted by law. Specifically, Article Eleven of the
Certificate of Incorporation provides as follows:
A director of the Corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate
action further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation shall
be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the corporation shall not adversely affect any right
or protection of a director of the corporation existing at the time of
such repeal or modification.
In addition, the Certificate of Incorporation and By-Laws of the Registrant
provide for indemnification of all officers and directors of the Registrant to
the fullest extent permitted by law. In particular, Article Nine of the
Certificate of Incorporation provides as follows:
The Corporation shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in
II-1
<PAGE>
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Article Five of the Corporation's By-Laws provides as follows:
1. MANDATORY INDEMNIFICATION. The corporation shall indemnify, to the
fullest extent permissible under Delaware law, any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, including an action or suit by or in the right of the corporation
to procure a judgment in its favor, by reason of the fact that he or she is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
2. MANDATORY ADVANCEMENT OF EXPENSES. Expenses reasonably and actually
incurred by a director, officer, employee, or agent in the course of defending
any suit under paragraph 1 of this Article V shall be paid by the corporation in
advance of the final disposition of the action, suit or proceeding, upon receipt
of an undertaking by or on behalf of the director, officer, employee, or agent
to repay such amounts if it is ultimately determined that he is not entitled to
be indemnified by the corporation. The corporation shall pay these expenses as
they are incurred by the person who may be entitled to indemnification.
3. CONTINUATION OF RIGHT TO INDEMNIFICATION. The indemnification and
advancement of expenses expressly provided by this bylaw shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his heirs, executors and administrators.
4. INTENT OF BYLAW. The intent of this Article V is to provide the
broadest possible rights to indemnification to the directors, officers,
employees, and agents of the corporation permissible under the law of Delaware
and not to affect any other right to indemnification that may exist.
Section 145 of the Delaware General Corporation Law provides as follows:
(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if
II-2
<PAGE>
the person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys, fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because the person has
met the applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorneys' fees) incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or other-wise, both as to action in his official
capacity and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a I
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer,
II-3
<PAGE>
employee or agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to eliminate or limit personal
liability of members of this board of directors or governing body for violations
of a director's fiduciary duty of care. However, directors remain liable for
breaches of duties of loyalty, failing to act in good faith, engaging in
intentional misconduct, knowingly violating a law, paying a dividend or
approving a stock repurchase which was illegal under Delaware General
Corporation Law Section 174 or obtaining an improper personal benefit. In
addition, equitable remedies for breach of fiduciary duty, such as injunction or
recession, are available.
The Company holds an insurance policy covering directors and officers under
which the insurer agrees to pay, with some exclusions, for any claim made
against the directors and officers of the registrant for a wrongful act that
they may become legally obligated to pay or for which the registrant is required
to indemnify the directors or officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted for directors,
officers and controlling persons of the Company under the above provisions, or
otherwise, the Securities and Exchange Commission has advised us that, in its
opinion, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
ITEM 15. Recent Sales of Unregistered Securities
On October 14, 1999, we issued 100,000 shares of our Common Stock to Small
Business Investment Corporation of America in exchange for consulting services.
This issuance was made in reliance upon Rule 506 of Regulation D, promulgated
under the Securities Act and Section 4(2) of the Securities Act, as transactions
with an accredited investor by an issuer not involving a public offering.
In February and March 2000, we issued 937,592 shares of our Common Stock to a
total of 11 of our vendors in exchange for the forgiveness of an aggregate total
of $2,343,978 of trade payables and long-term debt. These transactions were
made in reliance upon Rule 506 of Regulation D, promulgated under the Securities
Act and Section 4(2) of the Securities Act, as transactions with accredited
investors by an issuer not involving a public offering.
On March 31, 2000, we issued and sold 800,000 shares of our Common Stock to a
total of three investors for an aggregate purchase price of $1,800,000. These
transactions were made in reliance upon Rule 506 of Regulation D, promulgated
under the Securities Act and Section 4(2) of the Securities Act, as
transactions with accredited investors by an issuer not involving a public
offering.
II-5
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
2.1+ Private Equity Line of Credit Agreement dated April 26, 2000, between Registrant
and Majorlink Holdings Limited
2.2+ Registration Rights Agreement dated April 26, 2000, between Registrant and
Majorlink Holdings Limited
2.3+ Escrow Agreement dated as of April 26, 2000, among Registrant, Majorlink Holdings
Limited and Epstein Becker & Green, P.C.
2.4+ Stock Purchase Warrant dated April 26, 2000, issued to Majorlink Holdings Limited
2.5+ Letter Agreement dated November 28, 2000, between Registrant and Majorlink Holdings
Limited
3.1 Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
the Registrant's registration statement on Form S-3 filed November 5, 1997,
Registration No. 333-39607)
3.2 Restated Bylaws of the Registrant, as amended (Incorporated herein by reference
to Exhibit 4.2 to the Registrant's registration statement or Form S-8 filed July
21, 1997, Registration No. 333-31717)
4.1 Registration Rights Agreement dated April 26, 2000, between Registrant and
Majorlink Holdings Limited (filed as part of Exhibit 2.2)
4.2 Restated Certificate of Incorporation (filed as part of Exhibit 3.1)
4.3 Shareholder Protection Rights Agreement dated April 16, 1997 between CytRx
Corporation and American Stock Transfer & Trust Company as Rights Agent
(Incorporated herein by reference to Exhibit 4.1 to the Registrant's quarterly
report on Form 10-Q for the quarter ended March 31, 1997, File Number 000-15327)
5 Form of Opinion of Alston & Bird LLP
10.1 Agreement with Emory University, as amended (Incorporated herein by reference to
the Registrant's registration statement on Form S-1 filed on November 5, 1986,
File Number 33-8390)
10.2 Agreement with BASF Corporation, as amended (Incorporated herein by reference to
the Registrant's registration statement on Form S-1 filed on November 5, 1986,
File Number 33-8390)
10.3 Amended and Restated Employment Agreement between CytRx Corporation
and Jack J. Luchese (Incorporated herein by reference to the Registrant's annual
report on Form 10-K filed on March 30, 2000, File Number 000-15327)
10.4 Amended and Restated Change of Control Employment Agreement between CytRx
Corporation and Jack J. Luchese (Incorporated herein by reference to the
Registrant's annual report on Form 10-K filed on March 30, 2000, File Number
000-15327)
10.7 1986 Stock Option Plan, as amended and restated (Incorporated herein by reference
to the Registrant's annual report on Form 10-K filed on March 27, 1996, File
Number 000-15327)
10.8 1994 Stock Option Plan, as amended and restated (Incorporated herein by reference
to the Registrant's quarterly report on Form 10-Q filed on November 13, 1997, File
Number 000-15327)
10.9 1995 Stock Option Plan (Incorporated herein by reference to the Registrant's
registration statement on Form S-8 filed on June 25, 1995, File Number 33-93818)
10.10 1998 Long-Term Incentive Plan (Incorporated herein by reference to the
Registrant's annual report on Form 10-K filed on March 30, 1998, File Number
000-15327)
10.11 Purchase and Sale Agreement dated February 23, 1998 by and between CytRx
Corporation and Alexandria Real Estate Equities, Inc. (Incorporated herein by
reference to the Registrant's annual report on Form 10-K filed on March 30, 1998,
File Number 000-15327)
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
10.12 Common Stock Purchase Agreement dated March 24, 2000 by and between CytRx
Corporation and the Investors Signatory Thereto (Incorporated herein by reference
to the Registrant's annual report on Form 10-K filed on March 30, 2000, File
Number 000-15327)
10.13 License Agreement dated November 1, 2000 by and between CytRx Corporation
and Merck & Co., Inc. (Incorporated herein by reference to the Registrant's
current report on Form 8-K filed November 16, 2000, File Number 000-15327)
23.1 Consent of Ernst & Young LLP
27.1+ Financial Data Schedule (for SEC use only)
-- 1999 Restatement
27.2+ Financial Data Schedule (for SEC use only)
-- 1998 Restatement
27.3+ Financial Data Schedule (for SEC use only)
-- 1997 Restatement
27.4+ Financial Data Schedule (for SEC use only)
-- September 30, 2000 Restatement
27.5+ Financial Data Schedule (for SEC use only)
-- September 30, 1999 Restatement
</TABLE>
----------------------------------
+ Previously filed
II-7
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in the volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the Effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities being offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Atlanta, state of
Georgia, on January 10, 2001.
CYTRX CORPORATION
By: /s/ Jack J. Luchese
--------------------------
Jack J. Luchese
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on January 10, 2001.
SIGNATURE TITLE
/s/ Jack J. Luchese Director, President and Chief Executive
------------------------- Officer (Principal Executive Officer)
Jack J. Luchese
/s/ Mark W. Reynolds Vice President, Finance (Principal Financial
------------------------- Officer and Principal Accounting Officer)
Mark W. Reynolds
------------------------- Director
Alexander L. Cappello
* Director
-------------------------
Raymond C. Carnahan, Jr.
* Director
-------------------------
Lyle A. Hohnke
* Director
-------------------------
Max Link
* Director
-------------------------
Herbert H. McDade, Jr.
*By: /s/ Mark W. Reynolds
---------------------
Mark W. Reynolds
Attorney-in-fact
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
2.1+ Private Equity Line of Credit Agreement dated April 26, 2000, between Registrant
and Majorlink Holdings Limited
2.2+ Registration Rights Agreement dated April 26, 2000, between Registrant and
Majorlink Holdings Limited
2.3+ Escrow Agreement dated as of April 26, 2000, among Registrant, Majorlink Holdings
Limited and Epstein Becker & Green, P.C.
2.4+ Stock Purchase Warrant dated April 26, 2000, issued to Majorlink Holdings Limited
2.5+ Letter Agreement dated November 28, 2000, between Registrant and Majorlink Holdings
Limited
3.1 Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
the Registrant's registration statement on Form S-3 filed November 5, 1997,
Registration No. 333-39607)
3.2 Restated Bylaws of the Registrant, as amended (Incorporated herein by reference
to Exhibit 4.2 to the Registrant's registration statement or Form S-8 filed July
21, 1997, Registration No. 333-31717)
4.1 Registration Rights Agreement dated April 26, 2000, between Registrant and
Majorlink Holdings Limited (filed as part of Exhibit 2.2)
4.2 Restated Certificate of Incorporation (filed as part of Exhibit 3.1)
4.3 Shareholder Protection Rights Agreement dated April 16, 1997 between CytRx
Corporation and American Stock Transfer & Trust Company as Rights Agent
(Incorporated herein by reference to Exhibit 4.1 to the Registrant's quarterly
report on Form 10-Q for the quarter ended March 31, 1997, File Number 000-15327)
5 Form of Opinion of Alston & Bird LLP
10.1 Agreement with Emory University, as amended (Incorporated herein by reference to
the Registrant's registration statement on Form S-1 filed on November 5, 1986,
File Number 33-8390)
10.2 Agreement with BASF Corporation, as amended (Incorporated herein by reference to
the Registrant's registration statement on Form S-1 filed on November 5, 1986,
File Number 33-8390)
10.3 Amended and Restated Employment Agreement between CytRx Corporation
and Jack J. Luchese (Incorporated herein by reference to the Registrant's annual
report on Form 10-K filed on March 30, 2000, File Number 000-15327)
10.4 Amended and Restated Change of Control Employment Agreement between CytRx
Corporation and Jack J. Luchese (Incorporated herein by reference to the
Registrant's annual report on Form 10-K filed on March 30, 2000, File Number
000-15327)
10.7 1986 Stock Option Plan, as amended and restated (Incorporated herein by reference
to the Registrant's annual report on Form 10-K filed on March 27, 1996, File
Number 000-15327)
10.8 1994 Stock Option Plan, as amended and restated (Incorporated herein by reference
to the Registrant's quarterly report on Form 10-Q filed on November 13, 1997, File
Number 000-15327)
10.9 1995 Stock Option Plan (Incorporated herein by reference to the Registrant's
registration statement on Form S-8 filed on June 25, 1995, File Number 33-93818)
10.10 1998 Long-Term Incentive Plan (Incorporated herein by reference to the
Registrant's annual report on Form 10-K filed on March 30, 1998, File Number
000-15327)
10.11 Purchase and Sale Agreement dated February 23, 1998 by and between CytRx
Corporation and Alexandria Real Estate Equities, Inc. (Incorporated herein by
reference to the Registrant's annual report on Form 10-K filed on March 30, 1998,
File Number 000-15327)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.12 Common Stock Purchase Agreement dated March 24, 2000 by and between CytRx
Corporation and the Investors Signatory Thereto (Incorporated herein by reference
to the Registrant's annual report on Form 10-K filed on March 30, 2000, File
Number 000-15327)
10.13 License Agreement dated November 1, 2000 by and between CytRx Corporation and
Merck & Co., Inc. (Incorporated herein by reference to the Registrant's current
report on Form 8-K filed November 16, 2000, File Number 000-15327)
23.1 Consent of Ernst & Young LLP
27.1+ Financial Data Schedule (for SEC use only)
-- 1999 Restatement
27.2+ Financial Data Schedule (for SEC use only)
-- 1998 Restatement
27.3+ Financial Data Schedule (for SEC use only)
-- 1997 Restatement
27.4+ Financial Data Schedule (for SEC use only)
-- September 30, 2000 Restatement
27.5+ Financial Data Schedule (for SEC use only)
-- September 30, 1999 Restatement
</TABLE>
------------
+ Previously filed
