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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one: )
[X] Annual report pursuant to section 13 of 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1996
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to __________
Commission File Number 0-19701
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ZYNAXIS, INC.
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2562913
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
371 Phoenixville Pike, Malvern, Pennsylvania 19355
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(Address of principal executive offices) (Zip Code)
(610) 889-2200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $ .01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $1,298,248. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported by
the OTC Bulletin Board of the National Association of Securities Dealers, Inc.
on March 14, 1997. For purposes of making this calculation only, the registrant
has defined affiliates as including all directors and beneficial owners of more
than ten percent of the Common Stock of the Company.
The number of shares of the registrant's Common Stock outstanding as of March
14, 1997 was 10,377,240.
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TABLE OF CONTENTS
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PART 1 .............................................................................. 3
Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 11
Item 3. Legal proceedings............................................................. 11
Item 4. Submission of Matters to a Vote of Security holders........................... 11
PART II .............................................................................. 12
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......... 12
Item 6. Selected Financial Data....................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 14
Item 8. Financial Statements and Supplementary Data................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and...............
Financial Disclosure.......................................................... 22
PART III .............................................................................. 23
Item 10. Directors and Executive Officers of the Registrant............................ 23
Item 11. Executive Compensation........................................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 29
Item 13. Certain Relationships and Related Transactions................................ 35
PART IV .............................................................................. 36
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 36
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PART I
ITEM 1. BUSINESS
Overview
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Zynaxis, Inc. (the "Company" or "Zynaxis") is engaged in the development of
delivery systems designed to enhance the performance of vaccines and drugs. The
Company commenced operations in July 1988 and initially focused on the
development of proprietary cell linker molecule technology (Zyn-Linkers/(R)/)
for the retention at disease sites of drugs and radiopharmaceuticals as well as
the development of cellular diagnostic products. Between 1988 and 1991, the
Company received funding primarily through venture capital financing involving
the issuance of convertible preferred stock and convertible notes, all of which
have since been converted into Common Stock. In January 1992, the Company
completed an initial public offering of its Common Stock, receiving net proceeds
of approximately $23,300,000 through the sale of 2,875,000 shares of Common
Stock. Between 1992 and 1994, the Company focused on development of products for
site-directed drug delivery using its proprietary Zyn-Linker molecules and on
development of cellular diagnostic products including its Zymmune CD4/CD8 Cell
Monitoring Kit.
During 1995, the Company modified its strategic direction, divesting its
diagnostic products, acquiring vaccine delivery technologies, and focusing its
resources on selected drug and vaccine delivery opportunities. Four key events
occurred in 1995 as a result of the Company's modified strategic direction: (i)
the sales of the Company's diagnostic operations, accompanied by a significant
reduction in workforce, (ii) the acquisition by merger of Secretech, Inc.
("Secretech") and associated technologies for oral and mucosal vaccine
delivery, (iii) the completion of a private placement which raised net proceeds
of $2,700,000 to fund operations, and (iv) the completion of a significant
corporate collaborative agreement for the development of certain technologies
acquired through the merger with Secretech.
During the first nine months of 1996, Zynaxis had been continuing its
development of delivery systems designed to act through selected sites in the
body to improve the performance of products used for the prevention and
treatment of infectious diseases, allergies and cancer. The Company's delivery
portfolio included proprietary technologies which address problems encountered
using traditional delivery methods for drugs and vaccines:
.Oral vaccine delivery systems. These systems are designed to improve the
performance of new and traditional vaccines, particularly those which are
only partially effective or are underutilized due to the method of
administration. Vaccines using the Company's proprietary delivery systems
can be administered orally or nasally rather than by injection and have the
potential to increase protective immunity by stimulating formation of
antibodies at the most common points of entry for infectious agents. The
Company expects these advantages to lead to increased effectiveness,
increased ease of use and increased numbers of individuals receiving
vaccinations.
.Zyn-Linker/(R)/ Molecular Delivery System. The Zyn-Linker/(R)/ Molecular
Delivery System ("ZMD") couples small organic molecules, known as Zyn-
Linkers, to therapeutic agents to produce novel chemical entities which can
be localized at selected sites within the
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body to treat disease and to enhance the effectiveness and safety of the
incorporated drug. The Company believes that such molecular delivery systems
will be able to enhance the performance of both traditional small molecule
drugs, such as those used for treatment of cancer, and biopharmaceuticals,
such as antisense oligonucleotides, proteins and peptides. As discussed
below, the Company sold its Zyn-Linker technology in January 1997.
To date, the Company has had limited success in completing significant revenue-
generating collaborations which would advance these technologies to a commercial
phase.
During the first nine months of 1996, the Company attempted to develop its
technologies and enter into significant corporate collaborations. Other than
the Company's development and licensing agreement with ALK A/S ("ALK") entered
into in October 1995 relating to certain vaccine delivery technology, the
Company had limited success in entering into such significant collaborations.
As part of its continued efforts to raise cash in order to finance its ongoing
operations, in 1996 the Company began to focus on the possibility of selling its
process chemistry/pilot plant operations, known as Cauldron Process Chemistry
("Cauldron"), and its related assets for cash. Cauldron was established by the
Company to utilize its process chemistry expertise in response to growing demand
for contract services. Cauldron provides collaborative consulting services on
all aspects of bulk pharmaceutical production and offers process research,
development and pilot scale-up facilities for the pharmaceutical, biochemical
and fine chemical industries. In July 1996, the Company signed a binding letter
of intent to sell Cauldron to Seloc AG ("Seloc"), a subsidiary of Schwarz
Pharma. On August 27, 1996, the Company received notification that Seloc was
terminating its agreement in principle to purchase Cauldron (the "Seloc
Termination"). The Company has since revived discussions with previous
potential purchasers and initiated discussions with others and plans to sell
Cauldron in conjunction with the sale of substantially all the assets of the
Company in connection with the merger described below.
The Seloc Termination precipitated three significant strategic decisions. These
included (i) a 40% reduction in operations and workforce in September 1996 in
order to conserve cash, (ii) the sale of intellectual property related to the
Company's Zyn-Linker technologies and (iii) the decision to enter into a merger
agreement with CytRx Corporation ("CytRx") and Vaxcel, Inc., a wholly-owned
subsidiary of CytRx ("Vaxcel"). Each of these transactions is described at
length in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company has not received significant revenues from the sale of any of its
products and has sustained continued operating losses. For the period from its
inception to December 31, 1996, the Company had an accumulated deficit of
$49,751,000. The operations of Zynaxis will continue to require additional
capital investment by Vaxcel after the Merger.
Summary of business strategy
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Zynaxis historically had focused its development and partnering efforts on
markets where there is an opportunity for substantial improvement in patient
outcome and/or cost of therapy and where unmet needs may be filled through the
use of products incorporating the Company's delivery technologies. The
Company's strategy has been to fund initial feasibility testing through a
combination of corporate collaborations, academic collaborations and small
business grants, and to then establish more significant corporate collaborations
which fund research, development and commercialization activities focused on
specific products or indications. Acquisition (as with
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Secretech) or in-licensing has also been used to broaden the technology base and
provide additional opportunities for corporate collaborations.
In October 1995, Zynaxis entered into a development and licensing agreement with
ALK, a Danish company, which grants ALK exclusive rights to evaluate and develop
the Company's technologies for delivery of bioactive substances to treat
allergies. During 1995 and 1996, Zynaxis received payments aggregating
$1,000,000 for the funding of research activities, as well as revenues for
research and development support provided by Zynaxis to ALK. Additional
milestone and royalty payments may also be received as and when approved
products enter the market. ALK will fund ongoing clinical trials.
The Company has received governmental grants given to small businesses to fund
the continuing development of its Zyn-Linker technologies.
Vaccine delivery technologies and applications
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Research has led to increased recognition of the potential to use vaccines which
stimulate the body's common mucosal immune system ("CMIS") for protection
against infectious pathogens. Mucosal surfaces line all body cavities exposed
to the external environment, such as the mouth, nasal passages, lungs, stomach
and intestines and genitourinary tract. Most pathogens enter the body through
these surfaces, and seventy percent of all antibodies are produced by the body's
CMIS. Research has also shown that if immunity is induced at one mucosal
surface, antibodies conferring similar protection will be found on other mucosal
surfaces. The Company's oral vaccine delivery technology is designed to access
the body's CMIS by delivering antigens to the Peyer's Patches, which are patches
of organized lymphoid tissues found in the small intestine. The Peyer's Patches
sample particles passing through the small intestine, presenting small diameter
particles such as bacteria and viruses to the immune system, allowing
identification of those which are innocuous and those which are harmful. When
an antigen is brought into the Peyer's Patches, immune cells are generated which
travel through the body and lead to the production of secretory antibodies at
other mucosal surfaces.
Currently, most vaccines are delivered by the intramuscular injection of
antigens (for example, viruses) to stimulate the body's immune system to produce
circulating antibodies against the specific antigen. The Company believes that
an orally delivered vaccine has significant advantages over the current
injectable delivery method. Anticipated advantages include ease of use,
enhanced effectiveness resulting from the stimulation of the mucosal immune
system and increased numbers of individuals willing to be vaccinated, all of
which could lead to growth in the markets into which the oral vaccine is
introduced.
The Company has three different types of oral delivery technologies designed to
protect vaccines from degradation in the stomach, to increase uptake through the
Peyer's Patches and to preserve the ability of vaccines to stimulate the immune
system:
. Microencapsulation of vaccines into acid resistant, biodegradable
microspheres of an appropriate size for Peyer's Patch uptake.
. Use of mucoadhesive polymers to improve efficiency of vaccine uptake
into Peyer's Patches.
. Microgranular vaccines to allow delivery of live viral vaccines or
conformationally sensitive vaccines, especially to infants.
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Use of any or all of these delivery technologies should produce oral vaccines
anticipated to be more convenient and more effective (because of the stimulation
of the common mucosal system) than current vaccines.
The Company believes that its vaccine delivery technologies have broad
application to most traditional vaccines currently delivered by injection, as
well as to emerging vaccines for treatment of cancer and autoimmune diseases
such as diabetes and rheumatoid arthritis. The Company is presently focusing on
two product applications.
Allergy
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An allergy is an inappropriate immune response to certain substances which do
not themselves cause disease. Most individuals respond to pollens, animal
proteins or other environmental antigens in a controlled fashion. In
individuals who are defined as allergic, the immune system responds
inappropriately, resulting in congestion, allergic rhinitis and other
symptoms. In severe cases, allergic reactions can include anaphylaxis and
systemic shock.
It is estimated that there are forty million individuals in the United States
suffering from various allergies, the most common being allergies to grass
pollens, ragweed, house dust mites and cat dander. Steroids, antihistamines,
decongestants and cough syrups are used to treat allergy associated symptoms
but can cause substantial side effects and do not affect the underlying immune
response. Approximately one to three million people who suffer from severe or
debilitating allergies are treated using immunotherapy (also known as
desensitization therapy). This typically requires a course of weekly to
monthly injections with allergen extracts over prolonged time periods,
sometimes as long as several years.
ALK, the Company's partner in the allergy area, is a world leader in the
preparation and standardization of allergen extracts for allergy
immunotherapy. ALK has licensed from the Company worldwide rights to evaluate
and develop Zynaxis delivery technologies for use of bioactive substances in
treatment of allergy.
Influenza
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Influenza is an acute viral respiratory infection which is one of the ten
leading causes of death in the United States, particularly among the elderly.
Influenza symptoms include fever, congestion, muscular aches, headaches,
coughing and breathing difficulty, among others. Complications arising from
influenza can include bacterial pneumonia, among others, and can lead to death
in extreme cases (as many as 10,000 deaths in the United States in an epidemic
year).
Current treatment protocols for influenza are limited to the prophylactic
injections of influenza vaccines among the at-risk groups of the population,
and symptomatic treatments, such as the use of pain relievers, decongestants
and cough syrups. Treatment of complications arising from influenza can
include extended hospital care or other intermediate-term care.
The influenza virus mutates quickly and rapidly changes its immune profile.
This rapid mutation requires that those individuals among the at-risk group
receive yearly injections of the appropriate vaccine. In the United States,
less than 30% of the at-risk population is vaccinated. The current worldwide
market for influenza vaccines exceeds $300 million annually, with the U.S.
market accounting for $50 million of the total. The United States
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Public Health Service is attempting to increase the percentage of the at-risk
group actually being vaccinated to more than 60% by the year 2000;
accordingly, there is potential for significant future growth of this market.
Current vaccines typically require two to three injections over a period of at
least 6 weeks to initiate protective immunity against influenza. Since most
individuals have previously been exposed to influenza virus, a single
injection of the commercial vaccine is sufficient to induce protective
immunization to the three types of influenza viruses in the vaccine.
Periodically, however, a new strain emerges which is so different that
vaccination with previous strains is not protective. This leads to a so-
called "pandemic" (last seen in 1918-1919 and widely believed to be overdue)
in which the disease spreads faster than the new strain can be isolated and
used to vaccinate susceptible individuals. A vaccine which provided effective
immunity after a single administration would be of significant value in
stemming a pandemic and associated healthcare costs.
The Company believes that its oral vaccine delivery technologies will allow
development of orally delivered influenza vaccines that are as, or more,
effective than current injectable vaccines. Such vaccines would be expected to
significantly increase patient acceptance and the number of individuals being
vaccinated, leading to increased market size and decreased overall costs to
the healthcare system. The Company also believes that one of its delivery
systems may have the potential to provide effective immunity against influenza
after a single vaccination, and therefore would be of substantial value in a
pandemic year.
Zyn-Linker/(R)/ Molecular Delivery Systems
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On September 23, 1996, the Company entered into an Exclusive License Agreement
and Purchase Option with Phanos Technologies, Inc. ("Phanos") for intellectual
property related to its Zyn-Linker technologies. At that time, the Company
received initial deposits totaling $200,000, of which $195,000 was refundable
should Phanos have decided not to exercise the option. On January 21, 1997, the
Company received notification that Phanos had exercised its option and the
Company received $525,000, representing the balance of the purchase price.
Under the terms of the agreement, Phanos acquired all of the Company's Zyn-
Linker technologies.
During 1995, the National Heart, Lung and Blood Institute awarded the Company a
two-year Small Business Innovative Research ("SBIR") grant to synthesize ZMDs
incorporating heparin, investigate their ability to inhibit post-angioplasty
restenosis and local thrombosis and complete sufficient preclinical work to
attract a corporate development partner.
During 1996, the Company received a Phase I SBIR grant to provide funding for
(i) the development of Zyn-Linker molecules linked with Taxol and (ii) the
investigation of their ability to inhibit post-angioplasty restonosis and local
thrombosis.
Notwithstanding the January 1997 purchase by Phanos of the Zyn-Linker
technology, the studies conducted under these SBIR grants will continue to be
performed by Zynaxis. However, any patents, inventions or other intellectual
property that may arise from this SBIR research will become the property of
Phanos.
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Contract Chemical Process Development and Manufacturing: Cauldron
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The Company has expertise in chemical process research and development,
analytical methods development, scale-up and manufacturing of bulk
pharmaceutical chemicals ("BPCs") needed for the manufacture of ZMDs. Such
expertise is required to transform laboratory-scale procedures for producing
BPCs into commercially-viable, production-scale processes. On-site at its
Malvern facility, the Company has a pilot facility suitable for testing chemical
processes and for the manufacture of BPCs under Good Manufacturing Practices
("GMPs") prescribed by the U.S. Food and Drug Administration (the "FDA").
Cauldron was established by the Company to utilize its process chemistry
expertise in response to growing demand for contract services. Cauldron
provides collaborative consulting services on all aspects of bulk pharmaceutical
production and offers process research, development and pilot scale-up
facilities for the pharmaceutical, biochemical and fine chemical industries.
Cauldron's pilot facility offers unique advantages in the contract research and
development and manufacturing arenas. The small size of its equipment is
uncommon; the competition generally employs large glassware rather than the
small scale pharmaceutical-type reactors at the Company. This size advantage is
further enhanced by the ability of the Company's pilot facility to operate over
a much larger range of temperatures and pressures. In addition, the Company's
facility has the capability of performing hydrogenation (a specialized operation
whereby hydrogen is combined with another molecule), which is possessed by only
a small percentage of those companies providing similar services. Finally, and
perhaps most significantly, the Company's facility operates under GMPs, a
feature critical to the pharmaceutical and biotechnology sectors.
In September 1995, the Company began marketing the services of its pilot plant
and process chemistry facility and has had gradual success in attracting
clients. During 1996, Cauldron operations had a significant increase in
business with third parties. Revenues recognized in connection with these third
party contracts totaled $809,000 and $45,000 for the years ended December 31,
1996 and 1995, respectively. In continued efforts to raise cash in order to
finance its ongoing operations, in 1996 the Company began to focus on the
possibility of selling its Cauldron operations and its related assets for cash.
In July 1996, the Company signed a binding letter of intent to sell Cauldron to
Seloc. On August 27, 1996, the Company received notification that Seloc was
terminating its agreement in principle to purchase Cauldron. The Company has
since revived discussions with previous potential purchasers and initiated
discussions with others. Notwithstanding the merger to be consummated with
Vaxcel, plans are to divest the facility in order to generate cash. If Vaxcel
cannot find a buyer for the facility and continues to operate Cauldron, there is
no assurance that significant and sustainable revenues from contract work will
be able to offset the operating costs of the facility.
Current financial condition and the impact on operations; the Merger
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The Company is critically short of cash to fund its operations. At December 31,
1996, the Company had cash and cash equivalents of $124,000 and a working
capital deficit of $2,030,000. The ability of the Company to operate as a
going concern beyond December 31, 1996 is dependent on the consummation of the
Vaxcel merger.
On December 6, 1996, the Company entered into an Agreement and Plan of Merger
and Contribution (the "Merger Agreement") with CytRx, Vaxcel, a wholly-owned
subsidiary of CytRx, and Vaxcel Merger Subsidiary, Inc., a wholly-owned
subsidiary of Vaxcel ("Vaxcel Merger Sub"). Pursuant to the Merger Agreement,
subject to approval by shareholders of Zynaxis and certain
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other conditions, Vaxcel Merger Sub will be merged (the "Merger") with and into
Zynaxis, which will be the surviving corporation and will be a wholly-owned
subsidiary of Vaxcel. The Company anticipates that, subject to shareholder
approval and the satisfaction of conditions to the Merger, the Merger will be
consummated in April or early May 1997. In the Merger, the security holders of
Zynaxis will exchange their Zynaxis securities for securities of Vaxcel and will
own approximately 12.5% of the outstanding Common Stock of Vaxcel immediately
following the Merger. CytRx will own the remaining approximately 87.5% of Common
Stock of Vaxcel immediately following the Merger.
Simultaneously with the execution of the Merger Agreement, Zynaxis and CytRx
entered into a secured loan agreement in order for the Company to have
sufficient funding for continued operations pending the Merger. CytRx agreed to
loan up to $2,000,000 to the Company on a secured basis. At December 31, 1996,
$975,000 had been advanced and was used in settling a major portion of the
Company's outstanding liabilities as well as funding December operations. All
advances accrue interest at a rate of prime plus 2%. Upon the consummation of
the Merger between Zynaxis and Vaxcel, CytRx will contribute to Vaxcel an amount
of funding equal to the outstanding principal and interest of the loan, as well
as additional amounts specified in the Merger Agreement. Among other agreements
entered into in connection with the Merger is an agreement providing for the
sale of substantially all assets of the Company.
If the Company is unable to complete the transaction, if the shareholders fail
to approve the Merger or if certain conditions precedent to the closing of the
Merger do not occur, the Company will not be able to continue operations.
Should the Company determine that it is no longer in the best interest of its
shareholders to continue operations, the ability of the Company to fund an
orderly disposition of assets, pay off its then outstanding liabilities and
return any remaining cash to its shareholders will be limited by the amount of
working capital then on hand.
Competition
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The competition faced by the Company's vaccine delivery formulations will depend
on the particular product and/or delivery technology under consideration. The
primary competitor in the allergy immunotherapy market is Immulogic, a company
developing peptide based injectable products for cat dander, ragweed and other
common allergies, some of which are in clinical development. Zynaxis believes
that the formulations it is developing in conjunction with ALK will compete
based on improved ease of administration, improved patient acceptance, and ALK's
well established reputation for standardized high quality allergen preparations.
Competition in the infectious disease vaccines market is intense and
characterized by a few very large companies and a larger number of small
companies. The Company is aware of competitors who are developing improved
influenza vaccines incorporating recombinant antigens, more effective adjuvants,
genetic immunization and intranasal delivery, several of which are in clinical
development. It is also aware of two competitors developing oral influenza
vaccines, both of which are believed to be at the preclinical stage. Zynaxis
believes that its oral influenza vaccine formulations will compete based on
improved ease of administration, improved patient acceptance, reduced number of
vaccinations required to provide protective immunity, and a shorter regulatory
path based on use of materials already in use in humans.
The Company's competitors may be fully integrated pharmaceutical companies,
which have expertise in research and development, manufacturing, testing,
obtaining regulatory approvals, and marketing, and have substantial financial
and other resources. Smaller companies also may prove to be significant
competitors, particularly through collaborative arrangements with large
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pharmaceutical companies or through acquisition by large pharmaceutical
companies. Furthermore, academic institutions, governmental agencies and other
public and private research organizations will continue to conduct research,
seek patent protection and establish collaborative arrangements for product and
clinical development and marketing which would provide royalties for use of
their technologies. These products may compete directly or indirectly with
those developed utilizing the Company's technologies.
Patents and intellectual property
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The Company considers its patent rights and other intellectual property to be
critical to its business.
Compositions and methods for the administration of bioactive agents to and
through the Peyer's Patch by means of microencapsulation in biocompatible,
biodegradable microspheres of less than 10 microns diameter are protected by
issued patents, pending U.S. patent applications and foreign counterparts held
by Southern Research Institute ("SRI") and The UAB Research Foundation
(University of Alabama at Birmingham) ("UAB") which are licensed exclusively to
Zynaxis for the field of oral vaccine delivery. ALK has entered into a
development and licensing agreement with the Company which grants them exclusive
rights to sublicense the SRI/UAB patents for use in the field of allergy
immunotherapy. Through the Secretech merger, the Company also acquired rights
to additional pending U.S. patent applications and foreign counterparts relating
to the use of polymeric mucoadhesives for delivery of vaccines at mucosal
surfaces, the use of virasomes for intranasal vaccine delivery, and compositions
and methods for preparation of solid, orally administrable dosage units for live
viral vaccines.
Employees
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As of March 14, 1997, the Company had 11 full-time employees, 6 of whom are
Ph.Ds. None of the Company's employees is represented by a labor union. The
Company believes that its employee relations are good.
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ITEM 2. PROPERTIES
Through November 21, 1996, the Company leased approximately 39,000 square feet
of space in Malvern, Pennsylvania. The Company had been subleasing
approximately 9,000 square feet, or 23% of this facility, to two independent
biotechnology companies at pre-determined increasing annual rates. These
sublease agreements were to run through January 1999. In efforts to conserve
cash and also in conjunction with the proposed Vaxcel Merger, as previously
discussed, effective November 21, 1996 the Company's lease was amended to reduce
the leased space from 39,000 square feet to 23,460 square feet. The lease
amendment provides for pre-determined annual rates through January 1999 with
index-based adjustments to occur each year. In November 1996, the remaining
sublease agreement was mutually terminated. The Company uses the remaining
facility primarily for laboratory and administrative office space, including
2,700 square feet for a pilot manufacturing plant which the Company uses to
perform contract manufacturing of bulk pharmaceutical chemicals for third
parties. At December 31, 1996, the Company occupies approximately 15,800 square
feet and is seeking a subtenant for the remaining space.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor either of its subsidiaries is a party to any legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On December 6, 1996, in accordance with the provisions of the Company's Amended
and Restated Articles of Incorporation, as amended, the holders of Series A
Convertible Preferred Stock of the Company unanimously consented in writing to
the secured loan agreement with CytRx and the use of the assets of the Company
as security for such loan.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
As discussed below, the Company's Common Stock currently is not traded in any
established market. The Company's Common Stock traded on the Nasdaq SmallCap
Market under the symbol ZNXS until December 24, 1996, at which time it was
delisted due to the Company's inability to meet the criteria for continued
listing. Shares of the Company's Common Stock were first traded publicly on
January 30, 1992 in connection with the Company's initial public offering. The
following table sets forth for the periods indicated the high and low closing
sale prices of Common Stock, as reported by Nasdaq:
<TABLE>
<CAPTION>
High Low
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1996
First Quarter........................... $ 1 1/2 $ 5/8
Second Quarter.......................... 1 3/4 3/4
Third Quarter........................... 1 3/16 7/16
Fourth Quarter (until December 24, 1996) 7/16 3/32
1995
First Quarter........................... $ 2 1/8 $ 1
Second Quarter.......................... 1 7/16 1
Third Quarter........................... 2 1/4 15/16
Fourth Quarter.......................... 1 1/2 5/8
</TABLE>
As of March 14, 1997, there were approximately 305 holders of record of Common
Stock. The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its cash to finance operations
and therefore does not anticipate paying any cash dividends in the foreseeable
future.
Prior to December 20, 1995, the Company's Common Stock traded on the Nasdaq
National Market. The By-Laws of the National Association of Securities Dealers,
Inc. required that the Company maintain certain quantitative standards for
continued listing on the Nasdaq National Market. These standards included,
among other things, a minimum bid price of $1.00 per share or, in the
alternative, market value of public float of $3,000,000 and net tangible assets
of $4,000,000. Additionally, an issuer such as the Company, which had sustained
losses from continuing operations and/or net losses in three of its last four
most recent fiscal years, was required to have net tangible assets of at least
$4,000,000. Due to the Company's inability to continue to consistently meet
these standards, the Company's Common Stock was removed from the Nasdaq National
Market and began trading on the Nasdaq SmallCap Market. On December 24, 1996,
Zynaxis was delisted from the Nasdaq SmallCap Market due to its continued
noncompliance with quantitative listing standards, including Zynaxis' failure to
maintain a bid price greater than or equal to $1.00 per share or, in the
alternative, to maintain capital and surplus of $2,000,000 and a market value of
public float of $1,000,000.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for
the five years ended December 31, 1996. The information in the table below is
derived from, and qualified by reference to, the financial statements of the
Company which are included elsewhere in this Report and which have been audited
by Arthur Andersen LLP, independent public accountants, whose report on the
financial statements includes an explanatory paragraph concerning the Company's
ability to continue as a going concern. This data should be read in conjunction
with the Company's financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
Report.
<TABLE>
<CAPTION>
Year ended December 31,
Statement of Operations
Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 2,050,467 $ 761,792 $ 1,163,955 $ 1,573,550 $ 1,166,658
Operating Expenses:
- -------------------
Cost of sales - 40,262 273,088 - -
Research & development 3,642,195 5,168,912 6,344,221 7,042,790 4,341,691
Marketing, general &
administrative 2,019,042 2,239,921 3,397,948 2,875,112 1,263,317
Charge for acquired
research and development - 5,165,793 - - -
Restructuring charge - 347,436 - - -
Provision for asset
impairment 1,152,130 - 1,466,360 - -
-----------------------------------------------------------------------------
6,813,367 12,962,324 11,481,617 9,917,902 5,605,008
Other income (expense):
- -----------------------
Interest income (expense),
net (58,934) 44,023 106,259 574,261 1,023,676
Other income (expense) 591,364 162,232 - - -
Net gain on sale of
diagnostics technologies and
assets - 1,616,840 - - -
-----------------------------------------------------------------------------
532,430 1,823,095 106,259 574,261 1,023,676
Net loss ($4,230,470) ($10,377,437) ($10,211,403) ($7,770,091) ($3,414,674)
Net loss per common share ($0.42) ($ 1.57) ($ 1.95) ($1.49) ($0.71)
Shares used in computing
net loss per common share (1) 10,126,676 6,602,813 5,241,317 5,204,967 4,837,661
<CAPTION>
December 31,
Balance Sheet Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
investments $ 124,348 $ 509,143 $ 2,216,456 $ 15,375,621 $ 22,901,516
Working capital (deficit) (2,029,680) (733,698) 1,122,483 12,917,242 13,005,985
Total assets 1,398,283 3,987,828 6,399,135 20,888,148 24,429,508
Long-term debt and other
long-term obligations 65,511 183,403 212,245 3,833,841 312,058
Stockholders' equity
(deficit)(2) (1,110,557) 2,357,595 5,277,193 15,463,531 23,063,154
</TABLE>
(1) Computed on basis described for net loss per share in Note 2 to Notes to
Consolidated Financial Statements
(2) Includes accretion of $2,543,068 to convertible preferred stock redemption
value. No dividends on the Common Stock have been declared or paid since the
inception of the Company.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Background and Summary of 1996 Events
- -------------------------------------
This review should be read in conjunction with the information presented in the
Consolidated Financial Statements and the related Notes to the Consolidated
Financial Statements.
The Company commenced operations in July 1988 and initially focused on the
development of cell-mediated therapies and cellular diagnostic products
including research reagents for cell tracking. Between 1988 and 1991, the
Company received funding primarily through venture capital financing involving
the issuance of convertible preferred stock and convertible notes, all of which
have since been converted into Common Stock. In January 1992, the Company
completed an initial public offering of its Common Stock, receiving net proceeds
of approximately $23,300,000 through the sale of 2,875,000 shares of Common
Stock. Between 1992 and 1994, the Company focused on development of products
for site-directed drug delivery using its proprietary Zyn-Linker molecules and
on development of cellular diagnostic products including its Zymmune CD4/CD8
Cell Monitoring Kit.
During 1995, the Company modified its strategic direction, divesting its
diagnostic products, acquiring vaccine delivery technologies, and focusing its
resources on selected drug and vaccine delivery opportunities. Four key events
occurred in 1995 as a result of the Company's restructuring: (i) the sale of the
Company's diagnostic operations, accompanied by a significant reduction in
workforce, (ii) the acquisition by merger of Secretech and associated
technologies for oral and mucosal vaccine delivery, (iii) the completion of a
private placement which raised net proceeds of $2,700,000 to fund operations,
and (iv) the completion of a significant corporate collaboration agreement for
the development of certain technologies acquired through the merger with
Secretech. These events are described in detail within "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1995.
During 1996, the Company attempted to develop its technologies and enter into
significant corporate collaborations. Other than the Company's development and
licensing agreement with ALK, the Company had limited success in entering into
such significant collaborations.
As part of its continued efforts to raise cash in order to finance its ongoing
operations, in 1996 the Company began to focus on the possibility of selling its
process chemistry/pilot plant operations, known as Cauldron Process Chemistry,
and its related assets for cash. Cauldron was established by the Company to
utilize its process chemistry expertise in response to growing demand for
contract services. Cauldron provides collaborative consulting services on all
aspects of bulk pharmaceutical production and provides research, development and
pilot scale-up facilities to the pharmaceutical, biochemical and fine chemical
industries. In July 1996, the Company signed a letter of intent giving Seloc an
exclusive option to buy Cauldron. In conjunction with the execution of the
letter of intent, the Company received a nonrefundable exclusive option payment
of $100,000 and an up-front payment of $50,000 on a Seloc process development
contract. On August 27, 1996, the Company received notification that Seloc was
terminating its option to purchase Cauldron. The Company has since revived
discussions with previous potential purchasers and initiated discussions with
others and plans to sell Cauldron in conjunction with the sale of substantially
all the assets of the Company in connection with the Merger.
14
<PAGE>
The Seloc Termination precipitated three significant strategic decisions. These
included (i) a 40% reduction in operations and workforce in September 1996 in
order to conserve cash, (ii) the sale to Phanos of intellectual property related
to the Company's Zyn-Linker technologies and (iii) the decision to enter into a
merger agreement with CytRx and Vaxcel.
Zynaxis determined that, in order to conserve its limited cash resources, it
must limit its activities to those which were cash positive or were essential to
the Company's operations. Accordingly, in September 1996, the Company
terminated nearly all of its employees engaged in the research and development
of the Company's Zyn-Linker and vaccine delivery technologies. As a result, the
Company's operations were reduced to its Cauldron process chemistry operations,
research and development funded through SBIR grants and other essential
corporate functions. The Company's current staffing level is eleven full-time
employees.
On September 23, 1996, the Company entered into an Exclusive License Agreement
and Purchase Option with Phanos for intellectual property related to its Zyn-
Linker technologies. At that time, the Company received initial deposits
totaling $200,000, of which $195,000 was refundable should Phanos have decided
not to exercise the option. On January 21, 1997, the Company received
notification that Phanos had exercised its option and the Company received
$525,000, representing the balance of the purchase price. Under the terms of
the agreement, Phanos acquired all of the Company's Zyn-Linker technologies.
On December 6, 1996, the Company entered into the Merger Agreement with CytRx,
Vaxcel, and Vaxcel Merger Sub. Pursuant to the Merger Agreement, subject to
approval by shareholders of Zynaxis and certain other conditions, Vaxcel Merger
Sub will be merged with and into Zynaxis, which will be the surviving
corporation and will be a wholly-owned subsidiary of Vaxcel. The Company
anticipates that, subject to shareholder approval and the satisfaction of
conditions to the Merger, the Merger will be consummated in April or early May
1997. In the Merger, the security holders of Zynaxis will exchange their
Zynaxis securities for securities of Vaxcel and will own approximately 12.5% of
the outstanding Common Stock of Vaxcel immediately following the Merger. CytRx
will own the remaining approximately 87.5% of Common Stock of Vaxcel immediately
following the Merger.
Simultaneously with the execution of the Merger Agreement, Zynaxis and CytRx
entered into a secured loan agreement in order for the Company to have
sufficient funding for continued operations pending the Merger. CytRx agreed to
loan up to $2,000,000 to the Company on a secured basis. At December 31, 1996,
$975,000 had been advanced and was used in settling a major portion of the
Company's outstanding liabilities as well as funding December operations. All
advances accrue interest at a rate of prime plus 2%. Upon the consummation of
the Merger between Zynaxis and Vaxcel, CytRx will contribute to Vaxcel an amount
of funding equal to the outstanding principal and interest of the loan, as well
as additional amounts specified in the Merger Agreement. Among other agreements
entered into in connection with the Merger is an agreement providing for the
sale of substantially all assets of the Company.
The transaction documents further provide that Zynaxis preferred stockholders
who also hold warrants to purchase the Company's Common Stock, and three other
warrant holders, will exchange the Zynaxis warrants for warrants to purchase
Vaxcel Common Stock in the Merger. Additionally, certain shareholders who hold
convertible notes issued by Zynaxis will exchange such notes for shares of
Vaxcel Common Stock in the Merger.
15
<PAGE>
Upon execution of the Merger Agreement, a technology development agreement was
also executed by the Company and Vaxcel relating to the development of the
Company's vaccine delivery technology pending the Merger.
The Company has not received significant revenues from the sale of any of its
products. For the period from its inception to December 31, 1996, the Company
had an accumulated deficit of $49,751,000.
Liquidity, capital resources and plans to fund future operations
- -----------------------------------------------------------------
At December 31, 1996, the Company had cash and cash equivalents of $124,000 and
a working capital deficit of $2,030,000. For the year ended December 31, 1996,
net operating cash outflow was $2,307,000.
The Company has funded operations since December 31, 1995 primarily through the
issuance of short-term promissory notes to certain holders of Series A
Convertible Preferred Stock (the "Preferred Shareholders"), the completion of an
additional private offering, and a secured loan from CytRx.
The Company issued an aggregate of $450,000 of Demand Promissory Notes (the
"Notes") to three of its Preferred Shareholders in exchange for cash to fund
operations. These Notes bear interest at an annual rate of 11 1/4% and are to
be repaid on the earlier of (a) the date the Company receives aggregate proceeds
of at least $1,000,000 from the sale of Cauldron, as discussed previously, or
(b) upon demand on selected dates in the third or fourth quarters of 1996. As
additional consideration, the Company issued an aggregate of 225,000 warrants to
purchase Common Stock with an exercise price of $1.00 per share. In conjunction
with the signing of the Merger Agreement in December 1996, a Note Exchange
Agreement was entered into whereby two of these three notes payable to
shareholders will be exchanged for Vaxcel Common Stock upon consummation of the
Merger.
During the first half of 1996, the Company continued to attempt to raise
significant additional funds in a private offering. On February 29, 1996, the
Company received cash proceeds of $500,000 in a private placement of Common
Stock to an institutional investor. Under the terms of the purchase agreement,
the Company issued 500,000 shares of unregistered Common Stock at a price of
$1.00 per share, and a warrant to purchase 150,000 shares of unregistered Common
Stock at an exercise price of $1.00 per share.
Additionally, on February 29, 1996, the Company converted a $150,000 bridge loan
from a Preferred Shareholder and accrued interest thereon into 152,582 shares of
unregistered Common Stock and issued a warrant to purchase 45,775 shares of
Common Stock at an exercise price of $1.00 per share.
Simultaneously with the execution of the Merger Agreement, Zynaxis and CytRx
entered into a secured loan agreement in order for the Company to have
sufficient funding for continued operations pending the Merger. The terms of
the loan agreement allow the Company to borrow up to $2,000,000 from CytRx
between December 1996 and the closing of the Merger. Proceeds from any amounts
borrowed are to be used to satisfy existing liabilities and to fund operations
pending the Merger. As of December 31, 1996, $975,000 had been advanced at a
rate of prime plus 2%.
16
<PAGE>
Zynaxis is subject to significant uncertainty and risk which could have a severe
impact upon the ability of Zynaxis to continue as a going concern. Zynaxis'
independent accountants have included an explanatory paragraph in their report
covering Zynaxis' financial statements for the fiscal year ended December 31,
1996, expressing substantial doubt about Zynaxis' ability to continue as a going
concern.
The estimated effort, timing and resources necessary to develop the Zynaxis
vaccine technologies into commercially viable products are difficult to predict
and will vary based on the products under development. Management believes that
the closest products to commercialization using the Zynaxis technologies at
present are the allergy products being developed by ALK. Assuming continued
successful development, it is possible that such allergy products using the
Zynaxis technologies may be commercialized in three to four years. It should be
noted that the resources necessary to develop the allergy products using the
Zynaxis technologies will be borne by ALK, since under the terms of the ALK
development and licensing agreement, ALK is responsible for conducting all
development, regulatory submissions, and marketing activities. Products using
the Zynaxis technologies other than the ALK allergy products will require
additional effort and resources to develop. For the poly-(DL-lactide-co-
glycolide) ("PLG") microencapsulation technology, development efforts will be
undertaken to increase the efficiency of uptake through the Peyer's Patches or
increase the immunogenicity of PLG-encapsulated vaccines. For the mucoadhesive
technology, the aim of the development program will be to evaluate mucoadhesives
with a variety of different antigens in well-controlled preclinical studies.
The objective for both of these programs is to develop a data package on each
Zynaxis technology in order to secure licensing agreements with pharmaceutical /
biotechnology companies engaged in vaccine research and development. Under such
licensing agreements, partners will assume responsibility for product
development, regulatory approval and marketing. Consequently, the major expense
of commercializing products using the Zynaxis technologies will be borne by the
sublicensees. Given that such development programs are currently at the
preclinical stage, the process for a new vaccine from Phase I to
commercialization can take seven or more years. This timetable may be
significantly reduced if partners are using the Zynaxis technologies to
commercialize improved versions of existing vaccines such as influenza virus or
Hepatitis B vaccines.
Zynaxis is critically short of cash to fund its operations and has a working
capital deficit of $2,030,000. The ability of the Company to operate as a going
concern beyond December 31, 1996 will be determined by its ability to complete
the Merger with Vaxcel. There can be no assurance that the Company will
ultimately complete this transaction. Additionally, certain matters associated
with the transaction require the approval of shareholders. If the Company is
unable to complete the transaction, if the shareholders fail to approve the
Merger or if certain conditions precedent to the closing of the Merger do not
occur, the Company will not be able to continue operations. No assurance can be
provided as to when or if all of the conditions precedent to the Merger can or
will be satisfied. Pursuant to the terms of the Agreement, if the Merger is not
completed on or before March 31, 1997, the Agreement may be terminated by
Zynaxis, CytRx or Vaxcel. The parties intend to waive this condition. In
addition, if the Merger is not consummated, management believes that Zynaxis may
not be able to pay the outstanding balance under the secured loan from CytRx
when it comes due. If Zynaxis defaults, CytRx may exercise its rights as a
secured creditor with respect to certain assets of Zynaxis, including, but not
limited to, foreclosing on Zynaxis' rights in its vaccine delivery technologies.
Should the Company determine that it is no longer in the best interest of its
shareholders to continue operations, the ability of the Company to fund an
orderly disposition of assets, pay off its
17
<PAGE>
then outstanding liabilities and return any remaining cash to its shareholders
will be limited by the amount of working capital then on hand, if any.
The Company's net cash used for operations was $2,307,000, $5,104,000 and
$8,772,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
The 55% decrease in the use of cash for operations between 1995 and 1996 was
primarily due to the full year effect of the divestiture of the Company's
diagnostic operations and related reductions in workforce. Additionally, the
growth in the Company's notes payable favorably impacted the change. The 42%
decrease in the use of cash for operations between 1994 and 1995 reflected the
divestiture of the Company's diagnostics operations during 1995, combined with
an increase in accounts payable and accrued expenses.
The Company's net cash from investing activities was $205,000, $2,924,000, and
$7,575,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
Included in 1996 cash flows were proceeds of $143,000 from the sale of equipment
and leasehold improvements and purchases of equipment of $35,000. Included in
1995 cash flows were proceeds from the sale of the Company's diagnostic
technologies of $1,329,000, payment of Secretech merger-related expenses of
$380,000 and purchases of equipment and leasehold improvements of $54,000. In
1994, the Company used $652,000 to purchase property and leasehold improvements,
primarily related to the construction of the Company's process chemistry/pilot
plant operations and expansion of available laboratory space.
The Company's net cash from financing activities was $1,815,000, $2,501,000, and
$(3,735,000) for the years ended December 31, 1996, 1995, and 1994,
respectively. For the years ended December 31, 1996 and 1995, the Company
received net cash proceeds from private placements totaling $500,000 and
$2,712,000, respectively, and proceeds from bridge loans of $450,000 and
$150,000, respectively. Additionally, $975,000 was received in 1996 from a
secured loan with CytRx, as discussed above. In November 1996, a ten-year
collateralized note with the Company's lessor of office and research facilities
was satisfied in full for $91,000, the amount of the collateral certificate of
deposit. In 1995, the Company fully repaid a four-year $4,000,000 variable
rate secured bank term loan which had been obtained in 1993 to finance the
Company's leasehold improvements and equipment purchases.
Uncertainties and Risks
- -----------------------
The Company is subject to significant uncertainty and risk which could have a
severe impact upon the ability of the Company to continue as a going concern.
The Company's independent public accountants have included an explanatory
paragraph in their report covering the Company's financial statements for the
year ended December 31, 1996, expressing substantial doubt about the Company's
ability to continue as a going concern. These risks and uncertainties arise
from a number of factors, some of which are described below, including those
inherent in the biotechnology industry as well as those resulting from the
Company's poor financial condition, as previously discussed.
If the Company is ultimately able to complete the Merger, the Company will
continue to be exposed to the significant risks of product development. Product
opportunities that the Company is presently pursuing will require extensive
additional research, development, clinical testing and regulatory approvals
prior to commercialization. These activities are time-consuming and expensive.
The ability of the Company to advance these technologies will be highly
dependent upon the Company's available cash resources and the ability of the
Company to obtain significant
18
<PAGE>
and sustained funding from collaborative partners, investors or other sources.
To date, the Company has had limited success in obtaining substantial funding
from collaborative partners. There is no assurance that the Company will be
successful in the future. Pharmaceutical companies seeking collaborative
arrangements in order to avail themselves of products in the development stage
have become increasingly selective and have required substantial proof of
principle, safety and efficacy before agreeing to provide substantial
collaborative funding. Significant cash expenditures are required to obtain such
evidence of principle, safety and efficacy.
Even if a product candidate appears promising at an early stage of development,
there is no assurance that it can be successfully commercialized due to a number
of factors. Such possibilities include that the product will prove to be
ineffective or unsafe during clinical trials, will fail to receive necessary
domestic or foreign regulatory approvals on a timely basis, will not be accepted
by patients or physicians, will be difficult to manufacture on a commercial
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of others.
The Company's success depends in part on its ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of others. The Company has exclusive licenses from third parties under various
U.S. patent applications to the oral vaccine delivery technology. There can be
no assurance that any of the Company's patent applications will be approved,
that the Company will develop additional proprietary technologies that are
patented, that any patents issued by the Company or its licensers will provide
the Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
ability of the Company to operate in a particular field. Patent law relating to
the scope of claims in the biotechnology field is still evolving and the degree
of future protection for the Company's proprietary rights is uncertain.
Furthermore, there can be no assurance that others will not independently
develop similar technologies, or design around patents issued to the Company.
The failure by the Company to obtain appropriate patent protection may make
certain of its products commercially unattractive.
The Company's strategy for the research, development, manufacture and marketing
of vaccine products using its delivery technologies is to enter into various
arrangements with corporate partners, licensors, licensees and others. The
Company has no commercial-scale manufacturing or clinical trial capabilities.
Therefore, the successful commercialization of the Company's vaccine
technologies is dependent upon the Company's ability to enter into such
arrangements and the ability of these third parties to perform their agreed-upon
responsibilities. Although the Company believes that parties to any such
arrangements would have an economic motivation to succeed in performing their
contractual responsibilities, the actual performance under the arrangements is
outside of the control of the Company.
Research, preclinical development, clinical trials and manufacturing and
marketing of pharmaceutical products are subject to extensive, costly and
rigorous regulation by government authorities in the United States and other
countries. The process of obtaining required regulatory approval from the FDA
and other regulatory authorities often takes many years and can vary
substantially based upon the type, complexity, novelty and application of the
product. As with any investigational new drug or vaccine, additional government
regulations may be promulgated which could impose additional costly and time
consuming testing procedures necessary to obtain regulatory approval. There can
be no assurance that any products developed by the Company in collaboration with
others will be determined to be safe and efficacious in clinical trials or meet
other applicable regulatory standards to receive the necessary approvals for
manufacture and
19
<PAGE>
marketing. Even if such approvals are obtained, post-market evaluation of the
products could result in limitations of the approvals. Delays in obtaining U.S.
or foreign approvals could adversely affect the marketing of products developed
from the Company's technology and diminish any competitive advantage. Even if
FDA and/or foreign regulatory approvals are obtained, there can be no assurance
that such products will be accepted and prescribed by physicians, or will be
accepted by third party insurers or government health administration authorities
as a reimbursable expense. In addition, delays in regulatory approvals that may
be encountered by corporate collaborators or other licensees of the Company
could adversely affect the Company's ability to receive royalties under such
arrangements.
The Company has royalty obligations to SRI and UAB under a license agreement for
the rights to certain microencapsulation technology. Vaxcel will acquire these
rights and obligations through the Merger, but may not be able to renegotiate
the license agreement on terms and conditions which it believes will make the
sublicensing of the technology more attractive to corporate partners. In this
event, Vaxcel may be forced to abandon the development of the microencapsulation
technology.
Results of Operations
- ---------------------
Revenues totaled $2,050,000 in 1996, $762,000 in 1995, and $1,164,000 in 1994.
Revenues by major source in each of these years were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Collaborative revenue from ALK $ 750,000 $ 250,000 $ -
Collaborative revenue from Lilly - - 749,000
Other collaborative revenues 92,000 75,000 -
Research reagent sales - 77,000 241,000
Zymmune-related sales - 65,000 164,000
Government grant revenues 399,000 251,000 -
Contract revenues 809,000 44,000 -
----------------------------------------------
$ 2,050,000 $ 762,000 $ 1,164,000
==============================================
</TABLE>
Collaborative revenue from ALK is a result of a development and licensing
agreement entered into between ALK and the Company in October 1995. Other
collaborative revenues stem from research done on behalf of ALK as well as a few
other minor collaborations. The Lilly agreement was terminated by Lilly in
August 1994. Research reagent and Zymmune-related sales were from the Company's
diagnostic operations, which have subsequently been divested. Contract revenues
were from Cauldron process chemistry/pilot facility services provided to
pharmaceutical, biotechnology and chemical companies. These efforts commenced
in late 1995.
The Company's revenues have fluctuated in the past and are expected to continue
to fluctuate in the future. Zynaxis does not expect to generate any ALK
collaborative revenues in 1997. The Company expects to generate approximately
$200,000 in grant revenues in 1997 based upon existing grants. There is no
assurance additional grants will be received. Contract revenues are dependent
upon the Company's ability to continue to market its process chemistry/pilot
facility services. The Company is uncertain as to expected revenues and there
is no assurance that 1996 revenues are representative of future results.
Costs of sales in 1995 and 1994 related to the sale of both Zymmune and research
reagent products. With the divestiture of the Company's diagnostic technologies
in 1995, and the
20
<PAGE>
Company's focus on partnering its drug and vaccine technologies with other
companies, there were no cost of sales in 1996.
Research and development expenses totaled $3,642,000, $5,169,000, and $6,344,000
in 1996, 1995, and 1994, respectively. The 30% decrease between 1995 and 1996
resulted from the headcount reduction by nearly 40% in September 1996 as well as
the overall cost reduction measures adopted by the Company during 1996 due to
its dire financial condition. The 19% decrease between 1994 and 1995 was
primarily attributable to the divestiture of the diagnostic technologies, which
began in January 1995 with a 24% reduction in the Company's workforce.
Partially offsetting the favorable effect of these reductions were nonrecurring
costs of approximately $820,000 related to the funding of Secretech's operations
prior to the effective date of the Secretech merger in July 1995, and additional
depreciation expense of the Company's pilot plant which was operational for a
full twelve months in 1995.
Marketing, general and administrative costs were $2,019,000 in 1996, $2,239,000
in 1995, and $3,398,000 in 1994. Expenses in 1996 were higher for legal fees of
approximately $300,000, primarily due to extensive work regarding the Vaxcel
matters. This amount was more than offset by an overall reduction in general
and administrative expenses due to reduced operating activities and a reduction
of marketing, general and administrative expenses of approximately $150,000
related to the December 1996 settlement of certain outstanding liabilities at
less than 100% of amounts owed and the adjustment relating to the Company's
lease amendment. The 34% decrease between 1994 and 1995 was principally due to
1994's significant Zymmune-related marketing costs of $1,219,000, which ended
with the January 1995 decision to divest the diagnostic operations.
In connection with the acquisition of Secretech, in 1995 the Company recorded a
charge of $5,166,000 for acquired research and development. This charge
represented the purchase of in-process research and development equal to the
value of the 4,132,075 total shares of Common Stock issued to the Secretech
shareholders, the excess of liabilities assumed over assets acquired, as well as
fees and expenses to effect the transaction.
During 1995, in connection with the decision to divest its diagnostic
operations, the Company recorded a restructuring charge of $347,000 representing
severance payments, inventory buy-back payments, and certain other costs
associated with and directly attributable to the decision to terminate its
diagnostic operations.
During 1994, the Company recorded a provision of $1,466,000 for the impairment
in the value of the assets associated with the Company's diagnostic operations.
During 1996, the Company recorded a provision of $1,152,000 for the impairment
in the value of the assets associated with the Company's Cauldron operations.
The Company recognized interest income of $57,000, $81,000, and $367,000 in
1996, 1995, and 1994, respectively. The decreasing interest revenue was
attributed to declining investable assets.
The Company recognized interest expense of $116,000, $37,000, and $261,000 in
1996, 1995, and 1994, respectively. Interest expense in 1996 included a $60,000
charge deemed to be the value of 225,000 warrants to purchase Common Stock that
were issued during 1996. Also included in 1996 was approximately $36,000 of
interest expense accrued for the notes payable to shareholders and the note
payable to CytRx. The higher interest expense in 1994 was the result
21
<PAGE>
of the Company's $4,000,000 term loan obtained in December 1993, which was
substantially repaid in the fourth quarter of 1994 and fully paid off in the
second quarter of 1995.
Other income of $591,000 in 1996 was primarily comprised of (1) $238,000 from
the Company's subleasing of certain excess space at its Malvern facility, (2)
$46,400 of royalty income earned from Phanos for manufacturing and distributing
its research reagent products, (3) the option payment from Seloc of $100,000
which was forfeited by Seloc when Seloc terminated the proposed acquisition of
Cauldron, and (4) approximately $131,000 of gain recognized by the Company on
the sale of certain fixed assets during the fourth quarter of 1996. In 1995,
other income of $162,000 was primarily generated by the sublease agreements for
the excess space in the Company's Malvern, Pennsylvania facility.
In connection with the divestiture of its diagnostic technologies and assets,
the Company recognized a net gain of $1,617,000 in 1995. This represented the
cash received from both the Intracel Corporation ("Intracel") and Phanos
transactions, and the discounted value of the secured promissory note received
from Intracel, reduced by certain lease termination and other technology
transfer costs.
Basis of Accounting
- -------------------
The Zynaxis financial statements were prepared assuming the Company will
continue as a going concern. The Company's most significant assets are the
Cauldron assets, which are valued at $600,000, based upon the most recent non-
binding purchase proposal for these assets. All of the other assets are
principally monetary assets or are based on contractual arrangements. Zynaxis'
liabilities consist principally of trade payables and notes payable to its
shareholders and CytRx. The only other significant commitment is its facility
lease, which is expected to be assumed by the buyer of the Cauldron assets (see
Notes 6 and 13 to Notes to the Consolidated Financial Statements). The asset
and liability carrying amounts do not purport to represent realizable or final
settlement amounts.
The ability of the Company to operate as a going concern beyond December 31,
1996 will be determined by its ability to complete the Merger with Vaxcel. In
the absence of the consummation of the Merger, the management of Zynaxis does
not believe that sufficient cash could be generated to support its operations
during 1997. If the Company is unable to continue operations, the ability to
fund an orderly disposition of assets, pay off its then outstanding liabilities
and return any remaining cash to its shareholders will be limited by the amount
of working capital then on hand, if any.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under this
Item 8, beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's directors and executive officers as of March 14, 1997 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Martyn D. Greenacre 55 Chairman, President and Chief
Executive Officer
John F. Chappell (2) 60 Director
Lyle A. Hohnke, Ph.D. (1) 54 Director
Donald E. Morel Jr., Ph.D.
(2) 39 Director
Stephen K. Reidy (2) 46 Director
Dennis P. Schafer 49 Director
Michael A. Christie, Ph.D. 44 Vice President, Process
Development and Secretary
</TABLE>
- ------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
Mr. Greenacre has served as the Company's President and Chief Executive Officer
since March 1993 and as Chairman since April 1993. From 1989 to 1992, Mr.
Greenacre was Chairman Europe of SmithKline Beecham Pharmaceuticals in London,
where he was responsible for the management of all pharmaceutical subsidiaries
in Western Europe and for the execution of the merger of SmithKline Beecham
Corp. and Beecham Group p.l.c. pharmaceutical operations in Europe. From 1983 to
1989, Mr. Greenacre served as Vice President, Continental Europe, SmithKline &
French Pharmaceuticals. Mr. Greenacre is also a director of Cephalon, Inc.,
Creative BioMolecules, Inc., IBAH, Inc. and Genset s.a.
Mr. Chappell has served as a director of the Company since July 1995 and as the
President of Plexus Ventures, Inc. since December 1990. Plexus Ventures, Inc.
engages in venture capital investments in development-stage pharmaceutical
companies. From 1989 to 1990, Mr. Chappell was Chairman, Pharmaceuticals of
SmithKline Beecham, p.l.c. Mr. Chappell is a director of Neurex Corporation,
Ribi ImmunoChem Research and Telor Opthalmic Pharmaceuticals. Mr. Chappell also
served as a director of Secretech prior to the July 1995 merger with the
Company.
23
<PAGE>
Dr. Hohnke has served as a director of the Company since April 1996 and as a
member of Javelin Venture Partners, L.L.C., a general partner of Javelin
Ventures, L.P., a company engaged in venture capital investments, since 1994.
From January 1991 to September 1994, Dr. Hohnke was General Partner for Heart
Land Seed Capital Fund. Dr. Hohnke also serves as a director of Diamond Animal
Health, Inc., Southern BioSystems, Inc. and GuideStar Health Systems, Inc.
Dr. Morel has served as a director of the Company since July 1995 and as Vice
President, Research and Development of The West Company since November 1992. The
West Company is engaged in pharmaceutical packaging and the development of drug
delivery systems. From 1988 to 1992, Dr. Morel was Director, Research and
Development of Applied Research Inc., a company engaged in contract research in
the materials packaging area.
Mr. Reidy has served as a director of the Company since February 1995 and has
been affiliated with Euclid Partners Corporation, a company engaged in venture
capital investments in the information technology and healthcare fields, since
1987. Mr. Reidy is a general partner of Euclid Associates III, L.P. Mr. Reidy
also served as a director of Secretech prior to the July 1995 merger with the
Company.
Mr. Schafer has served as a director of the Company since July 1995 and was also
Vice President, Vaccine Development, of the Company from July 1995 to September
1995. Mr. Schafer served as a consultant to the Company from October 1995 until
September 1996. He served as President of Secretech, and was a member of its
board of directors, from 1989 to July 1995. From 1985 to 1989, Mr. Schafer was
Executive Vice President of Molecular Engineering Associates, Inc., a company
engaged in biotechnology and medical research.
Dr. Christie joined the Company in March 1992 as Vice President, Process
Development and was designated an executive officer in February 1993. In
November 1996, he was appointed Secretary of the Company. From 1981 through
1992, Dr. Christie served in various positions with SmithKline Beecham
Chemicals, last serving as the Director of Chemical Development.
Directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors or until a director's death,
resignation or removal. The executive officers are elected by the board of
directors and serve at the discretion of the board.
The board of directors met on 17 occasions in 1996, including several
teleconference meetings. Each director attended at least 75% of the meetings
held during the period for which he was a director during 1996 and the committee
or committees on which he served during 1996.
24
<PAGE>
The board of directors has standing Audit and Compensation and Stock Option
Committees. The board of directors has no nominating committee. The Audit
Committee meets with Zynaxis' independent accountants to review the scope of
auditing procedures and its accounting procedures and controls. The Audit
Committee also provides general oversight with respect to accounting principles
employed in Zynaxis' financial reporting. The Audit Committee met once during
1996. The Compensation and Stock Option Committee administers the terms and
provisions of the Zynaxis, Inc. Amended and Restated 1989 Stock Option Plan (the
"Option Plan"), including the determination, subject to the provisions of the
Option Plan, of the grantees eligible to receive options, the nature of options
granted, the number of options granted, and the exercise price, vesting
schedule, term and all other conditions and terms of options granted,
Additionally, the Compensation and Stock Option Committee reviews and makes
recommendations with respect to compensation of officers and key personnel,
including bonuses, and reviews other compensation matters generally. There were
no meetings of the Compensation and Stock Option Committee during 1996.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Zynaxis' executive officers and directors to file reports of ownership of
securities of Zynaxis and changes in ownership with the Securities and Exchange
Commission (the "Commission"). John F. Chappell, Lyle A. Hohnke and Stephen K.
Reidy, members of the board of directors, failed to file on a timely basis
three, one and four reports, respectively, with respect to securities of Zynaxis
acquired by their affiliates during 1995 and 1996. Plexus Ventures, Inc., an
affiliate of Mr. Chappell, acquired warrants to purchase Common Stock in May
1996 in connection with the issuance by Zynaxis of a demand note to the
affiliate. Additionally, Mr. Chappell's affiliate acquired Common Stock in
November 1996 as compensation under a consulting agreement between the affiliate
and Zynaxis. Mr. Hohnke failed to file an initial statement of beneficial
ownership upon his election to the board in April 1996 with respect to
securities of Zynaxis held by his affiliate, Javelin Capital Fund, L.P. Euclid
Partners III, L.P., an affiliate of Mr. Reidy, acquired warrants to purchase
Common Stock in December 1995 and May 1996 in connection with the issuance by
Zynaxis of demand notes to the affiliate. Additionally, Mr. Reidy's affiliate
acquired Common Stock and warrants to purchase Common Stock in February 1996 in
consideration for the surrender and cancellation of the demand note issued in
December 1995. Dennis P. Schafer, a member of the board of directors, failed to
file on a timely basis two reports with respect to securities of Zynaxis
acquired by him during 1995 and 1996. Mr. Schafer received shares of Common
Stock in April 1996 arising from his status as a beneficiary under a liquidating
trust that held Common Stock pursuant to the Secretech merger. Each of Mr.
Schafer, Mr. Reidy's affiliate and Mr. Chappell's affiliate received additional
shares of Common Stock as contingent merger consideration in December 1995
pursuant to the Secretech merger agreement.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table provides information concerning the annual and
long-term compensation of the Chief Executive Officer and the other most highly
compensated executive officers of the Company (the "Named Officers") for
services rendered to the Company and its subsidiaries in all capacities during
the fiscal years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Awards
------------
Annual Compensation (1) Shares
-------------------------
Underlying Other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------------------- ---- -------------- ----- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Martyn D. Greenacre 1996 $222,561 (2) -- -- --
President and Chief Executive Officer 1995 $219,280 -- 370,000 --
1994 $214,917 -- 25,000 --
Katharine A. Muirhead, Ph.D. 1996 $ 93,415 -- -- $30,494 (3)
Senior Vice President, New Business 1995 $128,928 -- -- --
& Technology Development 1994 $103,793 -- 15,000 --
Betsy M. Ohlsson-Wilhelm, Ph.D. 1996 $ 77,773 -- -- $13,230 (4)
Senior Vice President, Research & 1995 $101,673 -- -- --
Development 1994 $ 88,673 -- 7,000 --
Michael A. Christie, Ph.D. 1996 $117,828 (5) -- -- --
Vice President, Process Development 1995 $101,490 -- -- --
1994 $ 99,694 -- 10,000 --
</TABLE>
- ----------------------
(1) In fiscal 1996, none of the executive officers listed above received
perquisites or other personal benefits, securities or property which exceeded
the lesser of $50,000 or 10% of such executive officer's salary and bonus.
(2) Included in Mr. Greenacre's 1996 salary amount of $222,561 is $18,547 of
wages that have been earned in 1996 but deferred since October 1, 1996. In
efforts to conserve cash, Mr. Greenacre agreed to defer one-third of his salary,
beginning with the fourth quarter of 1996. The total deferred amount is
expected to be paid to Mr. Greenacre at the time of the closing of the Vaxcel
Merger.
(3) Dr. Muirhead was terminated in September 1996 in connection with the
Company's reduction in workforce. Upon her separation from the Company, she
agreed to defer receipt of her severance payment until the Company was in a more
favorable cash position, at which time she would receive severance of $29,042
plus accrued interest. In January 1997, Dr. Muirhead received $30,494 in
settlement of the severance plus interest owed to her.
(4) Dr. Ohlsson-Wilhelm was terminated in September 1996 in connection with the
Company's reduction in workforce. Upon her separation from the Company, she
agreed to defer receipt of her severance payment until the Company was in a more
favorable cash position, at which time she would receive severance of $12,600
plus accrued interest. In January 1997, Dr. Ohlsson-Wilhelm received $13,230 in
settlement of the severance plus interest owed to her.
26
<PAGE>
(5) Included in Dr. Christie's 1996 salary amount of $117,828 is $14,348 of
wages that have been earned in 1996 but deferred since May 1, 1996. In efforts
to conserve cash, Dr. Christie agreed to defer receipt of a salary increase that
he received in May 1996. The deferred amount accrues interest at a rate of 10%
and will be paid to him upon the sale of Cauldron.
During 1996, the Company did not issue any stock options under the Option Plan.
No stock appreciation rights have been granted by the Company; nor is the grant
of such rights currently provided for in the Option Plan.
The following table provides, as to the Named Officers, option exercises during
the fiscal year ended December 31, 1996 and the value of vested and unvested
options. Year-end values are based upon the closing market price of a share of
Common Stock on December 31, 1996 of $0.07.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
Shares December 31, 1996 at December 31, 1996
Acquired -------------------------- --------------------------
on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Martyn D. Greenacre -- -- 206,500 388,500 -- --
Katharine A. Muirhead, Ph.D. -- -- -- -- -- --
Betsy M. Ohlsson-Wilhelm, Ph.D. 857 $332 -- -- -- --
Michael A. Christie, Ph. D. -- -- 11,000 5,000 -- --
</TABLE>
The Company does not currently grant any long-term incentives, other than stock
options, to its executive officers or other employees.
Compensation of Directors
. Directors who are employees of the Company do not receive additional
compensation for service as directors. Directors who are not employees of the
Company receive reimbursement for travel expenses incurred in order to attend
board or committee meetings.
. Board members are differentiated between "independent" and "non-independent"
directors; independent directors are defined as those with less than a 1%
beneficial interest in the Company.
. There are no cash fees for directors except those defined as independent.
Independent directors receive $1,500 for each board meeting attended and $500
for each Audit Committee meeting attended. Independent directors serving on
the Compensation and Stock Option Committee will receive an annual fee of
$1,500.
. Newly appointed directors receive an "appointment grant" of 20,000 options
under the Option Plan.
27
<PAGE>
. Following each annual meeting at which a director is reelected by the
shareholders, each director so reelected will receive an annual grant of 5,000
options at an exercise price per share equal to the fair market value on the
date of grant.
Agreements with Certain Executive Officers
Mr. Greenacre and the Company entered into an Amendment of Employment Agreement
(the "Amendment") dated November 15, 1996. This Amendment applies to the May 5,
1995 Employment Agreement (the "Agreement") between Mr. Greenacre and the
Company, which provides for a two-year term commencing March 29, 1995 and ending
on March 29, 1997, with automatic annual renewals thereafter. The Agreement
provides Mr. Greenacre with an annual base salary of $214,000, plus such
additional amounts, if any, as may be approved by the Company's board of
directors. In accordance with the terms of the Agreement, Mr. Greenacre's
annual salary was set by the board of directors at $222,560 for 1996. The
Amendment, entered into in connection with the pending Vaxcel Merger, provides
for the following: (1) Mr. Greenacre shall remain as President and Chief
Executive Officer of the Company until the earlier of (i) the termination of his
Agreement or (ii) the date of the closing of the Vaxcel Merger; (2) beginning
October 1, 1996, a one-third salary deferral has been agreed to by Mr.
Greenacre; these deferred amounts shall be fully payable to him upon the closing
of the Merger; (3) upon his termination, Mr. Greenacre will be entitled to a
severance payment of $29,960; and (4) as determined by the achievement of
certain milestones pending the Merger, Mr. Greenacre may be entitled to up to
$55,000 of performance bonuses. Upon commencement of his employment in March
1993, Mr. Greenacre was granted an option under the Option Plan to acquire
200,000 shares of Common Stock at an exercise price of $5.125 per share, which
was the closing price at the grant date, exercisable during a seven-year term at
the rate of 20% of the shares subject to the option on each of the first five
anniversaries of the date of grant. As a condition of Mr. Greenacre's
employment contract signed in May 1995, he was granted an additional option to
purchase 370,000 shares of Common Stock at an exercise price of $1.3125 per
share, which was the closing price at the grant date, exercisable during a
seven-year term at the rate of 20% of the shares subject to the option on each
of the first five anniversaries of the date of grant. Mr. Greenacre has agreed
that he will not, directly or indirectly, engage in any business activities that
are competitive with the Company for at least two years after the termination of
his employment with the Company.
In November 1996, in anticipation of the sale of Cauldron and the consummation
of the Merger, the Company entered into an agreement with Dr. Christie, Vice
President of Process Development. The agreement provides that Dr. Christie will
receive a bonus of $25,000 upon the sale of Cauldron, assuming that (1) such a
sale is executed before the consummation of the Vaxcel Merger and (2) Dr.
Christie is still employed by Zynaxis at that time. If the sale of Cauldron
occurs after the closing of the Merger, Dr. Christie will receive $10,000 if he
is still employed by Zynaxis at that time. Additionally, upon the sale of
Cauldron, Dr. Christie will be paid deferred salary with interest from May 1996.
In April 1995, the Company and Secretech entered into an employment agreement
(the "Schafer Agreement") with Mr. Dennis Schafer, who became a director of the
Company upon the Secretech merger in 1995. Under the terms of the Schafer
Agreement, Mr. Schafer served as President of Secretech through the effective
date of the merger, and as an executive officer of the Company serving in the
capacity of Vice President - Vaccine Development from the merger in July 1995
through the termination of the Schafer Agreement on September 30, 1995. The
Schafer Agreement provided for a salary at the annual rate of $135,000 during
the employment term plus an incentive bonus of $15,000 on September 30, 1995, as
well as an additional
28
<PAGE>
incentive bonus of $15,000 based upon his achievement of certain management
objectives by that date. Total compensation paid to Mr. Schafer in 1995 pursuant
to the terms of the Schafer Agreement was $22,500. Additionally, under the terms
of the Schafer Agreement, concurrent with the effectiveness of the merger with
Secretech, Mr. Schafer was granted an option to purchase 50,000 shares of Common
Stock vesting at a rate of 50% on the date of the agreement and 50% on September
30, 1995. As described in Item 13, "Certain Relationships and Related
Transactions," concurrent with the execution of the Schafer Agreement, Mr.
Schafer entered into a consulting agreement (the "Consulting Agreement") with
the Company which became effective on September 30, 1995, the termination date
of the employment agreement, and remained in effect until September 30, 1996.
Mr. Schafer had agreed not to compete during the employment term and for a
period of one year after he last performed services under either the Schafer
Agreement or the Consulting Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding beneficial
ownership with respect to the shares of Common Stock of the Company (the "Common
Shares") and shares of Series A Convertible Preferred Stock of the Company (the
"Preferred Shares") as of March 1, 1997 by (1) each director of the Company, (2)
each Named Officer of the Company and (3) all directors and executive officers
of the Company as a group. This information has been provided by directors and
officers at the request of the Company.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Beneficial Owner Beneficially owned(1) Class/Voting Shares (2)
- ------------------------------ --------------------- ------------------------
John F. Chappell
- ------------------------------
<S> <C> <C>
Common Shares (4) 565,755 5.3%
Preferred Shares (5) 25,000 1.8%
Combined Voting 615,755 4.6%
Shares (3)
Michael A. Christie, Ph.D.
- ------------------------------
Common Shares (6) 19,828 *
Preferred Shares - -
Combined Voting 19,828 *
Shares (3)
Martyn D. Greenacre
- ------------------------------
Common Shares (7) 260,095 2.4%
Preferred Shares - -
Combined Voting 260,095 1.9%
Shares (3)
Lyle A. Hohnke, Ph.D
- ------------------------------
Common Shares (8) 500,000 4.6%
Preferred Shares (9) 250,000 17.7%
Combined Voting 1,000,000 7.3%
Shares (3)
Donald E. Morel, Ph.D.
- ------------------------------
Common Shares (10) 255,000 2.4%
Preferred Shares (11) 125,000 8.8%
Combined Voting 505,000 3.8%
Shares (3)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage of
Beneficial Owner Beneficially owned(1) Class/Voting Shares (2)
- ------------------------------ --------------------- -----------------------
Katharine A. Muirhead, Ph.D.
- ------------------------------
<S> <C> <C>
Common Shares (12) 34,560 *
Preferred Shares - -
Combined Voting 34,560 *
Shares (3)
Betsy Ohlsson-Wilhelm, Ph.D.
- ------------------------------
Common Shares(13) 857 *
Preferred Shares - -
Combined Voting 857 *
Shares (3)
Stephen K. Reidy
- ------------------------------
Common Shares (14) 2,263,192 20.3%
Preferred Shares (15) 260,000 18.4%
Combined Voting 2,783,192 19.9%
Shares (3)
Dennis P. Schafer
- ------------------------------
Common Shares (16) 189,074 1.8%
Preferred Shares - -
Combined Voting 189,074 1.4%
Shares (3)
All directors and executive
officers of registrant as a
group (9 persons)
Common Shares 4,088,361 32.7%
Preferred Shares 660,000 46.7%
Combined Voting 5,408,361 35.3%
Shares (3)
</TABLE>
- ------------------------------
* Indicates less than 1% of class.
(1) Nature of ownership consists of sole voting and investment power unless
otherwise indicated. The number of Common Shares indicated includes
shares issuable upon the exercise of outstanding stock options and
warrants to purchase Common Shares and upon the conversion of convertible
demand notes that are presently exercisable/convertible or
exercisable/convertible within 60 days after March 1, 1997. For the
determination of combined voting shares, see footnote (3).
(2) The percentage is based on (a) as to the Common Shares, the aggregate
number of Common Shares outstanding as of March 1, 1997 and all Common
Shares issuable upon the exercise of outstanding stock options and
warrants to purchase Common Shares and upon the conversion of convertible
demand notes that are presently exercisable/convertible or
exercisable/convertible within 60 days after March 1, 1997, (b) as to the
Preferred Shares, the aggregate number of Preferred Shares outstanding as
of March 1, 1997 and (c) as to the combined voting shares, the aggregate
number of Common Shares described in (a) plus the aggregate number of
Common Shares into which the aggregate number of Preferred Shares
described in (b) are convertible. For the determination of combined
voting shares, see footnote (3).
(3) Combined voting shares represent one vote per Common Share and two votes
per Preferred Share (the number of Common Shares into which a Preferred
Share is convertible).
30
<PAGE>
(4) Includes 301,155 Common Shares held by and 150,000 Common Shares
issuable to Plexus Ventures, Inc. ("Plexus") upon the exercise of
warrants presently outstanding. Also includes an estimated 104,600
Common Shares issuable to Plexus upon the conversion of a convertible
demand note presently outstanding. Mr. Chappell is President and the
sole shareholder of Plexus and is deemed to have sole voting and
investment power with respect to these shares. Also includes 5,000
Common Shares and 5,000 Common Shares issuable upon the exercise of
options owned directly by Mr. Chappell.
(5) Represents Preferred Shares held by Plexus. See footnote (4) as to Mr.
Chappell's beneficial ownership of these shares.
(6) Includes 11,000 Common Shares issuable upon the exercise of options and
8,828 Common Shares held for the benefit of Dr. Christie in the
Company's 401(k) Savings Plan.
(7) Includes 246,500 Common Shares issuable upon the exercise of options
and 13,595 Common Shares held for the benefit of Mr. Greenacre in the
Company's 401(k) Savings Plan.
(8) Represents 500,000 Common Shares issuable to Javelin Capital Fund, L.P.
("Javelin") upon the exercise of warrants presently outstanding. Dr.
Hohnke is a member of Javelin Venture Partners, L.L.C., a general
partner of Javelin and may be deemed to share voting and investment
power with respect to such shares. Dr. Hohnke disclaims beneficial
ownership of such shares.
(9) Represents Preferred Shares held by Javelin. See footnote (8) as to Dr.
Hohnke's beneficial ownership of these shares.
(10) Includes 250,000 Common Shares issuable to The West Company ("West")
upon the exercise of warrants presently outstanding. Also includes
5,000 Common Shares issuable upon the exercise of options (the "Option
Shares"). Dr. Morel is a vice president of West and may be deemed to
share voting and investment power with respect to such shares. Dr.
Morel disclaims beneficial ownership of such shares, except with
respect to the Option Shares.
(11) Represents Preferred Shares held by West. See footnote (10) as to Dr.
Morel's beneficial ownership of these shares.
(12) Dr. Muirhead was terminated in September 1996. Represents 34,560
Common Shares held by Dr. Muirhead.
(13) Dr. Ohlsson-Wilhelm was terminated in September 1996. Represents 857
Common Shares held by Dr. Ohlsson-Wilhelm.
(14) Includes 1,467,417 Common Shares held by and 680,775 Common Shares
issuable to Euclid Partners III, L.P. ("Euclid") upon the exercise of
warrants presently outstanding. Also includes an estimated 105,000
Common Shares issuable to Euclid upon the conversion of a convertible
demand note presently outstanding. Also includes 10,000 Common Shares
issuable upon the exercise of options held by Euclid. Mr. Reidy is a
general partner of Euclid Associates III, L.P., the general partner of
Euclid, and may be deemed to share voting and
31
<PAGE>
investment power with respect to such shares. Mr. Reidy disclaims
beneficial ownership of such shares.
(15) Represents Preferred Shares held by Euclid. See footnote (14) as to
Mr. Reidy's beneficial ownership of these shares.
(16) Includes 50,000 Common Shares issuable upon the exercise of options.
32
<PAGE>
Principal Shareholders
The following table sets forth certain information as of March 1, 1997 (or as of
such other date as may be noted below) with respect to Common Shares and
Preferred Shares beneficially owned by each person, entity or group believed by
the Company to own more than 5% of the Common Shares or Preferred Shares of the
Company.
<TABLE>
<CAPTION>
Common Shares Preferred Shares Combined Voting Shares
--------------------------------------------------------------------------------------------------------
Number of Shares Number of Shares Number of
Beneficially Owned Percentage of Beneficially Percentage of Voting Percentage of
(1) Class (2) Owned (1) Class (2) Shares (3) Voting Shares
---------------------- --------------- ---------------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Beneficial Owner
- ---------------------------
Euclid Partners III, L.P. 2,263,192(4) 20.3% 260,000 18.4% 2,783,192 19.9%
50 Rockefeller Plaza
Suite 1022
New York, NY 10020
SmithKline Beecham Corp. 1,197,013(5) 10.7% 257,500(6) 18.2% 1,712,013 12.2%
One Franklin Plaza
Philadelphia, PA 19101
Sentron Medical, Inc. 1,264,465(7) 11.9% 135,000 9.6% 1,534,465 11.4%
4445 Lake Forest Drive
Suite 600
Cincinnati, OH 45242
Javelin Capital Fund, L.P. 500,000(8) 4.6% 250,000 17.7% 1,000,000 7.3%
1075 13th Street, South
Birmingham, AL 35294
Alphi Fund L.P. 367,200(9) 3.4% 150,000 10.6% 667,200 4.9%
155 Pfingsten Road
Suite 360
Deerfield, IL 60015
MassMutual 650,000(10) 6.2% - - 650,000 4.9%
Life Insurance Company
1295 State Street
Springfield, MA 01111
Plexus Ventures, Inc. 555,755(11) 5.2% 25,000 1.8% 605,755 4.5%
1787 Sentry Parkway West
Building 18, Suite 301
Blue Bell, PA 19422
The West Company 250,000(12) 2.4% 125,000 8.8% 500,000 3.7%
101 Gordon Drive
Lionville, PA 19341
</TABLE>
33
<PAGE>
- --------------------
(1) Except as indicated in subsequent footnotes to this table, the Company
understands that the entities or groups named in this table have sole
voting and investment power with respect to all Common Shares and Preferred
Shares indicated. For the determination of combined voting shares, see
footnote (3).
(2) The percentage for each entity or group is based on (a) as to the
Common Shares, the aggregate number of Common Shares outstanding as of
March 1, 1997 and all Common Shares issuable upon the exercise of
outstanding stock options and warrants to purchase Common Shares and upon
the conversion of outstanding convertible demand notes that are presently
exercisable/convertible or exercisable/convertible within 60 days after
March 1, 1997, (b) as to the Preferred Shares, the aggregate number of
Preferred Shares outstanding as of March 1, 1997, and (c) as to the
combined voting shares, the aggregate number of Common Shares described in
(a) plus the aggregate number of Common Shares into which the aggregate
number of Preferred Shares described in (b) are convertible. For the
determination of combined voting shares, see footnote (3).
(3) Combined voting shares represent one vote per Common Share and two
votes per Preferred Share (the number of Common Shares into which a
Preferred Share is convertible).
(4) Includes 1,467,417 Common Shares held and 680,775 Common Shares
issuable upon the exercise of warrants presently outstanding. Also
includes an estimated 105,000 Common Shares issuable upon the conversion of
a convertible demand note presently outstanding and 10,000 Common Shares
issuable upon the exercise of options.
(5) Includes 210,966 Common Shares that are owned of record by S.R. One,
Limited, a wholly-owned subsidiary of SmithKline Beecham Corporation ("S.R.
One"), and 540,000 Common Shares issuable to S.R. One upon the exercise of
warrants presently outstanding. Also includes an estimated 260,000 Common
Shares issuable upon the conversion of a convertible demand note held by
S.R. One that is presently outstanding.
(6) Represents 257,500 Preferred Shares that are owned of record by S. R.
One.
(7) Includes 270,000 Common Shares issuable upon the exercise of warrants
presently outstanding.
(8) Represents 500,000 Common Shares issuable upon the exercise of
warrants presently outstanding.
(9) Includes 300,000 Common Shares issuable upon the exercise of warrants
presently outstanding.
(10) Includes 150,000 Common Shares issuable upon the exercise of warrants
presently outstanding.
(11) Includes 150,000 Common Shares issuable upon the exercise of warrants
presently outstanding. Also includes an estimated 104,600 Common Shares
issuable upon the conversion of a convertible demand note presently
outstanding.
(12) Represents 250,000 Common Shares issuable upon the exercise of
warrants presently outstanding.
34
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 28, 1995, the Company issued a $150,000 Demand Promissory Note (the
"Note") to one of its principal shareholders, Euclid Partners III. L.P.
("Euclid"). Stephen K. Reidy, a member of the board of directors, is a general
partner of Euclid Associates III, L.P., the general partner of Euclid. This
Note was extinguished in February 1996 as the Note plus accrued interest,
totaling $152,582, was surrendered to the Company for cancellation as
consideration for the purchase of 152,582 shares of Common Stock. Additionally,
the Company issued warrants to Euclid to purchase 45,775 shares of Common Stock
at an exercise price of $1.00 per share.
During 1996, business development services were rendered to the Company by a
consulting firm, Plexus Ventures, Inc. ("Plexus"), of which a member of the
board of directors, John F. Chappell, is President and sole shareholder. Terms
of the consulting agreement provided that a portion of the fees be paid in
Company stock. The Company issued 34,548 shares of Common Stock to Plexus and
two employees of Plexus in November 1996 in final payment for services rendered
by Plexus and the employees under the agreement. The number of shares issued
was based upon the fair market value of the services provided.
Consulting services were provided to the Company by Dennis P. Schafer, a member
of the board of directors. This consulting arrangement commenced on September
30, 1995 and ended September 30, 1996. Under the terms of the agreement, Mr.
Schafer was entitled to compensation at the annual rate of $135,000 through
March 31, 1996 and at an annual rate of $150,000 from April through September
1996. During 1996, the Company recognized expense of $108,750 related to this
agreement.
On May 3, 1996, the Company issued Demand Promissory Notes (the "May 1996
Notes") in the amount of $100,000 each to Euclid and Plexus. These May 1996
Notes bear interest at the annual rate of 11 1/4% and are due on the earlier of
(i) the receipt by the Company of proceeds from the sale of Cauldron aggregating
at least $1,000,000 or (ii) upon demand if the closing on the sale of Cauldron
does not occur by September 30, 1996. The May 1996 Notes are convertible at the
option of the holder into shares of the Company's Common Stock at any time prior
to repayment. In connection with the issuance of the May 1996 Notes, the
Company also issued warrants with five-year terms to each of Euclid and Plexus
to purchase 100,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share.
On June 7, 1996, the Company issued a $250,000 Demand Promissory Note to another
of its principal shareholders, S.R. One, Limited. This note was canceled and
reissued on July 17, 1996 due to a revision of the repayment terms (the "July
1996 Note"). This July 1996 Note bears interest at the annual rate of 11 1/4%
and is due on the earlier of (i) the receipt by the Company of proceeds from the
sale of Cauldron aggregating at least $1,000,000 or (ii) upon demand if the
closing on the sale of Cauldron does not occur by October 15, 1996. This July
1996 Note is convertible at the option of the holder into shares of the
Company's Common Stock at any time prior to repayment. In connection with the
issuance, the Company also issued a warrant with a five-year term to purchase
25,000 shares of the Company's Common Stock at an exercise price of $1.00 per
share.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
- --------------------
See Index to Financial Statements at page F-1
Financial Statement Schedules
- -----------------------------
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the financial statements or notes
thereto.
Reports on Form 8-K
- -------------------
The Company filed one Current Report on Form 8-K during the quarter ended
December 31, 1996: Form 8-K, dated and filed December 6, 1996, regarding the
Company's potential merger with Vaxcel.
Exhibits
- --------
The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated, exhibits which were previously filed are incorporated
by reference. For exhibits incorporated by reference, the location of the
exhibit in the previous filing is indicated in the reference column.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
exhibit description filing
ref. of exhibit reference
- --------------------------------------------------------------------------------
<C> <S> <C>
2.1 Agreement and Plan of Merger and Form 8-K filed
Contribution, dated December 6, 1996, December 6, 1996
among the Registrant, CytRx Corporation (exhibit 2.1)
("CytRx"), Vaxcel, Inc. ("Vaxcel") and
Vaxcel Merger Subsidiary, Inc. ("Vaxcel
Merger Sub")
- --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Form 10-Q for the period
Incorporation of the Registrant. ended September 30, 1995
(exhibit 3.1)
- --------------------------------------------------------------------------------
3.2 Amended and Restated Bylaws of the Form S-4 (File No. 33-
Registrant. 92090) (exhibit 3.2)
- --------------------------------------------------------------------------------
3.3 Statement with Respect to Shares Form S-4 (File No. 33-
(designation of Series A Convertible 92090) (exhibit 3.3)
Preferred Stock).
- --------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
exhibit description filing
ref. of exhibit reference
- --------------------------------------------------------------------------------
<C> <S> <C>
10.1[X] Employment Agreement, dated May 5, 1995, Form S-4 (File No. 33-
between the Registrant and Martyn 92090) (exhibit 10.1)
D. Greenacre.
- --------------------------------------------------------------------------------
10.2[X] Registrant's Amended and Restated 1989 Appendix E to the Joint
Stock Option Plan Proxy Statement/Prospectus
filed as part of the
Registration Statement on
Form S-4 (File No. 33-
92090)
- --------------------------------------------------------------------------------
10.3 Warrant Agreement to purchase Common Form S-1 (File No. 33-
Stock, dated December 1, 1988, between 44262) (exhibit 10.4)
the Registrant and Comdisco, Inc., as
amended.
- --------------------------------------------------------------------------------
10.4 Amendment to Warrant Agreement, dated Form S-1 (File No. 33-
January 17, 1992, between the Registrant 44262) (exhibit 10.14)
and Comdisco, Inc.
- --------------------------------------------------------------------------------
10.5 Warrant Agreement to purchase Common Form S-1 (File No. 33-
Stock, dated November 9, 1990, 44262) (exhibit 10.5)
between the Registrant and Comdisco, Inc.
- --------------------------------------------------------------------------------
10.6 Amendment to Warrant Agreement, dated Form S-1 (File No. 33-
January 17, 1992, between the Registrant 44262) (exhibit 10.15)
and Comdisco, Inc.
- --------------------------------------------------------------------------------
10.7 Second Amended and Restated Shareholders' Form S-1 (File No. 33-
Agreement, dated November 22, 1991, among 44262) (exhibit 10.6)
the Registrant and certain holders of
Common Stock, Preferred Stock and Junior
Convertible Preferred Stock.
- --------------------------------------------------------------------------------
10.8 Amendment No. 1, dated April 20, 1992, Form 10-Q for the period
to Second Amended and Restated ended June 30, 1992
Shareholders' Agreement. (exhibit 10.3)
- --------------------------------------------------------------------------------
10.9 Master Lease, dated December 1, 1988, Form S-1 (File No. 33-
between the Registrant and Comdisco, Inc. 44262) (exhibit 10.10)
- --------------------------------------------------------------------------------
10.10 Agreement of Lease, dated August 30, 1988, Form S-1 (File No. 33-
between Zynaxis Cell Science, Inc. and 44262) (exhibit 10.11)
Rouse & Associates - 335 Phoenixville Pike
Limited Partnership.
- --------------------------------------------------------------------------------
10.11 Improvements Agreement, dated August 30, Form S-1 (File No. 33-
1991, among Zynaxis Cell Science, Inc., 44262) (exhibit 10.12)
Rouse & Associates - Chester County and
Rouse & Associates - 335 Phoenixville Pike
Limited Partnership
- --------------------------------------------------------------------------------
10.12 First Amendment to Agreement of Lease, Form 10-K for the period
dated December 1, 1992, between PMRA III ended December 31, 1992
(successor to Rouse & Associates) and (exhibit 10.16)
Zynaxis Cell Science, Inc.
- --------------------------------------------------------------------------------
10.13 Design-Build Agreement, dated October 30, Form 10-K for the period
1992, between Zynaxis Cell Science, Inc. ended December 31, 1992
and IPS - Integrated Project Services. (exhibit 10.17)
- --------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
exhibit description filing
ref. of exhibit reference
- --------------------------------------------------------------------------------
<C> <S> <C>
10.14 Preferred Stock and Warrant Purchase Form 10-K /A-1 for the
Agreement, dated March 29, 1995, among period ended December 31,
the Registrant and certain purchasers 1994 (Exhibit 10.26)
of units comprised of Preferred Stock
and Warrants of the Registrant
- --------------------------------------------------------------------------------
10.15 Form of Warrant issuable to purchasers Form 10-K /A-1 for the
of units pursuant to the Preferred period ended December 31,
Stock and Warrant Purchase Agreement. 1994 (exhibit 10.28)
- --------------------------------------------------------------------------------
10.16 Amendment, dated April 6, 1995, to Form 10-K /A-1 for the
Preferred Stock and Warrant Purchase period ended December 31,
Agreement, dated March 29, 1995. 1994 (exhibit 10.29)
- --------------------------------------------------------------------------------
10.17 Employment Agreement, dated April 1, 1995, Form S-4 (File No. 33-
[X] among Secretech, Inc., the Registrant 92090) (exhibit 10.31)
and Dennis P. Schafer.
- --------------------------------------------------------------------------------
10.18 Second Amendment, dated June 15, 1995, to Form S-4 (File No. 33-
Preferred Stock and Warrant Purchase 92090) (exhibit 10.36)
Agreement, dated March 29, 1995.
- --------------------------------------------------------------------------------
10.19 Asset Purchase Agreement, dated June 21, Form S-4 (File No. 33-
1995, between the Registrant and 92090) (exhibit 10.38)
Phanos Technologies, Inc.
- --------------------------------------------------------------------------------
10.20 Amendment, dated May 15, 1995, to Form S-4 (File No. 33-
[X] Employment Agreement, dated April 1, 92090) (exhibit 10.40)
1995, among Secretech, Inc., the
Registrant and Dennis P. Schafer
- --------------------------------------------------------------------------------
10.21 Asset Purchase Agreement, dated July 18, Form 8-K filed July 25,
1995, between the Registrant and Intracel 1995 (exhibit 10.1)
Corporation
- --------------------------------------------------------------------------------
10.22 Release Agreement, dated October 24, 1995, Form 10-Q for the period
between the Registrant and Intracel ended September 30, 1995
Corporation (exhibit 10.2)
- --------------------------------------------------------------------------------
10.23 Agreement for the Assignment of Royalties, Form 10-K /A-1 for the
dated December 1, 1995, between the period ended December 31,
Registrant and The UAB Research Foundation 1995 (Exhibit 10.43)
- --------------------------------------------------------------------------------
10.24 Common Stock and Warrant Purchase Form 10-K /A-1 for the
Agreement, dated December 1, 1995, between period ended December 31,
the Registrant and The UAB Research 1995 (Exhibit 10.44)
Foundation
- --------------------------------------------------------------------------------
10.25 Warrant, dated December 1, 1995, issued Form 10-K /A-1 for the
by the Registrant to The UAB Research period ended December 31,
Foundation. 1995 (Exhibit 10.45)
- --------------------------------------------------------------------------------
10.26 Promissory Note, dated December 28, 1995, Form 10-K /A-1 for the
issued by the Registrant to Euclid period ended December 31,
Partners III, L.P. 1995 (Exhibit 10.46)
- ------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
exhibit description filing
ref. of exhibit reference
- --------------------------------------------------------------------------------
<C> <S> <C>
10.27 Warrant, dated December 28, 1995, issued Form 10-K /A-1 for the
by the Registrant to Euclid Partners III, Period ended December 31,
L.P. 1995 (Exhibit 10.47)
- --------------------------------------------------------------------------------
10.28 Common Stock and Warrant Purchase Form 10-K /A-1 for the
Agreement, dated February 28, 1996, period ended December 31,
between the Registrant and Connecticut 1995 (Exhibit 10.52)
Mutual Life Insurance Company
- --------------------------------------------------------------------------------
10.29 Warrant, dated February 28,1996, issued by Form 10-K /A-1 for the
the Registrant to Connecticut Mutual Life period ended December 31,
Insurance Company 1995 (Exhibit 10.53)
- --------------------------------------------------------------------------------
10.30 Common Stock and Warrant Purchase Form 10-K /A-1 for the
Agreement, dated February 28, 1996, period ended December 31,
between the Registrant and Euclid 1995 (Exhibit 10.54)
Partners III, L.P.
- --------------------------------------------------------------------------------
10.31 Warrant, dated February 28,1996, issued by Form 10-K /A-1 for the
the Registrant to Euclid Partners, III, period ended December 31,
L.P. 1995 (Exhibit 10.55)
- --------------------------------------------------------------------------------
10.32 Consultant Agreement, dated June 1, 1995 Form 10-K /A-1 for the
between the Registrant Ventures, Inc. period ended December 31,
1995 (Exhibit 10.56)
- --------------------------------------------------------------------------------
10.33 Promissory Note dated May 3, 1996 between Form 10-Q for the period
the Registrant and Euclid Partners III, ended June 30, 1996
L.P. (exhibit 10.1)
- --------------------------------------------------------------------------------
10.34 Warrant dated May 3, 1996 issued by the Form 10-Q for the period
Registrant to Euclid Partners III, L.P. ended June 30, 1996
(exhibit 10.2)
- --------------------------------------------------------------------------------
10.35 Registration Rights Agreement dated May 3, Form 10-Q for the period
1996 between the Registrant and Euclid ended June 30, 1996
Partners III, L.P. (exhibit 10.3)
- --------------------------------------------------------------------------------
10.36 Promissory Note dated May 3, 1996 between Form 10-Q for the period
the Registrant and Plexus Ventures, Inc. ended June 30, 1996
(exhibit 10.4)
- --------------------------------------------------------------------------------
10.37 Warrant dated May 3, 1996 issued by the Form 10-Q for the period
Registrant to Plexus Ventures, Inc. ended June 30, 1996
(exhibit 10.5)
- --------------------------------------------------------------------------------
10.38 Registration Rights Agreement dated Form 10-Q for the period
May 3, 1996 between the Registrant and ended June 30, 1996
Plexus Ventures, Inc. (exhibit 10.6)
- --------------------------------------------------------------------------------
10.39 Promissory Note dated July 17, 1996 Form 10-Q for the period
between the Registrant and S.R. One, Ltd. ended June 30, 1996
(exhibit 10.7)
- --------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
exhibit description filing
ref. of exhibit reference
- --------------------------------------------------------------------------------
<C> <S> <C>
10.40 Warrant dated May 3, 1996 issued by the Form 10-Q for the period
Registrant to S.R. One, Ltd. ended June 30, 1996
(exhibit 10.8)
- --------------------------------------------------------------------------------
10.41 Marketing Rights Agreement dated July 24, Form 10-Q for the period
1996 between the Registrant and ended June 30, 1996
Phanos Technologies, Inc. (exhibit 10.9)
- --------------------------------------------------------------------------------
10.42 Registration Rights Agreement dated Form 10-Q for the period
June 7, 1996 between the Registrant and ended September 30, 1996
S.R. One, Ltd. (exhibit 10.1)
- --------------------------------------------------------------------------------
10.43 Amended and Restated Warrant dated June 7, Form 10-Q for the period
1996 issued by the Registrant to S.R. ended June 30, 1996
One, Ltd. (exhibit 10.2)
- --------------------------------------------------------------------------------
10.44 Amended and Restated Warrant dated May 3, Form 10-Q for the period
1996 issued by the Registrant to Plexus ended June 30, 1996
Ventures, Inc. (exhibit 10.3)
- --------------------------------------------------------------------------------
10.45 Exclusive License Agreement with Purchase Form 10-Q for the period
Option dated September 23, 1996 between ended June 30, 1996
the Registrant and Phanos Technologies, (exhibit 10.4)
Inc.
- --------------------------------------------------------------------------------
10.46 Amendment No. 1 dated October 17, 1996 Form 10-Q for the period
to the Exclusive License Agreement with ended June 30, 1996
Purchase 1996 between the Registrant (exhibit 10.5)
and Phanos Technologies, Inc.
- --------------------------------------------------------------------------------
10.47 Second Amendment to Agreement of Lease filed herewith
between PMRA III and Registrant, dated
November 21, 1996
- --------------------------------------------------------------------------------
10.48 Sublease Cancellation Agreement between filed herewith
Registrant and Adolor Corporation, dated
November 20, 1996
- --------------------------------------------------------------------------------
10.49 Amendment of Employment Agreement between filed herewith
[X] Registrant and Martyn D. Greenacre, dated
November 15, 1996
- --------------------------------------------------------------------------------
10.50 Senior Secured Note of Registrant issued filed herewith
to CytRx, dated December 6, 1996
- --------------------------------------------------------------------------------
10.51 Secured Loan Agreement between Registrant filed herewith
and CytRx, dated December 6, 1996
- --------------------------------------------------------------------------------
10.52 Guaranty between Zynaxis Vaccine filed herewith
Technologies, Inc. and CytRx, dated
December 6, 1996
- --------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
exhibit description filing
ref. of exhibit reference
- --------------------------------------------------------------------------------
<C> <S> <C>
10.53 Preferred Stock and Warrant Agreement filed herewith
between Registrant, CytRx, Vaxcel, and
holders of Series A Convertible
Preferred Stock of the Registrant, dated
December 6, 1996
- --------------------------------------------------------------------------------
10.54 Collateral Assignment of License Agreement filed herewith
between Zynaxis Vaccine Technologies, Inc.
and CytRx, dated December 6, 1996
- --------------------------------------------------------------------------------
10.55 Liquidation Agreement between Registrant filed herewith
and CytRx, dated December 6, 1996
- --------------------------------------------------------------------------------
10.56 Pledge Agreement between Registrant and filed herewith
CytRx, dated December 6, 1996
- --------------------------------------------------------------------------------
10.57 Note Exchange Agreement between Registrant, filed herewith
CytRx, Vaxcel, Euclid Partners III, L.P.
and S.R. One, Ltd. dated December 6, 1996
- --------------------------------------------------------------------------------
10.58 Security Agreement between Registrant and filed herewith
CytRx, dated December 6, 1996
- --------------------------------------------------------------------------------
10.59 Security Agreement between Zynaxis Vaccine filed herewith
Technologies, Inc. and CytRx, dated
December 6, 1996
- --------------------------------------------------------------------------------
10.60 Technology Development Agreement between filed herewith
Zynaxis Vaccine Technologies, Inc. and
Vaxcel, dated December 6, 1996
- --------------------------------------------------------------------------------
21.1 Subsidiaries of the Registrant filed herewith
- --------------------------------------------------------------------------------
23.1 Consent of Arthur Andersen LLP filed herewith
- --------------------------------------------------------------------------------
24.1 Powers of Attorney Included on signature
page to this Annual
Report on Form 10-K
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule filed herewith
- --------------------------------------------------------------------------------
</TABLE>
[X] Compensation plans and arrangements for executives and others.
41
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants...................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995...............F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.....................................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1995 and 1994..................................F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.....................................................F-6
Notes to Consolidated Financial Statements.................................F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zynaxis, Inc.:
We have audited the accompanying consolidated balance sheets of Zynaxis,
Inc. (a Pennsylvania corporation) and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zynaxis, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred significant losses from operations since its inception, has a
shareholders' deficit and requires substantial additional capital to fund its
operations. In addition, the Company has a significant operating lease
commitment. As discussed in Note 1, on December 6, 1996 the Company entered into
an agreement and plan of merger and contribution with CytRx Corporation, Vaxcel,
Inc. (a wholly-owned subsidiary of CytRx), and Vaxcel Merger Subsidiary, Inc. (a
wholly-owned subsidiary of Vaxcel). The merger is subject to approval of the
shareholders of each company except CytRx. If the merger is not consummated,
management will be required to consider other alternatives, including the
liquidation of the Company's remaining assets and the payment of its liabilities
and commitments. Management's plans in regard to these matters are described in
Notes 1, 6 and 13. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
January 21, 1997
F-2
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)....................... $ 124,348 $ 411,706
Short-term securities (Note 8)........................... -- 97,437
Collaborative, contract and grant revenue receivable
(Note 17).............................................. 182,047 111,263
Restricted cash (Note 12)................................ -- 23,735
Other current assets..................................... 107,254 68,991
----------- -----------
Total current assets................................ 413,649 713,132
----------- -----------
Property and equipment:
Equipment................................................ 1,610,520 1,935,739
Leasehold improvements................................... 35,570 249,349
----------- -----------
1,646,090 2,185,088
Less--Accumulated depreciation and amortization.......... (1,605,502) (1,930,127)
----------- -----------
Net property and equipment............................. 40,588 254,961
Other assets:
Restricted cash (Note 12)................................ -- 109,711
Other long-term assets................................... 20,000 31,869
Cauldron--net assets (Note 6)............................ 600,000 2,590,580
Note receivable (Note 4)................................. 324,046 287,575
----------- -----------
Total other assets.................................. 944,046 3,019,735
----------- -----------
$ 1,398,283 $ 3,987,828
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 232,243 $ 747,777
Accrued expenses (Note 9)................................ 752,809 487,794
Notes payable to shareholders (Note 10).................. 450,000 150,000
Note payable to CytRx (Notes 3 and 11)................... 975,000 --
Current maturities of long-term debt (Note 12)........... -- 25,050
Current portion of other long-term obligations (Note 13) 33,277 36,209
----------- -----------
Total current liabilities........................... 2,443,329 1,446,830
----------- -----------
Long-term debt (Note 12)................................... -- 79,909
----------- -----------
Other long-term obligations (Note 13)...................... 65,511 103,494
----------- -----------
Commitments and contingencies (Notes 1 and 13)
Stockholders' equity (deficit) (Note 14):
Series A preferred stock, 2,000,000 shares authorized.
1,412,500 and 1,500,000 issued and outstanding at
December 31, 1996 and December 31, 1995, respectively.
(Liquidation preference of $3,207,230 and $3,149,655
at December 31, 1996 and 1995, respectively)........... 2,554,304 2,712,535
Common Stock, $.01 par value, 25,000,000 shares authorized.
10,338,768 and 9,460,676 issued and outstanding at
December 31, 1996 and 1995, respectively................. 103,387 94,607
Additional paid-in capital................................. 45,982,992 45,071,223
Accumulated deficit........................................ (49,751,240) (45,520,770)
----------- -----------
Total stockholders' equity (deficit)................ (1,110,557) 2,357,595
----------- -----------
$ 1,398,283 $ 3,987,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Collaborative, contract and grant revenues
(Note 17).................................. $ 2,050,467 $ 620,603 $ 760,196
Sales........................................ -- 141,189 403,759
-- ------------ ------------
2,050,467 761,792 1,163,955
Costs and expenses:
Cost of sales................................ -- 40,262 273,088
Research and development..................... 3,642,195 5,168,912 6,344,221
Marketing, general and administrative........ 2,019,042 2,239,921 3,397,948
Restructuring charge (Note 4)................ -- 347,436 --
Charge for acquired research and development
(Note 3)................................... -- 5,165,793 --
Provision for asset impairment (Notes 4, 5
and 6)..................................... 1,152,130 -- 1,466,360
---------- -- ------------
6,813,367 12,962,324 11,481,617
Operating loss................................. (4,762,900) (12,200,532) (10,317,662)
Other income (expense):
Interest income.............................. 56,881 80,919 366,910
Interest expense............................. (115,815) (36,896) (260,651)
Other (Note 18).............................. 591,364 162,232 --
Net gain on sale of diagnostic technologies
and assets (Note 4)........................ -- 1,616,840 --
-- ------------ --
532,430 1,823,095 106,259
Net loss....................................... $ (4,230,470) $(10,377,437) $(10,211,403)
---------- ------------ ------------
Net loss per common share...................... $ (0.42) $ (1.57) $ (1.95)
----- ----- -----
Shares used in computing net loss per common
share........................................ 10,126,676 6,602,813 5,241,317
---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1993............... -- -- 5,233,734 $ 52,337
--------- ---------- ---------- --------
Exercise of options to purchase
shares of Common Stock............... -- -- 14,820 149
Issuance of Common Stock to
401k Plan............................ -- -- 3,500 35
Amortization of deferred
compensation......................... -- -- -- --
Net loss............................... -- -- -- --
-- -- -- --
Balance, December 31, 1994............... -- -- 5,252,054 $ 52,521
--------- ---------- ---------- --------
Issuance of Common Stock
upon the exercise of stock
options.............................. -- -- 7,107 71
Issuance of Common Stock to
401k Plan............................ -- -- 12,911 129
Amortization of deferred
compensation......................... -- -- -- --
Issuance of Common Stock in
connection with the
acquisition of Secretech, Inc........ -- -- 4,132,000 41,320
Issuance of Common Stock and
warrants in connection with
reduction in royalty obligation...... -- -- 56,604 566
Issuance of Series A
Convertible Preferred Stock,
net of $287,465 in issue costs....... 1,500,000 2,712,535 -- --
Net loss............................... -- -- -- --
--------- ---------- ---------- --------
Balance, December 31, 1995............... 1,500,000 $2,712,535 9,460,676 $ 94,607
--------- ---------- ---------- --------
Issuance of Common Stock
upon the exercise of stock
options.............................. -- -- 2,989 30
Issuance of Common Stock to
401k Plan............................ -- -- 12,973 129
Conversion of Preferred Stock
into Common Stock.................... (87,500) (158,231) 175,000 1,750
Issuance of warrants in
connection with notes payable........ -- -- -- --
Issuance of Common Stock in
connection with the
conversion of notes payable.......... -- -- 152,582 1,526
Issuance of Common Stock in
connection with closing of
private placement.................... -- -- 500,000 5,000
Issuance of Common Stock in
settlement of consulting
agreement............................ -- -- 34,548 345
Net loss............................... -- -- -- --
-- -- -- --
Balance, December 31, 1996............... 1,412,500 $2,554,304 10,338,768 $103,387
--------- ---------- ---------- --------
<CAPTION>
Additional
Paid-in Accumulated Deferred
Capital Deficit Compensation Total
------- ------- ------------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 1993............... $ 40,353,316 $(24,931,930) $(10,192) $ 15,463,531
------------ ------------ -------- ------------
Exercise of options to purchase
shares of Common Stock............... 11,124 -- -- 11,273
Issuance of Common Stock to
401k Plan............................ 7,336 -- -- 7,371
Amortization of deferred
compensation......................... -- -- 6,421 6,421
Net loss............................... -- (10,211,403) -- (10,211,403)
------------ ------------ -------- ------------
Balance, December 31, 1994............... $ 40,371,776 $(35,143,333) $ (3,771) $ 5,277,193
------------ ------------ -------- ------------
Issuance of Common Stock
upon the exercise of stock
options.............................. 4,929 -- -- 5,000
Issuance of Common Stock to
401k Plan............................ 17,655 -- -- 17,784
Amortization of deferred
compensation......................... -- -- 3,771 3,771
Issuance of Common Stock in
connection with the
acquisition of Secretech, Inc........ 4,552,429 -- -- 4,593,749
Issuance of Common Stock and
warrants in connection with
reduction in royalty obligation...... 124,434 -- -- 125,000
Issuance of Series A
Convertible Preferred Stock,
net of $287,465 in issue cos......... -- -- -- 2,712,535
Net loss............................... -- (10,377,437) -- (10,377,437)
------------ ------------ -------- ------------
Balance, December 31, 1995............... $ 45,071,223 $(45,520,770) $ -- $ 2,357,595
------------ ------------ -------- ------------
Issuance of Common Stock
upon the exercise of stock
options.............................. 2,074 -- -- 2,104
Issuance of Common Stock to
401k Plan............................ 8,503 -- -- 8,632
Conversion of Preferred Stock
into Common Stock.................... 156,481 -- -- --
Issuance of warrants in
connection with notes payable........ 60,000 -- -- 60,000
Issuance of Common Stock in
connection with the
conversion of notes payable.......... 151,056 -- -- 152,582
Issuance of Common Stock in
connection with closing of
private placement.................... 495,000 -- -- 500,000
Issuance of Common Stock in
settlement of consulting
agreement............................ 38,655 -- -- 39,000
Net loss............................... -- (4,230,470) -- (4,230,470)
------------ ------------ -------- ------------
Balance, December 31, 1996............... $ 45,982,992 $(49,751,240) $ -- $ (1,110,557)
------------ ------------ -------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(4,230,470) $(10,377,437) $(10,211,403)
Adjustments to reconcile net loss to net cash
used for operating activities:
Charge for acquired research and
development..................................... -- 5,165,793 --
Gain on sale of diagnostic technologies and
assets.......................................... -- (1,616,840) --
Gain on asset disposals........................... (131,658) -- --
Gain on liability settlements..................... (152,717) -- --
Depreciation and amortization..................... 1,037,672 1,171,521 751,809
Imputed interest income on note receivable........ (36,472) -- --
Provision for asset impairment.................... 1,152,130 -- 1,466,360
Deferred compensation............................. -- 3,771 6,421
Charge for reduction in royalty obligation........ -- 125,000 --
Issuance of Common Stock to 401k plan............. 8,632 17,784 7,371
Imputed interest expense on notes payable......... 60,000 -- --
Stock issuance for payables....................... 39,000 -- --
Decrease (increase) in
Accounts receivable............................... -- 12,493 (14,625)
Inventories....................................... -- -- (316,945)
Restricted cash................................... 133,446 1,456 41,966
Collaborative, contract & grant revenue
receivable...................................... (70,784) (96,089) --
Other current assets.............................. 26,737 (6,820) 84,933
Other long-term assets............................ 11,869 8,812 12,279
Increase (decrease) in
Accounts payable.................................. (394,737) 455,132 (107,370)
Accrued expenses.................................. 267,600 61,503 (463,054)
Other long-term obligations....................... (27,489) (29,986) (29,717)
------- ------- -------
Net cash used for operating activities............ (2,307,241) (5,103,907) (8,771,975)
Cash flows from investing activities:
Proceeds from sale of property and
equipment....................................... 142,788 -- --
Cash used for purchase of property and
equipment....................................... (35,337) (54,257) (651,733)
Proceeds from sale of diagnostic
technologies and assets......................... -- 1,329,595 --
Payment of merger related costs................... -- (379,850) --
Sales of long-term and short-term
securities...................................... 196,166 2,968,257 27,404,253
Purchases of long-term and short-term
securities...................................... (98,729) (939,518) (19,177,465)
------- -------- -----------
Net cash from investing activities................ 204,888 2,924,227 7,575,055
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from issuance of Preferred
Stock........................................ -- 2,712,535 --
Proceeds from issuance of Common Stock......... 500,000 -- --
Proceeds from issuance of short-term
promissory notes to shareholders............. 450,000 150,000 --
Proceeds from note payable to CytRx............ 975,000 -- --
Proceeds from exercise of Common Stock
options...................................... 2,104 5,000 11,273
Principal payments on note payable............. (104,959) (342,578) (3,698,341)
Principal payments on capital lease
obligations.................................. (7,150) (23,851) (48,389)
------ ------- -------
Net cash (used for) provided by financing
activities................................... 1,814,995 2,501,106 (3,735,457)
Net increase (decrease) in cash and cash
equivalents......................................... (287,358) 321,426 (4,932,377)
Cash and cash equivalents, beginning of year........ 411,706 90,280 5,022,657
------- ------ ---------
Cash and cash equivalents, end of year.............. $ 124,348 $ 411,706 $ 90,280
- ------- - ------- - ------
Supplemental disclosure of cash flow information:
Cash paid for interest expense............ $ 14,242 $ 30,050 $ 244,459
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Background, Significant Uncertainties and Subsequent Events
Zynaxis, Inc. ("Zynaxis" or the "Company") was incorporated in Pennsylvania
on March 5, 1987 and commenced operations in July 1988. The Company initially
focused on development of cell-mediated therapies and cellular diagnostic
products including research reagents for cell tracking. Between 1988 and 1991,
the Company received funding primarily through venture capital financing
involving the issuance of convertible preferred stock and convertible notes, all
of which have since been converted into Common Stock. In January 1992, the
Company completed an initial public offering of its Common Stock, receiving net
proceeds of approximately $23,300,000 through the sale of 2,875,000 shares of
Common Stock. Between 1992 and 1994, the Company focused on development of
products for site-directed drug delivery using its proprietary Zyn-Linker(R)
molecules and on the development of cellular diagnostic products including its
Zymmune CD4/CD8 Cell Monitoring Kit.
During 1995 the Company modified its strategic direction, divesting its
diagnostic products, acquiring vaccine technologies, and focusing its resources
on selected drug and vaccine delivery opportunities. Four key events occurred in
1995 as a result of the Company's modified strategic direction: (i) the sales of
the Company's diagnostic operations, accompanied by a significant reduction in
work-force, (ii) the acquisition by merger of Secretech, Inc. ("Secretech") and
associated technologies for oral and mucosal vaccine delivery, (iii) the
completion of a private placement which raised net proceeds of $2,700,000 to
fund operations, and (iv) the completion of a significant corporate
collaborative agreement for the development of certain technologies acquired
through the merger with Secretech.
During 1996, the Company began to focus on the possibility of selling its
process chemistry/pilot plant operations, known as Cauldron Process Chemistry
("Cauldron") and its related assets for cash. Cauldron provides collaborative
consulting services on all aspects of bulk pharmaceutical production and offers
process research, development and pilot scale-up facilities for the
pharmaceutical, biochemical industries and fine chemical industries. In July
1996, the Company signed a binding letter of intent to sell Cauldron to Seloc AG
("Seloc"), a subsidiary of Schwarz Pharma. On August 27, 1996, the Company
received notification that Seloc was terminating its agreement in principle to
purchase Cauldron (See Note 6).
On September 23, 1996, the Company entered into an Exclusive License
Agreement and Purchase Option with Phanos Technologies, Inc ("Phanos") related
to intellectual property related to its Zyn-Linker technologies. At that time,
the Company received initial deposits totaling $200,000, of which $195,000 was
refundable should Phanos have decided not to exercise the option. On January 21,
1997, the Company received notification that Phanos had exercised its option and
the Company received $525,000, representing the balance of the purchase price.
Under the terms of the agreement, Phanos acquired all of the Company's
Zyn-Linker technologies.
On December 6, 1996 the Company entered into an Agreement and Plan of Merger
and Contribution (the "Merger Agreement") with CytRx Corporation ("CytRx"),
Vaxcel, Inc., a wholly-owned subsidiary of CytRx ("Vaxcel"), and Vaxcel Merger
Subsidiary, Inc., a wholly-owned subsidiary of Vaxcel ("Vaxcel Merger Sub").
Pursuant to the Merger Agreement, subject to approval by shareholders of Zynaxis
and certain other conditions, Vaxcel Merger Sub will be merged (the "Merger")
with and into Zynaxis, which will be the surviving corporation and will be a
wholly-owned subsidiary of Vaxcel. The Company anticipates that, subject to
shareholder approval and the satisfaction of conditions to the Merger, the
Merger will be consummated in the first half of April 1997. In the Merger, the
security holders of Zynaxis will exchange their Zynaxis securities for
securities of Vaxcel and will own approximately 12.5% of the outstanding Common
Stock of Vaxcel immediately following the Merger. CytRx will own the remaining
approximately 87.5% of Common Stock of Vaxcel immediately following the Merger.
The Merger will be accounted for as a purchase transaction, with Vaxcel as the
acquirer. Simultaneously with the execution of the Merger Agreement, Zynaxis and
F-8
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CytRx entered into a secured loan agreement in order for the Company to have
sufficient funding for continued operations pending the Merger. As discussed in
Note 6 to the Consolidated Financial Statements, CytRx agreed to loan up to
$2,000,000 to the Company on a secured basis, as defined in the loan agreement.
Among other agreements entered into in connection with the Merger is an
agreement providing for the sale of substantially all assets of the Company.
At December 31, 1996, the Company had cash, cash equivalents of $124,348 and
a working capital deficit of $2,030,000. For the year ended December 31, 1996,
net operating cash outflow was $2,307,000.
The Company has not received significant revenues from the sale of any of
its products. For the period from its inception to December 31, 1996, the
Company had an accumulated deficit of $49,751,000.
The ability of the Company to survive as a going concern beyond December 31,
1996 is dependent on the consummation of the Merger. There is no assurance that
the Company will ultimately complete this transaction. Additionally, certain
matters associated with the transaction require the approval of shareholders. If
the Company is unable to complete the transaction, if the shareholders fail to
approve the Merger or if certain conditions precedent to closing of the Merger
do not occur, the Company will not be able to continue operations. Should the
Company determine that it is no longer in the best interest of its shareholders
to continue operations, the ability of the Company to fund an orderly
disposition of assets, pay off its then outstanding liabilities and return any
remaining cash to its shareholders will be limited by the amount of working
capital then on hand, if any. Refer to Note 6 regarding the Cauldron assets and
Note 13 regarding the Company's operating lease commitment.
The Financial Statements were prepared assuming the Company will continue as
a going concern. The asset and liability carrying amounts do not propose to
represent realizable or final settlement values. See "Report of Independent
Public Accountants" regarding the Company's ability to continue as a going
concern.
Note 2 -- Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Zynaxis and
its wholly-owned subsidiaries. All intercompany transactions and accounts have
been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all investments with an original maturity of less than
three months to be cash equivalents. Cash equivalents at December 31, 1996 and
December 31, 1995 consisted of a bank repurchase agreement collateralized by a
United States government security.
F-9
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Supplemental Cash Flow Information
In 1995, the Company acquired Secretech through the issuance of 4,132,075
shares of Common Stock with a value of $4,593,749. Refer to Note 3 to the
Consolidated Financial Statements.
In 1996 and 1995, the Company financed $25,642 and $33,628, respectively, of
equipment purchases with capital leases.
Property and Equipment
Property and equipment are carried at cost. Equipment consists of laboratory
and office equipment which is depreciated on a straight-line basis, generally
over three to five years. Property and equipment under capital leases are
amortized over the term of the lease. Leasehold improvements are amortized over
the then remaining lease term or the estimated useful life of the improvement,
whichever is shorter. Maintenance and repairs are charged to expenses as
incurred and were $142,677, $178,440, and $171,753 in 1996, 1995, and 1994,
respectively. Major renewals and betterments are capitalized. Upon disposition,
the net book value of assets is relieved and resulting gains or losses are
reflected in the results of operations. Included in other current assets is a
receivable of $65,000 relating to the sale of certain fixed assets that were
sold during the fourth quarter of 1996.
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and undiscounted cash flows estimated to be generated by those assets are less
than the assets carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets where disposal is expected. The Company adopted SFAS No. 121
in the first quarter of 1996 and the adoption did not have any impact on the
Company's financial position or results of operations. See Note 6 regarding the
Cauldron assets.
Revenue Recognition
Government Small Business Innovative Research ("SBIR") grants revenue is
recognized on the percentage of completion method as the related expenses are
incurred. The Company receives payment based on the level of its related
research and development. Revenues recognized approximate costs incurred.
Collaboration revenues are recognized over the expected estimated period
services or work will be performed. Contract revenues are recognized according
to contract terms and milestones achieved on the percentage of completion
method. Sales are recognized upon product shipment. See Note 17 for further
disclosure.
Research and Development
Research and development costs are charged to expense as incurred. These
costs include personnel costs, materials consumed, depreciation on equipment and
cost of facilities used for research and development. Payments related to the
acquisition of technology rights for which development work is in process are
expensed and considered a component of research and development costs. Included
in research and development costs in 1994 are certain manufacturing, process
development and start-up costs associated with the Company's Zymmune CD4/CD8
Cell Monitoring Kit.
F-10
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Net Loss Per Common Share
Net loss per share has been computed by dividing the net loss by the
weighted average number of shares of Common Stock outstanding during the periods
presented. The weighted average number of shares of Common Stock used in the
computation were 10,126,676, 6,602,813, and 5,241,317 for the years ended
December 31, 1996, 1995, and 1994, respectively. Common shares obtainable from
the assumed conversion of the Series A Convertible Preferred Stock and the
exercises of outstanding options and warrants have been excluded from the
computation of net loss per common share for all periods presented because their
inclusion would be antidilutive.
Reclassifications
The Company has reclassified certain prior year amounts to conform to the
current year presentation.
Note 3 -- Acquisition of Secretech, Inc.
Effective July 27, 1995, the Company consummated the merger of Secretech, a
company engaged in the development of oral vaccines which stimulate mucosal and
systemic immunity, with and into a wholly-owned subsidiary of the Company.
In connection with this merger, the Company initially issued 3,000,000
shares of its Common Stock, independent of any fluctuations in its underlying
market value, to the former Secretech shareholders. Based on the July 27, 1995
market value of $1.03125 per share, the estimated total purchase price was
$3,093,750.
Pursuant to the terms of the merger agreement, as a result of the Company's
consummation of the collaborative agreement discussed in Note 17 to the
Consolidated Financial Statements, the Company issued an additional 1,132,075
shares (the "Contingent Shares") of Common Stock, with a market value at the
time of issuance of $1,500,000, to the former shareholders of Secretech. The
number of Contingent Shares was determined by dividing $1,500,000 by the then
current price per share of Zynaxis Common Stock based upon the ten day average
of the closing price on the Nasdaq National Market prior to public announcement
of the collaborative agreement.
The transaction was accounted for as a purchase. Revenues and expenses
related to Secretech are included in the results of operations for the Company
from the date of acquisition. The Company had recorded a total charge to 1995
earnings of $5,165,793 for acquired research and development equal to the value
of the initial 3,000,000 shares issued, the value of the 1,132,075 Contingent
Shares issued, the excess of liabilities assumed over assets acquired, as well
as fees and expenses to effect the transaction.
In connection with the merger of Secretech, Zynaxis' management performed an
analysis of all identifiable assets acquired. Such analysis included the
identification and evaluation of each significant development project to
determine if the technological feasibility had been achieved and if there were
any alternative future uses. As of the date of the merger, Secretech was a
development stage biotechnology company and had an accumulated deficit of
approximately $5 million. In addition, Secretech had no product sales since
inception and a shareholder deficit. Prior to the merger with Zynaxis, Secretech
was focused on developing new classes of oral vaccines. At the time of the
merger, one of Secretech's development programs was in human clinical trials and
was several years away from regulatory approval and ultimate commercialization.
The remaining development programs were preclinical. At that time, there were
significant risks that any of these product development efforts would be
successfully completed, that regulatory approval
F-11
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
would be obtained or that any products, if introduced, would be successfully
marketed or achieve customers' acceptance. The cost of developing this
technology was significant. As a result of the substantial time and effort to
continue the development of the product and the associated risk thereof, it was
determined that technological feasibility had not been achieved. In addition,
since alternative uses of this developmental technology did not exist at that
time, the cost of such technology had been charged to expense in accordance with
SFAS No. 2.
Note 5 to the Consolidated Financial Statements presents consolidated
condensed pro forma financial results of this transaction, and the pro forma
financial results of the diagnostic divestiture discussed in Note 4 below.
Note 4 -- Divestiture of Diagnostic Technologies
In January 1995, Zynaxis' management and Board of Directors committed to a
plan to divest its diagnostic products and technologies. Accordingly, the
realizability of all diagnostic assets was reviewed by the Company as of
December 31, 1994. As a result of the review of its diagnostic technologies and
assets, the Company recorded a charge in the statement of operations for the
year ended December 31, 1994 totaling $1,466,360 for the impairment of certain
of its diagnostic-related assets. The impairment represented substantially all
of the identifiable diagnostic-related assets, including equipment, prepaid
royalties, accounts receivable and leasehold improvements.
Also as a result of the decision to divest its diagnostic technologies and
assets, in January 1995 the Company recorded a restructuring charge of $347,436.
This charge consisted of severance and severance-related expenses resulting from
the termination of certain diagnostic employees, as well as amounts due to
certain distributors of the Company's Zymmune Cell Monitoring Kit pursuant to
the terms of their Zymmune distribution agreements.
Subsequent to these actions, the Company sold its diagnostic technologies in
two separate transactions and has recognized a combined net gain of $1,616,840
on these transactions.
Sale of Cell Tracking Molecule Technology
In June 1995, the Company announced that it had reached an agreement with
Phanos for the sale of the Company's cell tracking molecules for use as research
and diagnostic reagents, including certain Zyn-Linker patents owned by the
Company.
The Company retained all rights to the therapeutic uses of the Zyn-Linker
technology. Upon signing, the Company received a lump sum payment of $1,100,000,
which is included in the gain on the sale of diagnostic technologies.
Under the terms of the agreement, the Company continued to manufacture and
distribute the research and diagnostic reagents for Phanos and receive royalty
and other payments based upon the sales of these products, if any. In December
1996, the Company assigned its rights under this agreement to a consulting firm,
the founders of which are former vice presidents of Zynaxis. As the result of
this assignment, the Company is no longer responsible for the manufacture or
distribution of the research reagents, nor does it collect a royalty.
Sale of Zymmune Technology
In July 1995, the Company announced that it had reached an agreement (the
"Asset Purchase Agreement") with Intracel Corporation ("Intracel") for the sale
of the Company's Zymmune technology, Zymmune inventory, certain laboratory
equipment, patents, patent applications and certain other rights.
F-12
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Under the terms of the Asset Purchase Agreement, as amended by a release
agreement dated October 24, 1995, the Company received $560,000 of cash and a
$450,000 four-year promissory note secured by certain of the purchased assets.
This promissory note is interest-free for several years; accordingly, the
Company recorded the discounted value of the note receivable of $285,000 as a
long-term asset. In 1996, imputed interest of $36,000 was charged to the
statement of operations and the current carrying value of the note is $324,000.
In connection with the asset and technology transfer, the Company was required
to make a cash payment of $152,000 to terminate an operating lease on certain
equipment and incurred other costs of $180,000 principally related to employee
costs during the technology transfer period.
The Company could receive milestone payments of up to $1,250,000 upon
Intracel's achievement of certain milestones, including, among other things, the
approval by the FDA of the 510(k) application submitted by Zynaxis for U.S.
marketing approval of the Zymmune CD4/CD8 Cell Monitoring Kit ("FDA approval")
and certain manufacturing milestones.
Disputes have arisen between the Company and Intracel regarding certain
provisions of the Asset Purchase Agreement. On or about November 14, 1995,
Intracel was notified that FDA approval had been granted. On February 7, 1996,
the Company was notified by Intracel that Intracel was withholding payment of a
$500,000 milestone payment due upon FDA approval, asserting that final approval
had not been received, along with other claims. The Company is considering
options available to it regarding collection of this milestone payment. The
Company has given no financial statement recognition to this milestone payment
pending its final resolution.
There can be no assurance that Intracel will be able to achieve any of the
other remaining milestones.
Zynaxis will be entitled to royalties on future sales, if any, of the
Zymmune CD4/CD8 Cell Monitoring Kit and certain related technologies.
Note 5 -- Pro Forma Information: Secretech Merger and Diagnostic Divestitures
The unaudited consolidated results of operations on a pro forma basis as if
the acquisition of Secretech and the divestiture of the diagnostic technologies
discussed in Notes 3 and 4 to the Consolidated Financial Statements had occurred
at the beginning of the respective periods are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
<S> <C> <C>
Revenues................ $ 904,359 $ 1,362,411
Net loss................ (6,807,187) (6,958,468)
Net loss per common share $ (.63) $ (.74)
</TABLE>
These pro forma financial results of operations do not purport to be
indicative of the financial results of operations that might have occurred, nor
are they indicative of future results.
Note 6 -- Impairment of Cauldron Asset Value
In efforts to raise capital, and in conjunction with the Vaxcel Merger, the
Company has been soliciting bids from third parties who may have an interest in
purchasing the Cauldron operations and related assets. The net book value of
F-13
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the Cauldron assets at December 31, 1996 was $1,752,130. Notwithstanding the
aforementioned, the most recent bid that the Company has received for the
Cauldron assets is significantly less than this amount. Accordingly,
conservative measures have been taken and the entire Cauldron asset base has
been reduced to $600,000. The difference between the net book value and $600,000
is shown as a Provision for Asset Impairment in 1996. See Note 13 regarding the
Company's operating lease commitment.
Note 7 -- Vaxcel Merger Agreement
On December 6, 1996, the Company entered into the Merger Agreement with
CytRx, Vaxcel, a wholly-owned subsidiary of CytRx, and Vaxcel Merger Sub, a
newly-formed, wholly-owned subsidiary of Vaxcel, which provides for the merger
of Vaxcel Merger Sub with and into Zynaxis, with the effect that Zynaxis, as the
surviving corporation resulting from the Merger, will be a wholly-owned
subsidiary of Vaxcel.
Upon consummation of the Merger, shares of Common Stock of Zynaxis will be
exchanged for the right to receive a number of shares of Vaxcel Common Stock
equal to an exchange ratio defined in the Merger Agreement (approximately
.0947). Shares of the Company's Series A Convertible Preferred Stock will be
exchanged for the right to receive a number of shares of Vaxcel Common Stock
equal to two times the exchange ratio. CytRx will own approximately 87.5% of
Vaxcel Common Stock upon consummation of the Merger.
Simultaneously with the execution of the Merger Agreement, Zynaxis and CytRx
entered into a secured loan agreement in order for the Company to have
sufficient funding for continuing operations until the Merger is approved by
shareholder vote and consummated, anticipated to be in the first half of April
1997. CytRx agreed to loan up to $2,000,000 to the Company on a secured basis.
At December 31, 1996, $975,000 had been advanced and was used in settling a
major portion of the Company's outstanding liabilities as well as funding
December operations. All advances accrue interest at a rate of prime plus 2%.
Upon the consummation of the Merger between Zynaxis and Vaxcel, CytRx will
contribute to Vaxcel an amount of funding equal to the outstanding principal and
interest of the loan, as well as additional amounts specified in the Merger
Agreement. Another agreement entered into in connection with the Merger
Agreement provides for the sale of substantially all assets of the Company.
The transaction documents further provide that Zynaxis preferred
stockholders who also hold warrants to purchase the Company's Common Stock, and
three other warrant holders, will exchange the Zynaxis warrants for warrants to
purchase Vaxcel Common Stock. Additionally, certain shareholders who hold
convertible notes issued by Zynaxis will exchange such notes for shares of
Vaxcel Common Stock.
Upon execution of the Merger Agreement, a Technology Development Agreement
was also executed by the Company and Vaxcel relating to the development of the
Company's vaccine delivery technology pending the Merger.
Note 8 -- Securities
At December 31, 1996, the Company held no securities. All securities at
December 31, 1995 were classified as available-for-sale and were carried at fair
value. The adoption of Statement of Financial Accounting Standard No. 115 had no
effect on the Company's accumulated deficit or stockholders' equity as fair
market value equals the investments' amortized cost.
F-14
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 9 -- Accrued Expenses
Accrued expenses at December 31, 1996 and 1995, respectively, consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Professional fees.................................. $178,159 $251,889
Research costs..................................... 10,000 76,462
Compensation, payroll withholding and related 262,925 14,615
items............................................
License costs...................................... 40,002 18,813
Deposits........................................... 195,000 --
Other.............................................. 66,723 126,015
------ -------
$752,809 $487,794
======== ========
</TABLE>
Note 10 -- Notes Payable to Shareholders
On December 28, 1995, the Company issued a $150,000 Demand Promissory Note
(the "December 1995 Note") to one of its principal shareholders. A general
partner of the shareholder is a member of the Board of Directors. On February
29, 1996, the holder of the December 1995 Note converted the outstanding
principal balance and all accrued interest thereon to Common Stock with transfer
restrictions, as described in Note 14 below.
On May 3, 1996, the Company issued Demand Promissory Notes (the "May 1996
Notes") aggregating $200,000 to two of its principal shareholders. A general
partner of one shareholder and the president of another shareholder are members
of the Board of Directors. These May 1996 Notes bear interest at the annual rate
of 11 1/4% and are due on the earlier of (i) the receipt by the Company of
proceeds from the sale of Cauldron aggregating at least $1,000,000 or (ii) upon
demand if the closing on the sale of Cauldron does not occur by September 30,
1996. The May 1996 Notes are convertible at the option of the holder into an
aggregate of 200,000 shares of the Company's Common Stock at any time prior to
repayment. In connection with the issuance of the May 1996 Notes, the Company
issued warrants with five year terms to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
On June 7, 1996, the Company issued a $250,000 Demand Promissory Note to
another of its principal shareholders. This note was canceled and reissued on
July 17, 1996 due to a revision of the repayment terms (the "July 1996 Note").
This July 1996 Note bears interest at the annual rate of 11 1/4% and is due on
the earlier of (i) the receipt by the Company of proceeds from the sale of
Cauldron aggregating at least $1,000,000 or (ii) upon demand if the closing on
the sale of Cauldron does not occur by October 15, 1996. This July 1996 Note is
convertible at the option of the holder into an aggregate of 150,000 shares of
the Company's Common Stock at any time prior to repayment. In connection with
the issuance, the Company also issued a warrant with a five year term to
purchase 25,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share.
The value of these 225,000 warrants, relating to the May 1996 Notes and the
July 1996 Note, has been deemed to be $60,000 for accounting purposes and was
expensed in 1996 as a component of interest expense.
In conjunction with the signing of the Merger Agreement in December 1996, a
Note Exchange Agreement was
F-15
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
entered into whereby two of these three notes payable to shareholders will be
exchanged for Vaxcel Common Stock upon consummation of the Merger.
Note 11 -- Note Payable to CytRx
As discussed in Note 7, the Company has entered into a Merger Agreement with
Vaxcel, an Atlanta based vaccine technology company. In conjunction with the
Merger Agreement, Zynaxis also entered into a secured loan agreement with CytRx,
Vaxcel's parent company. The terms of the loan agreement allow for the Company
to borrow up to $2,000,000 from CytRx between December 1996 and the closing of
the Merger, anticipated to be in the first half of April 1997. Proceeds from any
amounts borrowed are to be used to satisfy accounts payable and accrued expenses
as well as to fund operations until the transaction is completed. Through
December 31, 1996, the Company had borrowed a total of $975,000. The borrowings
accrue interest at prime plus 2%. Interest expense on these borrowings totaled
$5,090 for the year ended December 31, 1996.
Note 12 -- Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Other note payable........ $104,959
-------
-- 104,959
Less current maturities... -- (25,050)
------- --------
-- $ 79,909
======= ======
</TABLE>
Other Note Payable
In 1989, the Company issued a ten-year note to the then lessor of its
office and research facility to finance certain leasehold and other
improvements. The note, with interest at 13%, was fully collateralized by a
certificate of deposit, which had been categorized as restricted cash in prior
years. During 1996, the Company was frequently unable to make the monthly
payments on a timely basis as required by the terms of the note. In November
1996, the holder of the note agreed to accept the full amount of the collateral
certificate of deposit, $91,142, in satisfaction of all obligations under the
note.
Note 13 -- Other Long-Term Obligations and Lease Commitments
Other long-term obligations consisted of the following:
December 31, December 31,
1996 1995
---- ----
Capital lease obligations $ 50,908 $ 32,418
Deferred rent liability ... 47,880 107,285
------ -------
98,788 139,703
Less current maturities ... (33,277) (36,209)
------- -------
$ 65,511 $103,494
======== ========
F-16
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Lease Obligations
The Company leases real property and equipment under noncancelable lease
agreements that expire at various dates through 2001. The future minimum lease
payments as of December 31, 1996, under all leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
1997.......................... 18,822 302,620
1998.......................... 18,822 299,966
1999.......................... 18,822 29,180
2000.......................... 9,400 --
2001.......................... 4,010 --
2002 & beyond................. -- --
------- -------
69,876 631,766
Less amounts representing interest (18,968) --
------- -------
$ 50,908 $ 631,766
= ====== = =======
</TABLE>
Rent expense on the Company's leased facility in Malvern, Pennsylvania was
$411,856 in 1996, $439,609 in 1995, and $405,173 in 1994.
Management believes the Company's operating lease commitment will be
transferred to the buyer of the Cauldron assets. If the Cauldron assets are not
sold, management believes that the related facility, or a portion thereof, will
be sublet to cover the commitment. If the Company is unable to find a new tenant
for the facility, either through the Cauldron sale or subletting, the related
commitments could be accelerated (See Notes 1 and 6).
Deferred Rent Expense
The Company records rent expense on a straight-line basis and records the
excess of rent expense over cash paid as deferred rent. During November 1996,
the Company's lease was amended to reduce the occupied space from 39,200 square
feet to 23,460 square feet, a 40% reduction. As a result of the amendment, the
deferred rent liability was reduced and booked as a reduction of marketing,
general and administrative expense in 1996. Deferred rent was $47,880 and
$107,285 at December 31, 1996 and 1995, respectively, with $22,982 and $29,988
classified as current at December 31, 1996 and 1995, respectively.
Note 14 -- Stockholders' Equity
Common Stock
On February 29, 1996, the Company completed a private placement of Common
Stock with transfer restrictions, raising proceeds of $500,000. Additionally, a
$150,000 short-term promissory note payable held by a related party, plus
accrued interest of $2,582, was converted to Common Stock with transfer
restrictions on February 29, 1996.
Under terms of the above agreements, the Company issued an aggregate of
652,582 shares of Common Stock at a price of $1.00 per share. Additionally, the
Company issued warrants to purchase 195,775 shares of Common Stock at an
exercise price of $1.00 per share.
In June 1995, the Company had entered into a Business Development Consulting
Agreement with a principal
F-17
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
shareholder, of which the president is a member of the Board of Directors. The
terms of the one year agreement stated that a portion of the compensation was to
be in shares of Common Stock. In November 1996, the Company issued 34,548 shares
of Common Stock in settlement of the amounts owed.
Series A Convertible Preferred Stock
In 1995, the Company issued 1,500,000 of Series A Convertible Preferred
Stock ("Preferred Stock") at $2.00 per share for aggregate proceeds, net of
offering costs, of $2,712,535. Each share of Preferred Stock is convertible into
two shares of Common Stock at an initial conversion price of $1.00 per share.
In 1996, a holder of Preferred Stock converted 87,500 shares of Preferred
Stock into 175,000 shares of Common Stock.
Stock Warrants
At December 31, 1996, there were warrants issued and outstanding to purchase
an aggregate of 3,647,189 shares of Common Stock at prices ranging from $1.325
to $7.035 and expiration dates ranging from 1998 through 2007.
As discussed above, in connection with (i) the completion of a private
placement in February 1996 and (ii) the conversion of a short-term note into
equity in February 1996, the Company issued 195,775 warrants to purchase Common
Stock at $1.00 per share.
As discussed in Note 10, in connection with the issuance of the May 1996
Notes and the July 1996 Note, the Company issued warrants to purchase an
aggregate of 225,000 shares of Common Stock at $1.00 per share.
In addition to the above, as part of the 1995 private placement, the Company
issued 1,500,000 warrants to purchase up to 3,000,000 shares of Common Stock.
Each warrant is exercisable for two shares of Common Stock at an exercise price
of $1.00 per share. The warrants have five year terms and contain certain
automatic termination conditions.
In connection with a royalty abatement agreement entered into in 1995, the
Company issued warrants to purchase 200,000 shares of Common Stock at an
exercise price of $1.325 per share. These warrants expire on December 31, 2007.
A five year warrant to purchase 15,000 shares of Common Stock at $1.00 per
share was issued in December 1995 in connection with the issuance of a note
payable.
Warrants to purchase 11,414 shares of Common Stock at $7.035 per share are
currently outstanding. These warrants were issued to the lessor upon the
execution of certain capital leases. These capital leases for laboratory and
office equipment have since expired and been bought out.
Stock Option Plan
The Company's stock option plan reserves shares of Common Stock for issuance
upon the exercise of incentive and nonqualified stock options. On July 27, 1995,
the shareholders of the Company approved an increase in the number of shares
issuable under the Company's Amended and Restated 1989 Stock Option Plan from
800,000 to 1,750,000. Incentive stock options are granted at market value or
above, and non-qualified stock options are granted at a price fixed by the Board
of Directors on the grant date. Options are exercisable for five to ten years
from the grant date and
F-18
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
generally vest over a four-year period. Options granted after December 31, 1991
are exercisable for ten years from the date of grant.
The Company accounts for this plan under APB Opinion No. 25 under which no
compensation cost has been recognized.
Had compensation cost for this plan been determined consistent with FASB
Statement No. 123, the Company's net loss and loss per share would have been
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Loss:
As Reported........ $(4,230,470) $(10,377,437)
Pro Forma.......... $(4,324,976) $(10,520,218)
Primary EPS:
As Reported........ $(0.42) $(1.57)
Pro Forma.......... $(0.43) $(1.59)
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
At December 31, 1996, 98,070 options had been exercised, 394,634 were
exercisable at prices ranging from $.7035 to $7.125, and 755,021 shares of
Common Stock remained available for grant. A summary of the status of the
Company's stock option plan at December 31, 1996 and 1995 and changes during the
years then ended are presented in the table and narrative below.
<TABLE>
<CAPTION>
1996 1995
---- ----
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of
year........................ 1,038,370 $ 3.44 825,784 $ 3.65
Granted....................... -- -- 512,800 $ 1.27
Exercised..................... 2,989 $ .70 7,107 $ 0.70
Forfeited..................... 128,472 $ 3.36 292,210 $ 3.76
Expired....................... -- -- 897 $ .070
Outstanding at the end of year 906,909 $ 3.71 1,038,370 $ 3.44
======= =========
Exercisable at the end of the year 404,634 $ 3.44 296,077 $ 3.68
======= =======
Weighted average fair value of
options granted............. $ -- $ 0.95
</TABLE>
404,634 of the 906,909 options outstanding at December 31, 1996 have
exercise prices between $0.70 and $7.13, with a weighted average exercise price
of $3.44 and a weighted average remaining contractual life of seven years. All
of these options are exercisable. The remaining 502,275 options outstanding at
December 31, 1996 have exercise prices between $0.70 and $7.13, with a weighted
average exercise price of $3.71 and a weighted average remaining contractual
life of seven years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995: risk-free interest rates ranging from 5.7%
to 7.2%, expected dividend yield of $0, expected life of seven years and
expected volatility of 70%. No options were granted in 1996.
F-19
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In December 1995, 10,000 stock options outside of the Amended and Restated
1989 Stock Option Plan were granted to a board member. These options became
fully vested in June 1996 at an exercise price of $0.875.
401(k) Savings Plan
In June 1994, the Company began to provide a match to the contributions to
the Zynaxis Inc. 401(k) Savings Plan (the "Plan") comprised of both cash and
Company stock. In July 1996, the cash portion of the match was eliminated and
the match was comprised entirely of Company stock. The shares are generally
contributed quarterly and valued at the closing market price on the last day of
each quarter. The Company contributed 12,973 and 12,836 shares to the Plan
during 1996 and 1995, respectively.
Note 15 -- 401(k) Savings Plan
In 1994, the Company began making matching contributions to the Plan. The
matching contribution is determined each year by the Board of Directors and
vests over four years with credit given for prior service. For the year ended
December 31, 1996, the Company contributed 50% of the salary deferred by
participants, up to a maximum of 4% of each participant's deferred salary. For
the first half of 1996, the matching contribution was equally comprised of the
Company's Common Stock and cash. Effective July 1, 1996, the Board resolved to
eliminate the cash aspect of the match, thereby making the entire match in
Company stock. The matching contributions are made on a quarterly basis and the
shares of the Company's Common Stock which are contributed are valued at the
closing market price on the last business day of the quarter. Total Company
contributions to the Plan, in both cash and stock, were $19,659 in 1996 and
$30,641 in 1995. In 1997, the Board of Directors resolved that the Zynaxis Inc.
401(k) Savings Plan would be terminated effective January 7, 1997.
Note 16 -- Income Taxes
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $31,000,000. The net operating loss and credit
carryforwards will expire at various dates beginning in 2003, if not utilized.
The Tax Reform Act of 1986 contains various provisions that limit the
utilization of net operating loss and tax credit carryforwards if there has been
an ownership change. Such an ownership change as described in Section 382 of the
Internal Revenue Code may limit the Company's utilization of its net operating
loss and tax credit carryforwards. Additionally, a portion of the net operating
loss carryforward relating to the 1995 Secretech acquisition (see Note 3) are
subject to SRLY restrictions as defined in the Internal Revenue Code. The
proposed Merger with Vaxcel (Notes 1 and 6), if consummated, will significantly
limit the availability of the net operating loss and tax credit carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount reported for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes as of
December 31, 1996 and 1995 were as follows:
F-20
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 10,910,000 $ 8,829,000
Capitalization of research and development 5,449,000 4,982,000
Asset impairment..................... 392,000 --
Other-- net.......................... 779,000 369,000
------- -------
Total deferred tax assets.............. 17,530,000 14,180,000
Valuation allowance for deferred tax assets(17,530,000) (14,180,000)
----------- -----------
Net deferred tax assets................ $ -- $ --
= == = ==
</TABLE>
A valuation allowance has been established as realization of the tax assets
is uncertain.
Note 17 -- Collaborative, Contract and Grant Revenues
Collaboration with ALK A/S
In October 1995, the Company announced a development and licensing agreement
with ALK A/S ("ALK"), a leading European pharmaceutical company in the field of
allergy immunotherapy. The collaboration involves certain of the technologies
acquired in the merger with Secretech relating to bioactive substance delivery
technology.
Under the terms of the ALK development and licensing collaboration, the
Company has received payments aggregating $1,000,000. $250,000 was received in
November 1995 and three additional payments totaling $750,000 were received
during 1996. These amounts are reflected in collaborative, contract and grant
revenues. The Company incurred costs related to the ALK collaboration of
approximately $200,000 and $500,000 in 1995 and 1996, respectively. This
agreement can be unilaterally terminated by either party in certain
circumstances and with notification periods stated in the agreement. During
1996, the Company also provided ALK with significant research and development
support of the licensed technology for which it received additional revenues of
$36,000 based on costs incurred.
The Company will receive a royalty of 7% on net sales of products that
utilize the Company's technology, increasing based upon certain sales criteria
established within the agreement. The Company could also receive additional
milestone payments of up to $2,000,000 based upon either FDA or certain other
regulatory approvals of additional products using the Company's vaccine delivery
technologies. There can be no assurance that ALK will ever obtain the
appropriate regulatory approvals, or will ever generate any sales using the
technology licensed from the Company.
Should the Company receive royalties under this agreement, it will be
required to pay approximately 3% of the net sales of the licensed product to the
original patent holder of the technology.
Contract Manufacturing
During 1996, the Company's Cauldron division had a substantial increase in
business with third parties in providing process chemistry and pilot
manufacturing services to other biotechnology, pharmaceutical and chemical
organizations. Revenue recognized in connection with these contracts totaled
$809,000 and $45,000 for the years ended December 31, 1996 and 1995,
respectively.
F-21
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Grant Revenue
For the years ended December 31, 1996 and 1995, the Company recognized
$311,000 and $251,000, respectively, pursuant to a SBIR grant awarded by the
National Heart, Lung and Blood Institute. Revenues recognized approximate costs
incurred. This grant is funding the preclinical development of Zyn-Linker
molecules linked with heparin and the investigation of their ability to inhibit
post-angioplasty restenosis and local thrombosis. In July 1996, this grant was
extended until June 1997. At December 31, 1996, the grant has a balance of
$198,000.
During 1996, the Company received a Phase I SBIR grant for up to $100,000 to
develop Zyn-Linker molecules linked with Taxol and for the investigation of
their ability to inhibit post-angioplasty restenosis and local thrombosis. The
Company has recorded $88,000 of revenue related to this grant for the year ended
December 31, 1996. Revenues recognized approximate costs incurred.
Notwithstanding the January 1997 purchase by Phanos of the Zyn-Linker
technology, the studies conducted under these grants will continue to be
performed by Zynaxis. However, any patents, inventions or other intellectual
property that may arise from this SBIR research will become the property of
Phanos.
Collaboration with Eli Lilly and Company
The Company's agreement with Eli Lilly and Company ("Lilly") to apply the
Company's drug delivery technology to vascular drugs which have the potential to
reduce the rate of restenosis after angioplasty was terminated by Lilly,
effective in August 1994. The Company recognized revenues of $749,122 under this
agreement in 1994.
Various Other Collaborations
During 1996, in an effort to obtain on-going collaborative arrangements, the
Company entered into a few small collaborative agreements, primarily related to
the Zyn-Linker technology as it pertains to oligonucleotide studies. Total
revenue recognized under these agreements was $56,000.
Note 18 -- Other Income
Sublease Income
As a result of the divestiture of the diagnostics technologies in 1995, the
Company had certain laboratory and office space that was not being utilized. In
order to fully maximize the leased facility, Zynaxis began to sublet portions of
its laboratory and office space to independent third parties in 1995. These
sublease arrangements continued until November 1996, when the Company's lease
was amended to decrease the total square footage occupied by Zynaxis. Rental
income recognized under the sublease arrangements was $238,000 and $139,000 for
the years ended December 31, 1996 and 1995, respectively.
Royalty Income
As discussed in Note 4 to the Consolidated Financial Statements, through
November 1996 Zynaxis continued to manufacture and distribute the research and
diagnostic reagents for Phanos, pursuant to the June 1995 agreement. In
accordance with the agreement between the two companies, Zynaxis realized a 10%
royalty in exchange for providing these manufacturing and distribution services,
subject to certain minimum royalty amounts. Royalty income recognized
F-22
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
was $46,400 and $13,800 for the years ended December 31, 1996 and 1995,
respectively.
Seloc
As discussed in Note 1 to the Consolidated Financial Statements, during 1996
the Company entered into a binding letter of intent with Seloc for the sale of
Cauldron. In conjunction with this letter, Seloc made an option payment in the
amount of $100,000, which, except under limited circumstances, would be
nonrefundable if the sale of Cauldron were not consummated. For reasons beyond
Zynaxis' control, in August 1996 Seloc decided not to proceed with the
acquisition, at which time the $100,000 was recognized as other income.
Asset Sales
In conjunction with the November 1996 lease amendment and in anticipation of
the consummation of the Merger, the Company began to sell various fixed assets
during the fourth quarter of 1996. A net gain on these asset disposals of
$131,600 was recorded in other income on the statement of operations for the
year ended December 31, 1996.
Note 19 -- Related Party Transactions
As described in Note 10 to the Consolidated Financial Statements, the
Company issued a $150,000 note to a related party in December 1995. This note
was extinguished in February 1996 as the note plus accrued interest, totaling
$152,582, was converted to equity.
As discussed in Note 14 to the Consolidated Financial Statements, business
development services were rendered to the Company by a consulting firm of which
a director of the Company is President and sole shareholder. Terms of the
consulting agreement provided that a portion of the fees be paid in Company
stock. The Company issued 34,548 shares of Common Stock in November 1996 in
settlement of this obligation. The number of shares issued was based upon the
fair market value of the services provided.
Consulting services were provided to the Company by a director of the
Company who was the former president of Secretech. This consulting arrangement
commenced on September 30, 1995 and ended September 30, 1996. Under the terms of
the agreement, the director was entitled to compensation at the annual rate of
$135,000 through March 31, 1996 and at an annual rate of $150,000 from April
through September 1996. During 1996, the Company recognized expense of $108,750
related to this agreement.
F-23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ZYNAXIS, INC.
Date: March 15, 1997 By: /s/ Martyn D. Greenacre
--------------------- --------------------------------
Martyn D. Greenacre
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Martyn D.
Greenacre, President, and Chief Executive Officer, his true and lawful attorney-
in-fact, in his name, place and stead to execute and cause to be filed with the
Securities and Exchange Commission any or all amendments to this report.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Martyn D. Greenacre President, Chief Executive Officer March 15, 1997
- --------------------------------- (Principal Executive Officer, --------------
Martyn D. Greenacre Principal Financial and Accounting Officer)
and Chairman
/s/ John F. Chappell Director March 15, 1997
- --------------------------------- --------------
John F. Chappell
/s/ Lyle A. Hohnke Director March 15, 1997
- --------------------------------- --------------
Lyle A. Hohnke
/s/ Donald E. Morel, Jr., Ph.D. Director March 15, 1997
- --------------------------------- --------------
Donald E. Morel, Jr., Ph.D.
/s/ Stephen K. Reidy Director March 15, 1997
- --------------------------------- --------------
Stephen K. Reidy
/s/ Dennis P. Schafer Director March 15, 1997
- --------------------------------- --------------
Dennis P. Schafer
</TABLE>
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit Description of Exhibit Page
------- ---------------------- ----
<S> <C> <C>
10.47 Second Amendment to Agreement of Lease between PMRA III
and Registrant, dated November 21, 1996
10.48 Sublease Cancellation Agreement between Registrant and
Adolor Corporation, dated November 20, 1996
10.49 Amendment of Employment Agreement between Registrant and
Martyn D. Greenacre, dated November 15, 1996
10.50 Senior Secured Note of Registrant issued to CytRx Corporation
("CytRx"), dated December 6, 1996
10.51 Secured Loan Agreement between Registrant and CytRx, dated
December 6, 1996
10.52 Guaranty between Zynaxis Vaccine Technologies, Inc. and
CytRx, dated December 6, 1996
10.53 Preferred Stock and Warrant Agreement between Registrant,
CytRx, Vaxcel, and holders of Series A Convertible Preferred
Stock of the Registrant, dated December 6, 1996
10.54 Collateral Assignment of License Agreement between Zynaxis
Vaccine Technologies, Inc. and CytRx, dated December 6, 1996
10.55 Liquidation Agreement between Registrant and CytRx, dated
December 6, 1996
10.56 Pledge Agreement between Registrant and CytRx, dated
December 6, 1996
10.57 Note Exchange Agreement between Registrant, CytRx, Vaxcel,
Euclid Partners III, L.P. and S.R. One, Ltd. dated December 6, 1996
10.58 Security Agreement between Registrant and CytRx, dated
December 6, 1996
10.59 Security Agreement between Zynaxis Vaccine Technologies,
Inc. and CytRx, dated December 6, 1996
10.60 Technology Development Agreement between Zynaxis Vaccine
Technologies, Inc. and Vaxcel, dated December 6, 1996
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
24.1 Powers of Attorney (included on signature page to this Annual
Report on Form 10-K)
27.1 Financial Data Schedule
</TABLE>
<PAGE>
SECOND AMENDMENT TO AGREEMENT OF LEASE
--------------------------------------
THIS SECOND AMENDMENT TO AGREEMENT OF LEASE, made this 21st day of
November, 1996 between PMRA III, c/o PM Realty Advisors, a California
corporation, successors to Rouse & Associates, a Pennsylvania limited
partnership, ("Landlord") and Zynaxis, Inc., a Pennsylvania corporation,
successor to Zynaxis Cell Science, Inc., a Pennsylvania corporation, ("Tenant").
WITNESSETH
WHEREAS, Tenant has entered into a certain Lease Agreement with Rouse &
Associates dated August 30, 1988 (the "Original Lease"), for approximately
24,000 square feet of space located in a building (the "Building") located at
371 Phoenixville Pike, Malvern, Charlestown Township, Chester County,
Pennsylvania 19355 (the "Original Premises") and,
WHEREAS, PMRA III, c/o PM Realty Advisors, succeeded to the title and
interest in the Premises by Deed from Rouse & Associates dated May 2, 1989; and
WHEREAS, Landlord and Tenant entered into that certain First Amendment
to Agreement of Lease dated December 1, 1992 (the "First Amendment") pursuant to
which the Original Lease was amended to provide Zynaxis occupancy of an
additional 15,200 square feet of space in the Building (the "Additional
Premises" which, together with the Original Premises, constitutes the
"Premises"). (The Original Lease, as amended by the First Amendment, is the
"Lease"); and
WHEREAS, Landlord and Tenant desire to further amend the Lease.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants, conditions and
agreements herein contained and intending to be legally bound hereby, Landlord
and Tenant agree to the following, effective as of the 15th day of November,
1996 ("Effective Date"):
1. The Premises, as defined in Article I of the Lease, shall be decreased
from 39,200 square feet to 23,460 square feet the difference being 15,740 square
------ ------
feet (the "Relinquished Space"), all as described and shown on Exhibit "A"
attached hereto and made a part hereof. From and after the Effective Date,
Tenant shall have no further rights, obligations or duties with regard to or in
connection with the Relinquished Space. Landlord acknowledges Tenant has
performed all of its duties and obligations with regard to and in connection
with the Relinquished Space up through the Effective Date except that Tenant
shall be responsible for payment of Tenant's share of utilities, taxes,
insurance and operating services. Landlord acknowledges that Tenant has been
paying its estimated share of utilities, taxes, insurance and operating services
and as soon as practical after year-end, Landlord will issue a statement
calculating the difference between Tenant's estimated payments and the actual
expenses.
2. The expiration date of the term of this Lease as provided in Article 3
shall extended to the 31st day of January, 1999.
3. The minimum annual rent in Article 5(a) of the Lease shall be amended to
be $238,822.80 payable in accordance with the terms and conditions of
-----------
2
<PAGE>
that Article, with the first payment of such amended minimum annual rent due on
the 1st day of November, 1996. Further, paragraph 5b of the Lease is deleted.
4. Tenant's Proportionate Share in Article 29(h) of the Lease shall be
amended to reflect the reduction in square footage of the Premises as amended
herein.
5. In reference to article 21 of the Lease, Tenant and Landlord hereby
agree that the calculation of any "profit" which may be recaptured by Landlord
as a result of any subletting of the Premises or assignment of this lease shall
not include the following: leasing costs and commissions, and amortization of
leasehold improvements and Tenant's share of operating expenses, including but
not limited to utilities, taxes, insurance operating services.
6. Landlord hereby acknowledges that Tenant is not in default under any
provision of the Lease as of the Effective Date. In particular, Landlord
warrants that Tenant is current on all rental payments under the Lease and does
not owe any amounts, rents or otherwise, to Landlord pursuant to any provision
of the Lease as of the Effective Date hereof.
7. Notwithstanding Article 13 of the Lease, Landlord and Tenant hereby
agree that the items listed on Exhibit B attached hereto and made a part hereof
(the "Miscellaneous Property") shall be the property of Tenant through,
including and after the expiration or prior termination of the Lease. Tenant
shall have the right up through, including or after the expiration or prior
termination of the Lease to sell, transfer or otherwise dispose of the
Miscellaneous Property to any person and Tenant
3
<PAGE>
or Tenant assignee may at the entity's sole option, remove the Miscellaneous
Property from the Premises and repair and restore any damage to the Premises
caused by such removal.
8. Article 32 of the Lease titled "ADDITIONAL ARTICLES" shall be
amended to include Article 33 through 51.
9. A new Article 50 titled "PREMISES RECONFIGURATION COSTS" shall be
added to the Lease as follows:
"50. PREMISES RECONFIGURATION COSTS. Tenant understands that Landlord
will incur construction costs to reconfigure and reduce the square footage of
the Premises pursuant to this Amendment, all as shown on Exhibit C attached
hereto and by reference incorporated herein (the "Reconfiguration"); and,
therefore, Tenant agrees that if the costs of said construction as shown on such
Exhibit C exceed $80,000. Tenant will reimburse Landlord for 50% of such
construction costs which exceed $80,000." "In addition, Tenant agrees to pay to
Landlord an additional $23,300 toward the reconfiguration costs."
[SEAL APPEARS HERE]
10. A new Article 51 titled "OPTION TO RENEW" shall be added as follows:
"51. OPTION TO RENEW." Tenant shall have the right, to be exercised as
hereinafter provided, to renew this Lease for two (2) additional terms (the
"First Extension Term" and the "Second Extension Term") of four (4) years upon
the following terms and conditions:
(a) At the time of the exercise of an option to renew and at the time of
the commencement either the First Extension Term or the Second Extension Term,
4
<PAGE>
Tenant shall not then be in default under any of the terms and conditions of
this Lease or have sublet more than fifty percent (50%) of the Premises to any
unrelated or unaffiliated entities; and
(b) The renewal shall be upon the same terms and conditions as are in
effect immediately prior to the expiration of the then current term, except for
the amount of rent; and
(c) There shall be no further privilege of renewal beyond the
Extension Term expressly set forth above; and
(d) Tenant's exercise of its renewal right shall be by the delivery to
Landlord, at least nine (9) months prior to the expiration of the then current
term, of a written election to exercise its renewal right (the "Extension
Notice"); and
(e) The Base Rent shall be adjusted in the first year of the Extension
Term to the fair market value of the Premises (as determined by Landlord
pursuant to (f) below), but, in no event shall the Base Rent be less than the
amount that was the Base Rent immediately prior to such Extension Term.
(f) "Fair market value" shall mean the then current market rent for
office/warehouse space then being offered for rent at office/warehouse buildings
similar in age and quality to the Building and located in similar proximity to
Great Valley Corporate Center, to a tenant proposing to sign a four year lease,
and shall be determined as follows;
5
<PAGE>
(i) On or before the day which is one hundred (180) days prior
to the commencement of the Extension Term, Landlord shall notify Tenant in
writing of the fair market value of the Premises and the Base Rent which
Landlord proposes to charge during such Extension Term. If Tenant either (a)
notifies Landlord in writing within thirty (30) days after the date of
Landlord's notice that Tenant agrees to the Base Rent proposed by Landlord or
(b) fails to object in writing to such proposed Base Rent within such thirty
(30) days period, then the Base Rent proposed by Landlord shall be final and
conclusive.
(ii) If pursuant to subparagraph (f)(i) Tenant objects in
writing to the Base Rent proposed by Landlord within the thirty (30) day period,
then "fair market value" shall be determined as follows:
(A) On or before the date which is one hundred forty (140)
days prior to the commencement of the term for the Extension Term, Landlord and
Tenant shall each appoint a licensed real estate broker with at least seven (7)
years active experience in the Metropolitan Philadelphia area, currently active
in negotiating office, warehouse and lab leases.
(B) On or before the date which is one hundred thirty (130)
days prior to the commencement of the term for the applicable Extension Term,
the two brokers appointed pursuant to subparagraph (f)(ii)(A) above shall choose
a third broker, who shall also be a licensed real estate broker with at least
ten years active experience in the Metropolitan Philadelphia area, currently
active in negotiating office and warehouse leases. If the two brokers appointed
pursuant to subparagraph
6
<PAGE>
(f)(ii)(A) above are unable to agree upon a third broker within such ten (10)
day period, then either broker, on behalf of both, may request that such
appointment be made by the appropriate court of the Commonwealth of
Pennsylvania.
(C) The valuation of the third broker appointed
pursuant to subparagraph (f)(ii)(A) and (B) above of the fair market value of
the Premises shall be completed within thirty (30) days after the appointment of
such third broker. The middle evaluation shall be deemed to be the fair market
value and the Base Rent for the Premises during the applicable Extension Term
shall be the greater of such fair market value or the Base Rent in effect during
the immediately preceding period. In the event Landlord and Tenant do not agree
which is the middle evaluation, Landlord and Tenant shall submit all three (3)
evaluations to an independent Certified Public Accountant for a final
determination. Such valuation shall be contained in a written opinion delivered
to both Landlord and Tenant setting forth the methodology, the research, the
findings and the conclusions. This written opinion is final and is provided for
information purposes only.
(D) The cost of the services rendered by all brokers
and accountants appointed pursuant to this subparagraph shall be paid equally
by Landlord and Tenant."
11. Except as amended herein, all of the other terms and conditions
of the Lease as previously amended shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment under
seal the day and year first above written.
LANDLORD: TENANT:
PMRA III ZYNAXIS, INC.
By: /s/ Michael R. Neill By: [SIGNATURE APPEARS HERE]
---------------------------- ----------------------------
Michael R. Neill,
Managing Director
By: /s/ David K. Hubbs
----------------------------
David K. Hubbs
8
<PAGE>
[FLOOR PLAN OF ZYNAXIS, INC. APPEARS HERE]
"EXHIBIT A"
ZYNAXIS, INC.
AREA DIAGRAM
TOTAL AREA
39,200 Square Feet
ADOLOR 15740 SQ.FT.
"RELINQUISHED SPACE"
ZYNAXIS 23460 SQ.FT.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ZYNAXIS EQUIPMENT AND LEASEHOLD IMPROVEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DESCRIPTION LOCATION
- --------------------------------------------------------------------------------
<S> <C>
- --------------------------------------------------------------------------------
589' LAB BENCH & CASEWORK LABS 135-139 & 246-253
- --------------------------------------------------------------------------------
233' WALL MOUNTED CABINETS LABS 135-139 & 246-253
- --------------------------------------------------------------------------------
(10)6' CHEMICAL FUME HOODS LABS 135-139 & 246-253
- --------------------------------------------------------------------------------
(10) 7' CHEMICAL CABINETS LABS 135-139 & 246-253
- --------------------------------------------------------------------------------
(3) 5' FLAMMABLE STORAGE CAB. LABS 135-139 & 246-253
- --------------------------------------------------------------------------------
AIR COMPRESSOR MECHANICAL ROOM 142
- --------------------------------------------------------------------------------
STEAM BOILER MECHANICAL ROOM 142
- --------------------------------------------------------------------------------
FLAKE ICE SYSTEM MECHANICAL ROOM 142
- --------------------------------------------------------------------------------
MAIN SCRUBBER MECHANICAL ROOM 142
- --------------------------------------------------------------------------------
SECONDARY SCRUBBER MECHANICAL ROOM 142
- --------------------------------------------------------------------------------
104' WHSE STORAGE RACKS ROOM 254
- --------------------------------------------------------------------------------
</TABLE>
EXHIBIT "B"
<PAGE>
SUBLEASE CANCELLATION AGREEMENT
-------------------------------
WHEREAS, on the 23rd day of August, 1988, a certain Lease (the "Lease")
was entered into by and between Rouse & Associates - 335 Phoenixville Pike
Limited Partnership ("Landlord") and Zynaxis Cell Science Inc. ("Tenant") for a
portion of a building located at 371 Phoenixville Pike, Malvern, PA 19355 (the
"Premises") and, thereafter, PMRA III, a California Group Trust, c/o PMRA Realty
Advisors, a California corporation, 800 Newport Center Drive, Suite 300, Newport
Beach, CA 92660 succeeded to the title and interest in the Premises by Deed from
Rouse & Associates on May 2, 1989. The Lease was amended December 1, 1992.
WHEREAS, Zynaxis, Inc., successor to Zynaxis Cell Science, Inc.
("Sublandlord") by that certain Sublease dated the 15th day of May 1995 by and
between Sublandlord and Adolor Corporation, a Delaware corporation, (the
"Subtenant"), as amended effective February 1, 1996 sublet a portion of the
Premises to Subtenant to wit, 5,311 square feet located in the Premises as shown
on Exhibit "B" (the "Subpremises"); said Sublease extending for a term of 3
years from May 1, 1995.
WHEREAS, it is the desire of the Sublandlord and Subtenant herein to
cancel and release said Sublease.
NOW THEREFORE, in consideration of the Sublandlord discharging the
Subtenant (as Sublandlord hereby does) from all of the covenants and obligations
contained therein, the said Subtenant does hereby release and surrender all of
its right, title and interest in and to the above described Sublease and
Subpremises, effective upon the date Adolor's new Lease with PMRA commences, and
the said Sublandlord, does hereby accept said release and surrender and hereby
consents and agrees to the cancellation of said Sublease as of such date, such
that Subtenant is and shall be forever released from any and all liability
accruing under the Sublease from and after said date. The parties hereby
acknowledge that all parties have fully performed their respective obligations
under the Sublease through the date of termination thereof and that, subject to
a final proration for Rent as of the Termination Date, the parties have no
further obligation to each other under the Sublease.
Sublandlord shall return Subtenant's security deposit in the amount of
$11,129 upon execution of this Sublease Cancellation Agreement.
<PAGE>
IN WITNESS WHEREOF, the said Sublandlord and Subtenant have hereunto
executed this Sublease Cancellation Agreement this 20th day of November, 1996.
SUBLANDLORD: SUBTENANT:
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE]
------------------------- --------------------------
PMRA III, c/o PMRA Realty Advisors, Inc. owner of the Premises hereby
consents to and approves the cancellation of the Sublease Agreement dated the
20th day of November, 1996, between Zynaxis, Inc. as Sublandlord, and Adolor,
Inc., as Subtenant, covering the Subpremises as described therein.
PRMA III:
Date: [SIGNATURE APPEARS HERE]
------------------- --------------------------
<PAGE>
EXHIBIT B
DIAGRAM OF SUBLEASED PREMISES
-----------------------------
[MAP APPEARS HERE]
ZYNAXIS, INC.
ROOM NUMBERS
[_] Space Dedicated to Adoler
[_] Space Shared with Ozis
<PAGE>
AMENDMENT OF EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT TO EMPLOYMENT AGREEMENT is made as of the 15 day of
November, 1996, between ZYNAXIS, INC., a Pennsylvania corporation ("Zynaxis"),
and MARTYN D. GREENACRE, (the "Employee").
BACKGROUND
- ----------
Zynaxis and the Employee are parties to an Employment Agreement dated
May 5, 1995 (the "Employment Agreement"). CytRx Corporation, a Delaware
corporation ("CytRx") and Zynaxis are in the process of negotiating an Agreement
and Plan of Merger and Contribution ("Merger Agreement"), pursuant to which
CytRx will lend money to Zynaxis and Zynaxis will become a wholly-owned
subsidiary of Vaxcel, Inc., a wholly-owned subsidiary of CytRx. In order to
ensure that Employee remains at Zynaxis pending the closing under the Merger
Agreement, the parties hereto desire that the Employment Agreement be amended as
provided herein. Terms are used herein as defined in the Employment Agreement
unless otherwise defined herein.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and in the Employment Agreement, the parties hereto, each
intending to be legally bound hereby, agree as follows:
TERMS
- -----
1. Employee shall continue to serve as the President and Chief Executive
Officer of Zynaxis until the first to occur of (i) the termination of this
employment under the terms of the Employment Agreement or (ii) the date of
final closing (the "Closing Date") under the Merger Agreement.
2. Since October 1, 1996, Employee has deferred, and shall continue to defer
until the Closing Date, one-third of the Base Compensation under the
Employment Agreement. The parties hereto acknowledge that Employee has
deferred $9,273.39 the Base Compensation through the date hereof.
3. Zynazis agrees, in the event of a closing of the Merger Agreement, to pay
to Employee the following amounts, so long as Employee remains in the
employ of Zynaxis until the Closing Date:
(i) An amount equal to all the Base Compensation deferred by Employee
through the Closing Date. This amount shall be paid to the Employee
in a lump sum on the Closing Date.
(ii) Severance of $29,960. This amount shall be paid to Employee in a lump
sum on the Closing Date.
<PAGE>
(iii) Performance bonuses up to an aggregate amount of $55,000 will be
paid to Employee on the Closing Date, payable in accordance with
the following;
A. If Zynaxis operates within the budget limits set forth in the
budget attached hereto, as such budget may be altered with the
consent of CytRx to accommodate investments in Cauldron (the
"Budget"), during the period from October 1996 to March 1997,
a bonus of $10,000 will be paid to Employee.
B. If $1,200,191 of accounts payable and accrued expenses are
satisfied at a discount of at least $114,282 by the Closing
Date, a bonus of $7,000 will be paid to the Employee.
C. If sales of assets (including, without limitation, leasehold
improvements, laboratory equipment and office furniture) to
Adolor Corporation and other purchasers, as contemplated by
Exhibit A to the Liquidation Agreement Schedules 1 and 2,
yields at least $407,000 in gross proceeds, a bonus of $15,000
will be paid to Employee.
D. If a sublease for the 7,600 square feet at the east end of
Zynaxis' current headquarters is executed with a rental rate
not less than the current rates paid by Adolor Corporation
under the sublease dated May 15, 1995 between Zynaxis and
Adolor Corporation, for an initial term not to exceed twelve
months, or such space is transferred to the purchaser of the
Cauldron business by the Closing Date, a bonus of $8,000 will
be paid to Employee.
E. If the Zyn-Linker therapeutic technology rights are sold to
Phanos under the terms of the Option Agreement between Zynaxis
and Phanos dated September 23, 1996 for at least $525,000, a
bonus of $15,000 will be paid to Employee.
4. In the event the Merger Agreement is not executed on or before November 22,
1996, or negotiations between the parties are otherwise sooner terminated,
this Amendment shall be null and void, and of no further force and effect,
in which event Employee shall have no further obligation to defer any
portion of his Base Compensation and Zynaxis shall pay to Employee, as
promptly as possible, all unpaid deferred amounts.
<PAGE>
5. Except as expressly modified hereby, the Employment Agreement is hereby
ratified and confirmed and remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have hereunto duly executed this
Amendment as of the date first written above.
ZYNAXIS, INC.
By: /s/ Stephen K. Reidy
------------------------
Chairman, Compensation Committee
/s/ Martyn D. Greenacre
-----------------------
President & Chief Executive Officer
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, IN RELIANCE UPON EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. THIS NOTE IS BEING
ACQUIRED BY THE PAYEE HEREOF FOR INVESTMENT ONLY AND FOR SAID PAYEE'S OWN
ACCOUNT, AND NEITHER THIS NOTE NOR ANY INTEREST HEREIN MAY BE OFFERED FOR SALE,
PLEDGED, HYPOTHECATED, SOLD, ASSIGNED OR TRANSFERRED AT ANY TIME EXCEPT IN
COMPLIANCE WITH THE ACT, ANY APPLICABLE STATE SECURITIES LAWS, AND ANY OTHER
LAWS WHICH ARE APPLICABLE TO SUCH TRANSACTION, AND IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THIS NOTE.
THIS NOTE IS THE SENIOR SECURED NOTE REFERRED TO IN, AND IS ENTITLED TO THE
BENEFITS OF, THE SECURED LOAN AGREEMENT, THE SECURITY AGREEMENT, THE COLLATERAL
ASSIGNMENT OF LICENSE AGREEMENT AND THE PLEDGE AGREEMENT OF EVEN DATE HEREWITH
BETWEEN MAKER AND HOLDER (TOGETHER WITH THIS NOTE, THE "LOAN DOCUMENTS").
SENIOR SECURED NOTE
---------------------
$2,000,000.00 December 6, 1996
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned, ZYNAXIS, INC., a Pennsylvania
corporation ("Maker"), hereby promises to pay to the order of CYTRX CORPORATION,
a Delaware corporation (hereafter, together with any holder hereof, called
"Holder"), the principal sum of TWO MILLION DOLLARS ($2,000,000.00), or such
lesser amount as may be the aggregate principal amount of loans outstanding
hereunder, together with interest thereon as described below.
The Holder will provide to the undersigned monthly a statement of loans made,
charges incurred and payments made pursuant to this Note and the outstanding
amount of loans hereunder; provided, however, the failure of the Holder to
provide such statement shall in no way affect its rights or the undersigned's
obligations hereunder.
<PAGE>
1. Payment of Principal, Interest and Expenses.
-------------------------------------------
(a) Principal. The aggregate principal balance of all loans
---------
outstanding hereunder shall be due and payable at 5:00 p.m. on the first to
occur of: (i) the day on which the closing of the transactions contemplated by
that certain Agreement and Plan of Merger and Contribution dated the date hereof
by and between Maker and Holder (the "Contribution Agreement") occurs, (ii) the
day on which the Contribution Agreement is terminated; or (iii) such other time
as may be agreed to in writing by Maker and Holder.
(b) Interest.
--------
(i) Interest Rate. Interest shall initially accrue on the
-------------
outstanding principal balance hereunder at a rate per annum equal to the rate
announced by NationsBank, N.A. (South) as its "prime rate" of interest (the
"Prime Rate") on the date hereof plus 200 basis points, and shall continue
accruing at such fixed rate until December 1, 1996, whereupon the interest rate
shall be adjusted to equal the Prime Rate in effect on such day plus 200 basis
points. Thereafter, the interest rate shall similarly be adjusted on the first
business day of every month to equal the Prime Rate in effect as of such day
plus 200 basis points. Interest shall be computed on the basis of a 360-day year
for the actual number of days elapsed. Holder shall notify Maker of the Prime
Rate within a reasonable time after the announcement thereof (A) on the date
hereof and (B) on any and all dates on which the interest rate shall be adjusted
in accordance with this paragraph 1(b)(i).
(ii) Calculation of Interest. Interest shall be simple
-----------------------
interest.
(iii) Time of Payments. Accrued interest shall be due and
----------------
payable at such time as the principal amount hereof becomes due pursuant to
paragraph 1(a) above.
(iv) Interest on Past Due Amounts. Interest shall accrue on
----------------------------
any amount past due hereunder at a rate equal to two percent (2.0%) per annum in
excess of the interest rate otherwise payable hereunder. All such interest shall
be due and payable on demand.
(v) Compliance with Usury Laws. In no event shall the amount
--------------------------
of interest due or payable under this Note exceed the maximum rate of interest
allowed by applicable law and, in the event any such payment is inadvertently
paid by the undersigned or inadvertently received by Holder, then such excess
sum shall be credited as a payment of principal, unless the undersigned shall
notify Holder in writing that the undersigned elects to have such excess sum
returned to it forthwith. It is the express intent of the parties hereto that
the undersigned not pay and Holder not receive, directly or indirectly, in any
manner whatsoever, interest in excess of that which may be lawfully paid by the
undersigned under applicable law.
-2-
<PAGE>
THE UNDERSIGNED, AND HOLDER BY ACCEPTING THIS NOTE, EACH AGREE AND STIPULATE
THAT THE ONLY CHARGE IMPOSED UPON THE UNDERSIGNED FOR THE USE OF MONEY IN
CONNECTION WITH THIS NOTE IS AND SHALL BE THE INTEREST DESCRIBED ABOVE, AND
FURTHER AGREE AND STIPULATE THAT ALL OTHER CHARGES IMPOSED BY HOLDER ON THE
UNDERSIGNED IN CONNECTION WITH THIS NOTE, INCLUDING WITHOUT LIMITATION, ALL
DEFAULT CHARGES, LATE CHARGES, PREPAYMENT FEES AND ATTORNEYS' FEES, ARE CHARGES
MADE TO COMPENSATE HOLDER FOR UNDERWRITING OR ADMINISTRATIVE SERVICES AND COSTS
OR LOSSES PERFORMED OR INCURRED, AND TO BE PERFORMED OR INCURRED, BY HOLDER IN
CONNECTION WITH THIS NOTE AND SHALL UNDER NO CIRCUMSTANCES BE DEEMED TO BE
CHARGES FOR THE USE OF MONEY PURSUANT TO OFFICIAL CODE OF GEORGIA ANNOTATED
SECTION 7-4-2 OR SECTION 7-4-18. ALL CHARGES OTHER THAN CHARGES FOR THE USE OF
MONEY SHALL BE FULLY EARNED AND NONREFUNDABLE WHEN DUE.
(c) Expenses. The undersigned shall pay all expenses incurred by
--------
Holder in the collection of this Note, including, without limitation, the
reasonable fees and disbursements of counsel to Holder, if this Note is
collected by or through an attorney-at-law.
(d) General. All payments of principal, interest and expenses shall
-------
be in lawful money of the United States of America, and made according to such
wire transfer instructions or other delivery method as Holder may designate to
Maker in writing from time to time.
2. Right of Set-Off. In addition to any rights now or hereafter granted
----------------
under applicable law and not by way of limitation of any such rights, the
undersigned hereby authorizes Holder, at any time or from time to time, without
notice to the undersigned or to any other person or entity, any such notice
being hereby expressly waived, to set-off and to appropriate and to apply any
and all indebtedness at any time held or owing by Holder or any affiliate of
Holder, to or for the credit or the account of the undersigned, against and on
account of all obligations of the undersigned owing hereunder or otherwise to
Holder, irrespective of whether or not Holder shall have declared any or all of
such obligations of the undersigned to be due and payable, and although such
obligations shall be contingent or unmatured.
3. Waiver. Maker, and its successors and assigns, waive presentment for
------
payment, demand, protest and notice of demand, dishonor, notice of dishonor,
protest and nonpayment. In any action on this Note, Holder or its assignee need
not produce or file the original of this Note, but need only file a photocopy of
this Note certified by Holder or such assignee to be a true and correct copy of
this Note in all material respects.
-3-
<PAGE>
THE UNDERSIGNED, AND HOLDER BY ACCEPTING THIS NOTE, EACH ACKNOWLEDGES THAT
ANY DISPUTE OR CONTROVERSY BETWEEN THE UNDERSIGNED AND HOLDER WOULD BE BASED ON
DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY, HOLDER AND THE
UNDERSIGNED HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND
OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR
AGAINST THE UNDERSIGNED ARISING OUT OF THIS NOTE OR BY REASON OF ANY OTHER CAUSE
OR DISPUTE WHATSOEVER BETWEEN THE UNDERSIGNED AND HOLDER OF ANY KIND OR NATURE.
THE UNDERSIGNED, AND HOLDER BY ACCEPTING THIS NOTE, HEREBY AGREE THAT THE
FEDERAL COURT OF THE NORTHERN DISTRICT OF GEORGIA OR, AT THE OPTION OF HOLDER,
ANY STATE COURT LOCATED IN FULTON COUNTY, GEORGIA SHALL HAVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE UNDERSIGNED AND HOLDER
PERTAINING DIRECTLY OR INDIRECTLY TO THIS NOTE OR ANY OTHER CAUSE OR DISPUTE
WHATSOEVER BETWEEN THE UNDERSIGNED AND HOLDER OF ANY KIND OR NATURE. THE
UNDERSIGNED EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN
ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL
SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN,
AND AGREEING THAT SERVICE OF SUCH SUMMONS AND COMPLAINT, OR OTHER PROCESS OR
PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED
ADDRESSED TO THE UNDERSIGNED AT THE ADDRESS OF THE UNDERSIGNED SET FORTH BELOW
ITS SIGNATURE HERETO. SHOULD THE UNDERSIGNED FAIL TO APPEAR OR ANSWER ANY
SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THIRTY DAYS AFTER THE
MAILING THEREOF, IT SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY
BE ENTERED AGAINST IT AS PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR
PAPERS. THE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO
PRECLUDE THE BRINGING OF ANY ACTION BY HOLDER OR THE ENFORCEMENT BY HOLDER OF
ANY JUDGMENT OBTAINED IN SUCH FORUM IN ANY OTHER APPROPRIATE JURISDICTION.
FURTHER, THE UNDERSIGNED HEREBY WAIVES THE RIGHT TO ASSERT THE DEFENSE OF FORUM
NON CONVENIENS AND THE RIGHT TO CHALLENGE THE VENUE OF ANY COURT PROCEEDING.
THE UNDERSIGNED AGREES THAT ALL OF ITS PAYMENT OBLIGATIONS HEREUNDER SHALL
BE ABSOLUTE, UNCONDITIONAL AND, FOR THE PURPOSES OF MAKING PAYMENTS HEREUNDER,
THE UNDERSIGNED HEREBY WAIVES ANY RIGHT TO ASSERT ANY SETOFF, COUNTERCLAIM OR
CROSS-CLAIM.
-4-
<PAGE>
FURTHER, THE UNDERSIGNED WAIVES (I) ANY NOTICE OR HEARING PRIOR TO THE
TAKING POSSESSION OR CONTROL BY HOLDER OF ANY COLLATERAL GIVEN BY THE
UNDERSIGNED, (II) THE POSTING OF ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY
ANY COURT PRIOR TO ALLOWING HOLDER TO EXERCISE ANY OF ITS RIGHTS OR REMEDIES,
INCLUDING THE ISSUANCE OF AN IMMEDIATE WRIT OF POSSESSION AND (III) THE BENEFIT
OF ALL VALUATION, APPRAISEMENT AND EXEMPTION OF LAWS.
THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A
FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF.
4. Governing Law. This Note shall be construed, interpreted and enforced
-------------
in accordance with the laws of the State of Georgia, without regard to the law
of the conflicts of laws of such State.
5. Return of Note. This Note shall be returned to Maker upon the payment
--------------
in full of all amounts owed under this Note.
6. Default. Each of the following events shall constitute an "Event of
-------
Default" under this Note: (i) Maker shall fail to pay any principal, interest
or other amount due hereunder when due, or Maker shall in any way fail to comply
with the other terms, covenants or conditions contained in this Note or the
other Loan Documents; (ii) any written representation or warranty made at any
time by Maker to the Holder shall prove to have been incorrect or misleading in
any material respect when made; (iii) a default, event of default, or event
which with the giving of notice or the passage of time or both would constitute
a default or event of default, shall have occurred under any other document,
instrument, contract or agreement now or hereafter entered into by Maker and
Holder or executed by Maker in favor of the Holder, or Maker shall in any
material way fail to comply with the terms, covenants or conditions contained in
any such document, instrument, contract or agreement; (iv) a default, event of
default, or event which with the giving of notice or the passage of time or both
would constitute a default or event of default, shall have occurred under any
document, instrument, contract or agreement (a) evidencing or securing
indebtedness of Maker for borrowed money or (b) material to the financial
condition of Maker; (v) a final judgment or order for the payment of money, or
any final order granting equitable relief, shall be entered against Maker and
such judgment or order has or will have a materially adverse effect on the
financial condition of Maker; (vi) a warrant, writ of attachment, levy or other
similar process shall be issued against any property of Maker; (vii) Maker shall
(a) commence a voluntary case under the Bankruptcy Code of 1978, as amended or
other federal bankruptcy law (as now or hereafter in effect); (b) file a
petition seeking to take advantage of any other laws, domestic or foreign,
relating to bankruptcy, insolvency, reorganization, winding up or composition
for adjustment of debts; (c) consent to or fail to contest in a timely and
-5-
<PAGE>
appropriate manner any petition filed against it in an involuntary case under
such bankruptcy laws or other laws; (d) apply for or consent to, or fail to
contest in a timely and appropriate manner, the appointment of, or the taking of
possession by, a receiver, custodian, trustee, or liquidator of itself or of a
substantial part of its property, domestic or foreign; (e) be unable to, or
admit in writing its inability to, pay its debts as they become due; (f) make a
general assignment for the benefit of creditors; or (g) make a conveyance
fraudulent as to creditors under any state or federal law; or (viii) a case or
other proceeding shall be commenced against Maker in any court of competent
jurisdiction seeking (a) relief under the Bankruptcy Code of 1978, as amended or
other federal bankruptcy law (as now or hereafter in effect) or under any other
laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization,
winding up or adjustment of debts or (b) the appointment of a trustee, receiver,
custodian, liquidator or the like for Maker or all or any substantial part of
the assets, domestic or foreign, of Maker.
Upon the occurrence of an Event of Default (other than an Event of Default
described in clause (vii) or (viii) of the definition thereof), any and all of
the loans and the undersigned's other obligations hereunder, at the option of
the Holder, and without demand or notice of any kind, may be immediately
declared, and thereupon shall immediately become in default and due and payable
and the Holder may exercise any and all rights and remedies available to it
under the Loan Documents, at law, in equity or otherwise. Upon the occurrence
of an Event of Default described in clause (vii) or (viii) of the definition
thereof, any and all of the loans and the undersigned's other obligations
hereunder, without demand or notice of any kind, shall immediately become in
default and due and payable and the Holder may exercise any and all rights and
remedies available to it under the Loan Documents, at law, in equity or
otherwise.
7. Representations and Warranties; Covenants and Agreements. The
--------------------------------------------------------
representations and warranties made in Article 5 of the Contribution Agreement
by Maker and the agreements of Maker made in Articles 7 and 8 of the
Contribution Agreement are incorporated herein by this reference; provided,
however, that the affirmative and negative covenants shall survive termination
of the Contribution Agreement until such time as the principal of this note and
all interest accrued thereon have been paid in full by Maker.
8. Miscellaneous.
-------------
(a) To the extent that it becomes necessary for Holder to engage legal
counsel to enforce the obligations of Maker to Holder hereunder, Maker shall pay
all reasonable, necessary, and actually incurred expenses of such legal counsel.
(b) Time is of the essence of this Note.
(c) All amendments to this Note, and any waiver or consent of Holder,
must be in writing and signed by Holder and Maker.
-6-
<PAGE>
(d) This Note shall be binding upon the successors and assigns of
Maker.
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly executed
and delivered under seal as of the day and year first above written.
ZYNAXIS, INC.
By: /s/ Martyn Greenacre
--------------------------------------
Name: M.D. Greenacre
---------------------------------
Title: Chairman, President & CEO
--------------------------------
ATTEST:
By: /s/ Michael A. Christie
--------------------------------------
Name: Michael A. Christie
---------------------------------
Title: Secretary
--------------------------------
Address: 371 Phoenixville Pike
Malvern, Pennsylvania 19355
-7-
<PAGE>
SECURED LOAN AGREEMENT
THIS LOAN AGREEMENT is dated December 6, 1996 between CytRx Corporation, a
Delaware corporation ("CytRx"), and Zynaxis, Inc., a Pennsylvania corporation
("Zynaxis").
Background
----------
This Loan Agreement is being entered into simultaneously with and in
connection with the execution of the Agreement and Plan of Merger and
Contribution among CytRx Corporation, Vaxcel, Inc., Vaxcel Merger Subsidiary,
Inc. and Zynaxis, Inc. ("Merger Agreement") and the Transaction Documents
referred to therein. Unless otherwise defined herein, capitalized terms that
are not defined herein and that are defined in the Merger Agreement shall have
the meaning given such terms in the Merger Agreement.
NOW, THEREFORE, in consideration of the above and the mutual promises
herein contained, the parties agree as follows:
Terms
-----
1. Amount of Loan. Subject to the terms and conditions of this Agreement,
--------------
CytRx will from time to time loan to Zynaxis, and Zynaxis may from time to time
borrow, repay and reborrow, up to an aggregate principal amount outstanding at
any one time of $2,000,000 (the "Loan"). The Loan will be evidenced by the
Senior Secured Note.
2. Advances. CytRx will advance the Loan as follows:
--------
2.1 Initial Amount. Simultaneous with the execution hereof and of the
--------------
Senior Secured Note, CytRx has made an initial loan of $500,000.00, to be
applied in accordance with the attached schedules.
2.2 Fixed Amounts. At the times set forth in Schedule 2.2, CytRx will
------------- ------------
loan to Zynaxis the amounts set forth in Schedule 2.2, to be applied in
------------
accordance with Schedule 2.2.
------------
2.3 Settlement Amounts. CytRx will loan to Zynaxis the amounts to be paid
------------------
by Zynaxis in accordance with the Liquidation Agreement (i) in settlement of
Liabilities (as defined in the Liquidation Agreement) and (ii) to reimburse
CytRx pursuant to Section 6 of the Liquidation Agreement.
2.4 Budgeted Amounts. CytRx will loan to Zynaxis on the first of each
----------------
month the aggregate budgeted amount set forth in Schedule 2.4, provided that
------------
amounts loaned pursuant to this Section 2.4 will be reduced by an amount equal
to (i) any cash held by Zynaxis at the time such loan is to be made minus (ii)
the total of severance payments
<PAGE>
that would be due employees of Maker if such employees were terminated during
the following month.
3. Term of Loan. CytRx's obligation to make the Loan will terminate on the
------------
first to occur of (i) May 1, 1997, (ii) an Event of Default (as defined in the
Senior Secured Note) under the Senior Secured Note, (iii) the Closing under the
Merger Agreement, or (iv) termination of the Merger Agreement.
4. Conditions to Loan. CytRx's obligation to make the initial loan and each
------------------
additional loan shall be subject to the following conditions:
4.1 that the representations and warranties of Zynaxis in the Merger
Agreement and in the Loan Documents shall be true and correct as of the date of
such loan with the same force and effect as made on an as of such date except to
the extent that such representations and warranties expressly relate solely to
an earlier date (in which case such representations and warranties shall have
been true and correct on and as of such earlier date), and that the Chief
Executive Officer of Zynaxis shall have provided to CytRx a certificate as to
fulfillment of this condition in a form reasonably satisfactory to CytRx;
4.2 that Zynaxis shall be in compliance with the agreements made by it
herein, in the other Loan Documents and in Article 5 of the Merger Agreement as
of the date of such loan, and that the Chief Executive Officer of Zynaxis shall
have provided to CytRx a certificate as to fulfillment of this condition in a
form reasonably satisfactory to CytRx;
4.3 that n Event of Default (as defined in the Senior Secured Note) shall
have occurred and be continuing as of the date of such loan and that the advance
of the new loan will not result in a Default or Event of Default, and that the
Chief Executive Officer of Zynaxis shall have provided to CytRx a certificate as
to fulfillment of this condition in a form reasonably satisfactory to CytRx;
4.4 that there is no pending or threatened suit, cause of action or
proceeding against Zynaxis that could reasonably be anticipated to have a
material adverse effect on Zynaxis or its operations, properties, business
prospects or condition, financial or otherwise, and that the Chief Executive
Officer of Zynaxis shall have provided to CytRx a certificate as to fulfillment
of this condition in a form reasonably satisfactory to CytRx;
4.5 that the use of proceeds of such extension of credit shall not violate
any law applicable to or binding upon either Zynaxis or CytRx; and
4.6 that after such loan the aggregate principal balance of all loans
outstanding hereunder shall not exceed Two Million Dollars ($2,000,000).
-2-
<PAGE>
5. Use of Proceeds. Zynaxis will use the proceeds of the Loan only in
---------------
accordance with the uses set forth in the Schedules hereto. Zynaxis will use
its best efforts to operate within the budget set forth in Schedule 2.4.
------------
6. Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of Georgia, without giving effect to
conflicts of laws.
IN WITNESS WHEREOF, the undersigned has caused this Loan Agreement to be
duly executed and delivered under seal as of the day and year first above
written.
CYTRX CORPORATION
By:/s/ Jack J. Luchese
---------------------------
Jack J. Luchese
Chairman, President and CEO
ZYNAXIS, INC.
By:/s/ Martyn D. Greenacre
---------------------------
Martyn D. Greenacre
Chairman, President and CEO
-3-
<PAGE>
GUARANTY
THIS GUARANTY dated as of December 6, 1996, executed and delivered by
ZYNAXIS VACCINE TECHNOLOGIES, INC. (the "Guarantor") in favor of CYTRX
CORPORATION (the "Lender").
WHEREAS, pursuant to that certain Senior Secured Note dated the date
hereof (as the same may be amended, modified, supplemented or extended from time
to time, the "Note"; terms used herein and not defined herein have their
respective defined meanings as set forth in the Note and the other Loan
Documents, as defined in the Note) by and between Zynaxis, Inc. (the "Borrower")
and the Lender, the Lender has made available to the Borrower certain financial
accommodations on the terms and conditions set forth in the Note;
WHEREAS, the Guarantor is a wholly owned Subsidiary of the Borrower;
WHEREAS, the Guarantor acknowledges that, while it is a separate
entity, the financial condition of the Guarantor is dependent upon the financial
condition of the Borrower and its other subsidiaries;
WHEREAS, the Guarantor is therefore willing to guarantee the payment
in full of the principal of, and interest on, all Guaranteed Obligations (as
defined below) owing by the Borrower to the Lender under the Note and otherwise;
and
WHEREAS, it is a condition precedent to the Lender making such
financial accommodations to the Borrower that the Guarantor execute and deliver
this Guaranty.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Guarantor, the Guarantor
agrees as follows:
Section 1. Guaranty. The Guarantor hereby, irrevocably and
--------
unconditionally, guarantees the due and punctual payment and performance when
due, whether at stated maturity, by acceleration or otherwise, of the following
(the following collectively referred to as the "Guaranteed Obligations"): (a)
all Obligations (as defined in the Security Agreement); (b) all other
indebtedness and obligations now or hereafter owing by the Borrower to the
Lender, whenever and however incurred or evidenced, whether direct or indirect,
absolute or contingent, or due or to become due (including, but not limited to,
any other loans or advances from time to time extended by the Lender to the
Borrower under any agreement whether or not evidenced by promissory notes or
otherwise); and (c) any and all extensions, renewals, modifications, amendments
or substitutions of the foregoing.
<PAGE>
Section 2. Guaranty of Payment and Not of Collection. This Guaranty
-----------------------------------------
is a guaranty of payment, and not of collection, and a debt of the Guarantor for
its own account. Accordingly, the Lender shall not be obligated or required
before enforcing this Guaranty against the Guarantor: (a) to pursue any right
or remedy the Lender may have against the Borrower or any other guarantor of the
Guaranteed Obligations or commence any suit or other proceeding against the
Borrower or any other guarantor of the Guaranteed Obligations in any court or
other tribunal; (b) to make any claim in a liquidation or bankruptcy of the
Borrower or any other guarantor of the Guaranteed Obligations; or (c) to make
demand of the Borrower or any other guarantor of the Guaranteed Obligations or
to enforce or seek to enforce or realize upon any collateral security held by
the Lender which may secure any of the Guaranteed Obligations. In this
connection, the Guarantor hereby waives the right of the Guarantor to require
any holder of the Guaranteed Obligations to take action against the Borrower as
provided in Official Code of Georgia Annotated (S)10-7-24.
Section 3. Guaranty Absolute. The Guarantor guarantees that the
-----------------
Guaranteed Obligations will be paid strictly in accordance with the terms of the
documents evidencing the same, regardless of any law, regulation or order now or
hereafter in effect in any jurisdiction affecting any of such terms or the
rights of the Lender with respect thereto. The liability of the Guarantor under
this Guaranty shall be absolute and unconditional in accordance with its terms
and shall remain in full force and effect without regard to, and shall not be
released, suspended, discharged, terminated or otherwise affected by, any
circumstance or occurrence whatsoever, including, without limitation, the
following (whether or not the Guarantor consents thereto or has notice thereof):
(a) (i) any change in the amount, interest rate or due date or other
term of any Guaranteed Obligations, or (ii) any change in the time, place or
manner of payment of all or any portion of the Guaranteed Obligations, or (iii)
any amendment or waiver of, or consent to the departure from or other indulgence
with respect to, the Note, any Loan Document, or any other document or
instrument evidencing any Guaranteed Obligations, or (iv) any renewal,
extension, addition, or supplement to, or deletion from, or any other action or
inaction under or in respect of, the Note, the other Loan Documents, or any
other documents, instruments or agreements relating to the Guaranteed
Obligations or any other instrument or agreement referred to therein or
evidencing any Guaranteed Obligations or any assignment or transfer of any of
the foregoing;
(b) any lack of validity or enforceability of the Note, the other Loan
Documents, or any other document, instrument or agreement referred to therein or
evidencing any Guaranteed Obligations or any assignment or transfer of any of
the foregoing;
- 2 -
<PAGE>
(c) any furnishing to the Lender of any additional security for the
Guaranteed Obligations, or any sale, exchange, release or surrender of, or
realization on, any collateral security for the Guaranteed Obligations;
(d) any settlement or compromise of any of the Guaranteed Obligations,
any security therefor, or any liability of any other party with respect to the
Guaranteed Obligations, or any subordination of the payment of the Guaranteed
Obligations to the payment of any other liability of the Borrower;
(e) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceeding relating to the
Guarantor or the Borrower or any other Loan Party or any other Person, or any
action taken with respect to this Guaranty by any trustee or receiver, or by any
court, in any such proceeding;
(f) any nonperfection of any security interest or lien on any
collateral securing any of the Guaranteed Obligations;
(g) any application of sums paid by the Borrower or any other Person
with respect to the liabilities of the Borrower to the Lender, regardless of
what liabilities of the Borrower remain unpaid;
(h) any defect, limitation or insufficiency in the borrowing powers of
the Borrower or in the exercise thereof; and
(i) any act or failure to act by the Lender which may adversely affect
the Guarantor's subrogation rights, if any, against the Borrower to recover
payments made under this Guaranty.
Section 4. Action with Respect to Guaranteed Obligations. The Lender
---------------------------------------------
may, at any time and from time to time, without the consent of, or notice to,
the Guarantor, and without discharging the Guarantor from its obligations
hereunder take any and all actions described in Section 3 above and may
otherwise: (a) amend, modify, alter or supplement the terms of any of the
Guaranteed Obligations, including, but not limited to, extending or shortening
the time of payment of any of the Guaranteed Obligations or increasing,
decreasing or otherwise changing the interest rate or fees that may accrue on
any of the Guaranteed Obligations; (b) amend, modify, alter or supplement the
Note or any other Loan Document or any other document evidencing any Guaranteed
Obligations; (c) sell, exchange, release or otherwise deal with all, or any
part, of any Collateral; (d) release any Person liable in any manner for the
payment or collection of the Guaranteed Obligations; (e) exercise, or refrain
from exercising, any rights against the Borrower or any other Person (including,
without limitation, any other guarantor of the Guaranteed Obligations); and (f)
apply any sum, by whomsoever paid or however realized, to the Guaranteed
Obligations in such order as the Lender shall elect.
- 3 -
<PAGE>
Section 5. Waiver. The Guarantor, to the fullest extent permitted by
------
law, hereby waives notice of acceptance hereof or any presentment, demand,
protest or notice of any kind, and any other act or thing, or omission or delay
to do any other act or thing, which in any manner or to any extent might vary
the risk of the Guarantor or which otherwise might operate to discharge the
Guarantor from its obligations hereunder.
Section 6. Inability to Accelerate Loan. If the Lender or the holder
----------------------------
of any of the Guaranteed Obligations is prevented under Applicable Law or
otherwise from demanding or accelerating payment thereof by reason of any
automatic stay or otherwise, the Lender or such holder shall be entitled to
receive from the Guarantor, upon demand therefor, the sums which otherwise would
have been due had such demand or acceleration occurred.
Section 7. Reinstatement of Guaranteed Obligations. If claim is ever
---------------------------------------
made upon the Lender for repayment or recovery of any amount or amounts received
in payment or on account of any of the Guaranteed Obligations, and the Lender
repays all or part of said amount by reason of (a) any judgment, decree or order
of any court or administrative body having jurisdiction over the Lender or any
of its property, or (b) any settlement or compromise of any such claim effected
by the Lender with any such claimant (including the Borrower or a trustee in
bankruptcy for the Borrower), then, and in such event, the Guarantor agrees that
any such judgment, decree, order, settlement or compromise shall be binding on
it, notwithstanding any revocation hereof or the cancellation of the Note, the
other Loan Documents, or any other instrument evidencing any liability of the
Borrower, and the Guarantor shall be and remain liable to the Lender for the
amounts so repaid or recovered to the same extent as if such amount had never
originally been paid to the Lender.
Section 8. Waiver of Subrogation. The Guarantor hereby forever
---------------------
waives and releases any and all claims or causes of action the Guarantor may
have against the Borrower or any other Person arising by reason of any payment
by the Guarantor to the Lender pursuant to this Guaranty, whether such claim or
cause of action arises by way of any common-law right of subrogation, by way of
any other applicable law or statutes, or by way of any written or oral agreement
between the Guarantor and the Borrower or Person. This waiver of subrogation is
for the benefit of the Borrower and the Lender and the foregoing waiver may not
be revoked by the Guarantor without the prior, written consent of the Lender.
Section 9. Payments Free and Clear. All sums payable by the
-----------------------
Guarantor hereunder, whether of principal, interest, fees, expenses, premiums or
otherwise, shall be paid in full, without set-off or counterclaim or any
deduction whatsoever.
- 4 -
<PAGE>
Section 10. Set-off. The Guarantor authorizes the Lender at any time
-------
and from time to time, without notice to the Guarantor, which notice the
Guarantor hereby expressly waives, to set off and apply any and all deposits
(whether general or special, time or demand, provisional or final, including any
negotiable or non-negotiable certificate of deposit now or hereafter issued by
the Lender to the Guarantor) or other indebtedness owing by such Lender to the
Guarantor, to the then outstanding Guaranteed Obligations then due and payable.
The Lender may exercise this right of setoff whether or not such Lender has made
demand for, or accelerated, any Guaranteed Obligations; provided, however, that
at any time at which the Lender exercises its right of setoff, any amount setoff
shall at such time be due and payable. The rights of the Lender under this
Section are in addition to, and not in limitation or substitution of, other
rights and remedies (including, but not limited to, other rights of set-off)
that the Lender may have.
Section 11. Subordination of the Borrower's Obligations To the
--------------------------------------------------
Guarantors. As an independent covenant, the Guarantor hereby expressly
- ----------
covenants and agrees for the benefit of the Lender that all obligations and
liabilities owing by the Borrower to the Guarantor of whatsoever description
including, without limitation, all intercompany receivables owing to the
Guarantor from the Borrower ("Junior Claims") shall be subordinate and junior in
right of payment to all obligations of the Borrower to the Lender under the
terms of the Note and the other Loan Documents ("Senior Claims").
If an Event of Default shall occur, then, unless and until such Event
of Default shall have been cured, waived, or shall have ceased to exist, no
direct or indirect payment (in cash, property, securities by setoff or
otherwise) shall be made by the Borrower to the Guarantor on account of or in
any manner in respect of any Junior Claim and the Guarantor shall not receive or
accept any such direct or indirect payment.
In the event of a Proceeding (as hereinafter defined), all Senior
Claims shall first be paid in full before any direct or indirect payment or
distribution (in cash, property, securities by setoff or otherwise) shall be
made to any Guarantor on account of or in any manner in respect of any Junior
Claim. For the purposes of the previous sentence, "Proceeding" means the
Borrower or the Guarantor shall commence a voluntary case concerning itself
under the Bankruptcy Code of 1978, as amended (the "Bankruptcy Code") or any
other applicable bankruptcy laws; or any involuntary case is commenced against
the Borrower or the Guarantor; or a custodian (as defined in the Bankruptcy Code
or any other applicable bankruptcy laws) is appointed for, or takes charge of,
all or any substantial part of the property of the Borrower or the Guarantor, or
the Borrower or the Guarantor commences any other proceedings under any
reorganization arrangement, adjustment of debt, relief of debtor, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Borrower or the Guarantor, or any such
proceeding is commenced against the Borrower or the Guarantor, or the Borrower
or the Guarantor is adjudicated insolvent or bankrupt; or any order of relief or
other order approving any such case or proceeding is entered; or the Borrower or
- 5 -
<PAGE>
the Guarantor suffers any appointment of any custodian or the like for it or any
substantial part of its property; or the Borrower or the Guarantor makes a
general assignment for the benefit of creditors; or the Borrower or the
Guarantor shall fail to pay, or shall state that it is unable to pay, or shall
be unable to pay, its debts generally as they become due; or the Borrower or the
Guarantor shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or the Borrower or the Guarantor shall
by any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing; or any corporate action shall be taken by
the Borrower or the Guarantor for the purpose of effecting any of the foregoing.
In the event any direct or indirect payment or distribution is made to
the Guarantor in contravention of this Section 11, such payment or distribution
shall be deemed received in trust for the benefit of the Lender and shall be
immediately paid over to the Lender for application against the Guaranteed
Obligations in accordance with the terms of the Note.
The Guarantor agrees to execute such additional documents as the
Lender may reasonably request to evidence the subordination provided for in this
Section 11.
Section 12. Automatic Acceleration in Certain Events. Upon the
----------------------------------------
occurrence of an Event of Default specified in Section 6 of the Note, all
Guaranteed Obligations shall automatically become immediately due and payable by
the Guarantor, without notice or other action on the part of the Lender, and
regardless of whether payment of the Guaranteed Obligations by the Borrower has
then been accelerated. In addition, if any of the Events of Default described
in Section 6 of the Note should occur with respect to the Guarantor, then the
Guaranteed Obligations shall automatically become immediately due and payable by
the Guarantor, without notice or other action on the part of the Lender, and
regardless of whether payment of the Guaranteed Obligations by the Borrower has
then been accelerated.
Section 13. Savings Clause. (a) It is the intent of the Guarantor
--------------
that the Guarantor's maximum liability hereunder shall be, but not in excess of:
(i) in a Proceeding commenced by or against the Guarantor under the
Bankruptcy Code on or within one year from the date on which any of the
Guaranteed Obligations are incurred, the maximum amount which would not
otherwise cause the Guaranteed Obligations (or any other obligations of the
Guarantor to the Lender) to be avoidable or unenforceable against the
Guarantor under (A) Section 548 of the Bankruptcy Code or (B) any state
fraudulent transfer or fraudulent conveyance act or statute applied in
such case or proceeding by virtue of Section 544 of the Bankruptcy Code; or
- 6-
<PAGE>
(ii) in a Proceeding commenced by or against the Guarantor under the
Bankruptcy Code subsequent to one year from the date on which any of the
Guaranteed Obligations is incurred, the maximum amount which would not
otherwise cause the Guaranteed Obligations (or any other obligations of the
Guarantor to the Lender) to be avoidable or unenforceable against the
Guarantor under any state fraudulent transfer or fraudulent conveyance act
or statute applied in any such case or proceeding by virtue of Section 544
of the Bankruptcy Code; or
(iii) in a Proceeding commenced by or against the Guarantor under any
law, statute or regulation other than the Bankruptcy Code (including,
without limitation, any other bankruptcy, reorganization, arrangement,
moratorium, readjustment of debt, dissolution, liquidation or similar
debtor relief laws), the maximum amount which would not otherwise cause the
Guaranteed Obligations (or any other obligations of the Guarantor to the
Lender) to be avoidable or unenforceable against the Guarantor under such
law, statute or regulation including, without limitation, any state
fraudulent transfer or fraudulent conveyance act or statute applied in any
such case or proceeding.
(The substantive laws under which the possible avoidance or unenforceability of
the Guaranteed Obligations (or any other obligations of the Guarantor to the
Lender) shall be determined in any such case or proceeding shall hereinafter be
referred to as the "Avoidance Provisions").
(b) To the end set forth in Section 13(a), but only to the extent that the
Guaranteed Obligations would otherwise be subject to avoidance under the
Avoidance Provisions if the Guarantor is not deemed to have received valuable
consideration, fair value or reasonably equivalent value for the Guaranteed
Obligations, or if the Guaranteed Obligations would render the Guarantor
insolvent, or leave the Guarantor with an unreasonably small capital to conduct
its business, or cause the Guarantor to have incurred debts (or to have intended
to have incurred debts) beyond its ability to pay such debts as they mature, in
each case as of the time any of the Guaranteed Obligations are deemed to have
been incurred under the Avoidance Provisions, the maximum Guaranteed Obligations
for which the Guarantor shall be liable hereunder shall be reduced to that
amount which, after giving effect thereto, would not cause the Guaranteed
Obligations (or any other obligations of the Guarantor to the Lender), as so
reduced, to be subject to avoidance under the Avoidance Provisions.
(c) This Section 13 shall be applicable only in connection with a
Proceeding brought by or against the Guarantor and is intended solely to
preserve the rights of the Lender hereunder to the maximum extent that would not
cause the Guaranteed Obligations of the Guarantor to be subject to avoidance
under the Avoidance Provisions in connection with any such Proceeding. Neither
the Guarantor nor any other Person
- 7 -
<PAGE>
shall have any right or claim under this Section 13 as against the Lender that
would not otherwise be available to the Guarantor or such other Person outside
of any Proceeding.]
Section 14. Covenants of the Guarantor. Until the Guaranteed Obligations
--------------------------
have been indefeasibly paid and performed in full, the Guarantor hereby
covenants and agrees with the Lender that:
(a) the Guarantor shall comply with all Applicable Laws to which it or its
properties is subject;
(b) the Guarantor shall not obtain any loans, advances or other financial
accommodations or arrangements or otherwise incur any other indebtedness for
money borrowed or for the deferred purchase price of any asset (including
capitalized lease obligations) from any other Person other than the Lender;
(c) the Guarantor shall not assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any Indebtedness of any other
Person other than guaranties and endorsements from time to time existing in
favor of the Lender;
(d) the Guarantor shall not make any investments in, or permit any
Subsidiaries to make any investments in, any Person or purchase or otherwise
acquire, or permit any Subsidiary (as defined below) to purchase or otherwise
acquire, any capital stock, properties, substantially all the assets or
obligations of, or any other equity interest in, any Person;
(e) the Guarantor shall not create, assume, incur or suffer to exist, or
permit any Subsidiary to create, assume, incur or suffer to exist, any Lien (as
defined below) upon any of its respective properties or assets whether now owned
or hereafter acquired, other than Permitted Liens (as defined below);
(f) the Guarantor shall not purchase or otherwise acquire for value any of
its capital stock now or hereafter outstanding, return any capital to its
stockholders as such or make any other similar payment or distribution of assets
to its stockholders with respect to its capital stock;
(g) except as contemplated by the Transaction Documents (as defined in that
certain Agreement and Plan of Merger and Contribution dated as of the date
hereof among the Lender, Vaxcel, Inc., Vaxcel Merger Subsidiary, Inc. and the
Borrower), the Guarantor shall not merge or consolidate with any other Person or
sell, lease or transfer or otherwise dispose of all or a substantial portion of
its assets to any Person or entity or permit any Subsidiary to do any of the
foregoing;
- 8 -
<PAGE>
(h) the Guarantor shall not effect any transaction with any Affiliate (as
defined below) by which any of the assets of the Guarantor are transferred to
such Affiliate at less than the cost or fair market value of such asset, or
enter into any other transaction with an Affiliate on terms more favorable to
such Affiliate than would be reasonably expected to be given in a similar
transaction with an unrelated entity;
(i) the Guarantor shall not extend credit to or make any advance, loan,
contribution or payment of money or goods (other than normal compensation for
personal services and travel expenses in the ordinary course of business) to any
Person or permit any Subsidiary to do any of the foregoing; and
(j) the Guarantor shall not create, incorporate or acquire any Subsidiary
other than Subsidiaries in existence as of the date hereof.
For purposes of this Guaranty, the following terms shall have the following
meanings:
"Affiliate" shall mean, with respect to a Person, any other Person that,
---------
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such given Person.
"Indebtedness" shall mean, as to any Person, all items (except items of
------------
capital stock, additional paid-in capital or retained earnings) which, in
accordance with generally accepted accounting principles, would be included in
determining total liabilities on a balance sheet of such Person as at the date
the Indebtedness is to be determined including, but not limited to, all
obligations of the Borrower under all personal and real property leases.
"Inventory" shall mean (a) all inventory and all other goods intended for
---------
sale or lease by the Borrower, or for display or demonstration; (b) all work in
process of the Borrower; (c) all raw materials and other materials and supplies
of every nature and description used or which might be used in connection with
the manufacture, packing, shipping, advertising, selling, leasing or furnishing
of such goods or otherwise used or consumed in the Borrower's business; and (d)
all documents relating to any of the foregoing.
"Lien" shall mean any security interest, lien, collateral assignment,
----
encumbrance, mortgage, deed to secure debt, deed of trust, pledge, charge,
conditional sale or other title retention agreement, or other encumbrance of any
kind covering any property of a Person.
"Permitted Liens" shall mean (a) Liens securing taxes, assessments and
---------------
other governmental charges or levies not yet due and payable or the claims of
materialmen, mechanics, carriers, warehousemen or landlords for labor,
materials, supplies or rentals
- 9 -
<PAGE>
incurred in the ordinary course of business but not yet due and payable; (b)
Liens consisting of deposits or pledges made, in the ordinary course of
business, in connection with, or to secure payment of, obligations under
workmen's compensation, unemployment insurance or similar legislation; and (c)
Liens in favor of the Lender.
"Person" shall mean an individual, corporation, partnership, association,
------
trust or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Subsidiary" shall mean a Person of which an aggregate of 50% or more of
----------
the voting stock of any class or classes or 50% or more of other voting
interests is owned of record or beneficially by another Person, or by one or
more Subsidiaries of such other Person, or by such other Person and one or more
Subsidiaries of such Person.
Section 15. Governing Law. THIS GUARANTY SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Section 16. JURISDICTION/JURY TRIAL WAIVER/OTHER MATTERS. (a) EACH
--------------------------------------------
OF THE LENDER AND THE GUARANTOR ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS GUARANTY OR THE RELATIONSHIP OF THE GUARANTOR AND THE
LENDER ESTABLISHED HEREBY, WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES.
ACCORDINGLY, TO THE FULLEST EXTENT PERMITTED BY LAW, EACH OF THE GUARANTOR AND
THE LENDER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND
OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE
GUARANTOR ARISING OUT OF THIS GUARANTY OR BY REASON OF ANY OTHER CAUSE OR
DISPUTE WHATSOEVER BETWEEN THE GUARANTOR AND THE LENDER OF ANY KIND OR NATURE.
(b) EACH OF THE GUARANTOR AND THE LENDER AGREES THAT THE FEDERAL COURT OF
THE NORTHERN DISTRICT OF GEORGIA OR ANY STATE COURT LOCATED IN FULTON COUNTY,
GEORGIA SHALL HAVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES
BETWEEN THE GUARANTOR AND THE LENDER PERTAINING DIRECTLY OR INDIRECTLY TO THIS
GUARANTY OR TO ANY MATTER ARISING HEREFROM. THE GUARANTOR EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED
IN SUCH COURT. THE GUARANTOR AND THE LENDER WAIVE ANY OBJECTION THAT IT MAY NOW
OR HEREAFTER HAVE TO THE VENUE OF ANY PROCEEDING IN ANY SUCH COURT OR THAT SUCH
PROCEEDING
- 10 -
<PAGE>
WAS BROUGHT IN AN INCONVENIENT FORUM AND EACH AGREES NOT TO PLEAD OR CLAIM THE
SAME.
(c) THE GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY SUMMONS AND
COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN, AND AGREES THAT SERVICE OF
SUCH SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS MAY BE MADE BY UNITED
STATES MAIL, POSTAGE PREPAID ADDRESSED TO THE GUARANTOR AT THE ADDRESS SET FORTH
BELOW ITS SIGNATURE HERETO. SHOULD THE GUARANTOR FAIL TO APPEAR OR ANSWER ANY
SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THIRTY DAYS AFTER THE
MAILING THEREOF, IT SHALL BE DEEMED IN DEFAULT AN ORDER AND/OR JUDGMENT MAY BE
ENTERED AGAINST IT AS PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS.
(d) THE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO
PRECLUDE THE BRINGING OF ANY ACTION BY THE LENDER OR THE ENFORCEMENT BY THE
LENDER OF ANY JUDGMENT OBTAINED IN SUCH FORUM IN ANY OTHER APPROPRIATE
JURISDICTION.
(e) THE GUARANTOR AGREES THAT ALL OF ITS PAYMENT OBLIGATIONS HEREUNDER
SHALL BE ABSOLUTE, UNCONDITIONAL AND, FOR THE PURPOSES OF MAKING PAYMENTS
HEREUNDER, THE GUARANTOR HEREBY WAIVES ANY RIGHT TO ASSERT ANY SETOFF,
COUNTERCLAIM OR CROSS-CLAIM.
(f) THE GUARANTOR ACKNOWLEDGES THAT ALL OF THE WAIVERS IN THIS SECTION HAVE
BEEN MADE WILLINGLY, WITH THE ADVICE OF LEGAL COUNSEL AND WITH A FULL
UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF.
Section 17. Loan Accounts. The Lender may maintain books and accounts
-------------
setting forth the amounts of principal, interest and other sums paid and payable
with respect to the Guaranteed Obligations, and in the case of any dispute
relating to any Guaranteed Obligation, the entries in such account shall be
binding upon the Guarantor as to the outstanding amount of such Guaranteed
Obligations and the amounts paid and payable with respect thereto absent
manifest error. The failure of the Lender to maintain such books and accounts
shall not in any way relieve or discharge the Guarantor of any of its
obligations hereunder.
Section 18. Waiver of Remedies. No delay or failure on the part of the
------------------
Lender in the exercise of any right or remedy it may have against the Guarantor
hereunder or otherwise shall operate as a waiver thereof, and no single or
partial exercise by the
- 11 -
<PAGE>
Lender of any such right or remedy shall preclude other or further exercise
thereof or the exercise of any other such right or remedy.
Section 19. Successors and Assigns. Each reference herein to the Lender
----------------------
shall be deemed to include the Lender's successors and assigns (including, but
not limited to, any holder of the Guaranteed Obligations) in whose favor the
provisions of this Guaranty also shall inure, and each reference herein to the
Guarantor shall be deemed to include the Guarantor's successors and assigns,
upon whom this Guaranty also shall be binding. The Lender may assign, transfer
or sell any Guaranteed Obligation, or grant or sell participation in any
Guaranteed Obligations, pursuant to the terms of the Loan Documents, to any
Person or entity without the consent of, or notice to, the Guarantor and without
releasing, discharging or modifying the Guarantor's obligations hereunder. The
Guarantor hereby consents to the delivery by the Lender to any assignee,
transferee or participant of any financial or other information regarding the
Borrower or the Guarantor. The Guarantor may not assign or transfer its
obligations hereunder to any Person or entity.
Section 20. Survival of Agreement. All agreements, representations and
---------------------
warranties made herein shall survive the execution and delivery of this Guaranty
and the Note, the making of the Loans and the execution and delivery of the
other Loan Documents.
Section 21. Amendments. This Guaranty may not be amended except in
----------
writing signed by the Lender and the Guarantor.
Section 22. Payments/Expenses. All payments made by the Guarantor
-----------------
pursuant to this Guaranty shall be made in the lawful currency of the United
States of America, in immediately available funds to the main office of the
Lender, not later than 11:00 a.m., Atlanta time, on the date three business days
after demand therefor. The Guarantor shall pay, on demand, all costs and
expenses incurred by the Lender in the collection and enforcement of this
Guaranty including the fees and disbursements of counsel to the Lender if
collection is sought by or through an attorney.
Section 23. Notices. All notices, demands or other communications to the
-------
Guarantor hereunder shall be in writing and shall be mailed or hand delivered or
sent via facsimile transmission to the address for the Guarantor set forth below
its signature hereto. All such notices, demands and communications shall be
deemed received by the Guarantor (a) if personally delivered or by messenger or
overnight courier or delivered via facsimile transmission, on the date of
delivery thereof or (b) if through the United States mail, on the earlier of (i)
the date three days after the posting thereof and (ii) the date of actual
receipt by the Guarantor.
- 12 -
<PAGE>
Section 24. Severability. In case any provision of this Guaranty shall be
------------
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
Section 25. Headings. Section headings used in this Guaranty are for
--------
convenience only and shall not affect the construction of this Guaranty.
Section 26. Review of Note/Loan Documents. The Guarantor acknowledges
-----------------------------
that, prior to the execution and delivery of this Guaranty, the Guarantor has
had the opportunity to review and ask questions regarding the Note and the other
Loan Documents referred to therein and to discuss the same and this Guaranty
with its counsel.
- 13 -
<PAGE>
IN WITNESS WHEREOF, the Guarantor has duly executed and delivered this
Guaranty as of the date and year first written above.
ZYNAXIS VACCINE TECHNOLOGIES,
INC.
By: /s/ Martyn Greenacre
--------------------
Title: President
---------
Address for Notices:
371 Phoenixville Pike
Malvern, Pennsylvania 19355
Attention: Martyn Greenacre
Telephone Number: 610-889-2200
Telecopy Number: 610-889-2222
- 14 -
<PAGE>
PREFERRED STOCK AND WARRANT AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
December 6, 1996, by and among ZYNAXIS, INC., a Pennsylvania corporation
("Zynaxis"), CYTRX CORPORATION, a Delaware corporation ("CytRx"), Vaxcel, Inc.,
a Delaware corporation and a wholly owned subsidiary of CytRx ("Vaxcel") and the
persons listed in Exhibit A (the "Securityholders").
---------
W I T N E S S E T H:
-------------------
WHEREAS, the Securityholders collectively hold all of the outstanding
shares of Series A Convertible Preferred Stock of Zynaxis (the "Series A Stock")
and each Securityholder holds the number of shares of Series A Stock and the
number of warrants to purchase additional shares of Common Stock of Zynaxis set
forth beside such Securityholder's name in Exhibit A (the "Warrants");
---------
WHEREAS, the Series A Stock and the Warrants were issued pursuant to
that certain Preferred Stock and Warrant Purchase Agreement dated March 29,
1995, as amended (the "Preferred Stock and Warrant Purchase Agreement"), and in
connection with bridge loans extended by certain of the Securityholders to
Zynaxis;
WHEREAS, simultaneously with the execution of this Agreement Zynaxis is
entering into an Agreement and Plan of Merger and Contribution (the "Merger and
Contribution Agreement") with CytRx, Vaxcel, and Vaxcel Merger Sub, Inc., a
Georgia corporation and a newly formed, wholly owned subsidiary of Vaxcel
("Vaxcel Merger Sub"), and certain other agreements, including, among other
things, a Liquidation Agreement (the "Liquidation Agreement") contemplating the
sale of Assets (as defined therein) of Zynaxis and documents (the "Secured Loan
Documents") relating to a secured loan being extended to Zynaxis by CytRx (the
"Secured Loan"). The Merger and Contribution Agreement provides for the issuance
of shares of Vaxcel Common Stock and a warrant to purchase shares of Vaxcel
Common Stock to CytRx in exchange for CytRx's contribution to Vaxcel of the
Secured Loan and a cash payment in an amount equal to Four Million Dollars
($4,000,000) minus the aggregate principal and interest balance outstanding
under the Secured Loan, subject to adjustment for payments made to shareholders
of Zynaxis pursuant to Section 3.3 of the Merger and Contribution Agreement. The
Merger and Contribution Agreement also provides for the issuance of shares of
Vaxcel Common Stock to the existing shareholders of Zynaxis in exchange for the
contribution to Vaxcel by the existing shareholders of Zynaxis of all of the
outstanding shares of capital stock of Zynaxis by means of a merger of Vaxcel
Merger Sub with and into Zynaxis. At the effective time of such merger, the
outstanding shares of the capital stock of Zynaxis will be converted into the
right to receive shares of the common stock of Vaxcel (except as provided
herein). As a result, shareholders of Zynaxis will become shareholders of Vaxcel
and Zynaxis will continue to conduct its business and operations as a wholly
owned subsidiary of Vaxcel.
<PAGE>
WHEREAS, CytRx is unwilling to enter into the Merger and Contribution
Agreement unless the rights of the Securityholders are modified as set forth in
this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, covenants, and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Treatment of Transactions. Each of the undersigned elects
-------------------------
that the consummation of the transactions contemplated by the Merger and
Contribution Agreement and the other agreements contemplated by the Merger and
Contribution Agreement, including but not limited to the Liquidation Agreement,
will not be deemed a liquidation for purposes of Sections 3.1 and 3.2 of the
Statement with Respect to Shares filed by Zynaxis in the Department of State of
the Commonwealth of Pennsylvania on April 6, 1995.
2. Consent to Secured Loan. Each of the undersigned consents
-----------------------
to the Secured Loan and all liens, pledges, mortgages, security interests and
other encumbrances to which the assets or properties of Zynaxis may become
subject as part of the Secured Loan.
3. Exchange of Warrants. Each of the undersigned agrees that
--------------------
upon consummation of the merger between Zynaxis and Vaxcel Merger Sub pursuant
to the Merger and Contribution Agreement (the "Merger"), each Warrant held by
the undersigned shall be exchanged for a new warrant substantially in the form
attached hereto as Exhibit B to purchase a number of shares of Vaxcel Common
Stock equal to: (i) the number of shares of Common Stock of Zynaxis as the
Warrants held by such undersigned are exercisable to purchase at that time
multiplied by (ii) the Exchange Ratio (the "New Warrant"). Each of the
undersigned Securityholders agrees that such undersigned Securityholder shall
surrender the Warrants held by such undersigned Securityholder and shall receive
in exchange therefor a New Warrant. Zynaxis shall not honor any warrant
agreement representing a Warrant after the Merger.
4. Termination of Preferred Stock and Warrant Purchase
---------------------------------------------------
Agreement and Registration Rights. Each of the undersigned agrees that the
- ---------------------------------
Preferred Stock and Warrant Purchase Agreement and all rights of the
Securityholders thereunder shall terminate upon the Merger. Each of the
undersigned further agrees that: (i) upon execution of this Agreement all rights
that the undersigned Securityholder may have to require Zynaxis to register
securities of Zynaxis for sale under applicable state and federal securities
laws, whether granted pursuant to the Preferred Stock and Warrant Agreement or
otherwise ("Registration Rights"), are suspended pending the Merger, and (ii)
upon occurrence of the Merger all such Registration Rights will be terminated
and such Securityholder will have such Registration Rights as are provided for
such Securityholder in the Merger and Contribution Agreement. If the Merger and
Contribution Agreement is terminated for any reason, beginning at the time of
such termination the undersigned Securityholder shall have such Registration
Rights as such Securityholder would have had at such time if such Registration
Rights had not been suspended pursuant to the preceding sentence.
-2-
<PAGE>
5. Accredited Investor Status of Securityholder. Each of the
--------------------------------------------
undersigned Securityholders represents and warrants to CytRx, Vaxcel and Zynaxis
that he or it is an "accredited investor" within the meaning of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
and that he or it is acquiring New Warrants for himself or itself and not for
other persons. Each Securityholder understands that the New Warrants and any
Securities purchased upon exercise of New Warrants (the "Warrant Securities")
have not been registered under the Securities Act and, therefore, cannot be
resold unless such Warrant Securities are registered under the Securities Act or
unless an exemption from such registration is available.
6. Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice): (i) if to Zynaxis, CytRx or
Vaxcel, to the address set forth in Section 11.8 of the Merger and Contribution
Agreement; and (ii) if to a Securityholder, to its address shown below its
signature on the last page hereof.
7. Headings. The headings contained in this Agreement are for
--------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8. Counterparts. This Agreement may be executed in two or
------------
more counterparts, all of which shall be considered one and the same agreement.
9. Entire Agreement. This Agreement (including the documents
----------------
and instruments referred to herein) constitutes the entire agreement, and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof.
10. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the Commonwealth of Pennsylvania,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
11. Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties without the prior
written consent of the other parties. Any assignment in violation of the
foregoing shall be void.
12. Equitable Remedies. Each Securityholder agrees that
------------------
irreparable damage would occur and that CytRx and Vaxcel would not have any
adequate remedy at law in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that CytRx and Vaxcel shall be entitled to an
injunction or injunctions to prevent breaches by a Securityholder of this
Agreement and to enforce specifically the terms and provisions of this
Agreement.
-3-
<PAGE>
13. Severability. If any term, provision, covenant or
------------
restriction herein, or the application thereof to any circumstance, shall, to
any extent, be held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions herein and the application thereof to any other circumstances,
shall remain in full force and effect, shall not in any way be affected,
impaired or invalidated, and shall be enforced to the fullest extent permitted
by law.
14. Defined Terms. Capitalized terms used in this Agreement
-------------
but not defined herein shall have the meanings given such terms in the Merger
and Contribution Agreement.
[Remainder of page intentionally left blank.]
-4-
<PAGE>
[First of Three Signature Pages to Preferred Stock and Warrant Agreement
dated December 6, 1996]
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
under seal as of the day and year first above written.
ZYNAXIS, INC. CYTRX CORPORATION
By: /s/ Martyn Greenacre By: /s/ Jack J. Luchese
-------------------------------- ---------------------------------
Name: M.D. Greenacre Name: Jack J. Luchese
------------------------------ -------------------------------
Title: Chairman, President & CEO Title: Chairman, President & CEO
----------------------------- --------------------------
VAXCEL, INC. S.R. ONE, LTD.
By: /s/ Paul J. Wilson By: /s/ Brenda D. Gavin
-------------------------------- ---------------------------------
Name: Paul J. Wilson Name: Brenda D. Gavin
------------------------------ -------------------------------
Title: President & CEO Title: Vice President
----------------------------- ------------------------------
Address: 565 E. Swedesford Rd -# 315
----------------------------
Wayne, PA 19087
----------------------------
----------------------------
----------------------------
EUCLID PARTNERS III, L.P. ALPHI FUND L.P.
BY: Euclid Associates III, L.P.
General Partner
By: /s/ Stephen K. Reidy By: Alphi Investment Management Co.
------------------------------- ---------------------------------
Name: Stephen K. Reidy General Partner
-----------------------------
Title: General Partner
----------------------------
By: /s/ Philip R. Smith
---------------------------------
Address: Euclid Partners Corp. Name: Philip R. Smith
-------------------------- -------------------------------
50 Rockefeller Plaza Title: President
-------------------------- ------------------------------
New York, NY 10020
--------------------------
Address: 155 Pfingsten Rd
-------------------------- ----------------------------
Suite 360
----------------------------
Deerfiled, IL 60015
----------------------------
JAVELIN CAPITAL FUND, L.P.
By: /s/ Lyle A. Hohnke
-------------------------------
Name: Lyle A. Hohnke
-----------------------------
Title: General Partner
----------------------------
Address: 1075 13th Street South
--------------------------
Birmingham, AL 35294
--------------------------
-5-
<PAGE>
[Second of Three Signature Pages to Preferred Stock and Warrant Agreement dated
December 6, 1996]
SENMED MEDICAL VENTURES CIP CAPITAL L.P.
By: CIP Capital Management Inc.,
General Partner
By: /s/ Vincent M. Paglino By: /s/ Joseph M. Corr
------------------------------- ---------------------------------
Name: Vincent M. Paglino Name: Joseph M. Corr
----------------------------- -------------------------------
Title: Vice President, Business Dev. Title: President
------------------------------ ------------------------------
Address: 4445 Lake Forest Drive # 600 Address: 20 Valley Stream Parkway
----------------------------- ----------------------------
Cincinnati, OH 45242 Suite 265
-------------------------- ----------------------------
Malvern, PA 19355
-------------------------- ----------------------------
-------------------------- ----------------------------
THE WEST COMPANY WILLIAM M. SPENCER, III
By: /s/ Donald E. Morel By: /s/ William M. Spencer, III
------------------------------- ---------------------------------
Name: Donald E. Morel Name: William M. Spencer
----------------------------- -------------------------------
Title: Corporate Vice President, Title:
---------------------------- ------------------------------
Scientific Services
----------------------------
Address: 101 Gordon Drive Address: 3300 Cahaba Rd- Suite 105
-------------------------- ----------------------------
Lionville, PA 19341 Birmingham, AL 35223
-------------------------- ----------------------------
-------------------------- ----------------------------
BIOTECHNOLOGY VENTURE COMMONWEALTH VENTURE
FUND S.A. PARTNERS I, L.P.
By: By: /s/ Charles A. Burton
------------------------------- ---------------------------------
Name: Name: Charles A. Burton
----------------------------- -------------------------------
Title: Title: General Partner
---------------------------- ------------------------------
Address: Address: The Bellevue
-------------------------- ----------------------------
200 S. Broad Street
-------------------------- ----------------------------
Phila, PA 19102
-------------------------- ----------------------------
-------------------------- ----------------------------
-6-
<PAGE>
[Third of Three Signature Pages to Preferred Stock and Warrant Agreement dated
December 6, 1996]
PLEXUS VENTURES, INC. PHILADELPHIA VENTURES - JAPAN I,
L.P.
By: /s/ John F. Chappell By: /s/ Charles A. Burton
------------------------------- ---------------------------------
Name: John F. Chappell Name: Charles A. Burton
----------------------------- -------------------------------
Title: President Title: General Partner
---------------------------- ------------------------------
Address: 1787 Sentry Parkway West Address: The Bellevue
-------------------------- ----------------------------
Building 18, Suite 301 200 S. Broad Street
-------------------------- ----------------------------
Blue Bell, PA 19422 Phila, PA 19102
-------------------------- ----------------------------
GROTECH PARTNERS II, L.P. GROTECH PARTNERS III, L.P.
GROTECH III COMPANION FUND, L.P.
By: Mid Atlantic Ventures II, L.P., GROTECH III PENNSYLVANIA FUND, L.P.
General Partner
By: Grotech Capital Group, Inc.,
By: Grotech Capital Group, Inc., General Partner
General Partner
By: /s/ Matthew D. Brunner By: /s/ Matthew D. Brunner
------------------------------- ---------------------------------
Name: Matthew D. Brunner Name: Matthew D. Brunner
----------------------------- -------------------------------
Title: Partner Title: Partner
---------------------------- ------------------------------
Address: 9690 Deereco Road Address: 9690 Deereco Road
-------------------------- ----------------------------
Timonium, MD 21093 Timonium, MD 21093
-------------------------- ----------------------------
-------------------------- ----------------------------
/s/ Gus S. Casten, M.D.
- ----------------------------------
Dr. Gus G. Casten
Address: 238 Meadowcroft Circle
--------------------------
Birmingham, AL 35242-2956
--------------------------
--------------------------
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<PAGE>
EXHIBIT A
HOLDERS OF PREFERRED STOCK AND WARRANTS ISSUED BY
ZYNAXIS, INC.
<TABLE>
<CAPTION>
Series A
Name Shares Warrants
---- ------ --------
<S> <C> <C>
Euclid Partners III, L.P. 260,000 680,775
S.R. One, Ltd. 257,500 540,000
Javelin Capital Fund, L.P. 250,000 500,000
Alphi Fund L.P. 150,000 300,000
Senmed Medical Ventures 135,000 270,000
The West Company 125,000 250,000
William M. Spencer, III 55,000 110,000
Biotechnology Venture Fund S.A. 50,000 100,000
CIP Capital L.P. 45,000 265,000
Grotech Partners III, L.P. 26,490 52,980
Plexus Ventures, Inc. 25,000 150,000
Dr. Gus G. Casten 12,500 25,000
Commonwealth Venture Partners I, L.P. 10,000 20,000
Grotech Partners II,L.P. 3,455 6,910
Grotech III Companion Fund, L.P. 3,155 6,310
Philadelphia Ventures - Japan I, L.P. 2,500 5,000
Grotech III Pennsylvania Fund, L.P. 1,900 3,800
--------- ---------
Totals 1,412,500 3,285,775
</TABLE>
<PAGE>
EXHIBIT B
---------
THE WARRANTS REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE WARRANTS MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
THE WARRANTS REPRESENTED HEREBY AND THE RIGHTS OF HOLDERS THEREOF ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND OTHER RESTRICTIONS, AND THE HOLDER OF THE
WARRANTS REPRESENTED HEREBY (INCLUDING ANY HOLDERS) ARE BOUND BY THE TERMS OF A
PREFERRED STOCK AND WARRANT AGREEMENT DATED NOVEMBER 25, 1996 AMONG ZYNAXIS,
INC., A PENNSYLVANIA CORPORATION, CYTRX CORPORATION, A DELAWARE CORPORATION,
VAXCEL, INC., A DELAWARE CORPORATION, AND THE HOLDERS OF SHARES OF SERIES A
CONVERTIBLE PREFERRED STOCK OF ZYNAXIS, INC. (THE "PREFERRED STOCK AND WARRANT
AGREEMENT") (COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY).
Void after 5:00p.m. (Eastern Standard Time), on the last
day of the Warrant Term, as provided herein.
Date:____________, 1996 Warrant to
Purchase_________________
Shares of Common Stock
WARRANT
TO PURCHASE COMMON STOCK OF
VAXCEL, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED, ______________ or such person's
registered assigns (herein called "Warrant Holder"), is the holder of a warrant
(this "Warrant") to purchase, subject to the provisions of this Warrant, from
Vaxcel, Inc., a Delaware corporation (the "Company"), at any time and from time
to time during the Warrant Term, __________ fully paid, validly issued and
nonassessable shares of Common Stock, par value $.001 per share, of the Company
("Common Stock"), at the Warrant Price. The Warrant Price and number and kind of
securities issuable hereunder are subject to adjustment as provided herein.
<PAGE>
1. Definitions. For the purpose of this Warrant:
-----------
(a) "Additional Shares of Capital Stock" means all shares of capital
stock issued by the Company, except shares of capital stock of the Company
issued and outstanding at the time of issuance of this Warrant or expressly
authorized to be issued in the future pursuant to any contract, option, warrant
or benefit or compensation plan in existence and/or outstanding at the time of
issuance of this Warrant.
(b) "Capital Stock" means the Company's Common Stock, and any other
stock of any class, whether now or hereafter authorized, which has the right to
participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
(c) "Merger and Contribution Agreement" means that certain Agreement
and Plan of Merger and Contribution entered into by and among CytRx Corporation,
a Delaware corporation, the Company, Vaxcel Merger Subsidiary, Inc., a Georgia
corporation, and Zynaxis, Inc., a Pennsylvania corporation.
(d) "Per Share Price" means the Per Share Price as defined in the
Merger and Contribution Agreement.
(e) "Warrants" mean the warrants to purchase Common Stock of the
Company issued by the Company pursuant to the Preferred Stock and Warrant
Agreement and any and all warrants which are issued in exchange or substitution
for any outstanding Warrant pursuant to the terms of that Warrant.
(f) "Warrant Price" means the price per share at which shares of
Common Stock are purchasable hereunder, as such price may be adjusted from time
to time hereunder. The Warrant Price shall initially be equal to: (i) the Per
Share Price divided by (ii) the Exchange Ratio, and beginning at 5:00 p.m.
----------
Eastern Time on the sixtieth (60th) day following the Closing Date, as such term
is defined in the Merger and Contribution Agreement, shall be equal to two (2)
times the Warrant Price in effect immediately prior to such time.
(g) "Warrant Shares" mean shares of Common Stock or other securities
purchased upon exercise of this Warrant.
(h) "Warrant Term" means a period of one year commencing on the
Closing Date and ending at 5:00 p.m. Eastern Time on the first anniversary of
the Closing Date, as such term is defined in the Merger and Contribution
Agreement.
2. Exercise of Warrants. This Warrant may be exercised during the Warrant
--------------------
Term in whole or in part by the surrender of the Warrant, with the purchase
agreement attached hereto as Exhibit A properly completed and executed, at the
principal office of
- 2 -
<PAGE>
the Company at 154 Technology Parkway, Norcross, Georgia 30092 or such other
location which shall at that time be the principal office of the Company (the
"Principal Office"), and upon payment to it by certified check or bank draft to
the order of the Company for the purchase price for the shares to be purchased
upon such exercise. The persons entitled to the shares so purchased shall be
treated for all purposes as the holders of such shares as of the close of
business on the date of exercise and certificates for the shares of stock so
purchased shall be delivered to the persons so entitled within a reasonable
time, not exceeding thirty (30) days, after such exercise. Unless this Warrant
has expired, a new Warrant of like tenor and for such number of shares as the
holder of subject to the restrictions on transfer set forth below.
(a) Registration Restrictions. This Warrant and any Warrant Shares that
-------------------------
may be issued upon exercise thereof have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to the exemption provided in Section 4(2) thereof, and
have not been registered under state securities laws by reason of their issuance
in a transaction exempt from such registration requirements. This Warrant and
such Warrant Shares may not be sold, transferred or otherwise disposed of unless
registered under the Securities Act and applicable state securities laws (the
Company being under no obligation so to register such Warrant or Warrant Shares
except as set forth in the Merger and Contribution Agreement) or exempted from
such registration. Warrant Shares issuable upon exercise of this Warrant will
bear a legend to this effect. The restrictions contained herein shall be binding
on any transferee of this Warrant and the Company may require any such
transferee to execute an instrument agreeing in writing to be so bound by these
restrictions as a condition to transfer.
(b) Notice of Transfer and Opinion of Counsel. Warrant Holder agrees that,
-----------------------------------------
prior to any transfer of this Warrant, such holder will give written notice to
the Company of such holder's intention to effect such transfer and to comply in
all other respects with the provisions of this Section 4. Each such notice shall
contain (i) a statement setting forth the intention of such holder's prospective
transferee with respect to its retention or disposition of this Warrant, and
(ii) unless waived by the Company, an
- 3 -
<PAGE>
opinion of counsel for such holder (who may be the inside or staff counsel
employed by such holder), as to the necessity or non-necessity for registration
under the Securities Act and applicable state securities laws in connection with
such transfer and stating the factual and statutory bases relied upon by
counsel. The following provisions shall then apply:
(A) If in the opinion of counsel for the Company the proposed transfer
of this Warrant may be effected without registration or qualification under
the Securities Act and any applicable state securities laws, then the
registered holder of this Warrant shall be entitled to transfer this
Warrant in accordance with the intended method of disposition specified in
the statement delivered by such holder to the Company.
(B) If in the opinion of counsel for the Company the proposed transfer
of this Warrant may not be effected without registration under the
Securities Act or registration or qualification under any applicable state
securities laws, the registered holder of this Warrant shall not be
entitled to transfer this Warrant until the requisite registration or
qualification is effective.
(c) Transfer. Subject to the restrictions on transfer set forth in this
--------
Section 4 and in Section 11 hereof, this Warrant is transferable, in whole or in
part, at the Principal Office by the registered holder thereof, in person or by
duly authorized attorney, upon presentation of this Warrant, properly endorsed,
for transfer. Each holder of this Warrant, by holding it, agrees that this
Warrant, when endorsed in blank, may be deemed negotiable, and that the holder
thereof, when the Warrant shall have been so endorsed, may be treated by the
Company and all other persons dealing with the Warrant as the absolute owner
thereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to the transfer thereof on the books of the
Company, any notice to the contrary notwithstanding.
5. Certain Covenants of the Company. The Company covenants and agrees that
--------------------------------
all shares which may be issued upon the exercise of this Warrant, will,
upon issuance, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof, and without
limiting the generality of the foregoing, the Company covenants and agrees that
it will from time to time take all such action as may be required to assure that
the par value per share of the Common Stock is at all times equal to or less
than the then effective purchase price per share of the Common Stock issuable
pursuant to this Warrant. The Company further covenants and agrees that during
the period within which the rights represented by this Warrant may be exercised,
the Company will at all times have authorized, and reserved for the purpose of
issue upon exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
6. Adjustments of Warrant Price. In the event that the Company at any time
----------------------------
or from time to time after the issuance of the Warrants shall declare any
dividend on the Common Stock payable in Common Stock or in any right to acquire
Common Stock for
-4-
<PAGE>
any consideration less than the Warrant Price, or shall effect a subdivision of
the outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by a payment of a
dividend in Common Stock or in any right to acquire Common Stock) or in the
event the outstanding shares of Common Stock shall be combined or consolidated,
by reverse stock split, reclassification or otherwise, into a lesser number of
shares of Common Stock, then the Warrant Price shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate, to avoid dilution of the exercise rights hereunder. In the event
that the Company shall declare or pay any dividend on the Common Stock payable
in any right to acquire Common Stock for no consideration, then the Company
shall be deemed to have made a dividend payable in Common Stock in an amount of
shares equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock. The Warrant Price will be adjusted on a
weighted-average basis in the event of the sale of Additional Shares of Capital
Stock for consideration less than the Warrant Price (except in connection with
corporate partnership or research and development agreements). For the purposes
of this Section 6, the value of consideration other than cash received for the
issuance of Additional Shares of Capital Stock shall be computed at the fair
value thereof at the time of such issuance, as determined in good faith by the
Board of Directors of the Company.
7. Adjustments for Reclassification and Reorganization. In case of any
---------------------------------------------------
reclassification or change of outstanding securities issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value or as a result of a subdivision or
combination) or in case of any consolidation or merger of the Company with or
into another corporation or in case of any sale or transfer to another
corporation of the property of the Company as an entirety or substantially as an
entirety, the Company, or such successor or purchasing corporation, as the case
may be, shall, without payment of any additional consideration therefor, execute
or require the execution of new warrants providing that the holders of the
Warrants shall have the right to exercise such new warrants (upon terms not less
favorable to the holders than those then applicable to the Warrants) and to
receive upon such exercise, in lieu of each share of Common Stock theretofore
issuable upon exercise of the Warrants, the kind and amount of shares of stock,
other securities, money or property receivable upon such reclassification,
change, consolidation, merger, sale or transfer by the holder of one share of
Common Stock issuable upon exercise of the Warrants had the Warrants been
exercised immediately prior to such reclassification, change, consolidation,
merger, sale or transfer. Such new warrant shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in Section 6 hereof and this Section 7. The provisions of this Section 7
shall similarly apply to successive reclassifications, changes, consolidations,
mergers, sales and transfers.
8. Notices. Whenever the Warrant Price shall be adjusted pursuant to
-------
Section 6 hereof, or there shall be a reclassification, reorganization or other
event specified in Section 7 hereof, the Company shall promptly prepare a
certificate signed by its President or a Vice President and by its Treasurer or
Assistant Treasurer or its
-5-
<PAGE>
Secretary or Assistant Secretary, setting forth in reasonable detail, as the
case may be, the event requiring the adjustment, the amount of the adjustment,
the method by which such adjustment was calculated, the Warrant Price after
giving effect to such adjustment, and information regarding the execution of new
warrants, and shall promptly cause copies of such certificate to be mailed (by
first class mail and postage prepaid) to the registered holders of the Warrants.
In the event the Company shall take any action which pursuant to Section 6
may result in an adjustment of the Warrant Price, or pursuant to Section 7 may
result in the execution of new warrants, the Company will give to the registered
holders of the Warrants at their last addresses known to the Company written
notice of such action ten (10) days in advance of its effective date in order to
afford to such holders of the Warrants an opportunity to exercise the Warrants
and to purchase shares of Common Stock of the Company prior to such action
becoming effective.
9. Fractional Shares. No fractional shares of Common Stock will be issued
-----------------
in connection with any purchase hereunder.
10. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
--------------------------------------
reasonable evidence satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and (in the case of loss, theft or
destruction) of reasonable indemnity and (in case of mutilation) upon surrender
and cancellation thereof, the Company will execute and deliver, in lieu thereof
a new Warrant of like tenor.
11. Restrictions on Transfer. This Warrant is, and any Warrant Shares
------------------------
issued upon the exercise of this Warrant will be, issued subject to the
restrictions on transfer contained in this Warrant or any certificate for
Warrant Shares issued in exchange or substitution for this Warrant or any
outstanding certificate for Warrant Shares and shall bear the restrictive
legend(s), if any, on this Warrant or such outstanding certificate for Warrant
Shares unless, in the opinion of counsel for the Company, such legend(s) may be
removed therefrom.
12. Headings. The description headings of the several sections of this
--------
Warrant are inserted for convenience only and do not constitute a part of this
Warrant.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Warrant.
VAXCEL, INC.
By:
-------------------------------------
As its:
ATTEST:
- 7 -
<PAGE>
EXHIBIT A
- ---------
PURCHASE AGREEMENT
------------------
Date:
-------------------
TO:
The undersigned, pursuant to the provisions set forth in the attached
Warrant, hereby agrees to purchase shares of Common Stock covered by such
Warrant, and makes payment herewith in full therefor at the price per share
provided by this Warrant.
Signature:
------------------------
Address:
--------------------------
--------------------------
* * *
ASSIGNMENT
----------
For Value Received, __________________________________________ hereby
sells, assigns and transfers all of the rights of the undersigned under the
within Warrant, with respect to the number of shares of Common Stock covered by
such Warrant to:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
---------------- ------- -------------
, and appoints ______________Attorney to make such transfer of the books of
Vaxcel, Inc. maintained for such purpose, with full power of substitution in the
premises.
Dated: Signature:
------------------------
Witness:
--------------------------
<PAGE>
COLLATERAL ASSIGNMENT OF LICENSE AGREEMENT
THIS COLLATERAL ASSIGNMENT OF LICENSE AGREEMENT dated as of December 6,
1996, executed and delivered by ZYNAXIS VACCINE TECHNOLOGIES, INC., a
Pennsylvania corporation (the "Debtor"), in favor of CYTRX CORPORATION, a
Delaware corporation (the "Secured Party").
WHEREAS, the Secured Party is extending a secured loan (the "Secured Loan")
to Zynaxis, Inc., a Pennsylvania corporation and the Debtor's parent
("Zynaxis"), which Secured Loan will be guaranteed by the Debtor pursuant to
that certain Guaranty dated as of the date hereof (the "Guaranty");
WHEREAS, the Debtor is party to a certain License Agreement dated July 1,
1987 (as amended, supplemented, restated or otherwise modified from time to
time, the "Assigned Agreement") with Southern Research Institute ("Southern"),
pursuant to which the Debtor licenses certain technology from Southern; and
WHEREAS, as a condition to the Secured Party extending the Secured Loan to
Zynaxis, the Secured Party has required, among other things, that the Debtor
execute and deliver the Guaranty and, in connection therewith, assign to the
Secured Party, and grant to the Secured Party a security interest in, the
Debtor's right, title and interest in, to and under the Assigned Agreement, as
additional security for the Guaranteed Obligations.
NOW, THEREFORE, in consideration of the premises set forth herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by the Debtor, the Debtor agrees as follows:
Section 1. Assignment and Security Interest. As security for the payment
--------------------------------
and performance of the Guaranteed Obligations, the Debtor hereby assigns to the
Secured Party, and grants to the Secured Party a security interest in (a) all of
the Debtor's right, title and interest in, to and under the Assigned Agreement,
together with all other documents, instruments, agreements, certificates and
opinions delivered in connection with the Assigned Agreement, all as the same
may be amended, supplemented, restated or otherwise modified from time to time,
(the "Assigned Agreement Documents"), including without limitation, (i) all
rights of the Debtor to receive moneys due and to become due to it thereunder or
in connection therewith; (ii) all rights of the Debtor to damages arising out
of, or for, breach or default in respect thereof and (iii) all rights of the
Debtor to perform and exercise all rights and remedies thereunder; (b) all of
the Debtor's books and records in any way relating to the Assigned Agreement
Documents and (c) all products and proceeds of any of the foregoing (all of the
foregoing, collectively the "Collateral").
<PAGE>
Section 2. Covenants. The Debtor covenants and agrees as to each Assigned
---------
Agreement Document as follows:
(a) The Debtor shall at all times duly and punctually perform all of the
terms, conditions and covenants of the Assigned Agreement Documents on the
Debtor's part to be kept, observed and performed.
(b) The Debtor will not sell, assign, grant a Lien in, or otherwise
transfer to any Person any of the Debtor's right, title or interest in, to or
under any of the Collateral.
(c) The Debtor will not amend or otherwise modify any of the terms of any
Assigned Agreement Document, or terminate any Assigned Agreement Document,
without the Secured Party's prior written consent.
(d) The Debtor shall promptly deliver to the Secured Party a copy of any
notice or other written communication given by Southern to the Debtor or by the
Debtor to Southern under or in connection with any Assigned Agreement Document.
Section 3. Representations and Warranties. The Debtor represents and
------------------------------
warrants to the Secured Party as follows:
(a) True, correct and complete copies of the Assigned Agreement Documents
(including all amendments, supplements and modifications thereto) have been
delivered to the Secured Party.
(b) Each Assigned Agreement Document is in full force and effect and is the
legal, valid and binding obligation of the Debtor and Southern, enforceable
against the Debtor and Southern in accordance with its terms.
(c) With the exception of the Debtor's failure to pay royalties as
described in letters from Southern to Debtor dated August 21, 1996 and August
27, 1996 (the "Royalty Default"), neither the Debtor nor Southern is in default
under any Assigned Agreement Document.
(d) Except for that certain Development and License Agreement by and
between Zynaxis and ALK A/S dated September 21, 1995, the Debtor has not
assigned any of its right, title or interest in, to or under any of the
Collateral to any Person.
(e) The Debtor has full authority and the legal right to assign to the
Secured Party, and to grant to the Secured Party a security interest in, the
Assigned Agreement Documents and the other Collateral and the Debtor has
obtained all consents necessary for the valid and binding assignment of and the
effectiveness and enforceability of such security interest under this Agreement.
(f) All of the Collateral is free and clear of all Liens.
-2-
<PAGE>
Section 4. Debtor's Right to Enforce. So long as no Event of Default
-------------------------
shall have occurred, the Secured Party will not exercise or enforce, or seek to
exercise or enforce, or avail itself of, any of the rights, powers, privileges,
authorizations and benefits assigned and transferred to the Secured Party
pursuant to this Agreement, and the Debtor may exercise or enforce, or seek to
exercise or enforce, such rights, powers, privileges, authorizations and
benefits in conformity with the provisions of this Agreement. If the Debtor
shall fail to perform or comply with any term or condition imposed upon the
Debtor under any of the Assigned Agreement Documents, or the Debtor shall fail
to exercise any right or remedy of the Debtor thereunder, then, without waiving
or releasing the Debtor from any of its obligations hereunder or under such
Assigned Agreement Document, the Secured Party may (but shall not obligated to)
take any action the Secured Party deems necessary or desirable to preserve and
protect any of the Debtor's rights thereunder or the Secured Party's rights
thereunder; provided, however, that the Secured Party may not take any such
action if the Debtor complies with the covenant in Section 8.10 of the Agreement
and Plan of Merger and Contribution dated the date hereof to which the Debtor
and the Secured Party are parties.
Section 5. Remedies. Upon the occurrence of an Event of Default, the
--------
Secured Party shall, at its election, without notice of election and without
demand, have the right to do any one or more of the following acts, all of which
are hereby authorized by the Debtor: (a) exercise any or all of the rights
available to a secured party under the Uniform Commercial Code or any other
Applicable Law; (b) exercise any or all of its rights and remedies under the
Loan Documents; and (c) through Vaxcel, Inc., a Delaware corporation and a
Subsidiary of the Secured Party, exercise any or all of the Debtor's rights
under any or all of the Assigned Agreement Documents to the exclusion of the
Debtor.
Section 6. Secured Party Not Obligated. Notwithstanding any other
---------------------------
provision of this Agreement to the contrary, the Debtor expressly acknowledges
and agrees that it shall continue to observe and perform all of the conditions
and obligations contained in the Assigned Agreement Documents to be observed and
performed by it, and that neither this Agreement, nor any action taken pursuant
hereto, shall cause the Secured Party to be under any obligation or liability in
any respect whatsoever to any party to any Assigned Agreement Document or to any
other Person for the observance or performance of any of the representations,
warranties, conditions, covenants, agreements or terms therein contained.
Section 7. Further Assurances. At any time and from time to time, upon
------------------
the written request of the Secured Party, and at the sole expense of the Debtor,
the Debtor will promptly execute and deliver such further instruments and
documents and take such further action as the Secured Party may reasonably
request for the purpose of obtaining or preserving the full benefits of this
Agreement and of the rights and powers herein granted.
-3-
<PAGE>
Section 8. Rights Cumulative. The rights and remedies of the Secured
-----------------
Party under this Agreement are cumulative and not exclusive of any rights or
remedies which it would otherwise have. In exercising its rights and remedies
the Secured Party may be selective and no failure or delay by the Secured Party
in exercising any right shall operate as a waiver of it, nor shall any single or
partial exercise of any power or right preclude its other or further exercise or
the exercise of any other power or right.
Section 9. Secured Party Appointed Attorney-in-Fact. The Debtor hereby
----------------------------------------
irrevocably appoints the Secured Party as the Debtor's attorney-in-fact, with
full power of substitution, effective after the occurrence of an Event of
Default and for so long thereafter as there are unsatisfied Guaranteed
Obligations, with full authority in the place and stead of the Debtor and in the
name of the Debtor or otherwise, from time to time in the Secured Party's
discretion, to take any action and to execute any instrument or document which
the Secured Party may deem necessary or advisable to accomplish the purposes of
this Agreement and to exercise any rights and remedies the Secured Party may
have under this Agreement or Applicable Law. The power-of-attorney granted
hereby is irrevocable and coupled with an interest.
Section 10. Expenses. The Debtor will pay, on demand, all reasonable out-
--------
of-pocket expenses incurred by the Secured Party or its assignee in connection
with: (a) the collection or enforcement of the Guaranteed Obligations including
the reasonable fees and disbursements of counsel to the Secured Party, if such
collection or enforcement is done through or by an attorney; and (b) the
exercise by the Secured Party or its assignee of any right or remedy granted to
it under this Agreement, if a Default or Event of Default has occurred.
Section 11. Amendments, Etc. No amendment or waiver of any provision of
---------------
this Agreement, nor consent to any departure by the Debtor herefrom, shall in
any event be effective unless the same shall be in writing and signed by the
parties hereto, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
Section 12. Notices. Notices, requests and other communications required
-------
or permitted hereunder shall be given in accordance with the applicable terms of
the Security Agreement of even date herewith between the Secured Party and the
Debtor.
Section 13. Continuing Security Interest. This Agreement shall create a
----------------------------
continuing security interest in the Collateral and shall (i) remain in full
force and effect until indefeasible payment in full of the Guaranteed
Obligations, (ii) be binding upon the Debtor, its successors and assigns and
(iii) inure to the benefit of the Secured Party, and its successors and assigns.
The Debtor's successors and assigns shall include, without limitation, a
receiver, trustee or debtor-in-possession thereof or therefore.
Section 14. Applicable Law; Severability. THIS AGREEMENT SHALL BE
----------------------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
-4-
<PAGE>
THE STATE OF GEORGIA. Whenever possible, each provision of this Agreement shall
be interpreted in such a manner as to be effective and valid under Applicable
Law, but if any provision of this Agreement shall be prohibited by or invalid
under Applicable Law, such provisions shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Agreement.
Section 15. Indemnification. The Debtor agrees to indemnify and hold the
---------------
Secured Party and its officers, directors, employees, agents and Affiliates
harmless from and against any claim, loss, damage, action, cause of action,
liability, cost and expense or suit of any kind or nature whatsoever, including
reasonable attorneys' fees and expenses, brought against or incurred by the
Secured Party or its officers, directors, employees, agents and Affiliates in
any manner arising out of or, directly or indirectly, related to or connected
with this Agreement, including without limitation, the exercise by the Secured
Party or the Secured Party's assignee of any of its rights and remedies under
this Agreement or under any of the Assigned Agreement Documents or any other
action taken by the Secured Party or its assignee pursuant to the terms of this
Agreement; provided, however, that the indemnity set forth in this Section 15
-------- -------
shall not apply to the extent that the claim, loss, damage, action, cause of
action, liability, cost, expense or suit arises primarily and directly from the
gross negligence or willful misconduct of the Secured Party or its assignee.
Section 16. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be an original and all of which, taken
together, shall constitute but one and the same instrument.
Section 17. Benefits. The terms, covenants and conditions contained
--------
herein shall inure to the benefit of the Secured Party, and its successors and
assigns, and shall be binding on the Debtor and its successors and assigns.
Section 18. Definitions. Capitalized terms not otherwise defined herein
-----------
are used herein as with the respective meanings given them in (i) the Security
Agreement of even date herewith between the Debtor and the Secured Party and
(ii) the Senior Secured Note of even date herewith executed by Zynaxis in favor
of the Secured Party, as the case may be.
-5-
<PAGE>
IN WITNESS WHEREOF, the Debtor has executed and delivered this Collateral
Assignment of License Agreement under seal as of the date first written above.
ZYNAXIS VACCINE TECHNOLOGIES, INC.
By: /s/ Martyn Greenacre
---------------------------
Title: President
---------------------
ATTEST:
By:
---------------------------------
Title:
---------------------------
(CORPORATE SEAL)
-6-
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT
The undersigned, Southern Research Institute ("Southern"), acknowledges
receipt of a copy of the within and foregoing Collateral Assignment of License
Agreement (the "Assignment"). Capitalized terms not otherwise defined herein
are used herein with the respective meanings given them in the Assignment.
NOW, THEREFORE, for good and valuable consideration, including the economic
benefit expected to accrue to Southern Research Institute as a result of the
proposed transactions between the Debtor and the Secured Party, the receipt and
sufficiency of which are hereby acknowledged by Southern, Southern agrees as
follows:
Section 1. Consent to Assignment. Southern consents to the execution and
---------------------
delivery of the Assignment by the Debtor and the assignment by the Debtor to the
Secured Party, and the grant by the Debtor to the Secured Party of a security
interest in, all of the Debtor's right, title and interest in, to and under the
Assigned Agreement Documents and the other Collateral upon satisfaction of the
following conditions:
a. the Collateral is subsequently assigned to Vaxcel, Inc., a wholly
owned subsidiary of the Secured Party; and
b. either Debtor or the Secured Party satisfies the monetary obligations
of the Debtor to Southern under the Assigned Agreement, including but
not limited to: (A) Debtor's obligation to cure the Royalty Default
and (B) Debtor's obligations to pay expenses of filing, prosecuting,
defending and maintaining patent applications and patents issued
thereon.
Upon receipt by the undersigned of: (i) written notice from the Secured
Party that an Event of Default has occurred under the Secured Loan, and (ii)
proof of satisfaction of the above conditions that is reasonably satisfactory to
the undersigned, the undersigned shall immediately thereupon, and at all times
thereafter, permit the Secured Party, at the Secured Party's option, to exercise
all of the rights and benefits of the Debtor under or in respect of such
Assigned Agreement Documents and the other Collateral which the Secured Party
desires to exercise, all to the complete and absolute exclusion of the Debtor.
The undersigned acknowledges and agrees that any exercise by the Secured Party
of any such rights and benefits shall not discharge or otherwise release the
Debtor from any of its obligations under or in respect of any of the Assigned
Agreement Documents and the other Collateral.
Section 2. Benefits. This Acknowledgment shall be binding upon the
--------
undersigned and its successors and assigns, and shall inure to the benefit of
the Secured Party and its successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Acknowledgment and Agreement under seal as of the date first written above.
SOUTHERN RESEARCH INSTITUTE
By: /s/ John Rouse
-----------------
Title: President
---------
<PAGE>
December 6, 1996
Mr. Martyn D. Greenacre
Chairman and CEO
Zynaxis, Inc.
371 Phoenixville Pike
Malvern, PA 19355
Dear Martyn:
We understand that the Board of Directors of Zynaxis (the "Company")
has approved the sale of the assets listed in Exhibit A attached hereto (the
---------
"Assets") for prices no less than the values indicated for such assets on
Exhibit A and the settlement of the liabilities listed in Exhibit B attached
- --------- ---------
hereto (the "Liabilities") for amounts no greater than the amounts indicated on
Exhibit B (collectively, the "Transactions"). We further understand that the
- ---------
Board of Directors (and any applicable committees thereof) of Zynaxis have
approved: (i) the operating budget attached as Exhibit C for the period between
---------
the date of this letter and the closing of the proposed business combination
transaction between the Company and CytRx Corporation, (ii) the agreements to be
entered into by the Company and CytRx Corporation with Martyn D. Greenacre and
Michael A. Christie attached as Exhibit D and Exhibit E, respectively, and (iii)
--------- ---------
the agreement between QED and Zynaxis covering QED's relationship as Zynaxis's
agent for the sale of the Cauldron Division attached as Exhibit F.
---------
1. The Company will exert its commercially reasonable best efforts to sell the
Assets and to cooperate with CytRx Corporation in its efforts to assist you in
selling the Assets. The Company shall approve and execute documents evidencing
and perform any agreement negotiated by the Company or us with any prospective
purchaser of any Asset if (a) the purchase price is no lower than the amount and
is consistent with the terms set forth for such Asset in Exhibit A, and (b) the
---------
other terms and conditions of the Transaction are not less favorable to the
Company in any material respect than the terms and conditions of similar
transactions.
2. The Company will exert its commercially reasonable best efforts to settle
the Liabilities and to cooperate with CytRx Corporation in its efforts to
assist you in settling the Liabilities. The Company shall approve and execute
documents evidencing and perform any agreement negotiated by the Company or us
with any creditor for any Liability, if (a) the cash payment required to be paid
by the Company to such creditor is no greater than the settlement amount and is
consistent with the terms set forth for such Liability in Exhibit B, and (b) the
---------
other terms and conditions of the Transaction are not less favorable to the
Company in any material respect than the terms and conditions of similar
transactions.
3. Subject to approval by the Committee (as defined below), which approval
shall not be unreasonably withheld, the Company shall approve and execute
documents
-1-
<PAGE>
evidencing and perform any agreement negotiated by us with any counsel,
accountants, appraisers, brokers and other advisors in connection with the
Transactions (all for the account of the Company), if (a) such person is not an
affiliate of ours, and (b) the terms and conditions of such agreement, taken as
a whole, are fair to the Company.
4. In connection with our activities on your behalf, the Company agrees to
cooperate with us, to furnish or cause to be furnished to us such information
and data as we may reasonably request, and to give us reasonable access to the
Company's officers, directors, employees, appraisers and independent
accountants. The Company represents that all information made available to us
by the Company will be complete and correct in all material respects and will
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in light
of the circumstances under which such statements are made.
5. The Board of Directors of the Company (the "Board") shall establish a
committee (the "Committee") of the Board consisting of John Chappell, Stephen
Reidy and Martyn Greenacre, which shall have full authority of the Board to
authorize the Transactions and the institution and prosecution of actions
(including arbitration proceedings) relating to the Transactions. The Committee
shall confer with us at such times as we reasonably request.
6. The Company shall reimburse us promptly for all reasonable out-of-pocket
expenses, including reasonable fees and expenses of our counsel, incurred in
connection with the rendering of our services hereunder.
7. The benefits of this Agreement shall inure to the respective successors and
assigns of the parties hereto and of the Indemnified Persons referred to in the
attached indemnification provisions, and the obligations and liabilities assumed
in this Agreement by the parties hereto shall be binding upon their respective
successors and assigns.
8. The Company agrees to indemnify us in accordance with the indemnification
provisions attached as Exhibit G hereto, which are incorporated herein by
---------
reference and made a part hereof.
9. We may terminate this Agreement at any time upon written notice, without
liability or continuing obligation to you. The Company may not terminate this
Agreement unless and until the Agreement and Plan of Merger and Contribution
dated as of the date hereof between us and the Company is terminated. Neither
termination nor completion of this assignment shall affect the provisions of
paragraphs 6 and 8, which shall remain operative and in full force and effect
until 5:00 p.m. Eastern time on the third anniversary of the execution of this
Agreement.
10. The validity and interpretation of this Agreement shall be governed by, and
construed and enforced in accordance with, the substantive laws of the State of
Delaware applicable to agreements made and to be fully performed therein. This
agreement may
-2-
<PAGE>
not be modified or amended except in writing signed by the parties hereto.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
person, other than the parties hereto or their respective successors, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement. The parties acknowledge that this Agreement is not to be construed as
creating a partnership or joint venture between the parties hereto.
[Signatures begin on the next page.]
-3-
<PAGE>
If the above terms are in accordance with our understanding, please sign the
enclosed copy of this letter and return it to us.
Very truly yours,
CYTRX CORPORATION
By: /s/ Jack J. Luchese
---------------------
Jack J. Luchese
President and Chief Executive Officer
Confirmed and Agreed to this
6th day of December, 1996:
ZYNAXIS, INC.
By:/s/ Martyn D. Greenacre
-----------------------
Martyn D. Greenacre
Chairman and Chief Executive Officer
-4-
<PAGE>
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT dated as of December 6, 1996 by and between ZYNAXIS,
INC., a Pennsylvania corporation (the "Pledgor") and CYTRX CORPORATION, a
Delaware corporation (the "Pledgee").
WHEREAS, Pledgee has agreed to lend funds to the Pledgor, with the
Pledgor's obligation to repay the loan being evidenced by that certain Senior
Secured Note made by Pledgor in favor of Pledgee that is being delivered
simultaneously with the execution of this Agreement (the "Note"); and
WHEREAS, in connection with such loan the Pledgee requires a first priority
security interest in all of the assets of the Pledgor.
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
Section 1. Pledge. The Pledgor hereby pledges, hypothecates, assigns,
------
transfers, sets over and delivers unto the Pledgee, and grants to the Pledgee a
security interest in, all of the Pledgor's right, title and interest in, to and
under the following (collectively, the "Pledged Collateral"): (a) all of the
common stock, shares, equity interest and other securities (collectively,
"Securities") of each Person (each an "Issuer") described in Schedule 1 attached
----------
hereto; (b) any additional Securities of any of such Issuers as may from time to
time be issued to the Pledgor or otherwise acquired by the Pledgor; (c) any
additional Securities of any Issuer as may hereafter at any time be delivered to
the Pledgee by or on behalf of the Pledgor; (d) any cash or additional
Securities or other property at any time and from time to time receivable or
otherwise distributable in respect of, in exchange for, or in substitution of,
any of the property referred to in any of the immediately preceding clauses (a)
through (c); and (e) any and all products and proceeds of any of the foregoing,
together with any and all other rights, titles, interests, powers, privileges
and preferences pertaining to said property.
Section 2. Obligations Secured. This Agreement is made, and the security
-------------------
interest created hereby is granted to the Pledgee, to secure the prompt
performance and payment in full of all indebtedness, liabilities, obligations,
covenants and duties of the Pledgor owing to the Pledgee of every kind, nature
and description, whether direct or indirect, absolute or contingent, due or not
due, contractual or tortious, liquidated or unliquidated, and whether or not
evidenced by any note, including any reasonable fees of or costs or expenses
incurred by the Pledgee or Pledgee's counsel in connection with the realization
of the security for which this Agreement provides, including, without
limitation, any reasonable costs or expenses of any proceedings to which this
Agreement may give rise.
<PAGE>
Section 3. Representations and Warranties. The Pledgor hereby represents
------------------------------
and warrants to the Pledgee as follows:
(a) Validly Issued, etc. All of the Securities of each Issuer have been
--------------------
validly issued and are fully paid and nonassessable.
(b) Title and Liens. The Pledgor is, and will at all times continue to be,
---------------
the legal and beneficial owner of the Pledged Collateral and none of the Pledged
Collateral is subject to any Lien. No financing statement under the Uniform
Commercial Code of any jurisdiction which names the Pledgor as debtor or covers
any of the Pledged Collateral, or any other notice filed in the public records
indicating the existence of a Lien thereon, has been filed and is still
effective in any state or other jurisdiction, other than Uniform Commercial Code
financing statements filed in favor of the Pledgee, and the Pledgor has not
signed any such financing statement or notice or any security agreement
authorizing the filing of any such financing statement or notice, other than
Uniform Commercial Code financing statements filed in favor of the Pledgee.
(c) Name; Chief Executive Office; Taxpayer ID Number. The correct
------------------------------------------------
corporate name of the Pledgor is set forth in the first paragraph of this
Agreement. The chief executive office and principal place of business of the
Pledgor and the location of the Pledgor's books and records relating to the
Pledged Collateral are located at 371 Phoenixville Pike, Malvern, Chester
County, Pennsylvania. The Internal Revenue Service taxpayer identification
number of the Pledgor is 23-2562913.
(d) Authority, etc. The Pledgor (i) has the power and authority to pledge
--------------
the Pledged Collateral in the manner hereby done or contemplated and (ii) will
defend its title or interest thereto or therein against any and all Liens (other
than the Lien created by this Agreement and Permitted Liens), however arising,
of all Persons.
(e) No Approval. No consent or approval of any Governmental Authority or
-----------
any securities exchange was or is necessary to the validity of the pledge
effected hereby.
(f) Outstanding Shares. Schedule 2 attached hereto sets forth the
------------------
authorized capital structure of each Issuer and the issued and outstanding
shares of stock of each class of capital stock.
Section 4. Covenants. The Pledgor hereby unconditionally covenants and
---------
agrees as follows:
(a) No Liens; No Sale of Pledged Collateral. The Pledgor will not create,
---------------------------------------
assume, incur or permit or suffer to exist or to be created, assumed or
incurred, any Lien on any of the Pledged Collateral (or any interest therein),
other than Permitted Liens, and will not, without the prior written consent of
the Pledgee, sell, lease, assign, transfer or otherwise dispose of all or any
portion of the Pledged Collateral (or any interest therein).
-2-
<PAGE>
(b) Change of Locations, Name, Etc. Without giving the Pledgor sixty-day's
------------------------------
prior written notice, the Pledgor will not (i) change the Pledgor's chief
executive office, principal place of business, or the location of its books and
records relating to the Pledged Collateral or (ii) change its name, identity or
structure.
Section 5. Additional Shares.
-----------------
(a) During the period this Agreement is in effect, the Pledgor shall not
permit any Issuer to issue any additional shares of capital stock or other
equity securities or interests to any Person other than the Pledgor. Further,
the Pledgor shall not permit any Issuer to amend or modify its articles or
certificate of incorporation in a manner which would affect the voting,
liquidation, preference or other rights of a holder of the shares of stock
pledged hereunder.
(b) The Pledgor agrees that, until this Agreement has terminated in
accordance with its terms, any additional Securities of an Issuer at any time
issued to the Pledgor or otherwise acquired by the Pledgor shall be promptly
delivered or otherwise transferred to the Pledgee as additional Pledged
Collateral and shall be subject to the Lien of, and the terms and conditions of,
this Agreement.
Section 6. Registration in Nominee Name, Denominations. The Pledgee shall
-------------------------------------------
have the right (in its sole and absolute discretion) to hold the Pledged
Collateral in its own name as pledgee, the name of its nominee (as Pledgee or as
sub-agent) or the name of the applicable Pledgor, endorsed or assigned in blank
or in favor of the Pledgee. The Pledgor will promptly give to the Pledgee
copies of any notices or other communications received by it with respect to
Pledged Collateral registered in the name of the Pledgor. The Pledgee shall at
all times have the right to exchange the certificates representing Pledged
Collateral for certificates of smaller or larger numbers of shares for any
purpose consistent with this Agreement.
Section 7. Voting Rights; Dividends, etc.
------------------------------
(a) So long as no Event of Default shall have occurred and be continuing:
(i) the Pledgor shall be entitled to exercise any and all voting
and/or consensual rights and powers accruing to an owner of the Pledged
Collateral or any part thereof for any purpose not inconsistent with the
terms and conditions of this Agreement or any agreement giving rise to or
otherwise relating to any of the Obligations; provided, however, that the
Pledgor shall not exercise, or refrain from exercising, any such right or
power if any such action would have a materially adverse effect on the
value of such Pledged Collateral in the judgment of the Pledgee;
-3-
<PAGE>
(ii) the Pledgor shall be entitled to retain and use any and all cash
dividends paid on the Pledged Collateral, but any and all stock and/or
liquidating dividends, other distributions in property, return of capital
or other distributions made on or in respect of Pledged Collateral, whether
resulting from a subdivision, combination or reclassification of
outstanding Securities of an Issuer which are pledged hereunder or received
in exchange for Pledged Collateral or any part thereof or as a result of
any merger, consolidation, acquisition or other exchange of assets or on
the liquidation, whether voluntary or involuntary, of an Issuer, or
otherwise, shall be and become part of the Pledged Collateral pledged
hereunder and, if received by the Pledgor, shall forthwith be delivered to
the Pledgee to be held as collateral subject to the terms and conditions of
this Agreement.
The Pledgee agrees to execute and deliver to the Pledgor, or cause to be
executed and delivered to the Pledgor, as appropriate, at the sole cost and
expense of the Pledgor, all such proxies, powers of attorney, dividend orders
and other instruments as the Pledgor may reasonably request for the purpose of
enabling the Pledgor to exercise the voting and/or consensual rights and powers
which Pledgor is entitled to exercise pursuant to clause (i) above and/or to
receive the dividends which Pledgor is authorized to retain pursuant to clause
(ii) above.
(b) Upon the occurrence and during the continuance of an Event of Default,
all rights of the Pledgor to exercise the voting and/or consensual rights and
powers which Pledgor is entitled to exercise pursuant to subsection (a)(i) above
and/or to receive the dividends which Pledgor is authorized to receive and
retain pursuant to subsection (a)(ii) above shall cease, and all such rights
thereupon shall become immediately vested in the Pledgee, which shall have, to
the extent permitted by law, the sole and exclusive right and authority to
exercise such voting and/or consensual rights and powers which the Pledgor shall
otherwise be entitled to exercise pursuant to subsection (a)(i) above and/or to
receive and retain the dividends which the Pledgor shall otherwise be authorized
to retain pursuant to subsection (a)(ii) above. Any and all money and other
property paid over to or received by the Pledgee pursuant to the provisions of
this subsection (b) shall be retained by the Pledgee as additional collateral
hereunder and shall be applied in accordance with the provisions of Section 9.
If the Pledgor shall receive any dividends or other property which it is not
entitled to receive under this Section, the Pledgor shall hold the same in trust
for the Pledgee, without commingling the same with other funds or property of or
held by the Pledgor, and shall promptly deliver the same to the Pledgee upon
receipt by the Pledgor in the identical form received, together with any
necessary endorsements.
Section 8. Remedies upon Default.
---------------------
(a) In addition to any right or remedy that the Pledgee may have under the
Note or otherwise under Applicable Law, if an Event of Default shall have
occurred, the Pledgee may exercise any and all the rights and remedies of a
secured party under the Uniform Commercial Code as in effect in any applicable
jurisdiction and may otherwise
-4-
<PAGE>
sell, assign, transfer, endorse and deliver the whole or, from time to time, any
part of the Pledged Collateral at a public or private sale or on any securities
exchange, for cash, upon credit or for other property, for immediate or future
delivery, and for such price or prices and on such terms as the Pledgee in its
discretion shall deem appropriate. The Pledgee shall be authorized at any sale
(if it deems it advisable to do so) to restrict the prospective bidders or
purchasers to Persons who will represent and agree that they are purchasing the
Pledged Collateral for their own account in compliance with the Securities Act
of 1933, as amended, and upon consummation of any such sale the Pledgee shall
have the right to assign, transfer, endorse and deliver to the purchaser or
purchasers thereof the Pledged Collateral so sold. Each purchaser at any sale of
Pledged Collateral shall take and hold the property sold absolutely free from
any claim or right on the part of the Pledgor, and the Pledgor hereby waives (to
the fullest extent permitted by Applicable Law) all rights of redemption, stay
and/or appraisal which the Pledgor now has or may at any time in the future have
under any Applicable Law now existing or hereafter enacted. The Pledgor agrees
that, to the extent notice of sale shall be required by Applicable Law, at least
ten days' prior written notice to the Pledgor of the time and place of any
public sale or the time after which any private sale is to be made shall
constitute reasonable notification, but notice given in any other reasonable
manner or at any other reasonable time shall constitute reasonable notification.
Such notice, in case of public sale, shall state the time and place for such
sale, and, in the case of sale on a securities exchange, shall state the
exchange on which such sale is to be made and the day on which the Pledged
Collateral, or portion thereof, will first be offered for sale at such exchange.
Any such public sale shall be held at such time or times within ordinary
business hours and at such place or places as the Pledgee may fix and shall
state in the notice or publication (if any) of such sale. At any such sale, the
Pledged Collateral, or portion thereof to be sold, may be sold in one lot as an
entirety or in separate parcels, as the Pledgee may determine in its sole and
absolute discretion. The Pledgee shall not be obligated to make any sale of the
Pledged Collateral if it shall determine not to do so regardless of the fact
that notice of sale of the Pledged Collateral may have been given. The Pledgee
may, without notice or publication, adjourn any public or private sale or cause
the same to be adjourned from time to time by announcement at the time and place
fixed for sale, and such sale may, without further notice, be made at the time
and place to which the same was so adjourned. In case the sale of all or any
part of the Pledged Collateral is made on credit or for future delivery, the
Pledged Collateral so sold may be retained by the Pledgee until the sale price
is paid by the purchaser or purchasers thereof, but the Pledgee shall not incur
any liability to the Pledgor in case any such purchaser or purchasers shall fail
to take up and pay for the Pledged Collateral so sold and, in case of any such
failure, such Pledged Collateral may be sold again upon like notice. At any
public sale made pursuant to this Agreement, the Pledgee, to the extent
permitted by Applicable Law, may bid for or purchase, free from any right of
redemption, stay and/or appraisal on the part of the Pledgor (all said rights
being also hereby waived and released to the extent permitted by Applicable
Law), any part of or all the Pledged Collateral offered for sale and may make
payment on account thereof by using any claim then due and payable to the
Pledgee from the Pledgor as a credit against the purchase price, and the Pledgee
may, upon compliance with the terms of sale and to the extent permitted by
Applicable Law, hold, retain and
-5-
<PAGE>
dispose of such property without further accountability to the Pledgor therefor.
For purposes hereof, a written agreement to purchase all or any part of the
Pledged Collateral shall be treated as a sale thereof; the Pledgee shall be free
to carry out such sale pursuant to such agreement and the Pledgor shall not be
entitled to the return of any Pledged Collateral subject thereto,
notwithstanding the fact that after the Pledgee shall have entered into such an
agreement all Events of Default may have been remedied or the Obligations may
have been paid in full as herein provided. The Pledgor hereby waives any right
to require any marshaling of assets and any similar right.
(b) In addition to exercising the power of sale herein conferred upon it,
the Pledgee shall also have the option to proceed by suit or suits at law or in
equity to foreclose this Agreement and sell the Pledged Collateral or any
portion thereof pursuant to judgment or decree of a court or courts having
competent jurisdiction.
(c) The rights and remedies of the Pledgee under this Agreement are
cumulative and not exclusive of any rights or remedies which it would otherwise
have.
Section 9. Application of Proceeds of Sale and Cash. The proceeds of any
----------------------------------------
sale of the whole or any part of the Pledged Collateral, together with any other
moneys held by the Pledgee under the provisions of this Agreement, shall be
applied by the Pledgee in the following order:
(a) First: to the payment of all costs and expenses incurred in connection
with such sale or other realization, including reasonable attorneys' fees
incurred if the Pledgee endeavored to collect the Obligations by or through an
attorney at law;
(b) Second: to the payment of the interest due upon any of the
Obligations, in any order which the Pledgee may elect;
(c) Third: to the payment of the principal due upon any of the Obligations
in any order which the Pledgee may elect; and
(d) Fourth: the balance (if any) of such proceeds shall be paid to the
Pledgor or to whomsoever may be legally entitled thereto.
The Pledgor shall remain liable and will pay, on demand, any deficiency
remaining in respect of the Obligations.
Section 10. Pledgee Appointed Attorney-in-Fact. The Pledgor hereby
----------------------------------
constitutes and appoints the Pledgee as the attorney-in-fact of the Pledgor with
full power of substitution either in the Pledgee's name or in the name of the
Pledgor to do any of the following after the occurrence of an Event of Default
and for so long as there are unsatisfied Obligations: (a) to perform any
obligation of the Pledgor hereunder in the Pledgor's name or otherwise; (b) to
ask for, demand, sue for, collect, receive, receipt and give acquittance for any
and all moneys due or to become due under and by virtue of any
-6-
<PAGE>
Pledged Collateral; (c) to prepare, execute, file, record or deliver notices,
assignments, financing statements, continuation statements, applications for
registration or like papers to perfect, preserve or release the Pledgee's
security interest in the Pledged Collateral or any of the documents,
instruments, certificates and agreements described in Section (b); (d) to
verify facts concerning the Pledged Collateral in its own name or a fictitious
name; (e) to endorse checks, drafts, orders and other instruments for the
payment of money payable to the Pledgor, representing any interest or dividend
or other distribution payable in respect of the Pledged Collateral or any part
thereof or on account thereof and to give full discharge for the same; (f) to
exercise all rights, powers and remedies which the Pledgor would have, but for
this Agreement, under the Pledged Collateral; and (g) to carry out the
provisions of this Agreement and to take any action and execute any instrument
which the Pledgee may deem necessary or advisable to accomplish the purposes
hereof, and to do all acts and things and execute all documents in the name of
the Pledgor or otherwise, deemed by the Pledgee as necessary, proper and
convenient in connection with the preservation, perfection or enforcement of its
rights hereunder. Nothing herein contained shall be construed as requiring or
obligating the Pledgee to make any commitment or to make any inquiry as to the
nature or sufficiency of any payment received by it, or to present or file any
claim or notice, or to take any action with respect to the Pledged Collateral or
any part thereof or the moneys due or to become due in respect thereof or any
property covered thereby, and no action taken by the Pledgee or omitted to be
taken with respect to the Pledged Collateral or any part thereof shall give rise
to any defense, counterclaim or offset in favor of the Pledgor or to any claim
or action against the Pledgee. The power or attorney granted herein is
irrevocable and coupled with an interest.
Section 11. Reimbursement of Pledgee. The Pledgor agrees to pay upon
------------------------
demand to the Pledgee the amount of any and all reasonable expenses, including
the reasonable fees, disbursements and other charges of its counsel and of any
experts or agents, and its fully allocated internal costs, that the Pledgee may
incur in connection with (i) the custody or preservation of, or any sale of,
collection from, or other realization upon, any of the Pledged Collateral, (ii)
the exercise or enforcement of any of the rights of the Pledgee hereunder, or
(iii) the failure by the Pledgor to perform or observe any of the provisions
hereof. Any such amounts payable as provided hereunder shall be additional
obligations secured hereby and by the other Loan Documents.
Section 12. Further Assurances. The Pledgor shall, at its sole cost and
------------------
expense, take all action that may be necessary or desirable in the Pledgee's
sole discretion, so as at all times to maintain the validity, perfection,
enforceability and priority of the Pledgee's security interest in the Pledged
Collateral, or to enable the Pledgee to exercise or enforce its rights
hereunder, including without limitation (a) delivering to the Pledgee, endorsed
or accompanied by such instruments of assignment as the Pledgee may specify, any
and all chattel paper, instruments, letters of credit and all other advices of
guaranty and documents evidencing or forming a part of the Pledged Collateral
and (b) executing and delivering financing statements, pledges, designations,
notices and assignments, in each case in form and substance satisfactory to the
Pledgee, relating to the creation, validity,
-7-
<PAGE>
perfection, priority or continuation of the security interest granted hereunder.
The Pledgor agrees to take, and authorizes the Pledgee to take on the Pledgor's
behalf, any or all of the following actions with respect to any Pledged
Collateral as the Pledgee shall deem necessary to perfect the security interest
and pledge created hereby or to enable the Pledgee to enforce its rights and
remedies hereunder: (i) to register in the name of the Pledgee any Pledged
Collateral in certificated or uncertificated form; (ii) to endorse in the name
of the Pledgee any Pledged Collateral issued in certificated form; and (iii) by
book entry or otherwise, identify as belonging to the Pledgee a quantity of
securities that constitutes all or part of the Pledged Collateral registered in
the name of the Pledgee. Notwithstanding the foregoing, the Pledgor agrees that
Pledged Collateral which is not in certificated form or is otherwise in book-
entry form shall be held for the account of the Pledgee. The Pledgor hereby
authorizes the Pledgee to execute and file in all necessary and appropriate
jurisdictions (as determined by the Pledgee) one or more financing or
continuation statements (or any other document or instrument referred to in the
immediately preceding clause (b)) in the name of the Pledgor and to sign the
Pledgor's name thereto. The Pledgor authorizes the Pledgee to file any such
financing statement, document or instrument without the signature of the Pledgor
to the extent permitted by Applicable Law. To the extent permitted by Applicable
Law, a carbon, photographic, xerographic or other reproduction of this Agreement
or any financing statement is sufficient as a financing statement. Any property
comprising part of the Pledged Collateral required to be delivered to the
Pledgee pursuant to this Agreement shall be accompanied by proper instruments of
assignment duly executed by the Pledgor and by such other instruments or
documents as the Pledgee may reasonably request.
Section 13. Securities Act. In view of the position of the Pledgor in
--------------
relation to the Pledged Collateral, or because of other current or future
circumstances, a question may arise under the Securities Act of 1933, as now or
hereafter in effect, or any similar Applicable Law hereafter enacted analogous
in purpose or effect (such Act and any such similar Applicable Law as from time
to time in effect being called the "Federal Securities Laws") with respect to
any disposition of the Pledged Collateral permitted hereunder. The Pledgor
understands that compliance with the Federal Securities Laws might very strictly
limit the course of conduct of the Pledgee if the Pledgee were to attempt to
dispose of all or any part of the Pledged Collateral in accordance with the
terms hereof, and might also limit the extent to which or the manner in which
any subsequent transferee of any Pledged Collateral could dispose of the same.
Similarly, there may be other legal restrictions or limitations affecting the
Pledgee in any attempt to dispose of all or part of the Pledged Collateral in
accordance with the terms hereof under applicable Blue Sky or other state
securities laws or similar Applicable Law analogous in purpose or effect. The
Pledgor recognizes that in light of the foregoing restrictions and limitations
the Pledgee may, with respect to any sale of the Pledged Collateral, limit the
purchasers to those who will agree, among other things, to acquire such Pledged
Collateral for their own account, for investment, and not with a view to the
distribution or resale thereof. The Pledgor acknowledges and agrees that in
light of the foregoing restrictions and limitations, the Pledgee, in its sole
and absolute discretion, may, in accordance with Applicable Law, (a) proceed to
make such a sale whether or not a registration statement for the purpose of
-8-
<PAGE>
registering such Pledged Collateral or part thereof shall have been filed under
the Federal Securities Laws and (b) approach and negotiate with a single
potential purchaser to effect such sale. The Pledgor acknowledges and agrees
that any such sale might result in prices and other terms less favorable to the
seller than if such sale were a public sale without such restrictions. In the
event of any such sale, the Pledgee shall incur no responsibility or liability
for selling all or any part of the Pledged Collateral in accordance with the
terms hereof at a price that the Pledgee, in its sole and absolute discretion,
may in good faith deem reasonable under the circumstances, notwithstanding the
possibility that a substantially higher price might have been realized if the
sale were deferred until after registration as aforesaid or if more than a
single purchaser were approached. The provisions of this Section will apply
notwithstanding the existence of public or private market upon which the
quotations or sales prices may exceed substantially the price at which the
Pledgee sells.
Section 14. Indemnification. The Pledgor agrees to indemnify and hold the
---------------
Pledgee and any corporation controlling, controlled by, or under common control
with, the Pledgee and any officer, attorney, director, shareholder, agent or
employee of the Pledgee or any such corporation (each an "Indemnified Person"),
harmless from and against any claim, loss, damage, action, cause of action,
liability, cost and expense or suit of any kind or nature whatsoever
(collectively, "Losses"), brought against or incurred by an Indemnified Person,
in any manner arising out of or, directly or indirectly, related to or connected
with this Agreement, including without limitation, the exercise by the Pledgee
of any of its rights and remedies under this Agreement or any other action taken
by the Pledgee pursuant to the terms of this Agreement; provided, however, the
Pledgor shall not be liable to an Indemnified Person for any Losses to the
extent that such Losses result from the gross negligence or willful misconduct
of such Indemnified Person. The Pledgor's obligations under this section shall
survive the termination of this Agreement and the payment in full of the
Obligations until the third anniversary of the date of this Agreement.
Section 15. Continuing Security Interest. This Agreement shall create a
----------------------------
continuing security interest in the Pledged Collateral and shall remain in full
force and effect until it terminates in accordance with its terms. The Pledgor
and the Pledgee hereby agree that the security interest created by this
Agreement in the Pledged Collateral shall not terminate and shall continue and
remain in full force and effect notwithstanding the transfer to the Pledgor or
any person designated by it of all or any portion of the Pledged Collateral.
Section 16. Security Interest Absolute. All rights of the Pledgee
--------------------------
hereunder, the grant of a security interest in the Pledged Collateral and all
obligations of the Pledgor hereunder, shall be absolute and unconditional
irrespective of (a) any lack of validity or enforceability of the Note, any
agreement with respect to any of the Obligations or any other agreement or
instrument relating to any of the foregoing, (b) any change in the time, manner
or place of the payment of, or in any other term of, all or any of the
Obligations, or any other amendment or waiver of or any consent to any departure
from the Note, or
-9-
<PAGE>
any other agreement or instrument relating to any of the foregoing, or (c) any
exchange, release or nonperfection of any other collateral, or any release or
amendment or waiver of or consent to or departure from any guaranty, for all or
any of the Obligations.
Section 17. No Waiver. Neither the failure on the part of the Pledgee to
---------
exercise, nor the delay on its part in exercising any right, power or remedy
hereunder, nor any course of dealing between the Pledgee and the Pledgor shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power, or remedy hereunder preclude any other or the further
exercise thereof or the exercise of any other right, power or remedy.
Section 18. Notices. Notices, requests and other communications required
-------
or permitted hereunder shall be in writing and shall be made by personal
delivery, telecopy or certified or registered mail, return receipt requested,
addressed as follows:
(a) If to the Pledgor: Zynaxis, Inc.
371 Phoenixville Pike
Malvern, PA 19355
Attn: Martyn Greenacre
Telephone: (610) 889-2200
Telecopy: (610) 889-2222
(b) If to the Pledgee: CytRx Corporation
154 Technology Parkway
Norcross, GA 30092
Attn: Jack J. Luchese
Telephone: (770) 368-9500
Telecopy: (770) 448-3357
or at such other address a party may specify to the other party by like notice.
All such notices and other communications shall be effective (i) if mailed, when
received; (ii) if telecopied, when transmitted; or (iii) if hand delivered, when
delivered.
SECTION 19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Section 20. Amendments. No amendment or waiver of any provision of this
----------
Agreement nor consent to any departure by the Pledgor herefrom shall in any
event be effective unless the same shall be in writing and signed by the parties
hereto, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
Section 21. Binding Agreement; Assignment. This Agreement shall be
-----------------------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and
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<PAGE>
assigns, except that the Pledgor shall not be permitted to assign this Agreement
or any interest herein or in the Pledged Collateral, or any part thereof, or any
cash or property held by the Pledgee as collateral under this Agreement.
Section 22. Termination. Upon indefeasible payment in full of all of the
-----------
Obligations, this Agreement shall terminate. Upon termination of this Agreement
in accordance with its terms the Pledgee agrees to take such actions as the
Pledgor may reasonably request, and at the sole cost and expense of the Pledgor,
(a) to return the Pledged Collateral to the Pledgor, and (b) to evidence the
termination of this Agreement, including, without limitation, the filing of any
releases or any termination statements under the Uniform Commercial Code.
Section 23. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such a manner as to be effective and valid
under Applicable Law, but if any provision of this Agreement shall be prohibited
by or invalid under Applicable Law, such provisions shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provisions or the remaining provisions of this Agreement.
Section 24. Headings. Section headings used herein are for convenience
--------
only and are not to affect the construction of or be taken into consideration in
interpreting this Agreement.
Section 25. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and all of which shall
constitute but one agreement.
Section 26. Definitions. Terms not otherwise defined herein are used
-----------
herein with the respective meanings given to them in (i) the Security Agreement
of even date herewith between Pledgor and Pledgee and (ii) the Senior Secured
Note of even date herewith executed by the Pledgor in favor of the Pledgee, as
the case may be.
"Governmental Authority" means any national, state or local government
----------------------
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, body, agency, bureau or entity (including, without limitation, the
Federal Deposit Insurance Corporation, the Comptroller of the Currency or the
Federal Reserve Board, any central bank or any comparable authority) or any
arbitrator with authority to bind a party at law.
-11-
<PAGE>
IN WITNESS WHEREOF, the Pledgor has executed and delivered this Pledge
Agreement under seal as of this the date first written above.
ZYNAXIS, INC.
By: /s/ Martyn Greenacre
---------------------
Title: Chairman, President & CEO
-------------------------
Agreed to, accepted and acknowledged
as of the date first written above.
CYTRX CORPORATION
By: /s/ Jack Luchese
----------------
Title: Chairman, President & CEO
-------------------------
-12-
<PAGE>
NOTE EXCHANGE AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of December 6,
1996, by and among ZYNAXIS, INC., a Pennsylvania corporation (the "Company"),
CYTRX CORPORATION, a Delaware corporation ("CytRx"), VAXCEL, INC., a Delaware
corporation and a wholly owned subsidiary of CytRx ("Vaxcel"), EUCLID PARTNERS
III, L.P., a Delaware limited partnership, and S.R. ONE, LTD., a Delaware
limited partnership (together with Euclid Partners III, L.P., the
"Noteholders").
W I T N E S S E T H:
-------------------
WHEREAS, the Noteholders hold certain convertible promissory notes on which
the Company is the obligor.
WHEREAS, simultaneously with the execution of this Agreement the Company is
entering into an Agreement and Plan of Merger and Contribution (the "Agreement
and Plan of Merger and Contribution") with CytRx, Vaxcel, and Vaxcel Merger Sub,
Inc., a Georgia corporation and a newly formed, wholly owned subsidiary of
Vaxcel ("Vaxcel Merger Sub"), and certain other agreements, including, among
other things, a Liquidation Agreement (the "Liquidation Agreement")
contemplating the sale of Assets (as defined therein) of the Company and
documents (the "Secured Loan Documents") relating to a secured loan being
extended to the Company by CytRx (the "Secured Loan"). The Agreement and Plan
of Merger and Contribution provides for the issuance of shares of common stock
of Vaxcel and a warrant to purchase shares of common stock of Vaxcel to CytRx in
exchange for CytRx's contribution of the Secured Loan and cash in an amount
equal to Four Million Dollars ($4,000,000) minus the balance of the Secured Loan
at the time of contribution, subject to adjustment for payments made to
shareholders of Zynaxis pursuant to Section 3.3 of the Agreement and Plan of
Merger and Contribution. The Agreement and Plan of Merger and Contribution also
provides for the issuance of shares of common stock of Vaxcel to the existing
shareholders of the Company in exchange for the contribution to Vaxcel by the
existing shareholders of the Company of all of the outstanding shares of capital
stock of the Company by means of a merger of Vaxcel Merger Sub with and into the
Company (the "Merger"). At the effective time of the Merger, the outstanding
shares of the capital stock of the Company will be converted into the right to
receive shares of the common stock of Vaxcel. As a result, shareholders of the
Company will become shareholders of Vaxcel and the Company will continue to
conduct its business and operations as a wholly owned subsidiary of Vaxcel.
WHEREAS, CytRx is unwilling to enter into the Agreement and Plan of Merger and
Contribution unless the Noteholders agree to exchange their promissory notes for
shares of common stock of Vaxcel upon the terms set forth in this Agreement in
connection with the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
covenants, and agreements contained herein and other good and valuable
consideration, the
<PAGE>
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Agreement to Exchange. Upon consummation of the Merger, each
---------------------
convertible demand promissory note issued by the Company and held by a
Noteholder (each a "Company Demand Note") shall be exchanged for the number of
shares (the "Note Shares") of Vaxcel Common Stock equal to the Exchange Ratio
multiplied by the quotient (rounded down to the nearest whole share) obtained by
dividing the unpaid principal amount of such Company Demand Note, together with
unpaid interest thereon accrued through September 30, 1996, by the Per Share
Price, as such term is defined in the Agreement and Plan of Merger and
Contribution. At the closing of the transactions contemplated by the Agreement
and Plan of Merger and Contribution (the "Closing") each holder of a Company
Demand Note shall deliver to the Company the Company Demand Note, marked "Paid
in Full," and Vaxcel shall deliver to each such holder in exchange therefor a
certificate representing all the Note Shares to be issued in exchange therefor,
duly registered in the name of such holder, free and clear of any liens,
security interests or other defects of title.
2. Termination of Registration Rights. Each of the undersigned
----------------------------------
Noteholders agrees that: (i) upon execution of this Agreement all rights that
the Noteholder may have to require the Company to register securities of the
Company for sale under applicable state and federal securities laws
("Registration Rights") are suspended pending the Closing, and (ii) upon
consummation of the Merger all such Registration Rights will be terminated and
such Noteholder will have such registration rights as are provided for such
Noteholder in the Agreement and Plan of Merger and Contribution. If the
Agreement and Plan of Merger and Contribution is terminated for any reason,
beginning at the time of such termination the undersigned Noteholder shall have
such Registration Rights as such Noteholder would have had at such time if such
Registration Rights had not been suspended pursuant to the preceding sentence.
3. Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice): (i) if to the Company, CytRx
or Vaxcel, to the address set forth in Section 11.8 of the Agreement and Plan of
Merger and Contribution; and (ii) if to a Noteholder, to its address shown below
its signature on the last page hereof.
4. Headings. The headings contained in this Agreement are for reference
--------
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
5. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered one and the same agreement.
6. Entire Agreement. This Agreement (including the documents and
----------------
instruments referred to herein) constitutes the entire agreement, and supersedes
all prior agreements and
-2-
<PAGE>
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
7. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the Commonwealth of Pennsylvania, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
8. Assignment. Neither this Agreement nor any of the rights, interests
----------
or obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties. Any assignment in violation of the foregoing
shall be void.
9. Equitable Remedies. Each Noteholder agrees that irreparable damage
------------------
would occur and that CytRx, Vaxcel and the Company would not have any adequate
remedy at law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that CytRx, Vaxcel and the Company shall be entitled to an
injunction or injunctions to prevent breaches by a Noteholder of this Agreement
and to enforce specifically the terms and provisions of this Agreement.
10. Severability. If any term, provision, covenant or restriction herein,
------------
or the application thereof to any circumstance, shall, to any extent, be held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions herein and the
application thereof to any other circumstances, shall remain in full force and
effect, shall not in any way be affected, impaired or invalidated, and shall be
enforced to the fullest extent permitted by law.
[Remainder of page intentionally left blank.]
-3-
<PAGE>
[Signature Page to Note Exchange Agreement]
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
under seal as of the day and year first above written.
ZYNAXIS, INC. CYTRX CORPORATION
By: /s/ Martyn Greenacre By:/s/ Jack Luchese
------------------------------ ------------------------------------
Name: M.D. Greenacre Name: Jack J. Luchese
---------------------------- ----------------------------------
Title: Chairman, President & CEO Title: Chairman, President &
--------------------------- ----------------------------
CEO
---
VAXCEL, INC.
By: /s/ Paul Wilson
------------------------------
Name: Paul J. Wilson
----------------------------
Title: President & CEO
---------------------------
EUCLID PARTNERS III, L.P. S.R. ONE, LTD.
BY: Euclid Associates III, L.P.
General Partner
By:/s/ Stephen K. Reidy By: /s/ Brenda D. Gavin
------------------------------ -------------------------------
Name: Stephen K. Reidy Name: Brenda D. Gavin
---------------------------- -----------------------------
Title: General Partner Title: Vice-President
--------------------------- ----------------------------
Address: Address: 565 E. Swedesford Rd
------------------------- -----------------------
Suite # 315
----------------------------- -----------------------
Wayne, PA 19087
----------------------------- -----------------------
----------------------------- -----------------------
-4-
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT dated as of December 6, 1996 executed and
delivered by ZYNAXIS, INC., a corporation organized under the laws of
Pennsylvania, with its principal place of business and chief executive office
located at 371 Phoenixville Pike, Malvern, Chester County, Pennsylvania (the
"Debtor"), in favor of CYTRX CORPORATION, with an office located at 154
Technology Parkway, Norcross, Georgia 30092 (the "Secured Party").
WHEREAS, the Debtor is indebted to the Secured Party and desires to
secure such indebtedness by granting to the Secured Party a security interest in
certain of the Debtor's assets;
NOW, THEREFORE, in consideration of the above premises and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Debtor, the Debtor hereby agrees with the Secured Party as
follows:
Section 1. Grant of Security. To secure the prompt and complete
-----------------
payment, observance and performance when due (whether at stated maturity, by
acceleration or otherwise) of all of the Obligations, the Debtor hereby
collaterally assigns and pledges to the Secured Party, and grants to the Secured
Party a security interest in, the Collateral.
Section 2. Representations and Warranties. The Debtor represents
------------------------------
and warrants to the Secured Party as follows:
(a) Name; Taxpayer ID Number. The correct corporate name of the
------------------------
Debtor is set forth in the first paragraph of this Agreement, and the Debtor
does not conduct and, during the five-year period immediately preceding the date
of this Agreement, has not conducted, business under any trade name or other
fictitious name other than those set forth in Schedule 2.(a) attached hereto.
The taxpayer identification number of the Debtor is 23-2562913.
(b) Organization; Power; Qualification. The Debtor is a corporation,
----------------------------------
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania, and has the corporate power and authority to carry
on its business as now conducted and to own, lease and operate its material
Assets. The Debtor is duly qualified or licensed to transact business as a
foreign corporation in good standing in the States of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on the Debtor.
<PAGE>
(c) Authorization. The Debtor has the right and power, and has taken
-------------
all necessary action to authorize it to execute, deliver and perform this
Agreement in accordance with its terms. This Agreement, the Financing
Statements and the instruments, agreements and other documents to which the
Debtor is a party and which evidence or relate in any way to the Obligations
have been executed and delivered by the authorized officers of the Debtor and
each is a legal, valid and binding obligation of the Debtor enforceable against
the Debtor in accordance with its terms.
(d) Compliance of Agreement with Laws, etc. Subject to execution of
--------------------------------------
that certain Preferred Stock and Warrant Agreement by and among the Debtor, the
Secured Party, Vaxcel, Inc., and the holders of the outstanding shares of the
Debtor's Series A Convertible Preferred Stock, the execution, delivery and
performance of this Agreement by the Debtor in accordance with its terms,
including the granting of the Security Interest, do not and will not, by the
passage of time, the giving of notice or otherwise (i) conflict with, result in
a breach of or constitute a default under any indenture, instrument or other
agreement to which the Debtor is a party or by which it or any of its properties
may be bound or (ii) result in, or require the creation or imposition of, any
Lien upon or with respect to any property in which the Debtor now or may
hereafter have rights.
(e) Liens. None of the Collateral is, as of the date hereof, subject
-----
to any Lien, except Permitted Liens set forth in Schedule 2.(e). No financing
statement under the Uniform Commercial Code of any jurisdiction which names the
Debtor as debtor or covers any of the Collateral, or any other notice filed in
the public records indicating the existence of a Lien thereon, has been filed
and is still effective in any jurisdiction, and the Debtor has not signed any
such financing statement or notice or any security agreement authorizing any
Person to file any such financing statement or notice.
(f) Chief Executive Office. The chief executive office and principal
----------------------
place of business of the Debtor are located at the address set forth in the
first paragraph of this Agreement, and have been located there for the five-year
period immediately preceding the date hereof. Except as listed in Schedule
2.(f), during such five-year period the Debtor has not changed its name,
identity or corporate structure in any way.
(g) Places of Business. The addresses (including the applicable
------------------
counties) of all of the places of business of the Debtor are set forth in
Schedule 2.(g) attached hereto.
(h) Collateral. All Equipment of the Debtor is located on or at one
----------
or more of the places set forth in Schedule 2.(h) hereof.
(i) Security Interest. It is the intent of the Debtor that this
-----------------
Agreement create a valid and perfected first-priority security interest in the
Collateral, securing the payment of the Obligations, except with respect to the
Collateral subject to the Permitted Liens set forth in Schedule 2.(e), with
respect to which Collateral the Debtor and the Secured Party hereby agree and
acknowledge that this Agreement shall create a valid and perfected second-
priority security interest therein.
<PAGE>
Section 3. Continued Priority of Security Interest.
---------------------------------------
(a) The Security Interest shall at all times be valid, perfected and of
first priority, except as set forth in Section 2.(i) hereof, and enforceable
against the Debtor and all other Persons, in accordance with the terms of this
Agreement, as security for the Obligations. The Debtor shall, at its sole cost
and expense, take all action that may be necessary or desirable, or that the
Secured Party may request, so as at all times to maintain the validity,
perfection, enforceability and priority of the Security Interest in the
Collateral in conformity with the immediately preceding sentence, or to enable
the Secured Party to exercise or enforce its rights hereunder, including, but
not limited to, executing and delivering financing statements, pledges,
designations, hypothecations, notices and assignments, in each case in form and
substance satisfactory to the Secured Party, relating to the creation, validity,
perfection, priority or continuation of the Security Interest under the Uniform
Commercial Code or other Applicable Law.
(b) The Secured Party is hereby authorized to execute and file in all
necessary and appropriate jurisdictions (as determined by the Secured Party) one
or more financing statements (or any other document or instrument referred to in
this Section) in the name of the Debtor and to sign the Debtor's name thereto.
The Debtor authorizes the Secured Party to file any such financing statement,
document or instrument without the signature of the Debtor to the extent
permitted by Applicable Law. Further, to the extent permitted by Applicable
Law, a carbon, photographic, xerographic or other reproduction of this Agreement
or of any Financing Statement is sufficient as a financing statement.
Section 4. Covenants Regarding Collateral Generally.
----------------------------------------
(a) Delivery of Instruments. In the event any of the Collateral becomes
-----------------------
evidenced by an instrument, the Debtor will immediately thereafter deliver such
instrument to the Secured Party, appropriately endorsed to the Secured Party.
(b) Defense of Title. The Debtor shall at all times be the sole owner of
----------------
each and every item of Collateral and shall defend its title in and to, and the
Secured Party's Security Interest in, the Collateral against the claims and
demands of all Persons.
(c) Maintenance of Collateral. The Debtor shall maintain all physical
-------------------------
property that constitutes Collateral in good and workable condition, with
reasonable allowance for wear and tear, and shall exercise proper custody over
all such property.
(d) Insurance. The Debtor shall at all times maintain insurance on the
---------
Collateral against loss or damage by fire, theft, burglary, pilferage, loss in
transit and such other hazards and risks as the Secured Party shall specify, in
amounts (which shall not be less than the aggregate amount of the Obligations)
and under policies issued by insurers acceptable to the Secured Party. All
premiums on such insurance shall be paid by the Debtor and certified copies of
the policies, or other evidence of insurance acceptable to
<PAGE>
the Secured Party, shall be delivered to the Secured Party promptly upon the
Secured Party's request. The Debtor will not use or permit the Collateral to be
used unlawfully or outside of any insurance coverage. All insurance policies
required under this Section shall contain loss payable clauses on New York
standard loss payee forms or other forms satisfactory to the Secured Party,
naming the Secured Party as loss payee, and providing that no such insurance
shall be affected by any act or neglect of the insured or owner of the property
described in such policy and such policies and loss payable clauses may not be
canceled, amended or terminated with respect to the Secured Party unless at
least thirty days' prior written notice is given to the Secured Party.
(e) Location of Office. The Debtor's chief executive office, principal
------------------
place of business will continue to be kept at the address set forth in the first
paragraph of this Agreement and the Debtor will not change the location of such
office and place of business or such books and records without giving the
Secured Party at least thirty days' prior written notice thereof.
(f) Location of Collateral. All Equipment and all other tangible
----------------------
Collateral will at all times be kept by the Debtor at the locations set forth in
Schedule 2.(f), and shall not, without the prior written consent of the Secured
Party, be removed therefrom except in connection with sales thereof made in the
ordinary course of business or pursuant to the Liquidation Agreement.
(g) Inspection. The Secured Party (by any of its officers, employees or
----------
agents) shall have the right, at any time or times during normal business hours:
(i) to inspect the Collateral, all files relating thereto and the premises upon
which any of the Collateral is located, (ii) to discuss the Debtor's affairs and
finances with any Person, to verify the amount, quantity, value and condition
of, or any other matter relating to, any of the Collateral and (iii) to review,
audit and make extracts from all records and files related to any of the
Collateral.
(h) Other Information. The Debtor shall furnish to the Secured Party such
-----------------
other information with respect to the Collateral as the Secured Party may
reasonably request from time to time.
(i) Payments Directly to Secured Party. The Secured Party may at any time
----------------------------------
and from time to time after the occurrence of an Event of Default notify, or
request the Debtor to notify, in writing or otherwise, any account debtor or
other obligor with respect to any one or more of the Receivables to make payment
to the Secured Party or any agent or designee of the Secured Party directly, at
such address as may be specified by the Secured Party. If, notwithstanding the
giving of any notice, any account debtor or other such obligor shall make
payment to the Debtor, the Debtor shall hold all such payments it receives in
trust for the Secured Party, without commingling the same with other funds or
property of or held by the Debtor, and shall promptly deliver the same to the
Secured Party or any such agent or designee immediately upon receipt by the
Debtor in the identical form received, together with any necessary endorsements.
<PAGE>
(j) Proceeds of Collateral. The Debtor shall account fully and faithfully
----------------------
for proceeds in whatever form received in disposition in any manner of any of
the Collateral. To the extent practicable, the Debtor shall at all times keep
accurate and complete records of the Collateral and proceeds thereof.
Section 5. Debtor's Name. So long as any of the Obligations remain unpaid
-------------
or unperformed, the Debtor shall not, without giving the Secured Party at least
sixty days' prior written notice, (i) change its name, identity or structure or
(ii) conduct business under any trade name or other fictitious name other than
those set forth in Schedule 2.(a).
Section 6. The Secured Party Appointed Attorney-in-Fact. The Debtor
--------------------------------------------
hereby irrevocably appoints the Secured Party the Debtor's attorney-in-fact,
effective after the occurrence of an Event of Default and for so long thereafter
as there are unsatisfied Obligations, with full authority in the place and stead
of the Debtor and in the name of the Debtor or otherwise, from time to time in
the Secured Party's discretion to take any action and to execute any instrument
or document which the Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement and to exercise any rights and
remedies the Secured Party may have under this Agreement or Applicable Law,
including, without limitation: (i) to obtain and adjust insurance required to be
maintained pursuant to Section 4.(d) hereof; (ii) to ask, demand, collect, sue
for, recover, compromise, receive and give acquittance and receipts for moneys
due and to become due under or in respect of any of the Collateral, including
any Receivable; (iii) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (i) or (ii)
above; (iv) to sell or assign any Receivable upon such terms, for such amount
and at such time or times as the Secured Party deems advisable, to settle,
adjust, compromise, extend or renew any Receivable or to discharge and release
any Receivable; (v) to file any claims or take any action or institute any
proceedings which the Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of the
Secured Party with respect to any of the Collateral; and (vi) to execute any
document or instrument referred to in Section 3. The power-of-attorney granted
hereby shall be irrevocable and coupled with an interest.
Section 7. The Secured Party May Perform. If the Debtor fails to perform
-----------------------------
any agreement contained herein, the Secured Party may, without notice to the
Debtor, itself perform, or cause performance of, such agreement, and the
expenses of the Secured Party incurred in connection therewith shall be payable
by the Debtor under Section 11. hereof.
Section 8. Remedies. The Secured Party may take any or all of the
--------
following actions upon the occurrence of an Event of Default hereunder.
(a) Acceleration. Upon the occurrence of an Event of Default specified in
------------
clauses (f) or (g) of the definition thereof, all of the Obligations shall
become automatically due and payable without presentment, demand, protest, or
other notice of any kind, all of which are expressly waived, notwithstanding
anything in this Agreement
<PAGE>
or any other agreement evidencing any Obligations to the contrary. If any other
Event of Default shall have occurred and be continuing, the Secured Party may
declare all of the Obligations to be forthwith due and payable, whereupon the
same shall immediately become due and payable without presentment, demand,
protest or other notice of any kind, all of which are expressly waived, anything
in this Agreement or any other agreement evidencing any Obligations to the
contrary notwithstanding.
(b) Equipment.
---------
(i) Entry. The Secured Party may enter upon any premises on which
-----
Equipment may be located and, without resistance or interference by the
Debtor, take physical possession of any or all thereof and maintain such
possession on such premises or move the same or any part thereof to such
other place or places as the Secured Party shall choose, without being
liable to the Debtor on account of any loss, damage or depreciation that
may occur as a result thereof, other than for actions that were not taken
in good faith.
(ii) Assembly. The Debtor shall, upon request of and without charge
--------
to the Secured Party, assemble the Equipment and maintain or deliver it
into the possession of the Secured Party or any agent or representative of
the Secured Party at such place or places as the Secured Party may
designate and as are reasonably convenient to both the Secured Party and
the Debtor.
(c) Use of Premises. The Secured Party may without notice, demand or
---------------
other process, and without payment of any rent or any other charge enter any of
the Debtor's premises and, without breach of the peace, until the Secured Party
completes the enforcement of its rights in the Collateral, take possession of
such premises or place custodians in exclusive control thereof, remain on such
premises and use the same and any of the Debtor's equipment, for the purpose of
(A) completing any work in process, preparing any Equipment for disposition and
disposing thereof and (B) collecting any Receivable.
(d) Rights as a Secured Creditor. The Secured Party may exercise all of
----------------------------
the rights and remedies of a secured party under the Uniform Commercial Code and
under any other Applicable Law, including, without limitation, the right,
without notice except as specified below and with or without taking possession
thereof, to sell the Collateral or any part thereof in one or more parcels at
public or private sale at any location chosen by the Secured Party, for cash, on
credit or for future delivery, and at such price or prices and upon such other
terms as the Secured Party may deem commercially reasonable. The Debtor agrees
that, to the extent notice of sale shall be required by Applicable Law, at least
ten days' prior notice to the Debtor of the time and place of any public sale or
the time after which any private sale is to be made shall constitute reasonable
notification, but notice given in any other reasonable manner or at any other
reasonable time shall constitute reasonable notification. The Secured Party
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. The Secured Party may
<PAGE>
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.
(e) Waiver of Marshaling. The Debtor hereby waives any right to require
--------------------
any marshaling of assets and any similar right.
(f) Appointment of Receiver. The Secured Party shall be entitled to the
-----------------------
appointment of a receiver, without notice of any kind whatsoever and without
regard to the adequacy of any security for the Obligations or the solvency of
any party bound for its payment, to take possession of all or any portion of the
Collateral and/or the business operations of the Debtor and to exercise such
power as the court shall confer upon such receiver.
Section 9. Application of Proceeds. All proceeds from each sale of, or
-----------------------
other realization upon, all or any part of the Collateral following an Event of
Default shall be applied or paid over as follows:
(a) First: to the payment of all costs and expenses incurred in connection
with such sale or other realization, including reasonable attorneys' fees if the
Secured Party endeavored to collect the Obligations by or through an attorney at
law;
(b) Second: to the payment of the interest due upon any of the
Obligations, in any order which the Secured Party may elect;
(c) Third: to the payment of the principal due upon any of the Obligations
in any order which the Secured Party may elect; and
(d) Fourth: the balance (if any) of such proceeds shall be paid to the
Debtor or to whomsoever may be legally entitled thereto.
The Debtor shall remain liable and shall pay, on demand, any deficiency
remaining in respect of the Obligations, together with interest thereon at a
rate per annum equal to the highest rate then payable hereunder on such
Obligations, which interest shall constitute part of the Obligations.
Section 10. Rights Cumulative. The rights and remedies of the Secured
-----------------
Party under this Agreement and each other document or instrument evidencing or
securing the Obligations shall be cumulative and not exclusive of any rights or
remedies which it would otherwise have. In exercising its rights and remedies
the Secured Party may be selective and no failure or delay by the Secured Party
in exercising any right shall operate as a waiver of it, nor shall any single or
partial exercise of any power or right preclude its other or further exercise or
the exercise of any other power or right.
<PAGE>
Section 11. Expenses. Upon the occurrence of an Event of Default, the
--------
Debtor will pay, on demand, all out-of-pocket expenses incurred by the Secured
Party in connection with: (a) the collection or enforcement of the Obligations
including the reasonable fees and disbursements of counsel to the Secured Party,
if such collection or enforcement is done through or by an attorney, and (b) the
exercise by the Secured Party of any right or remedy granted to it under this
Agreement, including, without limitation, the expenses incurred by the Secured
Party in connection with the collection of Receivables directly from account
debtors.
Section 12. Amendments, Etc. No amendment or waiver of any provision of
----------------
this Agreement nor consent to any departure by the Debtor herefrom shall in any
event be effective unless the same shall be in writing and signed by the parties
hereto, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
Section 13. Notices. Unless otherwise provided herein, communications
-------
provided for hereunder shall be in writing and shall be mailed, whether by
first-class United States Post or by any commercial express mail carrier
(including Federal Express and U.P.S.), telecopied or delivered, if to the
Debtor: at its address at 371 Phoenixville Pike, Malvern, Pennsylvania 19355,
Attn: Martyn Greenacre, telephone number: (610) 889-2200, telecopy number: (610)
889-2222, with a copy to Morgan, Lewis & Bockius LLP, 2000 One Logan Square,
Philadelphia, Pennsylvania 19103-6993, Attn: David King, telephone number: (215)
963-5000, telecopy number: (215) 963-5299; if to the Secured Party, at its
address at 154 Technology Parkway, Norcross, Georgia 30092, Attn: Jack J.
Luchese, telephone number: (770) 368-9500, telecopy number: (770) 448-3357, with
a copy to Alston & Bird, One Atlantic Center, 1201 West Peachtree Street,
Atlanta, Georgia 30309-3424, Attn: George M. Maxwell, Jr., telephone number:
(404) 881-7000, telecopy number: (404) 881-7777; or, as to each party, at such
other address as shall be designated by such party in a written notice to the
other parties. All such notices and other communications to the Debtor shall be
effective (i) if mailed, when received or three days after mailing, whichever is
earlier; (ii) if telecopied, when transmitted; or (iii) if hand delivered, when
delivered. All such notices or communications to the Secured Party shall be
effective when actually received.
Section 14. Continuing Security Interest. This Agreement shall create a
----------------------------
continuing security interest in the Collateral and shall (i) remain in full
force and effect until indefeasible payment in full of the Obligations, (ii) be
binding upon the Debtor, its successors and assigns and (iii) inure to the
benefit of the Secured Party, and its successors and assigns. The Debtor's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor-in-possession thereof or therefore.
Section 15. Applicable Law; Severability. THIS AGREEMENT SHALL BE
----------------------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Whenever possible, each provision of this Agreement shall be interpreted in such
a manner as to be effective and valid under Applicable Law, but if
<PAGE>
any provision of this Agreement shall be prohibited by or invalid under
Applicable Law, such provisions shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provisions
or the remaining provisions of this Agreement.
Section 16. Waiver. THE DEBTOR WAIVES (i) ANY NOTICE PRIOR TO THE TAKING
------
POSSESSION OR CONTROL OF THE COLLATERAL OR ANY POSTING OF ANY BOND OR SECURITY
WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE SECURED PARTY TO
EXERCISE ANY OF SECURED PARTY'S REMEDIES SET FORTH HEREIN, INCLUDING THE
ISSUANCE OF AN IMMEDIATE WRIT OF POSSESSION AND (ii) THE BENEFIT OF ALL
VALUATION, APPRAISEMENT AND EXEMPTION LAWS.
Section 17. Indemnification. The Debtor agrees to indemnify and hold the
---------------
Secured Party harmless from and against any claim, loss, damage, action, cause
of action, liability, cost and expense or suit of any kind or nature whatsoever,
including reasonable attorneys' fees and expenses, brought against or incurred
by the Secured Party, in any manner arising out of or, directly or indirectly,
related to or connected with any action taken by the Secured Party pursuant to
the terms of this Agreement; provided, however, that the indemnity set forth in
this Section 17. shall not apply to the extent that the claim, loss, damage,
action, cause of action, liability, cost, expense or suit arises primarily and
directly from the gross negligence or willful misconduct of the Secured Party.
Section 18. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be an original and all of which, taken
together, shall constitute but one and the same instrument.
Section 19. Definitions. (a) For the purposes of this Agreement:
-----------
"Agreement" means this Security Agreement, as the same may be amended,
---------
supplemented, restated or otherwise modified from time to time.
"Applicable Law" means all applicable provisions of constitutions,
--------------
statutes, laws, rules, regulations and orders of all governmental bodies and all
orders, rulings and decrees of all courts and arbitrators.
"Assets" of a Person means all of the assets, properties, businesses and
------
rights of such Person of every kind, nature, character and description, whether
real, personal or mixed, tangible or intangible, accrued or contingent, or
otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, and whether or not owned in the name of such Person or any
Subsidiary of such Person and wherever located.
"Capitalized Lease Obligation" means Indebtedness represented by
----------------------------
obligations under a lease that is required to be capitalized for financial
reporting purposes in
<PAGE>
accordance with GAAP, and the amount of such Indebtedness shall be the
capitalized amount of such obligations determined in accordance with such
principles.
"Collateral" means all of the Debtor's right, title and interest in and to
----------
each of the following, wherever located and whether now or hereafter existing,
or now owned or hereafter acquired or arising:
(a) all Receivables;
(b) all Equipment;
(c) all rights of the Debtor as an unpaid vendor or lienor (including,
without limitation, stoppage in transit, replevin and reclamation) with respect
to any other properties of the Debtor;
(d) all general intangibles of the Debtor including, but not limited to,
all contract rights of the Debtor and all trademarks, trade names, patents,
copyrights and any and all other intellectual property of the Debtor, but not
including the intangibles described on Schedule 19.(a);
(e) all documents of title, policies and certificates of insurance,
chattel paper and instruments of the Debtor;
(f) all books, records, files and correspondence in any way related to any
of the foregoing or otherwise pertaining to the business operations of the
Debtor;
(g) any and all balances, credits, deposits, accounts, items and monies of
the Debtor now or hereafter with the Secured Party or any Subsidiary of the
Secured Party or deposited with the Secured Party or any financial institution
selected by the Secured Party pursuant to any lock box, deposit, escrow or other
collection agreement or otherwise, and all property of the Debtor of every kind
and description now or hereafter in the possession or control of the Secured
Party for any reason; and
(h) any and all products and proceeds of any of the foregoing (including,
but not limited to, any claims to any items referred to in this definition, and
any claims of the Debtor against third parties for loss of, damage to or
destruction of, any or all of the Collateral or for proceeds payable under, or
unearned premiums with respect to, policies of insurance) in whatever form,
including, but not limited to, cash, instruments, general intangibles, accounts
receivable, goods, documents and chattel paper.
"Debtor" has the meaning set forth in the first paragraph hereof.
------
"Default" means any of the events specified in the definition of Event of
-------
Default, whether or not there has been satisfied any requirement for giving of
notice, lapse of time or the happening of any other condition.
<PAGE>
"Equipment" means all equipment, machinery, apparatus, fittings, fixtures
---------
and other tangible personal property of every kind and description owned by the
Debtor or in which the Debtor has an interest, and all parts, accessories and
special tools and all increases and accessions thereto and substitutions and
replacements therefor; provided, however, that the term "Equipment" shall not be
deemed to include items leased by the Debtor as lessee.
"Event of Default" means any of the following events, whatever the reason
----------------
for such event and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment or order of any court or any
order, rule or regulation of any governmental or nongovernmental body:
(a) failure of the Debtor to pay any principal, interest or other amount
with respect to any of the Obligations when due;
(b) the failure of the Debtor to comply with any of the terms and
provisions of this Agreement or any of the documents or instruments evidencing
any of the Obligations;
(c) any written representation or warranty made at any time by the
Debtor to the Secured Party shall prove to have been incorrect or misleading in
any material respect when made;
(d) a default, event of default, or event which with the giving of
notice or the passage of time or both would constitute a default or event of
default, shall have occurred under any other document, instrument, contract or
agreement now or hereafter entered into by the Debtor and Secured Party or
executed by the Debtor in favor of the Secured Party, or the Debtor shall in any
way fail to comply with the terms, covenants or conditions contained in any such
document, instrument, contract or agreement;
(e) a default, event of default, or event which with the giving of
notice or the passage of time or both would constitute a default or event of
default, shall have occurred under any document, instrument, contract or
agreement (i) evidencing or securing indebtedness of the Debtor for borrowed
money or (ii) material to the financial condition of the Debtor; provided,
however, that the Debtor's delinquency in its rent payments under that certain
Agreement of Lease dated August 30, 1988 between Rouse & Associates and Zynaxis
Cell Science, as amended, shall not constitute an Event of Default if Debtor
complies with the covenant in Section 8.10 of the Agreement and Plan of Merger
and Contribution dated the date hereof to which the Debtor and the Secured Party
are parties.
(f) the Debtor shall (i) commence a voluntary case under the Bankruptcy
Code of 1978, as amended or other federal bankruptcy law (as now or hereafter in
effect); (ii) file a petition seeking to take advantage of any other laws,
domestic or foreign,
<PAGE>
relating to bankruptcy, insolvency, reorganization, winding up or composition
for adjustment of debts; (iii) consent to, or fail to contest in a timely and
appropriate manner, any petition filed against it in an involuntary case under
such bankruptcy laws or other laws; (iv) apply for or consent to, or fail to
contest in a timely and appropriate manner, the appointment of, or the taking of
possession by, a receiver, custodian, trustee, or liquidator of itself or of a
substantial part of its property, domestic or foreign; (v) be unable to, or
admit in writing its inability to, pay its debts as they become due; (vi) make a
general assignment for the benefit of creditors; or (vii) make a conveyance
fraudulent as to creditors under any state or federal law; or
(g) a case or other proceeding shall be commenced against the Debtor in
any court of competent jurisdiction seeking (i) relief under the Bankruptcy Code
of 1978, as amended or other federal bankruptcy law (as now or hereafter in
effect) or under any other laws, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, winding up or adjustment of debts or (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like for the
Debtor of all or any substantial part of the assets, domestic or foreign, of the
Debtor.
"Financing Statements" means any and all financing statements executed and
--------------------
delivered by or on behalf of the Debtor in connection with the perfection of the
Security Interest, together with any amendments thereto and any continuations
thereof.
"GAAP" means generally accepted accounting principles as set forth in
----
statements from Auditing Standards No. 69 entitled "The Meaning of 'Present
Fairly in Conformance with Generally Accepted Accounting Principles in the
Independent Auditors Reports'" issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board that are applicable
to the circumstances. Unless otherwise agreed, references to GAAP herein shall
be to GAAP as in effect on the date hereof.
"Guaranty", "Guaranteed" or to "Guarantee" as applied to any obligation
-------- ---------- ---------
means and includes:
(a) a guaranty (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), directly or indirectly, in any
manner, of any part or all of such obligation, or
(b) an agreement, direct or indirect, contingent or otherwise, and
whether or not constituting a guaranty, the practical effect of which is to
assure the payment or performance (or payment of damages in the event of
nonperformance) of any part or all of such obligation whether by:
(i) the purchase of securities or obligations,
<PAGE>
(ii) the purchase, sale or lease (as lessee or lessor) of property or
the purchase or sale of services primarily for the purpose of enabling the
obligor with respect to such obligation to make any payment or performance
(or payment of damages in the event of nonperformance) of or on account of
any part or all of such obligation, or to assure the owner of such
obligation against loss,
(iii) the supplying of funds to or in any other manner investing in
the obligor with respect to such obligation,
(iv) repayment of amounts drawn down by beneficiaries of letters of
credit, or
(v) the supplying of funds to or investing in a Person on account of
all or any part of such Person's obligation under a Guaranty of any
obligation or indemnifying or holding harmless, in any way, such Person
against any part or all of such obligation.
"Indebtedness" as applied to a Person means, without duplication, (a) all
------------
items which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet of such Person as
at the date as of which Indebtedness is to be determined including, without
limitation, all Capitalized Lease Obligations of such Person and all
reimbursement obligations of such Person under letters of credit and acceptances
issued for its account, and (b) all obligations of other Persons which such
Person has Guaranteed.
"Lien" as applied to the property of any Person means: (a) any security
----
interest, encumbrance, mortgage, deed to secure debt, deed of trust, pledge,
lien, charge or lease constituting a Capitalized Lease Obligation, conditional
sale or other title retention agreement, or other security title or encumbrance
of any kind in respect of any property of such Person, or upon the income or
profits therefrom; (b) any arrangement, express or implied, under which any
property of such Person is transferred, sequestered or otherwise identified for
the purpose of subjecting the same to the payment of Indebtedness or performance
of any other obligation in priority to the payment of the general, unsecured
creditors of such Person; and (c) the filing of, or any agreement to give, any
financing statement under the Uniform Commercial Code or its equivalent in any
jurisdiction.
"Liquidation Agreement" means that certain letter agreement dated the date
---------------------
hereof by and between the Debtor and the Secured Party regarding the sale of
Assets and the settlement of liabilities of Debtor.
"Material Adverse Effect" on a Person means an event, change or occurrence
-----------------------
which, individually or together with any other event, change or occurrence, has
a material adverse impact on (i) the financial position, business, or results of
operations of such Person and its Subsidiaries, taken as a whole, or (ii) the
ability of such Person to perform its obligations under this Agreement or to
consummate the Contribution or the other
<PAGE>
transactions contemplated by this Agreement, provided that "Material Adverse
Effect" shall not be deemed to include the impact of (a) changes in laws of
general applicability or interpretations thereof by courts or governmental
authorities, (b) changes in generally accepted accounting principles or
regulatory accounting principles, and (c) actions and omissions of a Person (or
any of its Subsidiaries) taken with the prior informed written consent of the
other Person in contemplation of the transactions contemplated hereby.
"Note" means that certain Senior Secured Note dated the date hereof in a
----
principal amount equal to $2,000,000 and executed by the Debtor in favor of the
Secured Party.
"Obligations" means, individually and collectively: (a) all obligations
-----------
and indebtedness owing by the Debtor to the Secured Party and all future
advances made to the Debtor by the Secured Party, however and whenever created,
arising or evidenced, whether direct or indirect, through assignment from third
parties, whether absolute or contingent, or otherwise, now or hereafter
existing, or due or to become due, including, without limitation, obligations
under all guaranties, letters of credit and overdrafts; and (b) all renewals,
modifications, extensions and supplements to any of the foregoing, including,
but not limited to, any and all Obligations arising under and with respect to
the Note and the Liquidation Agreement.
"Permitted Liens" means: (a) Liens securing taxes, assessments and other
---------------
governmental charges or levies not yet due and payable or the claims of, or
obligations owing to, materialmen, mechanics, carriers, warehousemen or
landlords for labor, materials, supplies or rentals incurred in the ordinary
course of business but not yet due and payable; (b) Liens consisting of deposits
or pledges made, in the ordinary course of business, in connection with, or to
secure payment of, obligations under workmen's compensation, unemployment
insurance or similar legislation; (c) Liens consisting of encumbrances in the
nature of zoning restrictions, easements, and rights or restrictions of record
on the use of real property, which in the sole judgment of the Secured Party do
not materially detract from the value of such property or impair the use thereof
in the business of the Debtor; (d) Liens in favor of the Secured Party; and (e)
Liens identified in Schedule 2.(e) hereto.
"Person" means an individual, corporation, partnership, association, trust
------
or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Receivables" means all accounts and any and all rights to the payment of
-----------
money or other forms of consideration of any kind (whether classified under the
Uniform Commercial Code as accounts, chattel paper, general intangibles, or
otherwise) for goods sold or leased or for services rendered including, but not
limited to, accounts receivable, proceeds of any letters of credit naming the
Debtor as beneficiary, chattel paper, tax refunds, insurance proceeds, contract
rights, notes, drafts, instruments, documents, acceptances, and all other debts,
obligations and liabilities in whatever form from any Person.
<PAGE>
"Secured Party" has the meaning set forth in the first paragraph hereof.
-------------
"Security Interest" means the Lien of the Secured Party upon, and the
-----------------
collateral assignments to the Secured Party of, the Collateral effected hereby
or pursuant to the terms hereof.
"Subsidiaries" shall mean all those corporations, associations, or other
------------
business entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (provided, there
shall not be included any such entity the equity securities of which are owned
or controlled in a fiduciary capacity), (ii) in the case of partnerships, serves
as a general partner, (iii) in the case of a limited liability company, serves
as a managing member, or (iv) otherwise has the ability to elect a majority of
the directors, trustees or managing members thereof.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
-----------------------
effect in the State of Georgia, as the same may be amended from time to time.
(b) Unless otherwise set forth herein to the contrary, all terms not
otherwise defined herein and which are defined in the Uniform Commercial Code
are used herein with the meanings ascribed to them in the Uniform Commercial
Code.
<PAGE>
IN WITNESS WHEREOF, the Debtor has caused this Security Agreement to be
duly executed and delivered under seal by its duly authorized officers as of the
day first above written.
ZYNAXIS, INC.
By: /s/ Martyn Greenacre
--------------------
Name: Martyn D. Greenacre
-------------------
Title: Chairman, President & CEO
-------------------------
ATTEST:
By: /s/ Michael A. Christie
-----------------------
Name: Michael A. Christie
-------------------
Title: Secretary
---------
(CORPORATE SEAL)
Agreed and accepted as of the
date first written above.
CYTRX CORPORATION
By: /s/ Jack J. Luchese
--------------------
Name: Jack J. Luchese
---------------
Title: Chairman, President & CEO
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<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT dated as of December 6, 1996 executed and
delivered by ZYNAXIS VACCINE TECHNOLOGIES, INC., a corporation organized under
the laws of Pennsylvania, with its principal place of business and chief
executive office located at 371 Phoenixville Pike, Malvern, Chester County,
Pennsylvania (the "Debtor"), in favor of CYTRX CORPORATION, with an office
located at 154 Technology Parkway, Norcross, Georgia 30092 (the "Secured
Party").
WHEREAS, the Debtor has executed and delivered that certain Guaranty
dated the date hereof (the "Guaranty") guaranteeing the obligations of Zynaxis,
Inc., Debtor's parent ("Zynaxis"), to the Secured Party and desires to secure
its obligations under the Guaranty by granting to the Secured Party a security
interest in certain of the Debtor's assets;
NOW, THEREFORE, in consideration of the above premises and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Debtor, the Debtor hereby agrees with the Secured Party as
follows:
Section 1. Grant of Security. To secure the prompt and complete
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payment, observance and performance when due (whether at stated maturity, by
acceleration or otherwise) of all of the Guaranteed Obligations, the Debtor
hereby collaterally assigns and pledges to the Secured Party, and grants to the
Secured Party a security interest in, the Collateral.
Section 2. Representations and Warranties. The Debtor represents
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and warrants to the Secured Party as follows:
(a) Name. The correct corporate name of the Debtor is set forth in
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the first paragraph of this Agreement, and the Debtor does not conduct and,
during the five-year period immediately preceding the date of this Agreement,
has not conducted, business under any trade name or other fictitious name other
than those set forth in Schedule (a) attached hereto.
(b) Organization; Power; Qualification. The Debtor is a corporation,
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duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania, and has the corporate power and authority to carry
on its business as now conducted and to own, lease and operate its material
Assets. The Debtor is duly qualified or licensed to transact business as a
foreign corporation in good standing in the States of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on the Debtor.
<PAGE>
(c) Authorization. The Debtor has the right and power, and has taken
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all necessary action to authorize it to execute, deliver and perform this
Agreement in accordance with its terms. This Agreement, the Financing
Statements and the instruments, agreements and other documents to which the
Debtor is a party and which evidence or relate in any way to the Guaranteed
Obligations have been executed and delivered by the authorized officers of the
Debtor and each is a legal, valid and binding obligation of the Debtor
enforceable against the Debtor in accordance with its terms.
(d) Compliance of Agreement with Laws, etc. Subject to execution of
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that certain Preferred Stock and Warrant Agreement by and among Zynaxis, the
Secured Party, Vaxcel, Inc., and the holders of the outstanding shares of the
Debtor's Series A Convertible Preferred Stock, the execution, delivery and
performance of this Agreement by the Debtor in accordance with its terms,
including the granting of the Security Interest, do not and will not, by the
passage of time, the giving of notice or otherwise (i) conflict with, result in
a breach of or constitute a default under any indenture, instrument or other
agreement to which the Debtor is a party or by which it or any of its properties
may be bound or (ii) result in, or require the creation or imposition of, any
Lien upon or with respect to any property in which the Debtor now or may
hereafter have rights.
(e) Liens. None of the Collateral is, as of the date hereof,
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subject to any Lien, except Permitted Liens set forth in Schedule (e). No
financing statement under the Uniform Commercial Code of any jurisdiction which
names the Debtor as debtor or covers any of the Collateral, or any other notice
filed in the public records indicating the existence of a Lien thereon, has been
filed and is still effective in any jurisdiction, and the Debtor has not signed
any such financing statement or notice or any security agreement authorizing any
Person to file any such financing statement or notice.
(f) Chief Executive Office. The chief executive office and principal
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place of business of the Debtor are located at the address set forth in the
first paragraph of this Agreement, and have been located there for the five-year
period immediately preceding the date hereof. Except as listed in Schedule
2.(f), during such five-year period the Debtor has not changed its name,
identity or corporate structure in any way.
(g) Places of Business. The addresses (including the applicable
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counties) of all of the places of business of the Debtor are set forth in
Schedule (g) attached hereto.
(h) Collateral. All Equipment of the Debtor is located on or at one
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or more of the places set forth in Schedule (h) hereof.
(i) Security Interest. It is the intent of the Debtor that this
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Agreement create a valid and perfected first-priority security interest in the
Collateral, securing the payment of the Guaranteed Obligations, except with
respect to the Collateral subject to the Permitted Liens set forth in Schedule
(e), with respect to which Collateral the Debtor and the Secured Party hereby
agree and acknowledge that this Agreement shall create a valid and perfected
second-priority security interest therein.
<PAGE>
Section 3. Continued Priority of Security Interest.
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(a) The Security Interest shall at all times be valid, perfected and of
first priority, except as set forth in Section (i) hereof, and enforceable
against the Debtor and all other Persons, in accordance with the terms of this
Agreement, as security for the Guaranteed Obligations. The Debtor shall, at its
sole cost and expense, take all action that may be necessary or desirable, or
that the Secured Party may request, so as at all times to maintain the validity,
perfection, enforceability and priority of the Security Interest in the
Collateral in conformity with the immediately preceding sentence, or to enable
the Secured Party to exercise or enforce its rights hereunder, including, but
not limited to, executing and delivering financing statements, pledges,
designations, hypothecations, notices and assignments, in each case in form and
substance satisfactory to the Secured Party, relating to the creation, validity,
perfection, priority or continuation of the Security Interest under the Uniform
Commercial Code or other Applicable Law.
(b) The Secured Party is hereby authorized to execute and file in all
necessary and appropriate jurisdictions (as determined by the Secured Party) one
or more financing statements (or any other document or instrument referred to in
this Section) in the name of the Debtor and to sign the Debtor's name thereto.
The Debtor authorizes the Secured Party to file any such financing statement,
document or instrument without the signature of the Debtor to the extent
permitted by Applicable Law. Further, to the extent permitted by Applicable
Law, a carbon, photographic, xerographic or other reproduction of this Agreement
or of any Financing Statement is sufficient as a financing statement.
Section 4. Covenants Regarding Collateral Generally.
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(a) Delivery of Instruments. In the event any of the Collateral becomes
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evidenced by an instrument, the Debtor will immediately thereafter deliver such
instrument to the Secured Party, appropriately endorsed to the Secured Party.
(b) Defense of Title. The Debtor shall at all times be the sole owner of
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each and every item of Collateral and shall defend its title in and to, and the
Secured Party's Security Interest in, the Collateral against the claims and
demands of all Persons.
(c) Maintenance of Collateral. The Debtor shall maintain all physical
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property that constitutes Collateral in good and workable condition, with
reasonable allowance for wear and tear, and shall exercise proper custody over
all such property.
(d) Insurance. Zynaxis, on behalf of the Debtor, shall at all times
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maintain insurance on the Collateral against loss or damage by fire, theft,
burglary, pilferage, loss in transit and such other hazards and risks as the
Secured Party shall specify, in amounts (which shall not be less than the
aggregate value of the Collateral) and under policies issued by insurers
acceptable to the Secured Party. All premiums on such insurance shall be paid
by Zynaxis, on behalf of the Debtor, and certified copies of the policies, or
<PAGE>
other evidence of insurance acceptable to the Secured Party, shall be delivered
to the Secured Party promptly upon the Secured Party's request. The Debtor will
not use or permit the Collateral to be used unlawfully or outside of any
insurance coverage. All insurance policies required under this Section shall
contain loss payable clauses on New York standard loss payee forms or other
forms satisfactory to the Secured Party, naming the Secured Party as loss payee,
and providing that no such insurance shall be affected by any act or neglect of
the insured or owner of the property described in such policy and such policies
and loss payable clauses may not be canceled, amended or terminated with respect
to the Secured Party unless at least thirty days' prior written notice is given
to the Secured Party.
(e) Location of Office. The Debtor's chief executive office, principal
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place of business will continue to be kept at the address set forth in the first
paragraph of this Agreement and the Debtor will not change the location of such
office and place of business or such books and records without giving the
Secured Party at least thirty days' prior written notice thereof.
(f) Location of Collateral. All Equipment and all other tangible
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Collateral will at all times be kept by the Debtor at the locations set forth in
Schedule (f), and shall not, without the prior written consent of the Secured
Party, be removed therefrom except in connection with sales thereof made in the
ordinary course of business or pursuant to the Liquidation Agreement.
(g) Inspection. The Secured Party (by any of its officers, employees or
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agents) shall have the right, at any time or times during normal business hours:
(i) to inspect the Collateral, all files relating thereto and the premises upon
which any of the Collateral is located, (ii) to discuss the Debtor's affairs and
finances with any Person, to verify the amount, quantity, value and condition
of, or any other matter relating to, any of the Collateral and (iii) to review,
audit and make extracts from all records and files related to any of the
Collateral.
(h) Other Information. The Debtor shall furnish to the Secured Party such
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other information with respect to the Collateral as the Secured Party may
reasonably request from time to time.
(i) Payments Directly to Secured Party. The Secured Party may at any time
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and from time to time after the occurrence of an Event of Default notify, or
request the Debtor to notify, in writing or otherwise, any account debtor or
other obligor with respect to any one or more of the Receivables to make payment
to the Secured Party or any agent or designee of the Secured Party directly, at
such address as may be specified by the Secured Party. If, notwithstanding the
giving of any notice, any account debtor or other such obligor shall make
payment to the Debtor, the Debtor shall hold all such payments it receives in
trust for the Secured Party, without commingling the same with other funds or
property of or held by the Debtor, and shall promptly deliver the same to the
Secured Party or any such agent or designee immediately upon receipt by the
Debtor in the identical form received, together with any necessary endorsements.
<PAGE>
(j) Proceeds of Collateral. The Debtor shall account fully and faithfully
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for proceeds in whatever form received in disposition in any manner of any of
the Collateral. To the extent practicable, the Debtor shall at all times keep
accurate and complete records of the Collateral and proceeds thereof.
Section 5. Debtor's Name. So long as any of the Guaranteed Obligations
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remain unpaid or unperformed, the Debtor shall not, without giving the Secured
Party at least sixty days' prior written notice, (i) change its name, identity
or structure or (ii) conduct business under any trade name or other fictitious
name other than those set forth in Schedule (a).
Section 6. The Secured Party Appointed Attorney-in-Fact. The Debtor
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hereby irrevocably appoints the Secured Party the Debtor's attorney-in-fact,
effective after the occurrence of an Event of Default and for so long thereafter
as there are unsatisfied Guaranteed Obligations, with full authority in the
place and stead of the Debtor and in the name of the Debtor or otherwise, from
time to time in the Secured Party's discretion to take any action and to execute
any instrument or document which the Secured Party may deem necessary or
advisable to accomplish the purposes of this Agreement and to exercise any
rights and remedies the Secured Party may have under this Agreement or
Applicable Law, including, without limitation: (i) to obtain and adjust
insurance required to be maintained pursuant to Section (d) hereof; (ii) to
ask, demand, collect, sue for, recover, compromise, receive and give acquittance
and receipts for moneys due and to become due under or in respect of any of the
Collateral, including any Receivable; (iii) to receive, endorse, and collect any
drafts or other instruments, documents and chattel paper, in connection with
clause (i) or (ii) above; (iv) to sell or assign any Receivable upon such terms,
for such amount and at such time or times as the Secured Party deems advisable,
to settle, adjust, compromise, extend or renew any Receivable or to discharge
and release any Receivable; (v) to file any claims or take any action or
institute any proceedings which the Secured Party may deem necessary or
desirable for the collection of any of the Collateral or otherwise to enforce
the rights of the Secured Party with respect to any of the Collateral; and (vi)
to execute any document or instrument referred to in Section The power-of-
attorney granted hereby shall be irrevocable and coupled with an interest.
Section 7. The Secured Party May Perform. If the Debtor fails to perform
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any agreement contained herein, the Secured Party may, without notice to the
Debtor, itself perform, or cause performance of, such agreement, and the
expenses of the Secured Party incurred in connection therewith shall be payable
by the Debtor under Section hereof.
Section 8. Remedies. The Secured Party may take any or all of the
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following actions upon the occurrence of an Event of Default hereunder.
<PAGE>
(a) Acceleration. Upon the occurrence of an Event of Default specified in
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clauses (f) or (g) of the definition thereof, all of the Guaranteed Obligations
shall become automatically due and payable without presentment, demand, protest,
or other notice of any kind, all of which are expressly waived, notwithstanding
anything in this Agreement or any other agreement evidencing any Guaranteed
Obligations to the contrary. If any other Event of Default shall have occurred
and be continuing, the Secured Party may declare all of the Guaranteed
Obligations to be forthwith due and payable, whereupon the same shall
immediately become due and payable without presentment, demand, protest or other
notice of any kind, all of which are expressly waived, anything in this
Agreement or any other agreement evidencing any Guaranteed Obligations to the
contrary notwithstanding.
(b) Equipment.
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(i) Entry. The Secured Party may enter upon any premises on which
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Equipment may be located and, without resistance or interference by the
Debtor, take physical possession of any or all thereof and maintain such
possession on such premises or move the same or any part thereof to such
other place or places as the Secured Party shall choose, without being
liable to the Debtor on account of any loss, damage or depreciation that
may occur as a result thereof, other than for actions that were not taken
in good faith.
(ii) Assembly. The Debtor shall, upon request of and without charge
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to the Secured Party, assemble the Equipment and maintain or deliver it
into the possession of the Secured Party or any agent or representative of
the Secured Party at such place or places as the Secured Party may
designate and as are reasonably convenient to both the Secured Party and
the Debtor.
(c) Use of Premises. The Secured Party may without notice, demand or other
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process, and without payment of any rent or any other charge enter any of the
Debtor's premises and, without breach of the peace, until the Secured Party
completes the enforcement of its rights in the Collateral, take possession of
such premises or place custodians in exclusive control thereof, remain on such
premises and use the same and any of the Debtor's equipment, for the purpose of
(A) completing any work in process, preparing any Equipment for disposition and
disposing thereof and (B) collecting any Receivable.
(d) Rights as a Secured Creditor. The Secured Party may exercise all of
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the rights and remedies of a secured party under the Uniform Commercial Code and
under any other Applicable Law, including, without limitation, the right,
without notice except as specified below and with or without taking possession
thereof, to sell the Collateral or any part thereof in one or more parcels at
public or private sale at any location chosen by the Secured Party, for cash, on
credit or for future delivery, and at such price or prices and upon such other
terms as the Secured Party may deem commercially reasonable. The Debtor agrees
that, to the extent notice of sale shall be required by Applicable Law, at least
ten days' prior notice to the Debtor of the time and place of any public sale or
<PAGE>
the time after which any private sale is to be made shall constitute reasonable
notification, but notice given in any other reasonable manner or at any other
reasonable time shall constitute reasonable notification. The Secured Party
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. The Secured Party may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned.
(e) Waiver of Marshaling. The Debtor hereby waives any right to require
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any marshaling of assets and any similar right.
(f) Appointment of Receiver. The Secured Party shall be entitled to the
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appointment of a receiver, without notice of any kind whatsoever and without
regard to the adequacy of any security for the Guaranteed Obligations or the
solvency of any party bound for its payment, to take possession of all or any
portion of the Collateral and/or the business operations of the Debtor and to
exercise such power as the court shall confer upon such receiver.
Section 9. Application of Proceeds. All proceeds from each sale of, or
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other realization upon, all or any part of the Collateral following an Event of
Default shall be applied or paid over as follows:
(a) First: to the payment of all costs and expenses incurred in connection
with such sale or other realization, including reasonable attorneys' fees if the
Secured Party endeavored to collect the Guaranteed Obligations by or through an
attorney at law;
(b) Second: to the payment of the interest due upon any of the Guaranteed
Obligations, in any order which the Secured Party may elect;
(c) Third: to the payment of the principal due upon any of the Guaranteed
Obligations in any order which the Secured Party may elect; and
(d) Fourth: the balance (if any) of such proceeds shall be paid to the
Debtor or to whomsoever may be legally entitled thereto.
The Debtor shall remain liable and shall pay, on demand, any deficiency
remaining in respect of the Guaranteed Obligations, together with interest
thereon at a rate per annum equal to the highest rate then payable hereunder on
such Guaranteed Obligations, which interest shall constitute part of the
Guaranteed Obligations.
Section 10. Rights Cumulative. The rights and remedies of the Secured
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Party under this Agreement and each other document or instrument evidencing or
securing the Guaranteed Obligations shall be cumulative and not exclusive of any
rights or remedies which it would otherwise have. In exercising its rights and
remedies the Secured Party may be selective and no failure or delay by the
Secured Party in exercising any right shall operate as a waiver of it, nor shall
any single or partial exercise of any power or right preclude its other or
further exercise or the exercise of any other power or right.
<PAGE>
Section 11. Expenses. Upon the occurrence of an Event of Default, the
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Debtor will pay, on demand, all out-of-pocket expenses incurred by the Secured
Party in connection with: (a) the collection or enforcement of the Guaranteed
Obligations including the reasonable fees and disbursements of counsel to the
Secured Party, if such collection or enforcement is done through or by an
attorney, and (b) the exercise by the Secured Party of any right or remedy
granted to it under this Agreement, including, without limitation, the expenses
incurred by the Secured Party in connection with the collection of Receivables
directly from account debtors.
Section 12. Amendments, Etc. No amendment or waiver of any provision of
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this Agreement nor consent to any departure by the Debtor herefrom shall in any
event be effective unless the same shall be in writing and signed by the parties
hereto, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
Section 13. Notices. Unless otherwise provided herein, communications
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provided for hereunder shall be in writing and shall be mailed, whether by
first-class United States Post or by any commercial express mail carrier
(including Federal Express and U.P.S.), telecopied or delivered, if to the
Debtor: at its address at 371 Phoenixville Pike, Malvern, Pennsylvania 19355,
Attn: Martyn Greenacre, telephone number: (610) 889-2200, telecopy number: (610)
889-2222, with a copy to Morgan, Lewis & Bockius LLP, 2000 One Logan Square,
Philadelphia, Pennsylvania 19103-6993, Attn: David King, telephone number: (215)
963-5000, telecopy number: (215) 963-5299; if to the Secured Party, at its
address at 154 Technology Parkway, Norcross, Georgia 30092, Attn: Jack J.
Luchese, telephone number: (770) 368-9500, telecopy number: (770) 448-3357, with
a copy to Alston & Bird, One Atlantic Center, 1201 West Peachtree Street,
Atlanta, Georgia 30309-3424, Attn: George M. Maxwell, Jr., telephone number:
(404) 881-7000, telecopy number: (404) 881-7777; or, as to each party, at such
other address as shall be designated by such party in a written notice to the
other parties. All such notices and other communications to the Debtor shall be
effective (i) if mailed, when received or three days after mailing, whichever is
earlier; (ii) if telecopied, when transmitted; or (iii) if hand delivered, when
delivered. All such notices or communications to the Secured Party shall be
effective when actually received.
Section 14. Continuing Security Interest. This Agreement shall create a
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continuing security interest in the Collateral and shall (i) remain in full
force and effect until indefeasible payment in full of the Guaranteed
Obligations, (ii) be binding upon the Debtor, its successors and assigns and
(iii) inure to the benefit of the Secured Party, and its successors and assigns.
The Debtor's successors and assigns shall include, without limitation, a
receiver, trustee or debtor-in-possession thereof or therefore.
Section 15. Applicable Law; Severability. THIS AGREEMENT SHALL BE
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GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Whenever possible, each provision of this Agreement shall be interpreted in such
a manner as to be effective and valid under Applicable Law, but if any provision
of this Agreement shall be prohibited by or invalid under Applicable Law, such
provisions shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Agreement.
<PAGE>
Section 16. Waiver. THE DEBTOR WAIVES (i) ANY NOTICE PRIOR TO THE TAKING
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POSSESSION OR CONTROL OF THE COLLATERAL OR ANY POSTING OF ANY BOND OR SECURITY
WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE SECURED PARTY TO
EXERCISE ANY OF SECURED PARTY'S REMEDIES SET FORTH HEREIN, INCLUDING THE
ISSUANCE OF AN IMMEDIATE WRIT OF POSSESSION AND (ii) THE BENEFIT OF ALL
VALUATION, APPRAISEMENT AND EXEMPTION LAWS.
Section 17. Indemnification. The Debtor agrees to indemnify and hold the
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Secured Party harmless from and against any claim, loss, damage, action, cause
of action, liability, cost and expense or suit of any kind or nature whatsoever,
including reasonable attorneys' fees and expenses, brought against or incurred
by the Secured Party, in any manner arising out of or, directly or indirectly,
related to or connected with any action taken by the Secured Party pursuant to
the terms of this Agreement; provided, however, that the indemnity set forth in
this Section 18. shall not apply to the extent that the claim, loss, damage,
action, cause of action, liability, cost, expense or suit arises primarily and
directly from the gross negligence or willful misconduct of the Secured Party.
Section 19. Counterparts. This Agreement may be executed in several
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counterparts, each of which shall be an original and all of which, taken
together, shall constitute but one and the same instrument.
Section 20. Definitions. (a) For the purposes of this Agreement:
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"Agreement" means this Security Agreement, as the same may be amended,
---------
supplemented, restated or otherwise modified from time to time.
"Applicable Law" means all applicable provisions of constitutions,
--------------
statutes, laws, rules, regulations and orders of all governmental bodies and all
orders, rulings and decrees of all courts and arbitrators.
"Assets" of a Person means all of the assets, properties, businesses and
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rights of such Person of every kind, nature, character and description, whether
real, personal or mixed, tangible or intangible, accrued or contingent, or
otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, and whether or not owned in the name of such Person or any
Subsidiary of such Person and wherever located.
"Capitalized Lease Obligation" means Indebtedness represented by
----------------------------
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with such principles.
"Collateral" means all of the Debtor's right, title and interest in and to
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each of the following, wherever located and whether now or hereafter existing,
or now owned or hereafter acquired or arising:
<PAGE>
(a) all Receivables;
(b) all Equipment;
(c) all rights of the Debtor as an unpaid vendor or lienor (including,
without limitation, stoppage in transit, replevin and reclamation) with respect
to any other properties of the Debtor;
(d) all general intangibles of the Debtor including, but not limited to,
all contract rights of the Debtor and all trademarks, trade names, patents,
copyrights and any and all other intellectual property of the Debtor, but not
including the intangibles described on Schedule 19.(a);
(e) all documents of title, policies and certificates of insurance, chattel
paper and instruments of the Debtor;
(f) all books, records, files and correspondence in any way related to any
of the foregoing or otherwise pertaining to the business operations of the
Debtor;
(g) any and all balances, credits, deposits, accounts, items and monies of
the Debtor now or hereafter with the Secured Party or any Subsidiary of the
Secured Party or deposited with the Secured Party or any financial institution
selected by the Secured Party pursuant to any lock box, deposit, escrow or other
collection agreement or otherwise, and all property of the Debtor of every kind
and description now or hereafter in the possession or control of the Secured
Party for any reason; and
(h) any and all products and proceeds of any of the foregoing (including,
but not limited to, any claims to any items referred to in this definition, and
any claims of the Debtor against third parties for loss of, damage to or
destruction of, any or all of the Collateral or for proceeds payable under, or
unearned premiums with respect to, policies of insurance) in whatever form,
including, but not limited to, cash, instruments, general intangibles, accounts
receivable, goods, documents and chattel paper.
"Debtor" has the meaning set forth in the first paragraph hereof.
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"Default" means any of the events specified in the definition of Event of
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Default, whether or not there has been satisfied any requirement for giving of
notice, lapse of time or the happening of any other condition.
"Equipment" means all equipment, machinery, apparatus, fittings, fixtures
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and other tangible personal property of every kind and description owned by the
Debtor or in which the Debtor has an interest, and all parts, accessories and
special tools and all increases and accessions thereto and substitutions and
replacements therefor; provided, however, that the term "Equipment" shall not be
deemed to include items leased by the Debtor as lessee.
"Event of Default" means any of the following events, whatever the reason
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for such event and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment or order of any court or any
order, rule or regulation of any governmental or nongovernmental body:
<PAGE>
(a) failure of the Debtor to pay any principal, interest or other amount
with respect to any of the Guaranteed Obligations when due;
(b) the failure of the Debtor to comply with any of the terms and
provisions of this Agreement or any of the documents or instruments evidencing
any of the Guaranteed Obligations;
(c) any written representation or warranty made at any time by the Debtor
to the Secured Party shall prove to have been incorrect or misleading in any
material respect when made;
(d) a default, event of default, or event which with the giving of notice
or the passage of time or both would constitute a default or event of default,
shall have occurred under any other document, instrument, contract or agreement
now or hereafter entered into by the Debtor and Secured Party or executed by the
Debtor in favor of the Secured Party, or the Debtor shall in any way fail to
comply with the terms, covenants or conditions contained in any such document,
instrument, contract or agreement;
(e) a default, event of default, or event which with the giving of notice
or the passage of time or both would constitute a default or event of default,
shall have occurred under any document, instrument, contract or agreement (i)
evidencing or securing indebtedness of the Debtor for borrowed money or (ii)
material to the financial condition of the Debtor; provided, however, that the
Debtor's failure to pay royalties as described in letters from Southern Research
Institute to Debtor dated August 21, 1996 and August 27, 1996 shall not
constitute an Event of Default if Zynaxis complies with the covenant in Section
8.10 of the Agreement and Plan of Merger and Contribution dated the date hereof
to which Zynaxis and the Secured Party are parties.
(f) the Debtor shall (i) commence a voluntary case under the Bankruptcy
Code of 1978, as amended or other federal bankruptcy law (as now or hereafter in
effect); (ii) file a petition seeking to take advantage of any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding
up or composition for adjustment of debts; (iii) consent to, or fail to contest
in a timely and appropriate manner, any petition filed against it in an
involuntary case under such bankruptcy laws or other laws; (iv) apply for or
consent to, or fail to contest in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
or liquidator of itself or of a substantial part of its property, domestic or
foreign; (v) be unable to, or admit in writing its inability to, pay its debts
as they become due; (vi) make a general assignment for the benefit of creditors;
or (vii) make a conveyance fraudulent as to creditors under any state or federal
law; or
(g) a case or other proceeding shall be commenced against the Debtor in any
court of competent jurisdiction seeking (i) relief under the Bankruptcy Code of
1978, as amended or other federal bankruptcy law (as now or hereafter in effect)
or under any other laws, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, winding up or adjustment of debts or (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like for the
Debtor of all or any substantial part of the assets, domestic or foreign, of the
Debtor.
<PAGE>
"Financing Statements" means any and all financing statements executed and
--------------------
delivered by or on behalf of the Debtor in connection with the perfection of the
Security Interest, together with any amendments thereto and any continuations
thereof.
"GAAP" means generally accepted accounting principles as set forth in
----
statements from Auditing Standards No. 69 entitled "The Meaning of 'Present
Fairly in Conformance with Generally Accepted Accounting Principles in the
Independent Auditors Reports'" issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board that are applicable
to the circumstances. Unless otherwise agreed, references to GAAP herein shall
be to GAAP as in effect on the date hereof.
"Guaranty", "Guaranteed" or to "Guarantee" as applied to any obligation
-------- ---------- ---------
means and includes:
(a) a guaranty (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), directly or indirectly, in any
manner, of any part or all of such obligation, or
<PAGE>
(b) an agreement, direct or indirect, contingent or otherwise, and whether
or not constituting a guaranty, the practical effect of which is to assure the
payment or performance (or payment of damages in the event of nonperformance) of
any part or all of such obligation whether by:
(i) the purchase of securities or obligations,
(ii) the purchase, sale or lease (as lessee or lessor) of property or
the purchase or sale of services primarily for the purpose of enabling the
obligor with respect to such obligation to make any payment or performance
(or payment of damages in the event of nonperformance) of or on account of
any part or all of such obligation, or to assure the owner of such
obligation against loss,
(iii) the supplying of funds to or in any other manner investing in
the obligor with respect to such obligation,
(iv) repayment of amounts drawn down by beneficiaries of letters of
credit, or
(v) the supplying of funds to or investing in a Person on account of
all or any part of such Person's obligation under a Guaranty of any
obligation or indemnifying or holding harmless, in any way, such Person
against any part or all of such obligation.
"Guaranteed Obligations" (a) all Obligations; (b) all other indebtedness
----------------------
and obligations now or hereafter owing by Debtor to Secured Party, whenever and
however incurred or evidenced, whether direct or indirect, absolute or
contingent, or due or to become due (including, but not limited to, any other
loans or advances from time to time extended by Secured Party to Debtor under
any agreement whether or not evidenced by promissory notes or otherwise); and
(c) any and all extensions, renewals, modifications, amendments or substitutions
of the foregoing, including, but not limited to, any and all Guaranteed
Obligations arising under and with respect to the Guaranty.
"Indebtedness" as applied to a Person means, without duplication, (a) all
------------
items which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet of such Person as
at the date as of which Indebtedness is to be determined including, without
limitation, all Capitalized Lease Obligations of such Person and all
reimbursement obligations of such Person under letters of credit and acceptances
issued for its account, and (b) all obligations of other Persons which such
Person has Guaranteed.
"Lien" as applied to the property of any Person means: () any security
----
interest, encumbrance, mortgage, deed to secure debt, deed of trust, pledge,
lien, charge or lease constituting a Capitalized Lease Obligation, conditional
sale or other title retention agreement, or other security title or encumbrance
of any kind in respect of any property of such Person, or upon the income or
profits therefrom; () any arrangement, express or implied, under which any
property of such Person is transferred, sequestered or otherwise identified for
the purpose of subjecting the same to the payment of Indebtedness or performance
of any other obligation in priority to the payment of the general, unsecured
<PAGE>
creditors of such Person; and () the filing of, or any agreement to give, any
financing statement under the Uniform Commercial Code or its equivalent in any
jurisdiction.
"Liquidation Agreement" means that certain letter agreement dated the date
---------------------
hereof by and between the Debtor and the Secured Party regarding the sale of
Assets and the settlement of liabilities of Debtor.
"Material Adverse Effect" on a Person means an event, change or occurrence
-----------------------
which, individually or together with any other event, change or occurrence, has
a material adverse impact on (i) the financial position, business, or results of
operations of such Person and its Subsidiaries, taken as a whole, or (ii) the
ability of such Person to perform its obligations under this Agreement or to
consummate the Contribution or the other transactions contemplated by this
Agreement, provided that "Material Adverse Effect" shall not be deemed to
include the impact of (a) changes in laws of general applicability or
interpretations thereof by courts or governmental authorities, (b) changes in
generally accepted accounting principles or regulatory accounting principles,
and (c) actions and omissions of a Person (or any of its Subsidiaries) taken
with the prior informed written consent of the other Person in contemplation of
the transactions contemplated hereby.
"Note" means that certain Senior Secured Note dated the date hereof in a
----
principal amount equal to $2,000,000 and executed by Zynaxis in favor of the
Secured Party.
"Obligations" means, individually and collectively: (a) all obligations
-----------
and indebtedness owing by Zynaxis to the Secured Party and all future advances
made to Zynaxis by the Secured Party, however and whenever created, arising or
evidenced, whether direct or indirect, through assignment from third parties,
whether absolute or contingent, or otherwise, now or hereafter existing, or due
or to become due, including, without limitation, obligations under all
guaranties, letters of credit and overdrafts; and (b) all renewals,
modifications, extensions and supplements to any of the foregoing, including,
but not limited to, any and all Obligations arising under and with respect to
the Note and the Liquidation Agreement.
"Permitted Liens" means: (a) Liens securing taxes, assessments and other
---------------
governmental charges or levies not yet due and payable or the claims of, or
obligations owing to, materialmen, mechanics, carriers, warehousemen or
landlords for labor, materials, supplies or rentals incurred in the ordinary
course of business but not yet due and payable; (b) Liens consisting of deposits
or pledges made, in the ordinary course of business, in connection with, or to
secure payment of, obligations under workmen's compensation, unemployment
insurance or similar legislation; (c) Liens consisting of encumbrances in the
nature of zoning restrictions, easements, and rights or restrictions of record
on the use of real property, which in the sole judgment of the Secured Party do
not materially detract from the value of such property or impair the use thereof
in the business of the Debtor; (d) Liens in favor of the Secured Party; and (e)
Liens identified in Schedule 2.(e) hereto.
<PAGE>
"Person" means an individual, corporation, partnership, association, trust
------
or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Receivables" means all accounts and any and all rights to the payment of
-----------
money or other forms of consideration of any kind (whether classified under the
Uniform Commercial Code as accounts, chattel paper, general intangibles, or
otherwise) for goods sold or leased or for services rendered including, but not
limited to, accounts receivable, proceeds of any letters of credit naming the
Debtor as beneficiary, chattel paper, tax refunds, insurance proceeds, contract
rights, notes, drafts, instruments, documents, acceptances, and all other debts,
obligations and liabilities in whatever form from any Person.
"Secured Party" has the meaning set forth in the first paragraph hereof.
-------------
"Security Interest" means the Lien of the Secured Party upon, and the
-----------------
collateral assignments to the Secured Party of, the Collateral effected hereby
or pursuant to the terms hereof.
"Subsidiaries" shall mean all those corporations, associations, or other
------------
business entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (provided, there
shall not be included any such entity the equity securities of which are owned
or controlled in a fiduciary capacity), (ii) in the case of partnerships, serves
as a general partner, (iii) in the case of a limited liability company, serves
as a managing member, or (iv) otherwise has the ability to elect a majority of
the directors, trustees or managing members thereof.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
-----------------------
effect in the State of Georgia, as the same may be amended from time to time.
(b) Unless otherwise set forth herein to the contrary, all terms not
otherwise defined herein and which are defined in the Uniform Commercial Code
are used herein with the meanings ascribed to them in the Uniform Commercial
Code.
<PAGE>
IN WITNESS WHEREOF, the Debtor has caused this Security Agreement to be
duly executed and delivered under seal by its duly authorized officers as of the
day first above written.
ZYNAXIS VACCINE TECHNOLOGIES, INC.
By: /s/ Martyn Greenacre
---------------------------------
Name: Martyn Greenacre
----------------------------
Title: Chairman, President & CEO
---------------------------
ATTEST:
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
(CORPORATE SEAL)
Agreed and accepted as of the
date first written above.
CYTRX CORPORATION
By: /s/ Jack J. Luchese
--------------------------------
Name: Jack J. Luchese
----------------------------
Title: Chairman, President & CEO
---------------------------
<PAGE>
TECHNOLOGY DEVELOPMENT AGREEMENT
THIS TECHNOLOGY DEVELOPMENT AGREEMENT (this "Agreement") dated as of
December 6, 1996 by and among VAXCEL, INC., a Delaware corporation ("Vaxcel"),
and ZYNAXIS VACCINE TECHNOLOGIES, INC., a Pennsylvania corporation ("Zynaxis").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to that certain License Agreement dated July 1, 1987 by
and between Southern Research Institute ("Southern") and Molecular Engineering
Associates, Ltd., as amended, supplemented, restated, or otherwise modified from
time to time (the "Original License Agreement"), Zynaxis has an exclusive right
and license to certain oral vaccine microencapsulation technology (the "PLG
Technology");
WHEREAS, Zynaxis also owns certain oral vaccine delivery technology related
to compounds which bind to mucosal tissues (the "Mucoadhesive Technology"); and
WHEREAS, Vaxcel and Zynaxis plan to enter into a business combination
transaction that will take several months to consummate, and Vaxcel wishes to
develop the PLG Technology and the Mucoadhesive Technology (collectively
referred to herein as the "Technology") during the time period between execution
of this Agreement and the consummation of the planned business combination
transaction;
NOW, THEREFORE, in consideration of the foregoing and the other mutual
promises, covenants and agreements set forth in the other agreements being
executed by Vaxcel and Zynaxis on the date of this Agreement, the parties
hereto, intending to be legally bound, agree as follows;
ARTICLE I
CONDITION PRECEDENT
The parties acknowledge and agree this Agreement shall not take effect
unless and until, and only in conjunction with, the execution of that certain
Agreement and Plan of Merger and Contribution by and among Cytrx Corporation,
Vaxcel Merger Subsidiary, Inc., Zynaxis, Inc., and Vaxcel (the "Merger
Agreement").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ZYNAXIS
2.1 License to Technology, etc. Zynaxis represents and warrants that,
--------------------------
pursuant to the Original License Agreement, Zynaxis has an exclusive right and
license to make, have made for it, use and sell throughout the world the PLG
Technology, to grant sublicenses to make, have made for it, use and sell
throughout the world the PLG
<PAGE>
Technology, and to sell, transfer, or assign any or all of its rights and
obligations under the Original License Agreement with the written consent of
SRI, which consent shall not be unreasonably withheld. Zynaxis further
represents and warrants that it is the owner of all rights in the Mucoadhesive
Technology and possesses full right and authority to grant to Vaxcel the rights
set forth in this Agreement. In addition, Zynaxis represents and warrants that
it has the right to enter into and fully perform this Agreement, and Zynaxis'
performance of this Agreement will in no way infringe upon or violate any
applicable law, rule or regulation, any contract with any third party or any
rights of any third person, including, without limitation, rights of patent,
trade secret, trademark or copyright.
2.2 Relevant Information. Zynaxis represents and warrants that it will
--------------------
make available to Vaxcel on or prior to the Effective Date of this Agreement, or
as soon thereafter as practicable, all documents available to Zynaxis which are
relevant to the Technology. Zynaxis further represents and warrants that it
will continue to make available to Vaxcel during the term of this Agreement all
documents and information available to it which are relevant to the Technology.
2.3 No Other Undertakings. Zynaxis represents and warrants that the
---------------------
Technology is not subject to any agreement, joint venture, undertaking,
commitment or understanding of any kind or nature between Zynaxis and any other
person, firm, corporation, joint venture, partnership or other entity with
respect to or relating in any way to the contemplated activities of Vaxcel which
would materially interfere with the contemplated activities of Vaxcel, except
for this Agreement and except for that certain Development and License Agreement
by and between Zynaxis, Inc. and ALK A/S dated September 21, 1995 (the
"Development and License Agreement").
2.4 Further Assurances. Zynaxis represents and warrants that it will
------------------
promptly execute and deliver to Vaxcel such further documents and take such
further action as may be reasonably requested by Vaxcel in order to more
effectively carry out the intent and purpose of this Agreement.
2.5 Corporate Existence and Approvals. Zynaxis represents and warrants
---------------------------------
that it is a corporation validly existing under the laws of the Commonwealth of
Pennsylvania, that no authorization, consent, approval, or license is or will be
necessary to the taking by Zynaxis of any action contemplated by this Agreement,
and that this Agreement, when executed, constitutes a legal, valid, binding
obligation of Zynaxis.
ARTICLE III
REPRESENTATIONS, WARRANTIES, AND COVENANTS OF VAXCEL
3.1 Activities Consistent with Original License Agreement. Vaxcel agrees
-----------------------------------------------------
that all Development Activities (as defined herein) relating to the PLG
Technology shall be consistent with and subject to any limitations set forth in
the Original License Agreement.
-2-
<PAGE>
3.2 Relevant Information. Vaxcel represents and warrants that it will
--------------------
make available to Zynaxis upon termination of this Agreement all material
documents available to Vaxcel which are relevant to the Technology.
3.3 No Other Undertakings. Vaxcel represents and warrants that it is not
---------------------
subject to any agreement, joint venture, undertaking, commitment or
understanding of any kind or nature with any other person, firm, corporation,
joint venture, partnership or other entity with respect to or relating in any
way to the contemplated activities of Vaxcel which would materially interfere
with the contemplated activities of Vaxcel.
3.4 Corporate Existence and Approvals. Vaxcel represents and warrants
---------------------------------
that it is a corporation validly existing under the laws of the State of
Delaware, that no authorization, consent, approval, or license is or will be
necessary to the taking by Vaxcel of any action contemplated by this Agreement,
and that this Agreement, when executed, constitutes a legal, valid, binding
obligation of Vaxcel.
ARTICLE IV
AGREEMENTS AMONG VAXCEL AND ZYNAXIS
4.1 Vaxcel Right to Develop. It is the intent of the parties that there
-----------------------
be no interruption in the development of the Technology during the course of the
planned business combination between Zynaxis and Vaxcel. In furtherance of this
desire, Vaxcel is hereby granted during the term of this Agreement the exclusive
right to continue to develop the Technology at its own cost and expense, subject
to the rights granted to ALK A/S in the Development and License Agreement (the
"Development Activities"). By way of explanation and not in limitation of the
foregoing, Vaxcel may, at its option and its sole discretion, elect to undertake
the following activities:
(a) Perform preclinical experiments using the Technology at Vaxcel
facilities or with other third parties and potential sublicensees;
(b) Negotiate and execute agreements for the Technology, including, but
not limited to, materials transfer agreements, research agreements, option
agreements, sublicense agreements, or other similar agreements, subject to
Zynaxis' right of approval as provided for in Section 4.4;
(c) Conduct research activities involving the Technology and receive
compensation from potential sublicensees regarding such research
activities;
(d) Gain access to data from current Zynaxis sublicensees for the
Technology;
(e) Attend scientific conferences and present information to the
conferences on the Technology;
(f) Handle all patent application matters on behalf of Zynaxis as they
arise, provided that in the event Vaxcel elects not to handle a patent
application matter, then Zynaxis shall have the option to handle such
matter; and
(g) Perform other development activities that may arise during the term of
this Agreement.
Vaxcel shall inform and provide updates to Zynaxis on a regular basis regarding
Development Activities undertaken by Vaxcel.
-3-
<PAGE>
4.2 No Obligation to Develop. The grant in Section 4.1 does not impose
------------------------
any responsibilities on Vaxcel, including any affirmative duty to promote,
produce, sell, develop, or otherwise commercialize the Technology or
improvements. In addition, nothing in this Agreement shall be deemed to
prohibit Vaxcel from developing, making, using, marketing or otherwise
distributing or promoting products competitive with the Technology, provided
that Vaxcel does not disparage the Technology in doing so.
4.3 Zynaxis Development Activities. During the term of this Agreement,
------------------------------
Zynaxis shall not undertake any Development Activities nor disclose any
Confidential Information relating to the Technology without the prior written
consent of Vaxcel. To the extent Zynaxis is made aware of any potential
Development Activities with third parties relating to the Technology, Zynaxis
shall promptly disclose such information to Vaxcel.
4.4 Zynaxis Approval of Vaxcel Agreements. Zynaxis shall have the right
-------------------------------------
to approve, prior to execution, any agreement for the Technology negotiated by
Vaxcel pursuant to Section 4.1(b). Vaxcel will submit to Zynaxis final copies
of all proposed agreements for the Technology.
ARTICLE V
TERM AND TERMINATION
5.1 Term. This Agreement shall commence on the Effective Date and shall
----
continue in effect until the first to occur of (i) the closing of the
transaction contemplated by the Merger Agreement; or (ii) termination of the
Merger Agreement.
5.2 Termination. If any party materially defaults in the performance of
-----------
any of its obligations under this Agreement, which default shall not be
substantially cured within 60 days after notice is given to the defaulting party
specifying the default, then the party not in default may, by giving notice to
the defaulting party, terminate this Agreement as of a date specified in such
notice of termination. Notwithstanding the foregoing, with respect to material
defaults that cannot reasonably be cured within 60 days, it shall not be a
default under this Section if the defaulting party in good faith proceeds within
60 days to commence curing said default and thereafter prosecutes with due
diligence the curing of such default to conclusion.
5.3 Termination Obligations. Upon the expiration or termination of this
-----------------------
Agreement for any reason each party shall promptly return to the other all
Confidential Information of such party.
5.4 Survival. Articles 1, 2, 3, 5.3, 5.4, 6(a), 6(b), 7, 8 and 9 shall
--------
survive any termination or expiration of this Agreement.
-4-
<PAGE>
ARTICLE VI
PAYMENTS
The parties agree that in exchange for the mutual covenants and promises
contained in this Agreement, in the event Vaxcel obtains an agreement for the
Technology as provided for in Section 4.1(b) during the term of this Agreement,
Vaxcel shall retain a maximum of the first Fifty Thousand Dollars ($50,000)
received from all such agreements in consideration of the services performed
hereunder. Any amounts received in excess of Fifty Thousand Dollars ($50,000)
will be transferred to Zynaxis to be used in satisfaction of Zynaxis'
obligations under the Merger Agreement and the Secured Loan being extended by
Cytrx Corporation in connection with the execution of the Merger Agreement. In
the event that this Agreement is terminated due to the termination of the Merger
Agreement, then the following payment obligations shall apply:
(a) if the Merger Agreement is terminated for a reason described in
Section 11.2(b) of the Merger Agreement, all payments received following
termination of this Agreement as a result of agreements for the Technology
entered into by Vaxcel during the term of this Agreement shall be divided
such that ninety percent (90%) of all payments are promptly paid to Vaxcel;
or
(b) if the Merger Agreement is terminated for any other reason, all
payments received following termination of this Agreement as a result of
agreements for the Technology entered into by Vaxcel during the term of
this Agreement shall be paid to Zynaxis.
ARTICLE VII
CONFIDENTIALITY
7.1 Definition. As used herein, "Confidential Information" means any and
----------
all know-how, developments, data, trade secrets, specifications, procedures,
drawings, and other technical information relating to the Technology with the
exception only of the following:
(a) information that as of the date of receipt by any party is in the
public domain or subsequently enter the public domain without fault of the
recipient;
(b) information that at the time of receipt by any party was known to the
recipient or any of its affiliates as a result of disclosure from an
independent third party who was entitled to make such disclosure;
(c) information that at any time is received in good faith by any party or
any of such party's affiliates from a third party which was lawfully in
possession of the same and had the right to disclose the same;
(d) information that the parties mutually agree in writing to release from
the terms of this Agreement; and
(e) information disclosed by any party as required by law or regulation of
a duly constituted public authority.
-5-
<PAGE>
7.2 Obligation. Each party agrees that it will exert its best efforts to
----------
ensure that Confidential Information will not be disclosed to any unaffiliated
third person, corporation or entity, except as may be required to grant
sublicenses as provided for in Section 4.1, or as may be required to effect a
product or price registration, or to qualify for the benefits of any health
insurance or similar program. Furthermore, Vaxcel agrees not to disclose
Southern's microencapsulation processes and fabrication conditions as disclosed
by Zynaxis to Vaxcel to any affiliated person, corporation or entity without the
written consent of Southern. Each party will advise all of its employees who
may have access to or knowledge of the Confidential Information of the parties'
obligations hereunder and will obtain written confidentiality agreements from
such employees.
ARTICLE VIII
TECHNOLOGY DEVELOPED BY VAXCEL
8.1 During the life of this Agreement, Vaxcel shall promptly disclose to
Zynaxis and Southern, in writing, all inventions or improvements, whether
patentable or not, hereinafter developed, acquired, or controlled by Vaxcel
and/or its sublicensees, if any, relating to the licensed Technology. Such
inventions or improvements shall be included in this Agreement at no additional
cost, the Agreement then to extend and cover all such inventions or improvements
as though specifically enumerated herein as licensed Technology.
8.2 Vaxcel acknowledges that pursuant to the Original License Agreement
Southern shall have the option of filing and prosecuting any patent applications
at its own expense upon such inventions or improvements.
8.3 If Southern elects not to file and prosecute any such patent
applications on such inventions or improvements, then Zynaxis shall have the
option of filing and prosecuting patent applications at its own expense upon
those inventions or improvements.
8.4 If Zynaxis elects not to file and prosecute any such patent
applications on such inventions or improvements, then Vaxcel shall have the
option of filing and prosecuting patent applications at its own expense upon
those inventions or improvements. Title to any such patents shall be in
Southern and the UAB Research Foundation, but such patents shall be exclusively
licensed to Zynaxis under the terms of the Original License Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 Approvals and Similar Actions. Where approval, acceptance, consent or
-----------------------------
similar action is required or requested of a party under this Agreement, such
action shall not be unreasonably delayed or withheld.
-6-
<PAGE>
9.2 Binding Nature and Assignment. This Agreement shall be binding on the
-----------------------------
parties and their respective successors and assigns. However, no party may
assign its rights or delegate its obligations under this Agreement without the
prior written consent of the other parties, and any such attempted assignment
shall be null and void.
9.3 Entire Agreement. This Agreement, including any schedules or
----------------
amendments attached to this Agreement, each of which is incorporated herein for
all purposes, constitutes the entire agreement between the parties with respect
to the subject matter of this Agreement as of the Effective Date and supersedes
any prior agreements or arrangements between the parties regarding the subject
matter of this Agreement. This Agreement may be amended, modified or changed
only by a written instrument executed by the parties.
9.4 Severability. If any provision of this Agreement is declared or found
------------
to be illegal, unenforceable or void, then the parties shall be relieved of all
obligations arising under such provision, but only to the extent that such
provision is illegal, unenforceable or void, it being the intent and agreement
of the parties that this Agreement shall be deemed amended by modifying such
provision to the extent necessary to make it legal and enforceable while
preserving its intent or, if that is not possible, by substituting therefor
another provision that is legal and enforceable and achieves the same objective.
9.5 Waiver. No delay or omission by any party to exercise any right or
------
power under this Agreement shall impair such right or power or be construed to
be a waiver thereof. A waiver by any party of any of the covenants to be
performed by the other or any breach shall not be construed to be a waiver of
any succeeding breach or of any other covenant. All remedies provided for in
this Agreement shall be cumulative and in addition to and not in lieu of any
other remedies available to any party at law, in equity or otherwise.
9.6 Force Majeure. Each party shall be excused from performance under
-------------
this Agreement for any period and to the extent that it is prevented from
performing any action, in whole or in part, as a result of delays beyond its
reasonable control caused by the other party or by an act of God, war, civil
disturbance, court order, labor dispute, third party nonperformance, or other
cause beyond its reasonable control. Such nonperformance shall not be a default
or a ground for termination of this Agreement. Each party shall endeavor to
promptly remedy the cause of any such nonperformance.
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws, other than the choice of law rules, of the State of
Georgia.
9.8 Notices. Notices, requests and other communications required or
-------
permitted hereunder shall be given in accordance with the applicable terms of
Section 13 of the Security Agreement dated December 6, 1996, between Cytrx
Corporation and Zynaxis.
-7-
<PAGE>
9.9 Counterparts. This Agreement may be executed in several counterparts,
------------
all of which taken together shall constitute a single agreement between the
parties.
9.10 Headings. The article and section headings and the table of contents
--------
used in this Agreement are for reference and convenience only and shall not
enter into the interpretation of this Agreement.
9.11 Beneficiaries. This Agreement is solely for the benefit of the
-------------
parties and their successors and permitted assigns, and does not confer any
rights or remedies on any other person or entity.
9.12 Applicable Laws. The parties agree to comply with all applicable
---------------
laws, rules, regulations and other provisions enacted or promulgated by any
governmental authority with jurisdiction over the subject matter of this
Agreement relating to the subject matter of this Agreement.
-8-
<PAGE>
9.13 No Joint Venture. This Agreement shall not create a partnership or
----------------
joint venture between the parties hereto nor give either party the right to act
on behalf of the other party except as explicitly stated herein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed under seal as of the day and year first above written.
VAXCEL, INC. ZYNAXIS VACCINE
TECHNOLOGIES, INC.
By: /s/ Paul J. Wilson By: /s/ Martyn Greenacre
-------------------------- --------------------------
Name: Paul J. Wilson Name: Martyn Greenacre
------------------------ ------------------------
Title: President & CEO Title: President
----------------------- -----------------------
-9-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Zynaxis Holdings, Ltd., a Delaware corporation
Zynaxis Vaccine Technologies, Inc., a Pennsylvania corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statements File Nos. 33-92090, 33-99712 and 33-64416.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
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0
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