-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fs6IvfC8gYUwGSTiHfg63WV5tMU/Mjank6Hx1i+/7B61/dN6GsIypDLc1jEcsu0c oG4G5ARXirjriZ2+VaAvQQ== /in/edgar/work/20000623/0000931763-00-001595/0000931763-00-001595.txt : 20000920 0000931763-00-001595.hdr.sgml : 20000920 ACCESSION NUMBER: 0000931763-00-001595 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000618 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000623 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYTRX CORP CENTRAL INDEX KEY: 0000799698 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 581642740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-15327 FILM NUMBER: 659773 BUSINESS ADDRESS: STREET 1: 154 TECHNOLOGY PKWY STREET 2: TECHNOLOGY PARK/ATLANTA CITY: NORCROSS STATE: GA ZIP: 30092 BUSINESS PHONE: 4043689500 MAIL ADDRESS: STREET 1: 154 TECHNOLOGY PARKWAY CITY: NORCROSS STATE: GA ZIP: 30092 8-K 1 0001.txt CURRENT REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) June 18, 2000 -------------- CYTRX CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter)
Delaware 0-15327 58-1642740 - ---------------------------- ------------------------ ---------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.)
154 Technology Parkway, Norcross, Georgia 30092 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (770) 368-9500 --------------- - ------------------------------------------------------------------------------- (Former name or former address, if changed since last report) Item 5. Other Events ------------ Effective June 15, 2000, we entered into a Purchase Agreement with Titermax USA, Inc. (an unaffiliated company) whereby we sold the worldwide rights to market and distribute Titermax, including all accounts receivable, inventory and other assets used in the Titermax business. The gross purchase price was $750,000, consisting of $100,000 in cash and a $650,000 five-year secured promissory note bearing interest of 10% annually. Item 7. Financial Statements and Exhibits --------------------------------- (a) Financial Statements The following consolidated financial statements of the Company (restated to give effect to the transaction discussed above) are set forth on pages F-1 to F-21 of this Current Report on Form 8-K. Consolidated Financial Statements as of December 31, 1999 - --------------------------------------------------------- Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Report of Independent Auditors Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts Condensed Consolidated Financial Statements as of March 31, 2000 - ---------------------------------------------------------------- Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 Condensed Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2000 and 1999 Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2000 and 1999 Notes to Condensed Consolidated Financial Statements (b) Pro Forma Financial Information None. (c) Exhibits 2.1 Purchase Agreement dated June 15, 2000 by and between CytRx Corporation and Titermax USA, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CYTRX CORPORATION ----------------- (Registrant) Date: June 22, 2000 By: /s/ Mark W. Reynolds ------------- -------------------- Mark W. Reynolds Vice President, Finance CYTRX CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements as of December 31, 1999 - --------------------------------------------------------- Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-6 Report of Independent Auditors F-15 Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts F-16 Condensed Consolidated Financial Statements as of March 31, 2000 - ---------------------------------------------------------------- Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 F-17 Condensed Consolidated Statements of Operations (unaudited) for the Three Month Periods Ended March 31, 2000 and 1999 F-18 Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Month Periods Ended March 31, 2000 and 1999 F-19 Notes to Condensed Consolidated Financial Statements F-20
F-1 CYTRX CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------------- 1999 1998 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents $ 3,031,893 $ 8,855,375 Short-term investments - 6,417,066 Accounts receivable 174,292 83,249 Note receivable - 300,000 Inventories 6,480 10,935 Other current assets 202,610 10,377 ----------------- ----------------- Total current assets 3,415,275 15,677,002 Property and equipment, net 2,641,810 195,030 Other assets: Acquired developed technology, net - 600,000 Other assets 70,978 169,536 ----------------- ----------------- Total other assets 70,978 769,536 ----------------- ----------------- Total assets $ 6,128,063 $ 16,641,568 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 629,738 $ 540,089 Accrued expenses and other current liabilities 2,121,999 1,409,034 ----------------- ----------------- Total current liabilities 2,751,737 1,949,123 Long-term debt 650,000 - Other long-term liabilities 1,693,638 - Minority interest in Vaxcel, Inc. - 3,897 Commitments Stockholders' equity: Preferred Stock, $.01 par value, 1,000 shares authorized, including 1,000 shares of Series A Junior Participating Preferred Stock; no shares issued and outstanding - - Common stock, $.001 par value, 18,750,000 shares authorized; 8,373,853 and 8,236,926 shares issued at December 31, 1999 and 1998, respectively 8,374 8,237 Additional paid-in capital 67,805,871 66,423,577 Treasury stock, at cost (633,816 and 625,816 shares held at December 31, 1999 and 1998, respectively) (2,279,238) (2,270,238) Accumulated deficit (64,502,319) (49,473,028) ----------------- ----------------- Total stockholders' equity 1,032,688 14,688,548 ----------------- ----------------- Total liabilities and stockholders' equity $ 6,128,063 $ 16,641,568 ================= =================
See accompanying notes. F-2 CYTRX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------------------------ 1999 1998 1997 (restated) (restated) (restated) ------------------- ------------------- ------------------ Revenues: Net service revenues $ 322,536 $ 350,789 $ 422,039 Interest income 462,634 1,007,019 751,526 Grant revenue 464,442 511,375 94,477 Other 141,848 244,353 535,303 ------------------- ------------------- ------------------ 1,391,460 2,113,536 1,803,345 Expenses: Cost of service revenues 239,840 187,047 242,343 Research and development 12,811,925 7,305,835 3,605,408 Selling, general and administrative 3,609,613 2,312,062 2,281,413 Interest - 45,888 293,048 ------------------- ------------------- ------------------ 16,661,378 9,850,832 6,422,212 ------------------- ------------------- ------------------ Loss from continuing operations before extraordinary item (15,269,918) (7,737,296) (4,618,867) Income (loss) from discontinued operations 236,730 2,329,352 (1,676,612) Minority interest in discontinued operations (3,897) (614,585) (242,487) ------------------- ------------------- ------------------ Loss before extraordinary item (15,029,291) (4,793,359) (6,052,992) Extraordinary item: Loss on early extinguishment of debt - (325,120) - ------------------- ------------------- ------------------ Net loss $(15,029,291) $(5,118,479) $(6,052,992) =================== =================== ================== Basic and diluted income (loss) per common share: Continuing operations $ (1.99) $ (1.01) $ (.62) Discontinued operations 0.03 0.38 (.20) Extraordinary item - (0.04) - ------------------- ------------------- ------------------ Net loss $ (1.96) $ (0.67) $ (0.82) =================== =================== ================== Basic and diluted weighted average shares outstanding 7,652,227 7,625,578 7,424,372
See accompanying notes. F-3 CYTRX CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock --------------------- Additional Shares Paid-in Accumulated Treasury Issued Amount Capital Deficit Stock Total -------------------------------------------------------------------------------- Balance at December 31, 1996 7,945,203 $7,945 $62,653,015 $(38,301,557) $(2,021,669) $ 22,337,734 Issuance of common stock 41,238 41 169,373 - - 169,414 Purchase of treasury stock - - - - (176,864) (176,864) Unrealized gain on sale of shares of subsidiary - - 2,706,397 - - 2,706,397 Beneficial conversion feature of convertible debentures - - 264,706 - - 264,706 Net loss - - - (6,052,992) - (6,052,992) -------------------------------------------------------------------------------- Balance at December 31, 1997 7,986,441 7,986 65,793,491 (44,354,549) (2,198,533) 19,248,395 Issuance of common stock 250,485 251 630,086 - - 630,337 Purchase of treasury stock - - - - (71,705) (71,705) Net loss - - - (5,118,479) - (5,118,479) -------------------------------------------------------------------------------- Balance at December 31, 1998 8,236,926 8,237 66,423,577 (49,473,028) (2,270,238) 14,688,548 Issuance of common stock 136,927 137 339,078 - - 339,215 Issuance of stock options/warrants - - 1,043,216 - - 1,043,216 Purchase of treasury stock - - - - (9,000) (9,000) Net loss - - - (15,029,291) - (15,029,291) -------------------------------------------------------------------------------- Balance at December 31, 1999 8,373,853 $8,374 $67,805,871 $(64,502,319) $(2,279,238) $ 1,032,688 ================================================================================
See accompanying notes. F-4 CYTRX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------------------------- 1999 1998 1997 ---------------- ----------------- ----------------- Cash flows from operating activities: Net loss $(15,029,291) $(5,118,479) $ (6,052,992) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 68,377 216,811 607,349 Amortization - 282,732 145,644 Gain on sales of subsidiary operations (240,196) (7,012,305) - Gain on sale of real estate - (433,786) - Charge for acquired incomplete research and development - - 951,017 Charge for beneficial conversion feature of convertible debentures - - 264,706 Impairment loss (discontinued operations) - 3,212,615 - Extraordinary loss on early extinguishment of debt - 325,120 - Minority interest in net loss of subsidiary (3,897) (614,585) (242,487) Stock option expense 1,043,216 - - Changes in assets and liabilities: Receivables (91,043) 1,082,390 (979,874) Inventories 4,455 1,037,197 (2,263,290) Notes receivable 300,000 100,000 - Other assets (93,675) 98,545 537,902 Accounts payable 546,019 208,884 640,383 Unearned revenue - 172,380 (85,005) Other liabilities 1,950,233 (495,323) 382,053 ---------------- ----------------- ----------------- Total adjustments 3,483,489 (1,819,325) (41,602) ---------------- ----------------- ----------------- Net cash used in operating activities (11,545,802) (6,937,804) (6,094,594) Cash flows from investing activities: Purchases of held-to-maturity securities - (6,417,066) (22,103,140) Maturities of held-to-maturity securities 6,417,066 - 32,399,348 Decrease in long-term investments - 5,326,647 - Net proceeds from sales of subsidiary operations 240,196 8,336,985 - Net proceeds from sale of technology 600,000 - - Net proceeds from sale of real estate - 4,260,747 - Net cash paid for acquisition - - (1,257,974) Capital expenditures, net (2,515,157) (13,317) (273,755) ---------------- ----------------- ----------------- Net cash provided by investing activities 4,742,105 11,493,996 8,764,479 Cash flows from financing activities: Net proceeds from issuance of common stock 339,215 125,880 169,414 Redemption of debt - (1,650,000) - Purchase of treasury stock (9,000) (71,705) (176,864) Proceeds from issuance of debt, net of issuance costs 650,000 - 1,803,366 ---------------- ----------------- ----------------- Net cash provided by (used in) financing activities 980,215 (1,595,825) 1,795,916 ---------------- ----------------- ----------------- Net increase (decrease) in cash and cash equivalents (5,823,482) 2,960,367 4,465,801 Cash and cash equivalents at beginning of year 8,855,375 5,895,008 1,429,207 ---------------- ----------------- ----------------- Cash and cash equivalents at end of year $ 3,031,893 $ 8,855,375 $ 5,895,008 ================ ================= ================= Supplemental disclosure of cash flow information: Cash paid during the year for interest $ - $ 45,888 $ 23,342 ================ ================= =================
See accompanying notes F-5 CYTRX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Need for Additional Capital CytRx Corporation ("CytRx" or "the Company") is a biopharmaceutical company engaged in the development and commercialization of high-value human therapeutics. The Company's current research and development focus is on vascular-occlusive disorders. CytRx also has a research pipeline with opportunities in the areas of acute respiratory disorders, infectious disease, gene and drug delivery, vaccines, and animal feed additives. The Company also markets the services of its small group of human resources professionals under the name of Spectrum Recruitment Research ("Spectrum") as a way of offsetting the Company's cost of maintaining this function. Spectrum's services are marketed primarily within metropolitan Atlanta, Georgia. The Company's operational focus is on the development and commercialization of pharmaceutical products; the Spectrum operations were formed as an ancillary activity. At December 31, 1999, the Company had net assets of $1,033,000 and working capital of $664,000. During the first quarter of 2000, the Company terminated the services of twelve of its employees as part of its efforts to conserve its cash resources and has further reduced its operations by suspending most of its technology development efforts requiring significant expenditures. The Company has incurred losses from operations since inception, and the ongoing ability of the Company to operate as a going concern with the current portfolio of technologies under development will be determined by the results of technology licensing efforts and/or the actual proceeds of any fund-raising activities. If the Company is unable to raise significant additional funds, it will be limited in its ability to advance its technologies under development. During the first quarter of 2000, the Company took certain steps to improve its financial condition (see Notes 7 and 16). The Company believes that the proceeds of these transactions will allow the Company to operate throughout the remainder of 2000, but that additional funds will be needed to significantly advance any of the Company's technologies under development. 2. Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of CytRx together with those of its majority-owned subsidiaries. As more thoroughly discussed in Note 13, the Company's activities with regard to its Titermax product line, as well as the operations of Proceutics, Inc. ("Proceutics"), CytRx Animal Health, Inc. ("CytRx Animal Health") (formerly VetLife, Inc.), and Vaxcel, Inc. ("Vaxcel") are presented as discontinued operations for all periods presented. Cash Equivalents - The Company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents consist primarily of commercial paper and amounts invested in money market accounts. Investments - Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of stockholders' equity. Realized gains and losses are included in investment income and are determined on a first-in, first-out basis (see Note 3). Fair Value of Financial Instruments - The carrying amounts reported in the balance sheet for cash and cash equivalents, investments, accounts receivable, notes receivable and accounts payable approximate their fair values. The carrying amount reported in the balance sheet for long-term debt approximates its fair value. The fair value of such long- F-6 term debt is estimated using discounted cash flow analyses based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. Inventories - Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Property and Equipment - Property and equipment are stated at cost and depreciated using the straight-line method based on the estimated useful lives (five years for equipment and furniture) of the related assets. Leasehold improvements are amortized over the term of the related lease or other contractual arrangement. As of December 31, 1999, the Company had capitalized approximately $2.5 million of equipment and leasehold improvements which were not placed in service as of that date. Acquired Developed Technology and Other Intangibles - Acquired developed technology and other intangible assets, primarily goodwill, (see Note 13) are amortized over their estimated useful lives (fifteen years) on a straight-line basis. Management continuously monitors and evaluates the realizability of recorded acquired developed technology and other intangible assets to determine whether their carrying values have been impaired. In accordance with Financial Accounting Standards Board ("FASB") Statement No. 121, Accounting for the Impairment of Long-Lived Assets, the Company records impairment losses on long- lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Any impairment loss is measured by comparing the fair value of the asset to its carrying amount. As more fully discussed in Note 13, during 1998 management evaluated these assets and recorded a provision for impairment of such assets. Patents and Patent Application Costs - Although the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived therefrom is uncertain. Patent costs are therefore expensed rather than capitalized. Accrued Expenses and Other Liabilities - Accrued expenses and other liabilities at December 31 are summarized below (in thousands). The headings correspond to the captions on the accompanying Balance Sheet.
Accrued Expenses and Other -------------------------- Current Liabilities Other Long-Term Liabilities ------------------- --------------------------- 1999 1998 1999 1998 ---------------- ---------------- -------------- ----------- Clinical research activities $ 631 $ 455 $ 966 $ - Scientific and regulatory activities 564 83 460 - Chemical plant construction 146 - 228 - Deferred revenue 233 261 - - Employee incentives & severance 233 142 - - Other miscellaneous 315 468 40 - ------ ------ ------ ----------- Total $2,122 $1,409 $1,694 $ - ====== ====== ====== ===========
Basic and Diluted Loss per Common Share - Basic and diluted loss per share are computed based on the weighted average number of common shares outstanding. Common share equivalents (which may consist of options and warrants) are excluded from the computation of diluted loss per share since the effect would be antidilutive. Shares Reserved for Future Issuance - As of December 31, 1999, the Company has reserved approximately 3,200,000 of its authorized but unissued shares of common stock for future issuance pursuant to stock options and warrants and employee benefit plans. Revenue Recognition - Sales are recognized at the time products are shipped or services rendered. The Company does not require collateral or other securities for sales made on credit. Revenues from collaborative research arrangements and grants are generally recorded as the related costs are incurred. The costs incurred under such arrangements approximated the revenues reported in the accompanying statements of operations. Sale of Stock by a Subsidiary - The Company does not recognize gains on the sale of previously unissued stock of subsidiaries when there are significant uncertainties regarding the Company's ability to ultimately realize its investment in the subsidiary. Such gains are reflected as additional paid-in capital in the Company's consolidated financial statements. Stock-based Compensation - The Company grants stock options and warrants for a fixed number of shares to key employees and directors with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option grants and warrants in accordance with APB Opinion No. 25, Accounting for Stock F-7 Issued to Employees ("APB 25"), and, accordingly, recognizes no compensation expense for the stock option grants and warrants for which the terms are fixed. For stock option grants and warrants which vest based on certain corporate performance criteria, compensation expense is recognized to the extent that the quoted market price per share exceeds the exercise price on the date such criteria are achieved or are probable. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation ("Statement 123"), which provides an alternative to APB 25 in accounting for stock-based compensation issued to employees. However, the Company has continued to account for stock-based compensation in accordance with APB 25 (See Note 9). The Company has also granted stock options and warrants to certain consultants and other third parties. Stock options and warrants granted to consultants and other third parties are valued at the fair market value of the options and warrants granted or the services received, whichever is more reliably measurable. Expense is recognized in the period in which the services are received. Concentrations of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains cash and cash equivalents in large well-capitalized financial institutions and the Company's investment policy disallows investment in any debt securities rated less than "investment- grade" by national ratings services. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Segment Information - Effective January 1, 1998, the Company adopted FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 superceded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. See Note 15. 3. Investments At December 31, 1999, the Company held no investments. At December 31, 1998, the Company had classified all of its investments (consisting entirely of corporate debt securities) as held-to-maturity, of which $8,457,000 and $6,417,000 were included in cash and cash equivalents and short-term investments, respectively, in the accompanying consolidated balance sheets. Investments held at December 31, 1998 are summarized below (in thousands):
1998 ------------- Cost $14,874 Gross Unrealized Gains 3 Gross Unrealized Losses (38) ------- Fair Market Value $14,839 =======
4. Property and Equipment Property and equipment at December 31 consist of the following (in thousands):
1999 1998 ------------- ------------- Equipment and furnishings $2,200 $ 799 Leasehold improvements 969 - ------ ----- 3,169 799 Less accumulated depreciation (527) (604) ------ ----- $2,642 $ 195 ====== =====
5. 6% Convertible Debentures In October 1997, the Company privately placed with certain investors $2,000,000 of convertible notes (the "Debentures") with an original maturity of October, 2001. The Debentures were convertible on and after December 31, 1997 into shares of CytRx Common Stock at a price of the lesser of (a) 85% of the average closing bid price for the 10 days preceding the conversion, or (b) $5.68 per share. Such beneficial conversion feature was determined to have a fair F-8 value of $265,000 at the date of issuance and was amortized to interest expense from the date of issuance through the date the Debentures first became convertible. The Debentures were sold at par and bore interest at a rate of 6% per annum. The provisions for conversion of the Debentures allowed the Company, at its discretion, to disallow conversions below $4.00 per share by redeeming the amount attempted to be converted at a 10% premium. Also, in connection with the issuance of the Debentures, the investors were issued two-year warrants to purchase 40,000 shares of CytRx Common Stock at an exercise price of $5.68. The fair value of such warrants was determined to be insignificant. The warrants expired unexercised in 1999. In February and March 1998, $500,000 of the Debentures were converted into 204,104 shares of common stock. In February and May 1998, $1,500,000 of the Debentures were redeemed by the Company and total redemption premiums of $150,000 were paid. In addition, $175,000 of previously capitalized debt issue costs were expensed. The redemption premiums and debt issue costs ($325,000 total) are reflected as an extraordinary item in the statement of operations as loss on early extinguishment of debt. At December 31, 1998 and 1999 there were no remaining outstanding Debentures. 6. Long Term Debt In June 1999, the Company entered into a Purchase Agreement for the design and construction of manufacturing equipment for commercial production of FLOCOR(TM). The Purchase Agreement called for, among other things, certain progress payments to be made, with the final payment of $650,000 due 18 months after installation of the equipment or 12 months after FDA approval of FLOCOR(TM) (the "Note"). The Note bears interest of 12% annually, payable monthly beginning in the first month after installation of the equipment. CytRx accepted installed delivery of the equipment in February 2000; the Note is reflected in the accompanying Balance Sheet as Long Term Debt. In February 2000, the Note was cancelled in exchange for a cash payment of $200,000 and the issuance of Common Stock (see Note 7). 7. Exchange of Common Stock for Cancellation of Accounts Payable, Accrued Expenses and Debt During the first quarter of 2000, the Company reached agreements with certain of its trade creditors whereby an aggregate of $1,894,000 of trade payables was cancelled in exchange for issuance of approximately 758,000 shares of CytRx Common Stock. Of this amount, $1,694,000 existed at December 31, 1999, and has accordingly been classified as long-term liabilities on the accompanying Balance Sheet. The Company also cancelled $650,000 of long-term debt (see Note 6) in exchange for a cash payment of $200,000 and the issuance of 180,000 shares of CytRx Common Stock. 8. Commitments and Contingencies Rental expense from continuing operations under operating leases during 1999, 1998 and 1997 approximated $212,000, $154,000 and $13,000, respectively. Minimum annual future obligations for operating leases are $160,000, $165,000, $171,000, $178,000, $185,000 and $678,000 in 2000, 2001, 2002, 2003, 2004 and 2005 and beyond, respectively. Aggregate minimum future subrentals the Company expects to receive under noncancellable subleases total approximately $43,000 at December 31, 1999. 9. Stock Options and Warrants CytRx has stock option plans pursuant to which certain key employees and directors are eligible to receive incentive and/or nonqualified stock options to purchase shares of CytRx's common stock. The options granted under the plans generally become exercisable over a three year period from the dates of grant and have lives of ten years. Certain options granted to the Company's executive officers and others contain alternative or additional vesting provisions based on the achievement of corporate objectives. Additionally, the Company has granted warrants to purchase shares of the Company's common stock to its President and Chief Executive Officer subject to vesting criteria as set forth in his warrant agreements; such warrants have lives of ten years from the dates of grant. Exercise prices of all options and warrants for employees and directors are set at the fair market values of the common stock on the dates of grant. During 1998, the Company repriced all outstanding options held by current employees to the then current market value. No compensation expense was recorded for employees or directors for the three years ended December 31, 1998; however, during 1999 the vesting criteria for 680,238 options and warrants was achieved, resulting in $689,000 of compensation expense which was recorded in the first quarter of 1999. During 1999, services were received in exchange for options and warrants issued to certain consultants. Aggregate non-cash charges of $355,000 were recognized in 1999 for the services received. F-9 A summary of the Company's stock option and warrant activity and related information for the years ended December 31 is shown below.
Warrants and Options Weighted Average Exercise Price -------------------------------------------- --------------------------------- 1999 1998 1997 1999 1998 1997 ------------------ ----------- ----------- ----------------- ------ ------ Outstanding - beginning of year 2,258,308 1,439,297 1,237,031 $1.17 $4.87 $5.00 Granted 961,750 902,488 221,700 2.25 2.65 4.35 Exercised (12,103) - - 1.00 - - Forfeited (70,103) (83,477) (19,434) 5.91 4.37 6.64 Expired - - - - - - ---------- ---------- ---------- Outstanding - end of year 3,137,852 2,258,308 1,439,297 $1.43 $1.17 $4.87 ========== ========== ========== Exercisable at end of year 2,170,107 1,104,620 940,541 $1.25 $1.33 $5.22 Weighted average fair value of options and warrants granted during the year: $1.59 $2.30 $3.97
The following table summarizes additional information concerning options and warrants outstanding and exercisable at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------------------- ----------------------------------- Weighted Average Remaining Weighted Number Weighted Range of Contractual Average Of Shares Average Exercise Prices Number of Shares Life (years) Exercise Price Exercisable Exercise Price ---------------- ---------------- ------------ -------------- ------------------- -------------- $ 1.00 2,126,102 6.3 $1.00 1,830,107 $1.00 2.13 - 2.75 999,250 6.9 2.27 332,500 2.50 7.75 12,500 5.2 7.75 7,500 7.75 --------- --------- 3,137,852 6.5 1.43 2,170,107 1.25 ========= =========
The Company has elected to follow APB 25 and related Interpretations in accounting for employee stock options and warrants because, as discussed below, the alternative fair value accounting provided for under Statement 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Pro forma information regarding net loss and loss per share is required by Statement 123, which also requires that the information be determined as if the Company had accounted for employee stock options granted and warrants issued subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for the Company's options and warrants to employees was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
1999 1998 1997 -------------- ------------ ------------ Weighted average risk free interest rate 6.27% 5.64% 6.22% Dividend yields 0% 0% 0% Volatility factors of the expected market price of the Company's common stock 1.046 1.026 1.055 Weighted average life of the option (years) 8 8 8
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-10 For purposes of pro forma disclosures, the estimated fair value of the employee options and warrants is amortized to expense over the options' vesting periods. The Company's pro forma information is as follows (in thousands, except per share data):
1999 1998 1997 ------------- ------------- -------------- Pro forma net loss $(16,505) $(6,521) $(6,969) Pro forma net loss per share (basic and diluted) $ (2.16) $ (.86) $ (.94)
10. Shareholder Protection Rights Plan Effective April 16, 1997, the Company's Board of Directors declared a distribution of one Right for each outstanding share of the Company's common stock to stockholders of record at the close of business on May 15, 1997 and for each share of common stock issued by the Company therafter and prior to a Flip- in Date (as defined below). Each Right entitles the registered holder to purchase from the Company one-ten thousandth (1/10,000th) of a share of Series A Junior Participating Preferred Stock, at an exercise price of $30. The Rights are generally not exercisable until 10 business days after an announcement by the Company that a person or group of affiliated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the Company's then outstanding shares of common stock (a "Flip-in Date"). In the event the Rights become exercisable as a result of the acquisition of shares, each Right will enable the owner, other than the Acquiring Person, to purchase at the Right's then current exercise price a number of shares of common stock with a market value equal to twice the exercise price. In addition, unless the Acquiring Person owns more than 50% of the outstanding shares of common stock, the Board of Directors may elect to exchange all outstanding Rights (other than those owned by such Acquiring Person) at an exchange ratio of one share of common stock per Right. All Rights that are owned by any person on or after the date such person becomes an Acquiring Person will be null and void. The Rights have been distributed to protect the Company's stockholders from coercive or abusive takeover tactics and to give the Board of Directors more negotiating leverage in dealing with prospective acquirors. 11. Retirement Plan The Company maintains a defined contribution retirement plan (the "Plan") covering employees of the Company. Historically, at the Board of Directors' discretion, the Company has matched 50% of the participant's contribution with common stock. The Company's matching contribution vests over 3 years. Total expense for the Plan for the years ended December 31, 1999, 1998 and 1997 was approximately $69,000, $110,000 and $176,000, respectively, of which $1,000, $44,000 and $120,000 related to discontinued operations for the years ended December 31, 1999, 1998 and 1997, respectively. During the first quarter of 2000, the Company terminated the Plan. 12. Income Taxes For income tax purposes, CytRx and its subsidiaries have an aggregate of approximately $53.1 million of net operating losses available to offset against future taxable income, subject to certain limitations. Such losses expire in 2000 through 2019. CytRx also has an aggregate of approximately $6.3 million of research and development and orphan drug credits available for offset against future income taxes which expire in 2000 through 2014. Deferred income taxes reflect the net effect of temporary differences between the financial reporting carrying amounts of assets and liabilities and income tax carrying amounts of assets and liabilities. The components of the Company's deferred tax assets and liabilities are as follows:
December 31, ---------------------------- 1999 1998 ------------- ------------- Deferred tax assets: Net operating loss carryforward $ 20,163,000 $ 18,677,000 Tax credit carryforward 6,278,000 1,245,000 Other 108,000 1,218,000 ------------ ------------ Total deferred tax assets 26,549,000 21,140,000 Deferred tax liabilities: Acquired developed technology and other intangibles - (228,000) Depreciation and other (185,000) (143,000) ------------ ------------ Total deferred tax liabilities (185,000) (371,000) ------------ ------------ Net deferred tax assets 26,364,000 20,769,000 Valuation allowance (26,364,000) (20,769,000) ------------ ------------ $ - $ - ============ ============
Based on assessments of all available evidence as of December 31, 1999 and 1998, management has concluded that the respective deferred income tax assets should be reduced by valuation allowances equal to the amounts of the deferred income tax assets. F-11 13. Discontinued Operations Vaxcel, Inc. - ------------ On June 2, 1999, CytRx entered into a Stock Acquisition Agreement with A-Z Professional Consultants, Inc. ("A-Z") for the sale of CytRx's equity interest in Vaxcel. The sale was consummated on September 9, 1999. Pursuant to the agreement, A-Z purchased 9,625,000 shares of common stock of Vaxcel from CytRx for a cash purchase price of $319,000. After consummation of this transaction, CytRx has no further equity interest in Vaxcel. Net losses (net of minority interest) associated with Vaxcel included in income (loss) from discontinued operations were approximately $(40,000), $(4,319,000) and $(2,357,000) for the years ended December 31, 1999, 1998 and 1997, respectively. A summary of the assets and liabilities of Vaxcel which are included in the consolidated balance sheets at December 31, 1998 is as follows (in thousands):
1998 ----------- Current assets $ 314 Property and equipment, net 7 Other assets 655 ----- Total assets $ 976 ===== Total liabilities $ 618 =====
Termination of Optivax(R) License by CytRx -- In July 1999, CytRx terminated its license of Optivax(R) to Vaxcel due to Vaxcel's cessation of operations within the meaning of the license agreement. Concurrently with the termination of the Optivax(R) license, all of Vaxcel's rights and obligations pursuant to its license of the Optivax(R) technology to Corixa Corporation were assigned to CytRx. Impairment Loss - In its efforts to raise additional capital during 1998 and 1999, Vaxcel solicited bids for the sublicense or purchase of Vaxcel's acquired developed technology, either together with or separately from Vaxcel's other technologies. During the fourth quarter of 1998, the results of these efforts indicated to management that the acquired developed technology might be impaired. As a result of this indication, Vaxcel performed an evaluation to determine, in accordance with Statement 121, whether future cash flows (undiscounted and without interest charges) expected to result from the use and eventual disposition of the acquired developed technology would be less than its aggregate carrying amount and an allocation of goodwill resulting from the Zynaxis merger. Statement 121 requires that when a group of assets being tested for impairment was acquired as part of a business combination accounted for using the purchase method of accounting, any goodwill that arose as part of the transaction must be included as part of the asset grouping. As a result of the evaluation, management determined that the estimated future cash flows expected to be generated by the acquired developed technology would be less than its carrying amount and allocated goodwill, and therefore the asset was impaired as defined by Statement 121. Consequently, the original cost basis of the acquired developed technology and allocated goodwill were reduced to reflect the fair market value at the date the evaluation was made, resulting in a $3,213,000 impairment loss included in discontinued operations for the year ended December 31, 1998. In determining the fair market value of the asset, management considered the transaction described below, among other factors. Sale of Technology by Vaxcel -- In January 1999, Vaxcel entered into an agreement with Innovax Corporation ("Innovax") giving Innovax the option to purchase the rights to Vaxcel's PLG microencapsulation technology for an aggregate purchase price of $600,000. Innovax paid a nonrefundable option fee of $200,000, with an additional $400,000 due upon the exercise of the option. Innovax also paid a total of $20,000 for extensions of the option period. On April 1, 1999 Innovax exercised its option and the rights to such technology were assigned by Vaxcel to Innovax. The Company recorded this transaction in the second quarter of 1999 as a sale of its Acquired Developed Technology, valued at $600,000, and therefore did not record a gain or loss on the transaction. Proceutics, Inc. - ---------------- In February 1998, CytRx's wholly-owned subsidiary, Proceutics consummated a sale of substantially all of its non-real estate assets to Oread Laboratories, Inc. ("Oread") for approximately $2.1 million. Proceutics retained its real estate assets consisting of a laboratory building which it leased to Oread. The laboratory building was subsequently sold in May 1998 (see Note 14). Prior to consummation of this transaction, Proceutics provided preclinical development services to the pharmaceutical industry. Net income (loss) associated with Proceutics included in income (loss) from discontinued operations was approximately $1,387,000 and $(138,000) for the years ended December 31, 1998 and 1997, respectively (see Note 15). F-12 A $782,000 gain related to the sale of non-real estate assets is included in income from discontinued operations for 1998, as well as a $434,000 gain on the sale of Proceutics' real estate assets (see Note 14). CytRx Animal Health, Inc. - ------------------------- In April 1998, CytRx's wholly-owned subsidiary, CytRx Animal Health, consummated the sale of substantially all of its assets related to its cattle marketing operations to VetLife, LLC ("VL LLC") (an unaffiliated company) for a total purchase price of $7,500,000, subject to certain working capital adjustments, plus contingent payments based on certain events and future sales of specified products of VL LLC and its affiliates. CytRx Animal Health retained $5.3 million in investments that were pledged to secure a letter-of- credit, as well as the rights to certain technologies licensed from CytRx. Prior to consummation of this transaction, CytRx Animal Health was engaged in marketing and distributing products to enhance North American beef cattle productivity. Net income associated with CytRx Animal Health included in income (loss) from discontinued operations was approximately $5,645,000 and $868,000 for the years ended December 31, 1998 and 1997, respectively (see Note 15). A gain related to the sale of $6,230,000 is included in income from discontinued operations for 1998. Titermax - -------- Since 1987 CytRx has manufactured, marketed and distributed Titermax, an adjuvant used to produce immune responses in research animals. Effective June 15, 2000, the Company entered into a Purchase Agreement with Titermax USA, Inc. (an unaffiliated company) whereby Titermax USA purchased the worldwide rights to market and distribute Titermax, including all accounts receivable, inventory and other assets used in the Titermax business. The gross purchase price was $750,000, consisting of $100,000 in cash and a $650,000 five-year secured promissory note bearing interest of 10% annually. Net income associated with the Titermax activities included in income (loss) from discontinued operations was approximately $280,000, $231,000 and $193,000 for the years ended December 31, 1999, 1998 and 1997, respectively (see Note 15). A gain related to the sale of approximately $685,000 will be recorded in the second quarter of 2000 and classified as discontinued operations. 14. Sale of Real Estate In May 1998, CytRx and Proceutics consummated the sale of the two buildings owned by them at 150 and 154 Technology Parkway, Norcross, Georgia, to Alexandria Real Estate Equities, Inc. ("Alexandria") for $4.5 million. Proceutics' rights and obligations under the lease to Oread (See Note 13) were assigned to Alexandria, and CytRx leases the building at 154 Technology Parkway from Alexandria. The lease term extends 10 years and contains escalating rent payments over the term. CytRx will also be responsible for all operating expenses for the property. Proceutics recorded a gain of $434,000 for the sale of its building. A gain of $279,000 on the sale/leaseback of the CytRx building was deferred and will be amortized over the ten year lease period. 15. Segment Reporting The Company has six reportable segments: Research Products (TiterMax), Recruiting Services (Spectrum), Product Development (core business of development and commercialization of pharmaceutical-related products), Cattle Marketing Operations (CytRx Animal Health), Vaccine Development (Vaxcel) and Pharmaceutical Services (Proceutics). See Notes 1 and 13 for a description of these operations. The Company adopted FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, in 1998 which changes the way the Company reports information about its operating segments. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance of its operating segments based primarily on profit or loss from operations before income taxes. Summarized financial information concerning the Company's reportable segments is shown in the following table.
Continuing Operations Discontinued Operations ---------------------------------- ----------------------------------------------------------------- Total Cattle Total Recruiting Product Continuing Research Marketing Pharmaceutical Vaccine Discontinued (in thousands) Services Development Operations Products Operations Services Development Operations - ----------------------------- ---------- ----------- ----------- -------- ---------- -------------- ------------ ------------ 1999: - ----- Sales to external customers $323 $ - $ 323 $500 $ - $ - $ - $ 500 Intersegment sales - - - - - - - - Collaborative, grant & other revenue - 606 606 - - - 134 134 Interest income - 463 463 - - - 7 7 Interest expense - - - - - - 4 4 Depreciation and amortization - 62 62 - - - 6 6 Segment profit (loss) 75 (15,344) (15,269) 280 - - (40) 240 Total assets - 6,128 6,128 - - - - - Capital expenditures - 2,515 2,515 - - - - -
F-13 15. Segment Reporting (continued)
Continuing Operations Discontinued Operations --------------------------------- ------------------------------------------------------------------- Total Cattle Total Recruiting Product Continuing Research Marketing Pharmaceutical Vaccine Discontinued (in thousands) Services Development Operations Products Operations Services Development Operations - --------------------------- ------- ----------- ----------- ----------- ---------- -------------- ----------- ------------ 1998: - ---- Sales to external customers $351 $ - $ 351 481 $ 4,383 $ 419 $ - $ 5,283 Intersegment sales - - - - - 131 - 131 Collaborative, grant & other revenue - 756 756 - - - 167 167 Interest income - 1,007 1,007 - - 22 13 35 Interest expense - 46 46 - - 3 7 10 Depreciation and amortization - 120 120 - 8 78 294 380 Unusual Items: Gain on sale of business - - - - 6,230 782 - 7,012 Gain on sale of real estate - - - - - 434 - 434 Provision for asset impairment - - - - - - 3,213 3,213 Loss on early debt extinguishment - 325 325 - - - - - Segment profit (loss) 114 (8,176) (8,062) 231 5,645 1,387 (4,319) 2,944 Total assets - 15,666 15,666 - - - 976 976 Capital expenditures - 112 112 - - 12 4 16 1997: - ---------------------------- -- Sales to external customers 422 - 422 456 13,469 1,984 - 15,909 Intersegment sales - - - - - 853 - 853 Collaborative, grant & other revenue - 630 630 - - - 243 243 Interest income - 752 752 - - 2 46 48 Interest expense - 293 293 - - 36 1 37 Depreciation and amortization - 171 171 - 16 365 201 582 Segment profit (loss) 77 (4,696) (4,619) 193 868 (138) (2,357) (1,434) Total assets - 11,477 11,477 - 3,795 4,176 5,458 13,429 Capital expenditures - 98 98 - 11 165 - 176
16. Subsequent Event (Unaudited) Effective March 24, 2000, the Company entered into a Stock Purchase Agreement with certain investors (the "Investors") whereby the Investors agreed to purchase 800,000 shares of the Company's Common Stock for an aggregate purchase price of $1.8 million and the issuance of warrants to purchase an additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The Investors were granted registration rights for the shares issued to them and the shares underlying the warrants. In addition, the Investors will, upon effective registration of the shares, purchase an additional 286,000 shares at $2.25 per share and simultaneously receive an additional three-year warrant to purchase 143,000 shares at $2.25 per share. In lieu of these additional shares and warrants, the Investors have the option to purchase 429,000 shares at a price equal to 75% of a trailing average market price of the Company's Common Stock, as defined in the Stock Purchase Agreement. F-14 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders CytRx Corporation We have audited the accompanying consolidated balance sheets of CytRx Corporation as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CytRx Corporation at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 15, 2000, except for Note 13, paragraphs 10 and 11, as to which the date is June 15, 2000 F-15 CYTRX CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additions ------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period - ------------------------------------- ---------- ---------- ---------- ---------- ---------- Reserve Deducted in the Balance Sheet from the Asset to Which it Applies: Allowance for Bad Debts Year ended December 31, 1999 $ -- $ -- $ -- $ -- $ -- Year ended December 31, 1998 22,187 -- -- 22,187 -- Year ended December 31, 1997 48,430 44,850 -- 71,093 22,187 Allowance for Deferred Tax Assets Year ended December 31, 1999 $20,769,000 $5,595,000 $ -- $ -- $26,364,000 Year ended December 31, 1998 17,684,000 3,085,000 -- -- 20,769,000 Year ended December 31, 1997 15,200,000 2,484,000 -- -- 17,684,000
F-16 CYTRX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2000 1999 --------------- ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 3,219,486 $ 3,031,893 Accounts receivable 390,951 174,292 Inventories 5,142 6,480 Other current assets 130,813 202,610 --------------- ------------- Total current assets 3,746,392 3,415,275 Property and equipment, net 2,616,358 2,641,810 Other assets 60,978 70,978 --------------- ------------- Total assets $ 6,423,728 $ 6,128,063 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 629,850 $ 629,738 Accrued liabilities 1,392,993 2,121,999 --------------- ------------- Total current liabilities 2,022,843 2,751,737 Long-term debt - 650,000 Other long-term liabilities - 1,693,638 Commitments Stockholders' equity: Preferred Stock, $.01 par value, 1,000 shares authorized, including 1,000 shares of Series A Junior Participating Preferred Stock; no shares issued and outstanding - - Common stock, $.001 par value, 18,750,000 shares authorized; 10,213,866 and 8,373,853 shares issued at March 31, 2000 and December 31, 1999, respectively 10,214 8,374 Additional paid-in capital 72,072,318 67,805,871 Treasury stock, at cost (633,816 shares held at March 31, 2000 and December 31, 1999) (2,279,238) (2,279,238) Accumulated deficit (65,402,409) (64,502,319) --------------- ------------- Total stockholders' equity 4,400,885 1,032,688 --------------- ------------- Total liabilities and stockholders' equity $ 6,423,728 $ 6,128,063 =============== =============
See accompanying notes. F-17 CYTRX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Month Period Ended March 31, ------------------------------------ 2000 1999 (Restated) (Restated) ------------ ------------ Revenues: Net sales $ 100,128 $ 65,730 Interest income 30,889 176,109 Grant income 73,211 27,461 Other 146,314 49,769 ------------ ------------ 350,542 319,069 Expenses: Cost of sales 52,420 68,540 Research and development 674,574 2,358,061 Selling, general and administrative 563,452 1,160,176 ------------ ------------ 1,290,446 3,586,777 ------------ ------------ Loss from continuing operations (939,904) (3,267,708) Income (Loss) from discontinued operations 39,814 (12,116) Minority interest in discontinued operations - (3,897) ------------ ------------ Net loss $ (900,090) $ (3,275,927) ============ ============ Basic and diluted loss per common share: Continuing operations $ (.12) $ (.43) Discontinued operations .01 - ------------ ------------ Net loss $ (0.11) (0.43) ============ ============ Basic and diluted weighted average shares outstanding 8,070,164 7,623,394
See accompanying notes. F-18 CYTRX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Month Period Ended March 31, --------------------------------------- 2000 1999 -------------- -------------- Cash flows from operating activities: Net loss $ (900,090) $ (3,275,927) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 40,500 29,760 Stock option expense 156,075 726,621 Minority interest in net loss of subsidiary - (3,897) Net change in assets and liabilities (2,556,056) (214,498) -------------- -------------- Total adjustments (2,359,481) 537,986 -------------- -------------- Net cash used by operating activities (3,259,571) (2,737,941) Cash flows from investing activities: Decrease in short-term investments - 6,417,066 Capital expenditures, net (15,048) (182,761) -------------- -------------- Net cash (used) provided by investing activities (15,048) 6,234,305 Cash flows from financing activities: Net proceeds from issuance of common stock 4,112,212 18,659 Retirement of debt (650,000) - Purchase of treasury stock - (9,000) -------------- -------------- Net cash provided by financing activities 3,462,212 9,659 -------------- -------------- Net increase in cash and cash equivalents 187,593 3,506,023 Cash and cash equivalents at beginning of period 3,031,893 8,855,375 -------------- -------------- Cash and cash equivalents at end of period $ 3,219,486 $ 12,361,398 ============== ==============
See accompanying notes. F-19 CYTRX CORPORATION ----------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- March 31, 2000 -------------- (Unaudited) ----------- 1. Description of Company and Basis of Presentation CytRx Corporation ("CytRx" or "the Company") is a biopharmaceutical company engaged in the development and commercialization of high-value human therapeutics. The Company's current research and development focus is on vascular-occlusive disorders. CytRx also has a research pipeline with opportunities in the areas of acute respiratory disorders, infectious disease, gene and drug delivery, vaccines, and animal feed additives. The accompanying condensed consolidated financial statements at March 31, 2000 and for the three month periods ended March 31, 2000 and 1999 include the accounts of CytRx together with those of its subsidiaries and are unaudited, but include all adjustments, consisting of normal recurring entries, which the Company's management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with the Company's audited financial statements in its Form 10-K for the year ended December 31, 1999. 2. Exchange of Common Stock for Cancellation of Accounts Payable, Accrued Expenses and Debt During the first quarter of 2000, the Company reached agreements with certain of its trade creditors whereby an aggregate of $1,894,000 of trade payables was cancelled in exchange for issuance of approximately 758,000 shares of CytRx Common Stock. Of this amount, $1,694,000 existed at December 31, 1999, and was accordingly classified as long-term liabilities on the Balance Sheet at that date. The Company also cancelled $650,000 of long-term debt in exchange for a cash payment of $200,000 and the issuance of 180,000 shares of CytRx Common Stock. 3. Private Placement of Common Stock In March 2000, the Company entered into a Stock Purchase Agreement with certain investors (the "Investors") whereby the Investors agreed to purchase 800,000 shares of the Company's Common Stock for an aggregate purchase price of $1.8 million and the issuance of warrants to purchase an additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The Investors were granted registration rights for the shares issued to them and the shares underlying the warrants. In addition, the Investors will, upon effective registration of the shares, purchase an additional 286,000 shares at $2.25 per share and simultaneously receive an additional three-year warrant to purchase 143,000 shares at $2.25 per share. In lieu of these additional shares and warrants, the Investors have the option to purchase 429,000 shares at a price equal to 75% of a trailing average market price of the Company's Common Stock, as defined in the Stock Purchase Agreement. 4. Equity Line of Credit In April 2000, the Company entered into a Private Equity Line of Credit Agreement (the "ELC Agreement") with Majorlink Holdings Limited ("Majorlink"), pursuant to which the Company has the right to put shares of Common Stock to Majorlink from time to time during the "commitment period" to raise up to $5,000,000, subject to certain conditions and restrictions. The "commitment period" begins on the effective date of a registration statement filed by the Company to register the resale by Majorlink of the shares of Common Stock that Majorlink purchases under the ELC Agreement and ends on the earliest of (1) the date thirty months from such date, (2) the date on which Majorlink shall have purchased $5,000,000 of Common Stock under the ELC Agreement and (3) the date either party terminates the ELC Agreement in accordance with its terms. Each time the Company desires to raise a specific amount of cash under the ELC Agreement, the Company shall issue to Majorlink a number of shares of Common Stock determined by (1) dividing the amount of cash desired to be F-20 raised by the Company by (2) 90% of a trailing market average price of the Company's Common Stock, as defined in the ELC Agreement. In connection with the ELC Agreement, the Company issued Majorlink a warrant to purchase up to 200,000 shares of Common Stock at a per share exercise price of $3.438. The warrant is exercisable for a period of three years. 5. Segment Reporting
Continuing Operations ----------------------------------------------------------- Total Recruiting Product Continuing Discontinued (in thousands) Services Development Operations Operations - --------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2000: Sales to external customers $ 100 $ - $ 100 $ 64 Intersegment sales - - - - Segment profit (loss) 43 (983) (940) 40 Total assets - 6,424 6,424 - Three Months Ended March 31, 1999: Sales to external customers 66 - 66 136 Intersegment sales - - - - Segment profit (loss) (1) (3,266) (3,267) (9) Total assets - 13,164 13,164 805
6. Sale of Titermax Since 1987 CytRx has manufactured, marketed and distributed Titermax, an adjuvant used to produce immune responses in research animals. Effective June 15, 2000, the Company entered into a Purchase Agreement with Titermax USA, Inc. (an unaffiliated company) whereby Titermax USA purchased the worldwide rights to market and distribute Titermax, including all accounts receivable, inventory and other assets used in the Titermax business. The gross purchase price was $750,000, consisting of $100,000 in cash and a $650,000 five-year secured promissory note bearing interest of 10% annually. Net income associated with the Titermax activities included in income (loss) from discontinued operations was approximately $40,000 and $83,000 for the three months ended March 31, 2000 and 1999, respectively (see Note 5). A gain related to the sale of approximately $685,000 will be recorded in the second quarter of 2000 and classified as discontinued operations. F-21 EX-2.1 2 0002.txt PURCHASE AGREEMENT Exhibit 2.1 ----------- PURCHASE AGREEMENT ------------------ THIS AGREEMENT is made and entered into this 15th day of June 2000, between CYTRX CORPORATION, a Delaware corporation ("Seller"), and TITERMAX USA, INC., a Georgia corporation ("Buyer"). In consideration of the mutual promises and agreements set forth below, the parties agree as follows: 1. Items Purchased, Sold and Assumed. --------------------------------- 1.1 Assets. Subject to the terms and conditions contained in this ------ Agreement, on the Closing Date (as defined in Section 3 below) Seller agrees to sell, assign and deliver to Buyer, and Buyer agrees to purchase from Seller, free and clear of all liens and encumbrances (excluding payables describe in Section 1.2), the following items related with and limited to Seller's TiterMax product line (collectively, the "Items"): (i) All TiterMax accounts receivable as of the Closing Date; (ii) The Worldwide TiterMax trademark, which will be licensed to Buyer pursuant to a license agreement to be entered into at Closing, at no cost to Buyer until final note payment is made, at which time title to such trademark will pass from Seller to Buyer; (iii) All inventory of TiterMax components (including raw materials, less security reserved describe in Section 6(a)), glass, vials, stoppers, sealers, shipping boxes and labels and finished goods inventory that are owned by CytRx; (iv) All TiterMax marketing and promotional materials; (v) All TiterMax customer lists including sales data and contact information; (vi) All currently used equipment relating to Seller's TiterMax business including refrigerators, file cabinets, desks, two (2) computers, printer, facsimile machine, chairs, shelves, tables, trade show booth and TiterMax shipping equipment; (vii) All of Seller's rights under any distributor agreements currently in effect in all territories worldwide and distributor contracts and databases used in operating the TiterMax brand; (viii) All accounts in effect with current vendors and suppliers directly related to TiterMax and to the extent they can be transferred; (ix) All historic TiterMax records of invoices, customer files and communications, inventory production and supplies; (x) Seller shall provide Buyer with a license exclusive to TiterMax Gold for the limited use as adjuvants in laboratory animals. The license does not include any rights for research use for any other reason including DNA delivery. This license does not include a royalty-free license with any other party including Emory or BASF. (xi) Seller shall provide Buyer with a sub-license to use TiterMax Classic for the limited use as adjuvants in laboratory animals. The license does not include any rights for research use for any other reason, including DNA delivery. This license does not include a royalty-free license with any other party including Emory or BASF. 1.2 Liabilities Assumed by Buyer. Buyer assumes all trade liabilities for ----------------------------- promotion, advertising, supplies, and all other expenses with a future value at closing. However, the liability of such items is limited only to those items which are 60 days old or less. All liabilities over 60 days which are unpaid remain the responsibility of Seller. A listing of known such items at this date are listed on "Exhibit A" (Liabilities). 2. Purchase Price and Fees. ----------------------- (a) Purchase Price. As consideration for the purchase and sale of Seller's -------------- TiterMax business, Buyer agrees to pay to Seller the Purchase Price, which shall be the sum of $750,000 to be paid as follows: (i) $100,000 paid by Buyer at the time of Closing by either certified check or wire transfer and (ii) $650,000 provided to Buyer from Seller as a senior, secured five-year note at 10% interest in the form as attached hereto as "Exhibit B" (Secured Promissory Note). Obligations and repayment schedule of Seller's note are described under "Exhibit B" attached hereto. There will be no closing costs, loan points or other fees at closing except that each party will be responsible for its own legal expenses. (b) Maintenance Fee. Buyer shall pay Seller $500.00 due on the first of --------------- each month for patent maintenance fees (the "Patent Maintenance Fees"). It is understood that TiterMax patents are part of broader patent filings for other technologies of Seller that are not included in this Purchase Agreement including adjuvants, DNA delivery and in use with certain purified or restricted-weight poloxamers and compounds utilized, funded and maintained by Seller. In the event Seller abandons any or all of its patents or certain territories, Seller shall notify Buyer of this action, and give Buyer the right of first refusal to purchase all of such patents or territories for nominal consideration, not to exceed One Hundred Dollars ($100.00). In such event, Buyer may, at its discretion, negotiate a sublicense for any Emory patents (TiterMax Classic) and/or may choose to assume all of Seller's patent maintenance activities and costs at that time. 3. Closing. ------- (a) The closing (the "Closing") shall be at the office of Seller, 154 Technology Parkway, Norcross, Georgia, commencing on or before June __, 2000. (b) At Closing, Seller shall deliver the following to Buyer: (1) A Bill of Sale, including a lien for the Secured Promissory Note, for the Items, in the form attached hereto as Exhibit D. (2) A license agreement (the "License TiterMax Gold Agreement"), in form and substance acceptable to Buyer and its counsel, for TiterMax Gold exclusive for the limited use as adjuvants in laboratory animals. (3) A sub-license to use TiterMax Classic for the limited use as adjuvants in laboratory animals. The license shall not include any rights for research use for any other reason including DNA delivery. This license does not include a royalty-free license with any other party including Emory or BASF. (4) A license agreement, in form and substance acceptable to Buyer and its counsel, for the "TiterMax" trademark shown on Exhibit C at no cost to Buyer, which license shall be for the period of time until the final note payment is made, at which time the title to the "TiterMax" trademark will pass from Seller to Buyer. (5) Assignments of all of Seller's rights in and to the distributor agreements referenced in paragraph 1.1(vii) hereof, in form and substance acceptable to Buyer and its counsel. (6) A Noncompetition and Nonsolicitation Agreement in the form attached hereto as Exhibit E. (c) At Closing, Seller shall deliver the following to Buyer: (1) The sum of One Hundred Thousand Dollars ($100,000.00) in cash or other good and immediately available funds. (2) The Secured Promissory Note in the form attached hereto as Exhibit B. (3) Corporate resolutions of Buyer in the form attached hereto as Exhibit F. (4) Buyer shall execute the license agreements referenced in paragraph 3(b)(2) and 3(b)(3) and the Noncompetition and Nonsolicitation Agreement referenced in paragraph 3(b)(5). (5) A personal security interest and personal guarantee of the Secured Promissory Note by Gay I. Lemmerhirt, President & CEO of TiterMax USA, Inc. 4. Restrictions on use of TiterMax. ------------------------------- Buyer agrees that TiterMax shall be used for the sole purpose of selling to the research market for use in laboratory animals only. Any other use, including use in human and veterinary vaccines or DNA delivery, are prohibited and will result in the loss of marketing rights. Specifically, use is restricted to CRL 8300 compound for TiterMax Gold and compound L-141 (purchased from BASF) for TiterMax Classic. No other compounds from Seller may be used. 5. Responsibilities of Buyer. ------------------------- (a) Third Party Royalties: Buyer understands and accepts full --------------------- responsibility for payment of all third party royalties (collectively, the "Royalties") due and payable to Emory University and BASF pursuant to the license agreements Seller has with such parties. Buyer will provide Seller proof of compliance with such license agreements on a quarterly basis. Failure to maintain these license agreements will result in the breach of the license agreement and loss of the licenses granted thereunder, resulting in considerable and possibly irreparable damage to Seller. Therefore, Buyer will be in breach of this Agreement if it breaches such license agreements. Seller attests that it is in full compliance with such license agreements at closing. (b) Worldwide TiterMax Trademark: Buyer shall assume direct financial ---------------------------- responsibility for the payment of TiterMax trademark annuities, annuity prosecution and defense. Buyer will provide Seller proof of compliance of worldwide Trademark compliance on a quarterly basis. Failure to maintain these Trademarks will result in the loss of the Trademark resulting in considerable and possibly irreparable damage to CytRx. Therefore, Buyer will be in breach of this contract if it fails to maintain such Trademarks around the world. A listing of all Trademarks to be maintained by country is listed on "Exhibit C" (Trademarks). (c) Life and Disability Insurance: Buyer shall purchase and maintain Life ----------------------------- and Disability Insurance coverage for Buyer's President/CEO, naming Seller as beneficiary. These coverages shall protect Seller's interests in the TiterMax business in the event of the death or disability of Buyer's President/CEO. Buyer shall provide Seller proof of such insurance policies within 30 days of closing. Buyer will be in breach of this contract if it fails to maintain such coverage. (d) Financial Reports: Until the Secured Promissory Note has been paid in ----------------- full, Buyer shall prepare, sign, attest and submit to Seller within 30 days of the close of each calendar quarter, financial disclosure documents detailing the financial condition of the TiterMax business. These documents shall include a current income statement, balance sheet, accounts receivable report, and accounts payable summary. 6. Responsibilities of Seller. -------------------------- (a) Chemical Synthesis: Seller will provide Buyer one kilogram of the ------------------ active ingredient for TiterMax Gold and Seller's inventory of TiterMax Classic except 500 grams of TiterMax Classic (these items hereinafter, the "Reserve Inventory") which Seller will retain in its inventory. Seller shall provide Buyer with one (1) additional kilogram of the active ingredient for TiterMax Gold within two (2) months of Closing. Seller shall release the Reserve Inventory to Buyer at no additional cost when Buyer pays off the Secured Promissory Note attached hereto as Exhibit B. Future supplies (batches) shall be at the option of both parties. If Seller is unable or unwilling to synthesize additional materials, Seller shall provide Buyer with the know-how to develop the materials or have the materials developed by another party. (b) Patent Prosecution: Seller accepts liability for patent prosecution ------------------ costs incurred prior to closing. (c) Marketing Activities: Seller agrees to support the current marketing -------------------- plans of the TiterMax brand prior to closing, including attendance at Trade Shows and related promotional programs. (d) Emory License: Subject to the provisions of paragraph 2(b), Seller ------------- agrees to keep the Emory license in full force and effect to the best ability of Seller, except for the payment of third party royalties, which shall be Buyer's responsibility. 7. Miscellaneous. ------------- (a) Notice: Any notices given under this Agreement shall be deemed to be ------ effectively given when delivered personally or five days after being placed in the United States mail, postage prepaid, certified or registered mail or one day after being sent via air courier, addressed, in the case of Seller, as follows: CytRx Corporation 154 Technology Parkway Norcross, Georgia 30092 Attention: Jack Luchese with a copy to: Alston & Bird One Atlantic Center 1201 W. Peachtree Street Atlanta, Georgia 30309-3424 Attention: George Maxwell and in the case of Buyer, as follows: TiterMax USA, Inc. 2900 Delk Road # 700-17 Marietta, Georgia 30067 Attention: Gay I. Lemmerhirt with copy to: Robert A. Nephew, P.C. 4200 Northside Parkway, N.W. Building One, Suite 200 Atlanta, Georgia 30327 (b) Binding Effect and Counterparts. This Agreement shall be binding upon ------------------------------- and shall inure to the benefit of the parties hereto and their successors and assigns. (c) Governing Law. This Agreement and all rights and obligations of the ------------- parties shall be governed, construed and interpreted under and pursuant to the laws of the State of Georgia. (d) Termination. This Agreement may be terminated at any time prior to the ----------- Closing Date by (i) mutual consent of the parties hereto; (ii) the Buyer if any of the conditions of its obligations hereunder shall not have been satisfied at or prior to the Closing on the Closing Date and (if not satisfied) shall not have been waived by Buyer; (iii) the Seller if any of the conditions of its obligations hereunder shall not have been satisfied at or prior to the Closing on the Closing Date and (if not satisfied) shall not have been waived by Seller; or (iv) by either party if the Closing has not occurred by June __, 2000 and the terminating party has not breached the terms of this Agreement. If the parties hereto have not reached agreement on the form and substance of the closing documents referenced in paragraph 3, either party may terminate this Agreement and neither party shall owe any further duties to the other. (e) Survival. The completion of the sale hereunder shall not terminate any -------- of the covenants, representations, warranties or liabilities of the parties under this Agreement, and the same shall continue and survive the completion of the sale. (f) Entire Agreement; Modifications. This Agreement supersedes all prior ------------------------------- negotiations between the parties hereto and contains the entire understanding between them. It may be modified only by a writing duly executed by each of the parties hereto or their successors or assigns. (g) Negotiated Transaction. The provisions of this Agreement were ---------------------- negotiated by the parties hereto and this Agreement shall be deemed to have been drafted by all the parties hereto, notwithstanding any presumptions at law to the contrary. (h) Further Assurances. After the Closing, the parties, at the request of ------------------ the other or others, shall promptly execute, deliver, or cause to be executed or delivered, any documents and instruments requested by the other or others in addition to those required by this Agreement, in form and substance reasonably satisfactory to the other or others, as the other or others my deem necessary to carry out the terms of this Agreement. (i) Expenses. Each of the parties shall pay its own expenses and the fees -------- and expenses of its counsel, accountants, and other experts in connection with this Agreement. (j) Attorney's Fees to Prevailing Party. The prevailing party in any ----------------------------------- litigation with respect to this Agreement or the transactions contemplated hereby shall be entitled to recover from the non- prevailing party its reasonable attorney's fees and costs of litigation. (k) Publicity. The parties agree that the content and timing of any press --------- release of other public announcement concerning the transaction described in this Agreement are subject to the prior approval of the Seller. (l) Approval. The undersigned officers represent and warrant that their -------- execution of this Agreement on behalf of their respective corporations has been authorized (or will be ratified) by the Board of Directors of their respective corporations. If the execution of this Agreement has not been aurthorized or is not subsequently ratified by the Board of Directors of either corporation, this Agreement shall be rescinded and all compensation paid by Buyer shall be immediately returned to Buyer, and all items conveyed to Buyer by Seller pursuant to this Agreement shall be immediately returned to Seller. SELLER BUYER CYTRX CORPORATION TITERMAX USA, INC. By: ____________________ By: ____________________ Name: Jack J. Luchese Name: Gay I. Lemmerhirt Title: President & CEO Title: President & CEO Date: __________________ Date: __________________ Attachments: Exhibit A (Liabilities) Exhibit B (Secured Promissory Note) Exhibit C (Trademarks) Exhibit D (Bill of Sale) Exhibit E (Noncompetition and Nonsolicitation Agreement) Exhibit F (Buyer's Corporate Resolutions) -----END PRIVACY-ENHANCED MESSAGE-----