-----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, B7NnT4NChAi1eYaUY23C1an5KcHrorLNBsMtpJ2+8A6Fj1U6XenCtrlK7nQftlt+ Qjf8+zxGuEuzAO6Hs8Wvgw== 0000931763-01-000541.txt : 20010328 0000931763-01-000541.hdr.sgml : 20010328 ACCESSION NUMBER: 0000931763-01-000541 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYTRX CORP CENTRAL INDEX KEY: 0000799698 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 581642740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15327 FILM NUMBER: 1580933 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 10-K405 1 0001.txt FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-15327 ------- CYTRX CORPORATION ----------------- (Exact name of Registrant as specified in its charter) Delaware 58-1642740 --------------------------------- ----------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 154 Technology Parkway Suite 200 Norcross, Georgia 30092 30092 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 368-9500 -------------- -------------------- Securities registered pursuant to Section l2(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO__. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Registrant's common stock held by non- affiliates on March 19, 2001 was approximately $8.4 million. On March 19, 2001, there were 10,137,696 shares of the Registrant's common stock outstanding, exclusive of treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the CytRx Corporation Proxy Statement for the 2001 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference into Part III. 1 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, we make oral and written statements that may constitute "forward looking statements" (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the "SEC") in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). We desire to take advantage of the "safe harbor" provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward looking statements made in this Annual Report on Form 10-K (the "Annual Report"), as well as those made in other filings with the SEC. Forward looking statements can be identified by our use of forward looking terminology such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. Such forward looking statements are based on our management's current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward looking statements. In the preparation of this Annual Report, where such forward looking statements appear, we have sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward looking statements, and we have described many such items under "Risk Factors" set forth in Exhibit 99.1 to this Annual Report. We do not have, and expressly disclaim, any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward looking statement is based. 2 PART I Item 1. Business General We are a Delaware corporation, incorporated in 1985 and are engaged in the development and commercialization of pharmaceutical products. Our current research and development activities include FLOCOR, an intravenous agent for treatment of sickle cell disease and other acute vaso-occlusive disorders, and TranzFect, a delivery technology for DNA-based vaccines. We also have a research pipeline with opportunities in the areas of muscular dystrophy, cancer, spinal cord injury, vaccine delivery and gene therapy. See "Product Development". Certain financial information concerning the industry segments in which the Company operates can be found in Note 17 to the Company's Consolidated Financial Statements. Recent Developments Financing Activities - -------------------- During the first quarter of 2000, we took steps to improve our financial condition, including (i) agreements with trade creditors whereby an aggregate of $2.3 million of indebtedness was cancelled in exchange for issuance of approximately 938,000 shares of CytRx Common Stock, and (ii) a Stock Purchase Agreement with certain investors (the "Investors") whereby the Investors agreed to purchase 800,000 shares of the Company's Common Stock for an aggregate purchase price of $1.8 million and the issuance of warrants to purchase an additional 330,891 shares at $2.25 per share. As part of our efforts to conserve our cash resources we also reduced our staff and reduced our clinical development program for FLOCOR pending further analysis of results from a Phase III clinical study completed in December 1999 (see "Product Development"). In April 2000, we entered into a private equity line of credit agreement (the "ELC Agreement") whereby we have the right to put shares of our common stock to an investor from time to time to raise up to $5,000,000, subject to the conditions and restrictions included in the ELC Agreement. Our ability to raise significant funds through this mechanism is subject to a number of risks and uncertainties, including stock market conditions and our ability to obtain and maintain an effective registration of the relating shares with the Securities and Exchange Commission. Sale of Titermax - ---------------- Since 1987, we have manufactured, marketed and distributed Titermax, an adjuvant used to produce immune responses in research animals. Effective June 15, 2000, we entered into a Purchase Agreement with Titermax USA, Inc. (an unaffiliated company) whereby we sold the worldwide rights to market and distribute Titermax, including all accounts receivable, inventory and other assets used in the Titermax business. The gross purchase price was $750,000, consisting of $100,000 in cash and a $650,000 five-year secured promissory note bearing interest of 10% annually. Merck License - ------------- In November 2000, we entered into an exclusive, worldwide license agreement (the "License Agreement") with Merck & Co., Inc. ("Merck") whereby we granted Merck the right to use our TranzFect technology in DNA-based vaccines targeted to four infectious diseases, one of which is HIV. In November 2000, Merck paid us a signature payment of $2 million. Merck will also pay us up to $4 million in $1 million increments within 30 days of the occurrence of each of the following: (i) the commencement by Merck of the first U.S. Food and Drug Administration (FDA) Phase I Study for the first product incorporating TransFect designed for the prevention and treatment of HIV; (ii) the commencement by Merck of the earlier of the first FDA Phase IIb Study or Phase III Study for such HIV product; (iii) the filing by Merck of the first U.S. Public Health Service Act Product License Application in one of the countries mentioned below for such HIV product; and (iv) notification from a regulatory authority in the United States, Canada, France, Germany, Italy, Spain, the United Kingdom, or Japan that all approvals for the marketing of such HIV product, including pricing approvals, has been granted. Merck will also pay us an annual fee of $50,000 the first year, $75,000 the second year, and $100,000 the third year and each additional year thereafter until Merck receives notification from a regulatory authority as mentioned above. For the products incorporating TranzFect targeting the other diseases, Merck will pay us milestone payments of up to $2,850,000 in the following increments: (i) $100,000 for the commencement by Merck of the first FDA Phase I Study; (ii) $250,000 for the commencement by Merck of the earlier of the first FDA Phase IIb Study or Phase III Study; (iii) $500,000 for the filing by Merck of the first U.S. Public Health Service Act Product License Application in one of the countries mentioned below; and (iv) $2 million for notification from a regulatory authority in the United States, Canada, France, Germany, Italy, Spain, the United Kingdom, or Japan that all approvals for the marketing of such product, including pricing approvals, has been granted. Merck will also pay to us royalties of between 2% and 4% on a country-by- country basis, based on net sales. Merck will pay an additional 1% royalty on net sales if certain conditions are met regarding patent protection and Merck's competitive position. The royalty payments are subject to certain reductions. This agreement remains effective unless terminated according to its terms by either party or until the expiration of all royalty obligations thereunder. Merck may terminate this agreement at any time in its sole discretion by giving 90 days written notice. Upon termination by Merck, the rights and obligations under the agreement, including any licenses and payment obligations not yet due, also terminate. The agreement may also be terminated for cause by either party. Restrictions in the license agreement prevent us from disclosing certain of its terms, including some of the specific disease targets covered. We have applied with the SEC for and have received confidential treatment for certain portions of the agreement, which have been omitted from the exhibit filed with the SEC. 3 Ivy Animal Health License - ------------------------- In February 2001, we entered into a license agreement with Ivy Animal Health, Inc. ("Ivy") of Overland Park, Kansas, whereby we granted to Ivy a worldwide exclusive license to our investigational agent, CRL-8761, a non- antibiotic feed additive that enhances growth performance in monogastric food animals such as poultry and pigs. As part of the license, we received a nominal upfront payment, and, dependent upon Ivy's ability to successfully develop a commercially viable product, will receive a milestone fee upon regulatory approval in the United States and an eventual royalty equal to 5% of net sales. Product Development Therapeutic Copolymer Programs - ------------------------------ General. Our primary focus is on CRL-5861 (purified poloxamer 188), a ------- novel, intra-vascular agent with pharmacological properties that can be characterized as rheologic, cytoprotective and anti-adhesive / anti-thrombotic. CRL-5861 is an intravenous solution that has the unique property of improving micro-vascular blood flow. Extensive preclinical and clinical studies suggest CRL-5861 may be of significant benefit in acute ischemic vascular disorders such as stroke, heart attack, and vaso-occlusive crisis of sickle cell disease. CRL- 5861 may also provide benefit in cancer when used in combination with radiation or cytotoxic drugs. Through its effect on increasing blood flow, CRL-5861 is thought to (a) increase delivery of cytotoxic drugs to ischemic portions of tumors, and (2) increase oxygen delivery, thus increasing the sensitivity of tumor cells to drug and radiation therapy. The safety profile of CRL-5861 is well established. It has been investigated in over 17 clinical studies representing administration to approximately 4,000 patients and healthy volunteers. Sickle Cell Disease. We believe CRL-5861 has significant potential in ------------------- treating a variety of vascular-occlusive diseases, however, we have chosen vaso- occlusive crisis associated with sickle cell anemia as our first development priority. For purposes of our sickle cell disease development program, we refer to CRL-5861 as "FLOCOR". Sickle cell disease is a devastating disorder originating from an inherited abnormality of hemoglobin, the oxygen-carrying molecule in red blood cells. Under conditions of low blood oxygen, which is generally caused by dehydration or stress, the sickle cell victim's hemoglobin becomes rigid causing red blood to become rough, sticky and irregularly shaped, often looking like sickles, which gives the disease its name. Estimates place the number of persons suffering from sickle cell anemia in the U.S. at about 72,000, or roughly one in 400 African-Americans. It is also estimated that complications from sickle cell disease result in healthcare expenditures of from $1.0 to $1.5 billion annually in the U.S. The most common problem sickle cell patients face is episodic pain (also referred to as vaso-occlusive crisis, or VOC). These episodes can last anywhere from days to weeks, and can vary significantly in their severity. The deformed sickle cells cannot easily flow through the smaller blood vessels of the body and tend to clump together, forming occlusions which impede blood flow. The occlusions deprive tissues of vital oxygen that can result in tissue death, inflammation and intense throbbing pain. Aside from causing considerable pain and suffering, these crisis episodes slowly destroy vital organs as they are deprived of oxygen. As a result, the life expectancy of sickle cell victims is about twenty years shorter than those without the disease. Patients suffering from sickle cell disease may experience several crisis episodes each year. Hospitalization is required when pain becomes too much to bear. There are about 75,000 hospital admissions annually to treat sickle cell patients undergoing acute vascular-occlusive crisis caused by the disease. On average, these patients require 4 in-patient treatment for four to seven days. Currently there is no disease modifying treatment for acute crisis of sickle cell disease and treatment is limited to narcotics, fluids, and bed rest. In sickle cell disease, the application of FLOCOR can best be described as an intravenous blood "lubricant". FLOCOR's unique surface-active properties decrease blood viscosity and enable the rigid sickled cells to become more flexible, thus allowing easier passage of blood cells through narrow blood vessels. We believe FLOCOR can shorten the episodes of vaso-occlusive crises and, most importantly, preserve organ function. On December 21, 1999, we reported results from our Phase III clinical study of FLOCOR for treatment of acute sickle cell crisis. Although the study did not demonstrate statistical significance in the primary endpoint, statistically significant and clinically important benefits associated with FLOCOR were observed in certain subgroups. In addition, among the entire patient population, treatment with FLOCOR resulted in a statistically significant increase in the percent of patients achieving resolution of their crisis. The Phase III study also demonstrated that FLOCOR is well tolerated. Based on the encouraging efficacy results and a good safety profile our independent Data and Safety Monitoring Board (DSMB) and other thought leaders in the area of sickle cell disease have recommended that we continue with clinical development of FLOCOR in sickle cell disease. We presented the results of the Phase III trial at the 24th Annual Meeting of the National Sickle Cell Disease Program in Philadelphia on April 12, 2000. Based on our recent conversations with the FDA, it is likely that either two small additional pivotal trials or one large trial will be required for approval, along with one to two additional safety studies. We believe there is a reasonable possibility of applying for and obtaining government funding to support one or more of the remaining trials, which will minimize, but not eliminate our expenditures. If we are successful in these discussions, we would anticipate earliest funding approval in the second quarter of 2002. The additional studies would take approximately two years to complete patient enrollment, which might begin in the third or fourth quarter of 2002. FLOCOR has been granted "Orphan Drug" designation by the FDA for the treatment of sickle cell crisis. The Orphan Drug Act of 1983, as amended, provides incentive to drug manufacturers to develop drugs for the treatment of rare diseases (e.g., diseases that affect less than 200,000 individuals in the United States, or diseases that affect more than 200,000 individuals in the United States where the sponsor does not reasonably anticipate that its product will become profitable). As a result of the designation of FLOCOR as an Orphan Drug, if we are the first manufacturer to obtain FDA approval to market FLOCOR for treatment of sickle cell crisis, we will obtain a seven-year period of marketing exclusivity beginning from the date of FLOCOR's approval. During this period, the FDA may not approve the same drug for the same use from another sponsor. Cancer - Cancer is the second leading cause of death in the United States, ------ costing an astounding $1.7 billion yearly. Chemotherapy and/or radiation has highly variable results and improvements to these standard regimens are drastically needed. CRL-5861 possesses properties that appear to increase blood flow to poorly perfused areas of tumors, thus allowing chemotherapeutic agents to treat such areas more effectively. By increasing blood flow, the tumors become more active and sensitive to chemotherapy or radiation. Preliminary studies have shown promising results and we have begun further preclinical studies to evaluate CRL-5861's activity. Based on the successful outcome of these studies, we believe we will be able to quickly start a clinical program to evaluate CRL-5861's effectiveness in cancer patients. Muscular Dystrophy - Duchenne muscular dystrophy (DMD) is an inherited ------------------ disorder caused by an abnormal gene for a muscle protein known as dystrophin. Muscles deficient in dystrophin breakdown under normal muscular activity and the disease results in progressive muscle wasting, paralysis, and death often by age 20. There is no treatment that is effective in preventing the progressive muscle destruction of this devastating disorder. Several years ago, we began collaborating with researchers at the University of Cincinnati Medical Center to study CRL-5861 in the treatment of Muscular Dystrophy. Recently, the collaboration was awarded a research grant from the Muscular Dystrophy Association for further studies in animal models. If these laboratory studies suggest CRL-5861 can protect dystrophin deficient mice, it should work similarly in boys with DMD. Spinal Cord Injury - Traumatic spinal cord damage is one of the most ------------------ devastating injuries imaginable, and unfortunately occurs primarily in young people, often resulting in complete paralysis. Researchers believe that a significant portion of spinal cord damage results from a secondary progression of damage after the initial injury. This secondary injury results from membrane injury to nerve cells, causing them to lose function over time. We are currently testing CRL-5861 for its ability to interact with damaged nerve membranes in such a way as to "seal" the damage and restore membrane integrity. If successful, this treatment could limit the progression of secondary, post-injury damage, thereby maintaining or restoring spinal cord function. Based on the successful outcome of these studies, we 5 believe we can proceed very quickly with the clinical development of this agent since the program will benefit from the existing safety and manufacturing capabilities already in place for our FLOCOR program. Vaccine Enhancement and Gene Therapy - ------------------------------------ DNA Vaccines & Gene Therapy -- Gene therapy and/or gene based vaccines are --------------------------- mediated through the delivery of DNA containing selected genes into cells by a process known as transfection. We refer to our gene delivery technology as TranzFect. A common class of materials used to enhance the transfection process are known as cationic lipids. This type of lipid can associate with and alter the integrity of a cell membrane, thus increasing the uptake of the complexed DNA. Unfortunately, cationic lipids are toxic to cells and are readily metabolized. Thus the effect of these agents in transfection protocols is not readily reproducible when used in vivo. We have identified a series of non-ionic block copolymers known as poloxamers that share several physico-chemical traits with the cationic lipids in that they associate with DNA and cell membranes. However, the block copolymers are significantly less toxic than the cationic lipids and are not metabolized in vivo. In addition, the poloxamer family of non-ionic block copolymers have a significant history of being safely used in a wide variety of oral, injectable, and topical pharmaceutical products. Importantly, a poloxamer known as CRL-1005 which is among the most active in transfection protocols and is adjuvant active, has been studied in a Phase I clinical trial. In that trial, CRL-1005 was well tolerated at doses significantly higher than those anticipated to be useful in gene therapy or DNA vaccine studies. In addition to the ability of poloxamers to enhance transfection, these compounds have significant immuno-adjuvant activity. Accordingly, we believe that an optimal application for this technology may be in the field of DNA vaccines. We believe that in this application, the activity of poloxamers will be two-fold. First, the poloxamers will act as delivery/transfection agents to facilitate the intracellular delivery and protection of the DNA from enzymatic digestion. Second the poloxamer will act as an immuno-adjuvant. Since the poloxamer is not metabolized and has surface active properties, it is likely to remain on the surface of the transfected cell awaiting expression of the gene. When the gene product is excreted from the cell, the poloxamer is likely to associate with the antigen and exert immuno-adjuvant actions. Numerous preclinical and clinical studies have demonstrated that conventional vaccines adjuvanted with poloxamers are well tolerated and result in significantly enhanced antibody and cellular immune responses. Merck License -- In November 2000, we entered into an exclusive, worldwide ------------- license agreement (the "License Agreement") with Merck & Co., Inc. ("Merck") whereby we granted Merck the right to use our TranzFect technology in DNA-based vaccines targeted to four infectious diseases, one of which is HIV. In November 2000, Merck paid us a signature payment of $2 million. Merck will also pay us up to $4 million in $1 million increments within 30 days of the occurrence of each of the following: (i) the commencement by Merck of the first U.S. Food and Drug Administration (FDA) Phase I Study for the first product incorporating TransFect designed for the prevention and treatment of HIV; (ii) the commencement by Merck of the earlier of the first FDA Phase IIb Study or Phase III Study for such HIV product; (iii) the filing by Merck of the first U.S. Public Health Service Act Product License Application in one of the countries mentioned below for such HIV product; and (iv) notification from a regulatory authority in the United States, Canada, France, Germany, Italy, Spain, the United Kingdom, or Japan that all approvals for the marketing of such HIV product, including pricing approvals, has been granted. Merck will also pay us an annual fee of $50,000 the first year, $75,000 the second year, and $100,000 the third year and each additional year thereafter until Merck receives notification from a regulatory authority as mentioned above. For the products incorporating TranzFect targeting the other diseases, Merck will pay us milestone payments of up to $2,850,000 in the following increments: (i) $100,000 for the commencement by Merck of the first FDA Phase I Study; (ii) $250,000 for the commencement by Merck of the earlier of the first FDA Phase IIb Study or Phase III Study; (iii) $500,000 for the filing by Merck of the first U.S. Public Health Service Act Product License Application in one of the countries mentioned below; and (iv) $2 million for notification from a regulatory authority in the United States, Canada, France, Germany, Italy, Spain, the United Kingdom, or Japan that all approvals for the marketing of such product, including pricing approvals, has been granted. Merck will also pay to us royalties of between 2% and 4% on a country-by- country basis, based on net sales. Merck will pay an additional 1% royalty on net sales if certain conditions are met regarding patent protection and Merck's competitive position. The royalty payments are subject to certain reductions. This agreement remains effective unless terminated according to its terms by either party or until the expiration of all royalty obligations thereunder. Merck may terminate this agreement at any time in its sole discretion by giving 90 days written notice. Upon termination by Merck, the rights and obligations under the agreement, including any licenses and payment obligations not yet due, also terminate. The agreement may also be terminated for cause by either party. Restrictions in the license agreement prevent us from disclosing certain of its terms, including some of the specific disease targets covered. We have applied with the SEC for and have received confidential treatment for certain portions of the agreement, which have been omitted from the exhibit filed with the SEC. Conventional Vaccines - As part of our TranzFect program, we have developed --------------------- a library of compounds, many of which have been shown to enhance the activity of conventional vaccines. We refer to this program as Optivax. We are currently providing Optivax compounds to a number of vaccine companies for evaluation and possible license. Other Product Development Efforts - --------------------------------- Food Animal Growth Promotant - The United States Food and Drug ---------------------------- Administration has expressed a growing concern about the use of low level antibiotics in animal feed and the possibility of resultant antibiotic resistance in human pathogens. Pending regulations at the FDA could suspend farmers' use of any antibiotics found to promote the spread of resistant 6 human pathogens. In experimental studies, our compound, CRL-8761, has been shown to have a consistent effect to improve the rate of weight gain and feed efficiency in well-controlled studies in poultry and swine. CRL-8761 consistently provides the same growth performance benefits as antibiotics but, since it has no antibiotic activity, it is free from human health concerns over the use of antibiotics. In February 2001, we entered into a license agreement with Ivy Animal Health, Inc. ("Ivy") of Overland Park, Kansas, whereby we granted to Ivy a worldwide exclusive license to CRL-8761. As part of the license, we received a nominal upfront payment, and will receive a milestone fee upon regulatory approval in the United States and an eventual royalty equal to 5% of net sales. Expenditures for research and development activities related to continuing operations were $2.0 million, $12.8 million and $7.3 million during the years ended December 31, 2000, 1999 and 1998, respectively. Manufacturing We require three suppliers of materials or services to manufacture FLOCOR; (i) a supplier of the raw drug substance, (ii) a supplier of the purified drug which is refined from the raw drug substance and (iii) a manufacturer who can formulate and sterile fill the purified drug substance into the finished drug product. The raw drug substance is currently widely available at commercial scales from numerous manufacturers. We have not entered into a formal agreement with any supplier for the raw drug substance because of its wide availability. In August 1999, we entered into a long-term commercial supply contract with Organichem, Corp., located in Rennselaer, New York for production of the purified drug substance. There can be no assurance that our relationship with such supplier will continue or that we will be able to obtain additional purified drug substance if our current supply is inadequate. Such inability to obtain additional purified drug substance in amounts and at prices acceptable to the Company could have a material adverse effect on our business. To meet the need for manufacture of our finished drug product, we have entered into a supply agreement with the Hospital Products Division of Abbott Laboratories. Our inability to maintain such relationship on terms acceptable to us could have a material adverse effect on our business. If we modify our manufacturing process or change the source or location of product supply, regulatory authorities will require us to demonstrate that the material produced from the modified or new process or facility is equivalent to the material used in our clinical trials. Further, any manufacturing facility and the quality control and manufacturing procedures used by us for the commercial supply of a product must comply with applicable Occupational Safety and Health Administration, Environmental Protection Agency, and FDA standards, including Good Manufacturing Practice regulations. See "Government Regulation". Patents and Proprietary Technology We actively seek patent protection for our technologies, processes, uses, and ongoing improvements and consider our patents and other intellectual property to be critical to our business. We continually evaluate the patentability of new inventions and improvements developed by our employees and collaborators. Whenever appropriate, we will endeavor to file United States and international patent applications to protect these new inventions and improvements. However, there can be no assurance that any of the current pending patent applications or any new patent applications that may be filed will ever be issued in the United States or any other country. We also attempt to protect our proprietary products, processes and other information by relying on trade secrets and non-disclosure agreements with our employees, consultants and certain other persons who have access to such products, processes and information. Under the agreements, all inventions conceived by employees are our exclusive property. Nevertheless, there can be no assurance that these agreements will afford significant protection against misappropriation or unauthorized disclosure of our trade secrets and confidential information. We believe we have worldwide comprehensive intellectual property covering the use of poloxamers in a number of therapeutic areas. We have patents claiming broad areas of the use of these compounds currently pending or issued in Canada, Japan, South Korea, the EPO and the United States. On November 23, 1999 the U.S. Patent Office issued patent No. 5,990,241 "Polyoxypropylene/ Polyoxyethylene Copolymers With Improved Biological Activity" to us. We believe the issue of this patent provides important exclusivity since it contains composition of matter claims for purified poloxamers used in our products and technologies, including purified poloxamer 188, the active ingredient in FLOCOR. This patent will 7 expire in 2017. We also own a comprehensive group of patents that broadly claim the use of poloxamers as vaccine adjuvants that will provide additional coverage for DNA vaccines. Competition Many companies, including large pharmaceutical, chemical and biotechnology firms with financial resources, research and development staffs, and facilities that are substantially greater than ours, are engaged in the research and development of pharmaceutical products that could compete with products under development by us. The industry is characterized by rapid technological advances and competitors may develop their products more rapidly and/or such products may be more effective than those under development by us or our licensees and corporate partners. Government Regulation The marketing of pharmaceutical products requires the approval of the FDA and comparable regulatory authorities in foreign countries. The FDA has established guidelines and safety standards which apply to the pre-clinical evaluation, clinical testing, manufacture and marketing of pharmaceutical products. The process of obtaining FDA approval for a new therapeutic product (drug) generally takes several years and involves the expenditure of substantial resources. The steps required before such a product can be produced and marketed for human use in the United States include preclinical studies in animal models, the filing of an Investigational New Drug ("IND") application, human clinical trials and the submission and approval of a New Drug Application ("NDA"). The NDA involves considerable data collection, verification and analysis, as well as the preparation of summaries of the manufacturing and testing processes, preclinical studies, and clinical trials. The FDA must approve the NDA before the drug may be marketed. There can be no assurance that we will be able to obtain the required FDA approvals for any of our products. The manufacturing facilities and processes for our products, whether manufactured directly by us or by a third party, will be subject to rigorous regulation, including the need to comply with Federal Good Manufacturing Practice regulations. We are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Nuclear Energy and Radiation Control Act, the Toxic Substance Control Act and the Resource Conservation and Recovery Act. Employees As of December 31, 2000, we have four full-time employees and one part-time employee. Item 2. Properties We currently lease administrative office space at 154 Technology Parkway, Norcross, Georgia. These facilities are in satisfactory condition and suitable for our purposes and present operations. We also use contract lab facilities for research and development purposes. Item 3. Legal Proceedings We are not a party to any material litigation. We are occasionally involved in other claims arising out of our operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse affect on us. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our Common Stock is traded on The Nasdaq Stock Market under the symbol CYTR. The following table sets forth the high and low sale prices for our Common Stock for the periods indicated as reported by Nasdaq. Such prices represent prices between dealers without adjustment for retail mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. 8 High Low --------- --------- COMMON STOCK: 2001 January 1 to March 23 1 7/32 3/4 2000 Fourth Quarter 1 9/16 15/32 Third Quarter 1 5/8 13/16 Second Quarter 2 7/8 13/16 First Quarter 6 7/16 29/32 1999 Fourth Quarter 3 3/4 Third Quarter 3 1 7/8 Second Quarter 3 1/8 1 27/32 First Quarter 3 7/16 1 On March 23, 2001, the closing price of our Common Stock as reported on The Nasdaq Stock Market, was $25/32 and there were approximately 1,200 holders of record of our Company's Common Stock. The number of record holders does not reflect the number of beneficial owners of our Common Stock for whom shares are held by brokerage firms and other institutions. We have not paid any dividends since our inception and do not contemplate payment of dividends in the foreseeable future. Item 6. Selected Financial Data 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------- Statement of Operations Data: Revenues: Net service revenues $ 451,031 $ 322,536 $ 350,789 $ 422,039 $ 357,517 License fees 2,000,000 - - - - Interest and other income 876,827 1,068,924 1,762,747 1,381,306 1,558,914 --------------------------------------------------------------------------------- Total revenues 3,327,858 1,391,460 2,113,536 1,803,345 1,916,431 ================================================================================= Loss from continuing operations (1,147,457) (15,269,918) (7,737,296) (4,618,867) (2,241,795) Income (loss) from discontinued operations 799,355 240,627 2,943,937 (1,434,125) (3,549,984) Extraordinary item - - (325,120) - - --------------------------------------------------------------------------------- Net loss $ (348,102) $(15,029,291) $(5,118,479) $(6,052,992) $(5,791,779) ================================================================================= Basic and diluted loss per common share: Loss from continuing operations $ (0.12) $ (1.99) $ (1.01) $ (0.62) $ (0.29) Income (loss) from discontinued operations 0.08 0.03 0.38 (0.20) (0.46) Extraordinary item - - (0.04) - - --------------------------------------------------------------------------------- Net loss $ (0.04) $ (1.96) $ (0.67) $ (0.82) $ (0.75) ================================================================================= Balance Sheet Data: Total assets $ 6,859,238 $ 6,128,063 $16,641,568 $24,905,995 $24,299,322 Long-term debt - 650,000 - - - Other long-term liabilities - 1,693,638 - - - Convertible debentures - - - 2,000,000 - Total stockholders' equity 5,618,814 1,032,688 14,688,548 19,248,395 22,337,734
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion includes "forward looking" statements that reflect our current views with respect to future events and financial performance. Investors should be aware that actual results may differ materially from our expressed expectations because of risks and uncertainties inherent in future events, particularly those risks identified under "Risk Factors" set forth in Exhibit 99.1, and should not unduly rely on these forward looking statements. We undertake no duty to update the information in this discussion if any forward looking statement later turns our to be inaccurate. The following should be read in conjunction with Selected Financial Data and the audited Consolidated Financial Statements of the Company included in this report. Liquidity and Capital Resources - ------------------------------- At December 31, 2000, we had cash and cash equivalents of $3.8 million and net assets of $5.6 million, compared to $3.0 million and $1.0 million, respectively, at December 31, 1999. Working capital totaled $2.6 million at December 31, 2000, compared to $664,000 at December 31, 1999. 9 During the first quarter of 2000, we took steps to improve our financial condition, including (i) agreements with certain trade creditors whereby they cancelled indebtedness of $2.3 million in exchange for issuance of approximately 938,000 shares of our common stock, and (ii) a Stock Purchase Agreement with investors whereby they agreed to purchase 800,000 shares of our common stock for an aggregate purchase price of $1.8 million and the issuance of warrants. As part of our efforts to conserve cash resources, we also reduced our staff and our clinical development program for FLOCOR pending further analysis of results from a Phase III clinical study completed in December 1999 (see discussion under "Results of Operations "). In April 2000, we entered into a private equity line of credit agreement (the "ELC Agreement") whereby we have the right to put shares of our common stock to an investor from time to time to raise up to $5,000,000, subject to the conditions and restrictions included in the ELC Agreement. Our ability to raise significant funds through this mechanism is subject to a number of risks and uncertainties, including stock market conditions and our ability to obtain and maintain an effective registration of the related shares with the Securities and Exchange Commission. Effective June 15, 2000, we entered into a Purchase Agreement with Titermax USA, Inc. (an unaffiliated company) whereby we sold the worldwide rights to market and distribute Titermax, including all accounts receivable, inventory and other assets used in the Titermax business. The gross purchase price was $750,000, consisting of $100,000 in cash and a $650,000 five-year secured promissory note bearing interest of 10% annually. In November 2000, we entered into an exclusive, worldwide license agreement (the "License Agreement") with Merck & Co., Inc. ("Merck") whereby we granted to Merck the right to use our TranzFect technology in DNA-based vaccines targeted to four infectious diseases, one of which is HIV. For the license to the TranzFect technology to treat the first disease target, Merck has paid us a signature payment of $2 million, and will pay us milestone and product approval payments of up to $4 million as they develop the product. Additionally, if certain conditions are met regarding patent protection and Merck's competitive position, Merck may pay a royalty to us of 1% on net sales of products incorporating TranzFect for the first disease target. For each of the licenses to the TranzFect technology to treat the three additional disease targets, Merck will make a series of milestone and product approval payments to us totaling up to $2,850,000 each. If and when sales of products incorporating TranzFect for the three additional disease targets commence, we will receive royalties of between 2 and 4% of the net sales from such products. Additionally, if certain conditions are met regarding patent protection and Merck's competitive position, Merck may pay a royalty of 1% on net sales of products incorporating TranzFect for these additional disease targets. Merck will also pay an annual fee of between $50,000 and $100,000 until the first product approval for one of the three additional disease targets. Merck may terminate the License Agreement at any time, upon 90 days written notice. All amounts paid to us are non-refundable upon termination and require no additional effort on our part. We believe that we will have adequate working capital to allow us to operate through the first quarter of 2002, but that additional funds will be needed to significantly advance any of our technologies under development. We are continuing to seek corporate partnerships for FLOCOR, and are also seeking government support for additional clinical studies. During 2001, we also plan to focus attention on obtaining additional licenses for our TranzFect technology. Some of our additional capital requirements may be provided by the ELC Agreement, but we also intend to pursue other sources of equity capital. The results of our technology licensing efforts and/or the actual proceeds of any fund-raising activities will determine our ongoing ability to operate as a going concern with the current portfolio of technologies under development. Both our technology licensing efforts and our fund-raising activities are subject to market conditions and our ability to identify parties that are willing and able to enter into such arrangements on terms that are satisfactory to us. There is no assurance that such funding will be available to finance our operations on acceptable terms, if at all. Insufficient funding may require us to delay, reduce or eliminate some or all of our research and development activities, planned clinical trials and administrative programs. At December 31, 2000, we and our subsidiaries had net operating loss carryforwards for income tax purposes of approximately $54.2 million, which will expire in 2001 through 2020 if not utilized. We also have research and development tax credits and orphan drug tax credits available to reduce income taxes, if any, of approximately $6.7 million which will expire in 2001 through 2015 if not utilized. Based on an assessment of all available evidence including, but not limited to, our limited operating history and lack of profitability, uncertainties of the commercial viability of our technology, the impact of government regulation and healthcare reform initiatives, and other risks normally associated with biotechnology companies, we have concluded that it is more likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a 100% deferred tax valuation allowance has been recorded against these assets. The above statements regarding our plans and expectations for future financing are forward-looking statements that are subject to a number of risks and uncertainties. Our ability to obtain future financings through joint ventures, product licensing arrangements, equity financings or otherwise is subject to market conditions and our ability to identify parties that 10 are willing and able to enter into such arrangements on terms that are satisfactory to us. There can be no assurance that we will be able to obtain future financing from these sources. Additionally, depending upon the outcome of our fund raising efforts, the accompanying financial information may not necessarily be indicative of future operating results or future financial condition. Results of Operations - --------------------- We recorded a net loss of $348,000 for the year ended December 31, 2000 as compared to net losses of $15,029,000 for 1999 and $5,118,000 for 1998. Loss from continuing operations before extraordinary items was $1,147,000, $15,270,000 and $7,737,000 in 2000, 1999 and 1998, respectively. We market the services of our small group of human resource professionals to third parties under the name of Spectrum Recruitment Research as a way of offsetting our cost of maintaining this function. Net service revenues from continuing operations related to Spectrum were $451,000 in 2000, $323,000 in 1999 and $351,000 in 1998. Cost of service revenues was $268,000 in 2000, $240,000 in 1999 and $187,000 in 1998, or 59%, 74% and 53% of net service revenues, respectively. Interest income from continuing operations was $170,000 in 2000 as compared to $463,000 in 1999 and $1,007,000 in 1998. The variance between years is attributable to fluctuating cash and investment balances. License fee income of $2,000,000 in 2000 relates to our license of TranzFect to Merck & Co., Inc. in November 2000 (see Note 13 to Financial Statements). Grant income was $349,000 in 2000 versus $464,000 in 1999 and $511,000 in 1998; the higher amounts during 1998 and 1999 are primarily due to a $445,000 grant from the U.S. Food and Drug Administration's Division of Orphan Drug Development to support our Phase III clinical trial of FLOCOR. Other income was $358,000, $142,000 and $244,000 in 2000, 1999 and 1998, respectively. Other income for 2000 includes $225,000 in fees paid to us by Merck pursuant to an Evaluation Agreement for our TranzFect technology and pursuant to a Fee for Service Agreement whereby we provided certain chemistry services to Merck. Research and development expenditures from continuing operations during 2000 were $1,962,000 versus $12,812,000 in 1999 and $7,306,000 in 1998. Research and development expenditures were higher in 1998 and 1999 primarily due to our clinical development activities for FLOCOR. In March 1998, we began a Phase III trial of FLOCOR for treatment of acute sickle cell crisis, which was completed in December 1999. During 1999, we also continued our Phase I trial of FLOCOR for treatment of Acute Chest Syndrome in sickle cell patients and initiated two additional clinical trials of FLOCOR - a Phase III study investigated repeat use of FLOCOR in patients with acute sickle cell crisis and a Phase I/II study for treatment of Acute Lung Injury. Subsequent to the completion of the Phase III trial, we reduced our clinical development activities for FLOCOR pending further analysis of the Phase III results. Our development activities during 2000 consisted primarily of analysis of the Phase III results and consultation with our scientific and regulatory advisors and meetings with regulatory authorities regarding preparation for the next clinical activities for FLOCOR. The Phase III study did not achieve the high level of statistical significance required by the FDA for the study as a whole; the results in children, however, were statistically significant and our planned future studies will focus on the pediatric sickle cell population. Based on our recent conversations with the FDA, it is likely that either two small additional pivotal trials or one large trial will be required for approval, along with one to two additional safety studies. Selling, general and administrative expenses from continuing operations during 2000 were $2,245,000 as compared to $3,610,000 in 1999 and $2,312,000 in 1998. During 2000 and 1999, we recorded non-cash charges of $365,000 and $1,043,000, respectively related to issuance of stock warrants to certain consultants and certain vesting events for management stock options. Excluding these charges, selling, general and administrative expenses were $1,880,000, $2,567,000 and $2,312,000 during 2000, 1999 and 1998, respectively. The decrease from 1999 to 2000 reflects staff reductions and other measures we took during the first quarter of 2000 to reduce our expenses and conserve cash resources. Interest expense of $46,000 during 1998 relates to convertible notes issued in 1997, which were retired during 1998. The extraordinary loss of $325.000 in 1998 relates to the early extinguishment of the notes that resulted in payment of premiums of $150,000 and expense of capitalized debt issuance costs of $175,000 (see Note 16 to Financial Statements). Discontinued Operations - Net income from the discontinued operations of Proceutics, CytRx Animal Health, Vaxcel (net of minority interest) and Titermax was $799,000, $241,000 and $2,944,000 in 2000, 1999 and 1998. The following table presents the breakdown of net income (loss) from discontinued operations. 11 2000 1999 1998 ---------- ----------- ----------- Titermax: Operations $119,000 $281,000 $ 231,000 Gain on sale of business 680,000 - - ---------- ----------- ----------- 799,000 281,000 231,000 Proceutics: Operations - - 171,000 Gain on sale of business - - 782,000 Gain on sale of real estate - - 434,000 ---------- ----------- ----------- - - 1,387,000 CytRx Animal Health: Operations - - (585,000) Gain on sale of business - - 6,230,000 ---------- ----------- ----------- - - 5,645,000 Vaxcel: Operations - (44,000) (1,721,000) Minority interest - 4,000 615,000 Impairment loss - - (3,213,000) ---------- ----------- ----------- - (40,000) (4,319,000) ---------- ----------- ----------- Net income from discontinued operations $799,000 $241,000 $ 2,944,000 ========== =========== ===========
Inflation - Our management believes that inflation had no material impact on our operations during the three year period ended December 31, 2000. Item 7A. Qualitative and Quantitative Disclosures About Market Risk Our financial instruments that are sensitive to changes in interest rates are our investments. As of December 31, 2000, we held no investments other than amounts invested in money market accounts. We are not subject to any other material market risks. Item 8. Financial Statements and Supplementary Data Our consolidated financial statements and supplemental schedule and the notes thereto as of December 31, 2000 and 1999, and for each of the three years ended December 31, 2000, together with the independent auditors' report thereon, are set forth on pages F-1 to F-15 of this Annual Report on Form 10-K. Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to this item is incorporated herein by reference from the Proxy Statement. Item 11. Executive Compensation Information with respect to this item is incorporated herein by reference from the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to this item is incorporated herein by reference from the Proxy Statement. Item 13. Certain Relationships and Related Transactions Information with respect to this item is incorporated herein by reference from the Proxy Statement. 12 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of this 10-K: (1) Financial Statements The consolidated financial statements of the Company and the related report of independent auditors thereon are set forth on pages F-1 to F-15 of this Annual Report on Form 10-K. These consolidated financial statements are as follows: Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Report of Independent Auditors (2) Financial Statement Schedules The following financial statement schedule is set forth on page F-16 of this Annual Report on Form 10-K. Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2000, 1999 and 1998 All other schedules are omitted because they are not required, not applicable, or the information is provided in the financial statements or notes thereto. (3) Exhibits See Exhibit Index on page 14 of this Annual Report on Form 10-K. (b) Reports on Form 8-K On November 15, 2000, the Registrant filed a Current Report on Form 8-K reporting the license of its TranzFect technology to Merck & Co. Inc. 13 CytRx Corporation Form 10-K Exhibit Index
Exhibit Number - ------ 3.1 Restated Certificate of Incorporation (a) 3.2 Restated By-Laws (b) 4.1 Shareholder Protection Rights Agreement dated April 16, 1997 between CytRx Corporation and American Stock Transfer & Trust Company as Rights Agent (c) 10.1 Agreement with Emory University, as amended (d) 10.2 Agreement with BASF Corporation, as amended (d) 10.3* Amended and Restated Employment Agreement between CytRx Corporation and Jack J. Luchese (i) 10.4* Amended and Restated Change of Control Employment Agreement between CytRx Corporation and Jack J. Luchese (i) 10.7* 1986 Stock Option Plan, as amended and restated (f) 10.8* 1994 Stock Option Plan, as amended and restated (e) 10.9* 1995 Stock Option Plan (g) 10.10* 1998 Long-Term Incentive Plan (h) 10.11* 2000 Long-Term Incentive Plan 10.12 Purchase and Sale Agreement dated February 23, 1998 by and between CytRx Corporation and Alexandria Real Estate Equities, Inc. (h) 10.13 Common Stock Purchase Agreement dated March 24, 2000 by and between CytRx Corporation and the Investors Signatory Thereto (i) 10.14 Private Equity Line of Credit Agreement dated April 26, 2000, between CytRx Corporation and Majorlink Holdings Limited (j) 10.15+ License Agreement dated November 1, 2000 by and between CytRx Corporation and Merck & Co., Inc. (k) 10.16 License Agreement dated February 16, 2001 by and between CytRx Corporation and Ivy Animal Health, Inc. 23.1 Consent of Ernst & Young LLP 99.1 Safe Harbor Compliance Statement for Forward-looking Statements
* Indicates a management contract or compensatory plan or arrangement. + Confidential treatment has been granted for certain portions which have been blanked out in the copy of the exhibit file with the Securities and Exchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission. - ------------------- (a) Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 333-39607) filed on November 5, 1997. (b) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-37171) filed on July 21, 1997. (c) Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 21, 1997. (d) Incorporated by reference to the Registrant's Registration Statement on Form S-l (File No. 33-8390) filed on November 5, 1986. (e) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1997. (f) Incorporated by reference to the Registrant's Annual Report on Form 10-K filed on March 27, 1996. (g) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-93818) filed on June 22, 1995. (h) Incorporated by reference to the Registrant's Annual Report on Form 10-K filed on March 30, 1998. (i) Incorporated by reference to the Registrant's Annual Report on Form 10-K filed on March 30, 2000. (j) Incorporated by reference to the Registrant's Registration Statement on Form S-1 filed on June 21, 2000. (k) Incorporated by reference to the Registrant's Current Report on Form 8-K/A filed on March 16, 2001. 14 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CYTRX CORPORATION By: /s/ Jack J. Luchese -------------------------- Jack J. Luchese, President Date: March 23, 2001 and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Alexander L. Cappello Director March 23, 2001 - ---------------------------- Alexander L. Cappello /s/ Raymond C. Carnahan, Jr. Director March 23, 2001 - ---------------------------- Raymond C. Carnahan, Jr. /s/ Lyle A. Hohnke Director March 23, 2001 - ---------------------------- Lyle A. Hohnke /s/ Max Link Chairman of the March 23, 2001 - ---------------------------- Board of Directors Max Link /s/ Jack J. Luchese Director March 23, 2001 - ---------------------------- President and Chief Executive Officer Jack J. Luchese (Principal Executive Officer) /s/ Herbert H. McDade, Jr. Director March 23, 2001 - ---------------------------- Herbert H. McDade, Jr. /s/ Mark W. Reynolds Vice President, Finance March 23, 2001 - ---------------------------- (Principal Financial Officer) Mark W. Reynolds
15 CYTRX CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 Report of Independent Auditors F-15 Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts F-16 F-1
CYTRX CORPORATION CONSOLIDATED BALANCE SHEETS December 31, ---------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,779,376 $ 3,031,893 Accounts receivable, net 54,160 174,292 Inventories - 6,480 Other current assets 34,171 202,610 ------------ ------------ Total current assets 3,867,707 3,415,275 Property and equipment, net 2,331,977 2,641,810 Other assets: Note receivable 598,576 - Other assets 60,978 70,978 ------------ ------------ Total other assets 659,554 70,978 ------------ ------------ Total assets $ 6,859,238 $ 6,128,063 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 298,236 $ 629,738 Accrued expenses and other current liabilities 942,188 2,121,999 ------------ ------------ Total current liabilities 1,240,424 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; 10,734,012 and 8,373,853 shares issued at December 31, 2000 and 1999, respectively 10,734 8,374 Additional paid-in capital 72,737,739 67,805,871 Treasury stock, at cost (633,816 shares held at December 31, 2000 and 1999) (2,279,238) (2,279,238) Accumulated deficit (64,850,421) (64,502,319) ------------ ------------ Total stockholders' equity 5,618,814 1,032,688 ------------ ------------ Total liabilities and stockholders' equity $ 6,859,238 $ 6,128,063 ============ ============ See accompanying notes.
F-2
CYTRX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, -------------------------------------------- 2000 1999 1998 ----------- ------------ ----------- Revenues: Net service revenues $ 451,031 $ 322,536 $ 350,789 License fees 2,000,000 - - Interest income 170,433 462,634 1,007,019 Grant revenue 348,790 464,442 511,375 Other 357,604 141,848 244,353 ----------- ------------ ----------- 3,327,858 1,391,460 2,113,536 Expenses: Cost of service revenues 267,915 239,840 187,047 Research and development 1,962,171 12,811,925 7,305,835 Selling, general and administrative 2,245,229 3,609,613 2,312,062 Interest - - 45,888 ----------- ------------ ----------- 4,475,315 16,661,378 9,850,832 ----------- ------------ ----------- Loss from continuing operations before extraordinary item (1,147,457) (15,269,918) (7,737,296) Income from discontinued operations 799,355 236,730 2,329,352 Minority interest in discontinued operations - (3,897) (614,585) ----------- ------------ ----------- Loss before extraordinary item (348,102) (15,029,291) (4,793,359) Extraordinary item: Loss on early extinguishment of debt - - (325,120) ----------- ------------ ----------- Net loss $ (348,102) $(15,029,291) $(5,118,479) =========== ============ =========== Basic and diluted income (loss) per common share: Continuing operations $ (0.12) $ (1.99) $ (1.01) Discontinued operations 0.08 0.03 0.38 Extraordinary item - - (0.04) ----------- ------------ ----------- Net loss $ (0.04) $ (1.96) $ (0.67) =========== ============ =========== Basic and diluted weighted average shares outstanding 9,423,787 7,652,227 7,625,578 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, 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 Issuance of common stock 2,360,159 2,360 4,567,255 - - 4,569,615 Issuance of stock options/warrants - - 364,613 - - 364,613 Net loss - - - (348,102) - (348,102) ------------------------------------------------------------------------------------------ Balance at December 31, 2000 10,734,012 $10,734 $72,737,739 $(64,850,421) $(2,279,238) $ 5,618,814 ========================================================================================== See accompanying notes.
F-4
CYTRX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, -------------------------------------------- 2000 1999 1998 ------------ ------------- ------------- Cash flows from operating activities: Net loss $ (348,102) $(15,029,291) $(5,118,479) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 317,850 68,377 216,811 Amortization - - 282,732 Gain on sales of segment operations (679,784) (240,196) (7,012,305) Gain on sale of real estate - - (433,786) 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) Stock option and warrant expense 364,613 1,043,216 - Changes in assets and liabilities: Receivables 52,811 (91,043) 1,082,390 Inventories 3,585 4,455 1,037,197 Notes receivable 51,424 300,000 100,000 Other assets 198,454 (93,675) 98,545 Accounts payable 124,868 546,019 208,884 Unearned revenue - - 172,380 Other liabilities (1,435,841) 1,950,233 (495,323) ------------ ------------- ------------ Total adjustments (1,002,020) 3,483,489 (1,819,325) ------------ ------------- ------------ Net cash used in operating activities (1,350,122) (11,545,802) (6,937,804) Cash flows from investing activities: Purchases of held-to-maturity securities - - (6,417,066) Maturities of held-to-maturity securities - 6,417,066 - Decrease in long-term investments - - 5,326,647 Net proceeds from sales of segment operations 100,000 240,196 8,336,985 Net proceeds from sale of technology - 600,000 - Net proceeds from sale of real estate - - 4,260,747 Capital (expenditures) retirements, net (28,032) (2,515,157) (13,317) ----------- ------------ ----------- Net cash provided by investing activities 71,968 4,742,105 11,493,996 Cash flows from financing activities: Net proceeds from issuance of common stock 2,225,637 339,215 125,880 Redemption/retirement of debt (200,000) - (1,650,000) Purchase of treasury stock - (9,000) (71,705) Proceeds from issuance of debt, net of issuance costs - 650,000 - ----------- ------------ ----------- Net cash provided by (used in) financing activities 2,025,637 980,215 (1,595,825) Net increase (decrease) in cash and cash equivalents 747,483 (5,823,482) 2,960,367 Cash and cash equivalents at beginning of year 3,031,893 8,855,375 5,895,008 ----------- ------------ ----------- Cash and cash equivalents at end of year $ 3,779,376 $ 3,031,893 $ 8,855,375 =========== ============ =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest $ - $ - $ 45,888 =========== ============ ========== See accompanying notes.
F-5 CYTRX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business CytRx Corporation ("CytRx" or "the Company") is a biopharmaceutical company focused on the development and commercialization of high-value human therapeutics. The Company's current research and development include FLOCOR, an intravenous agent for treatment of sickle cell disease and other acute vaso- occlusive disorders, and TranzFect, a delivery technology for DNA-based vaccines. CytRx also has a research pipeline with opportunities in the areas of muscular dystrophy, cancer, spinal cord injury, vaccine delivery and gene therapy. The Company's sales from continuing operations relate to Spectrum Recruitment Research ("Spectrum"), through which the Company markets the services of its small group of human resources professionals 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. 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 14, the operations of Proceutics, Inc., CytRx Animal Health, Inc., Vaxcel, Inc., and the Company's TiterMax business segment 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 as 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. The Company held no investments at December 31, 2000 or 1999. Fair Value of Financial Instruments - The carrying amounts reported in the balance sheet for cash and cash equivalents, investments, accounts receivable, notes receivable, accounts payable and long-term debt approximate their fair values. 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 (generally 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. 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. Acquired Developed Technology and Other Intangibles - Acquired developed technology and other intangible assets are amortized over their estimated useful lives 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 F-6 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 14, during 1998 management evaluated these assets and recorded a provision for impairment of such assets. 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 ---------------------------- --------------------------- 2000 1999 2000 1999 ----- ------ ------- ----- Clinical research activities $ 378 $ 631 $ - $ 966 Scientific and regulatory activities - 564 - 460 Chemical plant construction - 146 - 228 Deferred revenue 256 233 - - Employee incentives & severance - 233 - - Other miscellaneous 308 315 - 40 ----- ------ ------- ----- Total $ 942 $2,122 $ - $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, 2000, the Company has reserved approximately 3,616,000 of its authorized but unissued shares of common stock for future issuance pursuant to its employee stock option plans and warrants, and 4,643,000 shares pursuant to warrants issued to consultants and investors. 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. Non-refundable license fee revenue is recognized upon receipt when no continuing involvement of the Company is required and payment of the license fee represents the culmination of the earnings process. Non-refundable license fees received subject to future performance by the Company or that are credited against future payments due to the Company are deferred until services are performed, future payments are received or termination of the agreement, whichever is earlier. Stock-based Compensation - The Company grants stock options and warrants for a fixed number of shares to key employees and directors with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option grants and warrants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related Interpretations, 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 accounted for in accordance with Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued for Sales of Goods and Services to Other Than Employees, and 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 a performance commitment exists or the period in which the services are received, whichever is earlier. Concentrations of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and note receivable. 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. The Company F-7 generally does not require collateral from its customers. The Company is at risk to the extent accounts receivable and note receivable amounts become uncollectible. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles in the United States 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 established 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 17). Recently Issued Accounting Standards - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, establishes a new model for accounting for derivatives and hedging activities and supercedes several existing standards. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect that the adoption of SFAS 133 will have a material impact on its financial statements. In December 1999, the SEC staff issued Staff Accounting Bulletin SAB 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 explains how the SEC staff applies by analogy the existing rules on revenue recognition to other transactions not covered by such rules. In March 2000, the SEC issued SAB 101A that delayed the original effective date of SAB 101 until the second quarter of 2000 for calendar year companies. In June 2000, the SEC issued SAB 101B that further delayed the effective date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The adoption of SAB 101 has not had a material impact on the Company's financial statements. 3. Property and Equipment Property and equipment at December 31 consist of the following (in thousands): 2000 1999 ------ ------ Equipment and furnishings $2,122 $2,200 Leasehold improvements 984 969 ------ ------ 3,106 3,169 Less accumulated depreciation (774) (527) ------ ------ $2,332 $2,642 ====== ====== 4. 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. 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 (the "Note"). The Note bore 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 at December 31, 1999 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 5). 5. 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 trade creditors whereby an aggregate of $1,894,000 of trade payables was cancelled in exchange for the issuance of approximately 758,000 shares of CytRx's Common Stock. Of the trade payables balance, $1,694,000 existed at December 31, 1999, and was accordingly classified as Long-Term Liabilities on the accompanying Balance Sheet. The Company also cancelled $650,000 of Long-Term Debt (see Note 4) in exchange for a cash payment of $200,000 and the issuance of 180,000 shares of CytRx's Common Stock. 6. Private Placement of Common Stock F-8 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 $1,800,000 and the issuance of warrants to purchase an additional 330,891 shares at $2.25 per share. After consideration of offering expenses, net proceeds to the Company were approximately $1,649,000. The warrants expire March 31, 2003. The Investors were granted registration rights for the shares issued to them and the shares underlying the warrants. Subject to certain conditions, the Investors were also required, upon effective registration of the shares, to either (a) purchase an additional 286,000 shares at $2.25 per share and simultaneously receive an additional three-year warrant to purchase 143,000 shares at $2.25 per share, or (b) purchase 429,000 shares at a price equal to 75% of a trailing average market price of the Company's Common Stock, as defined in the Stock Purchase Agreement. In July 2000, the Investors exercised their rights to purchase 429,000 additional shares at a net price of $.77 per share, resulting in net proceeds of $307,000 to the Company, after consideration of offering expenses. 7. Equity Line of Credit In April 2000, the Company entered into a Private Equity Line of Credit Agreement (the "ELC Agreement") with Majorlink Holdings Limited ("Majorlink"), pursuant to which the Company has the right to put shares of Common Stock to Majorlink from time to time during the "commitment period" to raise up to $5,000,000, subject to certain conditions and restrictions. The "commitment period" begins on the effective date of a registration statement filed by the Company to register the resale by Majorlink of the shares of Common Stock that Majorlink purchases under the ELC Agreement and ends on the earliest of (1) the date thirty months from such date, (2) the date on which Majorlink shall have purchased $5,000,000 of Common Stock under the ELC Agreement or (3) the date either party terminates the ELC Agreement in accordance with its terms. Each time the Company desires to raise a specific amount of cash under the ELC Agreement, the Company will issue to Majorlink a number of shares of Common Stock determined by dividing the amount of cash desired to be raised by the Company by 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 150,000 shares of Common Stock at a per share exercise price of $2.25. The warrant is exercisable for a period of three years. 8. Commitments and Contingencies Rental expense from continuing operations under operating leases during 2000, 1999 and 1998 approximated $160,000, $212,000 and $154,000, respectively. Minimum annual future obligations for operating leases are $165,000, $171,000, $178,000, $185,000, $193,000 and $485,000 in 2001, 2002, 2003, 2004, 2005 and 2006 and beyond, respectively. Aggregate minimum future subrentals the Company expects to receive under noncancellable subleases total approximately $110,000 at December 31, 2000. 9. Stock Options and Warrants CytRx has stock option plans pursuant to which certain key employees, directors and consultants 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 2000 and 1999, the vesting criteria for certain options and warrants held by employees were achieved, resulting in $115,000 and $689,000 of compensation expense, respectively. During 2000 and 1999, services were received in exchange for options and warrants issued to certain consultants, resulting in aggregate non-cash charges of $249,000 and $355,000, respectively. 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.
Options and Warrants Weighted Average Exercise Price ----------------------------------- ------------------------------- 2000 1999 1998 2000 1999 1998 ---------- ---------- ---------- ----- ----- ----- Outstanding - beginning of year 3,137,852 2,258,308 1,439,297 $1.43 $1.17 $4.87 Granted 1,416,803 961,750 902,488 2.04 2.25 2.65 Exercised (106,567) (12,103) - 1.28 1.00 - Forfeited (741,989) (70,103) (83,477) 1.86 5.91 4.37 Expired (20,417) - - 1.00 - - ---------- ---------- ---------- Outstanding - end of year 3,685,682 3,137,852 2,258,308 $1.57 $1.43 $1.17 ========== ========== ========== Exercisable at end of year 2,917,674 2,170,107 1,104,620 $1.47 $1.25 $1.33 Weighted average fair value of options and warrants granted during the year: $1.98 $1.59 $2.30
The following table summarizes additional information concerning options and warrants outstanding and exercisable at December 31, 2000:
Options Outstanding Options Exercisable ----------------------------------------------------------------------- ------------------------------- Weighted Average Remaining Weighted Number Weighted Range of Contractual Average Of Shares Average Exercise Price Number of Shares Life (years) Exercise Price Exercisable Exercise Price --------------- ------------------ -------------- --------------- ------------- -------------- $ 1.00 - 1.50 2,261,379 5.3 $1.08 2,034,874 $1.06 2.13 - 3.438 1,419,303 5.0 2.33 877,800 2.41 7.75 5,000 4.2 7.75 5,000 7.75 --------- --------- 3,685,682 5.2 1.57 2,917,674 1.47 ========= =========
The above tables for 2000 exclude an aggregate of 315,417 stock options with exercise prices ranging from $1.00 to $1.03 issued pursuant to the CytRx Corporation 2000 Long-Term Incentive Plan. These stock options are subject to shareholder approval. 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 issued to employees was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: 2000 1999 1998 ---- ----- ----- Weighted average risk free interest rate 6.24% 6.27% 5.64% Dividend yields 0% 0% 0% Volatility factors of the expected market price of the Company's common stock 1.03 1.046 1.026 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. 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): F-10 2000 1999 1998 ------ -------- ------- Pro forma net loss $ (941) $(16,505) $(6,521) Pro forma net loss per share (basic and diluted) $(0.10) $ (2.16) $ (.86) 10. Shareholder Protection Rights Plan Effective April 16, 1997, the Company's Board of Directors declared a distribution of one Right for each outstanding share of the Company's common stock to stockholders of record at the close of business on May 15, 1997 and for each share of common stock issued by the Company thereafter and prior to a Flip- in Date (as defined below). Each Right entitles the registered holder to purchase from the Company one-ten thousandth (1/10,000th) of a share of Series A Junior Participating Preferred Stock, at an exercise price of $30. The Rights are generally not exercisable until 10 business days after an announcement by the Company that a person or group of affiliated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the Company's then outstanding shares of common stock (a "Flip-in Date"). In the event the Rights become exercisable as a result of the acquisition of shares, each Right will enable the owner, other than the Acquiring Person, to purchase at the Right's then current exercise price a number of shares of common stock with a market value equal to twice the exercise price. In addition, unless the Acquiring Person owns more than 50% of the outstanding shares of common stock, the Board of Directors may elect to exchange all outstanding Rights (other than those owned by such Acquiring Person) at an exchange ratio of one share of common stock per Right. All Rights that are owned by any person on or after the date such person becomes an Acquiring Person will be null and void. The Rights have been distributed to protect the Company's stockholders from coercive or abusive takeover tactics and to give the Board of Directors more negotiating leverage in dealing with prospective acquirors. 11. Retirement Plan The Company maintained a defined contribution retirement plan (the "Plan") covering employees of the Company until February 2000, at which time the Plan was terminated. Total expense for the Plan for the years ended December 31, 2000, 1999 and 1998 was approximately $0, $69,000 and $110,000, respectively, of which $0, $1,000 and $44,000 related to discontinued operations for the years ended December 31, 2000, 1999 and 1998, respectively. 12. Income Taxes For income tax purposes, CytRx and its subsidiaries have an aggregate of approximately $54.2 million of net operating losses available to offset against future taxable income, subject to certain limitations. Such losses expire in 2001 through 2020 as of December 31, 2000. CytRx also has an aggregate of approximately $6.7 million of research and development and orphan drug credits available for offset against future income taxes which expire in 2001 through 2021. 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 (in thousands): December 31, -------------------------- 2000 1999 ------- -------- Deferred tax assets: Net operating loss carryforward $20,590 $ 20,163 Tax credit carryforward 6,652 6,278 Other 2,822 108 ------- -------- Total deferred tax assets 30,064 26,549 Deferred tax liabilities: Depreciation and other (2,882) (185) ------- -------- Total deferred tax liabilities (2,882) (185) ------- -------- Net deferred tax assets 27,182 26,364 Valuation allowance (27,182) (26,364) ------- -------- $ - $ - ======= ======== Based on assessments of all available evidence as of December 31, 2000 and 1999, 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. License Agreements Merck & Co., Inc. - ----------------- In November 2000, CytRx entered into an exclusive, worldwide license agreement with Merck and Company, Inc. ("Merck") whereby CytRx granted to Merck rights to use its TranzFect technology in DNA-based vaccines targeted to four infectious diseases. In addition an upfront payment of $2 million for the first disease target, Merck will pay to CytRx milestone and product approval payments of up to $4 million as they develop the product. The Company has no commitment for continuing involvement to earn the upfront payment or the future milestone payments. Thus, the $2 million upfront payment has been recognized as license fee revenue in the current year. Additionally, if certain conditions are met regarding patent protection and Merck's competitive position, Merck may pay a royalty to CytRx of 1% on net sales of products incorporating TranzFect for the first disease target. For each of the licenses for the three additional disease targets, Merck will pay to CytRx a series of milestone and product approval payments totaling up to $2,850,000 each. If and when sales of products incorporating TranzFect for the three additional disease targets commence, CytRx will receive royalties of between 2 and 4% of the net sales from such products. Additionally, if certain conditions are met regarding patent protection and Merck's competitive position, Merck may pay an additional royalty to CytRx of 1% on net sales of products incorporating TranzFect for these additional disease targets, in which case the total royalties may be up to 5%. Ivy Animal Health, Inc. - ----------------------- In February 2001, CytRx entered into a license agreement with Ivy Animal Health, Inc. ("Ivy") of Overland Park, Kansas, whereby CytRx granted to Ivy a worldwide exclusive license to its investigational agent, CRL-8761, a non- antibiotic feed additive that enhances growth performance in monogastric food animals such as poultry and pigs. As part of the license, CytRx received a nominal upfront payment, and will receive a milestone fee upon regulatory approval in the United States and an eventual royalty equal to 5% of net sales. 14. Discontinued Operations 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 $119,000, $281,000 and $231,000 for 2000, 1999 and 1998, respectively. A gain related to the sale of $680,000 was recorded in the second quarter of 2000 and is also classified as 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, Inc.. 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. Net losses (net of minority interest) associated with Vaxcel included in income (loss) from discontinued operations were approximately $(40,000) and $(4,319,000) for the years ended December 31, 1999 and 1998, respectively. Impairment Loss - In its efforts to raise additional capital during 1998 and 1999, Vaxcel solicited bids for the sublicense or purchase of it's acquired developed technology, either together with or separately from it'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. 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 therefore the asset was impaired as defined by Statement 121. Consequently, the original cost basis of the acquired developed technology was 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. F-12 Proceutics, Inc. - ---------------- In February 1998, CytRx's wholly-owned subsidiary, Proceutics, Inc., 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 that it leased to Oread. The laboratory building was subsequently sold in May 1998 (see Note 15). Net income associated with Proceutics included in income (loss) from discontinued operations was approximately $1,387,000 for the year ended December 31, 1998. 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 15). CytRx Animal Health, Inc. - ------------------------- In April 1998, CytRx's wholly-owned subsidiary, CytRx Animal Health, Inc., 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. Net income associated with CytRx Animal Health included in income (loss) from discontinued operations was approximately $5,645,000 for the year ended December 31, 1998. A gain related to the sale of $6,230,000 is included in income from discontinued operations for 1998. 15. 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 14) were assigned to Alexandria, and CytRx leased the building at 154 Technology Parkway from Alexandria. The lease term extends 10 years and contains escalating rent payments over the term. CytRx is also 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 is being amortized over the ten-year lease period. 16. Extraordinary Item 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. 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 for the year ended December 31, 1998 as loss on early extinguishment of debt. At December 31, 2000 and 1999 there were no remaining outstanding Debentures. 17. Segment Reporting The Company has six reportable segments: Recruiting Services (Spectrum), Product Development (core business of development and commercialization of pharmaceutical-related products), Research Products (TiterMax), Cattle Marketing Operations (CytRx Animal Health), Pharmaceutical Services (Proceutics) and Vaccine Development (Vaxcel). See Notes 1 and 14 for additional information concerning 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. F-13
Continuing Operations Discontinued Operations -------------------------------------------------------------------------------------------------- Total | Cattle Pharma- Total Recruiting Product Continuing | Research Marketing ceutical Vaccine Discontinued (in thousands) Services Development Operations | Products Operations Services Development Operations -------------- ---------- ------------ -----------| -------- ---------- --------- ----------- ------------ | 2000: | - ----- | Sales to external customers $451 $ - $ 451 | $170 $ - $ - $ - $ 170 Intersegment sales - - - | - - - - - Collaborative, grant & other - 2,706 2,706 | - - - - - revenue | Interest income - 170 170 | - - - - - Interest expense - - - | - - - - - Depreciation and amortization - 318 318 | - - - - - Segment profit (loss) 146 (1,293) (1,147) | 799 - - - 799 Total assets - 6,859 6,859 | - - - - - Capital expenditures - 20 20 | - - - - - | 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 (15,345) (15,270) | 281 - - (40) 241 Total assets - 6,128 6,128 | - - - - - Capital expenditures - 2,515 2,515 | - - - - - | 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
18. Quarterly Financial Data (unaudited) Summarized quarterly financial data for 2000 and 1999 is as follows (in thousands, except per share data):
Quarter Ended ---------------------------------------------------------------------- 2000 March 31 - -------------------------------------------------- (restated) (1) June 30 September 30 December 31 ---------------- ------------- ---------------- ---------------- Net sales $ 100 $ 85 $ 168 $ 98 Gross profit 48 41 86 8 Income (loss) from continuing operations (940) (762) (606) 1,161 Income from discontinued operations 40 759 - - Net income (loss) (900) (3) (606) 1,161 Basic and diluted income (loss) per common share: Continuing operations (0.12) (0.08) (0.06) 0.11 Discontinued operations 0.01 0.08 - - Net income (loss) (0.11) (0.00) (0.06) 0.11 1999 - -------------------------------------------------- Net sales 66 99 75 83 Gross profit (loss) (3) 61 24 1 Income (loss) from continuing operations (3,268) (2,586) (5,138) (4,278) Income (loss) from discontinued operations (8) (79) 252 76 Net loss (3,276) (2,665) (4,886) (4,202) Basic and diluted income (loss) per common share Continuing operations (0.43) (0.34) (0.67) (0.55) Discontinued operations - (0.01) 0.03 0.01 Net loss (0.43) (0.35) (0.64) (0.54)
(1) First quarter has been restated to reflect the sale of Titermax as discontinued operations. 19. Subsequent Event Effective January 1, 2001, the Company executed an agreement with Cappello Capital Corp. ("Cappello") for general corporate finance advisory services. In connection with this agreement, the Company issued to Cappello warrants to purchase up to 1.4 million shares of its common stock with an exercise price of $1.00 per share. During the first quarter of 2001, the Company will recognize a non-cash charge of approximately $445,000 associated with the issuance of these warrants. 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, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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 8, 2001 F-15 CYTRX CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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, 2000 $ -- $ 11,900 $ -- $ -- $ 11,900 Year ended December 31, 1999 -- -- -- -- -- Year ended December 31, 1998 22,187 -- -- 22,187 -- Allowance for Deferred Tax Assets Year ended December 31, 2000 $26,364,000 $ 818,000 $ -- $ -- $27,182,000 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
F-16 EX-10.11 2 0002.txt 2000 LONG TERM INCENTIVE PLAN Exhibit 10.11 CytRx Corporation 2000 LONG-TERM INCENTIVE PLAN ARTICLE I PURPOSE 1.1 GENERAL. The purpose of the CytRx Corporation 2000 Long-Term ------- Incentive Plan (the "Plan") is to promote the success, and enhance the value, of CytRx Corporation (the "Company"), by linking the personal interests of its employees, officers, consultants and directors to those of Company shareholders and by providing such persons with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees, officers, consultants and directors upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent. Accordingly, the Plan permits the grant of incentive awards from time to time to selected employees, officers, consultants and directors. ARTICLE 2 EFFECTIVE DATE 2.1 EFFECTIVE DATE. The Plan shall be effective as of the date upon which -------------- it shall be approved by the Board (the "Effective Date"). However, the Plan shall be submitted to the shareholders of the Company for approval within 12 months of the Board's approval thereof. No Incentive Stock Options granted under the Plan may be exercised prior to approval of the Plan by the shareholders and if the shareholders fail to approve the Plan within 12 months of the Board's approval thereof, any Incentive Stock Options previously granted hereunder shall be automatically converted to Non-Qualified Stock Options without any further act. In the discretion of the Committee, Awards may be made to Covered Employees which are intended to constitute qualified performance- based compensation under Code Section 162(m). ARTICLE 3 DEFINITIONS 3.1 DEFINITIONS. When a word or phrase appears in this Plan with the ----------- initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Section 1.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, Performance Unit Award, Dividend Equivalent Award, or Other Stock-Based Award, or any other right or interest relating to Stock or cash, granted to a Participant under the Plan. (b) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" means and includes each of the following: (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (1), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by a Person who is on April 1, 2000 the beneficial owner of 25% or more of the Outstanding Company Voting Securities, (ii) any acquisition directly from the Company, (iii) any acquisition by the Company, (iv) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (v) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this definition; or (2) Individuals who, as of April 1, 2000, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to April 1, 2000 whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the combined voting power of the then outstanding voting securities entitled to vote -2- generally in the election of directors of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, and (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee of the Board described in Article 4. (g) "Company" means CytRx Corporation, a Delaware corporation. (h) "Covered Employee" means a covered employee as defined in Code Section 162(m)(3). (i) "Disability" shall mean any illness or other physical or mental condition of a Participant that renders the Participant incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which, in the judgment of the Committee, is permanent and continuous in nature. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant's condition. Notwithstanding the above, with respect to an Incentive Stock Option, Disability shall mean Permanent and Total Disability as defined in Section 22(e)(3) of the Code. (j) "Dividend Equivalent" means a right granted to a Participant under Article 11. -3- (k) "Effective Date" has the meaning assigned such term in Section 2.1. (l) "Fair Market Value", on any date, means (i) if the Stock is listed on a securities exchange or is traded over the Nasdaq National Market, the closing sales price on such exchange or over such system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (ii) if the Stock is not listed on a securities exchange or traded over the Nasdaq National Market, the mean between the bid and offered prices as quoted by Nasdaq for such date, provided that if it is determined that the fair market value is not properly reflected by such Nasdaq quotations, Fair Market Value will be determined by such other method as the Committee determines in good faith to be reasonable. (m) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (n) "Non-Qualified Stock Option" means an Option that is not an Incentive Stock Option. (o) "Option" means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non- Qualified Stock Option. (p) "Other Stock-Based Award" means a right, granted to a Participant under Article 12, that relates to or is valued by reference to Stock or other Awards relating to Stock. (q) "Parent" means a corporation which owns or beneficially owns a majority of the outstanding voting stock or voting power of the Company. For Incentive Stock Options, the term shall have the same meaning as set forth in Code Section 424(e). (r) "Participant" means a person who, as an employee, officer, consultant or director of the Company or any Subsidiary, has been granted an Award under the Plan. (s) "Performance Unit" means a right granted to a Participant under Article 9, to receive cash, Stock, or other Awards, the payment of which is contingent upon achieving certain performance goals established by the Committee. (t) "Plan" means the CytRx Corporation 2000 Long-Term Incentive Plan, as amended from time to time. -4- (u) "Restricted Stock Award" means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture. (v) "Retirement" means a Participant's voluntary termination of employment with the Company, Parent or Subsidiary after attaining age 55. (w) "Stock" means the $0.001 par value common stock of the Company and such other securities of the Company as may be substituted for Stock pursuant to Article 14. (x) "Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article 8 to receive a payment equal to the difference between the Fair Market Value of a share of Stock as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 8. (y) "Subsidiary" means any corporation, limited liability company, partnership or other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. For Incentive Stock Options, the term shall have the meaning set forth in Code Section 424(f). (z) "1933 Act" means the Securities Act of 1933, as amended from time to time. (z) "1934 Act" means the Securities Exchange Act of 1934, as amended from time to time. ARTICLE 4 ADMINISTRATION 4.1 COMMITTEE. The Plan shall be administered by the Compensation --------- Committee of the Board or, at the discretion of the Board from time to time, by the Board. The Committee shall consist of two or more members of the Board. It is intended that the directors appointed to serve on the Committee shall be "non-employee directors" (within the meaning of Rule 16b-3 promulgated under the 1934 Act) and "outside directors" (within the meaning of Code Section 162(m) and the regulations thereunder) to the extent that Rule 16b-3 and, if necessary for relief from the limitation under Code Section 162(m) and such relief is sought by the Company, Code Section 162(m), respectively, are applicable. However, the mere fact that a Committee member shall fail to qualify under either of the foregoing requirements shall not invalidate any Award made by the Committee which Award is otherwise validly made under the Plan. The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board. During any time that the Board is acting as administrator of the Plan, it shall have all the powers of the Committee hereunder, and -5- any reference herein to the Committee (other than in this Section 4.1) shall include the Board. 4.2 ACTION BY THE COMMITTEE. For purposes of administering the Plan, the ----------------------- following rules of procedure shall govern the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved unanimously in writing by the members of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Parent or Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan. 4.3 AUTHORITY OF COMMITTEE. Except as provided below, the Committee has ---------------------- the exclusive power, authority and discretion to: (a) Designate Participants; (b) Determine the type or types of Awards to be granted to each Participant; (c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate; (d) Determine the terms and conditions of any Award granted under the Plan, including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; (e) Accelerate the vesting or lapse of restrictions of any outstanding Award, based in each case on such considerations as the Committee in its sole discretion determines; (f) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered; (g) Prescribe the form of each Award Agreement, which need not be identical for each Participant; -6- (h) Decide all other matters that must be determined in connection with an Award; (i) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; (j) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan; (k) Amend the Plan or any Award Agreement as provided herein; and (l) Adopt such modifications, procedures, and subplans as may be necessary or desirable to comply with provisions of the laws of non-U.S. jurisdictions in which the Company or any Parent or Subsidiary may operate, in order to assure the viability of the benefits of Awards granted to participants located in such other jurisdictions and to meet the objectives of the Plan. Not withstanding the above, the Board or the Committee may expressly delegate to a special committee consisting of one or more directors who are also officers of the Company some or all of the Committee's authority under subsections (a) through (g) above with respect to those eligible Participants who, at the time of grant are not, and are not anticipated to be become, either (i) Covered Employees or (ii) persons subject to Section 16 of the 1934 Act. 4.4. DECISIONS BINDING. The Committee's interpretation of the Plan, any ----------------- Awards granted under the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. ARTICLE 5 SHARES SUBJECT TO THE PLAN 5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section 14.1, ---------------- the aggregate number of shares of Stock reserved and available for Awards or which may be used to provide a basis of measurement for or to determine the value of an Award (such as with a Stock Appreciation Right or Performance Unit Award) shall be 1,000,000, of which not more than 10% may be granted as Awards of Restricted Stock or unrestricted Stock Awards. 5.2. LAPSED AWARDS. To the extent that an Award is canceled, terminates, ------------- expires or lapses for any reason, any shares of Stock subject to the Award will again be available for the grant of an Award under the Plan and shares subject to SARs or other Awards settled in cash will be available for the grant of an Award under the Plan. -7- 5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may ----------------- consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market. 5.4. LIMITATION ON AWARDS. Notwithstanding any provision in the Plan to -------------------- the contrary (but subject to adjustment as provided in Section 14.1), the maximum number of shares of Stock with respect to one or more Options and/or SARs that may be granted during any one calendar year under the Plan to any one Participant shall be 200,000; provided, however, that in connection with his or her initial employment with the Company, a Participant may be granted Options or SARs with respect to up to an additional 200,000 shares of Stock, which shall not count against the foregoing annual limit. The maximum fair market value (measured as of the date of grant) of any Awards other than Options and SARs that may be received by any one Participant (less any consideration paid by the Participant for such Award) during any one calendar year under the Plan shall be $500,000. ARTICLE 6 ELIGIBILITY 6.1. GENERAL. Awards may be granted only to individuals who are employees, ------- officers, consultants or directors of the Company or a Parent or Subsidiary. ARTICLE 7 STOCK OPTIONS 7.1. GENERAL. The Committee is authorized to grant Options to Participants ------- on the following terms and conditions: (a) EXERCISE PRICE. The exercise price per share of Stock under an -------------- Option shall be determined by the Committee, provided that the exercise price for any Option shall not be less than the Fair Market Value as of the date of the grant. (b) TIME AND CONDITIONS OF EXERCISE. The Committee shall determine ------------------------------- the time or times at which an Option may be exercised in whole or in part, subject to Section 7.1(e). The Committee also shall determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. The Committee may waive any exercise provisions at any time in whole or in part based upon factors as the Committee may determine in its sole discretion so that the Option becomes exerciseable at an earlier date. (c) PAYMENT. The Committee shall determine the methods by which the ------- exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including -8- "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants; provided, however, that if shares of Stock are used to pay the exercise price of an Option, such shares shall have been held by the Participant for at least six months. (d) EVIDENCE OF GRANT. All Options shall be evidenced by a written ----------------- Award Agreement between the Company and the Participant. The Award Agreement shall include such provisions, not inconsistent with the Plan, as may be specified by the Committee. (e) EXERCISE. In no event may any Option be exercisable for more than -------- ten years from the date of its grant. 7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options ----------------------- granted under the Plan must comply with the following additional rules: (a) EXERCISE PRICE. The exercise price per share of Stock shall be -------------- set by the Committee, provided that the exercise price for any Incentive Stock Option shall not be less than the Fair Market Value as of the date of the grant. (b) EXERCISE. In no event may any Incentive Stock Option be -------- exercisable for more than ten years from the date of its grant. (c) LAPSE OF OPTION. An Incentive Stock Option shall lapse under the --------------- earliest of the following circumstances; provided, however, that the Committee may, prior to the lapse of the Incentive Stock Option under the circumstances described in paragraphs (3), (4) and (5) below, provide in writing that the Option will extend until a later date, but if Option is exercised after the dates specified in paragraphs (3), (4) and (5) below, it will automatically become a Non-Qualified Stock Option: (1) The Incentive Stock Option shall lapse as of the option expiration date set forth in the Award Agreement. (2) The Incentive Stock Option shall lapse ten years after it is granted, unless an earlier time is set in the Award Agreement. (3) If the Participant terminates employment for any reason other than as provided in paragraph (4) or (5) below, the Incentive Stock Option shall lapse, unless it is previously exercised, three months after the Participant's termination of employment; provided, however, that if the Participant's employment is terminated by the Company for cause (as determined by the Company), the Incentive Stock Option shall (to the extent not previously exercised) lapse immediately. -9- (4) If the Participant terminates employment by reason of his Disability, the Incentive Stock Option shall lapse, unless it is previously exercised, one year after the Participant's termination of employment. (5) If the Participant dies while employed, or during the three- month period described in paragraph (3) or during the one-year period described in paragraph (4) and before the Option otherwise lapses, the Option shall lapse one year after the Participant's death. Upon the Participant's death, any exercisable Incentive Stock Options may be exercised by the Participant's beneficiary, determined in accordance with Section 13.5. Unless the exercisability of the Incentive Stock Option is accelerated as provided in Article 13, if a Participant exercises an Option after termination of employment, the Option may be exercised only with respect to the shares that were otherwise vested on the Participant's termination of employment. (d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value ---------------------------- (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00. (e) TEN PERCENT OWNERS. No Incentive Stock Option shall be granted to ------------------ any individual who, at the date of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary unless the exercise price per share of such Option is at least 110% of the Fair Market Value per share of Stock at the date of grant and the Option expires no later than five years after the date of grant. (f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive ------------------------------------- Stock Option may be made pursuant to the Plan after the day immediately prior to the tenth anniversary of the Effective Date. (g) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive ----------------- Stock Option may be exercised only by the Participant or, in the case of the Participant's Disability, by the Participant's guardian or legal representative. (h) DIRECTORS. The Committee may not grant an Incentive Stock Option --------- to a non-employee director. The Committee may grant an Incentive Stock Option to a director who is also an employee of the Company or Parent or Subsidiary but only in that individual's position as an employee and not as a director. -10- ARTICLE 8 STOCK APPRECIATION RIGHTS 8.1. GRANT OF STOCK APPRECIATION RIGHTS. The Committee is authorized to ---------------------------------- grant Stock Appreciation Rights to Participants on the following terms and conditions: (a) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation ---------------- Right, the Participant to whom it is granted has the right to receive the excess, if any, of: (1) The Fair Market Value of one share of Stock on the date of exercise; over (2) The grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of one share of Stock on the date of grant. (b) OTHER TERMS. All awards of Stock Appreciation Rights shall be ----------- evidenced by an Award Agreement. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at the time of the grant of the Award and shall be reflected in the Award Agreement. ARTICLE 9 PERFORMANCE UNITS 9.1. GRANT OF PERFORMANCE UNITS. The Committee is authorized to grant -------------------------- Performance Units to Participants on such terms and conditions as may be selected by the Committee. The Committee shall have the complete discretion to determine the number of Performance Units granted to each Participant, subject to Section 5.4. All Awards of Performance Units shall be evidenced by an Award Agreement. 9.2. RIGHT TO PAYMENT. A grant of Performance Units gives the Participant ---------------- rights, valued as determined by the Committee, and payable to, or exercisable by, the Participant to whom the Performance Units are granted, in whole or in part, as the Committee shall establish at grant or thereafter. The Committee shall set performance goals and other terms or conditions to payment of the Performance Units in its discretion which, depending on the extent to which they are met, will determine the number and value of Performance Units that will be paid to the Participant. 9.3. OTHER TERMS. Performance Units may be payable in cash, Stock, or ----------- other property, and have such other terms and conditions as determined by the Committee and reflected in the Award Agreement. -11- ARTICLE 10 RESTRICTED STOCK AWARDS 10.1. GRANT OF RESTRICTED STOCK. The Committee is authorized to make ------------------------- Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as may be selected by the Committee. All Awards of Restricted Stock shall be evidenced by a Restricted Stock Award Agreement. 10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to ------------------------- such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, upon the satisfaction of performance goals or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. 10.3. FORFEITURE. Except as otherwise determined by the Committee at the ---------- time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period or upon failure to satisfy a performance goal during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided, however, that the Committee may provide in any Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock. 10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under --------------------------------- the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock. ARTICLE 11 DIVIDEND EQUIVALENTS 11.1 GRANT OF DIVIDEND EQUIVALENTS. The Committee is authorized to grant ----------------------------- Dividend Equivalents to Participants subject to such terms and conditions as may be selected by the Committee. Dividend Equivalents shall entitle the Participant to receive payments equal to dividends with respect to all or a portion of the number of shares of Stock subject to an Award, as determined by the Committee. The Committee may provide that Dividend Equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional shares of Stock, or otherwise reinvested. -12- ARTICLE 12 OTHER STOCK-BASED AWARDS 12.1. GRANT OF OTHER STOCK-BASED AWARDS. The Committee is authorized, --------------------------------- subject to limitations under applicable law, to grant to Participants such other Awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares of Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including without limitation shares of Stock awarded purely as a "bonus" and not subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of Stock, and Awards valued by reference to book value of shares of Stock or the value of securities of or the performance of specified Parents or Subsidiaries. The Committee shall determine the terms and conditions of such Awards. ARTICLE 13 PROVISIONS APPLICABLE TO AWARDS 13.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under ------------------------------------------ the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for, any other Award granted under the Plan. If an Award is granted in substitution for another Award, the Committee may require the surrender of such other Award in consideration of the grant of the new Award. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards. 13.2. TERM OF AWARD. The term of each Award shall be for the period as ------------- determined by the Committee, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from the date of its grant (or, if Section 7.2(e) applies, five years from the date of its grant). 13.3. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and -------------------------- any applicable law or Award Agreement, payments or transfers to be made by the Company or a Parent or Subsidiary on the grant or exercise of an Award may be made in such form as the Committee determines at or after the time of grant, including without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee. 13.4. LIMITS ON TRANSFER. No right or interest of a Participant in any ------------------ unexercised or restricted Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Parent or Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Parent or Subsidiary. No unexercised or restricted Award shall be assignable or transferable by a Participant other than by will or the laws of descent and -13- distribution or, except in the case of an Incentive Stock Option, pursuant to a domestic relations order that would satisfy Section 414(p)(1)(A) of the Code if such Section applied to an Award under the Plan; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, (ii) does not cause any Option intended to be an Incentive Stock Option to fail to be described in Code Section 422(b), and (iii) is otherwise appropriate and desirable, taking into account any factors deemed relevant, including without limitation, any state or federal tax or securities laws or regulations applicable to transferable Awards. 13.5 BENEFICIARIES. Notwithstanding Section 13.4, a Participant may, in ------------- the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the Participant's estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee. 13.6. STOCK CERTIFICATES. All Stock issued under the Plan is subject to ------------------ any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate or issue instructions to the transfer agent to reference restrictions applicable to the Stock. 13.7 ACCELERATION UPON DEATH OR DISABILITY. Notwithstanding any other ------------------------------------- provision in the Plan or any Participant's Award Agreement to the contrary, upon the Participant's death or Disability during his employment or service as a director, all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions on outstanding Awards shall lapse. Any Option or Stock Appreciation Rights Awards shall thereafter continue or lapse in accordance with the other provisions of the Plan and the Award Agreement. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non- Qualified Stock Options. 13.8. ACCELERATION UPON A CHANGE IN CONTROL. Except as otherwise provided ------------------------------------- in the Award Agreement, upon the occurrence of a Change in Control, all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions -14- on outstanding Awards shall lapse; provided, however that such acceleration will not occur if, in the opinion of the Company's accountants, such acceleration would preclude the use of "pooling of interest" accounting treatment for a Change in Control transaction that (a) would otherwise qualify for such accounting treatment, and (b) is contingent upon qualifying for such accounting treatment. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. 13.9. ACCELERATION UPON CERTAIN EVENTS NOT CONSTITUTING A CHANGE IN ------------------------------------------------------------- CONTROL. In the event of the occurrence of any circumstance, transaction or - ------- event not constituting a Change in Control (as defined in Section 3.1) but which the Board of Directors deems to be, or to be reasonably likely to lead to, an effective change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of the 1934 Act, the Committee may in its sole discretion declare all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised to be fully exercisable, and/or all restrictions on all outstanding Awards to have lapsed, in each case, as of such date as the Committee may, in its sole discretion, declare, which may be on or before the consummation of such transaction or event. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. 13.10. ACCELERATION FOR ANY OTHER REASON. Regardless of whether an event --------------------------------- has occurred as described in Section 13.8 or 13.9 above, the Committee may in its sole discretion at any time determine that all or a portion of a Participant's Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully or partially exercisable, and/or that all or a part of the restrictions on all or a portion of the outstanding Awards shall lapse, in each case, as of such date as the Committee may, in its sole discretion, declare. The Committee may discriminate among Participants and among Awards granted to a Participant in exercising its discretion pursuant to this Section 13.10. 13.11 EFFECT OF ACCELERATION. If an Award is accelerated under Section ---------------------- 13.8 or 13.9, the Committee may, in its sole discretion, provide (i) that the Award will expire after a designated period of time after such acceleration to the extent not then exercised, (ii) that the Award will be settled in cash rather than Stock, (iii) that the Award will be assumed by another party to the transaction giving rise to the acceleration or otherwise be equitably converted in connection with such transaction, or (iv) any combination of the foregoing. The Committee's determination need not be uniform and may be different for different Participants whether or not such Participants are similarly situated. 13.12. PERFORMANCE GOALS. The Committee may (but need not) determine that ----------------- any Award granted pursuant to this Plan to a Participant (including, but not limited to, Participants who are Covered Employees) shall be determined solely on the basis of -15- (a) the achievement by the Company or a Parent or Subsidiary of a specified target return, or target growth in return, on equity or assets, (b) the Company's, Parent's or Subsidiary's stock price, (c) the achievement by an individual or a business unit of the Company, Parent or Subsidiary of a specified target, or target growth in, revenues, net income or earnings per share, (d) the achievement of objectively determinable goals with respect to (i) product development milestones, (ii) corporate financings, (iii) merger and acquisition activities, (iv) licensing transactions, (v) development of strategic partnerships or alliances, or (vi) acquisition or development of new technologies, or (e) any combination of the goals set forth in (a) through (d) above. If an Award is made on such basis, the Committee shall establish goals prior to the beginning of the period for which such performance goal relates (or such later date as may be permitted under Code Section 162(m) or the regulations thereunder) and the Committee has the right for any reason to reduce (but not increase) the Award, notwithstanding the achievement of a specified goal. Any payment of an Award granted with performance goals shall be conditioned on the written certification of the Committee in each case that the performance goals and any other material conditions were satisfied. 13.13. TERMINATION OF EMPLOYMENT. Whether military, government or other ------------------------- service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur in a circumstance in which a Participant transfers from the Company to one of its Parents or Subsidiaries, transfers from a Parent or Subsidiary to the Company, or transfers from one Parent or Subsidiary to another Parent or Subsidiary. -16- ARTICLE 14 CHANGES IN CAPITAL STRUCTURE 14.1. GENERAL. In the event of a corporate transaction involving the ------- Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the authorization limits under Section 5.1 and 5.4 shall be adjusted proportionately, and the Committee may adjust Awards to preserve the benefits or potential benefits of the Awards. Action by the Committee may include: (i) adjustment of the number and kind of shares which may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the exercise price of outstanding Awards; and (iv) any other adjustments that the Committee determines to be equitable. Without limiting the foregoing, in the event a stock dividend or stock split is declared upon the Stock, the authorization limits under Section 5.1 and 5.4 shall be increased proportionately, and the shares of Stock then subject to each Award shall be increased proportionately without any change in the aggregate purchase price therefor. ARTICLE 15 AMENDMENT, MODIFICATION AND TERMINATION 15.1. AMENDMENT, MODIFICATION AND TERMINATION. The Board or the Committee --------------------------------------- may, at any time and from time to time, amend, modify or terminate the Plan without shareholder approval; provided, however, that the Board or Committee may condition any amendment or modification on the approval of shareholders of the Company if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations. 15.2 AWARDS PREVIOUSLY GRANTED. At any time and from time to time, the ------------------------- Committee may amend, modify or terminate any outstanding Award without approval of the Participant; provided, however, that, subject to the terms of the applicable Award Agreement, such amendment, modification or termination shall not, without the Participant's consent, reduce or diminish the value of such Award determined as if the Award had been exercised, vested, cashed in or otherwise settled on the date of such amendment or termination. No termination, amendment, or modification of the Plan shall adversely affect any Award previously granted under the Plan, without the written consent of the Participant. ARTICLE 16 GENERAL PROVISIONS 16.1. NO RIGHTS TO AWARDS. No Participant or employee, officer, ------------------- consultant or director shall have any claim to be granted any Award under the Plan, and -17- neither the Company nor the Committee is obligated to treat Participants and employees, officers, consultants or directors uniformly. 16.2. NO SHAREHOLDER RIGHTS. No Award gives the Participant any of the --------------------- rights of a shareholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award. 16.3. WITHHOLDING. The Company or any Parent or Subsidiary shall have the ----------- authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the Award shares of Stock having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. 16.4. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. Nothing in the Plan or any -------------------------------------- Award Agreement shall interfere with or limit in any way the right of the Company or any Parent or Subsidiary to terminate any Participant's employment or status as a consultant or director at any time, nor confer upon any Participant any right to continue as an employee, officer, consultant or director of the Company or any Parent or Subsidiary. l6.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded" ------------------------- plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Parent or Subsidiary. 16.6. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be ------------------------------ taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or benefit plan of the Company or any Parent or Subsidiary unless provided otherwise in such other plan. 16.7. EXPENSES. The expenses of administering the Plan shall be borne by -------- the Company and its Parents or Subsidiaries. 16.8. TITLES AND HEADINGS. The titles and headings of the Sections in the ------------------- Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. -18- 16.9. GENDER AND NUMBER. Except where otherwise indicated by the context, ----------------- any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 16.10. FRACTIONAL SHARES. No fractional shares of Stock shall be issued ----------------- and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up. 16.11. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to -------------------------------- make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register under the 1933 Act, or any state securities act, any of the shares of Stock issued in connection with the Plan. The shares issued in connection with the Plan may in certain circumstances be exempt from registration under the 1933 Act, and the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. 16.12. GOVERNING LAW. To the extent not governed by federal law, the Plan -------------- and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Georgia. 16.13 ADDITIONAL PROVISIONS. Each Award Agreement may contain such other --------------------- terms and conditions as the Committee may determine; provided that such other terms and conditions are not inconsistent with the provisions of this Plan. The foregoing is hereby acknowledged as being the CytRx Corporation 2000 Long-Term Incentive Plan as adopted by the Board of Directors of the Company on August 24, 2000. CYTRX CORPORATION By: /s/ Mark W. Reynolds -------------------- Its: Vice President, Finance ----------------------- -19- EX-10.16 3 0003.txt LICENSE AGREEMENT Exhibit 10.16 LICENSE AGREEMENT ----------------- THIS AGREEMENT is entered into and effective as of the 16th day of February, 2001, by and between CytRx Corporation, a Delaware corporation, having a principal office at 154 Technology Parkway, Technology Park/Atlanta, Norcross, Georgia 30092 ("Licensor"), and Ivy Animal Health, Inc., a Delaware corporation, having a principal office at 8857 Bond Street, Overland Park, Kansas 66214 ("Licensee"). WHEREAS, Licensor is the owner or licensee of, and has the right to grant licenses to, certain existing proprietary know how, technical information and patentable subject matter, including certain patents owned by Emory University ("Emory") and listed on Schedule "A" hereto (the "Licensed Patents"), all generally relating to growth promotion in poultry and swine (collectively the "Technology"); WHEREAS, Licensee desires an exclusive license to make, have made, develop, use, market and/or sell the methods and compositions covered by the Technology for non-human use; NOW THEREFORE, in consideration of the mutual grants and undertakings and other good and valuable consideration, the receipt and sufficiency thereof hereby acknowledged, the parties hereto agree as follows: 1. License Grant. Licensor grants to Licensee a worldwide, ------------- irrevocable, exclusive right and license (the "License") to make, have made, develop, use, market, sell, import and/or export the methods and compositions covered by (a) the Licensed Patents; (b) any and all U.S. or foreign patents or applications covering the subject matter of the Technology; (c) any continuation and/or divisional patents or applications of (a) or (b); and (d) any reissues, extensions or reexaminations of (a), (b) or (c) for non-human use and to otherwise use the Technology in conjunction therewith. Licensor shall provide Licensee with the technical information, know how and technical assistance reasonably necessary to allow Licensee to exploit the Technology for non-human use. 2. Consideration. ------------- a. Initial Payment. Licensee shall pay to Licensor a one-time single --------------- and fixed lump sum initial payment of One Thousand Dollars ($1,000) upon execution of this Agreement in consideration for the License. b. Milestone Payments. Licensee shall pay to Licensor a one-time ------------------ single and fixed lump sum milestone payment of One Hundred Thousand Dollars ($100,000) upon Licensee's obtaining regulatory approval in the United States to market and sell methods or compositions covered by the claims of a Licensed Patents for non-human use. Licensee shall be responsible for obtaining any such regulatory approval, but is not required to seek or obtain any such approval. No milestone payments shall be due for any non-U.S. approvals. c. Royalty. Licensee shall pay to Licensor a royalty equal to five ------- percent (5 %) of Net Sales of compositions covered by the claims of a Licensed Patent (a "Licensed Product") in any country in which a Licensed Patent is valid and in force. "Net Sales" shall mean the total gross amount received by Licensee for sales of Licensed Products less (i) trade, quantity and cash discounts actually allowed, (ii) credits or allowances given for rejection or return of previously sold Licensed Products, billing errors or retroactive price reductions, (iii) sales taxes or other governmental charges levied directly on the sale, transportation or delivery of the Licensed Products and borne by the Licensee, and (iv) transportation and related insurance costs actually invoiced. Licensor shall be solely responsible for payment of any royalty and other amounts due to Emory resulting from Licensee's performance under this Agreement. During the term of this Agreement, Licensee shall be responsible for payment of the royalties owed by CytRx to BASF Corporation ("BASF") under the May 22, 1986 Agreement between CytRx and BASF, as amended by letter agreement dated February 15, 1990 ("the BASF Agreement") resulting from Licensee's performance under this Agreement. Royalties shall be paid during the term of the Agreement on a quarterly basis, on the last day of March, June, September and December of each year. Payment shall be accompanied by a report verifying the amount due. If no sales are made during a quarter, neither the royalty, nor the report, shall be due for that quarter. 3. No Development Requirements. Licensee shall have no obligation to --------------------------- make, have made, develop, use, market, sell, import or export any methods or compositions covered by or relating to the Technology. 4. Patent Maintenance. Licensor shall maintain the Licensed Patents ------------------ in full force and effect through the maximum term available for each Licensed Patent. Licensee shall pay to Licensor an annual maintenance fee of One Thousand Dollars ($1,000) to be applied to Licensor's costs in maintaining the Licensed Patents. It is understood that Licensor is obligated to pay any and all fees associated with maintenance of the Licensed Patents in excess of the amount paid to Licensor by Licensee pursuant to this Section 3. 5. Improvements. Licensee shall own any improvements or modifications ------------ developed by or on behalf of Licensee, relating to the Technology, whether or not patentable. 6. Patent Infringement. In the event that any infringement of the ------------------- Licensed Patents or other Technology rights comes to the attention of either party, such party shall promptly notify the other party of the infringement. Licensor shall have the option, but not the obligation, to take steps to abate the infringement by litigation or otherwise at its sole expense. Should Licensor opt not to take, or to cease, any steps to abate such infringement, Licensee shall have the option to take or continue steps to abate such infringement at its sole cost or expense, and Licensor agrees to be added as a legally indispensable party, if necessary. Licensor and Licensee agree to assist the other as reasonably necessary in any steps taken to abate the infringement. 7. Indemnity. --------- a. Licensor hereby releases, indemnifies, and agrees to defend and hold harmless Licensee, its sublicensees, agents, servants, employees, officers, directors, shareholders, and any subsidiary or affiliate of Licensee, from and against any and all actions, claims, liabilities, losses, damages, costs and expenses (including legal fees) of every kind, -2- incident to, arising in connection with, or resulting from any misrepresentation, breach, non-performance or inaccuracy of any representation or warranty made by Licensor in this Agreement. b. Licensee hereby releases, indemnifies, and agrees to defend and hold harmless Licensor, its agents, servants, employees, officers, directors, shareholders, and any subsidiary or affiliate of Licensor, from and against any and all actions, claims, liabilities, losses, damages, costs and expenses (including legal fees) of every kind, incident to, arising in connection with, or resulting from, Licensee's negligence in making, developing, using, marketing, selling, importing or exporting compositions covered by the Technology. 8. Representation and Warranty. Licensor represents and warrants --------------------------- that it has the legal power and authority to extend the rights granted to Licensee in this Agreement and that it has not made, and will not make, any commitments to others inconsistent with or in derogation of such rights. Licensor shall be solely responsible for assuring that it has the legal power and authority to extend the license of Emory's interest in the License Patents granted herein throughout the term of this Agreement. Licensor further represents and warrants that, to the best of its knowledge, Licensee's making, developing, using, marketing, selling, importing and exporting of any methods and/or compositions covered by the Technology under this Agreement will not infringe any patent, copyright, trade secret, or other rights of any third party, including Emory and BASF. Licensor makes no further warranties as to the fitness of the technology for any particular purpose or use. Licensee agrees to accept the technology on an "as is" basis. 9. Term and Termination. -------------------- a. This Agreement shall continue until the expiration date of the last patent of the Licensed Patents to expire. b. Either party may terminate this Agreement in the event the other party commits a material breach of any of the provisions of this Agreement and fails to cure such breach within thirty (30) days following receipt of written notice of such breach. 10. Notices. All notices, statements, payments, questions regarding ------- billing or otherwise under this Agreement shall be directed to the respective parties at the addresses identified in the first paragraph hereof (or such other address as a party may designate by giving written notice to the other party). Notices shall be deemed delivered when delivered personally or by reputable courier, or when mailed by United States registered or certified mail with return receipt requested. 11. Waiver. No waiver by either party of any non-performance or ------ violation by the other party of any covenants, obligations or agreements of such other party hereunder shall be deemed to be a waiver of any subsequent violation or non-performance of the same or any other covenant, agreement or obligation, nor shall forbearance by any party be deemed to be waiver by such party of its rights or remedies with respect to such violation or non-performance. -3- 12. Assignability. This Agreement will inure to the benefit of and ------------- be binding upon the parties hereto and their respective successors, assigns and personal representatives. Any successor or assignee of this Agreement shall take said assignment subject to the terms hereof. 13. Severability. Should any provision of this Agreement or the ------------ application thereof to any extent be held invalid or unenforceable, the remainder of this Agreement and the application thereof, other than those provisions as to which it shall have been held invalid or unenforceable, shall not be affected thereby and shall continue valid and enforceable to the fullest extent permitted by law. 14. Entire Agreement and Modifications. This Agreement constitutes ---------------------------------- the entire agreement between the parties and replaces any prior agreements between them. No modifications or revisions of this Agreement shall have any force and effect unless the same are in writing and executed by the parties hereto. LICENSOR: LICENSEE: CYTRX CORPORATION IVY ANIMAL HEALTH, INC. By: /s/ Jack J. Luchese By: /s/ Richard O. Shuler ----------------------- -------------------------- Name: Jack J. Luchese Name: Richard O. Shuler -------------------- ----------------------- Title: President & CEO Title: President & CEO ------------------- ----------------------- -4- SCHEDULE A ----------
Country Patent Number Title - -------------------------------------------------------------------------------------------------- United States 5,234,683 METHOD OF STIMULATING THE IMMUNE SYSTEM - -------------------------------------------------------------------------------------------------- Australia 596,986 BIOLOGICALLY-ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- Canada 1,279,822 BIOLOGICALLY ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- Chile 36,564 BIOLOGICALLY ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- China 96,104,742 BIOLOGICALLY ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- Germany 228,448 USE OF BIOLOGICALLY ACTIVE COPOLYMERS FOR THE USE OF MANUFACTURE OF A MEDICAMENT FOR STIMULATING THE GROWTH OF AN ANIMAL - -------------------------------------------------------------------------------------------------- EPO 228,448 USE OF BIOLOGICALLY ACTIVE COPOLYMERS FOR THE USE OF MANUFACTURE OF A MEDICAMENT FOR STIMULATING THE GROWTH OF AN ANIMAL - -------------------------------------------------------------------------------------------------- Spain 556 BIOLOGICALLY ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- France 228,448 USE OF BIOLOGICALLY ACTIVE COPOLYMERS FOR THE USE OF MANUFACTURE OF A MEDICAMENT FOR STIMULATING THE GROWTH OF AN ANIMAL - -------------------------------------------------------------------------------------------------- United Kingdom 228,448 USE OF BIOLOGICALLY ACTIVE COPOLYMERS FOR THE USE OF MANUFACTURE OF A MEDICAMENT FOR STIMULATING THE GROWTH OF AN ANIMAL - -------------------------------------------------------------------------------------------------- Mexico 176,179 BIOLOGICALLY ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- Netherlands 228,448 USE OF BIOLOGICALLY ACTIVE COPOLYMERS FOR THE USE OF MANUFACTURE OF A MEDICAMENT FOR STIMULATING THE GROWTH OF AN ANIMAL - -------------------------------------------------------------------------------------------------- South Africa 864,556 BIOLOGICALLY ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- United States 5,114,708 BIOLOGICALLY-ACTIVE COPOLYMERS - -------------------------------------------------------------------------------------------------- United States 5,824,322 GROWTH PROMOTING COMPOSITIONS AND METHODS OF USE - --------------------------------------------------------------------------------------------------
-5- EX-23.1 4 0004.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 No. 33-42259 pertaining to the CytRx Corporation 1986 Stock Option Plan, No. 33-93816 pertaining to the CytRx Corporation 1994 Stock Option Plan, No. 33-93818 pertaining to the CytRx Corporation 1995 Stock Option Plan, and No. 333-84657 pertaining to the CytRx Corporation 1998 Stock Option Plan and to the Registration Statements on Form S-3 Nos. 33-93820, 333-39607, 333-44043, 333- 48837, 333-45652, and 333-33792 of CytRx Corporation and in the related prospectuses of our report dated March 8, 2001, with respect to the consolidated financial statements and schedule of CytRx Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 26, 2001 EX-99.1 5 0005.txt SAFE HARBOR COMPLIANCE STATEMENT Exhibit 99.1 RISK FACTORS CytRx Corporation ("CytRx") intends to qualify both its written and oral forward-looking statements for protection under Section 27A of the Securities Act of 1933, as amended, and Section 216 of the Securities Exchange Act of 1934, as amended, and any other similar safe harbor provisions. CytRx provides the following risk factor disclosure in connection with its continuing efforts to qualify its written and oral forward-looking statements for the safe harbor protection of the Securities Act of 1933 and Securities Exchange Act of 1934 and any other similar safe harbor provision. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: You should carefully consider the following risks. If any of the following risks actually occur our business prospects, financial condition and results of operations could be materially adversely affected, the trading price of our common stock could decline, and you could lose all or part of your investment. You should also refer to the other information in this Form 10-K, including our financial statements and the related notes. We May Not Be Able to Obtain Adequate Funds to Continue Product Testing and Research and Development, Which Will Severely Reduce or Terminate Our Operations and Could Negatively Impact Our Future Profitability and Growth On December 31, 2000, we had approximately $3.8 million in cash and cash equivalents and working capital of $2.6 million. Our products are governed by extensive U.S. regulation and foreign regulation in other countries where we test and intend to market our current and future products. Approval of a product can take several years and requires substantial capital resources. We do not currently have adequate funds to conduct the required testing and data collection necessary for the FDA to approve FLOCOR or any of our other products. As a result, we must either severely reduce or terminate testing and research and development activities, or obtain additional financing from third parties to fund the required testing. If we elect to attempt to obtain additional financing, we may be unable to obtain funds from any third party on terms that we believe are acceptable. Our inability to obtain additional financing would require us to severely reduce or terminate testing and research and development activities and could result in the termination of our operations. We do not currently have enough funds to complete the required testing and data collections necessary to obtain regulatory approval of FLOCOR or any of our other products currently under development or to manufacture, market, and distribute any products that may obtain FDA approval. Our need for capital has greatly increased due to additional FDA-required testing of FLOCOR. Delays in regulatory approval will cause substantial unanticipated costs. We need to raise additional funds through equity or debt financing, or a combination of both. We may be unable to obtain any financing or financing on acceptable terms. Any financing may be on terms that dilute our stockholders. A lack of financing would require us to severely reduce or terminate testing and research and development activities and could result in the termination of our operations. We Have No Significant Source of Revenue From Our Operations and If We Are Unable to Generate Revenues From Our Operations We May Have to Depend on Third Parties to Raise Funds We currently have no significant source of operating revenue. Our total revenues for 2000 were approximately $3.3 million. Approximately 86% of our 2000 revenues, or $2,877,000, came from non-operating sources such as license for interest income, grants from government agencies and subleases. Approximately 14% of our 2000 revenues, or $451,000, came from selling our services (Spectrum Recruitment Research). If the FDA does not approve, for commercial sale, FLOCOR or one of our other products, we may not be able to generate significant revenues for an extended period of time. Lack of revenues adequate to satisfy our operating needs will cause us to depend on equity or debt financing, or a combination of both. Because the maximum amount of any drawdown request under the Private Equity Line of Credit Agreement with Majorlink Holdings is subject to a formula based on a percentage of the weighted average common stock price for the three (3) months prior to the request multiplied by the total trading volume for the same three (3) month period, a decline in the trading volume and/or price of our common stock may reduce the amount we can draw down under the private equity line of credit agreement. In addition, business and economic conditions may not make it feasible to draw down under the private equity line of credit agreement at every opportunity, and drawdowns are available only every 16 trading days. We may need to raise additional capital to fund more rapid expansion, to develop new and enhance existing services to respond to competitive pressures, and/or to acquire complementary businesses or technologies. Majorlink may also decline to purchase shares under a draw request under the private equity line of credit agreement if the conditions included in "Necessary Conditions Before Majorlink will Purchase our Shares" are not met. Our placement agreement with Ladenburg Thalman Co. Inc. restricts us from raising investment capital during the term of the placement agreement except through Ladenburg. If we need capital but are unable to drawdown under the private equity line of credit agreement for any reason, we will need to separately negotiate with Ladenburg and Majorlink to lift those restrictions so we can obtain the capital from other sources. We may not be able to obtain additional financing on terms favorable to us, if at all. If adequate funds are not available or are not available on terms favorable to us, we may not be able to effectively execute our business plan. We Have Operated at a Loss For Over Five Years and Will Likely Continue to Operate at a Loss For Some Time We incurred significant net losses for each of the last five years. Since our inception, we have primarily conducted research and development of our products. The costs of our research and development and our lack of operating revenues has resulted in our net losses. We will probably incur losses until one or more of our products is approved by the FDA and that product has achieved significant sales volume. The activities required for the FDA review process of a new pharmaceutical are extremely costly and usually take several years. We may never obtain FDA approval of any of our products currently under development. The Nasdaq National Market May Delist Our Common Stock and If We Are Delisted There May Not Be an Active Trading Market for Our Common Stock Our ability to remain listed on the Nasdaq National Market will depend on our ability to satisfy applicable Nasdaq criteria including our ability to maintain at least $4 million in "net tangible assets" (defined as Total Assets minus Total Liabilities minus Goodwill minus Redeemable Securities) and maintaining a minimum bid price of $1.00. Our net tangible assets and minimum bid price have recently been near the minimum threshold for these tests, and if we are unable to continue to satisfy these criteria, Nasdaq may begin procedures to remove our common stock from the Nasdaq National Market. If we are delisted from the Nasdaq National Market, an active trading market for our common stock may no longer exist. We May Be Unable to Successfully Develop or Commercialize Our Products, Which Would Severely Reduce or Terminate Our Operations Our continued operations substantially depend on our ability to successfully develop and commercialize our products. In a Phase III clinical study, a drug is tested in a large patient population to provide a thorough understanding of the drug's effectiveness, benefits and the range of possible side effects. A Phase III study must be successfully completed before a company can request FDA approval for marketing the drug. In December 1999, we reported results from our Phase III clinical study of FLOCOR for treatment of sickle cell disease patients experiencing an acute vaso- occlusive crisis (a blockage of blood flow caused by deformed, or "sickled" red blood cells). Overall, the study did not achieve the statistical target for its primary objective, which was to decrease the length of vaso-occlusive crisis for the study population as a whole. To collect adequate information for FDA approval, we will need to conduct additional clinical studies, which we will not begin unless we are able to raise additional funds. Even if we are able to obtain FDA approval of one or more of our products, we may not have adequate financial or other resources, or expertise to commercialize, market and distribute those products successfully. If we do not have adequate resources or the expertise to commercialize our products successfully, we may rely on third parties to provide financial or other resources to help us commercialize those products or we may have such third parties market and distribute our products for us. In order to enter into any such arrangements with a third party, we may have to give up some or all of our rights to some of our products. We may be unable to find a third party willing to provide us with resources or to market and distribute our products. Even if we find a willing third party, we may not be able to reach an agreement on terms that we believe are acceptable. We Depend on a Limited Number of Suppliers For an Adequate Supply of Materials, Which May Negatively Affect Our Ability to Manufacture Our Products We require three suppliers of materials or services to manufacture FLOCOR. These consist of a supplier of poloxamer 188, which is the raw material used to manufacture FLOCOR (the raw drug substance), a manufacturer who can refine the raw drug substance to our specifications (the purified drug substance), and a manufacturer who can mix the purified drug substance with other inactive ingredients in a sterile environment to produce the final dosage form of FLOCOR. Our inability to maintain relationships with those suppliers could result in lengthy delays in the FDA and other regulatory agencies approval processes, causing us to incur substantial unanticipated costs or our inability to produce, market and distribute our product. We have not entered into an agreement with any supplier for the raw drug substance because we believe that it is widely available. In August 1999, we entered into a long-term commercial supply contract with Organichem Corp. of Rensselaer, New York to obtain the purified drug substance. We have also entered into an agreement with the Hospital Products Division of Abbott Laboratories for the manufacture of our finished drug product. If we are unable to maintain those relationships on terms acceptable to us or to replace such suppliers if they fail to adequately perform, we will experience delays in clinical trials or commercialization of our products. We May Incur Substantial Costs and Liability From Product Liability Claims If any of our products are alleged defective, they may expose us to claims for personal injury. Even if the commercialization of one or more of our products is approved by the FDA, users may claim that such product caused unintended adverse effects. We currently carry product liability insurance covering the use of our products in human clinical trials and may extend that coverage to third parties who collaborate with us on the development of our products. However, if someone asserts a claim against us and the amount of such claim exceeds our policy limits or is not covered by our policy, such successful claim may exceed our financial resources and cause us to discontinue operations. Even if claims asserted against us are unsuccessful, they may divert management's attention from our operations and we may have to incur substantial costs to defend such claims. We May Experience Volatility in Our Stock Price, Which May Negatively Impact Your Investment The market price of our common stock has experienced significant volatility in the past and may continue to experience significant volatility from time to time. Our stock price has ranged from $0.75 to $13.50 over the past five years. Factors such as the following may affect such volatility: . our quarterly operating results; . announcements of regulatory developments or technological innovations by us or our competitors; . government regulation of drug pricing; . developments in patent or other technology ownership rights; and . public concern regarding the safety of our products. Other factors which may affect our stock price are general changes in the economy, financial markets or the pharmaceutical or biotechnology industries. We will have broad discretion in the use of the proceeds from the sale of our common stock under the private equity line of credit agreement, and any failure to apply the proceeds effectively could negatively affect our business prospects. We expect to use the net proceeds from the draw downs under the private equity line of credit agreement with Majorlink Holdings for general corporate purposes. We will have significant flexibility in applying the net proceeds. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the net proceeds. If we fail to apply the net proceeds effectively, our business could be negatively affected. Our stock price may be negatively affected and you will experience dilution if we raise additional funds by issuing shares of our common stock under the Private Equity Line of Credit Agreement. We may raise funds by issuing shares of our common stock under the private equity line of credit agreement. According to the private equity line of credit agreement, any shares of our common stock we sell to Majorlink, the investor, will be at 90% of the average market price over the nine lowest days of a fifteen-day valuation period. This discount to Majorlink may place downward pressure on our stock price and will dilute your ownership of our common stock. Additionally, a decrease in our stock price could damage our capital structure and make it difficult or impossible to raise additional financing (See Risk Factor "We May Not Be Able to Obtain Adequate Funds to Continue Product Testing and Research and Development, Which Will Severely Reduce or Terminate Our Operations and Could Negatively Impact Our Future Profitability and Growth" Our stock price may be negatively affected if we raise additional funds by issuing shares of our common stock under the Private Equity Line of Credit Agreement and if our stock price is negatively affected, the Nasdaq National Market may delist our common stock. If we raise additional funds by issuing shares of our common stock under the Private Equity Line of Credit Agreement, our stock price may be negatively affected (see Risk Factor "Our stock price may be negatively affected and you will experience dilution if we raise additional funds by issuing shares of our common stock under the Private Equity Line of Credit Agreement"). If our stock price is negatively affected, the Nasdaq National Market may delist our common stock (See Risk Factor "The Nasdaq National Market may delist our common stock and if we are delisted there may not be an active trading market for our common stock"). Our Anti-Takeover Provisions May Limit Stockholder Value We have a shareholder rights plan and provisions in our bylaws that may discourage or prevent a person or group from acquiring us without our board of directors' approval. The intent of the shareholder rights plan and our bylaw provisions is to protect our shareholders' interests by encouraging anyone seeking control of our Company to negotiate with our Board of Directors. We have a classified board of directors, which requires that at least two stockholder meetings, instead of one, will be required to effect a change in the majority control of our board of directors. This provision applies to every election of directors, not just an election occurring after a change in control. The classification of our board increases the amount of time it takes to change majority control of our board of directors and may cause our potential purchasers to lose interest in the potential purchase of us, regardless of whether our purchase would be beneficial to us and our stockholders. Our bylaws provide that directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the outstanding shares of our capital stock then entitled to vote at an election of directors. This provision prevents stockholders from removing any incumbent director without cause. Our bylaws also provide that a stockholder must give us at least 120 days notice of a proposal or director nomination that such stockholder desires to present at any annual meeting or special meeting of stockholders. Such provision prevents a stockholder from making a proposal or director nomination at a stockholder meeting without us having advance notice of that proposal or director nomination. This could make a change in control more difficult by providing our directors with more time to prepare an opposition to a proposed change in control. -----END PRIVACY-ENHANCED MESSAGE-----