-----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, MljeHpEOp//ZADWO43qVP0T+vIdQvuuJIu4GIkIyWCWET8l05+jjQ+ni/u/EvgkS IJRI/hCINTwBAgcQaXKnzg== 0000950144-00-004285.txt : 20000331 0000950144-00-004285.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004285 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 588297 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 CYTRX CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ----------------- 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 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 24, 2000 was approximately $28.0 million. On March 24, 2000, there were 8,778,050 shares of the Registrant's common stock outstanding, exclusive of treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the CytRx Corporation Proxy Statement for the 2000 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS This Form 10-K and other statements issued or made from time to time by CytRx Corporation or its representatives contain statements which may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of CytRx Corporation and members of its management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements are included as Exhibit 99.1 to this Form 10-K and are hereby incorporated by reference. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. GENERAL CytRx Corporation, a Delaware corporation ("CytRx" or the "Company"), was incorporated in 1985 and is engaged in the development and commercialization of pharmaceutical-related products and services primarily involving human therapeutics focused on high-value critical-care therapies. The Company's primary focus is on FLOCOR(TM), initially being developed for the treatment of acute sickle cell crisis. CytRx plans to expand the development of FLOCOR to other vascular disorders such as shock and stroke over time. CytRx is also engaged in research or has technology available for license in the areas of infectious disease, gene delivery, vaccine adjuvants, and animal feed additives. See "Product Development". Certain financial information concerning the industry segments in which the Company operates can be found in Note 15 to the Company's Consolidated Financial Statements. RECENT DEVELOPMENTS Results of FLOCOR Phase III Trial. As more fully discussed under "Product Development - FLOCOR" below, on December 21, 1999, the Company reported results from its Phase III clinical study of FLOCOR for treatment of acute sickle cell crisis. Although the study did not demonstrate statistical significance in the primary endpoint, statistically significant and clinically important benefits associated with FLOCOR were observed in certain subgroups. In addition, among the entire patient population, treatment with FLOCOR resulted in a statistically significant increase in the percent of patients achieving resolution of their crisis. Based on these encouraging efficacy results and a good safety profile the Company's independent Data and Safety Monitoring Board (DSMB) and other thought leaders in the area of sickle cell disease have recommended that the Company continue with clinical development of FLOCOR in sickle cell disease. The Company intends to present the results of the Phase III trial at the National Sickle Cell Disease Meeting in Philadelphia on April 9 - 12. Prior to the announcement of the Phase III results, the Company had been discussing potential licensing arrangements for FLOCOR with third parties. Currently, CytRx is continuing these discussions and is seeking other possible licensees. The terms of any potential license are unknown at the present time and there is no assurance that such a license will be consummated. CytRx does not plan to begin additional clinical studies for FLOCOR until such a license is put in place or the Company raises additional capital. Current Financial Condition and Need for Additional Capital At December 31, 1999, the Company had net assets of $1,033,000 and working capital of $664,000,. During the first quarter of 2000, the Company terminated the services of twelve of its employees as part of its efforts to conserve its cash resources. See "Employees". The Company has further reduced its operations by suspending most of its technology development efforts requiring significant expenditures. 2 3 During the first quarter of 2000 CytRx reached agreement with certain of its trade creditors whereby an aggregate of $2.3 million of indebtedness was cancelled in exchange for the issuance of 937,592 shares of CytRx Common Stock and the granting of registration rights to such creditors. See Note 7 to the Company's Consolidated Financial Statements. Effective March 24, 2000, the Company entered into a Stock Purchase Agreement with certain investors (the "Investors") whereby the Investors agreed to purchase 800,000 shares of the Company's Common Stock for an aggregate purchase price of $1.8 million and the issuance of warrants to purchase an additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The Investors were granted registration rights for the shares issued to them and the shares underlying the warrants. In addition, the Investors will, upon effective registration of the shares, purchase an additional 286,000 shares at $2.25 per share and simultaneously receive an additional three-year warrant to purchase 143,000 shares at $2.25 per share. In lieu of these additional shares and warrants, the Investors have the option to purchase 429,000 shares at a price equal to 75% of a trailing average market price of the Company's Common Stock, as defined in the Stock Purchase Agreement. As discussed under "Product Development - Other Product Development Efforts", in March 2000 CytRx entered into an Evaluation Agreement for its Gene Delivery technology. CytRx is also pursuing the sale of its TiterMax research adjuvant as well as the license or sale of certain of its other technologies. There is no assurance that any such transactions will be consummated. Without an infusion of additional working capital from the sale of equity securities, license/sale of technology assets, or a combination of these, the Company has limited ability to advance its existing technologies. In addition, on March 14, 2000 the Company received correspondence from Nasdaq regarding the Company's failure, as of December 31, 1999, to satisfy certain quantitative criteria of the maintenance standards for listing its Common Stock with the Nasdaq National Market which provided the Company with ten business days to respond with its plan to bring the Company back into compliance with such criteria. The Company has responded within such time period and is awaiting further notice from Nasdaq as to whether Nasdaq intends to commence procedures to delist CytRx Common Stock from the Nasdaq National Market. See Exhibit 99.1 - "Our Common Stock May Be Delisted from the Nasdaq National Market". PRODUCT DEVELOPMENT FLOCOR General. CytRx's primary focus is on FLOCOR(TM), purified poloxamer 188, a novel, intra-vascular agent with pharmacological properties that can be characterized as rheologic, cytoprotective and anti-adhesive / anti-thrombotic. FLOCOR is an intravenous solution that has the unique property of improving micro-vascular blood flow. Extensive preclinical and clinical studies suggest FLOCOR may be of significant benefit in acute ischemic vascular disorders such as stroke, heart attack, and vaso-occlusive crisis of sickle cell disease. FLOCOR may also provide benefit in acute care situations such as circulatory shock and acute respiratory distress syndromes where its favorable effects on micro-vascular blood flow may improve recovery from widespread ischemic / reperfusion injury. The safety profile of FLOCOR is well established. It has been investigated in over 17 clinical studies representing administration to approximately 3,000 patients and healthy volunteers. FLOCOR for Sickle Cell Crisis. The Company believes FLOCOR has significant potential in treating a variety of vascular-occlusive diseases, however, CytRx has chosen vaso-occlusive crisis associated with sickle cell anemia as its first development priority. Sickle cell disease is a devestating disorder originating from an inherited abnormality of hemoglobin, the oxygen-carrying molecule in red blood cells. Under conditions of low blood oxygen, which is generally caused by dehydration or stress, the sickle cell victim's hemoglobin becomes rigid causing red blood to become rough, sticky and irregularly shaped, often looking like sickles, which gives the disease its name. Estimates place the number of persons suffering from sickle cell anemia in the U.S. at about 72,000, or roughly one in 400 African-Americans. It is also estimated that complications from sickle cell disease result in healthcare expenditures of from $1.0 to $1.5 billion annually in the U.S. 3 4 The most common problem sickle cell patients face is episodic pain (also referred to as vaso-occlusive crisis, or VOC). These episodes can last anywhere from days to weeks, and can vary significantly in their severity. The deformed sickle cells cannot easily flow through the smaller blood vessels of the body and tend to clump together, forming occlusions which impede blood flow. The occlusions deprive tissues of vital oxygen that can result in tissue death, inflammation and intense throbbing pain. Aside from causing considerable pain and suffering, these crisis episodes slowly destroy vital organs as they are deprived of oxygen. As a result, the life expectancy of sickle cell victims is about twenty years shorter than those without the disease. Patients suffering from sickle cell disease may experience several crisis episodes each year. Hospitalization is required when pain becomes too much to bear. There are about 75,000 hospital admissions annually to treat sickle cell patients undergoing acute vascular-occlusive crisis caused by the disease. On average, these patients require in-patient treatment for four to seven days. Currently there is no disease modifying treatment for acute crisis of sickle cell disease and treatment is limited to narcotics, fluids, and bed rest. FLOCOR's unique surface-active properties decrease blood viscosity and enable the rigid sickled cells to become more flexible, thus allowing easier passage of blood cells through narrow blood vessels. FLOCOR for Other Indications. CytRx believes that FLOCOR has the potential to be an effective treatment for other vascular-occlusive diseases such as heart attack and stroke. However, CytRx's current strategy is to focus its efforts and resources on gaining approval for the acute crisis of sickle cell anemia. Status of Clinical Trials. On December 21, 1999, the Company reported results from its Phase III clinical study of FLOCOR for treatment of acute sickle cell crisis. The study demonstrated treatment benefits in favor of FLOCOR, however, it did not achieve statistical significance in the primary study endpoint. After thorough review of the data, the Company and its clinical consultants believe that a key assumption concerning the length of crisis may have negatively affected the outcome of the primary endpoint. The study assumed (based on historical data and supported by physician experiences) that most patients would resolve their crisis within one week (168 hours). Accordingly, the study used that time period to collect data concerning the primary endpoint of crisis duration. Patients not resolving their crisis within this time frame were assigned a "default" value of 168 hours. In the final study results, less than 40% of patients treated with placebo and about 52% of patients treated with FLOCOR resolved their crisis within 168 hours. Thus, the majority of patients in the study were assigned the default value of 168 hours. Consequently, it was not possible to detect a statistical difference in the primary endpoint defined as duration of crisis. However, the study did detect a highly statistically significant and clinically meaningful treatment effect in duration of crisis in the subgroup of patients fifteen years of age and less (p = 0.01) and patients concurrently treated with hydroxyurea (p = 0.02). More importantly, across the entire study population 51.6 % of patients treated with FLOCOR achieved resolution of their crisis compared to 36.6 % of patients treated with placebo. This treatment effect was highly statistically significant (p = 0.02). The Phase III study also demonstrated that FLOCOR is well tolerated. Based on the outcome of the Phase III trial, CytRx management and key thought leaders in the area of sickle cell disease believe a second pivotal clinical trial is warranted to confirm the treatment benefits of FLOCOR. Orphan Drug Status. In June 1989, the FDA informed CytRx of its decision to grant RheothRx "Orphan Drug" designation for the treatment of sickle cell crisis and this designation applies to FLOCOR as well. The Orphan Drug Act of 1983, as amended, provides incentive to drug manufacturers to develop drugs for the treatment of rare diseases (e.g. diseases that affect less than 200,000 individuals in the United States, or diseases that affect more than 200,000 individuals in the United States). As a result of the designation of RheothRx/FLOCOR as an Orphan Drug, if the Company is the first manufacturer to obtain FDA approval to market FLOCOR for treatment of sickle cell crisis, the Company will obtain a seven-year period of marketing exclusivity beginning from the date of FLOCOR's approval. During this period, the FDA may not approve the same drug for the same use from another sponsor. Other Product Development Efforts CytRx also is focusing its efforts on the sale or license of its "non-FLOCOR" technologies and is conducting minimal product development activities in order to conserve its cash resources. There is no assurance that any such sale or license of the Company's technologies will be consummated. Gene Delivery -- CytRx has discovered and patented the use of certain poloxamers for gene delivery. The Company believes that its delivery system is as effective as conventional non-viral gene delivery systems such as cationic liposomes 4 5 but is significantly less toxic and is not metabolized. In addition, recent concern over the safety of viral gene delivery systems is likely to result in increased interest in non-viral delivery systems. CytRx believes there is potential use for this technology in (a) gene-based vaccines, (b) gene replacement therapy, and (c) ribozyme and anti-sense delivery. In January 2000, CytRx entered into an evaluation agreement with a major worldwide pharmaceutical company (the "Potential Licensee") for the purpose of enabling the Potential Licensee to evaluate this technology in a gene-based vaccine for HIV. The agreement provides the Potential Licensee a one year exclusive option to license the technology for use in the aforementioned vaccine. Pursuant to the agreement, CytRx will provide material and consulting services during the evaluation period in exchange for certain payments. The agreement also prevents either party from naming the other party in any public or private disclosure, except as each may be legally required. There is no assurance that any sale or license of the Company's gene delivery technology to the Potential Licensee will result from this agreement. Vaccine Adjuvants / Delivery Systems -- CytRx has discovered the use of certain non-ionic block copolymers (poloxamers) both alone and in a variety of emulsion systems as vaccine delivery systems - immunoadjuvants. The adjuvant-delivery systems have potential for use in both injectable and oral vaccines. Companies currently are evaluating the safety and efficacy of this technology for potential license under material transfer agreements. Anti-Microbial -- CRL-1072 is a highly purified poloxamer that has demonstrated potent activity against a wide range of infectious agents. In animal models of fatal Mycobacterium tuberculosis, Mycobacterium avium and Toxoplasmosis infection, CRL-1072 results in significantly improved survival rates. More importantly, the compound is active against drug resistant isolates of M.tuberculosis. CRL-1072 has also been shown to reduce viral load and viral reactivation in models of chronic hepatitis B infection. P-Glycoprotein Inhibitor -- CytRx has identified a series of novel inhibitors of the drug efflux pump P-glycoprotein. These compounds have potential therapeutic use as (a) chemosensitizers for drug resistant bacteria, (b) oral bioavailability enhancers for antibiotics or chemotherapeutics, and (c) chemosensitizers for drug resistant cancer. Animal Growth Promotant -- CytRx's growth promotant has been shown to have a consistent effect to improve the rate of weight gain and feed efficiency in well-controlled studies in poultry and swine. CytRx is currently seeking a partner to purchase or license this technology. Expenditures for research and development activities related to continuing operations were $12.8 million, $7.3 million and $3.6 million during the years ended December 31, 1999, 1998, and 1997, respectively. SUBSIDIARY OPERATIONS AND DIVESTITURES Titermax(TM) - CytRx manufactures, markets and distributes TiterMax, an adjuvant used to produce cell mediated and humoral responses in research animals. The keys to the potency of TiterMax lie in its immunostimulatory activity and the formation of stable water-in-oil emulsions. TiterMax aids in the antigen's effective presentation to the immune system without the toxic effects of other research adjuvants. Spectrum Recruitment Research - CytRx also has a small group of human resource professionals who, in addition to their services to the Company, provide recruiting services to third parties under the name of Spectrum Recruitment Research. Vaxcel, Inc. - In July 1999, CytRx terminated its license of its Optivax(R) vaccine adjuvant technology to Vaxcel due to Vaxcel's cessation of operations within the meaning of the license agreement. Concurrently with the termination of the Optivax license, all of Vaxcel's rights and obligations pursuant to its license of the Optivax technology to Corixa Corporation were assigned to CytRx. On June 2, 1999, CytRx entered into a Stock Acquisition Agreement with A-Z Professional Consultants, Inc. ("A-Z") for the sale of CytRx's equity interest in Vaxcel. The sale was consummated on September 9, 1999. Pursuant to the agreement, A-Z purchased 9,625,000 shares of common stock of Vaxcel from CytRx for a cash purchase price of $319,000. After consummation of this transaction, CytRx has no further equity interest in Vaxcel. 5 6 MANUFACTURING The Company requires three suppliers of materials or services to manufacture FLOCOR; (i) a supplier of the raw drug substance, (ii) a supplier of the purified drug which is refined from the raw drug substance and (iii) a manufacturer who can formulate and sterile fill the purified drug substance into the finished drug product. The raw drug substance is currently widely available at commercial scales from numerous manufacturers. The Company has not entered into a formal agreement with any supplier for the raw drug substance because of its wide availability. In August 1999, the Company entered into a long-term commercial supply contract with Organichem, Corp., located in Rennselaer, New York for production of the purified drug substance. There can be no assurance that the Company's relationship with such supplier will continue or that the Company will be able to obtain additional purified drug substance if the Company's current supply is inadequate. Such inability to obtain additional purified drug substance in amounts and at prices acceptable to the Company could have a material adverse effect on the Company's business. To meet the need for manufacture of the Company's finished drug product, the Company has entered into a supply agreement with the Hospital Products Division of Abbott Laboratories. The inability of the Company to maintain such relationship on terms acceptable to the Company could have a material adverse effect on the Company's business. If the Company modifies its manufacturing process or changes the source or location of product supply, regulatory authorities will require the Company to demonstrate that the material produced from the modified or new process or facility is equivalent to the material used in the Company's clinical trials. Further, any manufacturing facility and the quality control and manufacturing procedures used by the Company for the commercial supply of a product must comply with applicable Occupational Safety and Health Administration, Environmental Protection Agency, and FDA standards, including Good Manufacturing Practice regulations. See "Government Regulation". PATENTS AND PROPRIETARY TECHNOLOGY The Company actively seeks patent protection for its technologies, processes, uses, and ongoing improvements and considers its patents and other intellectual property to be critical to its business. FLOCOR Patent. On November 23, 1999 the U.S. Patent Office issued patent No. 5,990,241 "Polyoxypropylene/Polyoxyethylene Copolymers With Improved Biological Activity" to CytRx Corporation. The Company believes the issue of this patent provides important exclusivity since it contains composition of matter claims for "purified" poloxamer 188, the active ingredient in FLOCOR. The patent will remain in effect until July 8, 2017. The Company continually evaluates the patentability of new inventions and improvements developed by its employees and collaborators. Whenever appropriate, the Company will endeavor to file United States and international patent applications to protect these new inventions and improvements. However, there can be no assurance that any of the current pending patent applications or any new patent applications that may be filed will ever be issued in the United States or any other country. The Company also attempts to protect its proprietary products, processes and other information by relying on trade secrets and non-disclosure agreements with its employees, consultants and certain other persons who have access to such products, processes and information. Under the agreements, all inventions conceived by employees are the exclusive property of the Company. Nevertheless, there can be no assurance that these agreements will afford significant protection against misappropriation or unauthorized disclosure of the Company's trade secrets and confidential information. COMPETITION Many companies, including large pharmaceutical, chemical and biotechnology firms with financial resources, research and development staffs, and facilities that are substantially greater than those of the Company, are engaged in the research and development of pharmaceutical products that could compete with FLOCOR or other products under development by the Company. The industry is characterized by rapid technological advances and competitors may develop their products more rapidly and/or such products may be more effective than those under development by the Company or its licensees and corporate partners. The Company competes in this research and development environment by attempting to develop its products and technologies in an innovative and timely fashion that would provide the Company with an advantage in the licensing and/or marketing of its products and technologies. 6 7 GOVERNMENT REGULATION The marketing of pharmaceutical products requires the approval of the FDA and comparable regulatory authorities in foreign countries. The FDA has established guidelines and safety standards which apply to the pre-clinical evaluation, clinical testing, manufacture and marketing of pharmaceutical products. The process of obtaining FDA approval for a new therapeutic product (drug) generally takes several years and involves the expenditure of substantial resources. The steps required before such a product can be produced and marketed for human use in the United States include preclinical studies in animal models, the filing of an Investigational New Drug ("IND") application, human clinical trials and the submission and approval of an NDA. The NDA involves considerable data collection, verification and analysis, as well as the preparation of summaries of the manufacturing and testing processes, preclinical studies, and clinical trials. The FDA must approve the NDA before the drug may be marketed. There can be no assurance that the Company will be able to obtain the required FDA approvals for any of its products. The manufacturing facilities and processes for the Company's products, whether manufactured directly by the Company or by a third party, will be subject to rigorous regulation, including the need to comply with Federal Good Manufacturing Practice regulations. The Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Nuclear Energy and Radiation Control Act, the Toxic Substance Control Act and the Resource Conservation and Recovery Act. EMPLOYEES As of December 31, 1999, the Company had fifteen full-time and three part-time employees, nine of which were directly involved in the conduct of scientific or research and development activities for the Company. In the first quarter of 2000, CytRx terminated the services of twelve of its employees as part of its overall reduction in operations in order to conserve its cash resources. As of March 24, 2000, the Company has six full-time employees and utilizes the services of two former employees on a contract basis. ITEM 2. PROPERTIES The Company currently subleases laboratory and related space from Oread at 150 Technology Parkway, Norcross, Georgia, and leases administrative office space at 154 Technology Parkway, Norcross, Georgia. These facilities are in satisfactory condition and suitable for purposes of the Company's present operations. The Company has historically made use of contract lab facilities for additional research and development purposes. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol CYTR. The following table sets forth the high and low sale prices for the Common Stock for the periods indicated as reported by Nasdaq. Such prices represent prices between dealers without adjustment for retail mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. 7 8
High Low ------ ------- COMMON STOCK: 2000 January 1 to March 24 6 7/16 29/32 1999 Fourth Quarter 3 3/4 Third Quarter 3 1 7/8 Second Quarter 3 1/8 1 27/32 First Quarter 3 7/16 1 1998 Fourth Quarter 1 1/4 3/4 Third Quarter 2 1/8 29/32 Second Quarter 3 7/16 2 1/16 First Quarter 3 5/8 2 9/16
On March 24, 2000, the closing price of the Common Stock as reported on The Nasdaq Stock Market, was $3 1/4 and there were approximately 1,500 holders of record of the Company's Common Stock. The number of record holders does not reflect the number of beneficial owners of the Company's Common Stock for whom shares are held by brokerage firms and other institutions. On March 14, 2000 the Company received correspondence from Nasdaq regarding the Company's failure to satisfy certain quantitative criteria of the maintenance standards for listing its Common Stock with the Nasdaq National Market which provided the Company with ten business days to respond with its plan to bring the Company back into compliance with such criteria. If the Company is unable to satisfy such criteria or provide Nasdaq with an adequate plan to return to compliance, Nasdaq may commence delisting procedures. See Exhibit 99.1 - "Our Common Stock May Be Delisted from the Nasdaq National Market". The Company has not paid any dividends since its inception and does not contemplate payment of dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 -------------------------------------------------------------------------------- Statement of Operations Data: Revenues: Net product sales $ 499,987 $ 481,495 $ 456,029 $ 522,385 $ 512,528 Net service revenues 322,536 350,789 422,039 357,517 -- Interest and other income 1,068,924 1,762,747 1,381,306 1,558,914 1,990,506 -------------------------------------------------------------------------------- Total revenues 1,891,447 2,595,031 2,259,374 2,438,816 2,503,034 ================================================================================ Loss from continuing operations (14,989,433) (7,506,060) (4,426,292) (2,068,302) (9,273,777) Income (loss) from discontinued operations (39,858) 2,712,701 (1,626,700) (3,723,477) (1,378,805) Extraordinary item -- (325,120) -- -- -- -------------------------------------------------------------------------------- Net loss $(15,029,291) $ (5,118,479) $ (6,052,992) $ (5,791,779) $(10,652,582) ================================================================================ Basic and diluted loss per common share: Loss from continuing operations $ (1.96) $ (0.99) $ (0.60) $ (0.27) $ (1.17) Income (loss) from discontinued operations -- 0.36 (0.22) (0.48) (0.18) Extraordinary item -- (0.04) -- -- -- -------------------------------------------------------------------------------- Net loss $ (1.96) $ (0.67) $ (0.82) $ (0.75) $ (1.35) ================================================================================ Balance Sheet Data: Total assets $ 6,128,063 $ 16,641,568 $ 24,905,995 $ 24,299,322 $ 30,959,983 Long-term debt 650,000 -- -- -- -- Other long-term liabilities 1,693,638 -- -- -- -- Convertible debentures -- -- 2,000,000 -- -- Total stockholders' equity 1,032,688 14,688,548 19,248,395 22,337,734 29,770,485
8 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with Selected Financial Data and the audited Consolidated Financial Statements of the Company included in this report. Liquidity and Capital Resources At December 31, 1999, the Company had cash, cash equivalents and investments of $3.0 million and net assets of $1.0 million, compared to $15.3 million and $14.7 million, respectively, at December 31, 1998. The Company had working capital of $664,000 at December 31, 1999 compared to $13.7 million at December 31, 1998. During the first quarter of 2000, CytRx reached agreement with certain of its trade creditors whereby an aggregate of $2.3 million of indebtedness was cancelled in exchange for issuance of 937,592 shares of CytRx Common Stock and the granting of registration rights to such creditors. Effective March 24, 2000, the Company entered into a Stock Purchase Agreement with certain investors (the "Investors") whereby the Investors agreed to purchase 800,000 shares of the Company's Common Stock for an aggregate purchase price of $1.8 million and the issuance of warrants to purchase an additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The Investors were granted registration rights for the shares issued to them and the shares underlying the warrants. In addition, the Investors will, upon effective registration of the shares, purchase an additional 286,000 shares at $2.25 per share and simultaneously receive an additional three-year warrant to purchase 143,000 shares at $2.25 per share. In lieu of these additional shares and warrants, the Investors have the option to purchase 429,000 shares at a price equal to 75% of a trailing average market price of the Company's Common Stock, as defined in the Stock Purchase Agreement. The Company will require additional funds to finance operations and currently is seeking private or public equity investments and future collaborative arrangements with third parties to meet such needs. The Company's ability to obtain future financings through joint ventures, product licensing arrangements, equity financings or otherwise is subject to market conditions and the Company's ability to identify parties that are willing and able to enter into such arrangements on terms that are satisfactory to the Company. There is no assurance that such funding will be available for the Company to finance its operations on acceptable terms, if at all. Insufficient funding may require the Company to delay, reduce or eliminate some or all of its research and development activities, planned clinical trials and administrative programs. The Company's future expenditures and capital requirements depend on numerous factors including the progress and focus of its research and development programs, the progress and results of pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, the ability of the Company to establish collaborative arrangements, the initiation of commercialization activities, the purchase of capital equipment and the availability of other financing. At December 31, 1999 the Company and its subsidiaries had net operating loss carryforwards for income tax purposes of approximately $53.1 million, which will expire in 2000 through 2019 if not utilized. The Company also has research and development tax credits and orphan drug tax credits available to reduce income taxes, if any, of approximately $6.3 million which will expire in 2000 through 2014 if not utilized. Based on an assessment of all available evidence including, but not limited to, the Company's limited operating history and lack of profitability, uncertainties of the commercial viability of the Company's technology, the impact of government regulation and healthcare reform initiatives, and other risks normally associated with biotechnology companies, the Company has concluded that it is more likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a 100% deferred tax valuation allowance has been recorded against these assets. Results of Operations The Company recorded a net loss of $15,029,000 for the year ended December 31, 1999 as compared to net losses of $5,118,000 for 1998 and $6,053,000 for 1997. Loss from continuing operations before extraordinary items was $14,989,000, $7,506,000 and $4,426,000 in 1999, 1998 and 1997, respectively. 9 10 Net product sales from continuing operations, which consist primarily of sales of TiterMax research adjuvant, were $500,000 in 1999, $481,000 in 1998 and $456,000 in 1997. Cost of product sales was $45,000 in 1999, $36,000 in 1998 and $40,000 in 1997, or 9%, 7% and 9% of net product sales, respectively. The Company also markets the services of its small group of human resource professionals to third parties under the name of Spectrum Recruitment Research ("Spectrum") as a way of offsetting the Company's cost of maintaining this function. Net service revenues from continuing operations related to Spectrum were $323,000 in 1999, $351,000 in 1998 and $422,000 in 1997. Cost of service revenues was $240,000 in 1999, $187,000 in 1998 and $242,000 in 1997, or 74%, 53% and 57% of net service revenues, respectively. Interest income from continuing operations was $463,000 in 1999 as compared to $1,007,000 in 1998 and $752,000 in 1997. The variances between years is attributable to fluctuating cash and investment balances. Collaborative, grant and license fee income was $464,000 in 1999 versus $511,000 in 1998 and $94,000 in 1997. The increase during 1998 and 1999 is due to a $445,000 grant from the U.S. Food and Drug Administration's Division of Orphan Drug Development to support CytRx's Phase III clinical trial of FLOCOR, as well as certain additional Small Business Innovative Research (SBIR) grants for the Company's additional research programs. Other income was $142,000, $244,000 and $535,000 in 1999, 1998 and 1997, respectively, and primarily relates to subrental fees to certain third parties, as well as administrative and facilities costs allocated by CytRx to its discontinued subsidiaries. The related costs are included in selling, general and administrative expenses. The decrease during the three year period is reflective of the discontinuance of the Proceutics and CytRx Animal Health operations in early 1998 and Vaxcel during 1999. Research and development expenditures from continuing operations during 1999 were $12,812,000 versus $7,306,000 in 1998 and $3,605,000 in 1997. Research and development expenditures have increased during the three year period primarily as a result of the Company's development activities for FLOCOR. The Company's pivotal Phase III trial of FLOCOR for treatment of acute sickle cell crisis, which was initiated in March 1998 was completed in December 1999. During 1999 the Company also continued its Phase I trial of FLOCOR for treatment of Acute Chest Syndrome in sickle cell patients and initiated two additional clinical trials of FLOCOR - a Phase III study investigated repeat use of FLOCOR in patients with acute sickle cell crisis and a Phase I/II study for treatment of Acute Lung Injury. Selling, general and administrative expenses from continuing operations during 1999 were $3,784,000 as compared to $2,527,000 in 1998 and $2,505,000 in 1997. The increase from 1998 to 1999 is primarily due to $1,044,000 of non-cash charges related to issuance of stock warrants to certain consultants and certain vesting events for management stock options. Interest expense was $0, $46,000 and $293,000 in 1999, 1998 and 1997, respectively. Included in the 1997 amount is $265,000 related to the beneficial conversion feature of $2,000,000 of convertible notes issued in 1997. (See Note 5 to Financial Statements.) The extraordinary loss in 1998 relates to the early extinguishment of 6% convertible notes which resulted in payment of premiums of $150,000 and expensing of capitalized debt issuance costs of $175,000. Discontinued Operations - Net income (loss) from the discontinued operations of Proceutics, CytRx Animal Health and Vaxcel (net of minority interest) was $(40,000), $2,713,000 and $(1,627,000) in 1999, 1998 and 1997. The following table presents the breakdown of net income (loss) from discontinued operations (see Notes 13 and 15 to Financial Statements). 10 11
1999 1998 1997 ------------ ------------ ------------ Proceutics: Gain on sale of business $ -- $ 782,000 $ -- Gain on sale of real estate -- 434,000 -- Operations -- 171,000 (138,000) ------------ ------------ ------------ -- 1,387,000 (138,000) CytRx Animal Health: Gain on sale of business -- 6,230,000 -- Operations -- (585,000) 868,000 ------------ ------------ ------------ -- 5,645,000 868,000 Vaxcel: Impairment loss -- (3,213,000) -- Operations (44,000) (1,721,000) (2,599,000) Minority interest 4,000 615,000 242,000 ------------ ------------ ------------ (40,000) (4,319,000) (2,357,000) ------------ ------------ ------------ Net income (loss) from discontinued operations $ (40,000) $ 2,713,000 $ (1,627,000) ============ ============ ============
Inflation - Management believes that inflation had no material impact on the Company's operations during the three year period ended December 31, 1999. Impact of Year 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed less than $25,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters are addressed promptly. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments that are sensitive to changes in interest rates are its investments. As of December 31, 1999, the Company held no investments other than amounts invested in money market accounts. The Company is not subject to any other material market risks. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplemental schedule of the Company and the notes thereto as of December 31, 1999 and 1998, and for each of the three years ended December 31, 1999, together with the independent auditors' report thereon, are set forth on pages F-1 to F-16 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to this item is incorporated herein by reference from the Proxy Statement. 11 12 ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item is incorporated herein by reference from the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item is incorporated herein by reference from the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS 10-K: (1) Financial Statements The consolidated financial statements of the Company and the related report of independent auditors thereon are set forth on pages F-1 to F-15 of this Annual Report on Form 10-K. These consolidated financial statements are as follows: Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Report of Independent Auditors (2) Financial Statement Schedules The following financial statement schedule is set forth on page F-16 of this Annual Report on Form 10-K. Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and 1997 All other schedules are omitted because they are not required, not applicable, or the information is provided in the financial statements or notes thereto. (3) Exhibits See Exhibit Index on page 13 of this Annual Report on Form 10-K. (b) REPORTS ON FORM 8-K None. 12 13 CYTRX CORPORATION FORM 10-K EXHIBIT INDEX
Exhibit Number ------ 3.1 Certificate of Incorporation (a) 3.2 By-Laws (b) 4.1 Shareholder Protection Rights Agreement dated April 16, 1997 between CytRx Corporation and American Stock Transfer & Trust Company as Rights Agent (c) 10.1 Agreement with Emory University, as amended (d) 10.2 Agreement with BASF Corporation, as amended (d) 10.3* Amended and Restated Employment Agreement between CytRx Corporation and Jack J. Luchese 10.4* Amended and Restated Change of Control Employment Agreement between CytRx Corporation and Jack J. Luchese 10.7* 1986 Stock Option Plan, as amended and restated (f) 10.8* 1994 Stock Option Plan, as amended and restated (e) 10.9* 1995 Stock Option Plan (g) 10.10* 1998 Long-Term Incentive Plan (h) 10.11 Purchase and Sale Agreement dated February 23, 1998 by and between CytRx Corporation and Alexandria Real Estate Equities, Inc. (h) 10.12 Common Stock Purchase Agreement dated March 24, 2000 by and between CytRx Corporation and the Investors Signatory Thereto 23.1 Consent of Ernst & Young LLP 27.1 Financial Data Schedule (for SEC use only). 99.1 Safe Harbor Compliance Statement for Forward-looking Statements
* Indicates a management contract or compensatory plan or arrangement. - --------- (a) Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 333-39607) filed on November 5, 1997. (b) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-37171) filed on July 21, 1997. (c) Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 21, 1997. (d) Incorporated by reference to the Registrant's Registration Statement on Form S-l (File No. 33-8390) filed on November 5, 1986. (e) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1997. (f) Incorporated by reference to the Registrant's Annual Report on Form 10-K filed on March 27, 1996. (g) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-93818) filed on June 22, 1995. (h) Incorporated by reference to the Registrant's Annual Report on Form 10-K filed on March 30, 1998. 13 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CYTRX CORPORATION By: /s/ Jack J. Luchese ----------------------------------------- Jack J. Luchese, President Date: March 29, 2000 and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Jack L. Bowman Director March 29, 2000 - ------------------------------------ Jack L. Bowman /s/ Raymond C. Carnahan, Jr. Director March 29, 2000 - ------------------------------------ Raymond C. Carnahan, Jr. /s/ Lyle A. Hohnke Director March 29, 2000 - --------------------------- Lyle A. Hohnke /s/ Max Link Chairman of the March 29, 2000 - ------------------------------------ Board of Directors Max Link /s/ Jack J. Luchese Director March 29, 2000 - ------------------------------------ Jack J. Luchese President and Chief Executive Officer (Principal Executive Officer) /s/ Herbert H. McDade, Jr. Director March 29, 2000 - ------------------------------------ Herbert H. McDade, Jr. /s/ Mark W. Reynolds VP, Finance March 29, 2000 - ------------------------------------ (Principal Financial Officer) Mark W. Reynolds
14 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 16 CYTRX CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,031,893 $ 8,855,375 Short-term investments -- 6,417,066 Accounts receivable 174,292 83,249 Note receivable -- 300,000 Inventories 6,480 10,935 Other current assets 202,610 10,377 ------------ ------------ Total current assets 3,415,275 15,677,002 Property and equipment, net 2,641,810 195,030 Other assets: Acquired developed technology, net -- 600,000 Other assets 70,978 169,536 ------------ ------------ Total other assets 70,978 769,536 ------------ ------------ Total assets $ 6,128,063 $ 16,641,568 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 629,738 $ 540,089 Accrued expenses and other current liabilities 2,121,999 1,409,034 ------------ ------------ Total current liabilities 2,751,737 1,949,123 Long-term debt 650,000 -- Other long-term liabilities 1,693,638 -- Minority interest in Vaxcel, Inc. -- 3,897 Commitments Stockholders' equity: Preferred Stock, $.01 par value, 1,000 shares authorized, including 1,000 shares of Series A Junior Participating Preferred Stock; no shares issued and outstanding -- -- Common stock, $.001 par value, 18,750,000 shares authorized; 8,373,853 and 8,236,926 shares issued at December 31, 1999 and 1998, respectively 8,374 8,237 Additional paid-in capital 67,805,871 66,423,577 Treasury stock, at cost (633,816 and 625,816 shares held at December 31, 1999 and 1998, respectively) (2,279,238) (2,270,238) Accumulated deficit (64,502,319) (49,473,028) ------------ ------------ Total stockholders' equity 1,032,688 14,688,548 ------------ ------------ Total liabilities and stockholders' equity $ 6,128,063 $ 16,641,568 ============ ============
See accompanying notes. F-2 17 CYTRX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Revenues: Net product sales $ 499,987 $ 481,495 $ 456,029 Net service revenues 322,536 350,789 422,039 Interest income 462,634 1,007,019 751,526 Grant revenue 464,442 511,375 94,477 Other 141,848 244,353 535,303 ------------ ------------ ------------ 1,891,447 2,595,031 2,259,374 Expenses: Cost of product sales 45,375 35,749 39,941 Cost of service revenues 239,840 187,047 242,343 Research and development 12,811,925 7,305,835 3,605,408 Selling, general and administrative 3,783,740 2,526,572 2,504,926 Interest -- 45,888 293,048 ------------ ------------ ------------ 16,880,880 10,101,091 6,685,666 ------------ ------------ ------------ Loss from continuing operations before extraordinary item (14,989,433) (7,506,060) (4,426,292) Income (loss) from discontinued operations (43,755) 2,098,116 (1,869,187) Minority interest in discontinued operations (3,897) (614,585) (242,487) ------------ ------------ ------------ Loss before extraordinary item (15,029,291) (4,793,359) (6,052,992) Extraordinary item: Loss on early extinguishment of debt -- (325,120) -- ------------ ------------ ------------ Net loss $(15,029,291) $ (5,118,479) $ (6,052,992) ============ ============ ============ Basic and diluted income (loss) per common share: Continuing operations $ (1.96) $ (0.99) $ (0.60) Discontinued operations -- 0.36 (0.22) Extraordinary item -- (0.04) -- ------------ ------------ ------------ Net loss $ (1.96) $ (0.67) $ (0.82) ============ ============ ============ Basic and diluted weighted average shares outstanding 7,652,227 7,625,578 7,424,372
See accompanying notes. F-3 18 CYTRX CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ------------------------ Additional Shares Paid-in Accumulated Treasury Issued Amount Capital Deficit Stock Total ------------------------------------------------------------------------------------- Balance at December 31, 1996 7,945,203 $ 7,945 $ 62,653,015 $(38,301,557) $ (2,021,669) $ 22,337,734 Issuance of common stock 41,238 41 169,373 -- -- 169,414 Purchase of treasury stock -- -- -- -- (176,864) (176,864) Unrealized gain on sale of shares of subsidiary -- -- 2,706,397 -- -- 2,706,397 Beneficial conversion feature of convertible debentures -- -- 264,706 -- -- 264,706 Net loss -- -- -- (6,052,992) -- (6,052,992) ------------------------------------------------------------------------------------- Balance at December 31, 1997 7,986,441 7,986 65,793,491 (44,354,549) (2,198,533) 19,248,395 Issuance of common stock 250,485 251 630,086 -- -- 630,337 Purchase of treasury stock -- -- -- -- (71,705) (71,705) Net loss -- -- -- (5,118,479) -- (5,118,479) ------------------------------------------------------------------------------------- Balance at December 31, 1998 8,236,926 8,237 66,423,577 (49,473,028) (2,270,238) 14,688,548 Issuance of common stock 136,927 137 339,078 -- -- 339,215 Issuance of stock options/warrants -- -- 1,043,216 -- -- 1,043,216 Purchase of treasury stock -- -- -- -- (9,000) (9,000) Net loss -- -- -- (15,029,291) -- (15,029,291) ------------------------------------------------------------------------------------- Balance at December 31, 1999 8,373,853 $ 8,374 $ 67,805,871 $(64,502,319) $ (2,279,238) $ 1,032,688 =====================================================================================
See accompanying notes. F-4 19 CYTRX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net loss $(15,029,291) $ (5,118,479) $ (6,052,992) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 68,377 216,811 607,349 Amortization -- 282,732 145,644 Gain on sales of subsidiary operations (240,196) (7,012,305) -- Gain on sale of real estate -- (433,786) -- Charge for acquired incomplete research and development -- -- 951,017 Charge for beneficial conversion feature of convertible debentures -- -- 264,706 Impairment loss (discontinued operations) -- 3,212,615 -- Extraordinary loss on early extinguishment of debt -- 325,120 -- Minority interest in net loss of subsidiary (3,897) (614,585) (242,487) Stock option expense 1,043,216 -- -- Changes in assets and liabilities: Receivables (91,043) 1,082,390 (979,874) Inventories 4,455 1,037,197 (2,263,290) Notes receivable 300,000 100,000 -- Other assets (93,675) 98,545 537,902 Accounts payable 546,019 208,884 640,383 Unearned revenue -- 172,380 (85,005) Other liabilities 1,950,233 (495,323) 382,053 ------------ ------------ ------------ Total adjustments 3,483,489 (1,819,325) (41,602) ------------ ------------ ------------ Net cash used in operating activities (11,545,802) (6,937,804) (6,094,594) Cash flows from investing activities: Purchases of held-to-maturity securities -- (6,417,066) (22,103,140) Maturities of held-to-maturity securities 6,417,066 -- 32,399,348 Decrease in long-term investments -- 5,326,647 -- Net proceeds from sales of subsidiary operations 240,196 8,336,985 -- Net proceeds from sale of technology 600,000 -- -- Net proceeds from sale of real estate -- 4,260,747 -- Net cash paid for acquisition -- -- (1,257,974) Capital expenditures, net (2,515,157) (13,317) (273,755) ------------ ------------ ------------ Net cash provided by investing activities 4,742,105 11,493,996 8,764,479 Cash flows from financing activities: Net proceeds from issuance of common stock 339,215 125,880 169,414 Redemption of debt -- (1,650,000) -- Purchase of treasury stock (9,000) (71,705) (176,864) Proceeds from issuance of debt, net of issuance costs 650,000 -- 1,803,366 ------------ ------------ ------------ Net cash provided by (used in) financing activities 980,215 (1,595,825) 1,795,916 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (5,823,482) 2,960,367 4,465,801 Cash and cash equivalents at beginning of year 8,855,375 5,895,008 1,429,207 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 3,031,893 $ 8,855,375 $ 5,895,008 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ -- $ 45,888 $ 23,342 ============ ============ ============
See accompanying notes F-5 20 CYTRX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Need for Additional Capital CytRx Corporation ("CytRx" or "the Company") is a biopharmaceutical company engaged in the development and commercialization of high-value human therapeutics. The Company's current research and development focus is on vascular-occlusive disorders. CytRx also has a research pipeline with opportunities in the areas of acute respiratory disorders, infectious disease, gene and drug delivery, vaccines, and animal feed additives. The Company's product sales from continuing operations include sales of TiterMax research adjuvant. TiterMax is currently sold worldwide through both distributor and direct channels. The Company also markets the services of its small group of human resources professionals under the name of Spectrum Recruitment Research ("Spectrum") as a way of offsetting the Company's cost of maintaining this function. Spectrum's services are marketed primarily within metropolitan Atlanta, Georgia. The Company's operational focus is on the development and commercialization of pharmaceutical products; the TiterMax and Spectrum operations were formed as ancillary activities. At December 31, 1999, the Company had net assets of $1,033,000 and working capital of $664,000. During the first quarter of 2000, the Company terminated the services of twelve of its employees as part of its efforts to conserve its cash resources and has further reduced its operations by suspending most of its technology development efforts requiring significant expenditures. The Company has incurred losses from operations since inception, and the ongoing ability of the Company to operate as a going concern with the current portfolio of technologies under development will be determined by the results of technology licensing efforts and/or the actual proceeds of any fund-raising activities. If the Company is unable to raise significant additional funds, it will be limited in its ability to advance its technologies under development. During the first quarter of 2000, the Company took certain steps to improve its financial condition (see Notes 7 and 16). The Company believes that the proceeds of these transactions will allow the Company to operate throughout the remainder of 2000, but that additional funds will be needed to significantly advance any of the Company's technologies under development. 2. Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of CytRx together with those of its majority-owned subsidiaries. As more thoroughly discussed in Note 13, the operations of Proceutics, Inc. ("Proceutics"), CytRx Animal Health, Inc. ("CytRx Animal Health") (formerly VetLife, Inc.), and Vaxcel, Inc. ("Vaxcel") are presented as discontinued operations for all periods presented. Cash Equivalents - The Company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents consist primarily of commercial paper and amounts invested in money market accounts. Investments - Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of stockholders' equity. Realized gains and losses are included in investment income and are determined on a first-in, first-out basis (see Note 3). F-6 21 Fair Value of Financial Instruments - The carrying amounts reported in the balance sheet for cash and cash equivalents, investments, accounts receivable, notes receivable and accounts payable approximate their fair values. The carrying amount reported in the balance sheet for long-term debt approximates its fair value. The fair value of such long-term debt is estimated using discounted cash flow analyses based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. Inventories - Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Property and Equipment - Property and equipment are stated at cost and depreciated using the straight-line method based on the estimated useful lives (five years for equipment and furniture) of the related assets. Leasehold improvements are amortized over the term of the related lease or other contractual arrangement. As of December 31, 1999, the Company had capitalized approximately $2.5 million of equipment and leasehold improvements which were not placed in service as of that date. Acquired Developed Technology and Other Intangibles - Acquired developed technology and other intangible assets, primarily goodwill, (see Note 13) are amortized over their estimated useful lives (fifteen years) on a straight-line basis. Management continuously monitors and evaluates the realizability of recorded acquired developed technology and other intangible assets to determine whether their carrying values have been impaired. In accordance with Financial Accounting Standards Board ("FASB") Statement No. 121, Accounting for the Impairment of Long-Lived Assets, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Any impairment loss is measured by comparing the fair value of the asset to its carrying amount. As more fully discussed in Note 13, during 1998 management evaluated these assets and recorded a provision for impairment of such assets. Patents and Patent Application Costs - Although the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived therefrom is uncertain. Patent costs are therefore expensed rather than capitalized. Accrued Expenses and Other Liabilities - Accrued expenses and other liabilities at December 31 are summarized below (in thousands). The headings correspond to the captions on the accompanying Balance Sheet.
Accrued Expenses and Other Current Liabilities Other Long-Term Liabilities -------------------------- --------------------------- 1999 1998 1999 1998 -------- -------- -------- ------ Clinical research activities $ 631 $ 455 $ 966 $ -- Scientific and regulatory activities 564 83 460 -- Chemical plant construction 146 -- 228 -- Deferred revenue 233 261 -- -- Employee incentives & severance 233 142 -- -- Other miscellaneous 315 468 40 -- -------- -------- -------- ------ Total $ 2,122 $ 1,409 $ 1,694 $ -- ======== ======== ======== ======
Basic and Diluted Loss per Common Share - Basic and diluted loss per share are computed based on the weighted average number of common shares outstanding. Common share equivalents (which may consist of options and warrants) are excluded from the computation of diluted loss per share since the effect would be antidilutive. Shares Reserved for Future Issuance - As of December 31, 1999, the Company has reserved approximately 3,200,000 of its authorized but unissued shares of common stock for future issuance pursuant to stock options and warrants and employee benefit plans. Revenue Recognition - Sales are recognized at the time products are shipped or services rendered. The Company does not require collateral or other securities for sales made on credit. Revenues from collaborative research arrangements and grants are generally recorded as the related costs are incurred. The costs incurred under such arrangements approximated the revenues reported in the accompanying statements of operations. F-7 22 Sale of Stock by a Subsidiary - The Company does not recognize gains on the sale of previously unissued stock of subsidiaries when there are significant uncertainties regarding the Company's ability to ultimately realize its investment in the subsidiary. Such gains are reflected as additional paid-in capital in the Company's consolidated financial statements. Stock-based Compensation - The Company grants stock options and warrants for a fixed number of shares to key employees and directors with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option grants and warrants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and, accordingly, recognizes no compensation expense for the stock option grants and warrants for which the terms are fixed. For stock option grants and warrants which vest based on certain corporate performance criteria, compensation expense is recognized to the extent that the quoted market price per share exceeds the exercise price on the date such criteria are achieved or are probable. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation ("Statement 123"), which provides an alternative to APB 25 in accounting for stock-based compensation issued to employees. However, the Company has continued to account for stock-based compensation in accordance with APB 25 (See Note 9). The Company has also granted stock options and warrants to certain consultants and other third parties. Stock options and warrants granted to consultants and other third parties are valued at the fair market value of the options and warrants granted or the services received, whichever is more reliably measurable. Expense is recognized in the period in which the services are received. Concentrations of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains cash and cash equivalents in large well-capitalized financial institutions and the Company's investment policy disallows investment in any debt securities rated less than "investment-grade" by national ratings services. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Segment Information - Effective January 1, 1998, the Company adopted FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 superceded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. See Note 15. 3. Investments At December 31, 1999, the Company held no investments. At December 31, 1998, the Company had classified all of its investments (consisting entirely of corporate debt securities) as held-to-maturity, of which $8,457,000 and $6,417,000 were included in cash and cash equivalents and short-term investments, respectively, in the accompanying consolidated balance sheets. Investments held at December 31, 1998 are summarized below (in thousands):
1998 -------- Cost $ 14,874 Gross Unrealized Gains 3 Gross Unrealized Losses (38) -------- Fair Market Value $ 14,839 ========
4. Property and Equipment Property and equipment at December 31 consist of the following (in thousands):
1999 1998 -------- -------- Equipment and furnishings $ 2,200 $ 799 Leasehold improvements 969 -- -------- -------- 3,169 799 Less accumulated depreciation (527) (604) --------- -------- $ 2,642 $ 195 ======== ========
F-8 23 5. 6% Convertible Debentures In October 1997, the Company privately placed with certain investors $2,000,000 of convertible notes (the "Debentures") with an original maturity of October, 2001. The Debentures were convertible on and after December 31, 1997 into shares of CytRx Common Stock at a price of the lesser of (a) 85% of the average closing bid price for the 10 days preceding the conversion, or (b) $5.68 per share. Such beneficial conversion feature was determined to have a fair value of $265,000 at the date of issuance and was amortized to interest expense from the date of issuance through the date the Debentures first became convertible. The Debentures were sold at par and bore interest at a rate of 6% per annum. The provisions for conversion of the Debentures allowed the Company, at its discretion, to disallow conversions below $4.00 per share by redeeming the amount attempted to be converted at a 10% premium. Also, in connection with the issuance of the Debentures, the investors were issued two-year warrants to purchase 40,000 shares of CytRx Common Stock at an exercise price of $5.68. The fair value of such warrants was determined to be insignificant. The warrants expired unexercised in 1999. In February and March 1998, $500,000 of the Debentures were converted into 204,104 shares of common stock. In February and May 1998, $1,500,000 of the Debentures were redeemed by the Company and total redemption premiums of $150,000 were paid. In addition, $175,000 of previously capitalized debt issue costs were expensed. The redemption premiums and debt issue costs ($325,000 total) are reflected as an extraordinary item in the statement of operations as loss on early extinguishment of debt. At December 31, 1998 and 1999 there were no remaining outstanding Debentures. 6. Long Term Debt In June 1999, the Company entered into a Purchase Agreement for the design and construction of manufacturing equipment for commercial production of FLOCOR(TM). The Purchase Agreement called for, among other things, certain progress payments to be made, with the final payment of $650,000 due 18 months after installation of the equipment or 12 months after FDA approval of FLOCOR(TM) (the "Note"). The Note bears interest of 12% annually, payable monthly beginning in the first month after installation of the equipment. CytRx accepted installed delivery of the equipment in February 2000; the Note is reflected in the accompanying Balance Sheet as Long Term Debt. In February 2000, the Note was cancelled in exchange for a cash payment of $200,000 and the issuance of Common Stock (see Note 7). 7. Exchange of Common Stock for Cancellation of Accounts Payable, Accrued Expenses and Debt During the first quarter of 2000, the Company reached agreements with certain of its trade creditors whereby an aggregate of $1,894,000 of trade payables was cancelled in exchange for issuance of approximately 758,000 shares of CytRx Common Stock. Of this amount, $1,694,000 existed at December 31, 1999, and has accordingly been classified as long-term liabilities on the accompanying Balance Sheet. The Company also cancelled $650,000 of long-term debt (see Note 6) in exchange for a cash payment of $200,000 and the issuance of 180,000 shares of CytRx Common Stock. 8. Commitments and Contingencies Rental expense from continuing operations under operating leases during 1999, 1998 and 1997 approximated $212,000, $154,000 and $13,000, respectively. Minimum annual future obligations for operating leases are $160,000, $165,000, $171,000, $178,000, $185,000 and $678,000 in 2000, 2001, 2002, 2003, 2004 and 2005 and beyond, respectively. Aggregate minimum future subrentals the Company expects to receive under noncancellable subleases total approximately $43,000 at December 31, 1999. 9. Stock Options and Warrants CytRx has stock option plans pursuant to which certain key employees and directors are eligible to receive incentive and/or nonqualified stock options to purchase shares of CytRx's common stock. The options granted under the plans generally become exercisable over a three year period from the dates of grant and have lives of ten years. Certain options granted to the Company's executive officers and others contain alternative or additional vesting provisions based on the achievement of corporate objectives. Additionally, the Company has granted warrants to purchase shares of the Company's common stock to its President and Chief Executive Officer subject to vesting criteria as set forth in his warrant agreements; such warrants have lives of ten years from the dates of grant. Exercise prices of all options and warrants for employees and F-9 24 directors are set at the fair market values of the common stock on the dates of grant. During 1998, the Company repriced all outstanding options held by current employees to the then current market value. No compensation expense was recorded for employees or directors for the three years ended December 31, 1998; however, during 1999 the vesting criteria for 680,238 options and warrants was achieved, resulting in $689,000 of compensation expense which was recorded in the first quarter of 1999. During 1999, services were received in exchange for options and warrants issued to certain consultants. Aggregate non-cash charges of $355,000 were recognized in 1999 for the services received. A summary of the Company's stock option and warrant activity and related information for the years ended December 31 is shown below.
Options and Warrants Weighted Average Exercise Price ---------------------------------------- ------------------------------------ 1999 1998 1997 1999 1998 1997 ------------ ------------ ------------ ---------- ------------ -------- Outstanding - beginning of year 2,258,308 1,439,297 1,237,031 $ 1.17 $ 4.87 $ 5.00 Granted 961,750 902,488 221,700 2.25 2.65 4.35 Exercised (12,103) -- -- 1.00 -- -- Forfeited (70,103) (83,477) (19,434) 5.91 4.37 6.64 Expired -- -- -- -- -- -- ---------- ---------- ---------- Outstanding - end of year 3,137,852 2,258,308 1,439,297 $ 1.43 $ 1.17 $ 4.87 ========== ========== ========== Exercisable at end of year 2,170,107 1,104,620 940,541 $ 1.25 $ 1.33 $ 5.22 Weighted average fair value of options and warrants granted during the year: $ 1.59 $ 2.30 $ 3.97
The following table summarizes additional information concerning options and warrants outstanding and exercisable at December 31, 1999:
Options Outstanding Options Exercisable -------------------------------------------------------------------- ------------------------------ Weighted Average Remaining Weighted Number Weighted Range of Contractual Average Of Shares Average Exercise Prices Number of Shares Life (years) Exercise Price Exercisable Exercise Price ---------------- ---------------- ------------ -------------- ----------- -------------- $ 1.00 2,126,102 6.3 $ 1.00 1,830,107 $ 1.00 2.13 - 2.75 999,250 6.9 2.27 332,500 2.50 7.75 12,500 5.2 7.75 7,500 7.75 ---------- -------- 3,137,852 6.5 1.43 2,170,107 1.25 ========== =========
The Company has elected to follow APB 25 and related Interpretations in accounting for employee stock options and warrants because, as discussed below, the alternative fair value accounting provided for under Statement 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Pro forma information regarding net loss and loss per share is required by Statement 123, which also requires that the information be determined as if the Company had accounted for employee stock options granted and warrants issued subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for the Company's options and warrants to employees was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
1999 1998 1997 ------ ------ ------ Weighted average risk free interest 6.27% 5.64% 6.22% rate Dividend yields 0% 0% 0% Volatility factors of the expected market price of the Company's common stock 1.046 1.026 1.055 Weighted average life of the option 8 8 8 (years)
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-10 25 For purposes of pro forma disclosures, the estimated fair value of the employee options and warrants is amortized to expense over the options' vesting periods. The Company's pro forma information is as follows (in thousands, except per share data):
1999 1998 1997 -------- -------- ------ Pro forma net loss $(16,505) $ (6,521) $ (6,969) Pro forma net loss per share (basic and diluted) $ (2.16) $ (.86) $ (.94)
10. Shareholder Protection Rights Plan Effective April 16, 1997, the Company's Board of Directors declared a distribution of one Right for each outstanding share of the Company's common stock to stockholders of record at the close of business on May 15, 1997 and for each share of common stock issued by the Company therafter and prior to a Flip-in Date (as defined below). Each Right entitles the registered holder to purchase from the Company one-ten thousandth (1/10,000th) of a share of Series A Junior Participating Preferred Stock, at an exercise price of $30. The Rights are generally not exercisable until 10 business days after an announcement by the Company that a person or group of affiliated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the Company's then outstanding shares of common stock (a "Flip-in Date"). In the event the Rights become exercisable as a result of the acquisition of shares, each Right will enable the owner, other than the Acquiring Person, to purchase at the Right's then current exercise price a number of shares of common stock with a market value equal to twice the exercise price. In addition, unless the Acquiring Person owns more than 50% of the outstanding shares of common stock, the Board of Directors may elect to exchange all outstanding Rights (other than those owned by such Acquiring Person) at an exchange ratio of one share of common stock per Right. All Rights that are owned by any person on or after the date such person becomes an Acquiring Person will be null and void. The Rights have been distributed to protect the Company's stockholders from coercive or abusive takeover tactics and to give the Board of Directors more negotiating leverage in dealing with prospective acquirors. 11. Retirement Plan The Company maintains a defined contribution retirement plan (the "Plan") covering employees of the Company. Historically, at the Board of Directors' discretion, the Company has matched 50% of the participant's contribution with common stock. The Company's matching contribution vests over 3 years. Total expense for the Plan for the years ended December 31, 1999, 1998 and 1997 was approximately $69,000, $110,000 and $176,000, respectively, of which $1,000, $44,000 and $120,000 related to discontinued operations for the years ended December 31, 1999, 1998 and 1997, respectively. During the first quarter of 2000, the Company terminated the Plan. 12. Income Taxes For income tax purposes, CytRx and its subsidiaries have an aggregate of approximately $53.1 million of net operating losses available to offset against future taxable income, subject to certain limitations. Such losses expire in 2000 through 2019. CytRx also has an aggregate of approximately $6.3 million of research and development and orphan drug credits available for offset against future income taxes which expire in 2000 through 2014. Deferred income taxes reflect the net effect of temporary differences between the financial reporting carrying amounts of assets and liabilities and income tax carrying amounts of assets and liabilities. The components of the Company's deferred tax assets and liabilities are as follows: F-11 26
December 31, --------------------------- 1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforward $ 20,163,000 $ 18,677,000 Tax credit carryforward 6,278,000 1,245,000 Other 108,000 1,218,000 ------------ ------------ Total deferred tax assets 26,549,000 21,140,000 Deferred tax liabilities: Acquired developed technology and other -- (228,000) intangibles Depreciation and other (185,000) (143,000) ------------ ------------ Total deferred tax liabilities (185,000) (371,000) ------------ ------------ Net deferred tax assets 26,364,000 20,769,000 Valuation allowance (26,364,000) (20,769,000) ------------ ------------ $ -- $ -- ============ ============
Based on assessments of all available evidence as of December 31, 1999 and 1998, management has concluded that the respective deferred income tax assets should be reduced by valuation allowances equal to the amounts of the deferred income tax assets. 13. Discontinued Operations Vaxcel, Inc. On June 2, 1999, CytRx entered into a Stock Acquisition Agreement with A-Z Professional Consultants, Inc. ("A-Z") for the sale of CytRx's equity interest in Vaxcel. The sale was consummated on September 9, 1999. Pursuant to the agreement, A-Z purchased 9,625,000 shares of common stock of Vaxcel from CytRx for a cash purchase price of $319,000. After consummation of this transaction, CytRx has no further equity interest in Vaxcel. Net losses (net of minority interest) associated with Vaxcel included in income (loss) from discontinued operations were approximately $(40,000), $(4,319,000) and $(2,357,000) for the years ended December 31, 1999, 1998 and 1997, respectively. A summary of the assets and liabilities of Vaxcel which are included in the consolidated balance sheets at December 31, 1998 is as follows (in thousands):
1998 ------ Current assets $ 314 Property and equipment, net 7 Other assets 655 ------ Total assets $ 976 ====== Total liabilities $ 618 ======
Termination of Optivax(R) License by CytRx -- In July 1999, CytRx terminated its license of Optivax(R) to Vaxcel due to Vaxcel's cessation of operations within the meaning of the license agreement. Concurrently with the termination of the Optivax(R) license, all of Vaxcel's rights and obligations pursuant to its license of the Optivax(R) technology to Corixa Corporation were assigned to CytRx. Impairment Loss - In its efforts to raise additional capital during 1998 and 1999, Vaxcel solicited bids for the sublicense or purchase of Vaxcel's acquired developed technology, either together with or separately from Vaxcel's other technologies. During the fourth quarter of 1998, the results of these efforts indicated to management that the acquired developed technology might be impaired. As a result of this indication, Vaxcel performed an evaluation to determine, in accordance with Statement 121, whether future cash flows (undiscounted and without interest charges) expected to result from the use and eventual disposition of the acquired developed technology would be less than its aggregate carrying amount and an allocation of goodwill resulting from the Zynaxis merger. Statement 121 requires that when a group of assets being tested for impairment was acquired as part of a business combination accounted for using the purchase method of accounting, any goodwill that arose as part of the transaction must be included as part of the asset grouping. As a result of the evaluation, management determined that the estimated future cash flows expected to be generated by the acquired developed technology would be less than its carrying amount and allocated goodwill, and therefore the asset was impaired as defined by Statement 121. Consequently, the original cost basis of the acquired developed technology and allocated goodwill were reduced to reflect the fair market value at the date the evaluation was made, resulting in a $3,213,000 F-12 27 impairment loss included in discontinued operations for the year ended December 31, 1998. In determining the fair market value of the asset, management considered the transaction described below, among other factors. Sale of Technology by Vaxcel -- In January 1999, Vaxcel entered into an agreement with Innovax Corporation ("Innovax") giving Innovax the option to purchase the rights to Vaxcel's PLG microencapsulation technology for an aggregate purchase price of $600,000. Innovax paid a nonrefundable option fee of $200,000, with an additional $400,000 due upon the exercise of the option. Innovax also paid a total of $20,000 for extensions of the option period. On April 1, 1999 Innovax exercised its option and the rights to such technology were assigned by Vaxcel to Innovax. The Company recorded this transaction in the second quarter of 1999 as a sale of its Acquired Developed Technology, valued at $600,000, and therefore did not record a gain or loss on the transaction. Proceutics, Inc. In February 1998, CytRx's wholly-owned subsidiary, Proceutics consummated a sale of substantially all of its non-real estate assets to Oread Laboratories, Inc. ("Oread") for approximately $2.1 million. Proceutics retained its real estate assets consisting of a laboratory building which it leased to Oread. The laboratory building was subsequently sold in May 1998 (see Note 14). Prior to consummation of this transaction, Proceutics provided preclinical development services to the pharmaceutical industry. Net income (loss) associated with Proceutics included in income (loss) from discontinued operations was approximately $1,387,000 and $(138,000) for the years ended December 31, 1998 and 1997, respectively (see Note 15). A $782,000 gain related to the sale of non-real estate assets is included in income from discontinued operations for 1998, as well as a $434,000 gain on the sale of Proceutics' real estate assets (see Note 14). CytRx Animal Health, Inc. In April 1998, CytRx's wholly-owned subsidiary, CytRx Animal Health, consummated the sale of substantially all of its assets related to its cattle marketing operations to VetLife, LLC ("VL LLC") (an unaffiliated company) for a total purchase price of $7,500,000, subject to certain working capital adjustments, plus contingent payments based on certain events and future sales of specified products of VL LLC and its affiliates. CytRx Animal Health retained $5.3 million in investments that were pledged to secure a letter-of-credit, as well as the rights to certain technologies licensed from CytRx. Prior to consummation of this transaction, CytRx Animal Health was engaged in marketing and distributing products to enhance North American beef cattle productivity. Net income associated with CytRx Animal Health included in income (loss) from discontinued operations was approximately $5,645,000 and $868,000 for the years ended December 31, 1998 and 1997, respectively (see Note 15). A gain related to the sale of $6,230,000 is included in income from discontinued operations for 1998. 14. Sale of Real Estate In May 1998, CytRx and Proceutics consummated the sale of the two buildings owned by them at 150 and 154 Technology Parkway, Norcross, Georgia, to Alexandria Real Estate Equities, Inc. ("Alexandria") for $4.5 million. Proceutics' rights and obligations under the lease to Oread (See Note 13) were assigned to Alexandria, and CytRx leases the building at 154 Technology Parkway from Alexandria. The lease term extends 10 years and contains escalating rent payments over the term. CytRx will also be responsible for all operating expenses for the property. Proceutics recorded a gain of $434,000 for the sale of its building. A gain of $279,000 on the sale/leaseback of the CytRx building was deferred and will be amortized over the ten year lease period. 15. Segment Reporting The Company has six reportable segments: Research Products (TiterMax), Recruiting Services (Spectrum), Product Development (core business of development and commercialization of pharmaceutical-related products), Cattle Marketing Operations (CytRx Animal Health), Vaccine Development (Vaxcel) and Pharmaceutical Services (Proceutics). See Notes 1 and 13 for a description of these operations. The Company adopted FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, in 1998 which changes the way the Company reports information about its operating segments. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting F-13 28 policies (see Note 2). The Company evaluates performance of its operating segments based primarily on profit or loss from operations before income taxes. Summarized financial information concerning the Company's reportable segments is shown in the following table.
Continuing Operations Discontinued Operations --------------------------------------------- --------------------------------------------------- Total Cattle Total Research Recruiting Product Continuing Marketing Pharmaceutical Vaccine Discontinued (in thousands) Products Services Development Operations Operations Services Development Operations - --------------------------- -------- -------- ----------- ---------- ---------- -------- ----------- ---------- 1999: - ----- Sales to external customers $ 500 $ 323 $ -- $ 823 $ -- $ -- $ -- $ -- Intersegment sales -- -- -- -- -- -- -- -- Collaborative, grant & other -- -- 606 606 -- -- 134 134 revenue Interest income -- -- 463 463 -- -- 7 7 Interest expense -- -- -- -- -- -- 4 4 Depreciation and amortization -- -- 62 62 -- -- 6 6 Segment profit (loss) 284 75 (15,348) (14,989) -- -- (40) (40) Total assets -- -- 6,128 6,128 -- -- -- -- Capital expenditures -- -- 2,515 2,515 -- -- -- -- 1998: - ----- Sales to external customers $ 481 $ 351 $ -- $ 832 $ 4,383 $ 419 $ -- $ 4,802 Intersegment sales -- -- -- -- -- 131 -- 131 Collaborative, grant & other -- -- 756 756 -- -- 167 167 revenue Interest income -- -- 1,007 1,007 -- 22 13 35 Interest expense -- -- 46 46 -- 3 7 10 Depreciation and amortization -- -- 120 120 8 78 294 380 Unusual Items: Gain on sale of business -- -- -- -- 6,230 782 -- 7,012 Gain on sale of real estate -- -- -- -- -- 434 -- 434 Provision for asset impairment -- -- -- -- -- -- 3,213 3,213 Loss on early debt -- -- 325 325 -- -- -- -- extinguishment Segment profit (loss) 231 114 (8,176) (7,831) 5,645 1,387 (4,319) 2,713 Total assets -- -- 15,666 15,666 -- -- 976 976 Capital expenditures -- -- 112 112 -- 12 4 16 1997: - ----- Sales to external customers 456 422 -- 878 13,469 1,984 -- 15,453 Intersegment sales -- -- -- -- -- 853 -- 853 Collaborative, grant & other -- -- 630 630 -- -- 243 243 revenue Interest income -- -- 752 752 -- 2 46 48 Interest expense -- -- 293 293 -- 36 1 37 Depreciation and amortization -- -- 171 171 16 365 201 582 Segment profit (loss) 193 77 (4,696) (4,426) 868 (138) (2,357) (1,627) Total assets -- -- 11,477 11,477 3,795 4,176 5,458 13,429 Capital expenditures -- -- 98 98 11 165 -- 176
16. Subsequent Event (Unaudited) Effective March 24, 2000, the Company entered into a Stock Purchase Agreement with certain investors (the "Investors") whereby the Investors agreed to purchase 800,000 shares of the Company's Common Stock for an aggregate purchase price of $1.8 million and the issuance of warrants to purchase an additional 330,891 shares at $2.25 per share, expiring March 31, 2003. The Investors were granted registration rights for the shares issued to them and the shares underlying the warrants. In addition, the Investors will, upon effective registration of the shares, purchase an additional 286,000 shares at $2.25 per share and simultaneously receive an additional three-year warrant to purchase 143,000 shares at $2.25 per share. In lieu of these additional shares and warrants, the Investors have the option to purchase 429,000 shares at a price equal to 75% of a trailing average market price of the Company's Common Stock, as defined in the Stock Purchase Agreement. F-14 29 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders CytRx Corporation We have audited the accompanying consolidated balance sheets of CytRx Corporation as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CytRx Corporation at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Atlanta, Georgia March 15, 2000 F-15 30 CYTRX CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additions -------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period ------------------------------------- ------------ ------------- ---------- ------------ ---------- Reserve Deducted in the Balance Sheet from the Asset to Which it Applies: Allowance for Bad Debts Year ended December 31, 1999 $ -- $ -- $ -- $ -- $ -- Year ended December 31, 1998 22,187 -- -- 22,187 -- Year ended December 31, 1997 48,430 44,850 -- 71,093 22,187 Allowance for Deferred Tax Assets Year ended December 31, 1999 $ 20,769,000 $ 5,595,000 $ -- $ -- $ 26,364,000 Year ended December 31, 1998 17,684,000 3,085,000 -- -- 20,769,000 Year ended December 31, 1997 15,200,000 2,484,000 -- -- 17,684,000
F-16 EX-10.3 2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT 1 EXHIBIT 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN CYTRX CORPORATION AND JACK J. LUCHESE 2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN CYTRX CORPORATION AND JACK J. LUCHESE This Amended and Restated Employment Agreement ("Agreement") is made and executed this 1st day of September, 1999 (the "Effective Date"), by and between CYTRX CORPORATION ("CytRx" or the "Company"), a Delaware Corporation having its principal place of business at 154 Technology Parkway, Technology Park/Atlanta, Norcross, Georgia 30092, and JACK J. LUCHESE ("Mr. Luchese") who currently resides at 3915 River Hollow Run, Duluth, Georgia 30096. WHEREAS, CytRx originally employed Mr. Luchese as its President and Chief Executive Officer pursuant to an Employment Agreement dated March 13, 1989. After several amendments, the original Employment Agreement was amended and restated effective as of January 1, 1995. That amended and restated agreement was subsequently amended by Amendment No. 1 dated April 16, 1997, Amendment No. 2 dated August 28, 1997, and Amendment No. 3 dated April 8, 1998 (collectively, the "1995 Agreement"). WHEREAS, the Compensation Committee of the Board of Directors of the Company at its meeting on September 1, 1999, approved certain changes to the terms of the employment of Mr. Luchese with the Company. WHEREAS, as a result of the foregoing, both the Company and Mr. Luchese concluded that the 1995 Agreement should be amended and restated so as to incorporate all prior amendments and reflect the most recent amendments. WHEREAS, this Agreement amends and restates the 1995 Employment Agreement. WHEREAS, the Board has authorized the execution of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and promises made in this Agreement, the parties do hereby agree as follows: 1. EMPLOYMENT. CytRx agrees to and does hereby engage and employ Mr. Luchese as President and Chief Executive Officer of CytRx Corporation for the term and upon the 1 3 terms and conditions set forth herein, and Mr. Luchese accepts such offer of employment. It is also understood and agreed that Mr. Luchese will serve as a director of the Company, without additional compensation, for any term he is elected to serve. During the term of this Agreement, the Board of Directors will take such actions as may be required to nominate and recommend Mr. Luchese for election as a director by the shareholders. Mr. Luchese agrees to discharge his duties hereunder in accordance with the direction of the Board of Directors of CytRx and to follow diligently and implement faithfully all management policies and decisions communicated to him by the Board of Directors. During the employment of Mr. Luchese by CytRx, Mr. Luchese shall devote his full and undivided time, attention, energies and loyalty to the Company's business but the foregoing shall not be construed to prevent Mr. Luchese from making investments in other businesses or enterprises or engaging in any other business activity that does not interfere with Mr. Luchese's duties under this Agreement, or conflict with his obligations under Paragraph 10 hereof or otherwise represent a conflict of interest with his duties to CytRx. Notwithstanding the above, Mr. Luchese may serve on the Board of Directors of companies not affiliated with CytRx, and receive compensation in connection therewith, if such position is approved by the Board of Directors of CytRx. 2. TERM AND RENEWAL. The term of Mr. Luchese's employment hereunder will be for a period commencing on the Effective Date and continuing until December 31, 2002 (the "Expiration Date"), unless Mr. Luchese's employment is terminated by either party pursuant to Paragraph 7 of this Agreement. 3. SALARY. (a) For services provided hereunder, Mr. Luchese will be paid an annual base salary. Mr. Luchese's base salary as of the Effective Date is Three Hundred Fifty Thousand Dollars ($350,000). The base salary shall be reviewed by the Board of Directors of the Company no less than once each 18 months. The base salary will be increased from time to time consistent with the average overall merit increases, if any, granted to all employees as a whole for such year, but will not be decreased. If the base salary is increased, then the increased amount shall be deemed the "base salary" for all purposes under this Agreement. (b) It is understood and contemplated that, in addition to the foregoing annual base salary, Mr. Luchese will be eligible to receive cash bonuses in each calendar year during the term of this Agreement in such amounts, if any, as shall be determined from time to time by the Board of Directors of the Company in its sole discretion. The bonus for each year shall accrue, and become due and payable, on January 1 of the following year, or any later time requested by Mr. Luchese. If this Agreement expires on the Expiration Date, then the obligation of the Company to pay a bonus to Mr. Luchese on January 1, 2003, shall survive such expiration, and the Company shall pay such bonus to Mr. Luchese as if this Agreement remained in full force and effect. 2 4 4. FRINGE BENEFITS. Mr. Luchese, during the period of his employment hereunder, will receive fringe benefits such as insurance, vacation leave, sick leave and participation in any retirement plan as may exist from time to time for all other executive officers of the Company; provided, however, that, during the term of this Agreement, the Company shall maintain at its expense a long-term disability policy for the benefit of Mr. Luchese, which will provide coverage equal to a percentage of Mr. Luchese's base salary consistent with the percentage coverage provided to the other executive officers of the Company. Such insurance shall include any group long-term disability insurance on Mr. Luchese that the Company maintains for the benefit of its senior executives. Mr. Luchese will not receive an automobile or automobile expense allowance. Mr. Luchese shall be entitled to six weeks of vacation leave, annually, which shall be paid at his base salary, and shall accrue and be used in accordance with the policies and procedures of the Company. 5. REIMBURSEMENT OF BUSINESS EXPENSES. The Company will promptly reimburse Mr. Luchese for all business expenses incurred by him in connection with the business of the Company in accordance with regular Company policy regarding the nature and amount of expenses and the maintenance and submission of receipts and records necessary for the Company to document them as proper business expenses. 6. THE EXECUTIVE WARRANTS. (a) Current Status. Exhibit A hereto contains a list of all of the warrants to acquire CytRx common stock ("Executive Warrants") held by Mr. Luchese as of September 1, 1999, including with respect to each such warrant: the grant date, the expiration date, the number of shares, the exercise price and the vesting status or schedule. (b) Other Registration, Vesting and Exercise Rights. (1) In addition to any other registration rights Mr. Luchese may have, the Company has filed or shall file with the Securities and Exchange Commission a registration statement to register the shares of CytRx common stock to be acquired under Executive Warrants under the Securities Act of 1933, and shall use its best efforts to keep such registration statement effective and current for as long as Mr. Luchese has the right to exercise the Executive Warrants and for a period of six (6) months thereafter, if such additional period is required to allow Mr. Luchese to dispose of the acquired shares in an orderly fashion. (2) All rights to purchase CytRx stock pursuant to the Executive Warrants that have vested prior to or upon the termination of Mr. Luchese's employment with the Company may be exercised by Mr. Luchese at any time until the expiration of such rights under the applicable warrant agreement, even after Mr. Luchese's employment with the Company has been terminated. All rights to purchase CytRx stock pursuant to the Executive Warrants that by their terms vest after the termination of Mr. Luchese's 3 5 employment with the Company shall terminate on the effective date of the termination of Mr. Luchese's employment. (3) For all purposes of this Agreement and the Executive Warrants, (A) in the event of the death of Mr. Luchese, the Executive Warrants may be exercised by his personal representative, executor, or heirs (whether by will or by the laws of descent and distribution), and (B) in the event of the incapacity of Mr. Luchese, the Executive Warrants may be exercised by his duly appointed attorney-in-fact or other authorized person, in each case, to the same extent such warrants have vested and are exercisable by the Holder (as defined in the Executive Warrants) in accordance with the terms thereof. 7. TERMINATION OF EMPLOYMENT AND THIS AGREEMENT. (a) If Mr. Luchese's employment is terminated by the Company for cause (as hereinafter defined) or if Mr. Luchese voluntarily leaves the employment of the Company prior to the Expiration Date, the Company will pay Mr. Luchese the equivalent of three (3) months' salary at the base salary, and three (3) months continuation of fringe benefits then being received by Mr. Luchese. For purposes of this Agreement, termination "for cause" means termination of Mr. Luchese's employment by action of a majority of the members of the Board of Directors who are not employees of CytRx or any subsidiary, because of: (1) material breach of contract, (2) failure or inability to carry out reasonable directives of the Board of Directors, (3) conviction of Mr. Luchese for a felony, even if such conviction is subject to appeal, (4) uncontroverted evidence of falsification of records or statements of the Company, (5) uncontroverted evidence of intentional misuse of Company funds or property, or (6) other substantial misconduct which, in the reasonable judgment of the Board, results in material adverse effect, discredit or disrepute to the Company. A termination of employment for any cause listed in clauses (1), (2) or (6) above shall be effective only if Mr. Luchese has first been given notice by the Board of Directors of the alleged breach, failure to perform or misconduct and such breach, failure to perform or misconduct continues for fifteen days following the date of such notice. 4 6 (b) If this Agreement expires on the Expiration Date, or if the sooner termination of Mr. Luchese's employment and this Agreement is not for cause, not because of Mr. Luchese's death or disability and not because of his voluntary termination of employment, then the Company will continue to make semi-monthly base salary payments for a period of one year after the Expiration Date or the earlier effective date of termination; provided, however, that (1) in the case of the expiration of this Agreement on the Expiration Date, the one-year salary continuation period shall be reduced by the period of time before the Expiration Date that the Board of Directors gives Mr. Luchese written notice that it intends to allow the Agreement to expire, or not to pay the full salary continuation obligation if negotiations to renew the Agreement are unsuccessful, and (2) in all cases, Mr. Luchese's rights to receive salary continuation payments are contingent upon his using his best efforts to find a new job commensurate with his position as the chief executive officer and member of the Board of Directors of the Company. If Mr. Luchese obtains a position during the one-year salary continuation period (whether commensurate with his position with the Company or not) the obligation for salary continuation hereunder shall be limited to an amount equivalent to the difference, if any, between the base salary under this Agreement and the base salary paid to him by his new employer. Fringe benefits provided during employment shall be continued until Mr. Luchese finds another job as provided for under this Subparagraph or until the end of the one-year salary continuation period, whichever first occurs. (c) If Mr. Luchese's employment and thereby this Agreement is terminated because of Mr. Luchese's death, CytRx shall pay any compensation then due him under this Agreement as of the date of his death to his surviving spouse, or if there is no surviving spouse, to his estate, and shall make to such spouse or his estate, as above, semi-monthly payments of salary based on the annual rate which then would have been applicable to Mr. Luchese's employment for six (6) months after his death, and provide six (6) months' continuation of fringe benefits available to his dependents covered for such benefits at the time of Mr. Luchese's death. If Mr. Luchese becomes permanently disabled or subject to long term disability during the period of his employment hereunder, and CytRx terminates this Agreement other than pursuant to Paragraph 7(a), Mr. Luchese's employment shall be deemed to have been terminated without cause pursuant to Paragraph 7(b); provided, however, that (1) Mr. Luchese shall not be required to find a new job, and (2) instead of the one-year salary continuation, an amount equal to his base salary for one year shall be paid to Mr. Luchese in variable monthly installments until such amount is exhausted, with each installment being equal to the amount that when combined with payments received during such month by Mr. Luchese from the Company under its short-term disability policy, or from one or more insurance companies under long term disability insurance policies maintained by the Company pursuant to Paragraph 4, equals the amount of base salary (calculated on a pre-tax basis) that Mr. Luchese would have received during such month if this Agreement had not been terminated. For example, if (1) CytRx terminates this Agreement because Mr. Luchese becomes permanently disabled at a time when his annual base salary is $350,000, (2) Mr. Luchese 5 7 is eligible immediately to receive monthly short term disability payments from the Company equal to $29,167 (100% of his base salary) and (3) Mr. Luchese will be eligible after one month to receive long term disability payments from the insurance carrier equal to $17,500 (60% of his base salary), then CytRx will not be obligated to make any payment to Mr. Luchese for the first month and will be obligated to pay Mr. Luchese $11,667 per month (40% of his base salary) for the next 2.5 years (30 months). If, in the above example, Mr. Luchese ceased for any reason to qualify for the insurance company payments after the first 11 months, then the Company shall be obligated to make monthly payments of $29,167 (100% of his base salary) for the following 8 months ($350,000 less the $116,668 already paid divided by $29,167), subject to the salary adjustment described in Paragraph 7(b) if Mr. Luchese obtains a position during the 8 month period. It is understood that permanently disabled and subject to long term disability shall mean such sickness, as well as physical or mental disability, that qualifies or, with the passage of time (not to exceed 90 calendar days), will qualify Mr. Luchese to receive benefit payments under at least one of the long-term disability policies maintained by the Company for Mr. Luchese in accordance with Paragraph 4. In the event of a dispute as to Mr. Luchese's ability to perform his duties, the Company may refer Mr. Luchese to a licensed practicing physician of CytRx's choice and reasonably satisfactory to Mr. Luchese, and Mr. Luchese agrees to submit to such tests and examinations as such physician shall deem appropriate. The determination by the physician as to whether or not Mr. Luchese is unable to perform substantially his normal duties shall conclusively determine such facts for the purposes of this Paragraph 7(c). Short term illness or injury not amounting to long term disability shall be treated in accordance with any benefit provided under Paragraph 4 of this Agreement. It is also understood that, if CytRx becomes obligated to make payments to Mr. Luchese pursuant to this Paragraph 7(c) because of Mr. Luchese's disability and, within a reasonable period of time after Mr. Luchese's termination, a majority of the members of the Board of Directors of the Company who are not employees of CytRx or any subsidiary determine in good faith that Mr. Luchese should have been terminated for cause in accordance with Paragraph 7(a), then the obligations of the Company under this Paragraph 7(c) shall cease after the Company has paid to Mr. Luchese an amount equal to the amount due him pursuant to Paragraph 7(a) and continued Mr. Luchese's fringe benefits for the period of time required by Paragraph 7(a); provided, however, that in no event shall Mr. Luchese be required to repay the Company any amounts paid to him under this Paragraph 7(c). 8. NO RESTRICTIONS ON MR. LUCHESE'S EMPLOYMENT BY CYTRX. Mr. Luchese represents as a condition of this Agreement that he is not under any existing employment agreement, noncompetition agreement or other legally binding agreement which would prohibit or in any manner restrict his employment hereunder with CytRx. 6 8 9. EMPLOYEE CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENT. Mr. Luchese and the Company are parties to a confidentiality and invention assignment letter agreement dated November 3, 1994, which shall be deemed to be incorporated into this Agreement as if fully set forth in this Paragraph 9. 10. RESTRICTIONS ON COMPETITION. (a) During Employment. In order to protect CytRx's investment, which includes but is not limited to, time, money and proprietary information, and in recognition of the unique character of the Trade Secrets and other Confidential Information which are the basis of CytRx's business and future business opportunities, in recognition of the worldwide geographic scope of CytRx's business and/or potential business opportunities and Mr. Luchese's contemplated role, responsibilities and knowledge therefor, for the entire period of Mr. Luchese's employment by CytRx, Mr. Luchese agrees that he will not work as a consultant for or directly or indirectly perform services anywhere in the world for himself or any other person, firm or corporation in competition with CytRx. A business in competition with CytRx includes any business activity being actively investigated or contemplated by CytRx during the period of Mr. Luchese's employment by CytRx. Without limitation on the foregoing, but by way of example, businesses currently contemplated by CytRx as being in competition with it include pharmaceutical businesses engaged in or considering engaging in manufacture, marketing or development of commercial products in any and all of the following areas: (1) Immune system stimulating compounds and methods; (2) Growth stimulation of animals; (3) all formulations and methods using the surface-active copolymers described in U.S. Patent No. 4,801,452, U.S. Patent Application Serial No. 291,925, U.S. Patent Application Serial No. 107,358, U.S. Patent Application Serial No. 208,335, and U.S. Patent Application Serial No. 150,731. (4) Mycobacterial and antiviral chemotherapy; and (5) Vaccine adjuvants. (b) For two (2) years after termination of employment. In order to protect CytRx's investment, which includes but is not limited to, time, money and proprietary information and in recognition of the unique character of the Trade Secrets and other Confidential Information which are the basis of CytRx's business and future business opportunities, in recognition of the worldwide geographic scope of CytRx's business and/or potential business opportunities and Mr. Luchese's contemplated role, responsibilities and knowledge therefor, for a period of two (2) years following the 7 9 termination of Mr. Luchese's employment with CytRx, regardless of the reason therefor, Mr. Luchese agrees that he will not work as a consultant for or directly or indirectly perform services anywhere in the world for himself or any other person, firm or corporation in any capacity involving the study, development, use, manufacture or marketing of all formulations and methods using the surface-active copolymers described in U.S. Patent No. 4,801,452, U.S. Patent Application Serial No. 291,925, U.S. Patent Application Serial No. 107,358, U.S. Patent Application Serial No. 208,335, and U.S. Patent Application Serial No. 150,731. The foregoing shall not preclude (1) the employment of Mr. Luchese, whether as a director, officer, employee, consultant or otherwise, by a research partner, joint venture partner, licensee or other person, or corporation or entity that at such time is authorized by CytRx to have rights in or to restricted products, or (2) the ownership by Mr. Luchese of investment securities representing not more than three (3) per cent of the outstanding voting securities of company engaged in a pharmaceutical business, whose stock and/or securities are traded on a national stock exchange or national quotations system, provided that such investment is passive and not with the intention of controlling such business. (c) Mr. Luchese will notify the Company at least three (3) weeks before he is to begin any employment or activity which is described in Subparagraph (b) of this Paragraph if such employment or activity would commence within two (2) years after the termination of his employment with CytRx. Such notice shall be in writing and shall contain a complete description of such offer, including the position and the responsibilities involved. (d) Mr. Luchese agrees and acknowledges that the restrictions on competition contained herein including their geographic and product scope are necessary and reasonable to protect the interests of CytRx and that the Company's Trade Secrets and other Confidential Information of which he will become acquainted, if used anywhere in the world during the period in which he has agreed not to use them or to disclose them would cause CytRx serious and irreparable damage and harm. Mr. Luchese represents and admits that upon the termination of his employment with CytRx, his experience and capabilities are such that he can obtain employment engaged in other lines of endeavor and that the enforcement of this Agreement would not prevent him from earning a livelihood. 11. ACKNOWLEDGMENTS. (a) It is understood and contemplated by the parties that if the obligations undertaken herein in Paragraphs 9 and 10 were breached in any way, irreparable harm to the Company should be presumed. Damages might be difficult if not impossible to ascertain, and the faithful observance of the terms of this Agreement during and after termination of Mr. Luchese's employment is an essential condition to his employment with the Company. In light of these considerations, Mr. Luchese agrees that a court of 8 10 competent jurisdiction may immediately enjoin any breach or threatened breach of Paragraphs 9 and 10 to this Agreement, without waiver of any other rights and remedies which the Company may have at law. (b) The obligations undertaken in Paragraphs 9 and 10 of this Agreement survive the termination of Mr. Luchese's employment hereunder for the period specified in each such Paragraph and the termination of this Agreement, regardless of the reason therefor. The obligations of CytRx to Mr. Luchese following his termination of employment as set forth in Paragraphs 3(b), 6, and 7 shall survive the termination of this Agreement until satisfied in accordance with the terms thereof. (c) The rights of Mr. Luchese under this Agreement are in addition to any other rights or remedies he may have in law or in equity in the event CytRx breaches this Agreement, all of which rights and remedies are preserved in full. Without limiting the foregoing, the rights of Mr. Luchese under Paragraph 7 herein do not limit any right he would have upon termination of employment caused by a breach of CytRx. However, any damages he may sustain shall be reduced by the payments required to be made under this Agreement. 12. CONSTRUCTION OF AGREEMENT. (a) It is the intention of the parties to this Agreement that any construction of this Agreement or Paragraph thereof shall be in favor of its legality and enforceability and that any construction causing illegality or unenforceability should yield to a construction favoring legality and enforceability. Further, the parties agree that should any portion of this Agreement be judicially held invalid, unenforceable or void, such holding shall not have the effect of invalidating or voiding any remaining portion of this Agreement not so declared and that any portion held to be invalid, unenforceable or void shall, if possible, be deemed amended or reduced in scope, otherwise to be stricken from this Agreement, but only to the extent required for purposes of maintaining the legality, validity and enforceability of this Agreement and all portions thereof in the jurisdiction so holding. (b) It is understood that use of the word "and" herein included the disjunctive as well as its injunctive meaning whenever such meaning would broaden the protection to the Company in the context in which it is used. 13. NO WAIVER. No waiver of any breach of this Agreement may be construed or deemed as a waiver of any succeeding breach of this Agreement. 14. PERSONAL SERVICES. It is understood and contemplated that this Agreement provides for personal services of Mr. Luchese to the Company. 9 11 15. NO INTERFERENCE. For two (2) years following the termination of Mr. Luchese's employment hereunder, regardless of the reason therefor, Mr. Luchese will not intentionally disrupt or attempt to disrupt the Company's business relationship with its customers or suppliers, nor solicit any of the Company's employees to terminate their employment with CytRx. 16. CERTIFICATION BY EMPLOYEE. Mr. Luchese certifies that he has received a copy of this Agreement for review and study before being asked to execute it, that he has read this Agreement carefully, that he has had a sufficient opportunity before executing this Agreement to ask questions about it and to receive answers to any such questions and that he understands the obligations and rights provided hereunder. 17. ENTIRE AGREEMENT. This Agreement hereto supersedes any and all other agreements, both oral and in writing, between the parties hereto with respect to the employment and terms and conditions thereof of Mr. Luchese by CytRx, and it contains all of the parties' representations, covenants and agreements with respect to such matters. The terms of this Agreement may not be changed orally but only by a subsequent writing signed by the party against whom enforcement of such modification is sought. 18. CAPTIONS. Paragraph captions used herein are for convenience of reference only and shall not change the meaning of the terms of this Agreement. 19. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall inure to the benefit of any successors and assigns of the Company. 20. GOVERNING LAW. This Agreement shall be construed and governed in accordance with the laws of the State of Georgia. 21. CORPORATE AUTHORITY. The Company represents and warrants that this Agreement including the issuance of the warrants (1) has been duly authorized, executed and delivered by the Company, (2) constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, and (3) does not conflict with or result in a violation of the Company's Certificate of Incorporation, By-laws, or any contract, agreement or instrument to which the Company is a party or is otherwise bound. (signatures on following page) 10 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal on the date hereof, to be effective as of the Effective Date. JACK J. LUCHESE: ---------------------------- Attest: CYTRX CORPORATION: - ------------------- ---------------------------- Corporate Secretary By: William B. Fleck (CORPORATE SEAL) Title: Vice President, Human Resources ---------------------------- By: Herbert H. McDade, Jr. Chairman, CytRx Compensation Committee 13 EXHIBIT A Executive Warrants Mr. Luchese has the following Executive Warrants as of September 1, 1999(1):
WARRANT GRANT EXPIRATION WARRANT EXERCISE VESTING ID NO. DATE DATE SHARES PRICE STATUS WI/II-1 2/20/95(2) 12/31/04 500,000 $ 1.00 100% WI/II-2 2/20/95(3) 02/22/01 50,000 $ 1.00 100% WIII-2 2/20/95(4) 03/24/03 32,427 $ 1.00 100% WIV-2 2/20/95(5) 12/31/04 100,000 $ 1.00 100% None 3/26/96(6) 03/25/06 200,000 $ 1.00 See schedule (A) below None 6/6/97(7) 06/05/07 50,000 $ 1.00 See schedule (B) below None 4/8/98(8) 04/07/08 450,000 $ 1.00 100% None 9/1/99 08/31/09 500,000 $2.125 See schedule (C) below
- ----------------------- (1) The Warrant numbers and prices have been adjusted to reflect the reverse stock split occurring on February 5, 1996. (2) First amended by Amendment No. 1 on April 16, 1997, to provide that it is fully vested. Last amended by Amendment No. 2 on September 15, 1998, to reduce the exercise price from $4.50 to $1.00. (3) First amended by Amendment No. 1 on April 16, 1997, to provide that it is fully vested. Last amended by Amendment No. 2 on September 15, 1998, to reduce the exercise price from $4.50 to $1.00. (4) First amended by Amendment No. 1 on April 16, 1997, to provide that it is fully vested. Last amended by Amendment No. 2 on September 15, 1998, to reduce the exercise price from $7.00 to $1.00. (5) First amended by Amendment No. 1 on April 16, 1997, to amend vesting schedule. Now fully vested. Last amended by Amendment No. 2 on September 15, 1998, to reduce the exercise price from $7.00 to $1.00. (6) First amended by Amendment No. 1 on April 16, 1997 to provide for full vesting upon a Change in Control, as defined. Later amended by Amendment No. 2 on April 8, 1998 to change the vesting schedule by changing the price target from $15 to $7.50. Last amended by Amendment No. 2 on September 15, 1998, to reduce the exercise price from $4.50 to $1.00. (7) First amended by Amendment No. 1 on April 8, 1998, to change the vesting schedule by changing the price target from $20 to $12. Last amended by Amendment No. 2 on September 15, 1998, to reduce the exercise price from $4.125 to $1.00. (8) Amended by Amendment No. 1 on September 15, 1998, to reduce the exercise price from $2.9375 to $1.00, and to reduce the vesting target stock prices from $5 to $1.50, $7.50 to $2.00, and $10 to $2.50, respectively. 14 SCHEDULE (A) - VESTING SCHEDULE FOR 1996 WARRANTS 25,000 on sale/IPO of Vaxcel by December 31, 1998 EXPIRED 25,000 on sale/IPO of VetLife by December 31, 1998 VESTED 25,000 on sale/IPO of Proceutics by December 31, 1998 VESTED 25,000 on third-party funding of RheothRx by December 31, 1998 EXPIRED 50,000 on significant business transaction by December 31, 1998 EXPIRED 50,000 on market price sustaining $7.50 by December 31, 1998 EXPIRED OR 100% on a Change in Control, as defined. SCHEDULE (B) - VESTING SCHEDULE FOR 1997 WARRANTS 6,250 on each of March 31, 1999; June 30, 1999; September 30, 1999 and December 31, 1999 or earlier on death, disability or termination of employment without cause before 12/31/99 or upon a Change in Control. 25,000 if on or before December 31, 1999 the stock price averages $12 for 10 days or there is a Change in Control. SCHEDULE (C) - VESTING SCHEDULE FOR 1999 WARRANTS 25,000 on each of March 31, 2000, June 30, 2000, September 30, 2000; December 31, 2000, March 31, 2001, June 30, 2001, September 30, 2001; December 31, 2001, March 31, 2002, June 30, 2002, September 30, 2002; and December 31, 2002, or as to all 300,000 shares upon a Change of Control on or before December 31, 2002. 50,000 if the stock price reaches $5.00 on or before July 1, 2000 or upon a Change of Control on or before July 1, 2000. 75,000 on (i) the successful completion of a significant merger, acquisition or strategic alliance on or before December 31, 2002, (ii) successfully raising a total of $15,000,000 on or before December 31, 2000, or (iii) a Change of Control on or before December 31, 2002. 75,000 on (i) the successful NDA/PLA regulatory (FDA) approval of FLOCOR on or before December 31, 2002, or (ii) a Change of Control on or before December 31, 2002. -2- EX-10.4 3 AMENDED AND RESTATED CHANGE IN CONTROL 1 EXHIBIT 10.4 AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT BETWEEN CYTRX CORPORATION AND JACK J. LUCHESE 2 AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT AGREEMENT by and between CytRx Corporation, a Delaware corporation (the "Company") and Jack J. Luchese (the "Executive"), dated as of the 1st day of September, 1999. This Agreement amends and restates that certain Change in Control Employment Agreement, dated as of April 16, 1997, by and between the Executive and the Company. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section l(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company -1- 3 shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) The "Employment Agreement" shall mean that certain Amended and Restated Employment Agreement, dated as of September 1, 1999, as amended from time to time, by and between the Company and the Executive. 2. Change of Control. For the purposes of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by a Person who is on April 1, 1997 the beneficial owner of 25% or more of the Outstanding Company Voting Securities, (ii) any acquisition directly from the Company, (iii) any acquisition by the Company, (iv) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (v) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of April 1, 1997, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to April 1, 1997 whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the -2- 4 corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date, and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) engage in other business activities that do not -3- 5 represent a conflict of interest with his duties to the Company, and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to 12 times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest annual bonus for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period -4- 6 immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 13(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall -5- 7 mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this -6- 8 Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for -7- 9 Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability, or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred, for the most recently completed fiscal year during the Employment Period, if any (such amount being referred to as the "Most Recent Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to two times the sum of (1) the Executive's Annual Base Salary, and (2) the Most Recent Annual Bonus; and C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's qualified retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's Retirement Plan immediately prior to the Effective Date), and any excess or supplemental retirement plans in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for two years after the Date of Termination, assuming for this purpose that all accrued benefits are fully vested, and, assuming that the Executive's compensation in each of such two years is the Annual Base Salary required by Section 4(b)(i) plus the Most Recent Annual Bonus, over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; -8- 10 (ii) for two years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two years after the Date of Termination and to have retired on the last day of such period; (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (iv) Notwithstanding any provision of this Agreement to the contrary, the Executive shall forfeit his right to receive, or, to the extent such amounts have previously been paid to the Executive, shall repay in full to the Company with interest at 8% per annum within thirty (30) days of a final determination of the Executive's liability therefor as set forth below, the amount described in Section 6(a)(i)(B) of this Agreement if at any time during the period of two years after the Date of Termination (the "Restricted Period") he violates the restrictions on competition set forth in Section 11 hereof. Any determination of whether the Executive has violated the such non-competition restrictions shall be made by arbitration in Atlanta, Georgia under the Rules of Commercial Arbitration (the "Rules") of the American Arbitration Association, which Rules are deemed to be incorporated by reference herein. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable of the following: (1) the death benefits described in Section 7(c) of the -9- 11 Employment Agreement (whether or not superseded by this Agreement), (2) benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date, or (3) similar benefits in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of the following: (1) the post-disability benefits described in Section 7(c) of the Employment Agreement (whether or not superseded by this Agreement), (2) disability and other benefits generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date, or (3) disability and other benefits in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(d) shall include, and the Executive shall be entitled after his termination of employment to receive, the post-termination benefits described in the first sentence of Section 7(a) of the Employment Agreement (whether or not superseded by this Agreement). 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or -10- 12 practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 13(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Adjustments for Excise Tax. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then, prior to the making of any Payment to the Executive, a calculation shall be made comparing (i) the net benefit to the Executive of the Payment after payment of the Excise Tax and all applicable federal, state and local income and other taxes, to (ii) the net benefit to the Executive if the Payment had been limited to the extent necessary to avoid being subject to the Excise Tax (but after payment of all other applicable federal, state and local income and other taxes). If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payment shall be limited to the extent necessary to avoid being subject to the Excise Tax, and the Executive may select the component of the Payment to which such limitation is to be applied. (b) The determination of whether an Excise Tax would be imposed, the amount of such Excise Tax, and the calculation of the amounts referred to in (i) and -11- 13 (ii) above shall be made by Ernst & Young LLP or such other nationally-recognized public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments which the Executive was entitled to, but did not receive pursuant to this Section 9, could have been made without the imposition of the Excise Tax ("Underpayment"). In such event, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Restriction on Competition. In order to protect the Company's investment, which includes but is not limited to, time, money and proprietary information and in recognition of the unique character of the trade secrets and other confidential information which are the basis of the Company's business and future business opportunities, in recognition of the worldwide geographic scope of the Company's business and/or potential business opportunities and the Executive's contemplated role, responsibilities and knowledge therefor, for a period of two years following the Date of Termination, regardless of the reason therefor, the Executive agrees that he will not work as a consultant for or directly or indirectly perform services anywhere in the world for himself or any other person, firm or corporation in any capacity involving the study, development, use, manufacture or marketing of all formulations and methods using the surface-active copolymers described in U.S. Patent No. 4,801,452, U.S. Patent -12- 14 Application Serial No. 291,925, U.S. Patent Application Serial No. 107,358, U.S. Patent Application Serial No. 208,335, and U.S. Patent Application Serial No. 150,731. The foregoing shall not preclude (i) the employment of the Executive, whether as a director, officer, employee, consultant or otherwise, by a research partner, joint venture partner, licensee or other person, or corporation or entity that at such time is authorized by the Company to have rights in or to restricted products, or (ii) the ownership by the Executive of investment securities representing not more than three per cent of the outstanding voting securities of company engaged in a pharmaceutical business, whose stock and/or securities are traded on a national stock exchange or national quotations system, provided that such investment is passive and not with the intention of controlling such business. 12. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than-by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mr. Jack J. Luchese 3915 River Hollow Run Duluth, Georgia 30096 -13- 15 If to the Company: CytRx Corporation 154 Technology Parkway Norcross, Georgia 30092 Attention: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, including without limitation the Employment Agreement; provided, however, that the following shall expressly survive the Effective Date of this Agreement: (i) Paragraphs 6, 9, 10(a), 10(c), 10(d) and 11(a) of the Employment Agreement, and (ii) any and all outstanding rights, options and/or warrants to purchase stock of the Company held by the Executive on the Effective Date. (signatures on following page) -14- 16 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf by its undersigned officer thereunto, duly authorized, all as of the day and year first above written. ---------------------------------- Jack J. Luchese Attest: CYTRX CORPORATION: - ------------------- ---------------------------- Corporate Secretary By: William B. Fleck (CORPORATE SEAL) Title: Vice President, Human Resources ---------------------------- By: Herbert H. McDade, Jr. Chairman, CytRx Compensation Committee -15- EX-10.12 4 COMMON STOCK PURCHASER AGREEMENT, DATED 03/24/00 1 EXHIBIT 10.12 COMMON STOCK PURCHASE AGREEMENT DATED MARCH 24, 2000 BY AND BETWEEN CYTRX CORPORATION AND THE INVESTORS SIGNATORY THERETO 2 COMMON STOCK PURCHASE AGREEMENT BETWEEN CYTRX CORPORATION AND THE INVESTORS SIGNATORY HERETO COMMON STOCK PURCHASE AGREEMENT dated as of March 24, 2000 (the "Agreement"), between the Investors signatory hereto (each an "Investor" and together the "Investors"), and CytRx Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investors, and the Investors shall purchase 800,000 shares of Common Stock (as defined below) and 330,891 Warrants (as defined below) and upon the Effective Date shall purchase an additional 429,000 shares of Common Stock or 286,000 shares of Common Stock and 143,000 Warrants. WHEREAS, such investments will be made in reliance upon the provisions of Section 4(2) ("Section 4(2)") and/or 4(6) of the United States Securities Act and/or Regulation D ("Regulation D") and the other rules and regulations promulgated thereunder (the "Securities Act"), and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments in securities to be made hereunder. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I CERTAIN DEFINITIONS Section 1.1. "Bid Price" shall mean the closing bid price (as reported by Bloomberg L.P.) of Common Stock on the Principal Market on the date in question. Section 1.2. "Capital Shares" shall mean the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. Section 1.3. "Capital Shares Equivalents" shall mean any securities, rights, or obligations that are convertible into or exchangeable for or give any right to subscribe for any Capital Shares of the Company or any warrants, options or other rights to subscribe for or purchase Capital Shares or any such convertible or exchangeable securities. 1 3 Section 1.4. "Closing" shall mean each closing of the purchase and sale of the Common Stock pursuant to Section 2.1. Section 1.5. "Closing Date" shall mean the date on which all conditions to the applicable Closing have been satisfied (as defined in Section 2.1 (b) hereto) and such Closing shall have occurred. Section 1.6. "Common Stock" shall mean the Company's common stock, $0.001 par value per share. Section 1.7. "Damages" shall mean any loss, claim, damage, judgment, penalty, deficiency, liability, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements and reasonable costs and expenses of expert witnesses and investigation). Section 1.8. "Effective Date" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in the Registration Rights Agreement. Section 1.9. "Escrow Agent" shall have the meaning set forth in the Escrow Agreement. Section 1.10. "Escrow Agreement" shall mean the Escrow Agreement in substantially the form of Exhibit A hereto executed and delivered contemporaneously with this Agreement. Section 1.11. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 1.12. "Legend" shall mean the legend set forth in Section 9.1. Section 1.13. "Market Price" shall mean seventy-five percent (75%) of the average of the Bid Prices for the ten (10) Trading Days prior to the Effective Date. Section 1.14. "Material Adverse Effect" shall mean any effect on the business, operations, properties, prospects or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement, the Registration Rights Agreement, the Escrow Agreement in any material respect. Section 1.15. "Outstanding" when used with reference to shares of Common Stock or Capital Shares (collectively the "Shares"), shall mean, at any date as of which the number of such Shares is to be determined, all issued and outstanding Shares, and shall include all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that "Outstanding" shall not mean any such Shares then directly or indirectly owned or held by or for the account of the Company. Section 1.16. "Person" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. 2 4 Section 1.17. "Principal Market" shall mean the American Stock Exchange, the New York Stock Exchange, the NASDAQ National, SmallCap Markets or the OTC Bulletin Board, whichever is at the time the principal trading exchange or market for the Common Stock, based upon share volume. Section 1.18. "Purchase Price" shall mean $2.25 per share of Common Stock for adjusted for any splits, reverse splits or Common Stock dividends declared by the Company after the execution hereof. Section 1.19. "Registrable Securities" shall mean the Shares and the Warrant Shares until (i) the Registration Statement has been declared effective by the SEC, and all Shares and the Warrant Shares have been disposed of pursuant to the Registration Statement, (ii) all Shares and the Warrant Shares have been sold under circumstances under which all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") are met, (iii) all Shares and the Warrant Shares have been otherwise transferred to holders who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend or (iv) such time as, in the opinion of counsel to the Company, all Shares and the Warrant Shares may be sold without any time, volume or manner limitations pursuant to Rule 144(k) (or any similar provision then in effect) under the Securities Act. Section 1.20. "Registration Rights Agreement" shall mean the agreement regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investors as of the Closing Date in the form annexed hereto as Exhibit B. Section 1.21. "Registration Statement" shall mean a registration statement on Form S-3 (or on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale by the Investors of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement, the Registration Rights Agreement and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investors of the Registrable Securities under the Securities Act. Section 1.22. "Regulation D" shall have the meaning set forth in the recitals of this Agreement. Section 1.24. "SEC" shall mean the Securities and Exchange Commission. Section 1.25. "Section 4(2)" and "Section 4(6)" shall have the meanings set forth in the recitals of this Agreement. Section 1.26. "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.27. "SEC Documents" shall mean the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and each report, proxy statement or registration statement filed by the Company with the SEC pursuant to the Exchange Act or the Securities Act since the filing of such Annual Report through the date hereof. 3 5 Section 1.28. "Shares" shall mean the shares of Common Stock purchased pursuant to this Agreement. Section 1.29. "Trading Day" shall mean any day during which the Principal Market shall be open for business. Section 1.30. "Warrants" shall mean the Common Stock purchase warrants in the form of Exhibit C hereto. Section 1.31. "Warrant Shares" shall mean the shares of Common Stock issuable upon exercise of the Warrants. ARTICLE II PURCHASE AND SALE OF COMMON STOCK Section 2.1. Investment. (a) Upon the terms and subject to the conditions set forth herein, the Company agrees to sell, and the Investors, severally and not jointly, agree to purchase the Shares as follows: (i) First Closing. Upon satisfaction by the Company of the Closing conditions set forth in Section 2.1(b), the Investors shall purchase Eight Hundred Thousand (800,000) Shares of Common Stock at the Purchase Price and Three Hundred Thirty Thousand Eight Hundred Ninety One (330,891) Warrants. Upon execution of this Agreement, the Investors shall deliver to the Escrow Agent immediately available funds in their proportionate amount of the Purchase Price as set forth next on the signature pages hereto and the Company shall deliver the Common Stock certificates representing the shares of Common Stock so purchased to the Escrow Agent, to be held by the Escrow Agent pursuant to the Escrow Agreement. (ii) Second Closing. The Company shall give the Investors written notice of the Effective Date. Within five (5) Trading Days of such notice, the Investors shall, severally and not jointly, advise the Company whether they will purchase their proportionate share of (A) 429,000 Shares of Common Stock at the Market Price or (B) 286,000 Shares of Common Stock at the Purchase Price and 143,000 Warrants. The Investors shall be obligated to purchase additional securities under either (A) or (B) but not both. Within five (5) Trading Days of the Effective Date, the Investors shall purchase such securities as they shall each have elected. The Investors shall deliver to the Escrow Agent immediately available funds in their proportionate amount of the aggregate purchase price, and the 4 6 Company shall deliver the Common Stock certificates representing the shares so purchased and the Warrants to the Escrow Agent, to be held by the Escrow Agent pursuant to the Escrow Agreement. (iii) Each Closing. Upon satisfaction of the conditions set forth in Section 2.1(b), each Closing shall occur at the offices of the Escrow Agent at which the Escrow Agent (x) shall release the Common Stock to the Investors and (y) shall release the purchase price to the Company (after all fees have been paid as set forth in the Escrow Agreement), pursuant to the terms of the Escrow Agreement. (b) Each Closing is subject to the satisfaction or waiver by the party sought to be benefited thereby of the following conditions: (i) acceptance and execution by the Company and by the Investors, of this Agreement and all Exhibits hereto; (ii) delivery into escrow by each Investor of immediately available funds in the amount of the purchase price of the Common Stock as applicable to each Closing and as more fully set forth in the Escrow Agreement; (iii) all representations and warranties of the Investors contained herein shall remain true and correct as of each Closing Date (as a condition to the Company's obligations); (iv) all representations and warranties of the Company contained herein shall remain true and correct as of each Closing Date (as a condition to the Investors' obligations); (v) the Company shall have obtained all permits and qualifications required by any state for the offer and sale of the Common Stock and Warrants or shall have the availability of exemptions therefrom; (vi) the sale and issuance of the Common Stock and Warrants hereunder shall be legally permitted by all laws and regulations to which the Investors and the Company are subject and there shall be no ruling, judgment or writ of any court prohibiting the transactions contemplated by this Agreement; (vii) delivery of the applicable original fully executed Common Stock certificates and Warrant certificates to the Escrow Agent; (viii) as to the first Closing only, delivery to the Escrow Agent of an opinion of Alston & Bird LLP, counsel to the Company, in the form of Exhibit D; (ix) as to the first Closing, delivery to the Escrow Agent of the Irrevocable Instructions to Transfer Agent in the form attached hereto as Exhibit E; and 5 7 (x) as to the first Closing only, delivery to the Escrow Agent of the Registration Rights Agreement; and (xi) as to the second Closing only, the Registration Statement shall have been declared effective, there shall have been no Material Adverse Effect with respect to the Company since the date of the first Closing, the Common Stock shall continue to be listed on the Nasdaq National or SmallCap Market and the average daily trading volume of the Common Stock on the Principal Market for the ten (10) consecutive Trading Days ending on the Effective Date shall have been at least 300,000. Section 2.2. Liquidated Damages. The parties hereto acknowledge and agree that the sums payable pursuant to the Registration Rights Agreement shall constitute liquidated damages and not penalties. The parties further acknowledge that (a) the amount of loss or damages likely to be incurred is incapable or is difficult to precisely estimate, (b) the amounts specified in such Sections bear a reasonable proportion and are not plainly or grossly disproportionate to the probable loss likely to be incurred by the Investors in connection with the failure by the Company to timely cause the registration of the Registrable Securities and (c) the parties are sophisticated business parties and have been represented by sophisticated and able legal and financial counsel and negotiated this Agreement at arm's length. ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR Each Investor, severally and not jointly, represents and warrants to the Company that: Section 3.1. Restricted Securities; Intent. (a) The Investor acknowledges that the shares of Common Stock and the Warrants and Warrant Shares delivered hereunder will not be registered under the Securities Act, or any state securities act and the resale of such securities will therefore be subject to certain restrictions. Investors further acknowledge that the Company's reliance upon exemptions under the Securities Act and under any state's blue sky laws is based in part upon Investor's representations, warranties and agreements contained in this Agreement. (b) The Investor is entering into this Agreement for its own account and not with a view to or for sale in connection with any distribution of the Common Stock, the Warrants or the Warrant Shares. The Investor has no present arrangement (whether or not legally binding) at any time to sell the securities to or through any person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold such securities for any minimum or other specific term and reserves the right to dispose of the securities at any time in accordance with federal and state securities laws applicable to such disposition. Section 3.2. Sophisticated Investor. The Investor is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as defined in Rule 501 of Regulation D), and Investor has such experience in business and financial matters that it has the 6 8 capacity to protect its own interests in connection with this transaction and is capable of evaluating the merits and risks of an investment in the securities. The Investor acknowledges that an investment in the securities is speculative and involves a high degree of risk. Section 3.3. Authority. This Agreement and each agreement attached as an Exhibit hereto which is required to be executed by Investor has been duly authorized and validly executed and delivered by the Investor and is a valid and binding agreement of the Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 3.4. Not an Affiliate. The Investor is not an officer, director or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company. Section 3.5. Absence of Conflicts. The execution and delivery of this Agreement and each agreement which is attached as an Exhibit hereto and executed by the Investor in connection herewith, and the consummation of the transactions contemplated hereby and thereby, and compliance with the requirements hereof and thereof by the Investor, will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Investor or (a) violate any provision of any indenture, instrument or agreement to which Investor is a party or is subject, or by which Investor or any of its assets is bound; (b) conflict with or constitute a material default thereunder; (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Investor to any third party; or (d) require the approval of any third-party (which has not been obtained) pursuant to any material contract, agreement, instrument, relationship or legal obligation to which Investor is subject or to which any of its assets, operations or management may be subject. Section 3.6. Disclosure; Access to Information. The Investor has received all documents, records, books and other publicly available information pertaining to Investor's investment in the Company that have been requested by the Investor. The Company is subject to the periodic reporting requirements of the Exchange Act, and the Investor has reviewed copies of all SEC Documents deemed relevant by Investor. Section 3.7. Manner of Sale. At no time was Investor presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Investors that, except as set forth in the SEC Documents or the Disclosure Schedule prepared by the Company and attached hereto: Section 4.1. Organization of the Company. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of Delaware and has all requisite corporate authority to own its properties and to carry on its business as now being conducted. 7 9 The Company does not have any subsidiaries and does not own more that fifty percent (50%) of or control any other business entity except as set forth in the SEC Documents. The Company is duly qualified and is in good standing as a foreign corporation to do business in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a Material Adverse Effect. Section 4.2. Authority. (i) The Company has the requisite corporate power and corporate authority to enter into and perform its obligations under this Agreement, the Registration Rights Agreement, the Escrow Agreement and to issue the Shares and the Warrants pursuant to their respective terms, (ii) the execution, issuance and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Common Stock certificates and the Warrants by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required, and (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Common Stock certificates representing the Shares and the Warrants have been duly executed and delivered by the Company and at each Closing shall constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 4.3. Capitalization. As of March 24, 2000, the authorized capital stock of the Company consists of 18,750,000 shares of Common Stock, $0.001 par value per share, of which 8,780,050 shares are issued and outstanding, 1,000 shares of preferred stock, $0.01 par value, of which none are issued or outstanding. Except for (i) outstanding options and warrants as set forth in the SEC Documents, and (ii) as set forth in the Disclosure Schedule, there are no outstanding Capital Shares Equivalents nor any agreements or understandings pursuant to which any Capital Shares Equivalents may become outstanding. The Company is not a party to any agreement granting registration or anti-dilution rights to any person with respect to any of its equity or debt securities. All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable. Section 4.4. Common Stock The Company has registered its Common Stock pursuant to Section 12(b) or (g) of the Exchange Act and is in full compliance with all reporting requirements of the Exchange Act, and the Company is in compliance with all requirements for the continued listing or quotation of its Common Stock, and such Common Stock is currently listed or quoted on, the Principal Market. As of the date hereof, the Principal Market is the NASDAQ National Market and the Company has not received any notice regarding, and to its knowledge there is no threat, of the termination or discontinuance of the eligibility of the Common Stock for such listing. Section 4.5. SEC Documents. The Company has made available to the Investors true and complete copies of the SEC Documents. The Company has not provided to the Investors any information that, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company, but which has not been so disclosed. As of 8 10 their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act, and rules and regulations of the SEC promulgated thereunder and the SEC Documents did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents complied in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto at the time of such inclusion. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited interim statements, to normal year-end audit adjustments). Neither the Company nor any of its subsidiaries has any material indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due) that would have been required to be reflected in, reserved against or otherwise described in the financial statements or in the notes thereto in accordance with GAAP, which was not fully reflected in, reserved against or otherwise described in the financial statements or the notes thereto included in the SEC Documents or was not incurred in the ordinary course of business consistent with the Company's past practices since the last date of such financial statements. Section 4.6. Exemption from Registration; Valid Issuances. Subject to the accuracy of the Investors' representations in Article III, the sale of the Shares and the Warrants will not require registration under the Securities Act and/or any applicable state securities law. Neither the sales of the Shares nor the Company's performance of its obligations under this Agreement, the Registration Rights Agreement, the Escrow Agreement or the Warrants will (i) result in the creation or imposition by the Company of any liens, charges, claims or other encumbrances upon the Shares or, except as contemplated herein, any of the assets of the Company, or (ii) entitle the holders of Outstanding Capital Shares to preemptive or other rights to subscribe for or acquire the Capital Shares or other securities of the Company. The Shares shall not subject the Investors to personal liability to the Company or its creditors by reason of the possession thereof. Section 4.7. No General Solicitation or Advertising in Regard to this Transaction. Neither the Company nor any of its affiliates nor, to the knowledge of the Company, any person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the sale of the Shares or the Warrants, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Shares or the Warrants under the Securities Act. Section 4.8. No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, including without limitation the issuance of the Shares and the Warrants, do not and will not (i) result in a violation of the Company's Certificate of Incorporation or By-Laws or (ii) conflict 9 11 with, or constitute a material default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument, or any "lock-up" or similar provision of any underwriting or similar agreement to which the Company is a party, or (iii) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any material property or asset of the Company is bound or affected, nor is the Company otherwise in violation of, conflict with or default under any of the foregoing (except in each case for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not have, individually or in the aggregate, a Material Adverse Effect). The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate would not have a Material Adverse Effect. The Company is not required under any Federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and sell the Shares in accordance with the terms hereof (other than any SEC or state securities filings that may be required to be made by the Company subsequent to each Closing, any registration statement that may be filed pursuant hereto); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Investors herein. Section 4.9. No Material Adverse Change. Since September 30, 1999, no Material Adverse Effect has occurred or exists with respect to the Company. Section 4.10. No Undisclosed Events or Circumstances. Since September 30, 1999, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents. Section 4.11. No Integrated Offering. Other than pursuant to an effective registration statement under the Securities Act, or pursuant to the issuance or exercise of employee stock options, or pursuant to its discussion with the Investors in connection with the transactions contemplated hereby, the Company has not issued, offered or sold its Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock within the six-month period next preceding the date hereof, and the Company shall not permit any of its directors, officers or affiliates directly or indirectly to take, any action (including, without limitation, any offering or sale to any Person of the Shares and Warrants), so as to make unavailable the exemption from Securities Act registration being relied upon by the Company for the offer and sale to Investors of the Shares and Warrants as contemplated by this Agreement. Section 4.12. Litigation and Other Proceedings. There are no lawsuits or proceedings pending or, to the knowledge of the Company, threatened, against the Company or any subsidiary, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which could reasonably be expected to have a Material Adverse Effect. No judgment, order, writ, injunction or decree or award has been issued by or, to the knowledge of 10 12 the Company, requested of any court, arbitrator or governmental agency which could result in a Material Adverse Effect. Section 4.13. No Misleading or Untrue Communication. The Company and, to the knowledge of the Company, any person representing the Company, or any other person selling or offering to sell the Shares and Warrants in connection with the transaction contemplated by this Agreement, have not made, at any time, any oral communication in connection with the offer or sale of the same which contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. Section 4.14. Material Non-Public Information. The Company has not disclosed to the Investors any material non-public information that (i) if disclosed, would reasonably be expected to have a material effect on the price of the Common Stock or (ii) according to applicable law, rule or regulation, should have been disclosed publicly by the Company prior to the date hereof but which has not been so disclosed. Section 4.15. Insurance. The Company and each subsidiary maintains property and casualty, general liability, workers' compensation, environmental hazard, personal injury and other similar types of insurance with financially sound and reputable insurers that is adequate, consistent with industry standards and the Company's historical claims experience. The Company has not received notice from, and has no knowledge of any threat by, any insurer (that has issued any insurance policy to the Company) that such insurer intends to deny coverage under or cancel, discontinue or not renew any insurance policy presently in force. Section 4.16. Tax Matters. (a) The Company and each subsidiary has filed all Tax Returns which it is required to file under applicable laws; all such Tax Returns are true and accurate in all material respects and has been prepared in compliance with all applicable laws in all material respects; the Company has paid all Taxes due and owing by it or any subsidiary (whether or not such Taxes are required to be shown on a Tax Return) and have withheld and paid over to the appropriate taxing authorities all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third parties; and since December 31, 1998, the charges, accruals and reserves for Taxes with respect to the Company (including any provisions for deferred income taxes) reflected on the books of the Company are to the knowledge of the Company adequate to cover any Tax liabilities of the Company if its current tax year were treated as ending on the date hereof. (b) To the knowledge of the Company, no claim has been made by a taxing authority in a jurisdiction where the Company does not file tax returns that the Company or any subsidiary is or may be subject to taxation by that jurisdiction. There are no foreign, federal, state or local tax audits or administrative or judicial proceedings pending or being conducted with respect to the Company or any subsidiary; no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority; and, except as disclosed above, no written notice indicating an intent to open an audit or other review has been received by the Company or any subsidiary from any foreign, federal, state or local taxing authority. There are no material 11 13 unresolved questions or claims concerning the Company's Tax liability. The Company (A) has not executed or entered into a closing agreement pursuant to ss. 7121 of the Internal Revenue Code or any predecessor provision thereof or any similar provision of state, local or foreign law; or (B) has not agreed to or is required to make any adjustments pursuant to ss. 481 (a) of the Internal Revenue Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or any of its subsidiaries or has any knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of the Company. The Company has not been a United States real property holding corporation within the meaning of ss. 897(c)(2) of the Internal Revenue Code during the applicable period specified in ss. 897(c)(1)(A)(ii) of the Internal Revenue Code. (c) The Company has not made an election under ss. 341(f) of the Internal Revenue Code. The Company is not liable for the Taxes of another person that is not a subsidiary of the Company (A) under Treas. Reg. ss. 1.1502-6 (or comparable provisions of state, local or foreign law), (B) as a transferee or successor, (C) by contract or indemnity or (D) otherwise. The Company is not a party to any tax sharing agreement. The Company has not made any payments, is obligated to make payments or is a party to an agreement that could obligate it to make any payments that would not be deductible under ss. 280G of the Internal Revenue Code. (d) For purposes of this Section 4.16: "IRS" means the United States Internal Revenue Service. "Tax" or "Taxes" means federal, state, county, local, foreign, or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. Section 4.17. Property. Neither the Company nor any of its subsidiaries owns any real property. Each of the Company and its subsidiaries has good and marketable title to all personal property owned by it, free and clear of all liens, encumbrances and defects except such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company; and to the Company's knowledge any real property, mineral or water rights, and buildings held under lease by the Company as tenant are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and intended to be made of such property, mineral or water rights, and buildings by the Company. 12 14 Section 4.18. Intellectual Property. Each of the Company and its subsidiaries owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "Intangibles") necessary for the conduct of its business as now being conducted. To the Company's knowledge, neither the Company nor any of its subsidiaries is infringing upon or in conflict with any right of any other person with respect to any Intangibles. To the knowledge of the Company, no adverse claims have been asserted by any person to the ownership or use of any Intangibles and the Company has no knowledge of any basis for such claim. Section 4.19. Regulatory Compliance. The Company has all necessary FDA and European Union permits and licenses and has made all filings to such regulatory bodies to conduct its business as it is now being conducted, and is not in material violation of any thereof. Section 4.20. Internal Controls and Procedures. The Company maintains books and records and internal accounting controls which provide reasonable assurance that (i) all transactions to which the Company or any subsidiary is a party or by which its properties are bound are executed with management's authorization; (ii) the recorded accounting of the Company's consolidated assets is compared with existing assets at regular intervals; (iii) access to the Company's consolidated assets is permitted only in accordance with management's authorization; and (iv) all transactions to which the Company or any subsidiary is a party or by which its properties are bound are recorded as necessary to permit preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles. Section 4.21. Payments and Contributions. Neither the Company, any subsidiary, nor any of its directors, officers or, to its knowledge, other employees has (i) used any Company funds for any unlawful contribution, endorsement, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment of Company funds to any foreign or domestic government official or employee; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other similar payment to any person with respect to Company matters. Section 4.22. No Misrepresentation. The representations and warranties of the Company contained in this Agreement, any schedule, annex or exhibit hereto and any agreement, instrument or certificate furnished by the Company to the Investors pursuant to this Agreement, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE V COVENANTS OF THE INVESTORS 13 15 Each Investor, severally and not jointly, covenants with the Company that: Section 5.1. Compliance with Law. The Investor's trading activities with respect to shares of the Company's Common Stock will be in compliance with all applicable state and federal securities laws, rules and regulations and rules and regulations of the Principal Market on which the Company's Common Stock is listed. If so required by the Company, the transfer of the Shares by the Investor at any time prior to the Effective Date may be conditioned upon the receipt by the Company of an opinion of competent counsel to the effect that the proposed transfer will not result in any violation of the Securities Act or the applicable securities laws of any other United States jurisdiction. ARTICLE VI COVENANTS OF THE COMPANY Section 6.1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof and shall use best efforts to timely prepare and file the Registration Statement. Section 6.2. Reservation of Common Stock. As of the date hereof, the Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to issue the Shares at the second Closing and to honor exercises of the Warrants. Section 6.3. Listing of Common Stock. The Company hereby agrees to maintain the listing of the Common Stock on a Principal Market, and as soon as reasonably practicable following the Closing to list the Shares on the Principal Market. The Company further agrees, if the Company applies to have the Common Stock traded on any other Principal Market, it will include in such application the Shares. The Company will take all action to continue the listing and trading of its Common Stock on a Principal Market and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market and shall provide Investors with copies of any correspondence to or from such Principal Market which questions or threatens delisting of the Common Stock, within three (3) Trading Days of the Company's receipt thereof, until the Investors have disposed of all of their Registrable Securities. Section 6.4. Exchange Act Registration. The Company will cause its Common Stock to continue to be registered under Section 12(b) or (g) of the Exchange Act, will use its best efforts to comply in all respects with its reporting and filing obligations under the Exchange Act, and will not take any action or file any document (whether or not permitted by the Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Act until the Investors have disposed of all of their Registrable Securities. Section 6.5. Legends. The certificates evidencing the Registrable Securities shall be free of legends, except as set forth in Article IX. 14 16 Section 6.6. Corporate Existence; Conflicting Agreements. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. The Company shall not enter into any agreement, the terms of which agreement would restrict or impair the right or ability of the Company to perform any of its obligations under this Agreement or any of the other agreements attached as exhibits hereto. Section 6.7. Consolidation; Merger. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all of the assets of the Company to, another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument or by operation of law the obligation to deliver to the Investors such shares of stock and/or securities as the Investors are entitled to receive pursuant to this Agreement. Section 6.8. Issuance of Common Stock. The sale of the Shares shall be made in accordance with the provisions and requirements of Section 4(2), 4(6) or Regulation D and any applicable state securities law. The Company shall make any necessary SEC and "blue sky" filings required to be made by the Company in connection with the sale of the Securities to the Investors as required by all applicable laws, and shall provide a copy thereof to the Investors promptly after such filing. Section 6.9. Limitation on Future Financing. The Company agrees that it will not enter into any sale of its securities for cash at a discount to its then current Market Price until the earlier of (A) sixty (60) days after the effective date of the Registration Statement or (B) the date on which the Investors have in the aggregate disposed of more than 50% of the Shares purchased at both Closings, except for any sales (i) pursuant to any placement arranged through Ladenburg Thalmann & Co. Inc., (ii) pursuant to any presently existing employee benefit plan which plan has been approved by the Company's stockholders, (iii) pursuant to any compensatory plan for a full-time employee or key consultant, or (iv) with the prior approval of a majority in interest of the Investors, which will not be unreasonably withheld, in connection with a strategic partnership or other business transaction, the principal purpose of which is not simply to raise money. ARTICLE VII SURVIVAL; INDEMNIFICATION Section 7.1. Survival. The representations, warranties and covenants made by each of the Company and each Investor in this Agreement, the annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement, shall survive each Closing and the consummation of the transactions contemplated hereby. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement, irrespective of any investigation made by or on behalf of such party on or prior to the first Closing Date. 15 17 Section 7.2. Indemnity. (a) The Company hereby agrees to indemnify and hold harmless the Investors, their respective Affiliates and their respective officers, directors, partners and members (collectively, the "Investor Indemnitees"), from and against any and all Damages, and agrees to reimburse the Investor Indemnitees for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Investor Indemnitees and to the extent arising out of or in connection with: (i) any misrepresentation, omission of fact or breach of any of the Company's representations or warranties contained in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or (ii) any failure by the Company to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or (iii) any action instituted against the Investors, or any of them, by any stockholder of the Company who is not an Affiliate of an Investor, with respect to any of the transactions contemplated by this Agreement. (b) Each Investor, severally and not jointly, hereby agrees to indemnify and hold harmless the Company, its Affiliates and their respective officers, directors, partners and members (collectively, the "Company Indemnitees"), from and against any and all Damages, and agrees to reimburse the Company Indemnitees for reasonable all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with any misrepresentation, omission of fact, or breach of any of the Investor's representations or warranties contained in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Investor pursuant to this Agreement or (ii) any failure by the Investor to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Investor pursuant to this Agreement. Notwithstanding anything to the contrary herein, the Investor shall be liable under this Section 7.2(b) for only that amount as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to the Registration Statement. Section 7.3. Notice. Promptly after receipt by either party hereto seeking indemnification pursuant to Section 7.2 (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party from whom indemnification pursuant to Section 7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is actually prejudiced by such omission or delay. In connection with any Claim as to which both 16 18 the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). Neither the Indemnifying Party nor the Indemnified Party shall, without the prior written consent of the Indemnified Party or the Indemnifying Party, as applicable (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party or the Indemnifying Party, as applicable, from all liabilities with respect to such Claim or judgment. All fees and expenses of the Indemnified Party (including reasonable costs of defense and investigation in a manner not inconsistent with this Section and all reasonable attorneys' fees and expenses) shall be paid to the Indemnified Party, as incurred, within ten (10) Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). Section 7.4. Direct Claims. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association as set forth in Article X. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. ARTICLE VIII 17 19 DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION. Section 8.1. Due Diligence Review. Subject to Section 8.2, the Company shall make available for inspection and review by the Investors, advisors to and representatives of the Investors (who may or may not be affiliated with the Investors and who are reasonably acceptable to the Company), any underwriter participating in any disposition of the Registrable Securities on behalf of the Investors pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, Nasdaq or other filing, all SEC Documents and other filings with the SEC, and all other publicly available corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such publicly available information reasonably requested by the Investors or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investors and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2. Non-Disclosure of Non-Public Information. (a) The Company shall not disclose material non-public information to the Investors, advisors to or representatives of the Investors unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investors, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. Other than disclosure of any comment letters received from the SEC staff with respect to the Registration Statement, the Company may, as a condition to disclosing any non-public information hereunder, require the Investors' advisors and representatives to enter into a confidentiality agreement in form and content reasonably satisfactory to the Company and the Investors. (b) Nothing herein shall require the Company to disclose material non-public information to the Investors or their advisors or representatives, and the Company represents that it does not disseminate material non-public information to any Investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, promptly notify the advisors and representatives of the Investors and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting material non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investors (without the written consent of the Investors prior to disclosure of such 18 20 information as set forth in Section 8.2(a)) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE IX LEGENDS; TRANSFER AGENT INSTRUCTIONS Section 9.1. Legends. Unless otherwise provided below, each certificate representing Registrable Securities will bear the following legend or equivalent (the "Legend"): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION. Section 9.2. Transfer Agent Instructions. Upon the execution and delivery hereof, the Company is issuing to the transfer agent for its Common Stock (and to any substitute or replacement transfer agent for its Common Stock upon the Company's appointment of any such substitute or replacement transfer agent) instructions substantially in the form of Exhibit E hereto. Such instructions shall be irrevocable by the Company from and after the date hereof or from and after the issuance thereof to any such substitute or replacement transfer agent, as the case may be. Section 9.3. No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in Section 9.1 has been or shall be placed on the share certificates representing the Registrable Securities and no instructions or "stop transfer orders," "stock transfer restrictions," or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Article IX. Section 9.4. Investors' Compliance. Nothing in this Article shall affect in any way each Investor's obligations to comply with all applicable securities laws upon resale of the Common Stock. 19 21 ARTICLE X CHOICE OF LAW; ARBITRATION Section 10.1. Governing Law/Arbitration. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made in New York by persons domiciled in New York City and without regard to its principles of conflicts of laws. Any dispute under this Agreement shall be submitted to arbitration under the American Arbitration Association (the "AAA") in New York City, New York, and shall be finally and conclusively determined by the decision of a board of arbitration consisting of three (3) members (hereinafter referred to as the "Board of Arbitration") selected according to the rules governing the AAA. The Board of Arbitration shall meet on consecutive business days in New York City, New York, and shall reach and render a decision in writing (concurred in by a majority of the members of the Board of Arbitration) with respect to the amount, if any, which the losing party is required to pay to the other party in respect of a claim filed. In connection with rendering its decisions, the Board of Arbitration shall adopt and follow the laws of the State of New York unless the matter at issue is the corporation law of the company's state of incorporation, in which event the corporation law of such jurisdiction shall govern such issue. To the extent practical, decisions of the Board of Arbitration shall be rendered no more than thirty (30) calendar days following commencement of proceedings with respect thereto. The Board of Arbitration shall cause its written decision to be delivered to all parties involved in the dispute. Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the parties to the dispute, and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. The Board of Arbitration shall be authorized and is hereby directed to enter a default judgment against any party failing to participate in any proceeding hereunder within the time periods set forth in the AAA rules. The prevailing party shall be awarded its costs, including attorneys' fees, from the non-prevailing party as part of the arbitration award. Any party shall have the right to seek injunctive relief from any court of competent jurisdiction in any case where such relief is available. The prevailing party in such injunctive action shall be awarded its costs, including attorney's fees, from the non-prevailing party. ARTICLE XI ASSIGNMENT Section 11.1. Assignment. Neither this Agreement nor any rights of the Investors or the Company hereunder may be assigned by either party to any other person. ARTICLE XII NOTICES Section 12.1. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise 20 22 specified herein, shall be (i) hand delivered, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the first business day following the date of sending by reputable courier service, fully prepaid, addressed to such address, or (c) upon actual receipt of such mailing, if mailed. The addresses for such communications shall be: If to the Company: 154 Technology Parkway Technology Park/Atlanta Norcross, Georgia 30092 Attention: Jack J. Luchese Telephone: (770) 368-9500 Facsimile: (770) with a copy to (shall not constitute Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Attention:George M. Maxwell, Jr. Telephone: (404) 881-7000 Facsimile: (404) if to the Investors: As set forth on the signature pages hereto with a copy to: Joseph A. Smith, Esq. (shall not constitute notice) Epstein Becker & Green, P.C. 250 Park Avenue New York, New York Telephone: (212) 351-4500 Facsimile: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number for notices under this Section 12.1 by giving written notice of such changed address or facsimile number to the other party hereto as provided in this Section 12.1. ARTICLE XIII MISCELLANEOUS 21 23 Section 13.1. Counterparts/ Facsimile/ Amendments. This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. Except as otherwise stated herein, in lieu of the original documents, a facsimile transmission or copy of the original documents shall be as effective and enforceable as the original. This Agreement may be amended only by a writing executed by all parties. Section 13.2. Entire Agreement. This Agreement, the agreements attached as Exhibits hereto, which, include but are not limited the Escrow Agreement, and the Registration Rights Agreement, set forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. The terms and conditions of all Exhibits to this Agreement are incorporated herein by this reference and shall constitute part of this Agreement as is fully set forth herein. Section 13.3. Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party. Section 13.4. Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. Section 13.5. Number and Gender. There may be one or more Investors parties to this Agreement, which Investors may be natural persons or entities. All references to plural Investors shall apply equally to a single Investor if there is only one Investor, and all references to an Investor as "it" shall apply equally to a natural person. Section 13.6. Replacement of Certificates. Upon (i) receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of a certificate representing the Shares and (ii) in the case of any such loss, theft or destruction of such certificate, upon delivery of an indemnity agreement or security reasonably satisfactory in form to the Company (which shall not include the posting of any bond) or (iii) in the case of any such mutilation, on surrender and cancellation of such certificate, the Company at its expense will execute and deliver, in lieu thereof, a new certificate of like tenor. Section 13.7. Fees and Expenses. Each of the Company and the Investors agrees to pay its own expenses incident to the performance of its obligations hereunder. Section 13.8. Brokerage. Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party, except Ladenburg Thalmann & Co. Inc. whose fees shall be paid by the Company. The Company on the one hand, and the Investors, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to 22 24 have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 13.9. Publicity. The Company agrees that, except as required by law or regulation, it will not issue any press release or other public announcement of the transactions contemplated by this Agreement without the prior consent of the Investors, which shall not be unreasonably withheld nor delayed by more than two (2) Trading Days from their receipt of such proposed release. No release shall name the Investors without their express consent. Section 13.10. No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of each party and their respective successors or permitted assigns. It is not the intention of the parties to confer third-party beneficiary rights and this Agreement does not confer any such rights upon any other person other than a party to this Agreement. 23 25 IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. CYTRX CORPORATION By: --------------------------------------------- Jack J. Luchese, President and CEO INVESTORS: Celeste Trust Reg. By: --------------------------------------------- Authorized Signatory Amount subscribed for: 25% of total Address for notices: Fax: AMRO International, S.A. By: --------------------------------------------- H.U. Bachofem, Authorized Signatory Amount subscribed for: 50% of total Address for notices: C/o Ultra Finanz AG Grossmuensterplatz 6 Zurich CH-8022 Switzerland Fax: 011-431-262-5515 24 26 [Cytrix Purchase Agreement, continued signature page] Balmore Funds, S.A. By: --------------------------------------------- Francois Morax, Authorized Signatory Amount subscribed for: 25% of total Trident Chambers P.O. Box 146 Road Town Tortola, BVI Fax: 25 EX-23.1 5 CONSENT OF ERNST & YOUNG, LLP. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS 2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 Nos. 33-48706 and 333-31717 pertaining to the CytRx Corporation 401(k) Profit Sharing Plan, No. 33-93816 pertaining to the CytRx Corporation 1994 Stock Option Plan, and No. 33-93818 pertaining to the CytRx Corporation 1995 Stock Option Plan and to the Registration Statements on Form S-3 Nos. 33-93820, 333-39607, 333-44043, and 333-48837 of CytRx Corporation and in the related prospectuses of our report dated March 15, 2000, with respect to the consolidated financial statements and schedule of CytRx Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 28, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,031,893 0 174,292 0 6,480 3,415,275 3,169,332 527,522 6,128,063 2,751,737 0 0 0 8,374 1,024,314 6,128,063 822,523 1,891,447 285,215 285,215 16,595,665 0 0 (14,989,433) 0 (14,989,433) (39,858) 0 0 (15,029,291) (1.96) (1.96)
EX-99.1 7 SAFE HARBOR COMPLIANCE 1 EXHIBIT 99.1 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS 2 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS CytRx Corporation ("CytRx") intends to qualify both its written and oral forward-looking statements for protection under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and any other similar safe harbor provisions. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, investors are urged not to place undue reliance on written or oral forward-looking statements of CytRx. CytRx undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements to reflect future developments. In addition, CytRx undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. CytRx provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Securities Act of 1933 and the Securities Exchange Act of 1934 and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: WE MAY NOT HAVE ADEQUATE FUNDS TO CONTINUE PRODUCT TESTING AND RESEARCH AND DEVELOPMENT On December 31, 1999, we had approximately $3 million in cash and cash equivalents and working capital of $664,000. During the first quarter of 2000 we reached agreement with certain of our trade creditors whereby $2.4 million of aggregate indebtedness was cancelled in exchange for issuance of 937,592 shares of CytRx Common Stock and the granting of registration rights to such creditors. We do not have adequate funds to conduct the required testing and data collection necessary for the FDA to approve FLOCOR or any of our other products We will have to either: 1. severely reduce or terminate testing and research and development activities with respect to some or all of our products; or -1- 3 2. obtain additional financing from third parties to fund the required testing. Our reduction in, or termination of, testing and research and development activities could have a material adverse impact on our business and future results of operations. If we elect to attempt to obtain additional financing, we may be unable to obtain funds from any third party or to obtain such financing on terms that we believe are acceptable. Our inability to obtain additional financing could have a material adverse effect on our business and future results of operations. See "We Will Require Additional Financing." WE HAVE NO SIGNIFICANT SOURCE OF REVENUE FROM OUR OPERATIONS We will require substantial funds to complete - research and development activities, - preclinical studies and testing activities, and - required data collection and other activities required for FDA review. We currently have no significant source of operating revenue. Our inability to generate revenues in amounts adequate to satisfy our operating needs may have a material adverse effect on our business and may cause us to depend on raising funds by borrowing from third parties or by entering into collaborative relationships with third parties. See "We Will Require Additional Financing." Our total revenues for 1999 were approximately $1.9 million. Approximately 49% of our 1999 revenues or $927,000 consisted of non-operating revenue such as interest income and grants from government agencies. Approximately 43% of our 1999 revenues or $823,000 was derived from selling our services and products (mainly consisting of TiterMax). If the FDA does not approve the commercialization of FLOCOR or one of our other pharmaceutical products, we may not be able to generate significant revenues for an extended period of time, which would have a material adverse effect on our business, financial condition and future results of operations. WE HAVE OPERATED AT A LOSS FOR OVER FIVE YEARS AND WILL PROBABLY CONTINUE TO OPERATE AT A LOSS FOR SOME TIME We have incurred significant net losses for each of the last five years. Our inability to operate at a profit in the future could have a material adverse effect on our business and financial condition. Since our inception, we have primarily conducted research and development of our products. The costs of our research and development and our lack of operating revenues has resulted in our net losses. We will continue to -2- 4 incur substantial additional losses in the near future because we are continuing to conduct research and development of our products while we continue to fail to generate any significant revenues. We will probably incur losses until one or more of our products is approved by the FDA and that product has achieved significant sustained commercial sales. The activities required for the FDA review process of a new pharmaceutical are extremely costly and usually take several years. See "We May Incur Substantial Unanticipated Costs If We Have Significant Delays in the Regulatory Approval of Our Products." Also, we may never obtain FDA approval of any of our products currently under development. WE WILL REQUIRE ADDITIONAL FINANCING We believe that we do not have enough funds (1) to complete the required testing and data collections necessary to obtain regulatory approval of FLOCOR or any of our other products currently under development or (2) to manufacture, market, and distribute any of our products, if we obtain FDA approval with respect to that product. The continuation of the Phase III clinical trials and the requirement of additional trials for FLOCOR and the related activities in preparation for its commercialization has greatly increased our need for capital. We may have to raise additional funds through an equity or debt offering, a third party loan, or a third party collaborative arrangement. We may be unable to obtain any financing when we need it or on terms that we believe to be acceptable. Our inability to raise the required additional financing when we need it could have a material adverse effect on our business and financial condition, and could result in the termination of our operations. If we are able to obtain financing when we require it, such financing may be on terms which may result in dilution to our then-existing stockholders. OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET On March 14, 2000 the we received correspondence from Nasdaq regarding the Company's failure to satisfy certain quantitative criteria of the maintenance standards for listing its Common Stock with the Nasdaq National Market which provided the Company with ten business days to respond with its plan to bring the Company back into compliance with such criteria. If we are unable to satisfy such criteria or provide Nasdaq with an adequate plan to return to compliance, Nasdaq may commence procedures to delist our Common Stock from the Nasdaq National Market. WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE OUR PRODUCTS Our overall success substantially depends on our ability to successfully develop and commercialize our products. Our inability to successfully develop and -3- 5 commercialize our products could have a material adverse effect on our business, financial condition and future results of operations. Our products are in various stages of development and significant amounts of time and money will be required to develop and commercialize them. Cost overruns caused by unanticipated regulatory delays or unexpected adverse side effects could end or substantially delay our development efforts. We also may be unable to obtain FDA approval of those products, if we are unable to prove to the FDA that those products are safe and effective. In December 1999, the Company reported results from its Phase III clinical study of FLOCOR for treatment of acute sickle cell crisis. The study did not demonstrate statistical significance in the primary endpoint. In order to collect adequate information to obtain FDA approval, we will need to conduct additional studies, which we will not commence unless we are able to raise additional funds. Even if we are able to obtain FDA approval of one or more of our products, we may not have adequate financial or other resources, or the expertise to successfully commercialize, market and distribute those products. If we do not have adequate resources or the expertise to successfully commercialize our products, we may rely on third parties to provide financial or other resources to help us commercialize those products or we may have such third parties market and distribute our products for us. In order to enter into any such arrangements with a third party, we may have to give up some or all of our rights to some of our products. Also, we may be unable to find a third party willing to provide us with resources or to market and distribute our products. Even if we find a willing third party, we may not be able to reach an agreement on terms that we believe are acceptable. Our inability to successfully commercialize our products, alone or with the assistance of third parties, may have a material adverse effect on our business, financial condition and future results of operations. WE MAY INCUR SUBSTANTIAL UNANTICIPATED COSTS IF WE HAVE SIGNIFICANT DELAYS IN THE REGULATORY APPROVAL OF OUR PRODUCTS Our products are subject to extensive regulation by federal, state and local governments in the United States, including the FDA, and similar agencies in other countries where we test and intend to market our current and future products. Regulatory approval of a product can take several years and requires the expenditure of substantial resources. If we experience significant delays in the regulatory approval process of our products, we may incur substantial unanticipated additional costs. Because we generate insignificant revenues from operations and we have limited funds, if we incur substantial unanticipated costs, we may have to seek additional financing earlier than we had anticipated. At that time, we may be unable to obtain additional financing or financing on terms that we believe are acceptable. Our inability to obtain additional financing to complete the regulatory approval process could have a material adverse effect on our business, financial condition and our ability to continue to operate. -4- 6 In December 1999, the Company reported results from its Phase III clinical study of FLOCOR for treatment of acute sickle cell crisis. The study did not demonstrate statistical significance in the primary endpoint. In order to collect adequate information to obtain FDA approval, we will need to conduct additional studies, which we will not commence unless we are able to raise additional funds. WE MAY BE UNABLE TO SUCCESSFULLY COMPETE AGAINST OTHER PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES Our competitors mainly consist of pharmaceutical and biotechnology companies. Many of those companies have advantages over us, including the following: - substantially greater financial resources and research and development staffs, - substantially superior facilities, - more extensive experience regarding FDA and other regulatory processes, - greater manufacturing and marketing expertise, and - alliances with major pharmaceutical companies that may afford greater resources and other advantages. If our competitors develop better products than us; or if they develop their products and obtain regulatory approval faster than us; or if they more successfully manufacture, market and distribute their products than us, then that could have a material adverse effect on our business and future results of operations. WE MAY BE UNABLE TO ESTABLISH AND MAINTAIN NECESSARY RELATIONSHIPS WITH THIRD PARTIES We may have to rely on third parties to enable us to offer our products to a larger customer base than we could otherwise reach through direct marketing efforts. Consequently, our success will depend in part on our ability to enter into relationships with strategic partners and the performance of those partners. We may be unable to find third parties willing to enter into a relationship with us or to enter a relationship on terms that are acceptable to us. Also, we may be unable to maintain any relationships once we have formed them. Our inability to establish and maintain such third party relationships or the unsuccessful performance of one or more of our strategic partners could have a material adverse effect on our business, financial condition and future results of operations. If we are unable to establish and maintain third party relationships, or if such third parties are unsuccessful, we may have to establish our own marketing and distribution channels for our products. We may not have the available financial or other resources at such time to establish our own marketing or distribution channels. Our inability to develop our own marketing and distribution channels in such case could have -5- 7 a material adverse effect on our business and financial condition, and could result in the termination of our operations. WE DEPEND ON CERTAIN SUPPLIERS FOR AN ADEQUATE SUPPLY OF MATERIALS We require three suppliers of materials or services to manufacture FLOCOR. These consist of a supplier of the raw drug substance, a supplier of the purified drug which is refined from the raw drug and a manufacturer who can formulate and sterile fill the purified drug substance into the finished drug product. Our inability to maintain relationships with those suppliers could result in (1) lengthy delays in the FDA and other regulatory agencies approval processes, causing us to incur substantial unanticipated costs or (2) our inability to produce, market and distribute our product. Such delays or inability could have a material adverse effect on our business, financial condition and future results of operation. We have not entered into an agreement with any supplier for the raw drug substance because we believe that it is widely available. In August 1999, we entered into a long-term commercial supply contract with Organichem Corp. of Rensselaer, New York to obtain the purified drug substance. We have also entered into an agreement with the Hospital Products Division of Abbott Laboratories for the manufacture of our finished drug product. Our inability to maintain such relationships on terms acceptable to us or to replace such suppliers if they fail to adequately perform could have a material adverse effect on our business, financial condition and future results of operations. WE DEPEND ON CERTAIN MEMBERS OF MANAGEMENT FOR FUTURE SUCCESS We depend to a significant extent on the members of the management staff, particularly Jack J. Luchese, for our future success. We may be unable to retain his services or the services of such members of management, or to replace them with qualified skilled individuals. Our loss of the services of Mr. Luchese or any of the other members of management could have a material adverse effect on our business and future results of operations. We have an employment agreement with Mr. Luchese, however, we would be unable to prevent him from terminating his employment with us. Also, we carry no key man life insurance on the life of Mr. Luchese or any other member of the management team. WE MAY INCUR SUBSTANTIAL COSTS AND LIABILITY FROM PRODUCT LIABILITY CLAIMS We may be exposed to claims for personal injury resulting from allegedly defective products. Even if the commercialization of one or more of our products is approved by the FDA, users may claim that such product caused unintended adverse effects. We currently carry product liability insurance covering the use of our products in human clinical trials and may extend that coverage to third parties who collaborate with us on the development of our products. However, if a claim is successfully asserted -6- 8 against us and the amount of such claims exceeds our policy limits or is not covered by our policy, such successful claim may have a material adverse effect on our business. Even if claims asserted against us are unsuccessful, they may divert management's attention from our operations and we may have to incur substantial costs to defend such claims. If a significant number of claims are asserted against us, regardless of whether they are successful, they may have a material adverse effect on our operations and business. WE DEPEND ON OUR PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS FOR OUR FUTURE SUCCESS Our future success, if any, will depend in a substantial part, on our ability to protect our products by obtaining patents covering them in the United States and other countries. If we are unable to obtain patents covering our products, other companies may develop, manufacture, market and distribute products similar to or the same as our products. Our inability to obtain patents in each country in which we intend to market our products or our inability to successfully challenge third party infringement of our patent claims could have a material adverse effect on our business and future results of operations. Third parties may challenge the validity of our patents through challenges filed with the United States Patent and Trademark Office and its foreign equivalents or through lawsuits. Third parties may also claim that our products infringe their rights under their patents. If a third party successfully asserts an infringement claim against us, we may be prevented from practicing the subject matter claimed in such third party's patents or we could be required to obtain licenses or redesign our products to avoid infringement. If any of our patents are successfully challenged, or any of our products are determined to infringe on the rights of others, we may incur substantial additional costs which may have a material adverse effect on our business, financial condition and future results of operations. In addition, we depend on our trade secrets, proprietary know-how and continuing technological innovation, which we seek to protect with confidentiality agreements with our employees, consultants and collaborators. However, we may be unable to prevent an employee, consultant or collaborator from disclosing trade secrets, know-how or other information. If we are unable to prevent such disclosure, we may have a cause of action against the disclosing party for only monetary damages, which may not be an adequate remedy compared to the harm we may have suffered from the disclosure. Our inability to adequately protect our proprietary information and trade secrets could have a material adverse effect on our business, financial condition and future results of operations. WE MAY BE UNABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF THEIR COSTS ARE NOT ADEQUATELY REIMBURSED BY GOVERNMENT AND THIRD PARTY PAYORS -7- 9 The success of each of our products will depend in part upon the extent to which a consumer will be able to obtain reimbursement for the cost of such product from government health administration authorities, private health insurers and other organizations. We are uncertain as to the reimbursement status of any of our products that we are currently developing. Government and other third party payors are increasingly attempting to decrease health care costs by refusing to provide coverage for products that have not been approved by the FDA, and by limiting the coverage and reimbursement levels for new products approved by the FDA. If the government and other third party payors do not adequately cover our products, the market may not accept our products. The lack of market acceptance could have a material adverse effect on our business, financial condition and future results of operations. We have initiated discussions with consultants and other advisors who will help us to develop a strategy for seeking adequate reimbursement from the government and other third party payors for FLOCOR. However, we will be unable to finalize our strategy until we have obtained all of the required regulatory approvals for FLOCOR and established its market price. GOVERNMENT PRICING REGULATION MAY REDUCE OUR FUTURE REVENUES AND PROFITABILITY Our future revenues and profitability may be affected by the continuing efforts of governments to decrease or contain the costs of health care through the regulation of the pricing and profitability of pharmaceutical products. We are unable to predict whether any federal, state, local or foreign governments will adopt such regulations. However, if such regulations are adopted, they could have a material adverse effect on our business and future results of operations. WE MAY INCUR SUBSTANTIAL COSTS AND LIABILITY UNDER ENVIRONMENTAL AND HAZARDOUS MATERIALS LAWS Our research and development activities involve the use of hazardous materials, which are subject to federal, state and local laws regarding the use, manufacture, storage, handling and disposal of such materials. Although we believe that we comply with applicable environmental laws and regulations, we are unable to completely eliminate the risk of accidental contamination or injury from our hazardous materials and other waste products. If an accident or injury were to occur, we could be liable for any damages that result and any such liability could exceed our resources, which could have a material adverse effect on our business. In addition, we may have to incur substantial costs to comply with environmental laws and regulations in the future which could also have a material adverse effect on our business and future results of operations. WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE The market price of our common stock may experience significant volatility from time to time. Such volatility may be affected by factors such as: -8- 10 - our quarterly operating results; - announcements of regulatory developments, technological innovations or new therapeutic products; - developments in patent or other proprietary rights; and - public concern regarding the safety of our products. Other factors which may affect our stock price is general changes in the economy, financial markets or the pharmaceutical or biotechnology industries. OUR ANTI-TAKEOVER PROVISIONS MAY LIMIT STOCKHOLDER VALUE We have provisions in our bylaws and in our shareholder protection rights agreement that may discourage or prevent a person or group from acquiring us without our board of directors' approval. The intent of these provisions is to protect shareholders' interests by encouraging anyone seeking control of the Company to negotiate with the Board of Directors. The following is a description of these provisions which may reduce the market value of our shares of common stock. We have a classified board of directors, which requires that at least two stockholder meetings, instead of one, will be required to effect a change in the majority control of our board of directors. This provision applies to every election of directors, not just an election occurring after a change in control. The classification of our board increases the amount of time it takes to change majority control of our board of directors and may cause our potential purchasers to lose interest in the potential purchase of us, regardless of whether our purchase would be beneficial to us and our stockholders. Our bylaws provide that directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the outstanding shares of our capital stock then entitled to vote at an election of directors. This provision prevents stockholders from removing any incumbent director without cause. Our bylaws also provide that a stockholder must give us at least 120 days notice of a proposal or director nomination that such stockholder desires to present at any annual meeting or special meeting of stockholders. Such provision prevents a stockholder from making a proposal or director nomination at a stockholder meeting without us having advance notice of that proposal or director nomination. This could make a change in control more difficult by providing our directors with more time to prepare an opposition to a proposed change in control. -9- 11 Under our shareholder protection rights agreement, on May 15, 1997, we distributed one preferred stock purchase right for each then-outstanding share of our common stock. Each right entitles registered holders to purchase one ten-thousandth of a share of our Series A Junior Participating Preferred Stock at an initial purchase price of $30 per share, subject to adjustment. Our preferred stock purchase rights are exercisable only if a person or group (1) announces that they have acquired beneficial ownership of 15% or more of our common stock, or (2) commences a tender offer for 15% or more of our common stock. If a person or group announces that they had acquired 15% or more of our common stock, or commences a tender offer for 15% or more of our common stock, then, after ten days, each right not owned by the person or group which acquired 15% or more of our common stock or who commenced a tender offer for 15% or more of our stock entitles its holder to purchase at the purchase price the number of shares of common stock having a market value equal to twice the purchase price. We may exchange or terminate the preferred stock purchase rights at any time before they become exercisable. The preferred stock purchase rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors, which encourages persons who seek to acquire us to initiate such an acquisition through negotiations with our board of directors. This could discourage any potential acquiror of us and could result in the lower prices of our common stock than may occur during a hostile acquisition attempt. -10- -----END PRIVACY-ENHANCED MESSAGE-----