SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 0-11550
December 31, 2001
Pharmos Corporation
(Exact name of registrant as specified in its charter)
Nevada 36-3207413
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
99 Wood Avenue South, Suite 311
Iselin, NJ 08830
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 452-9556
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's Common Stock at March 15, 2002
held by those persons deemed to be non-affiliates was approximately $98,777,140.
As of March 15, 2002, the Registrant had outstanding 56,573,792 shares of its
$.03 par value Common Stock.
PART I
Item 1. Business
Introduction
Pharmos Corporation is a bio-pharmaceutical company that discovers and develops
new drugs to treat a range of inflammatory and neurological disorders such as
traumatic brain injury and stroke. Although we do not currently have any
approved products, we have an extensive portfolio of drug candidates under
development, as well as discovery, preclinical and clinical capabilities. Prior
to the sale of our existing ophthalmic product line to Bausch & Lomb
Incorporated in October of last year, we had two successful ophthalmic products
on the market. To date, our principal sources of cash have been the sale of our
existing ophthalmic business, revenues from our ophthalmic product line, private
financings and research grants.
Dexanabinol, Pharmos' lead central nervous system product, is currently
undergoing a pivotal Phase III clinical trial for severe traumatic brain injury
in Europe and Israel. The study is expected to enroll a total of 860 patients,
including patients in the U.S. upon receipt of necessary FDA authorization.
Fifty-four centers are currently participating in the trial, which number may
ultimately increase to ninety by the end of the year. The Phase II studies,
completed in early 2000, revealed that the drug inhibited the increase in
intracranial pressure above 25mmHg, the level of pressure above which is
considered to be a prognostic indicator of poor outcome. This result was
statistically significant. The study also showed a trend of efficacy in the drug
treated groups versus the placebo group and, within the most severely injured
patients, a more than two-fold increase in the percentage of those achieving
good recovery (28.0% in the dexanabinol group vs. 11.7% in the placebo group)
was demonstrated. In addition, neurological recovery appeared to be accelerated
in the dexanabinol treated group, such that the percentage of dexanabinol
patients achieving good recovery at one month after injury was significantly
higher than in the placebo group.
Pharmos has identified several promising new compounds based upon its program to
develop synthetic relatives of the active ingredient in cannabis. Preclinical
investigations are underway for compounds to treat stroke, multiple sclerosis,
neuropathic pain and Parkinson's disease.
On October 9, 2001, Pharmos sold all of its rights to its existing ophthalmic
product line to Bausch & Lomb for cash and assumption of certain ongoing
obligations. The disposition had two parts, one for its two products already on
the market, Lotemax(R) and Alrex(R), and the second part for a medication now in
Phase III clinical trials, a product known as LE-T, involving a combination of
loteprednol etabonate and the antibiotic tobramycin. Based on meeting certain
new product milestones for LE-T in the future, the gross proceeds of the total
disposition may reach $49 million.
Pharmos received gross proceeds of approximately $25 million in cash for its
rights to Lotemax(R) and Alrex(R), prescription anti-inflammation and allergy
products that have been manufactured and marketed by Bausch & Lomb under a 1995
Marketing Agreement with Pharmos and for the rights to any future extensions of
LE-T. Additionally, Pharmos may receive up to an additional $14 million in gross
proceeds, adjusted based on the date of FDA approval of this new combination
therapy. An additional milestone payment of up to $10 million could be paid to
Pharmos to the extent certain sales levels are exceeded in the first two years
following commencement of sales in the U.S. Pharmos will pay the loteprednol
etabonate patent owner/licensor 11% of any such gross proceeds and 14.3% of any
such milestone payment. Pharmos agreed to pay up to $3.75 million of the costs
of developing LE-T based on the arrangement with Bausch & Lomb.
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Strategy
Pharmos' business is the discovery and development of new drugs to treat a range
of inflammatory and neurological disorders such as traumatic brain injury and
stroke. We seek to enter into collaborative relationships with established
pharmaceutical companies to complete development and commercialization of our
products.
Pharmos is applying its experience in rational drug design, novel drug delivery
technology and high through-put screening in developing products directed at
several fields including neuroprotective compounds for traumatic brain injury
and stroke, and synthetic, non-psychotropic compounds related to cannabis for
neurological, vascular and other conditions involving inflammatory processes.
Products
Platform Technologies
Pharmos is developing two families of compounds based on scientific knowledge of
the medicinal activities of cannabis. Since these compounds are chemically
similar in several ways to the main active component of cannabis, they are
referred to as cannabinoids. The company utilizes state-of-the-art technologies
to synthesize, evaluate and develop new cannabinoid molecules that exhibit
enhanced therapeutic benefit but do not display the undesirable, psychotropic
effects seen with cannabis. Pharmos continues to expand its library of compounds
through a hybrid methodology combining the rational design of compounds based on
knowledge of detailed molecular requirements for drug activity with
combinatorial chemistry, a technique that utilizes randomized chemical reactions
to synthesize large numbers of different molecules. In contrast to the
conventional random methods of combinatorial chemistry, this hybrid approach
leads to a larger percentage of synthesized compounds that demonstrate activity
in screening assays and increases the potential of developing potent and
selective drug candidates.
Pharmos' chemical library consists of two chemically distinct cannabinoid
platforms, tricyclic dextrocannabinoids and bicyclic cannabinoids. The two
classes of synthetic cannabinoids have different mechanisms of action, but there
is considerable overlap in their therapeutic potential for treating
neurological, cardiovascular, autoimmune and inflammatory disorders.
Tricyclic dextrocannabinoids
The tricyclic dextrocannabinoids, for which dexanabinol is the prototype, do not
bind to either of the two known classes of cannabinoid receptors. Therefore,
this family of compounds does not show the psychotropic and other negative side
effects seen with naturally occurring cannabinoids. Drug candidates in this
family display biological activity by blocking the activation of specific
channels in nerve cells and/or inhibiting several major inflammatory mechanisms.
Both activities may reduce the amount of sudden and programmed cell death caused
by certain disorders.
In addition to dexanabinol, which is currently undergoing a Phase III clinical
study for the treatment of severe head injury, other tricyclic
dextrocannabinoids are under evaluation in preclinical models for stroke;
neuropathic pain, which results from nerve damage or dysfunction; nociceptive
pain, which is caused by activation of nerve sensors as a result of acute tissue
damage; neurodegenerative disorders such as Parkinson's disease; and autoimmune
disorders such as multiple sclerosis, inflammatory bowel disease, rheumatoid
arthritis, etc.
Dexanabinol
Dexanabinol is Pharmos' lead central nervous system product aimed at treating
severe head trauma. It is a member of the tricyclic family of compounds,
therefore it is similar in structure to cannabis but is designed to
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avoid the unwanted psychotropic and sedative effects while retaining properties
as an agent to reduce inflammation and pain.
In 1996, a Phase I study of rising dose tolerance in healthy volunteers (50
subjects) showed dexanabinol to be safe and well tolerated at doses up to and
including the expected therapeutic doses. In late 1996, Pharmos commenced a
Phase II study conducted at six medical centers in Israel on patients with
severe head injury. This trial was reviewed and approved by the American Brain
Injury Consortium and the European Brain Injury Consortium.
In 1998, Pharmos announced the results of the first two cohorts of the three
cohort Phase II Clinical Study involving 67 patients. Clinical endpoints
established an excellent safety profile of the drug in the treated patients.
There were no unexpected adverse experiences reported for either the drug
treated or placebo group. Intracranial pressure above a threshold of 25 mmHg, an
important risk factor and a predictor of poor neurological outcome, was
significantly reduced in the drug-treated patients through the third day of
treatment, without a concomitant reduction in systolic blood pressure. The
mortality rate of 10% (3/30) in the dexanabinol group compared favorably with a
13.5% rate in the placebo group (5/37). The investigators concluded that
dexanabinol was shown to be safe and well tolerated in severe head trauma
patients. Neurological outcomes in the study, assessed periodically up to 6
months after injury, established a strong trend of efficacy. The percentage of
patients achieving Good Neurological Outcome, the highest score on the five
level Glasgow Outcome Score used to assess the recovery of head trauma patients,
was higher in the drug-treated group at each measurement. Among the most
severely injured patients in the study, a better outcome was consistently
observed among the drug treated group than among the placebo treated group.
Patients received an intravenous injection of either dexanabinol or placebo
within 6 hours of the injury. Demographically, all 67 patients were fairly
representative of the characteristics describing severe head trauma.
In early 2000, Pharmos announced the results of the third cohort of the Phase II
Clinical Study. The study concluded that the Phase II goals of establishing the
safety of dexanabinol in traumatic brain injury and the dosing parameters for a
pivotal study were met. 101 patients in total were enrolled in the multi-center,
double-blind, randomized Phase II study, which was carried out in six trauma
centers in Israel affiliated with the American Brain Injury Consortium.
Fifty-two of the patients were treated with dexanabinol at three separate doses
and forty-nine received a placebo. In the third cohort, thirty-three patients
received an intravenous injection of either 200 mg. of dexanabinol (N=21) or
placebo (N=12) within six hours of injury. Demographically, these patients were
fairly representative of the traumatic brain injury population, comprising
mostly young men injured in motor vehicle accidents. However, the dexanabinol
and placebo groups differed with respect to several important baseline entry
parameters affecting the patients' prognosis; for example, injury severity as
determined by the Glasgow Coma Scale was significantly worse in the treated
group than in the placebo group. In addition, the patients' Computerized
Tomography classifications indicating the extent of the brain injury were worse
in the drug-treated group compared to placebo. Predictably, the strong trend for
better neurological outcome in comparison with placebo that was observed in the
first two cohorts was not repeated in this cohort. Nevertheless, intracranial
pressure above a threshold of 25mmHg, a major risk factor affecting the
prognosis of traumatic brain injury, was lower 40-70% of the time during the
first days after injury in the treated group vs. the placebo group. This result
was similar to those of the previous two cohorts (48mg. and 150mg. doses)
reported in 1998. An analysis of patient performance on the Galveston
Orientation and Amnesia Test demonstrated significantly better results in the
dexanabinol treated patients at 1, 3 and 6 months follow-up compared to placebo.
The Galveston Orientation and Amnesia Test is a neurological test that measures
awareness of surroundings and ability to remember.
The 6 month outcome as measured by the Glasgow Outcome Score was similar in the
treated and placebo groups as a whole, a comparison of outcome within the
subgroup of very severe (Glasgow Coma Scale 4-6) patients revealed a more than
two-fold increase in the percentage of those achieving good recovery (28.0% in
the dexanabinol group vs. 11.7% in the placebo group). In addition, neurological
recovery appeared to be accelerated in the dexanabinol treated group, such that
the percentage of dexanabinol patients achieving good
4
recovery (measured by Glasgow Outcome Score) at 1 month was significantly higher
than in the placebo group (17% vs. 2%, p<0.02).
During January 2001, Pharmos announced that its international pivotal trial of
dexanabinol for severe traumatic brain injury commenced in Europe and Israel.
The purpose of the Phase III study is to determine the safety and efficacy of
dexanabinol in severe traumatic brain injury patients. The study is expected to
enroll a total of 860 patients, including patients in the U.S. upon receipt of
necessary FDA authorization. Fifty-four centers are currently participating in
the trial. Approximately 90 centers in Europe, the U.S. and Israel are expected
to participate in the study. European countries participating in the study
include Belgium, Finland, France, Germany, Italy, the Netherlands and the U.K.,
along with Israel. Pharmos is collaborating with the European Brain Injury
Consortium and the American Brain Injury Consortium in a number of areas,
including recruitment efforts with trauma centers.
Bicyclic cannabinoids
As with the tricyclic dextrocannabinoids, the bicyclic cannabinoids do not
display the unwanted psychotropic side effects seen with natural cannabinoids
because they do not bind to cannabinoid receptors known as CB1, which are
located predominately in the brain. However, the molecular activity of the
bicyclics is different from the tricyclics in that the bicyclic cannabinoids
bind with high affinity to cannabinoid receptors known as CB2, which are located
on immune and inflammatory cells. Such binding of bicyclic cannabinoids to CB2
receptors leads to the inhibition of certain intracellular processes that would
normally lead to activation of inflammatory processes. Therefore, active
bicyclic cannabinoids may help prevent certain cells from activating
inflammation pathways.
Pharmaceuticals that activate CB2 receptors may be important in treating various
autoimmune, inflammatory or degenerative disorders. Several candidates from
Pharmos' bicyclic cannabinoid library have shown promise in animal models for
autoimmune disorders including multiple sclerosis, inflammatory bowel disease,
rheumatoid arthritis, and insulin dependent diabetes mellitus; for neuropathic
and nociceptive pain; and for neurodegeneration seen in Parkinson's disease.
Loteprednol Etabonate
Loteprednol etabonate is a unique steroid, designed to act in the eye and
alleviate inflammatory and allergic conditions, and is quickly and predictably
reduced into inactive particles before it reaches the inner eye or systemic
circulation. This results in improved safety by avoiding the side effects
related to exposure to most ocular steroids. In the eye, the most unwanted side
effect of steroids is the elevation of intra-ocular pressure, which can be sight
threatening. While steroids, for lack of an alternative, are regularly used for
severe inflammatory conditions of the eye, milder conditions, such as allergies,
are preferentially treated with less effective non-steroidal agents.
LE-T, a loteprednol etabonate-based eye drug combined with the antibiotic
tobramycin that was sold to Bausch & Lomb as part of the ophthalmic business
disposition in October 2001, is undergoing a further clinical trial before
submitting the New Drug Application for FDA approval. Upon successful completion
of the clinical trial, Bausch & Lomb expects to file the New Drug Application
with the FDA.
In October 2001, Pharmos sold all of the assets of its existing ophthalmic
business to Bausch & Lomb. Pharmos retains no residual rights to Lotemax(R) or
Alrex(R), two commercially-available products which were included in the assets
sold to Bausch & Lomb, but may receive up to a maximum gross $14 million based
on the date of FDA approval of LE-T, and receive an additional fee of up to $10
million if the following occurs: (a) net sales of LE-T in the first 12 months
after commercial launch are at least $7.5 million and (b) net sales of LE-T in
the second twelve consecutive months after commercial launch (i) exceed $15.0
million and (ii) are greater than net sales in (a) above. Future payments will
be included in the Company's income when all
5
contingencies are resolved. In addition, Pharmos has agreed to pay for up to
$3.75 million of the clinical development costs of LE-T, depending upon the
total developmental costs for LE-T. There are several products currently on the
market against which LE-T would compete, with Alcon's Tobradex(R) being the
largest selling product in the category.
SERM Platform
Pharmos has developed a library of new proprietary compounds, called Selective
Estrogen Receptor Modulators (SERM), which have been synthesized and screened
primarily on the basis of their binding activity to estrogen receptors. Pharmos
believes these compounds may be active against various forms of cancer,
including some cancers that are not hormone dependent such as pancreatic cancer
and malignant melanoma. In addition to its anti-cancer potential, this platform
could provide drug candidates to treat various estrogen-related conditions, such
as post-menopausal osteoporosis, cardiovascular disease and mood and cognitive
disorders. This platform is at an early stage of discovery.
Competition
The pharmaceutical industry is highly competitive. Pharmos competes with a
number of pharmaceutical companies that have financial, technical and marketing
resources significantly greater than those of Pharmos. Some companies with
established positions in the pharmaceutical industry may be better equipped than
Pharmos to develop and market products in the markets Pharmos is seeking to
enter. A significant amount of pharmaceutical research is also being carried out
at universities and other not-for-profit research organizations. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for the use of technology they have developed.
These institutions may also market competitive commercial products on their own
or through joint ventures and will compete with Pharmos in recruiting highly
qualified scientific personnel.
Pharmos is pursuing areas of product development in which there is a potential
for extensive technological innovation. Pharmos' competitors may succeed in
developing products that are more effective than those of Pharmos. Rapid
technological change or developments by others may result in Pharmos' potential
products becoming obsolete or non-competitive.
Collaborative Relationships
Pharmos' commercial strategy is to develop products independently and, where
appropriate, in collaboration with established pharmaceutical companies and
institutions. Collaborative partners may provide financial resources, research
and manufacturing capabilities and marketing infrastructure to aid in the
commercialization of Pharmos' products in development and potential future
products. Depending on the availability of financial, marketing and scientific
resources, among other factors, Pharmos may license its technology or products
to others and retain profit sharing, royalty, manufacturing, co-marketing,
co-promotion or similar rights. Any such arrangements could limit Pharmos'
flexibility in pursuing alternatives for the commercialization of its products.
Due to the often unpredictable nature of the collaborative process, we cannot be
sure that we will be able to establish any additional collaborative arrangements
or that, if established, any such relationships will be successful.
Bausch & Lomb
In October 2001, Pharmos sold to Bausch & Lomb all of its rights to manufacture
and market Lotemax(R) and Alrex(R) and the third loteprednol etabonate-based
product, LE-T, which continues to be developed by Bausch & Lomb. As part of the
sale agreement, Pharmos will receive up to an additional $14 million in gross
proceeds, based upon the date of
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FDA approval of the product, and a milestone payment of up to an additional $10
million if actual sales during the first two years following commercialization
exceed agreed-upon forecasted amounts. Pharmos agreed to pay up to $3.75 million
of the costs of developing LE-T based on the arrangement with Bausch & Lomb and
will have a passive role as a member of a joint committee overseeing the
development of LE-T.
Pharmos will pay Dr. Nicholas Bodor, the loteprednol etabonate patent owner and
licensor, who is also a former director of and consultant to our company, a
total of approximately $2.7 million from the initial proceeds of the sale of
Lotemax(R) and Alrex(R) in return for his consent to Pharmos' assignment of its
rights under the license agreement to Bausch & Lomb. Pharmos will also pay Dr.
Bodor 11% of our LE-T proceeds due upon FDA approval and 14.3% of the payment we
will receive in the event that certain sales levels are exceeded in the first
two years following commencement of sales in the U.S.
Patents, Proprietary Rights and Licenses
Patents and Proprietary Rights
Proprietary protection generally has been important in the pharmaceutical
industry, and the commercial success of products incorporating Pharmos'
technologies may depend, in part, upon the ability to obtain strong patent
protection.
Some of the technologies underlying Pharmos' potential products were invented or
are owned by various third parties, including the Hebrew University of
Jerusalem. Pharmos is the licensee of these technologies under patents held by
the applicable owner through licenses that generally remain in effect for the
life of the applicable patent. Pharmos generally maintains, at its expense, U.S.
and foreign patent rights with respect to both the licensed and its own
technology and files and/or prosecutes the relevant patent applications in the
U.S. and foreign countries. Pharmos also relies upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop its
competitive position. Pharmos' policy is to protect its technology by, among
other things, filing, or requiring the applicable licensor to file, patent
applications for technology that it considers important to the development of
its business. Pharmos intends to file additional patent applications, when
appropriate, relating to its technology, improvements to its technology and to
specific products it develops.
The patent positions of pharmaceutical firms, including Pharmos, are uncertain
and involve complex factual questions. In addition, the coverage claimed in a
patent application can be significantly reduced before or after the patent is
issued. Consequently, Pharmos does not know whether any of the pending patent
applications underlying the licensed technology will result in the issuance of
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the U.S. are maintained in secrecy until patents issue and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, Pharmos cannot be certain that it or its licensors,
as the case may be, were the first creators of inventions covered by pending and
issued patents or that it or its licensors, as the case may be, were the first
to file patent applications for such inventions. Moreover, Pharmos may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to Pharmos, even if the eventual outcome is favorable to
Pharmos. The results of the judicial process are often uncertain, and we cannot
therefore be sure that a court of competent jurisdiction will uphold the
patents, if issued, relating to the licensed technology, or that a competitor's
product will be found to infringe such patents.
Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in Pharmos'
fields. If patents are issued to other companies that contain competitive or
conflicting claims and such claims are ultimately determined to be valid, it is
possible that Pharmos would not be able to obtain licenses to these patents at a
reasonable cost or be able to develop or obtain alternative technology.
Pharmos also relies upon trade secret protection for its confidential and
proprietary information. It is always
7
possible that others will independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to Pharmos'
trade secrets.
It is Pharmos' policy to require its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting or
advisory relationships with Pharmos. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Pharmos is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees and certain consultants, the agreements provide that all inventions
conceived by the individual in the course of their employment or consulting
relationship shall be the exclusive property of Pharmos. Due to the vital nature
of trade secrets and the often uncertain results of the judicial process, we
cannot be sure, however, that these agreements will provide meaningful
protection or adequate remedies for Pharmos' trade secrets in the event of
unauthorized use or disclosure of such information. Pharmos' patents and
licenses underlying its potential products described herein are summarized
below.
Neuroprotective Agents. Pharmos has licensed from the Hebrew University of
Jerusalem, which is the academic affiliation of the inventor, Dr. Raphael
Mechoulam, patents covering new compounds that have demonstrated beneficial
activity which may prevent damage or death to nerve cells resulting from various
diseases and disorders of the nervous system while appearing to be devoid of
most of the deleterious side effects usually associated with this class of
compounds. Several patents have been designed to protect this family of
compounds and their uses devised by Pharmos and the inventors. The earliest
patent applications resulted in patents issued in 1989, and the most recent
patents date from 2000. These patents cover dexanabinol, which is under
development for the treatment of head trauma and other conditions, and new
molecules discovered by modifying the chemical structure of dexanabinol.
Site-Specific Drugs. In the general category of site-specific drugs that are
active mainly in the eye and have limited systemic side effects, Pharmos
licensed several patents from Dr. Nicholas Bodor. It assigned its rights under
the Bodor license to Bausch & Lomb in October 2001 in connection with its sale
of its existing ophthalmic business. The earliest patents date from 1984 and the
most recent from 1996. Some of these patents cover loteprednol etabonate-based
products and its formulations.
Selective Estrogen Receptor Modulators (SERM). Pharmos has filed patent
applications in the U.S., Israel, Australia, Canada, Japan, Brazil, Korea and
the European Patent Office to protect certain derivatives of tamoxifen, a drug
approved by the FDA, and other steroid hormones, and molecules that oppose the
hormones' activities. In July 1997, the U.S. Patent and Trademark Office issued
a patent with claims covering the compounds themselves and their use. A second
patent issued in July 2000 claims the use of these compounds as agents to
inhibit growth of new blood vessels, a potential method of treating various
cancers. Pharmos believes that these charged derivatives are superior to the
parent compounds in that they are devoid of central nervous system side effects.
Emulsion-based Drug Delivery Systems. In the general category of SubMicron
Emulsion technology, Pharmos licensed two patents from the Hebrew University of
Jerusalem and has separately filed ten patent applications that are at different
stages of prosecution. These patents and patent applications have been devised
to protect a group of formulation technologies devised by Pharmos and the
inventors as they relate to pharmaceutical and medicinal products. The earliest
patent filings for SubMicron Emulsion technology date from 1986 and the most
recent from 1996. These patents cover a broad range of new formulations, which
improve the absorption of drugs that are poorly soluble in water.
Licenses
As discussed above, Pharmos licenses patents covering neuroprotective agents and
emulsion-based drug delivery systems from the Hebrew University of Jerusalem.
Pharmos assigned its rights as licensee of Dr.
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Bodor's loteprednol etabonate ophthalmic compounds to Bausch & Lomb in October
2001.
Government Regulation
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in our ongoing research and development activities and in the
production and marketing of our products. In order to undertake clinical tests,
to produce and market products for human therapeutic or diagnostic use,
mandatory procedures and safety standards established by the FDA in the U.S. and
comparable agencies in other countries must be followed.
The standard process required by the FDA before a pharmaceutical agent may be
marketed in the U.S. includes the following steps:
(i) Preclinical studies including laboratory evaluation and animal
studies to test for initial safety and efficacy;
(ii) Submission to the FDA of an Investigational New Drug Application,
which must become effective before human clinical trials may
commence;
(iii) Adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug in its intended application;
(iv) Submission to the FDA of a New Drug Application, which application
is not automatically accepted by the FDA for consideration; and
(v) FDA approval of the New Drug Application prior to any commercial
sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered or licensed by the FDA for
each product that is manufactured at that facility. U.S. manufacturing
establishments are subject to inspections by the FDA and by other Federal, state
and local agencies and must comply with current Good Manufacturing Practices,
requirements applicable to the production of pharmaceutical drug products.
Preclinical studies include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. The results of the preclinical studies are submitted to the FDA
as part of an Investigational New Drug Application, and unless the FDA objects,
the application will become effective 30 days following its receipt by the FDA.
Clinical trials involve the administration of the drug to healthy volunteers
and/or to patients under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part
of the application. Each clinical study is approved and monitored by an
independent Institutional Review Board or Ethics Committee at each clinical site
who will consider, among other things, ethical factors, informed consents, the
safety of human subjects and the possible liability of the institution
conducting a clinical study.
Clinical trials typically are conducted in three sequential phases, although the
phases may overlap. In Phase I, the initial introduction of the drug to humans,
the drug is tested for safety and clinical pharmacology such as metabolism.
Phase II involves detailed evaluation of safety and efficacy of the drug in
patients with the disease or condition being studied. Phase III trials consist
of larger scale evaluation of safety and efficacy and usually require greater
patient numbers and multiple clinical trial sites, depending on the clinical
indications for which
9
marketing approval is sought.
The process of completing clinical testing and obtaining FDA approval for a new
product is likely to take a number of years and require the expenditure of
substantial resources. The FDA may grant an unconditional approval of a drug for
a particular indication or may grant approval conditioned on further
post-marketing testing. The FDA also may conclude that the submission is not
adequate to support an approval and may require further clinical and preclinical
testing, re-submission of the New Drug Application, and further review. Even
after initial FDA approval has been obtained, further studies may be required to
provide additional data on safety or to gain approval for the use of a product
for clinical indications other than those for which the product was approved
initially. Also, the FDA may require post-market testing and surveillance
programs to monitor the drug's efficacy and side effects.
Marketing of pharmaceutical products outside of the U.S. are subject to
regulatory requirements that vary widely from country to country. In the
European Union, the general trend has been towards coordination of the common
standards for clinical testing of new drugs. Centralized approval in the
European Union is coordinated through the European Medicines Evaluation Agency,
or EMEA.
The level of regulation outside of the U.S. varies widely. The time required to
obtain regulatory approval from comparable regulatory agencies in each country
may be longer or shorter than that required for FDA or EMEA approval. In
addition, in certain markets, reimbursement may be subject to governmentally
mandated prices.
Corporate History
Pharmos Corporation, a Nevada corporation, formerly known as Pharmatec, Inc.,
was incorporated under the laws of the State of Nevada on December 20, 1982. On
October 29, 1992, Pharmos, the Nevada Corporation, completed a merger with a
privately held New York corporation known as Pharmos Corporation, and in 1992
acquired all of the outstanding shares of Xenon Vision, Inc., a privately held
Delaware corporation.
Human Resources
As of January 1, 2002, Pharmos had 70 employees (62 full-time and 8 part-time),
including 11 in the U.S. (2 part-time) and 59 in Israel (6 part-time), of whom
approximately 29 hold doctorate or medical degrees.
Pharmos' employees are not covered by a collective bargaining agreement. Pharmos
has never experienced employment-related work stoppages and considers its
employee relations to be excellent.
Public Funding and Grants
Pharmos' subsidiary, Pharmos Ltd., has received certain funding from the Chief
Scientist of the Israel Ministry of Industry and Trade (the Chief Scientist) for
research and development of dexanabinol, SubMicron Emulsion technology for
injection and nutrition as well as for research relating to pilocarpine,
dexamethasone and ophthalmic formulations for dry eyes. Pharmos has received an
aggregate of $3,348,189 under such agreements through December 31, 2001. Pharmos
will be required to pay royalties to the Chief Scientist ranging from 2% to 5%
of product sales, if any, as a result of the research activities conducted with
such funds. Aggregate royalty payments per product are limited to the amount of
funding received to develop that product. Additionally, funding by the Chief
Scientist places certain legal restrictions on the transfer of know-how and the
manufacture of resulting products outside of Israel. See "Conditions in Israel."
Pharmos received funding of $925,780 from the Israel-U.S. Binational Industrial
Research and Development Foundation to develop Lotemax(R) and LE-T. Pharmos was
required to pay royalties to this foundation on product sales, if any, of 2.5%,
through September 1999, then 5% thereafter, as a result of the research
activities conducted with such funds. Aggregate royalty payments are limited to
150% of the amount of such funding
10
received, linked to the exchange rate of the U.S. dollar and the New Israeli
Shekel. During October 2001, in connection with the sale of Pharmos's existing
ophthalmic business, Pharmos paid the foundation royalties of approximately $1.0
million for Lotemax(R) which concluded Pharmos' obligation to pay royalties to
the foundation for Lotemax(R).
In April 1997, Pharmos signed an agreement with the Magnet consortium, operated
by the Office of the Chief Scientist, for developing generic technologies and
for the design and development of drug and diagnostic kits. Under such
agreement, Pharmos was entitled to a non-refundable grant amounting to
approximately 60% of the actual research and development and equipment
expenditures on approved projects. No royalty obligations were required within
the framework. As of December 31, 2001, Pharmos had received grants totaling
$1,734,037 pursuant to this agreement.
Conditions in Israel
A significant part of our operations is conducted in Israel through our
wholly-owned subsidiary, Pharmos Ltd., and we are directly affected by economic,
political and military conditions there.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, as well as
incidents of civil unrest. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic boycott. Although
Israel has entered into various agreements with certain Arab countries and the
Palestinian Authority, there has been an increase in the unrest and terrorist
activity that began in September 2000 and has continued with varying levels of
severity into 2002. We do not believe that the political and security situation
has had any material negative impact on our business to date; however, the
situation is volatile and we cannot be sure that security and political
conditions will have no such effect in the future.
Many of our employees in Israel are obligated to perform military reserve duty.
In the event of severe unrest or other conflict, individuals could be required
to serve in the military for extended periods of time. Our operations could be
disrupted by the absence for a significant period of time of some of our
employees due to military service. Such disruption could harm our operations.
In addition, since 1997 Pharmos Ltd. has received funding from the Office of the
Chief Scientist of the Israel Ministry of Industry and Trade relating to generic
technologies for the design and development of drugs and diagnostic kits.
Through 2001, we have received an aggregate of $1,443,335 from these grants, and
may receive future grants, the amounts of which would be determined at the time
of application. This funding prohibits the transfer or license of know-how and
the manufacture of resulting products outside of Israel without the permission
of the Chief Scientist. Although we believe that the Chief Scientist does not
unreasonably withhold this permission if the request is based upon commercially
justified circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, the matter is solely within his discretion and we cannot
be sure that such consent, if requested, would be granted upon terms
satisfactory to us or granted at all. Without such consent, we would be unable
to manufacture any products developed by this research outside of Israel, which
may greatly restrict any potential revenues from such products.
Item 2. Properties
Pharmos is headquartered in Iselin, New Jersey where it leases its executive
offices and maintains clinical, regulatory and business development staff.
Pharmos also leases facilities used in the operation of its research,
development, pilot manufacturing and administrative activities in Rehovot,
Israel. These facilities have been improved to meet the special requirements
necessary for the operation of Pharmos' research and development activities. In
the opinion of the management these facilities are sufficient to meet the
current and anticipated future requirements of Pharmos. In addition, management
believes that it has sufficient ability to renew its present leases related to
these facilities or obtain suitable replacement facilities. The monthly lease
obligations
11
for our office space in 2002 are $9,548 for Iselin, New Jersey and $10,607 for
Rehovot, Israel.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on July 12, 2001, the
stockholders of the Company elected the following persons as directors of the
Company to serve until the next annual meeting of stockholders and until their
successors are duly elected and qualified: Haim Aviv, Elkan R. Gamzu, Samuel D.
Waksal, David Schlachet, Mony Ben Dor and Georges Anthony Marcel. The results of
the voting were as follows:
VOTES FOR VOTES WITHHELD
Haim Aviv 42,272,069 431,763
Elkan R. Gamzu 42,279,742 424,090
Samuel D. Waksal 42,183,724 520,108
David Schlachet 42,283,942 419,890
Mony Ben Dor 42,281,039 422,793
Georges Anthony Marcel 42,282,922 421,010
Also at the Annual Meeting, the stockholders approved the adoption of the
Company's 2001 Employee Stock Purchase Plan, with 41,594,111 votes cast for
approval 1,030,636 votes cast against and 79,085 abstentions. Stockholders also
ratified the appointment by the Board of Directors of PricewaterhouseCoopers LLP
as the independent auditors of the Company for the fiscal year ending December
31, 2001.
12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq SmallCap Marketsm. The
following table sets forth the range of high and low bid prices for the Common
Stock as reported on the NASDAQ National Market System and the Nasdaq SmallCap
Market during the periods indicated.
Year ended December 31, 2001 HIGH LOW
- --------------------- ---- -----
1st Quarter........................... $2.88 $1.50
2nd Quarter........................... 3.80 1.87
3rd Quarter........................... 3.85 1.84
4th Quarter........................... 2.76 1.97
Year ended December 31, 2000 HIGH LOW
- --------------------- ---- -----
1st Quarter........................... $15.38 $1.75
2nd Quarter........................... 6.75 2.38
3rd Quarter........................... 4.56 2.94
4th Quarter........................... 3.59 1.47
The high and low bid prices for the Common Stock during the first quarter of
2002 (through March 15, 2002) were $2.55 and $1.75, respectively. The closing
price on March 15, 2002 was $1.80.
The foregoing represents inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
On March 15, 2002, there were approximately 511 record holders of the Common
Stock of the Company and approximately 19,800 beneficial owners of the Common
Stock of the Company, based upon the number of shares of Common Stock held in
"street name".
The Company has paid no dividends on its Common Stock and does not expect to pay
cash dividends in the foreseeable future. The Company is not under any
contractual restriction as to its present or future ability to pay dividends.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.
13
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Revenues $ 4,298,441 $ 5,098,504 $ 3,279,397 $ 1,539,941 --
Gross Margin 3,029,852 3,222,549 2,284,780 1,102,228 --
Operating expenses (13,789,291) (9,969,879) (6,999,136) (6,109,809) $ (8,563,091)
Income (Loss) Before Income Taxes and
Extraordinary Item 4,819,822* (7,984,202)** (4,618,190) (4,663,347) (8,233,547)
Extraordinary gain from
forgiveness of debt -- -- -- -- 416,248
Dividend embedded in
convertible preferred stock -- -- -- (642,648) (1,952,767)
Preferred Stock dividends -- -- (22,253) (242,295) (240,375)
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common shareholders $ 5,045,855* ($ 7,984,202)** ($4,640,443) ($ 5,548,290) ($10,010,441)
============ ============ ============ ============ ============
Income(loss) per share applicable
to common shareholders before
extraordinary gain - basic & diluted $ 0.09 ($ 0.15) ($ 0.11) ($ 0.15) ($ 0.32)
Extraordinary gain per share -- -- -- -- 0.01
------------ ------------ ------------ ------------ ------------
Net loss per share applicable
to common shareholders - basic & diluted $ 0.09 ($ 0.15) ($ 0.11) ($ 0.15) ($ 0.31)
============ ============ ============ ============ ============
Total assets $ 44,262,991 $ 30,783,109 $ 7,791,294 $ 8,066,670 $ 8,421,841
============ ============ ============ ============ ============
Long term obligations $ 5,847,951 $ 7,680,872 $ 1,277,565 $ 2,691,023 $ 4,100,000
============ ============ ============ ============ ============
Cash dividends declared -- -- -- -- --
* includes a $16.3 million gain on sale of the ophthalmic product line in
October 2001
** includes a beneficial conversion future charge of $1.8 million.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. Such statements reflect our
current views with respect to future events and are subject to unknown risks,
uncertainty and other factors that may cause results to differ materially from
those contemplated in such forward looking statements. In addition, the
following discussion should be read in conjunction with the audited consolidated
financial statements and the related notes thereto included elsewhere in this
report.
During 2000 and through the end of the third quarter of 2001, the Company
generated revenues from product sales but continues to be dependent upon
external financing, interest income, and research and development contracts to
pursue its intended business activities. The Company had not been profitable
from inception through 2000 and has incurred a cumulative net loss of $85.5
million through December 31, 2001. Losses have resulted principally from costs
incurred in research activities aimed at identifying and developing the
Company's product candidates, clinical research studies, the write-off of
purchased research and development, and general and administrative expenses. The
Company expects to incur additional losses over the next several years as the
Company's research and development and clinical trial programs continue. The
Company's ability to achieve profitability is dependent on its ability to
develop and obtain regulatory approvals for its product candidates, to enter
into agreements for product development and commercialization with strategic
corporate partners and contract to develop or acquire the capacity to
manufacture and sell its products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Critical Accounting Policies
The Company considers certain accounting policies related to the tax valuation
allowance and revenue recognition to be critical policies due to the estimation
process involved in each.
Revenue
The Company earns license fees from the transfer of drug candidate technology
and the related preclinical research data. License fee revenue is recognized
when all performance obligations are completed and the amounts are considered
collectible. Up-front license fees are deferred and recognized when all
performance obligations are completed.
Royalty revenue is recognized upon the sale of the related products, provided
the royalty amounts are fixed or determinable and the amounts are considered
collectible. The Company has not recognized any royalty revenue during 2001,
2000 and 1999.
Tax Valuation Allowance
The Company has assessed the future taxable income and has determined that a
100% deferred tax valuation allowance is deemed necessary. In the event the
Company were to determine that it would be able to realize its deferred tax
asset, an adjustment to the deferred tax asset would increase income in the
period such determination is made.
Results of Operations
15
Years Ended December 31, 2001 and 2000
Revenues from sales decreased by $800,063 or 16%, from $5,098,504 in 2000 to
$4,298,441 in 2001. The decrease is due to the sale of the Company's ophthalmic
product line to Bausch & Lomb in October 2001. Bausch & Lomb was the Company's
marketing partner for its ophthalmic product line. Product revenues for the year
ended December 31, 2000 included a full year of revenue, while the product
revenues for the year ended December 31, 2001 included revenues for only the
first three fiscal quarters. Additionally, License Fee revenues were $225,000 in
2000 compared to $80,000 in 2001.
Cost of goods sold decreased by $607,366 or 32%, from $1,875,955 in 2000 to
$1,268,589 in 2001. The decrease reflects the decrease in product revenue due to
the sale of the Company's ophthalmic product line to Bausch & Lomb in October
2001. Cost of goods sold includes the cost of the active drug substance and
royalty payments to the licensor.
Total operating expenses increased by $3,819,412 or 38%, from $9,969,879 in 2000
to $13,789,291 in 2001. The increase in operating expenses is primarily due to
increased research and development expenses as the Company increased
expenditures related to the development of dexanabinol for the treatment of
traumatic brain injury and to increased activity in the Company's cannabinoid
program to treat various central nervous system and inflammation-based
conditions.
The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The only
major project of the Company is the development of dexanabinol for the treatment
of traumatic brain injury, which is currently involved in Phase III testing in
Europe and Israel. During the periods ending December 31, 2001, 2000 and 1999,
the costs of this project were $6.2 million, $2.9 million and $1.9 million,
respectively. Total costs since the project entered Phase II development in 1996
through December 31, 2001 are $14.7 million. Enrollment in the current Phase III
trial is expected to continue until the end of 2003. The principal costs of
completing the project include patient enrollment, production of the drug
product, collection and evaluation of the data, and management of the project.
The primary uncertainties in the completion of the project are the time required
to enroll sufficient numbers of patients in the study, the results of the study
upon its conclusion, and the Company's ability to produce sufficient quantities
of drug product under current Good Manufacturing Practice conditions. Should the
uncertainties delay completion of the project on the current timetable, the
Company may experience additional costs that cannot be accurately estimated. If
the Phase III trial of dexanabinol for the treatment of traumatic brain injury
is successfully completed, the Company can expect to begin to earn revenues upon
marketing approval as early as 2005; however, should our product candidate
experience set backs or should a product fail to achieve FDA approval and market
acceptance for any reason, it would have a material adverse affect on our
business.
Expenses for other research & development projects in earlier stages of
development for the years ended December 31, 2001, 2000 and 1999 were $2.9
million, $2.4 million and $1.9 million, respectively. Total research &
development expenses for the years ended December 31, 2001, 2000 and 1999 were
$9.1 million, $5.3 million and $3.8 million, respectively.
Selling, general and administrative expenses decreased by $378,574 or 9%, from
$5,283,397 in 2000 to $3,666,293 in 2001. The decrease is primarily due to a
reallocation of employee resources to research and development from general and
administrative areas.
Depreciation and amortization expenses increased by $292,249, or 61%, from
$481,724 in 2000 to $773,973 in 2001, reflecting increased depreciation expense
related to laboratory equipment purchases.
Other income (expense), net of interest and other expenses, increased by
$16,816,133 from expense of
16
$1,236,872 in 2000 to income of $15,579,261 in 2000. The increase is primarily
due to a gain of $16.3 million from the sale of the Company's ophthalmic product
line to Bausch & Lomb in October 2001. The reported gain includes charges of
$3.75 million representing the Company's maximum liability for the completion of
the clinical development of LE-T, the final product resulting from the
ophthalmic marketing relationship with Bausch & Lomb. Should LE-T gain FDA
approval, the Company will receive additional gross proceeds up to a maximum of
$14 million depending on the date of FDA approval and up to an additional $10
million based upon the achievement of certain sales goals. Also contributing to
the increase in other income was a lower level of interest expense primarily due
to non-cash charges related to the Company's convertible debt financing,
completed in the third quarter of 2000. Partially offsetting the increase in
other income is decreased interest income as a result of lower market interest
rates on the Company's cash balances in 2001.
Years Ended December 31, 2000 and 1999
Revenues from sales increased $1,819,107 or 55%, from $3,279,397 in 1999 to
$5,098,504 in 2000. The increase primarily resulted from increased market shares
for the Company's products. Additionally, License Fee revenues were $225,000
compared to zero in 1999. The license income was primarily generated from the
licensing of a technology of the Company for use in Japan.
Cost of goods sold increased $881,338 or 89%, from $994,617 in 1999 to
$1,875,955 in 2000. The increase reflects the high product revenue for 2000
compared to 1999. Cost of goods sold includes the cost of the active drug
substance and royalty payments to the licensor. Cost of goods in 2000 grew
faster than product revenues as a result of higher expenses for product samples,
higher LE product license expenses and higher royalties.
Total operating expenses increased $2,970,743 or 42%, from $6,999,136 in 1999 to
$9,969,879 in 2000. The increase in operating expenses is primarily due to
increases in selling, general & administrative expenses, research and
development expenses and depreciation.
Net research and development expenses increased by $1,456,396 or 38%, from
$3,827,001 in 1999 to $5,283,397 in 2000. The increase in R&D expense is
primarily due to increased expenditures, including increased employee
headcounts, related to the development of dexanabinol for the treatment of
traumatic brain injury and to increased activity in the Company's cannabinoid
program to treat various central nervous system and inflammation-based
conditions.
Selling, general and administrative expenses increased by $1,432,697 or 55%,
from $2,612,170 in 1999 to $4,044,867 in 2000. The increase is primarily due to
higher staffing levels and increased investor relations activities.
Depreciation and amortization expenses increased by $135,680, or 39%, from
$346,044 in 1999 to $481,724 in 2000, reflecting increased depreciation expense
related to laboratory equipment purchases.
Other income (expense), net of interest and other expenses, decreased by
$1,333,038 from income of $96,166 in 1999 to expense of $1,236,872 in 2000. A
higher level of interest expense was primarily due to non-cash charges related
to the Company's convertible debt financing, completed in the third quarter of
2000, of approximately $2.4 million. The increased expense was partially offset
by increased interest income of approximately $1.1 million a result of higher
average cash balances in 2000.
Liquidity and Capital Resources
While the Company received revenues since 1998 until the third quarter of 2001
from the sale of its approved products, it has incurred cumulative operating
losses since its inception and had an accumulated deficit of $85,448,454 at
December 31, 2001. The Company has financed its operations with public and
private offerings of securities, advances and other funding pursuant to a
marketing agreement with Bausch & Lomb, research
17
contracts, license fees, royalties and sales, and interest income.
The Company had working capital of $25.7 million as of December 31, 2001
(excluding restricted cash of $2.3 million). Included in the current assets of
$39.2 million is $35.3 million related to cash and cash equivalents.
In October 2001, Bausch & Lomb purchased all rights to the Company's loteprednol
etabonate (LE) ophthalmic product line for cash and assumption of certain
ongoing obligations. The Company received gross proceeds of approximately $25
million in cash for its rights to Lotemax(R) and Alrex(R), prescription products
that are made and marketed by Bausch & Lomb under a 1995 Marketing Agreement
with the Company; in addition, Bausch & Lomb also acquired future extensions of
LE formulations including LE-T, a product currently in Phase III clinical trial.
The Company had no product sales beginning in the fourth quarter of 2001. Bausch
& Lomb will pay the Company up to an additional maximum gross proceeds of $14
million, with the actual payment price based on the date of FDA approval of this
new combination therapy. An additional milestone payment of up to $10 million
could be paid to the Company to the extent sales of the new product exceed an
agreed-upon forecast in the first two years. The Company has a passive role as a
member of a joint committee overseeing the development of LE-T and has an
obligation to Bausch & Lomb to fund up to a maximum of $3.75 million of the LE-T
development cost. As a result of this transaction, the Company recorded a net
gain of $16.3 million. The company recorded an accrual of $3.75 million
representing the Company's maximum obligation in the continuing clinical
development of LE-T. The Company incurred transaction and royalty costs of
approximately $2 million. The Company also compensated the LE patent owner
approximately $2.7 million ($1.5 million paid upon closing and $1.2 million of
this amount is to be paid in October 2002) from the proceeds of the sale of
Lotemax and Alrex in return for his consent to the Company's assignment of its
rights under the license agreement to Bausch & Lomb. Additionally, the patent
owner will receive 11% of the proceeds payable to the Company following FDA
approval of LE-T, as well as 14.3% of its milestone payment, if any.
In September 2000, the Company completed a private placement of Convertible
Debentures, common stock and warrants to purchase shares of common stock with
institutional investors, generating gross proceeds of $11 million. The
Convertible Debentures, which generated gross proceeds of $8 million, were due
in February 2002 and carried a 6% interest payable semiannually in cash or
common stock. In connection with the Convertible Debenture, the institutional
investors also received warrants for the purchase of 276,259 common shares with
a relative fair value of $725,000. The Convertible Debentures were convertible
into common shares of the Company at the conversion price of $3.83 per share (or
2,088,775 common shares) and were convertible beginning October 31. 2000. Under
certain limited anti-dilutive conditions, the conversion price may change. Until
converted into common stock or the outstanding principal is repaid, the terms of
the Convertible Debentures require the Company to deposit $4 million in an
escrow account. The escrowed capital is shown as Restricted Cash on the
Company's balance sheet and will be released to the Company in proportion to the
amount of Convertible Debentures converted into common shares or upon the
repayment of the debt.
In December 2001, the holders of the Convertible Debentures and the Company
agreed to modify the repayment and conversion terms. The holders of $5.8 million
convertible debt (book value on December 31, 2001, including accrued interest)
extended the maturity date to June 2003 in exchange for a reduction in the
conversion price from $3.83 to $2.63 for half of the outstanding balance and $
2.15 for the other half of the outstanding balance. The convertible debt with a
maturity date of June 2003 is convertible beginning December 31, 2001. The
holder of the remaining outstanding debt of $1.9 million (including accrued
interest) changed the maturity date from February 28, 2002 to January 31, 2002
in exchange for lowering the conversion price for the other holders. As the
modification was not significant in accordance with EITF 96-19 the change in the
fair value between the original convertible debt and the modified convertible
debt will be accreted over the remaining term of the convertible debt with a
corresponding charge into interest expense.
Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios, require the Company to compute the Beneficial Conversion Feature ("BCF")
of the convertible debt from the private placement of September 2000. The BCF
must be capitalized and amortized from the closing date until the earliest date
that the investors have the right to convert the debt into common shares. The
BCF was computed at approximately $1.8 million, all of which has been amortized
and included as interest expense in the year ending December 31, 2000.
Additionally, the discount on the Convertible Debenture of approximately
$800,000 will be amortized to interest expense over the life of the debt. For
the year ending December 31, 2001, $533,932 has been amortized.
During 2001, the Company paid $589,819 and issued 182,964 shares of the common
stock of the Company to the investors in the convertible debenture. The payment
of cash and stock were the option chosen by the Company and represent
adjustments to the pricing based upon the Company's stock price during the
adjustment period. Under the terms of the agreements, no further adjustments are
due.
One investor in the September 2000 private placement had an option, in the form
of a warrant, to purchase an additional $2 million of common shares for a period
of one year provided that the future purchase price is greater than the initial
closing price of $3.65 per share. During the third quarter of 2001, the investor
exercised this option and, accordingly, the Company issued 542,299 shares to the
investor. The Private Placement provided certain conditions under which the
number of shares issued for this option could be adjusted and, accordingly, the
Company issued 281,659 shares to the investor in the fourth quarter of 2001 as
an adjustment to the warrant.
The issuance costs related to the Private Placement of approximately $1.4
million were capitalized and amortized over the life of the debt. For the years
ending December 31, 2001 and 2000, $682,464 and $224,691 have been amortized and
included as interest expense, respectively.
18
Commitments and Long Term Obligations
As of December 31, 2001, we had the following commitments and long term
obligations:
2002 2003 2004 2005 Thereafter Total
---- ---- ---- ---- ---------- -----
Operating Leases $ 284,419 $ 184,473 $ 158,617 $ 156,615 $ 202,336 $ 986,460
Convertible debentures,
excluding interest 1,949,317 5,847,951 7,797,268
R&D commitments 761,748 190,437 952,185
---------- ---------- ---------- ---------- ---------- ----------
Grand total $2,995,484 $6,222,861 $ 158,617 $ 156,615 $ 202,336 $9,735,913
The convertible debenture commitment excludes interest that will accrue until
the maturity date in June 2003. The principal amount of the debentures plus any
accrued interest is convertible into common shares and may ultimately not
require a cash outlay. In January 2002, the convertible debenture commitment of
approximately $2 million was repaid in cash. Additionally, $2.6 million
(including accrued interest of $0.1million) was converted into 1,217,485 common
shares, thus leaving $3.9 million (including accrued interest of $0.4 million)
outstanding as of March 15, 2002. After the repayment and conversion, $3.6
million was released from restricted cash.
The R&D commitments represent scheduled professional fee payments for clinical
services relating the phase III clinical study for dexanabinol. Upon the
completion of certain agreed upon milestones, additional fees will be paid. The
fees that Pharmos is obligated to pay upon the reaching of the agreed upon
milestones is not included in the above table due to uncertainties in timing.
The maximum amount that could be paid is approximately $4.6 million.
The Company has entered into various employment agreements. The terms of these
employment agreements include one-year renewable terms and do not represent long
term commitments of the Company.
Management believes that cash and cash equivalents of $35.3 million and the
total restricted cash balance of $5.4 million as of December 31, 2001, will be
sufficient to support the Company's continuing operations through at least the
middle of 2004. The Company is continuing to actively pursue various funding
options, including additional equity offerings, strategic corporate alliances,
business combinations and the establishment of product related research and
development limited partnerships, to obtain additional financing to continue the
development of its products and bring them to commercial markets.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
We assessed our vulnerability to certain market risks, including interest rate
risk associated with financial instruments included in cash and cash
equivalents, restricted cash, and convertible debentures. Due to the short-term
nature of the cash and cash equivalent investments, restricted cash, and the
fixed interest rate on the convertible debt, we have determined that the risks
associated with interest rate fluctuations related to these financial
instruments do not pose a material risk to us.
Item 8. Financial Statements and Supplementary Data
The information called for by this Item 8 is included following the "Index to
Financial Statements" contained in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors, officers and key employees of the Company are as follows:
Name Age Position
- ----- ---- -------
Haim Aviv, Ph.D. 62 Chairman, Chief Executive Officer,
Chief Scientist and Director
Gad Riesenfeld, Ph.D. 58 President, Chief Operating Officer
Robert W. Cook 46 Executive Vice President and
Chief Financial Officer
David Schlachet 56 Director
Mony Ben Dor 56 Director
Georges Anthony Marcel, M.D., Ph.D. 61 Director
Elkan R. Gamzu, Ph.D. 59 Director
Samuel D. Waksal, Ph.D. 53 Director
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and a
Director of the Company. In 1990, he co-founded Pharmos Corporation, a New York
corporation ("Old Pharmos"), which merged into the Company in October 1992 (the
"Merger"). Dr. Aviv also served as Chairman, Chief Executive Officer, Chief
Scientist and a Director of Old Pharmos prior to the Merger. Dr. Aviv was the
co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a publicly-traded
company engaged in the development of products using recombinant DNA, its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific Consultant until August 1993. Prior to that time, Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv is
the principal stockholder of Avitek Ltd., a stockholder of the Company. Dr. Aviv
is also an officer and/or significant stockholder of several privately held
Israeli biopharmaceutical and venture capital companies.
Gad Riesenfeld, Ph.D., was named President and Secretary in February 1997, and
has served as Chief Operating Officer since March 1995. He served as Executive
Vice President from December 1994 to February 1997, Vice President of Corporate
Development and General Manager of Florida Operations from October 1992 to
December 1994, and was employed by Pharmos from March 1992 until the Merger.
Prior thereto, he was engaged in a variety of Pharmaceutical and Biotechnology
business activities relating to the development and commercialization of
intellectual property, primarily in the pharmaceutical and medical fields. From
March 1990 through May 1991 Dr. Riesenfeld was a Managing Director of Kamapharm
Ltd., a private company specializing in human blood products. Prior thereto,
from May 1986, he was Managing Director of Galisar Ltd., a pharmaceutical
company involved in extracorporeal blood therapy. Dr. Riesenfeld holds a Ph.D.
degree from the Hebrew University of Jerusalem and held a scientist position, as
a post doctorate, at the Cedars Sinai Medical Center in Los Angeles, California.
Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998 and became Executive Vice President in February 2001.
From May 1995 until his appointment as the Company's Chief Financial Officer, he
was a vice president in GE Capital's commercial finance subsidiary, based in New
York. From 1977 until 1995, Mr. Cook held a variety of corporate finance and
capital markets positions at The Chase Manhattan Bank, both in the U.S. and in
several overseas locations. He was named a managing director of Chase in January
1986. Mr. Cook holds a degree in international finance from The American
University, Washington, D.C.
David Schlachet, a Director of the Company from December 1994, served as the
Chairman of Elite Industries
20
Ltd. from July 1997 until June 30th 2000. From January 1996 to June 1997, Mr.
Schlachet served as the Vice President of the Strauss Group and Chief Executive
Officer of Strauss Holdings Ltd, one of Israel's largest privately owned food
manufacturers. He was Vice President of Finance and Administration at the
Weizmann Institute of Science in Rehovot, Israel from 1990 to December 1995, and
was responsible for the Institute's administration and financial activities,
including personnel, budget and finance, funding, investments, acquisitions and
collaboration with the industrial and business communities. From 1989 to 1990,
Mr. Schlachet was President and Chief Executive Officer of YEDA Research and
Development Co. Ltd., a marketing and licensing company at the Weizmann
Institute of Science. Today Mr. Schlachet serves as Chairman of Harel Capital
Markets (Israeli broker, underwriter and asset management firm) and as a
Director of Israel Discount Bank Ltd., Hapoalim Capital Markets Ltd, Teldor Ltd.
(software and computer company), Proseed Ltd., a Venture Capital investment
company, Compugen Ltd. and Taya Investment Company Ltd., and also serves as
Managing Partner in Biocom, a V.C. Fund in the field of Life Science.
Mony Ben Dor, a director of the Company since September 1997, has been managing
partner of Biocom, a V.C Fund in the field of Life Science since April 2000.
Prior to that he was Vice President of the Israel Corporation Ltd. from May
1997, and Chairman of two publicly traded subsidiaries: H.L. Finance and Leasing
and Albany Bonded International Trade. He was also a Director of a number of
subsidiary companies such as Israel Chemicals Ltd., Zim Shipping Lines, and
Tower Semi Conductors. From 1992-1997 Mr. Ben Dor was Vice President of Business
Development for Clal Industries Limited, which is one of the leading investment
groups in Israel. He was actively involved in the acquisition of companies
including a portfolio of pharmaceutical companies Pharmaceutical Resources Inc.,
Finetech Ltd., BioDar Ltd., to name a few. He served as a director representing
Clal Industries in all of the acquired companies as well as other companies of
Clal Industries. Prior to his position at Clal Industries, Mr. Ben Dor served as
Business Executive at the Eisenberg Group of companies.
Georges Anthony Marcel, M.D., Ph.D., a Director of the Company since September
1998, is President and Chairman of TMC Development S.A., a biopharmaceutical
consulting firm based in Paris, France. Prior to founding TMC Development in
1992, Dr. Marcel held a number of senior executive positions in the
pharmaceutical industry, including Chief Executive Officer of Amgen's French
subsidiary, Vice President of Marketing for Rhone-Poulenc Sante and Director of
Development for Roussel-Uclaf. Dr. Marcel teaches biotechnology industrial
issues and European regulatory affairs at the Faculties of Pharmacy of Paris and
Lille. Dr. Marcel is also a member of the Gene Therapy Advisory Committee at the
French Medicines Agency.
Elkan R. Gamzu, Ph.D., a Director of the Company since February 2000, is a
consultant to the biotechnology and pharmaceutical industries. Prior to becoming
a consultant, Dr. Gamzu held a number of senior executive positions in the
biotechnology and pharmaceutical industries, including President and Chief
Executive Officer of Cambridge Neuroscience, Inc. from 1994 until 1998. Dr.
Gamzu also served as President and Chief Operating Officer and Vice President of
Development for Cambridge Neuroscience, Inc. from 1989 to 1994. Previously, Dr.
Gamzu held a variety of senior positions with Warner-Lambert and Hoffmann-La
Roche, Inc. Dr. Gamzu is a member of the Board of Directors of three other
biotechnology companies: the publicly traded XTL Biopharmaceuticals Ltd. and the
privately held biotechnology companies Neurotech S.A. of Evry, France and
Hypnion, Inc. of Worcester, MA. He is also on the Board of Directors of
Rho-ADDS, sas, a Paris-based provider of biostatistics and data management for
the biopharmaceutical industry. Since February 2001, Dr. Gamzu has been acting,
on a part-time basis, as Interim VP, Development Product Leadership for
Millennium Pharmaceuticals, Inc.
Samuel D. Waksal, Ph.D., a Director of the Company since March 2000, is a
founder of ImClone Systems Incorporated and has been its Chief Executive Officer
and a Director since August 1985 and President since March 1987. From 1982 to
1985, Dr. Waksal was a member of the faculty of Mt. Sinai School of Medicine as
Associate Professor of Pathology and Director of the Division of Immunotherapy
within the Department of Pathology. He has served as visiting Investigator of
the National Cancer Institute, Immunology Branch, Research Associate of the
Department of Genetics, Stanford University Medical School, Assistant Professor
of
21
pathology at Tufts University School of Medicine and Senior Scientist for the
Tufts Cancer Research Center. Dr. Waksal was a scholar of the Leukemia Society
of America from 1979 to 1984. Dr. Waksal currently serves on the Executive
Committee of the New York Biotechnology Association, the Board of Directors of
Cadus Pharmaceutical Corporation and is Chairman of the New York Council for the
Humanities.
22
Section 16 Filings
No person who, during the fiscal year ended December 31, 2001, was a director,
officer or beneficial owner of more than ten percent of the Company's Common
Stock which is the only class of securities of the Company registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act"), a "Reporting
Person" failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year. The foregoing is based solely upon a
review by the Company of Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
Item 11. Executive Compensation
The following table summarizes the total compensation of the Chief Executive
Officer of the Company for 2001 and the two previous years, as well as all other
executive officers of the Company who received compensation in excess of
$100,000 for 2001.
Annual Compensation Long Term Compensation
------------------- ----------------------
Stock
Name/ Restricted Underlying
Principal Position Year Salary Bonus Other Stock Options
- ----------------- ---- ---- ----- ------- -------- -----------
Haim Aviv, Ph.D
Chairman, Chief 2001 $268,000 $ 80,000 $ 2,844 100,000
Executive Officer, and 2000 $244,662 $ 74,044 $ 2,925 100,000
Chief Scientist 1999 $236,418 $ 29,906 $ 2,829 65,000
Gad Riesenfeld, Ph.D
President and 2001 $209,790 $ 42,000 $ 56,556 (2) 50,000
Chief Operating Officer 2000 $194,250 $ 20,000 $ 71,125 (2) 60,000
1999 $185,000 $ 20,000 $ 53,860 (2) 50,000
Robert W. Cook
Executive Vice President 2001 $198,450 $ 40,000 $ 15,338 (1) 40,000
and Chief Financial Officer 2000 $183,750 $ 40,000 $ 4,800 (1) 45,000
1999 $175,000 $ 20,000 $ 4,800 (1) 40,000
(1) Consists of contributions to insurance premiums, car allowance and car
expenses.
(2) Consists of housing allowance, contributions to insurance premiums, and car
allowance.
23
The following tables set forth information with respect to the named executive
officers concerning the grant, repricing and exercise of options during the last
fiscal year and unexercised options held as of the end of the fiscal year.
Option Grants for the Year Ended December 31, 2001
Common
Stock % of Total
Underlying Options Exercise
options Granted to Price per
Granted Employees Share Expiration Date
------- --------- ----- ---------------
Haim Aviv, Ph.D 100,000 19.6 % $ 1.875 April 2, 2011
Gad Riesenfeld, Ph.D. 50,000 9.8 % $ 1.875 April 2, 2011
Robert W. Cook 40,000 7.8 % $ 1.875 April 2, 2011
Aggregated Option Exercises
for the Year Ended December 31, 2001
and Option Values as of December 31, 2001:
Value of Unexercised
Number of Number of Unexercised In-the-Money Options at
Shares Options at December 31, 2001 December 31, 2001
Acquired on Value ---------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Haim Aviv, Ph.D 0 0 331,876 232,500 $ 60,500 $ 83,250
Gad Riesenfeld, Ph.D. 0 0 179,333 140,000 $ 44,000 $ 51,250
Robert W. Cook 0 0 118,750 106,250 $ 39,500 $ 41,000
Stock Option Plans
It is currently the Company's policy that all full time key employees are
considered annually for the possible grant of stock options, depending upon
employee performance. The criteria for the awards are experience, uniqueness of
contribution to the Company and level of performance shown during the year.
Stock options are intended to generate greater loyalty to the Company and help
make each employee aware of the importance of the business success of the
Company.
As of December 31, 2001, the Company had 2,452,030 options to purchase shares of
the Company's Common Stock outstanding under various option plans, 437,192 of
which are non-qualified options. During 2001, the Company granted 610,500
options to purchase shares of its Common Stock to employees, and directors, of
which 100,000 are non-qualified options. A summary of the various established
stock option plans is as follows:
1992 Plan. The maximum number of shares of the Company's Common Stock available
for issuance under the 1992 Plan is 750,000 shares, subject to adjustment in the
event of stock splits, stock dividends, mergers, consolidations and the like.
Common Stock subject to options granted under the 1992 Plan that expire or
terminate will again be available for options to be issued under the 1992 Plan.
As of December 31, 2001, there were options to purchase 385,792 shares of the
Company's Common Stock outstanding under this plan. Each option granted
outstanding under the 1992 plan as of December 31, 2000 expires on October 31,
2005.
24
1997 Plan and 2000 Plan. The 1997 Plan and the 2000 Plan are each administered
by a committee appointed by the Board of Directors (the "Compensation
Committee"). The Compensation Committee will designate the persons to receive
options, the number of shares subject to the options and the terms of the
options, including the option price and the duration of each option, subject to
certain limitations.
The maximum number of shares of Common Stock available for issuance under the
1997 Plan, as amended, and under the 2000 Plan is 1,500,000 shares each, subject
to adjustment in the event of stock splits, stock dividends, mergers,
consolidations and the like. Common Stock subject to options granted under the
1997 Plan and the 2000 Plan that expire or terminate will again be available for
options to be issued under each Plan.
The price at which shares of Common Stock may be purchased upon exercise of an
incentive stock option must be at least 100% of the fair market value of Common
Stock on the date the option is granted (or at least 110% of fair market value
in the case of a person holding more than 10% of the outstanding shares of
Common Stock (a "10% Stockholder")).
The aggregate fair market value (determined at the time the option is granted)
of Common Stock with respect to which incentive stock options are exercisable
for the first time in any calendar year by an optionee under the 1997 Plan, the
2000 Plan or any other plan of the Company or a subsidiary, shall not exceed
$100,000. The Compensation Committee will fix the time or times when, and the
extent to which, an option is exercisable, provided that no option will be
exercisable earlier than one year or later than ten years after the date of
grant (or five years in the case of a 10% Stockholder). The option price is
payable in cash or by check. However, the Board of Directors may grant a loan to
an employee, pursuant to the loan provision of the 1997 Plan or the 2000 Plan,
for the purpose of exercising an option or may permit the option price to be
paid in shares of Common Stock at the then current fair market value, as defined
in the 1997 Plan or the 2000 Plan.
Under the 1997 Plan, upon termination of an optionee's employment or
consultancy, all options held by such optionee will terminate, except that any
option that was exercisable on the date employment or consultancy terminated
may, to the extent then exercisable, be exercised within three months thereafter
(or one year thereafter if the termination is the result of permanent and total
disability of the holder), and except such three month period may be extended by
the Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such three-month period, the option may be
exercised within one year after death by the decedent's estate or his legatees
or distributees, but only to the extent exercisable at the time of death. The
2000 Plan provides that the Compensation Committee may in its discretion
determine when any particular stock option shall expire. A stock option
agreement may provide for expiration prior to the end of its term in the event
of the termination of the optionee's service to the Company or death or any
other circumstances.
The 1997 Plan and the 2000 Plan each provides that outstanding options shall
vest and become immediately exercisable in the event of a "sale" of the Company,
including (i) the sale of more than 75% of the voting power of the Company in a
single transaction or a series of transactions, (ii) the sale of substantially
all assets of the Company, (iii) approval by the stockholders of a
reorganization, merger or consolidation, as a result of which the stockholders
of the Company will own less than 50% of the voting power of the reorganized,
merged or consolidated company.
The Board of Directors may amend, suspend or discontinue the 1997 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 1997 Plan, (ii) change the designation of the class of persons eligible to
receive options, (iii) decrease the price at which options may be granted,
except that the Board may, without stockholder approval accept the surrender of
outstanding options and authorize the granting of new options in substitution
therefore specifying a lower exercise price that is not less than the fair
market value of Common Stock on the date the new option is granted, (iv) remove
the administration of the 1997 Plan from the Compensation Committee, (v) render
any member of the Compensation Committee eligible to receive an option under the
1997 Plan while serving thereon, or (vi) amend the 1997 Plan in such a manner
25
that options issued under it intend to be incentive stock options, fail to meet
the requirements of Incentive Stock Options as defined in Section 422 of the
Code.
The Board of Directors may amend, suspend or discontinue the 2000 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 2000 Plan or (ii) change the designation of the class of persons eligible to
receive options.
Under current federal income tax law, the grant of incentive stock options under
the 1997 Plan or the 2000 Plan will not result in any taxable income to the
optionee or any deduction for the Company at the time the options are granted.
The optionee recognizes no gain upon the exercise of an option. However the
amount by which the fair market value of Common Stock at the time the option is
exercised exceeds the option price is an "item of tax preference" of the
optionee, which may cause the optionee to be subject to the alternative minimum
tax. If the optionee holds the shares of Common Stock received on exercise of
the option at least one year from the date of exercise and two years from the
date of grant, he will be taxed at the time of sale at long-term capital gains
rates, if any, on the amount by which the proceeds of the sale exceed the option
price. If the optionee disposes of the Common Stock before the required holding
period is satisfied, ordinary income will generally be recognized in an amount
equal to the excess of the fair market value of the shares of Common Stock at
the date of exercise over the option price, or, if the disposition is a taxable
sale or exchange, the amount of gain realized on such sale or exchange if that
is less. If, as permitted by the 1997 Plan or the 2000 Plan, the Board of
Directors permits an optionee to exercise an option by delivering already owned
shares of Common Stock valued at fair market value) the optionee will not
recognize gain as a result of the payment of the option price with such already
owned shares. However, if such shares were acquired pursuant to the previous
exercise of an option, and were held less than one year after acquisition or
less than two years from the date of grant, the exchange will constitute a
disqualifying disposition resulting in immediate taxation of the gain on the
already owned shares as ordinary income. It is not clear how the gain will be
computed on the disposition of shares acquired by payment with already owned
shares.
2001 Employee Stock Purchase Plan. The 2001 Plan is intended to qualify as an
employee stock purchase plan under Section 423 of the Code. All employees of the
Company, its Pharmos Ltd. subsidiary or any other subsidiaries or affiliated
entities who have completed 180 consecutive days of employment and who
customarily work at least 20 hours per week will be eligible to participate in
the 2001 Plan, except for any employee who owns five percent or more of the
total combined voting power or value of all classes of stock of the Company or
any subsidiary on the date a grant of a right to purchase shares under the 2001
Plan (Right) is made. There currently are no such employees with such large
holdings. Participation by officers in the 2001 Plan will be on the same basis
as that of any other employee. No employee will be granted a Right which permits
such employee to purchase shares under the 2001 Plan at a rate which exceeds
$25,000 of fair market value of such shares (determined at the time such Right
is granted) for each calendar year in which such Right is outstanding. Each
Right will expire if not exercised by the date specified in the grant, which
date will not exceed 27 months from the date of the grant. Rights will not be
assignable or transferable by a participating employee, other than in accordance
with certain qualified domestic relations orders, as defined in the Code, or by
will or the laws of descent and distribution.
The total number of shares reserved for issuance under the 2001 Plan is 500,000
shares. Under the 2001 Plan, for any given calendar year, a participating
employee can only be granted Rights to purchase that number of shares which,
when multiplied by the exercise price of the Rights, does not exceed more than
10% of the employee's base pay. The Company contemplates that payroll deductions
generally will be used by participating employees to acquire the shares covered
by their Rights.
From time to time, the Board of Directors may fix a date or a series of dates on
which the Company will grant Rights to purchase shares of Common Stock under the
2001 Plan at prices not less than 85% of the lesser of (i) the fair market value
of the shares on the date of grant of such Right or (ii) the fair market value
of the shares on the date such Right is exercised.
26
The 2001 Plan also provides that any shares of Common Stock purchased upon the
exercise of Rights cannot be sold for at least six months following exercise, to
avoid potential violations of the "short swing" trading provisions of Section 16
of the Securities Exchange Act of 1934, as amended.
The Board of Directors or a committee to which it delegates its authority under
the 2001 Plan will administer, interpret and apply all provisions of the 2001
Plan. The Board has delegated such authority to the Compensation and Stock
Option Committee.
The Board of Directors may amend, modify or terminate the 2001 Plan at any time
without notice, provided that no such amendment, modification or termination may
adversely affect any existing Rights of any participating employee, except that
in the case of a participating employee of a foreign subsidiary of the Company,
the 2001 Plan may be varied to conform with local laws. In addition, subject to
certain appropriate adjustments to give effect to relevant changes in the
Company's capital stock, no amendments to the 2001 Plan may be made without
stockholder approval if such amendment would increase the total number of shares
offered under the 2001 Plan or would render Rights "unqualified" for special tax
treatment under the Code.
No taxable income will be recognized by a participant either at the time a Right
is granted under the 2001 Plan or at the time the shares are purchased. Instead,
tax consequences are generally deferred until a participant disposes of the
shares (e.g., by sale or gift). The federal income tax consequences of a sale of
shares purchased under the 2001 Plan will depend on the length of time the
shares are held after the relevant date of grant and date of exercise, as
described below.
If shares purchased under the 2001 Plan are held for more than one year after
the date of purchase and more than two years from the date of grant, the
participant generally will have taxable ordinary income on a sale or gift of the
shares to the extent of the lesser of: (i) the amount (if any) by which the fair
market value of the stock at the date of grant exceeds the exercise price paid
by the participant; or (ii) the amount by which the fair market value of the
shares on the date of sale or gift exceeds the exercise price paid by the
participant for the shares. In the case of a sale, any additional gain will be
treated as long-term capital gain. If the shares are sold for less than the
purchase price, there will be no ordinary income, and the participant will have
a long-term capital loss for the difference between the purchase price and the
sale price.
If the stock is sold or gifted within either one year after the date of purchase
or two years after the date of grant (a "disqualifying disposition"), the
participant generally will have taxable ordinary income at the time of the sale
or gift to the extent that the fair market value of the stock at the date of
exercise was greater than the exercise price. This amount will be taxable in the
year of sale or disposition even if no gain is realized on the sale, and the
Company would be entitled to a corresponding deduction. A capital gain would be
realized upon the sale of the shares to the extent the sale proceeds exceed the
fair market value of those shares on the date of purchase. A capital loss would
be realized to the extent the sales price of the shares disposed of is less than
the fair market value of such shares on the date of purchase. Special tax
consequences may follow from dispositions other than a sale or gift.
1997 Employees and Directors Warrants Plan
The 1997 Employees and Directors Warrants Plan was approved by the Stock Option
Committee as of February 12, 1997 and March 19, 1997. 1,030,000 Warrants to
purchase 1,030,000 shares of Common Stock were granted to certain employees of
the Company. Of such warrants, 955,000 were granted at an exercise price of
$1.59 per share and 75,000 were granted and an exercise price of $1.66 per share
(together, the "1997 Employees Warrants"). The 1997 Employees Warrants become
exercisable in increments of 25% each on their first, second, third and fourth
anniversaries, respectively, and shall expire in the year 2007. 100,000 Warrants
to purchase 100,000 shares of Common Stock were granted to directors of the
Company at an exercise price of $1.59 per share (the "1997 Directors Warrants")
on February 12, 1997. The 1997 Directors Warrants become exercisable in
increments of 25% each on the first, second, third and fourth anniversaries of
February 12, 1997
27
and shall expire on February 12, 2003. At December 31, 2001, there were 491,500
1997 Employees Warrants at $1.59, no 1997 Employees Warrants at $1.66 and 5,000
1997 Directors Warrants at $1.59 outstanding.
Upon termination of a Warrant Holder's employment, consultancy or affiliation
with the Company, all Warrants held by such Warrant Holder will terminate,
except that any Warrant that was exercisable on the date which the employment,
consultancy or affiliation terminated may, to the extent then exercisable, be
exercised within three months thereafter (or one year thereafter if the
termination is the result of permanent and total disability of the holder). If a
Warrant Holder dies while he or she is an employee, consultant or affiliate of
the Company, or during such three month period, the Warrant may be exercised
within one year after death by the decedent's estate or his legatees or
distributees, but only to the extent exercisable at the time of death.
Employment/Consulting Contracts/Directors' Compensation
Haim Aviv, Ph.D. In addition to serving as Chairman of the Board and Chief
Executive Officer of the Company, Dr. Aviv has provided consulting services
under a consulting agreement with an initial three-year term ended May 3, 1993.
The term automatically renewed for additional one-year periods unless either the
Company or Dr. Aviv terminated the agreement at least 90 days prior to a
scheduled expiration date. The agreement was renewed on an annual basis and was
to have expired on May 3, 2001. Under the agreement, Dr. Aviv was entitled to
severance pay equal to 25% of his salary in the event of termination or
non-renewal without cause. Under the agreement, Dr. Aviv was required to render
certain consulting services to the Company.
The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief Executive
Officer under an employment agreement with Dr. Aviv. Dr. Aviv was required to
devote at least 50% of his business time and attention to the business of
Pharmos, Ltd. and to serve on its Board of Directors.
In April 2001, the Compensation and Stock Option Committee of the Board of
Directors recommended, and the Board approved, a new one-year
employment/consulting agreement for Dr. Aviv, as Chairman of the Board and Chief
Executive Officer of the Company. Dr. Aviv has agreed to devote a majority of
his business time to the Company and to Pharmos Ltd. The agreement provides for
automatic one year renewals unless either the Company terminates the agreement
at least 180 days prior to the scheduled expiration date during for the initial
one year term (and 90 days for subsequent terms) or Dr. Aviv terminates the
agreement at least 60 days prior to the scheduled expiration date. Dr. Aviv's
base compensation for 2001, effective January 1, was $268,000, to be allocated
between the Company and Pharmos Ltd., and his base compensation for 2002,
effective January 1, is $281,400, to be allocated between the Company and
Pharmos Ltd. The Company also agreed to make available for Dr. Aviv's benefit
following his death, termination of employment for disability or retirement at
the age of at least 62 an amount equal to the cost of insurance premiums the
Company would otherwise have incurred to obtain and maintain a "split-dollar"
life insurance policy on his life (approximately $10,000 per year, accruing
interest at 8% per year). In addition, the Company agreed to pay, in lieu of
contributing to other benefits plans on his behalf, an amount equal to an
aggregate of approximately 21% of his base compensation toward the "Management
Insurance Scheme" managed by the government of Israel for members of management
of Israeli companies.
Dr. Aviv's new employment agreement also provides that if his employment is
terminated within one year following a "change of control," he will receive
severance pay of 18 months of base salary for the then-current year, accelerated
vesting of all unvested stock options and extended exercisability of all stock
options until their respective expiration dates. A "change of control" involves
an acquisition of at least 50% of the voting power of the Company's securities,
a change in at least 51% of the composition of the current Board of Directors,
or approval by the Board of Directors or stockholders of the Company of a
transaction where such change of voting control or composition of the Board
would occur, where the Company would be liquidated or where all or substantially
all of its assets would be sold.
28
If Dr. Aviv's employment is terminated by the Company, after notice, other than
for a change in control, death, disability or for "cause," as defined in his
employment agreement, or if he terminates his employment within one year of a
change in control or otherwise for "good reason," as defined in his employment
agreement, he will receive severance pay of 12 months of base salary for the
then-current year, accelerated vesting of all unvested stock options and
extended exercisability of all stock options until their respective expiration
dates.
The new employment agreement also contains customary confidentiality and
non-competition undertakings by Dr. Aviv.
Gad Riesenfeld, Ph.D. In October 1992, the Company's predecessor entered into a
one-year employment agreement with Dr. Riesenfeld, which was automatically
renewable for successive one-year terms unless either party gave three months
prior notice of non-renewal. Under the Agreement, Dr. Riesenfeld devoted his
full time to serving as President and Chief Operating Officer of the Company.
In April 2001, the Compensation and Stock Option Committee of the Board of
Directors recommended, and the Board approved, a new one year employment
agreement for Dr. Riesenfeld, as full-time President and Chief Operating Officer
of the Company. The Committee also increased his base salary, as of January 1,
2001, by 8%, to $209,790. In March 2002, the Committee increased his base
salary, effective January 1, 2002, by 12% to $234,965.
The other provisions of Dr. Riesenfeld's new employment agreement relating to
benefits, severance arrangements and confidentiality and non-competition
obligations are substantially similar to the those included in Dr. Aviv's
employment agreement, as described above, except that the Company's contribution
to the "Management Insurance Scheme" on Dr. Riesenfeld's behalf is approximately
16%. In addition, the Compensation Committee and the Board of Directors in April
2001 also authorized an amendment to Dr. Riesenfeld's new employment agreement
to provide that if the Company hires a new Chief Executive Officer, Dr.
Riesenfeld will be awarded, at the time of commencement of employment, a
one-time stock option grant equal to the highest grant he received during the
previous three years, in addition to his annual stock option awards. In
addition, any termination by the Company within 12 months after such
commencement of employment will require 180 days' prior written notice to Dr.
Riesenfeld and will entitle him to severance pay equal to 12 months of base
salary. In such circumstances, any resignation by Dr. Riesenfeld within 12
months thereafter, other than for "good reason" (as defined in his employment
agreement) will require 90 days' prior written notice by Dr. Riesenfeld and will
entitle him to 12 months of base salary. The amendment to his employment
agreement also provides that Dr. Riesenfeld will act as an unpaid consultant to
the Company for a one year period following any such termination or resignation.
Robert W. Cook. In January 1998, the Company entered into a one-year employment
agreement with Mr. Cook, which was automatically renewable for a successive
one-year term unless either party gave three months prior notice of non-renewal.
Under the Agreement, Mr. Cook devoted his full time to serving as Vice President
Finance and Chief Financial Officer of the Company.
In April 2001, the Compensation and Stock Option Committee of the Board of
Directors recommended, and the Board approved, a new one year employment
agreement for Mr. Cook, as full-time Vice President Finance and Chief Operating
Officer of the Company. The Committee also increased his base salary, as of
January 1, 2001, by 8%, to $198,450 and the Board ratified his promotion to
Executive Vice President. In March 2002, the Committee increased his base
salary, effective January 1, 2002, by 12% to $222,264.
The other provisions of Mr. Cook's new employment agreement relating to
benefits, severance arrangements and confidentiality and non-competition
obligations are substantially similar to the those included in Dr. Aviv's
employment agreement, as described above, except that Mr. Cook does not
participate in the "Management Insurance Scheme" of the Company's Israeli
subsidiary, and that in lieu of investing life insurance premiums for his
benefit, the Company has actually obtained a $500,000 "split-dollar" life
insurance policy for the benefit of Mr. Cook.
29
Elkan R. Gamzu, Ph.D. In January 2000, the Company entered into a consulting
agreement with Dr. Gamzu with a term of one year (subject to extension by
written agreement of the Company and Dr. Gamzu), pursuant to which Dr. Gamzu may
provide certain assistance and consulting services to the Company as and when
needed. The agreement provides for compensation on a per diem basis in
connection with the provision of such assistance and consulting services at the
rate of $3,000 per day. In 2001, the Company paid $ 23,580 to Dr. Gamzu pursuant
to the consulting agreement.
Directors' Compensation. In 2001, Directors did not receive any compensation for
service on the Board or for attending Board meetings. In March 2002, the Board
of Directors of the Company adopted a compensation policy with respect to
outside members of the Board. Specifically, the board approved:
Cash Compensation
1) Two payments of $2,500 each per annum, the first due on January 1,
and the second immediately after the earlier of the director's
initial appointment to the board or election by the shareholders;
and
2) $1,000 per each board or committee meeting attended in person or by
conference call; no payment for a committee meeting if it occurs on
the same day as the board meeting.
Stock Compensation
1) An initial grant of 30,000 options, awardable on the earlier of the
director's initial appointment to the board or election by the
shareholders; and
2) 20,000 options annually thereafter, awardable on the earlier of the
date of the director's re-election by the shareholders or the date
on which a general option grant is made by the Company for its key
employees and directors; and
3) Special, one-time awards may be granted for attaining certain
corporate achievements at the recommendation of the Chairman.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 15, 2002, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's Directors, and
(iii) all current Directors and executive officers of the Company as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.
Amount of
Name and Address of Beneficial Percentage of
Beneficial Ownership Ownership Total (1)
- -------------------- --------- -------------
Haim Aviv, Ph.D. (2) 1,267,995 2.2%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel
David Schlachet (3) 21,250 *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel
30
Mony Ben Dor (3) 18,125 *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel
Georges Anthony Marcel M.D., Ph.D.(3) 13,750 *
TMC Development
9, rue de Magdebourg
77116 Paris France
Elkan R. Gamzu, Ph.D. (3) 11,250 *
enERGetics
199 Wells Avenue, Suite 302
Newton, MA 02459
Samuel D. Waksal, Ph.D. 3,750 *
ImClone Systems Incorporated
180 Varick Street
New York, NY 10014
All Directors and 1,697,603 3.0%
Executive Officers as a group
(8 persons)(4)
- ----------
* Indicates ownership of less than 1%.
(1) Based on 56,573,792 shares of Common Stock outstanding, plus each
individual's currently exercisable warrants or options. Assumes that no
other individual will exercise any warrants and/or options.
(2) Includes 276,153 shares of Common Stock held in the name of Avitek Ltd.,
of which Dr. Aviv is the Chairman of the Board of Directors and the
principal stockholder, and, as such, shares the right to vote and dispose
of such shares. Also includes currently exercisable options and warrants
to purchase 557,063 shares of Common Stock.
(3) Consists of currently exercisable options and warrants to purchase Common
Stock.
(4) Based on the number of shares of Common Stock outstanding, plus 956,021
currently exercisable warrants and options held by the Directors and
executive officers.
Item 13. Certain Relationships and Related Transactions
In January 2000, the Company entered into a consulting agreement with one of our
Directors, Dr. Elkan Gamzu, for a term of one year (subject to extension by
written agreement of the Company and Dr. Gamzu), pursuant to which Dr. Gamzu may
provide certain assistance and consulting services to the Company as and when
needed. The agreement provides for compensation on a per diem basis in
connection with the provision of such assistance and consulting services at the
rate of $3,000 per day. In 2001, the Company paid $ 23,580 to Dr. Gamzu pursuant
to the consulting agreement.
31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits
(1) FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or note thereto.
(3) EXHIBITS
3 Articles of Incorporation and By-Laws
3(a) Restated Articles of Incorporation (Incorporated by reference
to Appendix E to the Joint Proxy Statement/Prospectus included
in the Form S-4 Registration Statement of the Company dated
September 28, 1992 (No. 33-52398) (the "Joint Proxy
Statement/Prospectus").
3(b) Certificate of Amendment of Restated Articles of Incorporation
dated January 30, 1995 (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1994).
3(c) Certificate of Amendment of Restated Articles of Incorporation
dated January 16, 1998 (Incorporated by reference to the
Company's Current Report on Form 8-K, dated February 6, 1998).
3(d) Certificate of Amendment of Restated Articles of Incorporation
dated October 21, 1999 (Incorporated by reference to Form S-3
Registration Statement of the Company dated September 28, 2000
(No. 333-46818).
3(e) Amended and Restated By-Laws (Incorporated by reference to
Form S-3 Registration Statement of the Company dated September
28, 2000 (No. 333-46818).
32
4 Instruments defining the rights of security holders, including indentures
4(a) Form of Placement Agent's Warrant Agreement, dated August 13,
1993, to purchase shares of Common Stock (Incorporated by
reference to Form S-3 Registration Statement of the Company
dated September 14, 1993 (33-68762)).
4(b) Form of Warrant Agreement dated September 2, 1994 to purchase
42,000 shares of Common Stock (Incorporated by reference to
Form S-1 Registration Statement of the Company dated June 30,
1994 [No. 33-80916], Amendment No. 2).
4(c) Warrant Agreement dated October 4, 1994 between the Company
and Judson Cooper (Incorporated by reference to Form S-3
Registration Statement of the Company dated November 25, 1994
[No. 33-86720]).
4(d) Warrant Agreement dated February 7, 1995 between the Company
and Judson Cooper (Incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1994).
4(e) Form of Employee Warrant Agreement, dated April 11, 1995,
between the Company and Oculon Corporation (Incorporated by
reference to the Company's Current Report on Form 8-K, dated
April 11, 1995, as amended).
4(f) Form of Warrant Agreement dated as of September 14, 1995
between the Company and the Investors (Incorporated by
reference to the Company's Current Report on Form 8-K, dated
September 14, 1995).
4(g) Form of Warrant Agreement dated as of April 30, 1995 between
the Company and Charles Stolper (Incorporated by reference to
Form S-3 Registration Statement of the Company dated November
14, 1995, as amended [No. 33-64289]).
4(h) Form of Warrant Agreement dated as of April 30, 1995 between
the Company and Janssen/Meyers Associates, L.P. (Incorporated
by reference to Form S-3 Registration Statement of the Company
dated November 14, 1995, as amended [No. 33-64289]).
4(i) Form of Warrant Agreement dated as of October 31, 1995 between
the Company and S. Colin Neill (Incorporated by reference to
Form S-3 Registration Statement of the Company dated November
14, 1995, as amended [No. 33-64289]).
4(j) Certificate of Designation, Rights, Preferences and Privileges
of Series A Preferred Stock of the Company (Incorporated by
reference to Form S-3 Registration Statement of the Company
dated December 20, 1996, as amended [No. 333-15165]).
4(k) Form of Stock Purchase Warrant dated as of September 30, 1996
between the Company and Alan M. Mark (Incorporated by
reference to Form S-3 Registration Statement of the Company
dated December 20, 1996, as amended [No. 333-15165]).
4(l) Form of Warrant Agreement dated as of March 15, 1996 between
the Company and Michael E. Lewis, Ph.D. (Incorporated by
reference to Form S-3 Registration Statement of the Company
dated December 20, 1996, as amended [No. 333-15165]).
4(m) Stock Purchase Agreement, dated December 12, 1996, between the
Company and Bausch &
33
Lomb Pharmaceuticals, Inc. (Incorporated by reference to
Annual Report on Form 10-K dated March 29, 1997).
4(n) Certificate of Designation, Rights Preferences and Privileges
of Series B Preferred Stock of the Company (Incorporated by
reference to Form S-3 Registration of the Company dated April
30, 1997 [No. 333-26155]).
4(o) Form of Stock Purchase Warrant dated as of March 31, 1997
between the Company and the Investors (Incorporated by
reference to Form S-3 Registration Statement of the Company
dated April 30, 1997 [No. 333-26155]).
4(p) Certificate of Designation, Rights Preferences and Privileges
of Series C Preferred Stock of the Company (Incorporated by
reference to the Company's Current Report on Form 8-K filed on
February 4, 1998).
4(q) Form of Stock Purchase Warrant dated as of February 4, 1998
between the Company and the Investor and the Company and the
Placement Agent (Incorporated by reference to the Company's
Current Report on Form 8-K filed on February 4, 1998).
4(r) Form of Stock Purchase Warrant dated as of March 31, 1997
between the Company and the Investor (Incorporated by
reference to Form S-3 Registration Statement of the Company
dated March 5, 1998 [No. 333-47359]).
4(s) Private Equity Line of Credit Agreement dated as of December
10, 1998 between the Company and the Investor (Incorporated by
reference to the Company's Current Report 8-K filed on
December 23, 1998).
4(t) Amendment Agreement dated as of December 18, 1998 between the
Company and Dominion Capital Fund, Ltd. (Incorporated by
reference to the Company's Current Report 8-K filed on
December 23, 1998).
4(u) Purchase Agreement between the Company, Millennium Partners
LP, Strong River Investments Inc. and St. Albans Partners
Ltd., dated as of September 1, 2000 (Incorporated by reference
to Exhibit 4.1 to the Company's Current Report on Form 8-K
filed on September 11, 2000).
4(v) Form of 6% convertible debenture due February 28, 2002
(Incorporated by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K filed on September 11, 2000).
4(w) Registration Rights Agreement between the Company, Millennium
Partners LP, Strong River Investments Inc. and St. Albans
Partners Ltd., dated as of September 1, 2000 (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on
Form 8-K filed on September 11, 2000).
4(x) Form of Common Stock Purchase Warrant exercisable until
September 1, 2005 (Incorporated by reference to Exhibit 4.4 to
the Company's Current Report on Form 8-K filed on September
11, 2000).
4(y) Escrow Agreement between the company, Millennium Partners LP,
Strong River Investments Inc., St. Albans Partners Ltd. and
Kleinberg Kaplan Wolff & Cohen PC, dated as of September 1,
2000 (Incorporated by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K filed on September 11,
2000).
34
4(z) Common Stock Investment Agreement between the Company,
Millennium Partners LP, Strong River Investments Inc. and
Laterman & Co. LP, dated as of September 1, 2000 (Incorporated
by reference to Exhibit 4.6 to the Company's Current Report on
Form 8-K filed on September 11, 2000).
4(aa) Registration Rights Agreement between the Company, Millennium
Partners LP, Strong River Investments Inc. and Laterman & Co.
LP, dated as of September 1, 2000 (Incorporated by reference
to Exhibit 4.7 to the Company's Current Report on Form 8-K
filed on September 11, 2000).
4(bb) Form of Common Stock Adjustment Warrant exercisable until
November 1, 2001 (Incorporated by reference to Exhibit 4.8 to
the Company's Current Report on Form 8-K filed on September
11, 2000).
4(cc) Form of Call Warrant exercisable until September 1, 2001
(Incorporated by reference to Exhibit 4.9 to the Company's
Current Report on Form 8-K filed on September 11, 2000).
4(dd) Form of Optional Adjustment Warrant exercisable until February
28, 2002 (Incorporated by reference to Exhibit 4.10 to the
Company's Current Report on Form 8-K filed on September 11,
2000).
4(ee) Form of placement agent warrant with Ladenburg Thalmann & Co.
Inc. (Incorporated by reference to Form S-3 Registration
Statement of the Company dated September 28, 2000 (No.
333-46818).
4(ff) Form of placement agent warrant with SmallCaps OnLine LLC
(Incorporated by reference to Form S-3 Registration Statement
of the Company dated September 28, 2000 (No. 333-46818).
4(gg) Form of consulting warrant with SmallCaps OnLine LLC
(Incorporated by reference to Form S-3 Registration Statement
of the Company dated September 28, 2000 (No. 333-46818).
4(hh) Form of 6% convertible debenture due June 30, 2003 with $2.15
exercise price (Incorporated by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed on January 4,
2002).
4(ii) Form of 6% convertible debenture due June 30, 2003 with $2.63
exercise price (Incorporated by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed on January 4,
2002).
10 Material Contracts
10(a) Agreement between Avitek Ltd. ("Avitek") and Yissum Research
Development Company of the Hebrew University of Jerusalem
("Yissum") dated November 20, 1986 (Incorporated by reference
to Annual Report on Form 10-K, as amended by Form10-K/A, for
year ended December 31, 1992). (1)
10(a)(1) Supplement to Agreement (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992). (1)
35
10(a)(2) Hebrew language original executed version of Agreement
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992). (1)
10(b) Agreement between Avitek and Yissum dated January 25, 1987
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992). (1)
10(b)(1) Schedules and Appendixes to Agreement (Incorporated by
reference to Annual Report on Form 10-K, as amended by Form
10-K/A, for year ended December 31, 1992). (1)
10(b)(2) Hebrew language original executed version of Agreement
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992). (1)
10(c) Research, Development and License Agreement between Pharmos
Ltd., Pharmos Corporation ("Old Pharmos") and Yissum dated
February 5, 1991 (Incorporated by reference to Annual Report
on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992). (1)
10(c)(1) Schedules and Appendixes to Agreement (Incorporated by
reference to Annual Report on Form 10-K, as amended by Form
10-K/A, for year ended December 31, 1992). (1)
10(d) License Agreement dated as of April 2, 1993 between the
Company and Dr. Nicholas Bodor (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for
year ended December 31, 1993). (1)
10(e) Marketing Agreement, dated as of June 30, 1995, between the
Company and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1995). (1)
10(f) Processing Agreement, dated as of June 30, 1995, between the
Company and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1995). (1)
10(g) Marketing Agreement, dated as of December 12, 1996, between
the Company and Bausch & Lomb Pharmaceuticals, Inc. (1)
10(h) 1992 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix F to the Joint Proxy Statement/Prospectus). **
10(i) 1997 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix B to the Proxy Statement on Form 14A filed November
5, 1997). **
10(j) 2000 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix A to the Proxy Statement on Form 14A filed June 19,
2000).**
10(k) Agreement dated as of January 21, 2000 between the Company and
Dr. Elkan R. Gamzu (Incorporated by reference to Exhibit 10(n)
to the Company's Annual Report for the fiscal year ended
December 31, 2000).**
10(l) Agreement dated as of April 7, 2000 between the Company and
Dr. Stephen C. Knight
36
(Incorporated by reference to Exhibit 10(o) to the Company's
Annual Report for the fiscal year ended December 31, 2000).**
10(m) Agreement dated as of April 14, 2000 between the Company and
Mr. Marvin P. Loeb (Incorporated by reference to Exhibit 10(p)
to the Company's Annual Report for the fiscal year ended
December 31, 2000).**
10(n)*** Employment Agreement dated as of April 2, 2001, between
Pharmos Corporation and Haim Aviv.**
10(o)*** Employment Agreement dated as of April 2, 2001, between
Pharmos Corporation and Gad Riesenfeld.**
10(p)*** Amendment of Employment Agreement dated as of April 23, 2001,
between Pharmos Corporation and Gad Riesenfeld.**
10(q)*** Employment Agreement dated as of April 2, 2001, between
Pharmos Corporation and Robert W. Cook.**
10(r) 2001 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit B to the Company's Definitive Proxy Statement on
Form 14A filed on June 6, 2001).**
10(s) Asset Purchase Agreement between Bausch & Lomb Incorporated
and Pharmos Corporation dated October 9, 2001 (Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed on October 16, 2001).
10(t) License Assignment and Amendment Agreement dated as of October
9, 2001 by and among Dr. Nicholas S. Bodor, Pharmos
Corporation and Bausch & Lomb Incorporated (Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K filed on October 16, 2001).
10(u) Amendment Agreement between Pharmos Corporation, Millennium
Partners LP and St. Albans Partners Ltd., dated as of December
31, 2001 (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on January 4,
2002).
10(v)*** Amendment No. 1 to Asset Purchase Agreement dated as of
December 28, 2001 between Bausch & Lomb Incorporated and
Pharmos Corporation
21 Subsidiaries of the Registrant
21(a) Subsidiaries of the Registrant (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for
year ended December 31, 1992).
23 Consents of Experts and Counsel
23(a) *** Consent of PricewaterhouseCoopers, LLP
- ----------
(1) Confidential information is omitted and identified by a * and filed
separately with the SEC.
(**) This document is a management contract or compensatory plan or
arrangement.
(***) Filed herewith.
(b) Reports on Form 8-K
37
1. Current Report filed on October 16, 2001 (date of earliest
event reported October 9, 2001); Item 2 was reported.
2. Current Report filed on January 4, 2002 (date of earliest
event reported December 31, 2001); Item 5 was reported.
38
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.
PHARMOS CORPORATION
By: /s/ Haim Aviv
-----------------------------------------------
Dr. Haim Aviv, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
Date: April 11, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Robert W. Cook Chief Financial Officer (Principal April 11, 2002
- ---------------------------------------------- Financial and Accounting Officer),
Robert W. Cook and Secretary
/s/ David Schlachet Director April 11, 2002
- ----------------------------------------------
David Schlachet
/s/ Mony Ben Dor Director April 11, 2002
- ----------------------------------------------
Mony Ben Dor
/s/ Georges Anthony Marcel Director April 11, 2002
- ---------------------------------------
Georges Anthony Marcel, M.D.,Ph.D.
/s/ Elkan R. Gamzu Director April 11, 2002
- ---------------------------------------------
Elkan R. Gamzu, Ph.D.
/s/ Samuel D. Waksal Director April 11, 2002
- --------------------------------------------
Samuel D. Waksal, Ph.D.
39
Pharmos Corporation
Index to Consolidated Financial Statements
Report of Independent Accountants F-2
Consolidated balance sheets as of December 31, 2001 and 2000 F-3
Consolidated statements of operations for the years ended
December 31, 2001, 2000 and 1999 F-4
Consolidated statements of changes in shareholders' equity
for the years ended December 31, 2001, 2000 and 1999 F-5
Consolidated statements of cash flows for the years ended
December 31, 2001, 2000 and 1999 F-6
Notes to consolidated financial statements F-7
F-1
Report of Independent Accountants
To the Board of Directors and
Shareholders of Pharmos Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Pharmos Corporation and its subsidiary at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 8, 2002
F-2
Pharmos Corporation
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------
2001 2000
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 35,269,114 $ 22,480,777
Restricted cash 2,275,251 --
Inventories -- 796,550
Receivables 690,067 1,188,502
Prepaid royalties -- 6,591
Prepaid expenses and other current assets 997,695 281,109
------------- -------------
Total current assets 39,232,127 24,753,529
Fixed assets, net 1,918,281 1,681,390
Prepaid royalties, net of current portion -- 143,000
Intangible assets, net -- 151,690
Restricted cash 3,090,550 4,035,414
Other assets 22,033 18,086
------------- -------------
Total assets $ 44,262,991 $ 30,783,109
============= =============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 2,197,299 $ 458,504
Accrued expenses (Note 6) 5,809,642 1,162,098
Accrued wages and other compensation 1,317,934 768,975
Convertible debentures, net 1,949,317 --
Advances against future sales -- 619,702
------------- -------------
Total current liabilities 11,274,192 3,009,279
Advances against future sales, net of current portion -- 1,000,000
Convertible debentures, net 5,847,951 6,580,872
Other liabilities -- 100,000
------------- -------------
Total liabilities 17,122,143 10,690,151
------------- -------------
Commitments and Contingencies (Note 14)
Shareholders' equity
Preferred stock, $.03 par value, 1,250,000 shares authorized,
none issued and outstanding
Common stock, $.03 par value; 80,000,000 shares authorized, 55,356,307 and
54,063,897 shares outstanding (excluding $551 (18,356 shares)
in 2001 and 2000, held in Treasury) in 2001 and 2000, respectively 1,660,688 1,621,916
Deferred compensation (223,144) --
Paid in capital 111,151,758 108,965,351
Accumulated deficit (85,448,454) (90,494,309)
------------- -------------
Total shareholders' equity 27,140,848 20,092,958
------------- -------------
Total liabilities and shareholders' equity $ 44,262,991 $ 30,783,109
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Pharmos Corporation
Consolidated Statements of Operations
- --------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues
Product sales $ 4,218,441 $ 4,873,504 $ 3,279,397
License fee 80,000 225,000 --
------------ ------------ ------------
Total Revenues 4,298,441 5,098,504 3,279,397
Cost of Goods Sold 1,268,589 1,875,955 994,617
------------ ------------ ------------
Gross Margin 3,029,852 3,222,549 2,284,780
------------ ------------ ------------
Expenses
Research and development, net 9,085,266 5,283,397 3,827,001
Selling, general and administrative 3,666,293 4,044,867 2,612,170
Patents 263,759 159,891 213,921
Depreciation and amortization 773,973 481,724 346,044
------------ ------------ ------------
Total operating expenses 13,789,291 9,969,879 6,999,136
------------ ------------ ------------
Loss from operations (10,759,439) (6,747,330) (4,714,356)
------------ ------------ ------------
Other income (expense)
Interest income 979,234 1,133,439 129,481
Other income (expense), net 28,509 (10,226) (2,790)
Interest expense (1,713,806) (2,360,085) (30,525)
Gain from sale of LE product line (Note 4) 16,285,324 -- --
------------ ------------ ------------
Other income (expense), net 15,579,261 (1,236,872) 96,166
------------ ------------ ------------
Income (loss) before income taxes 4,819,822 (7,984,202) (4,618,190)
Income tax benefit (226,033) -- --
------------ ------------ ------------
Net Income (loss) 5,045,855 (7,984,202) (4,618,190)
Less: Preferred stock dividends -- -- (22,253)
------------ ------------ ------------
Net income (loss) applicable to common shareholders $ 5,045,855 $ (7,984,202) $ (4,640,443)
============ ============ ============
Net income (loss) per share applicable to common
shareholders - basic $ .09 $ (.15) $ (.11)
============ ============ ============
Net income (loss) per share applicable to common
shareholders - diluted $ .09 $ (.15) $ (.11)
============ ============ ============
Weighted average shares outstanding - basic 54,678,932 52,109,589 42,725,157
============ ============ ============
Weighted average shares outstanding - diluted 55,298,063 52,109,589 42,725,157
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
Pharmos Corporation
Consolidated Statements of Changes in Shareholders' Equity (Notes 9 & 10)
For the Years ended December 31, 2001, 2000 and 1999
- ---------------------------------------------------------------------------------------------------------------------
Series C
Convertible
Common Stock Deferred Preferred Stock
Shares Amount Compensation Shares Amount
------ ------ ------------ ------ ------
December 31, 1998 39,800,112 $ 1,194,003 $ 0 1,500 45
Warrant and option exercises 150,000 4,500 121,500
Conversion of Series C preferred stock 1,270,058 38,102 (1,500) (45)
Common Stock Dividend upon conversion of P/S,
Series C 76,066 2,282
Issuance of Common Stock and warrants - equity
credit line, net of fees of $199,197 4,128,165 123,845
Preferred Stock Dividends
Net loss
------------- ------------- ------------- ------------- -------------
December 31, 1999 45,424,401 1,362,732 0 0 0
Warrant and option exercises 2,615,003 78,450
Warrant issuances for consultant compensation 243,449 243,449
Issuance of Common Stock and warrants - equity
credit line, net of fees of $77,831 518,424 15,552
Issuance of Common Stock - private equity sales,
net of fees of $382,000 5,524,425 165,733
Net loss
------------- ------------- ------------- ------------- -------------
December 31, 2000 54,082,253 1,622,467 0 0 0
Warrant and option exercises 1,109,446 33,283
Warrant issuances for consultant compensation ($ 50,175)
Stock option issuances below fair market value (172,969)
Issuance of Common Stock and adjustments in
connection with private equity sale, net
of fees of $5,924 182,964 5,489
Net income
------------- ------------- ------------- ------------- -------------
December 31, 2001 55,374,663 $ 1,661,239 ($ 223,144) 0 $ 0
============= ============= ============= ============= =============
Paid-in Total
Capital in Accumulated Treasury Stock Shareholders'
Excess of Par Deficit Shares Amount Equity
------------- ------- ------ ------ ------
December 31, 1998 $ 78,051,783 ($ 77,779,075) 18,356 ($ 551) $ 1,466,205
Warrant and option exercises 126,000
Conversion of Series C preferred stock (38,057) 0
Common Stock Dividend upon conversion of P/S,
Series C 88,307 (90,589) 0
Issuance of Common Stock and warrants - equity
credit line, net of fees of $199,197 5,126,956 5,250,801
Preferred Stock Dividends 22,253 (22,253) 0
Net loss (4,618,190) (4,618,190)
------------- ------------- ------------- ------------- -------------
December 31, 1999 83,372,742 (82,510,107) 18,356 (551) 2,224,816
Warrant and option exercises 4,754,443 4,832,893
Warrant issuances for consultant compensation
Issuance of Common Stock and warrants - equity
credit line, net of fees of $77,831 2,130,352 2,145,904
Issuance of Common Stock - private equity sales,
net of fees of $382,000 18,464,365 18,630,098
Net loss (7,984,202) (7,984,202)
------------- ------------- ------------- ------------- -------------
December 31, 2000 108,965,351 (90,494,309) 18,356 (551) 20,092,958
Warrant and option exercises 2,384,259 2,417,542
Warrant issuances for consultant compensation 189,893 139,718
Stock option issuances below fair market value 207,563 34,594
Issuance of Common Stock and adjustments in
connection with private equity sale, net
of fees of $5,924 (595,308) (589,819)
Net income 5,045,855 5,045,855
------------- ------------- ------------- ------------- -------------
December 31, 2001 $ 111,151,758 ($ 85,448,454) 18,356 ($ 551) $ 27,140,848
============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
Pharmos Corporation
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities
Net income (loss) $ 5,045,855 $ (7,984,202) $ (4,618,190)
Adjustments to reconcile net income (loss) to net
cash flow used in operating activities
Depreciation and amortization 773,973 481,724 346,044
Amortization of Beneficial Conversion Feature -- 1,796,344 --
Amortization of Debt Discount and Issuance costs 1,216,398 449,053 --
Option issuances - consultant compensation 139,718 243,449 --
Stock options issued below fair market value 34,594 -- --
Gain from sale of LE product line (16,285,324) -- --
Changes in operating assets and liabilities
Inventories 322,620 1,041,201 (110,655)
Receivables (862,542) (226,733) (411,712)
Prepaid expenses and other current assets (116,586) (58,718) (15,598)
Prepaid royalties 6,591 301,079 174,970
Other assets (3,947) -- 60,314
Accounts payable (113,179) (221,550) (256,846)
Accrued expenses 25,820 450,909 31,452
Accrued wages 548,959 219,433 92,967
Other liabilities (100,000) -- --
------------ ------------ ------------
Net cash used in operating activities (9,367,050) (3,508,011) (4,707,254)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (859,174) (932,731) (302,350)
Proceeds from sale of LE business,net 23,136,930 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 22,277,756 (932,731) (302,350)
------------ ------------ ------------
Cash flows from financing activities:
Advances against future sales, net (619,702) (1,567,863) (1,239,689)
Proceeds from issuance of common stock
and exercise of options and warrants, net 2,417,542 23,462,991 126,000
Proceeds from issuance of convertible debentures, net -- 4,335,475 --
Pricing adjustments for private placement, net (589,819) -- --
Proceeds from exercise of equity credit line -- 2,145,904 5,250,803
(Increase) in restricted cash (1,330,390) (4,035,414) --
(Decrease) increase in notes payable, net -- (338,128) 338,128
------------ ------------ ------------
Net cash (used in) provided by financing activities (122,369) 24,002,965 4,475,242
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 12,788,337 19,562,223 (534,362)
Cash and cash equivalents at beginning of year 22,480,777 2,918,554 3,452,916
------------ ------------ ------------
Cash and cash equivalents at end of year $ 35,269,114 $ 22,480,777 $ 2,918,554
============ ============ ============
Supplemental Information:
Interest paid $ 243,983 $ 3,210 $ 1,944
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
Pharmos Corporation
Notes to Consolidated Financial Statements
1. The Company
Pharmos Corporation (the "Company") is a bio-pharmaceutical company that
discovers and develops new drugs to treat a range of inflammatory and
neurological disorders such as traumatic brain injury and stroke. Although
we do not currently have any approved products, we have an extensive
portfolio of drug candidates under development, as well as discovery,
preclinical and clinical capabilities. The Company has executive offices
in Iselin, New Jersey and conducts research and development through its
wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
In October 2001, the Company sold its ophthalmic product line that
included Lotemax and Alrex, two products that were being marketed and
future extensions of loteprednol etabonate (see Note 4). As a result of
the sale, the Company is exclusively in the drug candidate development
stage.
2. Liquidity and Business Risks
The Company incurred operating losses since its inception through the year
ended December 31, 2000. At December 31, 2001, the Company has an
accumulated deficit of $85.5 million. Such losses have resulted
principally from costs incurred in research and development and from
general and administrative expenses. The Company has funded its operations
through the use of cash obtained principally from third party financing.
Management believes that the current cash and cash equivalents of $35.3
million and restricted cash of $5.4 million as of December 31, 2001, will
be sufficient to support the Company's continuing operations through at
least the middle of 2004.
The Company is continuing to actively pursue various funding options,
including additional equity offerings, strategic corporate alliances,
business combination and the establishment of product related research and
development limited partnerships, to obtain additional financing to
continue the development of its products and bring them to commercial
markets.
3. Significant Accounting Policies
Basis of consolidation
The accompanying consolidated financial statements include the Company's
wholly owned subsidiary, Pharmos Ltd. All significant intercompany
transactions are eliminated in consolidation.
Use of estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues, costs
and expenses during the reporting period. The most significant estimates
and assumptions related to revenue recognition and recoverability of
inventories. Actual results could differ from those estimates.
Net income (loss) per common share
Basic net income (loss) per common share is computed by dividing net
income (loss) for the period, reduced by any preferred stock dividends
(declared or in arrears), by the sum of the weighted average number of
shares of common
F-7
Pharmos Corporation
Notes to Consolidated Financial Statements
stock issued and outstanding. Diluted earnings per share is computed by
dividing net income (loss) for the period by the sum of the weighted
average number of shares of common stock issued and outstanding, increased
to include the number of common shares that would have been issued if all
outstanding preferred stock, stock options, and stock warrants that are
dilutive are converted.
A reconciliation of the basic and diluted earnings per share computations
for net income for the year ended December 31, 2001 is as follows:
Earnings
Income Shares per Share
-------------- --------------- --------------
Net income $5,045,855
Basic EPS Income applicable to common
shareholders 5,045,855 54,678,932 $ .09
Effect of Dilutive Securities:
Warrants 314,738
Options 304,393
---------- ---------- -------
Dilutive EPS Income applicable to common
shareholders plus assumed conversion $5,045,855 55,298,063 $ .09
========== ========== =======
In accordance with FASB 128 "Earnings per Share," 1,811,961 options and
warrants and the convertible debt were not included in the calculation
above as the results of the exercise of such would be antidilutive. For
the years ended December 31, 2000 and 1999, there were 5,005,240 and
5,890,273, respectively, of outstanding options and warrants and
convertible debt (in 2000) which were excluded from the dilutive EPS
calculation due to the fact that the results of the exercise of such would
be antidilutive.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents primarily consist of commercial paper and money market
accounts in 2001 and 2000.
Revenue recognition
The Company earns license fees from the transfer of drug technology and
the related preclinical research data. License fee revenue is recognized
when all performance obligations are completed and the amounts are
considered collectible. Up-front license fees are deferred and recognized
when all performance obligations are completed.
Royalty revenue is recognized upon the sale of the related products,
provided the royalty amounts are fixed or determinable and the amounts are
considered collectible. The Company has not recognized any royalty revenue
during 2001, 2000 and 1999.
Accounts Receivable
F-8
Pharmos Corporation
Notes to Consolidated Financial Statements
As of December 31, 2001, accounts receivable consists primarily of grants
for research and development relating to certain projects. In addition to
grants for research and development, as of December 31, 2000 accounts
receivable also consisted of receivables from the sales of ophthalmic
products.
F-9
Pharmos Corporation
Notes to Consolidated Financial Statements
Inventories
As of December 31, 2000, inventories consist of loteprednol etabonate, the
compound used in the Company's products, Lotemax and Alrex, and is stated
at the lower of cost or market with cost determined on a weighted average
basis.
Fixed assets
Fixed assets are recorded at cost. Property, furniture and equipment are
depreciated on a straight-line basis over their estimated useful lives.
The Company uses the following estimated useful lives:
Laboratory, pilot plant and other equipment 7 years to 14 years
Leasehold improvements 5 years to 14 years
Office furniture and fixtures 3 years to 17 years
Computer equipment 3 years
Vehicles 7 years
Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated lives of the related assets.
Maintenance and repairs are expensed as incurred.
Intangible assets
Intangible assets represent the Company's rights to develop and
commercialize certain products derived from certain licensed technologies.
The assets have been amortized over their estimated useful life. As of
December 31, 2001, the intangible assets have been fully amortized. As of
December 31, 2001 and 2000, accumulated amortization was $1,039,780 and
$888,090, respectively. Amortization expense amounted to $151,690 for the
year ended December 31, 2001 and $46,524 in each of the years ended
December 31, 2000 and 1999. The increase in amortization expense in 2001
is a result of a change in the estimated useful life.
Long-lived assets
The Company periodically evaluates potential impairments of its long-lived
assets, including intangible assets. When the Company determines that the
carrying value of long-lived assets may not be recoverable based upon the
existence of one or more indicators of impairment, the Company evaluates
the projected undiscounted cash flows related to the assets and other
factors. If these cash flows are less than the carrying value of the
assets, the Company measures the impairment using discounted cash flows or
other methods of determining fair value.
Research and development costs
All research and development costs are expensed when incurred. The Company
has accounted for reimbursements of research and development costs as a
reduction of research and development expense.
Income taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under the asset and
F-10
Pharmos Corporation
Notes to Consolidated Financial Statements
liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities, if any, are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Foreign exchange
The Company's foreign operations are principally conducted in U.S.
dollars. Any transactions or balances in currencies other than U.S.
dollars are remeasured and any resultant gains and losses are included in
the determination of current period income and loss. To date, such gains
and losses have been insignificant.
Concentration of credit risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintains some of its cash balances in accounts
that exceed federally insured limits. The Company has not experienced any
losses to date resulting from this practice.
Substantially all product sales have been to a single customer, as a
result of the Company's marketing agreement with that customer.
Equity based compensation
The Company accounts for its employee stock option plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense related to employee stock options is
recorded only if, on the date of grant, the fair value of the underlying
stock exceeds the exercise price. The Company adopted the disclosure-only
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation",
which allows entities to continue to apply the provisions of APB Opinion
No. 25 for transactions with employees and provide pro forma operating
results and pro forma per share disclosures for employee stock grants made
in 1996 and future years as if the fair-value-based method of accounting
in SFAS No. 123 had been applied to these transactions. Warrants issued to
non-employees are valued using the fair value methodology under SFAS No.
123.
Reclassifications
Certain amounts for 2000 and 1999 have been reclassified to conform to the
fiscal 2001 presentation. Such reclassifications did not have an impact on
the Company's financial position or results of operations.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of" and certain provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
F-11
Pharmos Corporation
Notes to Consolidated Financial Statements
Occurring Events and Transactions," for the disposal of a segment of a
business (as previously defined in that Opinion). The provisions of SFAS
144 are effective for fiscal years beginning after December 15, 2001. The
Company does not anticipate that the adoption of SFAS 144 will have a
material impact on the consolidated financial statements.
In June 2001, the FASB issued Statement No. 143 ("SFAS 143")," Accounting
for Asset Retirement Obligations" SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company does not anticipate that the adoption of SFAS
143 will have a material impact on the consolidated financial statements.
In July 2001, the FASB issued Statement No. 141 ("SFAS 141"), "Business
Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets." SFAS 141 addresses financial accounting and reporting for
business combinations and supersedes APB16, "Business Combinations." The
provisions of SFAS 141 were required to be adopted July 1, 2001 for
acquisitions initiated after June 30, 2001. The most significant changes
made by SFAS 141 were: (1) requiring that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, (2) establishing specific criteria for the recognition of intangible
assets separately from goodwill and (3) requiring unallocated negative
goodwill to be written off immediately as an extraordinary gain. SFAS 142
primarily addresses accounting for goodwill and intangible assets
subsequent to their acquisition and supersedes APB 17, "Intangible
Assets." The provisions of SFAS 142 are required to be adopted in fiscal
years beginning after December 15, 2001. The most significant changes made
by SFAS 142 are: (1) goodwill and indefinite-lived intangible assets will
no longer be amortized, (2) goodwill will be tested for impairment at
least annually at the reporting-unit level, (3) intangible assets deemed
to have an indefinite life will be tested for impairment at least annually
and (4) the amortization period of intangible assets with finite lives
will no longer be limited to forty years. The Company does not anticipate
that the adoption of SFAS 141 and 142 will have a material impact on the
consolidated financial statements.
4. Collaborative Agreements
In June 1995, the Company entered into a marketing agreement (the
"Marketing Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch &
Lomb"), a shareholder of the Company, to market Lotemax and Alrex, on an
exclusive basis in the United States following receipt of FDA approval.
The Marketing Agreement also covered the Company's other loteprednol
etabonate based product, LE-T. Under the Marketing Agreement, Bausch &
Lomb purchased the active drug substance (loteprednol etabonate) from the
Company. A second agreement, covering Europe, Canada and other selected
countries, was signed in December 1996 ("the New Territories Agreement").
In October 2001, the Company sold its ophthalmic product line, including
the Company's rights under the above agreements to Bausch & Lomb.
Through October 2001, Bausch & Lomb provided the Company with $5 million
in cash advances against future sales. Bausch & Lomb was entitled to
recoup the advances by withholding a certain percentage of payments to the
Company against payments for purchases of the active drug substance. With
the completion of the sale of the ophthalmic business to Bausch & Lomb in
October 2001, all the advances have been repaid. The portion of advances
expected to be recouped by Bausch & Lomb in 2001, based on management's
estimate of product sales to Bausch & Lomb in 2001, was presented as a
current liability in the accompanying balance sheet at December 31, 2000.
Total receivables from Bausch & Lomb as of December 31, 2001 and December
31, 2000 were $0 and
F-12
Pharmos Corporation
Notes to Consolidated Financial Statements
$870,043, respectively.
Sale of Ophthalmic Product line
In October 2001, Bausch & Lomb purchased all rights to the Company's
loteprednol etabonate (LE) ophthalmic product line for cash and assumption
of certain ongoing obligations. The Company received gross proceeds of
approximately $25 million in cash for its rights to Lotemax(R) and
Alrex(R), prescription products that were manufactured and marketed by
Bausch & Lomb under a 1995 Marketing Agreement with the Company. Bausch &
Lomb also acquired future extensions of LE formulations including LE-T, a
product candidate currently in Phase III clinical trial. Bausch & Lomb
will pay the Company additional fees depending on the approval date with
the FDA as follows: If the earlier of (a) commercial launch or (b) 6
months after FDA approval of LE-T (the "Triggering Event") occurs before
January 1, 2002 the Company will receive $15.4 million. This amount will
be reduced by $90,000 for each month thereafter to a minimum amount of
$13.3 million (if the Triggering Event occurs on December 31, 2003). If
the Triggering Event occurs after December 31, 2003, then the Company and
Bausch & Lomb will negotiate in good faith to agree upon the amount of
additional consideration that Bausch & Lomb will pay the Company but not
to exceed $13.3 million. The patent owner of LE-T is entitled to 11% of
the additional fees that the Company receives as a result of the
contingent payment, which will be net against any additional gain
recorded. The Company estimates its gross proceeds to be approximately $14
million.
Pharmos will receive an additional fee of up to $10 million if the
following occurs: (a) net sales of LE-T in the first 12 months after
commercial launch are at least $7.5 million and (b) net sales of LE-T in
the second twelve consecutive months after commercial launch (i) exceed
$15.0 million and (ii) are greater than net sales in (a) above. Future
payments will be included in the Company's income when all contingencies
are resolved. The patent owner is also entitled to 14.3% of the additional
fees that the Company receives as a result of these contingent payments.
The Company's only future obligation to Bausch & Lomb after the sale is to
pay up to $3.75 million in research and development cost relating to LE-T,
of which $600,000 was withheld from the sales proceeds. The entire $3.75
million was netted against the gain on sale recorded. The Company has a
passive role as a member of a joint committee, with Bausch & Lomb,
overseeing the development of LE-T.
As a result of this transaction, the Company recorded a gain of $16.3
million. The Company incurred transaction and royalty costs of
approximately $2 million. The Company also compensated the LE patent owner
approximately $2.7 million ($1.5 million paid upon closing and $1.2
million of this amount is to be paid in October 2002) from the proceeds of
the sale of Lotemax and Alrex in return for his consent to the Company's
assignment of its rights under the license agreement to Bausch & Lomb.
5. Fixed Assets
Fixed assets consist of the following:
December 31,
------------
2001 2000
----------- -----------
Laboratory, pilot plant and other equipment $ 2,826,727 $ 2,400,221
Leasehold improvements 623,607 467,444
Office furniture and fixtures 397,745 249,480
Computer equipment 704,316 582,396
F-13
Pharmos Corporation
Notes to Consolidated Financial Statements
Vehicles 38,742 38,742
----------- -----------
4,591,137 3,738,283
Less - Accumulated depreciation and amortization (2,672,857) (2,056,893)
----------- -----------
$ 1,918,281 $ 1,681,390
=========== ===========
Depreciation and amortization of fixed assets was $622,283, $435,200 and
$299,520 in 2001, 2000 and 1999, respectively.
F-14
Pharmos Corporation
Notes to Consolidated Financial Statements
6. Accrued expenses
Accrued expenses consist of the following:
December 31,
------------
2001 2000
---------- ----------
Accrued expenses, other $ 814,910 $1,162,098
Research & development cost relating to LE-T (Note 4) 3,750,000 --
Accrued fee due to the LE patent owner (Note 4) 1,244,732 --
---------- ----------
Total accrued expenses $5,809,642 $1,162,098
========== ==========
7. Grants for Research and Development
The Company has entered into agreements with U.S. federal agencies and the
State of Israel, which provide for grants for research and development
relating to certain projects. Amounts received pursuant to these
agreements have been reflected as a reduction of research and development
expense. Such reductions amounted to $1,336,566, $326,438 and $138,102
during 2001, 2000 and 1999, respectively. The agreements with agencies of
the State of Israel place certain legal restrictions on the transfer of
the technology and manufacture of resulting products outside Israel. The
Company will be required to pay royalties, at rates ranging from 3% to 5%,
to such agencies from the sale of products, if any, developed as a result
of the research activities carried out with the grant funds.
As of December 31, 2001, the total amounts received under such grants
amounted to $4,853,657, of which $4,273,969 relates to grants that contain
royalty provisions. Aggregate future royalty payments related to sales of
products developed, if any, as a result of these grants are limited to
$3,142,551 based on grants received through December 31, 2001.
In April 1997, the Company also signed an agreement with Consortium Magnet
for developing generic technologies for design and development of drugs
and diagnostic kits, operated by the Office of the Chief Scientist. Under
such agreements the Company is entitled to a non-refundable grant
amounting to approximately 60% of actual research and development and
equipment expenditures on approved projects. No royalty obligations are
required within the framework. The Company received grants totaling
$281,453, $543,807 and $418,074 in 2001, 2000 and 1999, respectively,
pursuant to this agreement.
8. Licensing Arrangements
The Company is a licensee of certain research technologies and has various
license agreements wherein the Company has acquired exclusive or
co-exclusive rights to develop and commercialize certain research
technologies. These agreements generally require the Company to pay
royalties on the sale of products developed and contingent royalties based
upon milestones from the licensed technologies and fees on revenues from
sublicenses, where applicable. The royalty rates, as defined in the
respective license agreements, are customary and usual in the
pharmaceutical industry. The royalties will be payable for periods up to
fifteen years from the date of specified events, including the date of the
first sale of such products, or the date from which the first registered
patent from the developed technologies is in force, or the year following
the date on which approval from the FDA is received for a developed
product. No amounts have been recorded as a liability with respect to any
contingent royalties as of December 31, 2001.
F-15
Pharmos Corporation
Notes to Consolidated Financial Statements
Certain of the license agreements, which include agreements related to
Lotemax and Alrex, required annual payments for periods extending through
2012. Minimum annual payments under licensing agreements are $103,500.
License fee expense amounted to approximately $103,500 during 2001, 2000,
and 1999. With the completion of the sale of the ophthalmic business to
Bausch & Lomb in October 2001, the obligations under these agreements have
been assumed by Bausch & Lomb.
The Company has paid a licensor, who is a former director, prepaid
royalties against future royalties on sales of Lotemax and Alrex.
Outstanding prepaid royalties totaled $ 0 and $149,591 and are reflected
as an asset on the balance sheets at December 31, 2001 and 2000,
respectively.
9. Private Placement
In September 2000, the Company completed a private placement of
convertible debentures, common stock and warrants to purchase shares of
common stock with institutional investors, generating gross proceeds of
$11 million.
Convertible Debentures
The Convertible Debentures, which generated gross proceeds of $8 million,
were due in February 2002 and carried a 6% interest payable semiannually
in cash or common stock. In connection with the Convertible Debenture, the
institutional investors also received warrants for the purchase of 276,259
common shares with a relative fair value of $725,000. The Convertible
Debentures were convertible into common shares of the Company at the
conversion price of $3.83 per share (or 2,088,775 common shares) and were
convertible beginning October 31, 2000. Under certain limited
anti-dilutive conditions, the conversion price may change. Until converted
into common stock or the outstanding principal is repaid, the terms of the
Convertible Debentures require the Company to deposit $4 million in an
escrow account. The escrowed capital is shown as Restricted Cash on the
Company's balance sheet and will be released to the Company in proportion
to the amount of Convertible Debentures converted into common shares or
upon the repayment of the debt.
During 2001, the Company paid $589,819 and issued 182,964 shares of the
common stock of the Company to the investors in the convertible debenture.
The payment of cash and stock were the option chosen by the Company and
represent adjustments to the pricing based upon the Company's stock price
during the adjustment period. Additional shares were issued for no
additional consideration resulting in an increase in common stock of
$5,489 and a corresponding decrease in additional paid in capital.
Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, require the Company to compute the Beneficial
Conversion Feature ("BCF") on the convertible debt due to the spread
between the fair market value of the common stock at the date of issuance
of the convertible debt and the conversion price taking into consideration
the relative fair value of the warrants issued in conjunction with this
financing. The BCF is netted out of the proceeds and is amortized from the
closing date until the earliest date that the investors have the right to
convert the debt into common shares. The BCF was computed at approximately
$1.8 million, all of which has been amortized and included as interest
expense in the year ending December 31, 2000. Additionally, the discount
on the Convertible Debenture due to the warrants issued in connection with
the convertible debenture of approximately $800,000 will be amortized to
interest expense over the life of the debt. For the years ended December
31, 2001 and 2000, $533,932 and $177,976, respectively, has been
amortized.
F-16
Pharmos Corporation
Notes to Consolidated Financial Statements
In December 2001, the holders of the Convertible Debentures and the
Company agreed to modify the repayment and conversion terms. The holders
of $5.8 million convertible debt (book value on December 31, 2001,
including accrued interest) extended the maturity date to June 2003 in
exchange for a reduction in the conversion price from $3.83 to $2.63 for
half of the outstanding balance and $2.15 for the other half of the
outstanding balance. The convertible debt with a maturity date of June
2003 is convertible beginning December 31, 2001. The holder of the
remaining outstanding debt of $1.9 million (including accrued interest)
changed the maturity date from February 28,2002 to January 31, 2002 in
exchange for lowering the conversion price for the other holders. As the
modification was not significant in accordance with EITF 96-19 the change
in the fair value between the original convertible debt and the modified
convertible debt will be accreted over the remaining term of the
convertible debt with a corresponding charge to interest expense.
Common Stock
The Company issued 1,024,425 common shares in the private placement that
generated gross proceeds of $3 million. Under the terms of the
transaction, 821,515 shares were issued at closing. In accordance with the
terms of the agreement, since the average closing price of the Company's
common stock during the 30 business days following the effective date of
the registration statement relating to the shares purchased did not exceed
110% of the initial closing price of $3.65 per share, the Company issued
an additional 202,910 shares, calculated in accordance with the stock
purchase agreement. The additional shares were issued in the fourth
quarter of 2000 for no additional consideration, resulting in an increase
in common stock of $6,087 and a corresponding decrease in additional paid
in capital.
One common stock investor has an option ("Call Warrant"), in the form of a
warrant, to purchase an additional $2 million of common shares for a
period of one year (September 2002) provided that the future purchase
price is greater than the initial closing price of $3.65 per share. The
maximum number of shares that can be issued from this warrant is 547,945
and is part of the maximum number of warrants issued for the total private
placement of 1,115,730, including placement agent warrants at prices
ranging from $3.65 to $6.08 per share. The warrants to the one investor
for the purchase of an additional $2 million of common stock were valued
using the Black Scholes option-pricing model (assumptions: volatility of
78%, risk free rate of 5.89% and a zero dividend yield). The warrants to
the placement agents were valued using the Black Scholes option-pricing
model using the same assumptions as above. Both warrant issuances were
recorded upon issuance as additional paid-in-capital. The investor
exercised the Call Warrant in the third quarter of 2001, with the Company
issuing 542,299 common shares. During the fourth quarter the Company
issued 281,659 shares as an adjustment to the pricing of the Call Warrant
based upon the Company's stock price during the adjustment period as
defined in the Call Warrant agreement.
The issuance costs related to the Private Placement of approximately $1.4
million, included the value of 187,929 warrants to purchase common shares
(included in the total warrants of 1,115,780 issued in connection with the
private placement) at prices ranging from $4.34 to $4.56. The issuance
costs relating to the Convertible Debenture of $981,000 will be amortized
over the life of the debt. For the year ending December 31, 2001 and 2000,
$682,464 and $224,691, respectively, has been amortized and included as
interest expense. The issuance costs related to the common stock of
$382,000 were netted against the proceeds.
Of the warrants issued in connection with the private placement, warrants
for the purchase of 567,785 common shares at exercise prices ranging from
$4.34 to $6.08 per share and an expiration date of September 2005, remain
outstanding at December 31, 2001.
The warrants that were issued in connection with the private placement
noted above were valued using the Black-Scholes option pricing model with
the following assumption: volatility 78%, risk free rate 5.89% and zero
dividend yield.
F-17
Pharmos Corporation
Notes to Consolidated Financial Statements
10. Common and Preferred Stock Transactions
2001 Transactions
The Company issued 1,109,446 shares of its common stock upon the exercise
of stock options and warrants, and received consideration of $2,417,542.
On January 1, 2001 the Company terminated the employment contract for two
employees and they became independent consultants. In accordance with the
incentive option plan, all terminated employees who are extended a
consulting contract may continue to vest their options. Since the
employees became consultants on a prospective basis, the options
outstanding on the date of termination are marked to market each quarter
until the options vest. The Company is recording the value of the services
being received based on the fair market value of the options using the
Black-Scholes option-pricing model, which was more reliable than the value
of the services provided. The fair value of these options has been
estimated based on the following weighted average assumptions: volatility
of 78%, risk free rate of 5.89% and a zero dividend yield. For the year
ended December 31, 2001 the Company recorded professional fees relating to
these terminated employees of $139,718.
As of December 31, 2001, the Company had reserved 2,534,089 common shares
for the possible conversion of the convertible debentures, 2,452,030 for
outstanding stock options and 2,297,277 for outstanding warrants.
2000 Transactions
During 2000, the Company issued 1,024,425 shares of common stock in a
private placement transaction that generated gross proceeds of $3 million.
Additionally, the Company issued warrants to purchase up to 1,115,730
shares of common stock at prices ranging from $3.65 to $6.08 per share and
expiring in 2001 and 2005 in connection with the private placement of
convertible debt and common stock described in Note 9.
The Company issued 2,615,003 shares of its common stock upon the exercise
of stock options and warrants, and received consideration of $4,832,893.
During the first quarter of 2000, the Company issued 4,500,000 registered
shares of its common stock under a "shelf" registration to several
investors, and received consideration, net of offering costs and expenses,
of $12,648,383.
F-18
Pharmos Corporation
Notes to Consolidated Financial Statements
During 2000, under terms of the Credit Agreement, the Company issued
518,424 shares of its Common Stock and warrants to purchase 51,162 shares
of its Common Stock to the Investor for consideration of $2,145,904, net
of fees. The warrants have exercise prices ranging from $2.19 to $16.80
per share and expire in 2003. The proceeds from the common stock issuance
were allocated to the common stock and warrants based on the fair value of
the securities. The warrants were valued using the Black-Scholes
option-pricing model (assumptions: volatility of 78%, risk free rate of
5.89% and a zero dividend yield) and recorded as additional paid in
capital. As of December 31, 2000, $1.7 million remained available under
the equity line of credit.
During 2000, the Company issued warrants to purchase 32,000 shares of its
common stock (4000 warrants each month through August 2000) as
compensation to a consultant. The warrants were immediately exercisable,
have an exercise price of $1.19 per share and expire by 2005. The warrants
were valued using the Black-Scholes option-pricing model (assumptions:
volatility of 78%, risk free rate of 5.89% and a zero dividend yield) and
recorded as additional paid in capital.
1999 Transactions
In October 1999, the shareholders of the Company approved the increase in
the number of authorized shares of common stock from 60,000,000 to
80,000,000 and approved an increase in the number of shares of common
stock reserved for issuance under the 1997 Incentive and Non-Qualified
Stock Option Plan from 1,000,000 to 1,500,000.
During 1999, the Company issued 1,346,124 shares of common stock upon
conversion of its Series C convertible preferred stock. These transactions
completed the conversion of the Series C convertible preferred stock,
leaving no preferred stock outstanding at December 31, 1999.
The Company entered into this Private Equity Line of Credit Agreement (the
"Credit Agreement") as of December 10, 1998, and as amended on December
18, 1998, with Dominion Capital Fund, Ltd. (the "Investor"). Pursuant to
the terms of the Credit Agreement, the Company may, from time to time
during a specified term, cause the Investor to purchase up to an aggregate
of $10,000,000 of the Company's common stock, par value $.03 per share
(the "Common Stock"). The price per share of Common Stock to be paid by
the Investor is to be determined at the time of each purchase according to
a specified formula, which is based upon the average closing bid price of
the Common Stock on the principal trading exchange or market for the
Common Stock (the "Principal Market") over a prescribed, five-day period.
With each purchase of Common Stock, the Investor is also to receive
warrants exercisable for a number of shares of Common Stock equal to ten
percent of the number of shares of Common Stock purchased at an exercise
price per share equal to 125% of the closing bid price of the Common Stock
on the Principal Market on a specified date. During 1999, under terms of
the Credit Agreement, the Company issued 4,128,165 shares of its Common
Stock and warrants to purchase 348,495 shares of its Common Stock to the
Investor for consideration of $5,250,803, net of fees. The warrants have
exercise prices ranging from $1.41 to $2.38 per share and expire by
December 2002. The proceeds from the common stock issuance were allocated
to the common stock and warrants base on the fair value of the securities.
The warrants were valued using the Black-Scholes option pricing model
(assumptions: volatility of 50%, risk free rate of 6.5%, zero dividend
yield) and recorded as additional paid in capital.
F-19
Pharmos Corporation
Notes to Consolidated Financial Statements
11. Warrants
Some of the warrants issued in connection with various equity financing
and related transactions during 1991 through 2001 contain anti-dilution
provisions requiring adjustment. The following table summarizes the common
shares issuable upon exercise of warrants outstanding at December 31, 2001
as adjusted for the events which have triggered anti-dilution provisions
contained in the respective warrant agreements:
Common Shares
Issuable Exercise
Issuance Date Expiration Date Upon Exercise Price
------------- --------------- ------------- --------
April 1995 April 2005 341,600 $ 2.75
April 2005 10,000 $ .78
February 1997 February 2007 45,000 $ 1.59
February 2007 404,000 $ 1.59
March 1997 March 2008 171,052 $ 1.38
March 2007 10,000 $ 1.66
January 1998 October 2005 7,000 $ 2.22
February 1998 January 2003 531,081 $ 2.51
January 2003 157,185 $ 2.18
November 1999 November 2004 4,000 $ 1.19
December 1999 December 2004 4,000 $ 1.19
January 2000 January 2005 4,000 $ 1.19
February 2000 February 2005 4,000 $ 1.19
March 2000 March 2005 4,000 $ 1.19
April 2000 April 2005 4,000 $ 1.19
May 2000 May 2005 4,000 $ 1.19
June 2000 June 2005 4,000 $ 1.19
June 2003 12,574 $ 5.00
July 2000 July 2005 4,000 $ 1.19
August 2000 August 2005 4,000 $ 1.19
September 2000 September 2005 95,843 $ 4.56
September 2005 92,086 $ 4.34
September 2005 379,856 $ 6.08
------- ------
Total shares and average
exercise price 2,297,277 $ 2.99
========= ======
F-20
Pharmos Corporation
Notes to Consolidated Financial Statements
12. Stock Option Plans
The Company's shareholders have approved incentive stock option plans for
officers and employees. Options granted are generally exercisable over a
specified period, not less than one year from the date of grant, generally
expire ten years from the date of grant and vest in four annual
installments of 25% each.
The following table summarizes activity in approved incentive stock
options approved by the Company's Board of Directors:
Under Weighted Average
Option Exercise Price
------ --------------
Options Outstanding at 12/31/98 1,014,336 $ 2.47
Granted 312,000 $ 1.25
Cancelled (14,000) $ 2.05
---------- --------
Options Outstanding at 12/31/99 1,312,336 $ 2.19
---------- --------
Granted 449,252 $ 4.03
Exercised (214,167) $ 2.31
Cancelled (27,583) $ 2.65
---------- --------
Options Outstanding at 12/31/00 1,519,838 $ 2.71
---------- --------
Granted at fair market value 57,000 $ 2.56
Granted below fair market value 453,500 1.88
Exercised (12,500) 1.25
Cancelled (3,000) 4.03
---------- --------
Options Outstanding at 12/31/01 2,014,838 $ 2.53
========== ========
Options exercisable at 12/31/01 898,399 $ 2.47
========== ========
Options exercisable at 12/31/00 602,836 $ 2.29
========== ========
Options exercisable at 12/31/99 581,836 $ 2.32
========== ========
Additional information with respect to the outstanding incentive stock options
as of December 31, 2001 is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------------------
Weighted
Average Weighted
Range of Exercise Options Remaining Average Weighted Average
Prices Outstanding Contractual Life Exercise Price Options Exercisable Exercise Price
--------------------- --------------- ----------------- ----------------- --------------------- ---------------------
$1.25 - $1.88 741,000 8.7 years $ 1.63 136,500 $ 1.25
$1.94 - $2.78 815,586 5.7 years $ 2.50 650,336 $ 2.46
$3.68 - $4.03 458,252 8.5 years $ 4.02 111,563 $ 4.03
--------------- ----------------- ----------------- --------------------- ---------------------
2,014,838 7.4 years $ 2.53 898,399 $ 2.47
F-21
Pharmos Corporation
Notes to Consolidated Financial Statements
All incentive stock option grants during 2001 were made from the Pharmos
Corporation 2000 Incentive and Non-Qualified Stock Option Plan. As of
December 31, 2001, there were 802,500 shares remaining available for
issuance under this plan.
The Company's Board of Directors approved nonqualified stock options for
key employees, directors and certain non-employee consultants. The
following table summarizes activity in Board-approved nonqualified stock
options:
Under Weighted Average
Option Exercise Price
------ --------------
Options Outstanding at 12/31/98 536,765 $ 2.47
Granted 80,000 $ 1.25
-------- --------
Options Outstanding at 12/31/99 616,765 $ 2.31
-------- --------
Granted 190,748 $ 3.81
Exercised (283,333) $ 2.23
Cancelled (20,000) $ 1.25
-------- --------
Options Outstanding at 12/31/00 504,180 $ 2.97
-------- --------
Granted below fair market value 100,000 $ 1.88
Exercised (136,988) $ 2.20
Cancelled (30,000) $ 2.77
-------- --------
Options Outstanding at 12/31/01 437,192 $ 2.97
======== ========
Options exercisable at 12/31/01 184,756 $ 3.18
======== ========
Options exercisable at 12/31/00 287,807 $ 2.77
======== ========
Options exercisable at 12/31/99 616,765 $ 2.31
======== ========
Additional information with respect to the outstanding nonqualified stock
options as of December 31, 2001 is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------------------
Weighted
Average Weighted
Range of Exercise Options Remaining Average Weighted Average
Prices Outstanding Contractual Life Exercise Price Options Exercisable Exercise Price
--------------------- --------------- ----------------- ----------------- --------------------- ---------------------
$1.25 - $1.88 165,000 8.4 years $ 1.74 36,875 $ 1.58
$2.41 - $2.50 83,194 4.6 years $ 2.48 71,944 $ 2.50
$4.00 - $5.20 188,998 6.5 years $ 4.25 75,937 $ 4.61
--------------- ----------------- ----------------- --------------------- ---------------------
437,192 6.6 years $ 2.97 184,756 $ 3.18
All incentive stock option grants during 2001 were made from the Pharmos
Corporation 2000 Incentive
F-22
Pharmos Corporation
Notes to Consolidated Financial Statements
and Non-Qualified Stock Option Plan. As of December 31, 2001, there were
889,500 shares remaining available for issuance under this plan.
During 2000, the Company modified the terms of certain nonqualified stock
options granted to two of the Company's former Directors who entered into
consulting relationships with the Company. The modifications included the
immediate vesting of the nonqualified options and, accordingly, the
Company expensed the value of these options as consultant compensation for
the year ended December 31, 2000.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its plans. During 2001, the Company issued 453,500 incentive stock
options and 100,000 non-qualified stock options to employees and directors
at an exercise price of $1.875 per share. The exercise price of $1.875 was
representative of the average price during the month the options were
granted, but was below the closing market price on the date of the grant.
Accordingly, the Company recorded compensation expense of $34,594 and
deferred compensation expense of $172,969 to reflect the difference
between the exercise price and the closing market price on the date of the
grant. The deferred compensation expense will be amortized over the
remaining three-year vesting period.
All other options and warrants granted to employees were granted with
exercise prices equal to the fair value of the common stock on the
respective grant dates, thus no compensation expense has been recognized
for those stock-based compensation plans. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at
the grant date for awards under these plans consistent with the
methodology prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's net income
and income per share would have been decreased by approximately $923,000,
or $.02 per share in 2001 and net loss and loss per share would have
increased by approximately $798,000, or $.02 per share in 2000 and
$560,000, or $.01 per share in 1999. The weighted average fair value of
options and warrants granted to employees, officers, and directors from
1999 through 2001 are estimated at $ 0.783 to $2.697 on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 78% in 2000and 2001 and 50%
in 1999, risk-free interest rate ranging between 3.90% and 4.94% in 2001,
5.89% in 2000 and 6.5% in 1999, assumed forfeiture rate of 3%, and an
expected life of 1 to 5 years.
13. Income Taxes
No provision for federal income taxes was recorded for the two years ended
December 31, 2000 due to net operating losses incurred. No provision for
income taxes was recorded for the year ended December 31, 2001 since the
Company will be able to utilize its net operating loss carryforwards to
offset any tax due. Net operating loss carryforwards for U.S. tax purposes
of approximately $64,000,000 expire from 2002 through 2021.
During 2001, the Company sold a portion of its New Jersey net operating
loss carryforwards to a third party under the New Jersey Technology Tax
Certificate Program and, as a result, recorded a tax benefit of $226,033.
The Company's gross deferred tax assets of $26,900,000 and $28,300,000 at
December 31, 2001 and 2000, respectively, represented primarily the tax
effect of both the net operating loss carryforwards ($22.4 million in 2001
and $23.1 million in 2000), deferred research and development costs ($2.4
million in 2001 and $3.0 million in 2000) and research and development tax
credit carryforwards ($1.9 million in 2001 and $1.5 million in 2000). As a
result of
F-23
Pharmos Corporation
Notes to Consolidated Financial Statements
previous business combinations and changes in stock ownership,
substantially all of these net operating losses and tax credit
carryforwards are subject to significant restriction with regard to annual
utilization. A full valuation allowance has been established with regard
to the gross deferred tax assets due to management's uncertainty of the
recoverability of the deferred tax assets.
F-24
Pharmos Corporation
Notes to Consolidated Financial Statements
14. Commitments and Contingencies
Leases
The Company leases research and office facilities in Israel and New
Jersey. The facilities in Israel are used in the operation of the
Company's research and administration activities.
All of the leases and subleases described above call for base rentals,
payment of certain building maintenance costs (where applicable) and
future increases based on the consumer price indices.
At December 31, 2001, the future minimum lease commitments with respect to
non-cancelable operating leases (including office and equipment leases)
with initial terms in excess of one year are as follows:
Lease
Commitments
-----------
2002 $ 284,419
2003 184,473
2004 158,617
2005 156,516
2006 156,516
thereafter 45,820
--------
$ 986,361
=========
Rent expense during 2001 2000 and 1999 amounted to $353,793, $329,246 and
$323,469, respectively. Rent expense in 2001, 2000 and 1999 is net of $0,
$0 and $86,454 of sublease income, respectively.
Consulting contracts and employment agreements
In the normal course of business, the Company enters into annual
employment and consulting contracts with various employees and
consultants.
Dividend restrictions
Dividends may be paid by the Company's subsidiary, Pharmos Limited, only
out of retained earnings as determined for Israeli statutory purposes.
There are no retained earnings in Israel available for distribution as
dividends as of December 31, 2001, 2000 or 1999. The Company does not
intend to pay a cash dividend in the foreseeable future.
15. Employee Benefit Plan
The Company has a 401-K defined contribution profit-sharing plan covering
certain employees. Contributions to the plan are based on salary
reductions by the participants, matching employer contributions as
determined by the Company, and allowable discretionary contributions, as
determined by the Company's Board of Directors, subject to certain
limitations. Contributions by the Company to the plan amounted to $39,637,
$26,570 and $11,333 in 2001, 2000 and 1999, respectively.
F-25
Pharmos Corporation
Notes to Consolidated Financial Statements
16. Estimated Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, grants and other
receivables, accounts payable and accrued expenses are reasonable
estimates of their fair values. The estimated fair market value of the
convertible debt is $9.5 million, or $1.7 million greater than the book
value of $7.8 million at December 31, 2001.
17. Segment and Geographic Information
The Company is active in one business segment: designing, developing,
selling and marketing pharmaceutical products. The Company maintains
development operations in the United States and Israel. The Company's
selling operations are maintained in the United States.
Geographic information for the years ending December 31, 2001, 2000 and
1999 are as follows:
2001 2000 1999
------------ ------------ ------------
Net revenues
United States $ 4,298,441 $ 5,098,504 $ 3,279,397
Israel -- -- --
------------ ------------ ------------
$ 4,298,441 $ 5,098,504 $ 3,279,397
============ ============ ============
Net income (loss)
United States $ 5,564,634 ($ 7,597,846) ($ 4,343,289)
Israel (518,779) (386,356) (274,901)
------------ ------------ ------------
$ 5,045,855 ($ 7,984,202 ($ 4,618,190)
============ ============ ============
Total assets
United States $ 40,648,880 $ 28,073,517 $ 5,728,624
Israel 3,614,111 2,709,592 2,062,670
------------ ------------ ------------
$ 44,262,991 $ 30,783,109 $ 7,791,294
============ ============ ============
Capital expenditures, net
United States $ 138,424 $ 54,746 $ 23,448
Israel 720,750 877,985 278,902
------------ ------------ ------------
$ 859,174 $ 932,731 $ 302,350
============ ============ ============
F-26
Pharmos Corporation
Notes to Consolidated Financial Statements
18. Quarterly Information (Unaudited)
Year ended
December 31, 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------- ----------- ----------- -----------
Revenues $ 1,105,058 $ 1,480,737 $ 1,712,646 --***
Gross Margin 693,717 1,026,829 1,309,306 --***
Operating Expenses 3,350,345 3,189,482 3,093,611 $ 4,155,853
Loss from Operations (2,656,628) (2,162,653) (1,784,305) (4,155,853)
Other Income (Expense), net (93,475) (204,092) (212,741) 16,089,569*
Net income (loss) applicable to
common shareholders $ (2,750,103) $ (2,366,745) $ (1,997,046) $ 12,159,749*
Net income (loss)
per share - basic & diluted $ (.05) $ (.04) $ (.04) $ .22
*- Other Income (Expense), net and the Net Loss for the fourth quarter of
2001 include the gain from the sale of the ophthalmic product line to
Bausch & Lomb in October 2001.
***- As a result of the sale to Bausch & Lomb in October 2001, there was no
revenue or gross margin during the fourth quarter of 2001.
Year ended
December 31, 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------- ----------- ----------- -----------
Revenues $ 663,580 $ 1,414,837 $ 1,761,735 $ 1,258,352
Gross Margin 383,051 937,675 1,181,533 720,290
Operating Expenses 2,425,064 2,075,209 2,576,618 2,892,988
Loss from Operations (2,042,013) (1,137,534) (1,395,085) (2,172,698)
Other Income (Expense), net
146,869 287,602 (136,074)** (1,535,269)**
Net loss applicable to common
shareholders $(1,895,144) $ (849,932) $(1,531,159)** $(3,707,967)**
Net loss per share -basic & diluted
$ (.04) $ (.02) $ (.03) $ (.07)
F-27
Pharmos Corporation
Notes to Consolidated Financial Statements
**- Other Income (Expense), net and the Net Loss for the third and fourth
quarter of 2000 include the amortization of the Beneficial Conversion Feature
from the Private Placement as discussed in Note 9.
F-28
Pharmos Corporation
Notes to Consolidated Financial Statements
19. Subsequent event
In January 2002, the convertible debenture commitment of approximately $2
million was repaid in cash. Additionally, $2.6 million (including accrued
interest of $0.1 million) was converted into 1,217,485 common shares, thus
leaving $3.9 million (including accrued interest of $0.4 million) as
outstanding as of March 15, 2002. After the repayment and conversion, $3.6
million was released from restricted cash.
F-29