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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2744744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Hartwell Avenue
Lexington, Massachusetts 02421-3134
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(Address of principal executive offices)
(781) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Series B Preferred Stock Purchase Rights, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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 shares of Common Stock held by
non-affiliates, based upon the closing price for such stock on March 9, 2001 was
approximately $79,000,000. As of March 9, 2001, 25,465,675 shares of Common
Stock, $.01 par value, were outstanding.
PART I
Item 1. Business.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. MACROCHEM'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED
TO IN "RISK FACTORS".
MacroChem develops pharmaceutical products for commercialization by
applying SEPA(R) (Soft Enhancer of Percutaneous Absorption), our patented
topical drug delivery technology. SEPA compounds, when properly combined with
drugs, provide pharmaceutical formulations, such as creams, gels and solutions,
etc. that enhance the transdermal delivery of drugs into the skin or into the
bloodstream. We believe that SEPA compounds enhance the diffusion of drugs into
and through the skin by making the outer layer of the skin more permeable to the
drug molecule. Transdermal delivery provides an alternative to other methods of
drug administration, such as injection, oral dosage forms and inhalation, and
may allow selected drugs to be administered more effectively, at lower doses,
with fewer adverse events and with improved patient compliance, for both human
and veterinary use.
We are developing specific SEPA formulations for use with non-proprietary
and proprietary drugs manufactured by pharmaceutical companies, and we plan to
commercialize these products through the formation of partnerships, strategic
alliances and license agreements with those companies. In order to attract
strategic partners, we are conducting clinical testing of SEPA-enhanced
pharmaceuticals. Because of the substantial costs involved in bringing a new
pharmaceutical product or a new formulation of an old drug to market, we may be
required to rely on pharmaceutical companies to conduct all or part of the
clinical trials necessary to gain regulatory approval to manufacture and to
market any resulting product.
We have also developed a series of new low molecular weight polymers,
termed MacroDerm(TM), for cosmetic use and the topical delivery of
pharmaceuticals. We have developed, tested and evaluated MacroDerm prototypes
and are seeking strategic partners to manufacture and market products based upon
this technology.
We do not maintain general product liability insurance, since we do not
market drug products. We have ongoing clinical studies and have obtained
specific liability insurance relating to our studies. As of December 31, 2000,
no liability claims had been asserted against us. However, in the future,
incidents could give rise to claims which could exceed our insurance coverage
and resources.
Research and Development
We conduct our research and development activities through our own staff
and facilities, and also through collaborative arrangements with universities,
contract research organizations and independent consultants. As of March 1,
2001, the Company had 30 full-time employees, 21 of whom are devoted to research
and development and regulatory affairs. Research and developmental
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expenditures were $5,280,600, $5,423,100 and $4,318,800 during the years
ended December 31, 2000, 1999 and 1998, respectively. We are also dependent upon
third parties to conduct clinical studies, obtain U.S. Food and Drug
Administration ("FDA") and other regulatory approvals and manufacture and market
a finished product.
We conduct stability studies, test our unique formulations and design
manufacturing processes for our SEPA compounds and adhesive and polymer
technologies at our facility and other facilities. We have cGMP (current Good
Manufacturing Practices) facilities for the manufacture of dosage forms for
clinical evaluations.
PRODUCTS AND TECHNOLOGIES
BACKGROUND
To be effective, drugs must reach an intended site in the body, at an
effective concentration, and for an appropriate length of time. Traditional
methods of drug administration, such as oral ingestion, intramuscular and
intravenous injections and inhalation, are effective for a wide variety of
drugs. However, depending upon the given drug, each method may have
disadvantages. For example, following oral administration, a drug must pass
through the gastrointestinal system to be absorbed and may be metabolized or
broken down in the stomach, intestines or liver, resulting in a lower amount of
unchanged drug at the target site for its action. As a result, higher dosages of
the drug must be administered orally to produce the desired effect, which may
cause irritation of the gastrointestinal tract and systemic toxicity.
In addition, the rate at which an orally administered drug is absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. The pharmaceutical industry has investigated a variety of
alternative approaches for dealing with drug adverse events and loss of efficacy
following oral dosing, including enteric coating of tablets, formulating with
various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers. However, the desired effects of these approaches are
not always reproducible from patient to patient or effective in bypassing
metabolism.
TOPICAL DRUG DELIVERY
Topical drug delivery is the process of delivering drugs into the skin
(dermal delivery) so that they can be effective in the treatment of
dermatological conditions and diseases, or through the skin (transdermal
delivery) and into the bloodstream for the treatment of systemic diseases.
The skin is made up of three layers: the outer layer, the stratum corneum;
the middle layer or viable epidermis; and the inner layer, the dermis. The
stratum corneum, which serves as the skin's primary barrier to the external
environment, consists of closely packed dead cells and fatty (lipid) material.
The epidermis is composed of several layers of active cells and the dermis
consists, in part, of tissue containing hair follicles, nerve endings and blood
capillaries. Within the stratum corneum, lipid layers bind the dead cells
together to form a protective barrier. Research conducted by MacroChem shows
that SEPA compounds affect drug delivery by acting, in part, upon the stratum
corneum to disrupt the alignment of the lipid molecules within the lipid layers.
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This disruption increases the porosity of the lipid-cell layers, allowing drugs
to diffuse through the stratum corneum through the more porous epidermis to the
dermis, where they enter the blood stream through the capillaries. The rate and
amount of drug absorbed can be controlled by varying the formulation used.
MACROCHEM'S DRUG DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA COMPOUNDS
The delivery of a drug through the skin depends on the drug's physical and
chemical characteristics (molecular size and shape, the drug's solubility in
lipids and water, its melting point and whether it is lipophilic or
hydrophilic).
Since some drugs move through the skin too rapidly, the transdermal system
must retard the rate of drug absorption to ensure optimal efficacy with minimum
toxicity. Since other drugs move through the skin with difficulty, the
transdermal system must be formulated to increase a drug's rate of absorption
through the skin. Common methods of transdermal delivery use common chemicals
such as ethanol or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have proven to be
somewhat effective with specific drugs, such as drugs used for the treatment of
motion sickness or hormone deficiencies, they have caused adverse events, such
as skin irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug necessary to
achieve the desired therapeutic effect, have not been successfully delivered
transdermally to date.
MacroChem has developed SEPA compounds that are designed to enhance the
transport, penetration and controlled delivery of drugs through the skin. SEPA
compounds are generally colorless, clear liquids that are intended to promote
drug delivery by aiding drug molecules to penetrate the skin, diffuse into or
through the skin layers and become absorbed into the bloodstream.
We have our own facility for the in vitro testing of drug formulations
containing SEPA, and therefore are less dependent on outside laboratories for
this type of testing. We are conducting in vitro studies to evaluate the
transdermal enhancing effect of SEPA in combination with a variety of drugs with
differing physical and chemical characteristics, representing a broad spectrum
of potential drug products. Although our research and development efforts with
SEPA are at an advanced stage, we must still conduct substantial additional
studies to demonstrate the efficacy and safety of any SEPA-drug formulation. We
have found that specific drugs administered transdermally with SEPA demonstrate
increased transdermal absorption. Some of the drug formulations tested by us
with SEPA contain compounds generally recognized as unlikely or difficult
candidates for transdermal delivery because of their physical and chemical
properties and molecular size. As these drug formulations are further developed,
we plan to conduct additional studies to investigate the efficacy and safety of
some of these formulations.
We have conducted early clinical studies with several drug formulations
containing SEPA where SEPA has been demonstrated to enhance transdermal
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penetration of the specific drug within in vitro testing. Clinical studies
have included Phase I trials in which safety and tolerance of a topical
application of the drug formulation were assessed, Phase II trials in which
efficacy of the specific drug was evaluated in an appropriate clinical condition
and Phase III trials in broad patient groups.
We have designed and sponsored clinical trials through Phase III of
Topiglan(R), our topical formulation of alprostadil and SEPA for use in the
treatment of erectile dysfunction. Testing has established safety and tolerance
in both normal volunteers and patients with the target disorder. In addition,
randomized controlled trials have demonstrated effectiveness of the alprostadil
formulation in patients with erectile dysfunction. The Company has also
conducted laboratory and clinical studies with SEPA formulations of nonsteroidal
anti-inflammatory drugs for topical application in pain management.
In addition to the ongoing clinical development programs cited above,
MacroChem, in association with third parties, is currently conducting
pre-clinical studies with SEPA formulations in combination with specific drugs
for a variety of other applications, including but not limited to fungal
infections.
We believe that SEPA compounds can be used with a broad variety of new and
existing drugs to enhance their commercial value. The therapeutic effectiveness
and improved convenience of a transdermal SEPA product may substantially expand
the existing market for a drug. In addition, a formulation containing a SEPA
compound may prove to be a superior alternative to the existing methods of
administering certain drugs.
We are also conducting research on potential extensions of our SEPA
platform technology to enable us to deliver even more drugs.
MACRODERM(TM) DRUG DELIVERY SYSTEM
We have developed a series of new low molecular weight polymers, termed
MacroDerm, for use in cosmetics and in the superficial dermal delivery of
pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents. We have synthesized, tested and evaluated
MacroDerm prototypes and are seeking strategic partners to manufacture and
market specific MacroDerm products.
COMPETITION
We compete with numerous firms, many of which are large, multi-national
organizations with worldwide distribution. We believe that our major competitors
in the drug delivery sector of the health care industry include ALZA
Corporation, Cygnus Therapeutic Systems, Elan Corporation, plc., Novartis and
Pfizer. Compared with MacroChem, these firms have substantially greater capital
resources, research and development and technical staffs, facilities and
experience in obtaining regulatory approvals, as well as in manufacturing,
marketing and distribution of products. Recent trends in this area are toward
further market consolidation of large drug companies into a smaller number of
very large entities, further concentrating financial, technical and market
strength and increasing competitive pressure in the industry. Academic
institutions, hospitals, governmental agencies and other public and private
research organizations are also conducting research and seeking patent
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protection and may develop competing products or technologies of their own
through joint ventures or other arrangements. In addition, recently developed
technologies or technologies that may be developed in the future may or could be
the basis for competitive products. We cannot guarantee that our competitors
will not succeed in developing technologies and products that are more effective
or less costly to use than any that we are currently developing.
Alprostadil, a synthetic prostaglandin E1 (PGE1), and Viagra(R) are the
only drugs approved for marketing in the United States for erectile dysfunction.
PGE1 is available in two dosage forms. Caverject(R), marketed by Pharmacia &
Upjohn, is administered by needle injection directly into the penis. The second
product, developed by Vivus, is a pellet form of the drug administered through a
tube inserted into the urethra. In contrast to the invasive forms now available,
MacroChem believes that a topical gel formulation applied to the penis will be
the preferred dosage form for treatment of this disorder. Viagra(R), an oral
product of Pfizer, was approved by the FDA in 1998. Many large drug companies
have announced internal programs to develop orally administered alternatives to
Pfizer's Viagra for treating male erectile dysfunction. In addition, NexMed has
announced commencement of U.S. Phase II clinical trials of its topical cream
formulation of alprostadil for treating the disease.
Johnson & Johnson and Novartis each offer an orally administered
anti-fungal therapy for treating fungal infections of the nail. A number of
smaller firms are also developing topical and oral therapies for these
infections.
We expect any products approved for sale to compete primarily on the basis
of efficacy, safety, patient compliance, reliability, price and patent position.
Generally, the first pharmaceutical product to reach the market in a therapeutic
or preventive area often has a significant advantage compared with later
entrants to the market. Our competitive position will also depend on our ability
to attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement production and marketing plans, obtain
patent protection and secure adequate capital resources.
EMPLOYEES
As of March 1, 2001, the Company had 30 full time employees, 21 of whom are
devoted to research and development and regulatory affairs. None of our
employees are covered by a collective bargaining agreement, and we consider
relations with our employees to be good.
GOVERNMENT REGULATION
The production and marketing of our drug delivery systems and
pharmaceutical products are subject to regulation for safety, efficacy and
quality by numerous federal, state and local agencies and comparable agencies in
foreign countries. In the United States, the Federal Food, Drug and Cosmetics
Act, the Public Health Service Act, the Controlled Substances Act and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, advertising and promotion
of our proposed products and technologies.
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Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including recalls and criminal prosecutions based
on violation of statutory requirements by products, promotional practices, or
manufacturing practices. In addition, administrative remedies can involve
voluntary recalls or cessation of sale of products, administrative detention,
public notice, voluntary changes in labeling, manufacturing or promotional
practices, as well as refusal of the government to approve New Drug Applications
(NDAs). The FDA also has the authority to withdraw approval of drugs in
accordance with statutory procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
studies to the FDA in an Investigational New Drug (IND) exemption in support of
performing clinical trials. IND allowance is then followed by performance of
human clinical trials, and additional pre-clinical and manufacturing quality
control studies, supporting safety, efficacy and manufacturing quality control.
The safety, chemistry, manufacturing and stability and clinical studies
developed under the IND are compiled into an NDA or Abbreviated New Drug
Application (ANDA) and submitted to the FDA for approval to market.
Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing of the
product in a small number of normal volunteers primarily for safety. In Phase
II, in addition to safety, the efficacy of the product is evaluated in a small
patient population. Phase III trials typically involve multicenter testing for
safety and clinical efficacy in an expanded population of patients at
geographically dispersed test sites. A clinical plan, or "protocol," accompanied
by the identification of the institutions participating in the trials, must be
submitted to the FDA prior to commencement of each clinical trial. The FDA may
order the temporary or permanent discontinuation of a clinical trial at any time
if adverse events that endanger patients in the trials are observed. In
addition, the FDA may request Phase IV clinical trials, to be performed after
marketing approval, to resolve any lingering questions.
A 30-day waiting period after the filing of each IND application is
required by the FDA prior to the commencement of clinical testing in human
subjects. If the FDA does not comment on or question the IND application within
30 days, initial clinical studies may begin. However, any FDA comments or
questions must be answered to the satisfaction of the FDA before initial
clinical testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the preclinical and clinical studies on new drugs are
submitted to the FDA in the form of NDAs for approval to commence commercial
sales. Following extensive review, the FDA may grant marketing approval, require
additional testing or information or deny the application. All products must
continue to comply with all FDA requirements and the conditions in an approved
application, including product specifications, manufacturing process and
labeling requirements. Failure to comply, or the occurrence of unanticipated
adverse events during commercial marketing, could lead to the need for labeling
changes, product recall, seizure, injunctions against distribution or other
FDA-initiated action, which could delay further marketing until the products are
brought into compliance.
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In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA
relies on bioequivalency tests that compare the applicant's drug with an already
approved reference drug, rather than on clinical trials. An ANDA may be
available to us for a new formulation of a drug which has already been approved
by the FDA in other topical dosage forms. By concentrating on drug delivery
systems employing existing drugs, we expect that the time for regulatory
approval of certain products should be shorter than for entirely new substances.
The NDA itself is a complicated and detailed document and must include the
results of extensive animal, clinical and other testing, the cost of which is
substantial. Although the FDA is required to review applications within 180 days
of filing, in the process of reviewing applications the FDA frequently requests
that additional information be submitted and restarts the 180-day regulatory
review period when the requested additional information is submitted. The effect
of such requests and subsequent submissions can significantly extend the time
for the NDA review process. Until an NDA is actually approved, no assurance can
be given that the information requested and submitted will be considered
adequate by the FDA to justify approval.
In addition, packaging and labeling of most of our proposed products are
subject to FDA regulation. We must get FDA approval for all labeling and
packaging prior to marketing of a regulated product.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority must be obtained in most foreign countries
before marketing of the product in that country. The approval procedure varies
from country to country and may involve additional testing, and the time
required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedure and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from foreign regulatory authorities can result after the relevant
applications are filed. After such approvals are obtained, further delays may be
encountered before the products become commercially available.
We cannot guarantee that any required FDA or other governmental approval
will be granted or, if granted, will not be withdrawn. Governmental regulation
may prevent or substantially delay the marketing of our proposed products, cause
us to undertake costly procedures and furnish a competitive advantage to the
more substantially capitalized companies with which we plan to compete. In
addition, we cannot predict the extent of potentially adverse government
regulations that may arise from future administrative action or legislation.
PATENTS, TRADEMARKS AND LICENSE RIGHTS
During 2000, our U.S. patent application for topical antifungal
formulations using the SEPA skin penetration enhancer (EcoNail(TM)) was allowed
with all of its claims. The application also covers the use of SEPA compounds as
a plasticizing agent for film-forming polymers with or without antifungal
agents. The patent is expected to formally issue in the first quarter of 2001.
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During the year we filed two new U.S. patent applications. One application
is for the use of the SEPA skin penetration enhancer compounds in veterinary
products. The other application is directed to an antifungal topical
formulation.
We filed foreign patent applications for the Topiglan product in eleven
countries. The U.S. application for registration of the Topiglan trademark was
approved during the year.
We are also actively continuing to pursue domestic and European
registration of our MacroDerm and Benefen trademarks, which have been allowed in
the United States; however, registration is still pending the outcome of
potential oppositions.
We believe that patent protection of our technologies, processes and
products is important to our future operations. The success of our proposed
products may depend, in part, upon our ability to obtain patent protection.
Although we intend to file additional patent applications, as management
believes appropriate for any new products or technological developments, we
cannot guarantee that any additional patents will be issued or, if issued, will
be of commercial benefit to us. In addition, to anticipate the breadth or degree
of protection that any such patents may afford is impossible. To the extent that
we rely on unpatented proprietary technology, we cannot guarantee that others
will not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to our trade secrets, that any obligation of
confidentiality will be honored or that we will be able to effectively protect
our rights to proprietary technology. Further, we cannot guarantee that any
products developed by us will not infringe patents held by third parties or
that, in such case, licenses from such third parties will be available on
commercially acceptable terms, if at all.
In connection with our prior research and development efforts, we own
several patents and possess certain license rights in connection with other
technologies, which we are not currently pursuing. We intend to enforce our
patent position and intellectual property rights vigorously. The cost of
enforcing our patent rights in lawsuits, if necessary, may be significant and
could interfere with our operations.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING US AND OUR BUSINESS. THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN FORWARD-LOOKING STATEMENTS MADE
FROM TIME TO TIME BY THE US ON THE BASIS OF MANAGEMENT'S THEN-CURRENT
EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED OR REFERRED TO BELOW.
WE HAVE A HISTORY OF OPERATING LOSSES AND WILL CONTINUE TO NEED WORKING CAPITAL.
Since 1981, we have been engaged primarily in research and development and
have derived limited revenues from feasibility studies, the commercial sale of
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our products and the licensing of certain technology. We have not generated any
revenues from the sale of any products currently under development. We have
incurred net losses every year since we began doing business and we anticipate
that losses will continue for the foreseeable future. As of December 31, 2000,
we had an accumulated deficit of $43,041,000. Our ability to continue operations
after our current capital resources are exhausted depends on our ability to
secure additional financing and to become profitable, which we cannot guarantee.
However, we believe that our financial resources are sufficient to meet planned
operating activities for at least the next 12 months.
In addition, the two investors in an October 2000 private financing each
have rights of first refusal with respect to our issuance of equity securities
before August 23, 2001, which could make it harder for us to attract additional
financing, if required, prior to that time.
We continue to pursue the commercialization of our SEPA technology through
discussions with potential licensees. There can be no guarantee that these
discussions will lead to any licenses or that we will receive any license fees.
Until marketing approvals are obtained and/or license agreements are entered
into, if ever, we expect to generate only limited licensing revenue and no
royalties from sales of products using SEPA. In addition, we intend to continue
to make the substantial expenditures required to support our research and
development programs, including preclinical studies and clinical trials. As a
result, we expect to incur operating losses for the foreseeable future.
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND REMAIN SUBJECT TO
TECHNOLOGY UNCERTAINTY.
Various pharmaceutical companies have developed systems to enhance the
transdermal delivery of specific drugs, but relatively limited research has been
conducted about using transdermal delivery systems for a wider range of
pharmaceutical products. Although we have demonstrated in preclinical and
clinical studies that SEPA transdermal compounds may have applicability when
paired with a broad range of drugs, transdermal delivery systems are currently
marketed for only a limited number of products. In addition, some transdermal
delivery systems used to date have demonstrated adverse side effects for users,
including skin irritation and delivery difficulties.
Most of our proposed products are in the early development stage and will
require significant further research, development, testing and regulatory
clearances. Our proposed products are subject to the risks of failure inherent
in the development of products based on innovative technologies. These risks
include the possibilities that any or all of the proposed products may be found
to be ineffective or toxic, or otherwise may fail to receive necessary
regulatory clearances. In addition, even if our proposed products are effective,
they may be uneconomical to market or third parties may market superior or
equivalent products. Due to the extended testing and regulatory review process
required before we obtain marketing clearance for any of our proposed products,
we do not expect to realize royalty revenues from the sale of any drugs in the
foreseeable future.
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WE WILL NEED TO MAKE SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND RECEIVE
ADDITIONAL FUNDING TO MARKET OR LICENSE ANY PRODUCTS.
Before we or any of our potential licensees may market any products based
upon our technology, significant additional development efforts and substantial
testing will be necessary. In most cases, we will require substantial additional
funding to fund clinical studies on our proposed products. We cannot guarantee
that we will be able to secure such funding on favorable terms, if at all.
OUR PRODUCTS MAY NOT SUCCESSFULLY COMPLETE THE EXTENSIVE REGULATORY APPROVAL
PROCESS REQUIRED PRIOR TO ANY PHARMACEUTICAL PRODUCT BEING MARKETED.
Before obtaining regulatory approval for the commercial sale of any of the
pharmaceutical products we have under development, we must demonstrate that the
product is safe and efficacious for use in each proposed indication. The results
of preclinical studies and early clinical trials may not accurately predict
results that will be obtained in large-scale testing, and we cannot guarantee
that clinical trials will prove that our products are safe and efficacious or
that any of our products will ultimately be marketable. A number of other
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after they achieved promising results in earlier
trials. If we are unable to demonstrate the safety and efficacy of our products,
we may be adversely affected.
WE DEPEND ON THIRD PARTIES ENTERING INTO LICENSE ARRANGEMENTS WITH US AND
HELPING US DEVELOP OUR PRODUCTS.
To the extent we rely on licensees and joint venture arrangements to fund
most of the costs relating to product development and clinical trials, licensees
may have the legal right to terminate funding for a product at any time for any
reason without significant penalty. We cannot control the resources and
attention that a licensee may devote to a product and this can result in delays
in clinical testing, regulatory filings and commercialization efforts. We also
cannot guarantee that we will be able to enter into collaborative arrangements
or that any collaborative arrangements will succeed.
OUR PRIOR DEVELOPMENT EFFORTS HAVE NOT GENERATED SUSTAINED REVENUES OR ANY
PROFITS.
Since 1981, we have engaged in research and development activities with
respect to a variety of technologies and products, including polymers for
medical and industrial use, dental adhesives, osteoporotic drugs and transdermal
drug delivery products. None of our products or technologies has ever generated
sustained revenues and we have never been profitable. We have expended
substantial resources in researching and developing technology relating to our
products as well as in connection with the research and development of
transdermal delivery systems. We cannot guarantee that our development
activities with respect to transdermal delivery systems will be successful or
that these efforts will not eventually be abandoned.
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WE LACK MARKETING EXPERIENCE AND AS A RESULT WE DEPEND ON THIRD PARTIES TO
MARKET AND DISTRIBUTE OUR PRODUCTS.
We intend to market and distribute our proposed products through other
companies. We cannot guarantee that we will be able to enter into agreements
with other companies on acceptable terms, if at all. We may have to cede control
over some or all aspects of the marketing and sales of our products as a
condition to entering into such arrangements. We currently have no sales force
or marketing organization. If we decide to directly market and sell any of our
products, we will, among other things, have to develop such capabilities,
including the ability to attract and retain qualified and experienced marketing
and sales personnel. We cannot guarantee that we will be able to attract and
retain qualified and experienced marketing and sales personnel or that any
efforts undertaken by such personnel will be successful.
WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS.
We do not have facilities capable of manufacturing any of our proposed
products in commercial quantities and we do not have plans to obtain such
facilities. Accordingly, we will depend to a significant extent on licensees or
corporate partners for such manufacturing and for compliance with regulatory
requirements for good manufacturing practices. There can be no guarantee that
such partners or licensees will perform their obligations in a timely fashion.
Our dependence on third parties for manufacturing may adversely affect our
ability to develop and deliver products on a timely and competitive basis. If we
decide to establish a commercial manufacturing facility, we will require
substantial additional funds. We will be required to hire and retain significant
additional personnel and we will have to comply with extensive government
regulations. We cannot guarantee that we will be able to obtain the additional
capital required to conduct manufacturing activities directly on acceptable
terms, if at all.
OUR BUSINESS WILL SUFFER IF WE LOSE KEY PERSONNEL.
The success of our business depends on our ability to attract, retain and
motivate qualified senior management personnel who are in high demand.
OUR BUSINESS WILL SUFFER IF WE FAIL TO ATTRACT AND RETAIN EXPERIENCED SCIENTIFIC
PERSONNEL.
Our business also depends on our ability to attract and retain scientific
personnel. The competition for such experienced personnel is intense and can be
expected to increase. We cannot guarantee that we will be able to retain our
existing personnel or attract additional qualified employees.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE
SIGNIFICANTLY MORE RESOURCES THAN WE HAVE.
We compete with numerous firms, many of which are large, multi-national
organizations with worldwide distribution and which have substantially greater
capital resources, research and development and technical staffs, facilities and
experience in obtaining regulatory approvals, as well as in manufacturing,
marketing and distribution of products, than we have. Recent trends in this area
12
are toward further market consolidation of large drug companies into a smaller
number of very large entities, further concentrating financial, technical and
market strength and increasing competitive pressure in the industry. Academic
institutions, hospitals, governmental agencies and other public and private
research organizations are also conducting research and seeking patent
protection and may develop competing products or technologies through joint
ventures and other arrangements. In addition, recently developed technologies or
technologies that may be developed in the future may or could be the basis for
competitive products. In particular, a number of our competitors have already
developed or are developing products to treat erectile dysfunction that will
compete with our Topiglan product. We cannot guarantee that our competitors will
not succeed in developing technologies and products that are more effective or
less costly to use than any that we are currently developing.
We expect any products approved for sale to compete primarily on the basis
of efficacy, safety, patient compliance, reliability, price and patent position.
Generally, the first pharmaceutical product to reach the market in a therapeutic
or preventive area often has a significant advantage compared with later
entrants to the market. Our competitive position will also depend on our ability
to attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement production and marketing plans, obtain
patent protection and secure adequate capital resources.
OUR PRODUCTS ARE SUBJECT TO RIGOROUS GOVERNMENTAL REVIEW AND SIGNIFICANT
REGULATION.
Our technologies must undergo a rigorous regulatory approval process, which
includes extensive preclinical and clinical testing, to demonstrate safety and
efficacy before any resulting product can be marketed. To date, neither the FDA
nor any of its international equivalents has approved any of our technologies
for marketing. The clinical trial and regulatory approval process can require
many years and substantial cost, and there can be no guarantee that our efforts
will result in an approved product.
Our activities are regulated by a number of government authorities in the
United States and other countries, including the FDA. The FDA regulates
pharmaceutical products, including their manufacture and labeling. Data obtained
from testing is subject to varying interpretations which can delay, limit or
prevent FDA approval. Risks associated with the regulatory approval process
include:
o Changes in existing regulatory requirements could prevent or affect our
regulatory compliance. Federal and state laws, regulations and policies may
be changed with possible retroactive effect, and how these rules actually
operate can depend heavily on administrative policies and interpretations
over which we have no control or inadequate experience to assess their full
impact upon our business.
o Obtaining FDA clearances is time-consuming and expensive and we cannot
guarantee that such clearances will be granted or, if granted, will not be
withdrawn.
o The FDA review process may prevent the marketing of our products or may
involve delays that significantly and negatively affect our products. We
may encounter similar delays in foreign countries.
13
o Regulatory clearances may place significant limitations on the uses for
which any approved products may be marketed.
o Any marketed product and its manufacturer are subject to periodic review.
Any discovery of previously unrecognized problems with a product or
manufacturer could result in suspension or limitation of approvals.
WE DEPEND ON PATENTS TO PROTECT OUR TECHNOLOGIES AND THE SCOPE OF SUCH
PROTECTION IS INHERENTLY UNCERTAIN.
We believe that patent protection of our technologies, processes and
products is important to our future operations. The success of our proposed
products may depend, in part, upon our ability to obtain patent protection.
Although we intend to file additional patent applications, we cannot
guarantee that any additional patents will be issued or, if issued, will be of
commercial benefit to us. In addition, it is impossible to anticipate the
breadth or degree of protection that any such patents may afford. There can be
no guarantee that other parties will not commence litigation challenging our
existing or future patents or that we will be successful in defending against
any such challenge. To the extent that we rely on unpatented proprietary
technology, we cannot guarantee that others will not independently develop or
obtain substantially equivalent or superior technology or otherwise gain access
to our trade secrets, that any obligation of confidentiality will be honored or
that we will be able to effectively protect our rights to proprietary
technology. Further, products we develop could infringe patents held by third
parties. In such cases, licenses from the third parties may not be available on
commercially acceptable terms, if at all.
We intend to enforce our patent position and intellectual property rights
vigorously. The cost of enforcing our patent rights in lawsuits, if necessary,
may be significant and could interfere with our operations.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS AND WE MAY NOT HAVE SUFFICIENT
PRODUCT LIABILITY INSURANCE TO COVER SUCH CLAIMS. IT MAY BE EXPENSIVE AND
DIFFICULT TO OBTAIN ADEQUATE INSURANCE COVERAGE.
The design, development, manufacture and sale of our products involve risk
of liability claims and associated adverse publicity. We currently have
liability insurance to cover claims related to our products that may arise from
clinical trials, but we do not maintain product liability insurance and we may
need to acquire such insurance coverage prior to the commercial introduction of
our products. Such insurance is expensive, is difficult to obtain and may not be
available on acceptable terms, if at all. If we obtain such coverage, we
have no guarantee that the coverage limits of such insurance policies will be
adequate. A successful claim against us if we are uninsured, or which is in
excess of our insurance coverage, if any, could have a material adverse effect
upon us and our financial condition.
14
GOVERNMENT OR PRIVATE INITIATIVES TO REDUCE HEALTH CARE COSTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON PHARMACEUTICAL PRICING AND ON US.
The future revenues and profitability of, and availability of capital for,
biomedical and pharmaceutical companies such as us may be affected by the
continuing efforts of governmental and third-party payers to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets pricing or profitability of prescription pharmaceuticals is subject to
government control and to reform in the health care system. In the United
States, there have been, and we expect there will continue to be, a number of
federal and state proposals to impose similar government control. While we
cannot predict whether any such legislative or regulatory proposals will be
adopted, the announcement or adoption of such proposals could have a material
adverse effect on our prospects. If we or one of our partners succeeds in
bringing to market one or more of our products, there can be no assurance that
these products will be cost effective and that reimbursement to the consumer
will be available or will be sufficient to allow us or our partners to sell such
products on a profitable basis.
ITEM 2. PROPERTIES.
We occupy 17,277 square feet of office and laboratory space under a lease
expiring February 28, 2005. This space is located on one floor of a three story
building in Lexington, Massachusetts. We believe that this facility is adequate
to meet our current and foreseeable future requirements.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the three
months ended December 31, 2000, through the solicitation of proxies or
otherwise.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF SECURITIES AND RELATED MATTERS
Our Common Stock is traded on the Nasdaq National Market under the symbol
"MCHM." The following chart shows the high and low closing prices for the Common
Stock for the periods indicated as obtained from Nasdaq:
COMMON STOCK
MCHM
YEAR ENDED HIGH LOW
DECEMBER 31, 1999
First Quarter 10 3/4 7 5/8
Second Quarter 10 5/8 5 15/16
Third Quarter 8 5
Fourth Quarter 6 9/16 4 1/16
DECEMBER 31, 2000
First Quarter 8 7/8 4
Second Quarter 7 15/16 4 1/4
Third Quarter 6 11/16 3 17/32
Fourth Quarter 5 31/32 2 1/4
These prices are between dealers and do not reflect retail markups,
markdowns or commissions and may not necessarily represent actual transactions.
As of December 31, 2000, there were 497 record holders of our Common Stock.
We have never paid dividends on our Common Stock and our Board of
Directors does not contemplate declaring any dividends in the foreseeable
future. We intend to retain any earnings to finance research, development, and
expansion of our business.
RECENT SALES OF UNREGISTERED SECURITIES
During 2000 we issued the following securities that were not registered
under the Securities Act of 1933 at the time they were issued:
o On March 23, 2000 we issued 890 shares of our Common Stock to a consultant
in consideration of services to us.
o On July 31, 2000 we issued 928 shares of our Common Stock to a consultant
in consideration of services to us.
o On October 20, 2000 we issued 104,577 shares of our Common Stock to a newly
elected member of the Board of Directors for $500,000.
o On October 23, 2000 we issued 1,816,658 shares of our Common Stock and
warrants to purchase our Common Stock for $9,000,000 in gross proceeds
($8,295,400 net of issuance costs) to two institutional investors. We also
16
may require the investors to purchase an additional $7,000,000 of our
Common Stock seven months after December 12, 2000, which was the effective
date of the required SEC registration statement, subject to certain
conditions.
The warrants sold in the offering consist of warrants to purchase an
aggregate of 363,322 shares of Common Stock at a purchase price of $5.90 per
share expiring in five years. In addition, each investor received a warrant to
purchase additional shares at a purchase price of $.01 per share exercisable
only upon certain conditions relating to the trading price of the Common Stock
during the 240 day period following December 12, 2000. The placement agent
received a warrant to purchase 108,999 shares of Common Stock at a purchase
price of $7.43 per share expiring in five years.
The transactions described above were effected in reliance upon the
exemption from the registration requirements of the Securities Act of 1933
provided by Section 4(2) on the basis that such transactions did not involve any
public offering.
Item 6. Selected Financial Data.
Years Ended December 31,
----------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
STATEMENTS OF
OPERATIONS DATA:
Revenues $ 129,786 $ 120,350 $ 274,749 $ 464,332 $ 629,647
Research and development
expenses 1,736,561 2,084,826 4,318,758 5,423,138 5,280,641
Net loss (3,139,796) ( 3,569,113) ( 4,842,871) ( 6,787,069) ( 9,745,357)
Basic and diluted net
loss per share ( 0.21) ( 0.21)( 0.22) ( 0.30) ( .43)
Shares used to compute
basic and diluted net
loss per share 5,239,080 16,638,401 22,204,105 22,311,890 22,854,646
Balance Sheet Data:
Working capital $ 7,127,252 $ 24,756,904 $ 19,891,936 $ 14,776,372 $ 15,969,137
Current assets 7,495,715 25,069,804 20,756,671 15,437,685 17,063,070
Total assets 8,063,750 25,623,836 21,509,724 16,313,732 17,981,957
Current liabilities 368,463 312,900 864,735 661,313 1,093,933
Capitalized lease obligations 57,038 18,408 --- --- ---
Total liabilities 386,871 312,900 1,364,735 1,161,313 1,131,197
Stockholders' equity 7,676,879 25,310,936 20,144,989 15,152,419 16,850,760
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations for the Company should be read in conjunction with the accompanying
financial statements and related footnotes.
17
GENERAL
Our primary business is the development of pharmaceutical products for
commercialization by applying SEPA(R) (Soft Enhancer of Percutaneous
Absorption), our patented drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
solutions, etc.) that enhance the transdermal delivery of drugs into the skin or
into the bloodstream. We currently derive no significant revenue from product
sales, royalties or license fees. We plan to develop specific SEPA formulations
for use with proprietary and non-proprietary drugs manufactured by
pharmaceutical companies, and to commercialize these products through the
formation of partnerships, strategic alliances and license agreements with those
companies. In order to attract strategic partners we are conducting clinical
testing of certain SEPA-enhanced pharmaceuticals.
Our results of operations vary significantly from year to year and quarter
to quarter, and depend, among other factors, on the signing of new licenses and
product development agreements, the timing of revenues recognized pursuant to
license agreements, the achievement of milestones by licensees, the progress of
clinical trials conducted by licensees and the Company, and the degree of
research, marketing and administrative effort. The timing of our revenues may
not match the timing of associated product development expenses. To date,
research and development expenses have generally exceeded revenues in any
particular period and/or fiscal year.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
For 2000 and 1999, we recognized revenues of approximately $629,600 and
$464,300, respectively. Although there has been a drop in feasibility studies,
$500,000 in deferred revenue was recognized in 2000 from the termination of an
agreement with American Home Products.
Research and development costs decreased by approximately $142,000 from
approximately $5,423,000 in 1999 to approximately $5,281,000 in 2000, a 3%
decrease. This decrease is primarily attributable to a slight
increase in clinical trial expenses from Phase II to Phase III, net of a
decrease of $255,000 due to a stock based compensation adjustment.
Marketing, general and administrative expenses for 2000 aggregated
approximately $5,794,000, an increase of approximately $3,183,000 or 122%, from
1999's total of approximately $2,611,000. This increase is primarily the result
of $2,809,000 in stock-based compensation related to the extension of certain
stock options to key employees in the second quarter of 2000. The Company
expects that marketing, general and administrative expenses will remain
essentially the same as 2000 for 2001 with the exception of routine salary
increases and the stock based compensation charge.
Other income decreased by approximately $79,000 or 10%, from $831,000 in
1999 to $752,000 in 2000. The decrease is attributable primarily to assets being
held as short-term marketable securities.
18
For the year ended December 31, 2000, the Company's net loss was
approximately $9,745,000 as compared to a loss of approximately $6,787,000 for
the previous year, a 44% increase.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
For 1999 and 1998, the Company recognized revenues of approximately
$464,300 and $274,700, respectively, which were primarily from feasibility
studies.
Research and development costs increased by approximately $1,104,300 from
approximately $4,318,800 in 1998 to approximately $5,423,100 in 1999, a 26%
increase. This increase reflects the Company's continued acceleration of
clinical testing of its products and increased internal research and development
efforts.
Marketing, general and administrative expenses for 1999 aggregated
approximately $2,610,800, an increase of approximately $685,800, or 36%, from
1998's total of approximately $1,925,000. This increase primarily reflects
increases of $331,100 in stock-based compensation, $32,500 in consulting fees
and $295,600 in officers' salaries.
Other income decreased by approximately $343,700, or 29%, from $1,174,200
in 1998 to $830,500 in 1999. This decrease is attributable primarily to the
lower amount of cash available to be invested.
For the year ended December 31, 1999, the Company's net loss was
approximately $6,787,100 as compared to a loss of approximately $4,482,900 for
the previous year, a 51% increase.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the primary source of funding for the Company's operations
has been the private and public sale of its securities, and to a lesser extent,
the licensing of its proprietary technology and products, government grants and
the limited sales of products and test materials. During 2000, the Company
received aggregate net proceeds of approximately $8,886,000 from the exercise of
stock options and sale of common stock, compared to approximately $1,367,000 in
1999. At December 31, 2000, working capital was approximately $16.0 million,
compared to $14.7 million at December 31, 1999. The increase in the Company's
working capital was due to proceeds from the sale of our common stock, and the
exercise of common stock options net of cash expenditures used for operating
activities, capital expenditures and repurchases of treasury stock. Until such
time as the Company obtains agreements with third-party licensees or partners to
provide funding for the Company's anticipated business activities, the Company's
working capital will be utilized to fund its operating activities.
Pursuant to a plan approved by the Company's Board of Directors, the
Company is authorized to repurchase 1,000,000 shares of its common stock to be
held as treasury shares for future use. During 2000, the Company repurchased
19
120,500 shares at an aggregate cost of approximately $334,700. At December 31,
2000, 276,174 repurchased shares remain available for future use and 679,587
shares remain available for repurchase under the plan.
Capital expenditures and additional patent development costs for the year
ended December 31, 2000 were approximately $216,900. The Company anticipates
capital expenditures of approximately $250,000 during the fiscal year ending
December 31, 2001.
In October 2000, the Company sold 1,816,658 shares of its common stock and
warrants to purchase its common stock for $9,000,000 in gross proceeds
($8,295,400 net of issuance costs) in a private placement to two institutional
investors. At its options the Company also may require the investors to purchase
an additional $7,000,000 of common stock and warrants seven months after the
effectiveness of the required SEC registration statement, subject to certain
conditions.
The warrants issued consist of warratns to purchase an aggregate of 363,322
shares of common stock at a purchase price of $5.90 per share for five years.
The warrants may be exercised on a "cashless" basis. Additionally, each investor
received a warrant to purchase additional shares of common stock at a purchase
price of $.01 per share exercisable only upon certain conditions relating to the
trading price of the common stock during the period following the effectiveness
of the registration statement. Through March 9, 2001, 379,892 $.01 warrants had
been exercised. The placement agent received a warrant to purchase 108,999
shares of common stock at a purchase price $7.43 for five years.
The Company believes that its existing cash and cash equivalents will be
sufficient to meet its operating expenses and capital expenditure requirements
for at least the next twelve months. The Company's cash requirements may vary
materially from those now planned because of changes in focus and direction of
the Company's research and development programs, competitive and technical
advances, patent developments or other developments. It is not believed that
inflation will have any significant effect on the results of the Company's
operations.
FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The provisions of SFAS No. 133 will be effective for the
Company beginning January 1, 2001. The Company does not believe the effect of
adopting SFAS No. 133 will be material to the Company's financial position or
results of operations as the Company has not historically entered into such
instruments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
As of December 31, 2000, the Company is exposed to market risks which
relate primarily to changes in U.S. interest rates. The Company's cash
equivalents and short term investments are subject to interest rate risk and
20
will decline in value if interest rates increase. Due to the short duration
of these financial instruments changes to interest rates would not have a
material effect upon the Company's financial position. A hypothetical 10% change
in the average yield would result in an increase or decrease of approximately
$90,000 on interest income within the Company's statement of operations for the
year ended December 31, 2000.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
--------------------------------------------------------------
2000 Quarters
Revenues $ 543,247 $ 28,800 $ 28,800 $ 28,800
Net Loss $( 906,861) $(4,536,584)(1) $(1,749,920) $(2,551,992)
Net Loss per share
(basic and diluted) $( 0.04) $( 0.20) $( 0.08) $( 0.11)
1999 Quarters
Revenues $ 58,746 $ 175,225 $ 143,417 $ 86,944
Net Loss $(2,056,551) $(1,876,962) $(1,460,517) $(1,393,039)
Net Loss per share
(basic and diluted) $( 0.09) $( 0.08) $( 0.07) $( 0.06)
(1) Included in net loss for the second quarter is a stock based compensation
charge for Alvin Karloff and Carlos Samour aggregating $2,800,000.
THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED OR REFERRED TO IN ITEM 1, BUSINESS - "RISK FACTORS".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this Item 8 is set forth on pages 22 through
37 of this report.
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MacroChem Corporation:
We have audited the accompanying balance sheets of MacroChem Corporation as of
December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of MacroChem Corporation at December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 9, 2001
22
MACROCHEM CORPORATION
BALANCE SHEETS
December 31, December 31,
2000 1999
-------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 589,773 $ 318,310
Short-term investments 16,178,760 14,864,979
Accounts receivable 30,669 66,954
Receivable due from related party 22,564 20,960
Prepaid expenses and other current assets 241,304 166,482
----------- -----------
Total current assets 17,063,070 15,437,685
Property & equipment, net 376,892 375,464
Other assets:
Patents, net 512,802 471,390
Deposits 29,193 29,193
---------- ----------
Total other assets 541,995 500,583
---------- ----------
Total Assets $ 17,981,957 $ 16,313,732
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $ 330,658 $ 71,318
Accrued expenses and other liabilities 763,275 493,762
Deferred compensation and related accrued
interest --- 96,233
---------- ----------
Total current liabilities 1,093,933 661,313
Deferred rent 37,264 ---
Deferred revenue --- 500,000
---------- ----------
Total Liabilities 1,131,197 1,161,313
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Preferred stock, authorized and unissued, 6,000,000 shares --- ---
Common stock, $.01 par value, 60,000,000 shares
authorized; 24,730,783 and 22,597,564 shares issued
at December 31, 2000 and 1999, respectively 247,308 225,976
Additional paid-in capital 60,787,144 49,387,454
Unearned compensation ( 24,719) ( 382,473)
Accumulated deficit (43,040,545) (33,295,188)
Less treasury stock, at cost, 276,174 and 160,165 shares at
December 31, 2000 and 1999, respectively ( 1,118,428) ( 783,350)
---------- ----------
Total stockholders' equity 16,850,760 15,152,419
---------- ----------
Total Liabilities and Stockholders' Equity $ 17,981,957 $ 16,313,732
========== ==========
See notes to financial statements.
23
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------------------------
2000 1999 1998
---- ---- ----
REVENUES
Research contracts $ 629,647 $ 464,332 $ 274,749
---------- ---------- ----------
OPERATING EXPENSES
Research and development 5,280,641 5,423,138 4,318,758
Marketing, general and administrative 5,794,023 2,610,768 1,925,021
Consulting fees with related parties 52,000 48,000 48,000
---------- ---------- ----------
TOTAL OPERATING EXPENSES 11,126,664 8,081,906 6,291,779
---------- ---------- ----------
LOSS FROM OPERATIONS (10,497,017) ( 7,617,574) ( 6,017,030)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 752,547 833,450 1,178,825
Interest expense ( 887) ( 2,945) ( 4,666)
---------- ---------- ----------
TOTAL OTHER INCOME 751,660 830,505 1,174,159
---------- ---------- ----------
NET LOSS $( 9,745,357) $( 6,787,069) $( 4,842,871)
========== ========== ==========
BASIC AND DILUTED NET LOSS
PER SHARE $( 0.43) $( .30) $( .22)
========== ========== ==========
SHARES USED TO COMPUTE BASIC
AND DILUTED NET LOSS PER
SHARE 22,854,646 22,311,890 22,204,105
========== ========== ==========
STOCK BASED COMPENSATION INCLUDED IN:
2000 1999 1998
---- ---- ----
Research and development $( 255,236) $ 51,160 $ 47,786
Marketing, general and
administrative 3,078,827 445,880 118,111
--------- ------- -------
$ 2,823,591 $497,040 $165,897
========= ======= =======
See notes to financial statements.
24
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Shares
------------------- Additional Cost of Total
Common Paid-In Unearned Accumulated Treasury Stockholders'
Issued Treasury Stock Capital Compensation Deficit Subtotal Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 1998 22,182,865 $221,829 $ 46,923,677 $(169,322) $(21,665,248) $25,310,936 $ --- $ 25,310,936
Exercise of common
stock warrants 6,342 63 38,465 38,528 38,528
Exercise of common
stock options 91,683 917 171,139 172,056 172,056
Purchase of treasury
stock (154,850) ( 757,599) ( 757,599)
Stock based
compensation (1) 355 6,158 3 139,352 ( 1,354) 138,001 27,896 165,897
Stock issued to
401(k) trust 7,775 22,816 22,816 35,226 58,042
Net loss --- --- --- --- --- ( 4,842,871) ( 4,842,871) ( 4,842,871)
---------- ------- ------- ---------- ------- ---------- ---------- --------- ----------
BALANCE,
DECEMBER 31, 1998 22,281,245 (140,917) 222,812 47,295,449 (170,676) (26,508,119) 20,839,466 ( 694,477) 20,144,989
Exercise of common
stock warrants 137,319 1,374 832,840 834,214 834,214
Exercise of common
stock options 179,000 1,790 531,366 533,156 533,156
Purchase of treasury
stock ( 32,500) ( 147,570) ( 147,570)
Stock based
compensation (1) 708,837 (211,797) 497,040 497,040
Stock issued to
401(k) trust 13,252 18,962 18,962 58,697 77,659
Net loss ( 6,787,069) ( 6,787,069) ( 6,787,069)
---------- ------- ------- ---------- ------- ---------- ---------- ---------
BALANCE,
DECEMBER 31, 1999 22,597,564 (160,165) 225,976 49,387,454 (382,473) (33,295,188) 15,935,769 ( 783,350) 15,152,419
Issuances of common
stock-net 1,921,235 19,212 8,776,225 8,795,437 8,795,437
Exercise of common
stock options 210,166 ( 12,563) 2,102 166,741 168,843 ( 78,531) 90,312
Purchase of treasury
stock (120,500) ( 334,698) ( 334,698)
Stock based
compensation (1) 1,818 18 2,465,819 357,754 2,823,591 2,823,591
Stock issued to
401(k) trust 17,054 ( 9,095) ( 9,095) 78,151 69,056
Net loss ( 9,745,357) (9,745,357) ( 9,745,357)
---------- ------- ------- ---------- ------- ---------- ---------- --------- ---------
BALANCE,
DECEMBER 31, 2000 24,730,783 (276,174) $247,308 $ 60,787,144 $( 24,719) $(43,040,545) $ 17,969,188 $(1,118,428) $ 16,850,760
========== ======= ======= ========== ======= ========== ========== ========= ==========
(1) See page 26 for details.
See notes to financial statements.
25
(1) Stock Based Compensation
Common Stock Shares
-------------------
Additional Cost of Total
Common Paid-In Unearned Treasury Stockholders'
Issued Treasury Stock Capital Compensation Subtotal Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Issuance of treasury stock
in exchange for services 6,158 $ 22,104 $ 22,104 $27,896 $ 50,000
Issuance of common stock
in exchange for services 355 $ 3 4,501 $( 4,504) 0 0
Issuance of common stock
options to non-employees 112,747 (112,747) 0 0
Amortization and other changes
in unearned compensation 115,897 115,897 115,897
----- ----- -- --------- ------- --------- ------ ---------
355 6,158 $ 3 $ 139,352 $( 1,354) $ 138,001 $27,896 $ 165,897
===== ===== == ========= ======= ========= ====== =========
1999
Issuance of common stock
options to non-employees $ 807,888 $(807,888)
Amortization and other changes
in unearned compensation ( 99,051) 596,091 $ 497,040 $ 497,040
--------- ------- --------- ---------
$ 708,837 $(211,797) $ 497,040 $ 497,040
========= ======= ========= =========
2000
Issuance of common stock
in exchange for services 1,818 $18 $ 9,372 $( 9,390)
Issuance of common stock
options to non-employees 183,346 (183,346)
Amortization and other changes
in unearned compensation ( 536,431) 550,490 $ 14,059 $ 14,059
Stock based compensation to
employees 2,809,532 2,809,532 2,809,532
----- -- --------- ------- --------- ---------
1,818 $18 $ 2,465,819 $357,754 $2,823,591 $2,823,591
===== == ========= ======= ========= =========
26
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,745,357) $(6,787,069) $(4,842,871)
--------- --------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 174,091 244,986 186,779
Stock-based compensation 2,823,591 497,040 165,897
401(k) contributions in company common stock 69,056 77,659 58,042
Deferred rent 37,264 --- ---
Deferred revenue ( 500,000) --- ---
Change in assets and liabilities:
Accounts receivable 36,285 ( 18,561) ( 48,393)
Receivable due from related party ( 1,604) ( 20,960) ---
Prepaid expenses and other current assets ( 74,822) 37,699 ( 86,498)
Accounts payable and accrued expenses 528,853 ( 206,092) 566,820
Deferred compensation and related accrued
interest ( 96,233) 2,670 3,423
Deferred revenue --- --- 500,000
--------- --------- ---------
Net cash used by operating activities (6,748,876) (6,172,628) (3,496,801)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) sales of short-term investments-net (1,313,781) 4,936,640 3,350,107
Deposits --- ( 24,733) ---
Expenditures for property and equipment ( 154,080) ( 179,067) ( 277,445)
Additions to patents ( 62,851) ( 164,180) ( 108,355)
--------- --------- ---------
Net cash (used) provided by investing activities (1,530,712) 4,568,660 2,964,307
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net purchase of treasury stock ( 334,698) ( 147,570) ( 757,599)
Principal payments on capital lease --- --- ( 18,408)
Net proceeds from exercise of common stock options 90,312 533,156 172,056
Net proceeds from issuance of common stock 8,795,437 --- ---
Proceeds from exercise of warrants --- 834,214 38,528
--------- --------- ---------
Net cash provided (used) by financing activities 8,551,051 1,219,800 ( 565,423)
--------- --------- ---------
(Continued)
27
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
-----------------------------------------------
2000 1999 1998
---- ---- ----
NET CHANGE IN CASH
AND CASH EQUIVALENTS $271,463 $(384,168) $(1,097,917)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 318,310 702,478 1,800,395
------- ------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $589,773 $ 318,310 $ 702,478
======= ======= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
During 2000, the Company received 12,563 shares of Company stock valued at
$78,531 as payment of option exercises.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $886, $2,945 and $4,666, respectively, for the
years ended December 31, 2000, 1999 and 1998.
The Company did not pay any income taxes during the periods presented.
See notes to financial statements. (Concluded)
28
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
MacroChem Corporation (the "Company") develops and licenses transdermal drug
delivery compounds and systems intended to promote the delivery of drugs from
the surface of the skin into the skin or the bloodstream.
The Company has been engaged primarily in research and development since its
inception in 1981 and has derived limited revenues from the commercial sale of
its products, licensing of certain technology and feasibility studies. The
Company has had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its inception
and the Company anticipates that losses may continue for the foreseeable future.
At December 31, 2000, the Company's accumulated deficit was approximately $43.0
million. The Company's ability to continue operations after its current capital
resources are exhausted depends on its ability to obtain additional financing
and achieve profitable operations, as to which no assurances can be given.
However, the Company believes that its financial resources are sufficient to
meet planned operating activities at least through December 31, 2001.
The Company organizes itself as one segment reporting to the chief operating
decision maker. Products and services consist primarily of research and
development activities in the pharmaceutical industry.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash equivalents,
short-term securities, accounts receivable, accounts payable and accrued
expenses approximate their fair value because of their short-term nature.
Short-term investments are carried at fair value.
CONCENTRATION OF RISK - Cash and cash equivalents at December 31, 2000 and 1999
are primarily comprised of government agency securities. Accounts receivable at
December 31, 2000 and 1999 are due from one customer. 100% of revenue for the
year ended December 31, 2000 was derived from research contracts with two
customers. 100% of revenue for the years ended December 31, 1999 and 1998 was
derived from research contracts with one customer.
REVENUE RECOGNITION - Revenues are earned and recognized based upon the sale or
licensing of product rights, completion of contractually identified development
milestones, upon shipment of product, upon completion of a contract or upon the
attainment of specific milestones or benchmarks specified in license or
development agreements. Amounts received in advance are recorded as deferred
revenue and are amortized over the life of the agreement or achievement of
milestones. Research revenue associated with the research contracts was billed
on a cost reimbursement basis, which includes direct costs incurred in
connection with research activities and an allocation of certain other costs
incurred by the Company.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. Such costs include proprietary research and development
activities and expenses associated with research and development contracts.
29
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS - Cash equivalents consist of short-term, highly
liquid investments with a maturity of three months or less when purchased.
SHORT-TERM INVESTMENTS - The Company has classified its short-term investments
as "available-for-sale" and, accordingly, carries such securities at aggregate
fair value. Fair value has been determined based on quoted market prices. The
cost of such securities approximates fair market value. Short-term investments
are comprised of bank certificates of deposit, with maturities of up to 23
months, amounting to $3,261,013 at December 31, 2000, and a liquid money market
mutual fund with a carrying value of $12,917,747 and $14,864,979 at December 31,
2000 and 1999, respectively.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the related assets which range from five to ten years.
PATENTS - The Company has filed applications for United States and foreign
patents covering aspects of its technology. Costs and expenses incurred in
connection with pending patent applications are deferred. Costs related to
successful patent applications are amortized over the estimated useful lives of
the patents, not exceeding 20 years, using the straight-line method. Accumulated
costs related to patents or deferred patent application costs that are
considered to have limited future value are charged to expense. Accumulated
amortization aggregated approximately $144,900 and $123,500, respectively, at
December 31, 2000 and 1999. On an on-going basis, the Company evaluates the
recoverability of the net carrying value of various patents by reference to the
patent's expected use in drug and other research activities as measured by
outside interest in the Company's patented technologies and management's
determination of potential future uses of such technologies.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which requires the use of the liability method. The objective of
this method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities using tax rates in effect in the year(s) in
which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE - Basic earnings per share is computed using the
weighted average number of common shares outstanding during each year. Diluted
earnings per common share reflect the effect of the Company's outstanding
options and convertible securities, except where such items would be
anti-dilutive. Due to the net losses, reported in 2000, 1999 and 1998, basic and
diluted per share amounts are the same. Potential common shares are not
included in the per share calculations for diluted EPS, because the effect of
their inclusion would be anti-dilutive. Anti-dilutive potential shares not
included in per share calculations for 2000, 1999 and 1998 were approximately
4,761,000, 3,999,000 and 3,987,000 shares, respectively.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
30
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts of revenues and expenses during the reporting period. The primary
estimates underlying the Company's financial statements include the carrying
value and useful lives of the Company's patents, property and equipment, the
valuation allowance established for the Company's deferred tax assets, and the
underlying assumptions to apply the pricing model to value stock options under
SFAS No. 123. Management bases its estimates on certain assumptions, which it
believes are reasonable in the circumstances, and while actual results could
differ from those estimates, management does not believe that any change in
those assumptions in the near term would have a significant effect on the
financial position or the results of operations.
STOCK BASED COMPENSATION - The Company has elected to continue to use the
intrinsic value based method to account for employee stock option awards under
the provisions of Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees," and provides disclosures based on the fair value method in
the notes to the financial statements as permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation."
Stock or other equity based compensation for non-employees must be accounted for
under the fair value based method as required by SFAS No. 123 and Emerging
Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". Under this method, the equity based instrument is valued at either
the fair value of the consideration received or from the equity instrument
issued on the date earned. The resulting compensation cost is recognized and
charged to operations over the service period, which is usually the vesting
period.
NEW ACCOUNTING PRONOUNCEMENTS - In 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The provisions of SFAS No. 133 will
be effective for the Company beginning January 1, 2001. The Company does not
believe the effect of adopting SFAS No. 133 will be material to the Company's
financial position or results of operations, as the Company has not historically
entered into such instruments.
RECLASSIFICATIONS - Certain amounts in the prior year financial statements have
been reclassified to conform to the current year presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
2000 1999
---- ----
Laboratory equipment $ 896,726 $ 806,647
Office equipment 355,959 324,328
Leasehold improvements 206,674 174,305
--------- ---------
Total 1,459,359 1,305,280
Less: accumulated depreciation (1,082,467) ( 929,816)
--------- ---------
Property and equipment, net $ 376,892 $ 375,464
========= =========
31
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of December
31:
2000 1999
---- ----
Accounts payable $ 389,247 $ 71,318
Accrued professional fees 56,406 150,096
Accrued clinical trial costs 446,802 257,125
Accrued miscellaneous 201,478 86,541
--------- -------
$1,093,933 $565,080
========= =======
4. STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 60,000,000
shares of $.01 par value common stock of which 24,730,783 shares are issued
(24,454,609 are outstanding) and 4,652,630 are reserved for issuance upon
exercise of common stock options at December 31, 2000. Authorized and unissued
preferred stock totals 6,000,000 shares, of which 600,000 have been designated
Series B Preferred Stock. During 1998, the Company's Board of Directors
authorized the repurchase of up to 1,000,000 shares of common stock at market
price. The Company repurchased 120,500, 32,500 and 154,850 common shares in
2000, 1999 and 1998, respectively. At December 31, 2000, 276,174 repurchased
shares remain available for future use and 679,587 shares are available to be
repurchased.
WARRANTS - During 2000, as part of a financing, two institutional investors
received warrants to purchase an aggregate of 363,322 shares of common stock at
a purchase price of $5.90 per share expiring in five years. In addition, the
investors received a warrant to purchase additional shares at a purchase price
of $.01 per share exercisable only upon certain conditions relating to the
trading price of the common stock during the period following December 12, 2000.
The warrants may be exercised on a cashless basis. Through March 9, 2001,
379,892 of the $0.01 warrants had been exercised. The placement agent received a
warrant to purchase 108,999 shares of common stock at a purchase price of $7.43
per share expiring in five years.
In 1996, in connection with services performed for the Company, the firm of
Janssen-Meyers, L.P. received a warrant, exercisable immediately and expiring
June 17, 1999, for the purchase of 145,800 shares of the Company's common stock
at a price of $6.075 per share. During 1999 and 1998, 137,319 and 6,342 warrants
were exercised for aggregate proceeds of $834,214 and $38,528, respectively.
During 1999, 2,139 warrants expired.
STOCK OPTION PLANS - The Company has three stock option plans, the 1984
Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option Plan
(Non-Qualified Plan) and the 1994 Equity Incentive Plan (1994 Plan). Under the
terms of the 1984 ISO and Non-Qualified Plans, the Company may no longer award
any options. All options previously granted may be exercised at any time up to
ten years from date of award.
Under the terms of the 1994 Plan, the Company may grant options to purchase up
to a maximum of 4,000,000 shares of common stock to certain employees, directors
and consultants. The options may be awarded as incentive stock options
(employees only) and non-incentive stock options (certain employees, directors
and consultants).
32
The 1994 Plan and the ISO Plan state that the exercise price of options shall
not be less than fair market value at the date of grant. The exercise price of
the Non-Qualified options and the non-incentive options from the 1994 Plan is
determined by the Board of Directors. All options become exercisable as
specified at the date of grant.
The following table presents activity under all stock option plans:
Weighted
Average
Number of Options Exercise Price
Outstanding January 1, 1998 3,411,704 3.13
Granted 574,200 10.14
Exercised ( 91,683) 1.88
Canceled ( 46,500) 7.17
---------
Outstanding December 31, 1998 3,847,721 4.16
Granted 573,750 6.73
Exercised ( 179,000) 2.98
Canceled ( 243,180) 7.15
---------
Outstanding December 31, 1999 3,999,291 4.40
Granted 725,000 5.94
Exercised ( 210,166) 2.73
Expired ( 5,000) .44
Canceled ( 250,500) 7.81
---------
Outstanding December 31, 2000 4,258,625 4.64
=========
Exercisable at December 31: 2000 3,603,350 4.26
=========
1999 3,230,070 3.48
=========
1998 3,065,518 2.89
=========
The weighted average fair values of options granted during 2000, 1999 and 1998
were $4.30, $5.53 and $8.38, respectively.
All options granted during the three year period ended December 31, 2000 were
granted at the market price of the stock. Also, in June 2000, the Company
extended the exercise period for 620,000 options that were previously issued to
Alvin Karloff and Carlos Samour under the 1984 Non-Qualified Stock Option Plan,
resulting in a non-cash stock compensation charge to operations of $2,809,532.
In addition, during 2000, the Company sold to a board member 104,577 shares of
common stock out of the 1994 Plan for proceeds of $500,000.
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
2000 1999 1998
---- ---- ----
Risk-free interest rate 5.67%-6.57% 5.01%-6.46% 4.08%-5.88%
Expected life of option grants 6 years 6 years 6 years
Expected volatility of
underlying stock 72%-82.18% 62.5%-95.6% 71%-112.4%
Expected dividend payment
rate, as a percentage
of the stock price on
the date of grant --- --- ---
33
The option pricing model used was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are not
tradable and have contractual lives of up to ten years.
The following table sets forth information regarding options outstanding at
December 31, 2000:
Weighted Ave. Weighted Ave.
Range of Number of Number Exercise Price- Weighted Ave. Exercise Price-
Exercise Options Currently Options Remaining Currently
Prices Outstanding Exercisable Outstanding Life Exercisable
----------------------------------------------------------------------------------------------------------------
$0.43 1,064,580 1,064,580 $ 0.4375 1.38 $ 0.43
$1.50-$2.00 19,000 19,000 $ 1.6875 .92 $ 1.69
$2.75-$4.00 534,920 534,920 $ 3.0731 3.25 $ 3.07
$4.38-$5.94 1,670,175 1,248,175 $ 5.5590 4.34 $ 5.62
$6.06-$8.25 676,950 536,675 $ 7.0128 7.44 $ 6.94
$9.00-$12.69 293,000 200,000 $12.2522 7.36 $12.26
--------- ----------
TOTAL 4,258,625 3,603,350
========= =========
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees. Had the Company used the
fair value method to measure compensation, the reported net loss and basic and
diluted net loss per share would have been as follows:
2000 1999 1998
---- ---- ----
Net loss as reported $( 9,745,357) $(6,787,069) $(4,842,871)
Compensation costs: ( 3,846,761) (2,270,636) (2,210,404)
---------- --------- ---------
Proforma net loss $(13,592,118) $(9,057,705) $(7,053,275)
========== ========= =========
Proforma basic and diluted
net loss per share $( 0.59) $( 0.41) $( 0.32)
========== ========= =========
The proforma amounts presented above are inexact in that the pricing model was
designed to value freely-traded options rather than employee stock options.
UNEARNED COMPENSATION - The following table sets forth the changes to the
Company's reported unearned compensation for the years ended December 31, 2000,
1999 and 1998:
2000 1999 1998
---- ---- ----
Balance, January 1 $ 382,473 $ 170,676 $ 169,322
Options, warrants and common stock
granted to non-employees at fair
value 192,736 807,888 117,248
Amortization of unearned compensation ( 14,059) (497,040) (115,894)
Other changes in unearned compensation (536,431) ( 99,051) ---
------- ------- -------
Balance, December 31 $ 24,719 $ 382,473 $ 170,676
======= ======= =======
34
STOCK AND STOCK OPTION ISSUANCES TO NON-EMPLOYEES - During 1998, the Company
issued 355 shares to non-employees at fair value and recorded earned
compensation related to the shares of $4,504. Also in 1998, the Company issued
20,000 options to non-employees with a fair value of $112,744 at the
date of grant. These estimates will be revised as these options are earned,
thus total compensation may increase or decrease over time.
During 1998, the Company issued 6,158 common shares and recorded $50,000 as
compensation for services rendered to the Company.
During 1999, the Company issued 129,000 options to non-employees with a fair
value of $807,888 at the date of grant. These estimates will be revised
as these options are earned, thus total compensation may increase or decrease
over time.
During 2000, the Company issued a total of 1,818 shares of common stock to a
consultant in consideration for services, resulting in stock based compensation
amounting to $9,390 being charged to operations.
During 2000, the Company issued 37,818 options to non-employees with a fair
value of $183,346 at the date of grant. These estimates will be revised
as these options are earned, thus total compensation may increase or decrease
over time.
STOCK SALES - In October 2000, the Company sold 1,816,658 shares of common stock
to two institutional investors, and 104,577 shares of common stock to a newly
elected member of the Board of Directors. Net proceeds were $8,295,437 and
$500,000, respectively.
SHAREHOLDER RIGHTS PLAN - The Company has adopted a shareholder rights plan. The
Company declared a dividend consisting of one Right for each share of common
stock outstanding on September 10, 1999. Stock issued after that date will be
issued with an attached Right.
Each Right entitles the holder, upon the occurrence of certain events, to
purchase 1/100th of a share of Series B Preferred Stock of the Company at an
initial exercise price of $50.00, subject to adjustments for stock dividends,
splits and similar events. The Rights are exercisable only if a person or group
acquires 20% or more of the Company's outstanding common stock, or announces an
intention to commence a tender or exchange offer, the consummation of which
would result in ownership by such person or group of 20% or more of the
Company's outstanding common stock.
The Board of Directors may, at its option after the occurrence of one of the
events described above, exchange all of the then outstanding and exercisable
Rights for shares of common stock at an exchange ratio of one share of common
stock per Right.
The Board of Directors may redeem the Rights at the redemption price of $0.01
per Right at any time prior to the expiration of the rights plan on August 13,
2009. Distribution of the Rights is not a taxable event to shareholders.
The Board of Directors has authorized 600,000 shares of Series B Preferred
Stock.
35
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases office space under an agreement expiring
in 2005. The lease includes payment increases over the term of the agreement.
The total amount of the lease payments is being charged to expense using the
straight-line method over the term of the agreement. The Company has recorded a
deferred credit to reflect the excess of rental expense over cash payments since
the inception of the agreement. Deferred rent of $37,264 is recorded within the
balance sheet at December 31, 2000. Future minimum payments under the agreement
are as follows:
2001 $425,800
2002 438,600
2003 451,800
2004 465,300
2005 78,400
EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has employment and consulting
agreements with various consultants and certain key employees, with terms
ranging from one year to an indefinite period of time. These agreements provide
for annual payments of approximately $937,000. In addition, certain consulting
agreements also provide for additional payments to certain consultants related
to obtaining a financial placement or the sale or licensing of the Company's
product or technology to third parties. During the years ended December 31,
2000, 1999 and 1998, no such additional amounts were earned by the related
consultants.
6. INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December 31,
2000, the Company has available net operating loss carryforwards of
approximately $38.5 million for federal income tax purposes, expiring through
2020 and $23.6 million for state income tax purposes, expiring through 2005. In
addition, the Company has unused investment and research and development tax
credits for federal and state income tax purposes aggregating $998,700 and
$521,600, respectively. The use of the federal net operating loss may also be
restricted due to changes in ownership in accordance with definitions as stated
in the Internal Revenue Code.
The net tax effect of differences in the timing of certain revenue and expense
items and the related carrying amounts of assets and liabilities for financial
reporting and tax purposes are not material and, accordingly, are not displayed
in the table below. The components of the Company's deferred tax assets as of
December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Deferred Tax Assets:
Net operating loss carryforwards $ 14,586,000 $ 12,557,000
Tax credit carryforwards 1,520,000 1,261,000
---------- ----------
16,106,000 13,818,000
Valuation allowance (16,106,000) (13,818,000)
---------- ----------
Deferred tax asset, net $ --- $ ---
========== ==========
For the years ended December 31, 2000, 1999 and 1998, the valuation allowance
was increased by approximately $2,288,000, $3,006,200 and $2,418,800,
respectively, due to the uncertainty of future realization of currently
generated net operating loss and tax credit carryforwards.
36
7. EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified 401(k) Retirement Plan (the "Plan") under which
employees are allowed to contribute certain percentages of their pay, up to the
maximum allowed under Section 401(k) of the Internal Revenue Code. Company
contributions to the Plan are at the discretion of the Board of Directors. The
Company contributed 17,054 shares of common stock in 2000, 13,252 shares of
common stock in 1999, and 7,775 shares of common stock in 1998, valued at
$69,056, $77,659, and $58,042, respectively.
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the year each Director was first elected and
the age, positions, and offices presently held by each Director with the
Company:
Year First
Name Age Became a Director Position with Company
- --------------------------------------------------------------------------------
Alvin J. Karloff....69 1990 Chief Executive Officer, President
and Director
John L. Zabriskie....61 2000 Chairman of the Board of Directors
Peter G. Martin.....52 1995 Director
Michael A. Davis....59 1997 Director and Consultant
Robert J. DeLuccia...55 2000 Director
Paul S. Echenberg....57 2000 Director
Peter G. Savas.......52 2000 Director
The following is a brief summary of the background of each Director of the
Company:
ALVIN J. KARLOFF has served as the Company's Chief Executive Officer and
President and as a Director since January 1990, and as Chairman of the Board of
Directors from May 2000 until March 22, 2001. In 1986, Mr. Karloff founded
Medical and Scientific Enterprises, Inc., a privately held medical diagnostic
equipment company, where he served as Chairman, Chief Executive Officer and
President prior to joining the Company. Mr. Karloff was Director of Marketing
for Medical Products with New England Nuclear ("NEN"), a Dupont company, from
1984 to 1985, and from 1969 to 1984, he served as Marketing Manager, Sales
Manager, and in several other sales and marketing positions for NEN. Mr. Karloff
received a B.S. from the University of Massachusetts.
JOHN L. ZABRISKIE, PH.D., has served as a Director of the Company since
2000 and as Chairman of the Board of Directors since March 22, 2001. From 1997
to 2000, he was Chairman, President and Chief Executive Officer of NEN Life
Science Products, which was sold to Perkin Elmer. In 1994, Dr. Zabriskie became
Chairman, President and Chief Executive Officer of Upjohn; he was responsible
for Upjohn's merger with the Swedish pharmaceutical company Pharmacia, and
became C.E.O. of the merged company. Before his appointment at Upjohn, he spent
38
nearly 30 years with Merck & Company, rising to Executive Vice President and
President of Merck Manufacturing Division. He is a member of the Board of
Directors of the following publicly traded companies: Biomira Inc. (since 1998);
Cubist Pharmaceuticals, Inc. (since 1998); and Kellogg Company (since 1995). Dr.
Zabriskie received a B.S. in chemistry from Dartmouth College and a Ph.D. in
organic chemistry from the University of Rochester.
PETER G. MARTIN has served as a Director of the Company since 1995. Since
1990 Mr. Martin has been an independent investment banker and venture
capitalist. Prior to 1990 he was a commercial banker. Mr. Martin was initially
elected to the Board of Directors as the designee of David Russell, who
privately purchased 1 million shares of the Company's Common Stock in 1995. Mr.
Russell is no longer entitled to designate a Director of the Company. Mr. Martin
received a B.A. and J.D. from Fordham University and an M.B.A. from Columbia
University.
MICHAEL A. DAVIS, M.D., SC.D., has served as a Director of the Company
since 1997 and has provided medical and pharmaceutical consulting services to
the Company since 1991. Since 1980, Dr. Davis has been Professor of Radiology
and Nuclear Medicine and Director of the Division of Radiologic Research at
University of Massachusetts Medical School. From 1982 to 1997 Dr. Davis was
Adjunct Professor of Surgery at Tufts University School of Veterinary Medicine.
Since 1986, he has been Affiliate Professor of Biomedical Engineering at
Worcester Polytechnic Institute. He is also a director of EZ EM, Inc., a public
company engaged in supplying oral radiographic contrast media, as well as
medical devices. In addition, from February to November 1999, he was President
and Chief Executive Officer of Amerimmune Pharmaceuticals, Inc., formerly known
as Versailles Capital Corporation, a public company, and its wholly owned
subsidiary, Amerimmune Inc., which is engaged in developing drugs relating to
the immune system. Since February 1999, Dr. Davis has been a director of both
Amerimmune Pharmaceuticals, Inc. and Amerimmune Inc.. Dr. Davis received a B.S.
and M.S. from Worcester Polytechnic Institute, an S.M. and Sc.D. from the
Harvard School of Public Health, an M.B.A. from Northeastern University and an
M.D. from the University of Massachusetts Medical School.
ROBERT J. DELUCCIA has served as a Director of the Company since 2000. Mr.
DeLuccia is currently a director of IBEX Technologies, Inc., a publicly traded
biotechnology company developing enzymes for a variety of therapeutic
applications. From 1998 through 1999, Mr. DeLuccia was President and Chief
Executive Officer and a director of Immunomedics, Inc. Immunomedics is a
publicly traded biotechnology company focused on diagnostic and therapeutic
products for the detection and treatment of cancer and infectious diseases. From
1994 through 1997, Mr. DeLuccia was President of Sterling Winthrop
Pharmaceuticals and Senior Vice President of Sanofi Winthrop, Inc. Sanofi
Winthrop Inc. was then the U.S. subsidiary of Sanofi (now Sanofi-Synthelabo),
based in Paris, France. Sanofi Winthrop focused on a wide range of
cardiovascular, thrombosis, rheumatoid arthritis, analgesics and oncology
products as well as a full line of parenteral products in a proprietary drug
delivery system. From 1984 through 1994, Mr. DeLuccia was also with Sterling
Drug as a Vice President in a variety of marketing roles prior to the company's
sale by Eastman Kodak to Sanofi. From 1974 through 1981 Mr. DeLuccia held sales,
marketing and general management positions at Pfizer, Inc. Mr. DeLuccia holds
both an M.B.A. and a B.S. in marketing from Iona College.
39
PAUL S. ECHENBERG has served as a Director of the Company since 2000. Since
1997 he has been the President and Chief Executive Officer of Schroders &
Associates Canada, Inc. and a director of Schroder Ventures Limited. These firms
provide merchant banking advisory services to a number of Canadian buy-out
funds. He is a director of the following companies: EZ EM, Inc., a supplier of
oral radiographic contrast media and medical devices; Cedara Software Inc.;
Benvest Capital Inc., a merchant bank that he founded; and Shirmax Fashions Ltd.
From 1989 through 1997, Mr. Echenberg was President of Eckvest Equity, Inc., a
private merchant bank providing consulting and personal investment services.
From 1970 to 1989, he was President and Chief Executive Officer of Twinpak,
Inc., a manufacturer of plastic packaging, and from 1982 to 1989 was Executive
Vice President of CB Pak, Inc., a publicly traded plastic, glass and packaging
company. Mr. Echenberg received a B.Sc. from McGill University and an M.B.A.
from Harvard Business School.
PETER G. SAVAS has served as a Director of the Company since 2000. Since
2000 Mr. Savas has been President and Chief Executive Officer of Discovery
Therapeutics, Inc., a private biotechnology company developing cardio-renal
drugs. From 1992 to 2000, Mr. Savas was with Unisyn Technologies, Inc., a
private biotechnology company that provides contract process development and
manufacturing of biologics to the global pharmaceutical industry. Mr. Savas
joined Unisyn in 1992 as President and Chief Operating Officer and became Chief
Executive Officer in 1995. From 1989 to 1992, Mr. Savas was Senior Vice
President of Zymark Corporation, a manufacturer of standard and custom
laboratory automation and robotics equipment. From 1984 through 1989, Mr. Savas
held the position of Vice President of Genex Corporation, a single chain
antibody therapy company. From 1975 through 1984 Mr. Savas held positions of
increasing responsibility culminating in the role of Vice President & General
Manager of Millipore Corporation, a Fortune 1000 biotechnology company. Mr.
Savas began his career as a Senior Research Scientist at Bristol-Myers. He
received a B.A. in Chemistry from Syracuse University.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their positions with
the Company are as follows:
Name Age Position with Company
- --------------------------------------------------------------------------------
John L. Zabriskie......61 Chairman of the Board of Directors
Alvin J. Karloff.......69 Chief Executive Officer, President and Director
Paul J. Schechter......61 Vice President, Drug Development & Regulatory Affairs
Kenneth L. Rice, Jr....47 Vice President, Chief Financial Officer, Treasurer
and Secretary
Melvin A. Snyder.......58 Vice President, Market Development
The following is a brief summary of the backgrounds of Dr. Schechter, Mr.
Rice and Mr. Snyder. The background of the Company's other executive officer,
Mr. Karloff, is summarized above.
PAUL J. SCHECHTER, M.D., PH.D., the Company's Vice President, Drug
Development and Regulatory Affairs since May 1998, was from 1973 to 1990 with
Merrell Dow Research Institute, where he attained the position of Vice President
40
for Clinical Research. He went on to become Vice President of Fujisawa
Pharmaceutical Company from 1990 to 1993. Most recently he served as Senior Vice
President, Drug Development with Hybridon, Inc. from 1993 to 1997. Dr. Schechter
holds an M.D. and Ph.D. in Pharmacology from the University of Chicago and a
B.S. from Columbia University, College of Pharmacy.
KENNETH L. RICE, JR., Vice President and Chief Financial Officer of the
Company since August 1999 and Treasurer and Corporate Secretary since February
2000, has held executive financial and operating positions at a number of life
sciences and computer services firms. Most recently Mr. Rice was Vice President,
Finance and Administration, Chief Financial Officer & Secretary at Pentose
Pharmaceuticals, Inc. from 1998 to 1999. Mr. Rice held similar positions at
Unisyn Technologies, Inc. (1993 to 1998, Senior Vice President, CFO and General
Counsel). Mr. Rice spent his early career at Millipore Corporation, where he
attained the position of Corporate Tax Director. Mr. Rice holds an LL.M. in
Taxation from Boston University Law School, a J.D. from Suffolk Law School and
an M.B.A. and B.S.B.A. from Babson College.
MELVIN A. SNYDER, the Company's Vice President for Market Development since
October 20, 2000, was from June 1999 until October 2000 consulting director of
business development of the Company. From 1998 until 1999 he was Vice President
of Marketing and Business Development at Immunomedics, and between 1995 and 1998
he was a consultant to several pharmaceutical companies including Immunomedics.
Between 1975 and 1995 he was President of ProClinica Inc., a marketing
communications and licensing-support company. Mr. Snyder holds a bachelor's
degree from Lehigh University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than 10 percent of
the Company's Common Stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Based solely on its review of the
copies of such reports received by it, and written representations from certain
reporting persons that no Forms 5 were required for those persons, the Company
believes that during 2000 all filing requirements applicable to its officers,
directors, and such 10 percent beneficial owners were complied with.
41
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth the compensation earned by or paid or
awarded to Dr. Samour, Mr. Karloff and Dr. Schechter during each of the three
fiscal years ended December 31, 2000 and to Mr. Rice during the fiscal year
ended December 31, 2000:
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
- ---------------------------------------------------------------------------------------------------------------------
Other Annual Securities Underlying All Other
Name and Principal Salary Bonus Compensation Options Compensation
Position Year $ $(1) $(2) # $(3)
- ---------------------------------------------------------------------------------------------------------------------
Carlos M. Samour 2000(4) 275,000(7) 27,000 5,444 100,000 2,854
Former Chairman, 1999 250,000 45,000 10,606 ----- 5,000
Scientific Director 1998 237,538 42,757 10,889 ----- 5,000
Alvin J. Karloff 2000 300,000 54,000 13,043 100,000 5,250
Chief Executive Officer, 1999 250,000 45,000 10,955 ----- 5,000
President and Chairman 1998 237,563 42,761 13,453 ----- 5,000
of the Board of
Directors
Paul J. Schechter 2000 203,333 ----- 753 ----- 5,250
Vice President, 1999 182,500 ----- ----- 50,000 5,000
Drug Development 1998(5) 116,667 ----- 392 180,000 5,000
& Regulatory Affairs
Kenneth L. Rice, Jr. 2000 165,000 ----- 2,906 30,000 2,475
Vice President, Chief 1999(6) 61,875 ----- 730 ----- -----
Financial Officer,
Treasurer & Corporate
Secretary
- ---------------------------------------------------------------------------------------------------------------------
(1) Since March 1992, Dr. Samour and Mr. Karloff have each received, in lieu of
retirement benefits, annual payments equal to eighteen percent of their
salaries.
(2) Includes amounts paid for taxable group term life insurance. Also includes
for Dr. Samour and Mr. Karloff a monthly automobile allowance of $799, plus
a health insurance benefit equal to the annual premium each individual pays
under separate health insurance policies maintained by their former
employers, which health insurance benefit is paid in lieu of any other
health, medical or retirement benefits.
(3) Represents the dollar value of Company contributions to the Company's
401(k) Retirement Plan, which are made in its common stock.
(4) Dr. Samour resigned as Chairman of the Board of Directors and Scientific
Director on May 17, 2000.
(5) Dr. Schechter's employment commenced on May 1, 1998.
(6) Mr. Rice's employment commenced on August 16, 1999.
(7) Includes $125,000 in consulting fees paid to Dr. Samour in 2000.
42
STOCK OPTIONS
The following table provides information concerning the grant of stock
options during 2000 to Dr. Samour, Mr. Karloff and Mr. Rice (no stock options
were granted during 2000 to Dr. Schechter):
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------
Potential
Realizable
Value
at Assumed
Annual Rates
of Stock Price
Number of % of Total Appreciation for
Securities Options Exercise Option Term
Underlying Granted to or Base ---------------------
Options Employees in Price Expiration 5% 10%
Name Granted (#) Fiscal Year ($/Sh) Date ($) ($)
- --------------------------------------------------------------------------------------------------
Carlos M. Samour 100,000(1) 14.8 6.50 5/17/10 408,782 1,035,933
Alvin J. Karloff 100,000(2) 14.8 6.50 5/17/10 408,782 1,035,933
Kenneth L. Rice, Jr. 30,000(3) 4.5 5.00 10/23/10 94,334 239,061
- --------------------------------------------------------------------------------------------------
(1) The options granted to Dr. Samour were granted in May 2000 at an exercise
price of $6.50 per share. The options expire ten years from the date of
grant and vest immediately.
(2) The options granted to Mr. Karloff were granted in May 2000 at an exercise
price of $6.50 per share. The options expire ten years from the date of
grant and vest immediately.
(3) The options granted to Mr. Rice were granted in October 2000 under the
Company's 1994 Equity Incentive Plan at an exercise price of $5.00 per
share. The options expire ten years from the date of grant and vest
immediately.
The following table provides information concerning option exercises during
the fiscal year ended December 31, 2000 and unexercised options held by Dr.
Samour, Mr. Karloff, Dr. Schechter and Mr. Rice as of December 31, 2000:
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Acquired Value Options at Options at
On Exercise (#) Realized ($) Fiscal Year-End # Fiscal Year-End $ (1)
- -----------------------------------------------------------------------------------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------
Carlos M. Samour(2)(3) 0 0 795,080 / NA 1,262,863 / NA
Alvin J. Karloff(4) 10,000 4.375 1,170,000 / NA 3,160,787 / NA
Paul J. Schechter 0 0 145,000 / 85,000 0 / 0
Kenneth L. Rice 0 0 80,000 / 100,000 0 / 0
- -----------------------------------------------------------------------------------------------------
(1) The value of Dr. Samour's, Mr. Karloff's, Dr. Schechter's and Mr. Rice's
in-the-money unexercised options at the end of the fiscal year ended
December 31, 2000 was determined by multiplying the number of options held
by the difference between the market price of the Common Stock underlying
the options on December 29, 2000 ($4.9616 per share) and the exercise price
of the options granted.
(2) Does not include options to purchase 120,500 shares of Common Stock granted
to Pierrette Samour, Dr. Samour's wife, of which he is deemed to have
beneficial ownership. If such 120,500 options were included, Dr. Samour
43
would be deemed to have had a total of 435,580 exercisable in-the-money
options as of December 29, 2000, the value of which would have been
$1,355,523.
(3) In June 2000 the Board of Directors voted to extend from March 1, 2001 to
March 31, 2003 the final exercise date for Dr. Samour to exercise options
to purchase 140,000 shares at $0.4375 per share.
(4) In June 2000, the Board of Directors voted to extend from March 1, 2001 to
March 31, 2003 the final exercise date for Mr. Karloff to exercise options
to purchase 480,000 shares at $0.4375 per share.
DIRECTORS' COMPENSATION
Each non-employee Director of the Company receives compensation of $12,000
annually, $1,000 per regular meeting attended, $500 for each special, telephone
or committee meeting attended and reimbursement of travel expenses in connection
with attending meetings of the Board of Directors. Mr. Karloff does not receive
any additional compensation for his service as Director. During 2000 ten-year
stock options were granted to non-employee Directors as follows: Dr. Davis and
Mr. Martin - 30,000 exercisable at $6.50 per share, vested immediately, and
20,000 exercisable at $5.1875 per share, vesting as to 10,000 shares on each of
May 26, 2001 and May 26, 2002; Messrs. DeLuccia, Echenberg and Savas - 50,000
exercisable at $5.1875 per share, of which 10,000 shares vested immediately, and
vesting as to 13,333 shares on each of May 26, 2001, May 26, 2002 and May 26,
2003.
The Company currently compensates Dr. Davis at the rate of $5,000 per month
for medical and pharmaceutical consulting services.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into an employment agreement of indefinite length
effective as of November 1, 1992 with Mr. Karloff. The agreement currently
provides for annual compensation of $300,000. The agreement also provides for a
monthly automobile allowance of $500 net of taxes and a payment, in lieu of
retirement benefits, equal to 18% of his base salary. Further, the agreement
provides for the payment of 12 months' salary in the event he is terminated
without cause. In addition, the agreement was amended in 1999 to preclude him
from competing with the Company during his employment and for a period of two
years thereafter, and from disclosing confidential information.
In May 2000 the Company's Board of Directors voted to pay Mr. Karloff a
bonus of $75,000 upon the earlier of payment of a bonus to a new Chief Executive
Officer or the signing of a license agreement by the Company for one of its
products.
The Company has entered into an employment agreement of indefinite length
effective as of June 8, 1999 with Dr. Schechter. The agreement currently
provides for annual compensation of $210,000 and for the payment of six months'
salary in the event he is terminated without cause. In addition, the agreement
precludes Dr. Schechter from competing with the Company during his employment
and for a period of two years thereafter, and from disclosing confidential
information.
The Company has entered into an employment agreement of indefinite length
effective as of August 18, 1999 with Mr. Rice. The agreement currently provides
for annual compensation of $165,000 and for the payment of six months' salary in
the event he is terminated without cause. In addition, the agreement precludes
Mr. Rice from competing with the Company during his employment and for a period
of two years thereafter, and from disclosing confidential information.
44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Dr. Davis (Chairman) and
Mr. Savas.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 1, 2001, certain information
concerning ownership of the Company's common stock by (i) each person known by
the Company to be the beneficial owner of more than five percent (5%) of the
Company's common stock, (ii) each of the Company's Directors, (iii) each of the
executive officers named in the Summary Compensation Table under "Executive
Officers' Compensation" above and (iv) all Directors and executive officers as a
group. Except as otherwise indicated, the stockholders listed in the table have
sole voting and investment powers with respect to the shares indicated.
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED OF CLASS
- --------------------------------------------------------------------------------
Carlos M. and Pierrette E. Samour(2)(3)..... 1,339,337 5.3%
Alvin J. Karloff(2)(3)...................... 1,180,000 4.6%
Peter G. Martin(2) ......................... 70,270 *
Michael A. Davis(2)......................... 35,000 *
Robert J. DeLuccia(2)....................... 13,600 *
Paul S. Echenberg(2)........................ 12,000 *
Peter G. Savas(2)........................... 18,000 *
John L. Zabriskie(2)........................ 114,577 *
Paul J. Schechter(2)(3)..................... 230,000 *
Kenneth L Rice(2)(3)........................ 31,500 *
Mel Snyder.................................. 60,000 *
Peter Janssen............................... 1,396,577 5.5%
1780 Route 106
Muttontown, NY 11791
All Directors and Officers as a Group
(10 persons) (2)(3)...................... 3,104,284 12.2%
- --------------------------------------------------------------------------------
* Less than one percent (1%).
(1) The address of Dr. Samour, Mrs. Samour, Mr. Karloff, Mr. Martin, Dr. Davis,
Mr. DeLuccia, Mr. Echenberg, Mr. Savas, Mr. Zabriskie, Dr. Schechter, Mr.
Rice and Mr. Snyder is c/o the Company, 110 Hartwell Avenue, Lexington,
Massachusetts 02421.
(2) Includes the following numbers of shares issuable upon the exercise of
stock options exercisable within 60 days: Dr. and Mrs. Samour-915,580; Mr.
Karloff-1,060,000; Mr. Martin-70,000; Dr. Davis-31,000; Mr.
DeLuccia-10,000; Mr. Echenberg-10,000; Mr. Savas-10,000; Mr.
Zabriskie-10,000; Dr. Schechter-230,000; Mr. Rice-30,000.
(3) Does not include the following numbers of vested shares in the Company's
401(k) Plan contributed by the Company to match portions of cash
contributions by the following Plan participants: Dr. and Mrs.
Samour-2,636; Mr. Karloff-2,815; Dr. Schechter-2,815; Mr. Rice-753.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following Financial Statements as of December 31, 2000 and 1999 and
for the three years in the period ended December 31, 2000 are filed herewith:
PAGE
Independent Auditors' Report 22
Balance Sheets 23
Statements of Operations 24
Statements of Stockholders' Equity 25-26
Statements of Cash Flows 27-28
Notes to Financial Statements 29-37
(a)(2) The following Financial Statement Schedules are filed herewith:
None.
Schedules not included herein are omitted because they are not applicable
or the required information appears in the Financial Statements or Notes
thereto.
(a)(3) The following exhibits are filed herewith or are incorporated by
reference as may be indicated:
3a Certificate of Incorporation as amended, incorporated by reference to
exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
3b Amended and Restated By-Laws of the Company, incorporated by reference
to exhibits to the Company's Current Report on Form 8-K dated August 13, 1999.
4a Stock Purchase Warrant, incorporated by reference to exhibits to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
4b Rights Agreement dated as of August 13, 1999 between the Company and
American Stock Transfer & Trust Company, as Rights Agent, including Form of
Certificate of Designation with respect to the Series B Preferred Stock, par
value $.01 per share (attached as Exhibit A to the Rights Agreement), Form of
Rights Certificate (attached as Exhibit B to the Rights Agreement), and Summary
of Rights (attached as Exhibit C to the Rights Agreement), incorporated by
reference to exhibits to the Company's Current Report on Form 8-K dated August
13, 1999.
4c Common Stock Certificate, incorporated by reference to exhibits to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999.
4d Securities Purchase Agreement among the Company, Bay Harbor
Investments, Inc. and Strong River Investments, Inc., incorporated by reference
to exhibits to the Company's Current Report on Form 8-K dated October 23, 2000.
46
4e Form of Closing Warrant dated as of October 23, 2000, incorporated by
reference to exhibits to the Company's Current Report on Form 8-K dated
October 23, 2000.
4f Form of Adjustable Warrant dated as of October 23, 2000, incorporated
by reference to exhibits to the Company's Current Report on Form 8-K
dated October 23, 2000.
4g Form of Registration Rights Agreement by and among the Company, Bay
Harbor Investments, Inc. and Strong River Investments, Inc., incorporated by
reference to exhibits to the Company's Current Report on Form 8-K dated October
23, 2000.
4h Warrant issued to Leerink Swann & Company dated as of October 23, 2000,
incorporated by reference to exhibits to the Company's Current Report
on Form 8-K dated October 23, 2000.
10.10.1 1994 Equity Incentive Plan as amended November 14, 1997,
incorporated by reference to exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. *
10.10.2 1984 Non-Qualified Stock Option Plan as amended November 15,
1996, incorporated by reference to exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996. *
10.10.2 1984 Incentive Stock Option Plan as amended November 15, 1996,
incorporated by reference to exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. *
10a Form of Employment Agreement between the Company and Dr. Carlos M.
Samour, incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (No. 33-62042)*
10a.1 Amendment to Employment Agreement between the Company and Dr. Carlos M.
Samour, incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999. *
10b Form of Employment Agreement between the Company and Mr. Alvin J.
Karloff, incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (No. 33-62042). *
10b.1 Amendment to Employment Agreement between the Company and Mr. Alvin J.
Karloff, incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999. *
10d Form of Employment Agreement between the Company and Dr. Paul J.
Schechter, incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999. *
10e Form of Employment Agreement between the Company and Mr. Kenneth L.
Rice, incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. *
47
10f Form of Employment Agreement between the Company and Mr. Mel Snyder,
filed herewith. *
10.11 Lease between GLB Lexington Limited Partnership and the Company dated
as of July 21, 1999, for space located at 110 Hartwell Avenue, Lexington, MA
02421, incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
23.1 Consent of Deloitte & Touche LLP
(b) One Current Report on Form 8-K was filed in the three-month period
ended December 31, 2000. The items reported were Item 5, Other Events, and Item
7, Financial Statements, Pro Forma Financial Information and Exhibits disclosing
a private placement of common stock. No financial statements were filed. The
Current Report on Form 8-K was dated October 23, 2000.
- --------------------------
*Management contract or compensatory plan or arrangement
48
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.
MACROCHEM CORPORATION
Dated: March 30, 2001 By:/s/Alvin J. Karloff
-------------------------------------
Alvin J. Karloff
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 30, 2001.
/s/ Alvin J. Karloff Chief Executive Officer and President
- ---------------------------------
Alvin J. Karloff
/s/ John L. Zabriskie Chairman of the Board of Directors
- ---------------------------------
John L. Zabriskie
/s/ Kenneth L. Rice Vice President and Chief Financial
- --------------------------------- Officer
Kenneth L. Rice
/s/ Peter G. Martin Director
- ---------------------------------
Peter G. Martin
/s/ Michael A. Davis Director
- ---------------------------------
Michael A. Davis, M.D.
/s/ Robert J. DeLuccia Director
- ---------------------------------
Robert J. DeLuccia
/s/ Paul S. Echenberg Director
- ---------------------------------
Paul S. Echenberg
/s/ Peter G. Savas Director
- ------------------
Peter G. Savas
49