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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, 1995
PHARMOS CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 36-3207413
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(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
2 INNOVATION DRIVE
ALACHUA, FL 32615
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (904) 462-1210
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 par value
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(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 21,
1996 held by those persons deemed to be non-affiliates was approximately
$56,000,000
As of March 21, 1996, the Registrant had outstanding 29,205,683 shares of
its $.03 par value Common Stock.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Pharmos Corporation (the "Company") is an emerging pharmaceutical company
engaged in the discovery, design, development and commercialization of
pharmaceuticals to meet significant therapeutic needs in major markets. The
Company is developing pharmaceuticals in various fields including: site specific
drugs for ophthalmic indications, neuroprotective agents targeted at specific
brain receptors for the treatment of central nervous system (CNS) disorders,
systemic drugs designed to avoid CNS related side effects, and emulsion-based
products for topical and systemic applications. The Company submitted to the
U.S. Food and Drug Administration ("FDA") a new drug application ("NDA") for the
treatment of ocular inflammation and allergy on March 30, 1995 and signed an
agreement with Bausch & Lomb Pharmaceuticals Inc. ("Bausch & Lomb") regarding
the marketing of this product in the U.S. on June 30, 1995. In addition, the
Company has two other ophthalmic products in Phase II clinical trials, a CNS
product aimed at treating stroke, head trauma and cardiac arrest which has been
studied in a Phase I clinical trial, and an anti-cancer project in a preclinical
stage.
STRATEGY
The Company's business objective is the design of novel drugs with safety
superiority initially targeted to ophthalmic, neurological and other disorders.
The Company expects to enter into collaborative relationships with established
pharmaceutical companies to bring its products to market.
PRODUCTS AND TECHNOLOGY
The Company is developing pharmaceuticals which are designed to address
unmet needs in the market place and exhibit superior efficacy and safety
profiles over competing products. Many current ophthalmic drugs have
significant side effects, such as elevation of intraocular pressure ("IOP"), or
have inconvenient dosing regimens which can significantly reduce their use. For
many neurological indications, there are no effective drug therapies available.
The Company is applying its experience in drug design and its novel drug
delivery technology in developing products directed at several fields including:
site specific drugs for ophthalmic indications, neuroprotective compounds
targeted at specific CNS receptors associated with neurological indications, and
systemic drugs designed to avoid CNS side effects and to have an excellent
peripheral safety profile. The Company is also using proprietary lipid-based
technologies, primarily submicron emulsions, to achieve better delivery routes.
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SITE SPECIFIC DRUGS FOR OPHTHALMIC INDICATIONS
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LOTEMAX AND LINE EXTENSIONS
LotemaxTM is the trade name of a drug product in a form of eye drop
suspension in which the active compound is Loteprednol Etabonate ("LE"). The
product is a unique steroid, designed to act in the eye and cure inflammatory
and allergic conditions, and then, as predicted, be deactivated to an inactive
metabolite once it reaches systemic circulation. This pharmacological profile
results in improved safety by preventing the side effects related to exposure to
systemic steroids. In the eye, the most unwanted side effect of steroids is the
elevation of IOP, which is sight-threatening. While glucocorticoids, 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
potent non-steroidal agents. LotemaxTM has demonstrated a superior safety
profile without compromising efficacy.
An NDA for LotemaxTM for general ocular inflammatory indications ("class
labeling") was submitted to the FDA in March 1995. A low dose LE for specific
allergic conditions ("LEA") has completed Phase III clinical studies and a
combination of LE with the antibiotic tobramycin ("LET") for the treatment of
inflammatory and ineffective indications such as post-cataract surgery is in a
preclinical development stage. In December 1995, because of the clinical
importance of uveitis, a severe form of eye inflammation, the Company, in
conjunction with Bausch & Lomb, opted to accelerate a previously planned uveitis
clinical trial to provide the FDA with additional information fully supporting
the broad class labeling claims sought in the NDA. The study began in early
1996 and is expected to be completed by mid 1996. Contingent upon receiving
approval of the NDA, the Company anticipates a late 1996 product launch.
On June 30, 1995, the Company entered into an agreement with Bausch & Lomb
to market the product in the U.S., to purchase the "drug substance" from the
Company, to manufacture the "drug product" and to assist the Company in
developing the product and line extensions. In 1995, the Company also signed an
agreement with SIPSY Chemical Corporation for exclusive manufacturing of LE for
sale to the Company.
ADAPROLOL MALEATE
Adaprolol Maleate is a beta blocker for the treatment of glaucoma,
designed, like LotemaxTM, as a "soft drug," with a predictable metabolic
disposition in the systemic circulation. Systemic side effects of beta blockers
include cardiovascular and pulmonary complications due to the presence of beta
adrenergic receptors in the heart and lung. These complications limit the use
of beta blockers in the elderly, cardiac patients and asthmatics.
Adaprolol Maleate is in Phase II clinical trials. A completed Phase II
study with 60 patients (with a control group treated with Timolol) has shown
that Adaprolol Maleate significantly reduces IOP in glaucoma patients by an
average 18% with no deleterious effect on mean arterial blood pressure unlike in
the Timolol-treated patients. Presently, the Company is attempting to identify
a strategic partner to assist in the continued development of Adaprolol Maleate.
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NEUROPROTECTIVE AGENTS: DEXANABINOL AND ANALOGS
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DEXANABINOL (HU-211)
Dexanabinol is a synthetic cannabinoid designed to avoid the psychotropic
and sedative spectrum of canabimimetic agents, while retaining their beneficial
properties as anti-emetics, analgesics and anti-glaucoma agents.
It is now well established that the psychotropic effects of cannabinoids
are mediated via stereo selective (-) preferring receptors. Dexanabinol is a
(+) optical isomer and does not interact with cannabinoid receptors. It does,
nevertheless, retain anti-emetic and anti-glaucoma properties. More importantly,
it is also a stereo selective, non-competitive antagonist of the glutamate NMDA
receptor channel, activation of which is believed to play a key role in
secondary neuronal damage due to head trauma, stroke and cardiac arrest. The
molecule also has free radical scavenging properties, and anti-inflammatory
properties (including inhibition of TNF- production). Both of these latter
mechanisms are important for neuroprotection. Therefore, dexanabinol emerges as
a unique modality for neuroprotection, combining three relevant mechanisms of
action in a single molecule.
While trauma and stroke are the highest priority indications for
dexanabinol, this drug also has potential in chronic neuroprotection associated
with other diseases such as glaucoma and Parkinson's and Alzheimer's diseases,
as well as various inflammatory conditions. Development of dexanabinol for
these indications is being explored at the preclinical level.
A Phase I study of rising dose tolerance in healthy volunteers (30
subjects) has shown dexanabinol to be safe at doses up to and including the
expected therapeutic doses. Specifically, there were no hallucinations,
sedation or blood pressure changes of the type reported with other glutamate
antagonists. The Company plans on beginning Phase II studies in 1996.
DRUG DESIGN FOR ELIMINATION OF CNS SIDE EFFECTS
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TAMOXIFEN METHIODIDE
Tamoxifen Methiodide is an analog of Tamoxifen, which is a widely used drug
in the treatment of breast cancer. Several diseases not involving brain
pathology are currently treated with drugs that produce mild to dose-limiting
CNS side effects. For instance, tamoxifen, which is used to treat breast cancer
patients and has been suggested for use as a prophylactic agent in healthy women
at risk of developing the disease, causes hot flashes and may be associated with
cognitive and affective deficits as well. Additionally, corticosteroids, used
to treat chronic inflammatory and auto-immune diseases, cause psychotic
reactions in some patients and have been shown to cause selective neuronal death
in animals. Neuropathic pain could be treated by certain systemic anesthetics,
but the resulting CNS side effects make such therapy unsafe. These side effects
could be addressed by designing drugs with limited passage to the brain through
the blood brain barrier (BBB).
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In the light of this concept, several analogs of tamoxifen and lidocaine
with poor CNS uptake have been synthesized and tested in several animal models.
Tamoxifen Methiodide, a permanently charged tamoxifen derivative, was tested in
animals (nude mice) inoculated with human breast cancer cells. Treatment
resulted in rapid arrest of growth followed by tumor regression. Growth arrest
was also observed in estrogen-independent tumors. The rate and magnitude of
response was higher than that seen with tamoxifen itself. The compound retains
the anti-osteoporotic effects of tamoxifen in bone but is considerably less
active than tamoxifen as auterotrophic agent, demonstrating an improved
therapeutic profile as compared to the parent compound. Permanently charged
lidocaine analogs suppress electrophysiological activities typical to
neuropathic pain in vivo, similar to that achieved with the parent compound.
EMULSION-BASED DRUG DELIVERY SYSTEMS
------------------------------------
PILOCARPINE-SME
Pilocarpine-SME is an eye drop formulation of generic Pilocarpine in a
submicron emulsion ("SME") for the treatment of glaucoma. The development of
ocular drug delivery systems that extend corneal residence time, reduce
irritation and deliver lipophilic drugs to the eye, addresses many of the major
problems of topical eye preparations. In general, lipophilic drugs are
difficult to deliver systematically. The Company's SME technology, consisting of
oily droplets in an aqueous medium, was developed to meet these needs. Further,
the Company's second generation EmulsomeTM technology, which combines features
of oil-in-water emulsion and liposomal technologies, has demonstrated increased
drug loading capacity and drug availability, without the use of synthetic
surfactants.
Ophthalmic drugs, including Pilocarpine, Indomethacin, and Adaprolol
Maleate, were successfully formulated using the Company's proprietary SME
technology, and have demonstrated advantages over standard formulations in terms
of reduced irritation and increased bioavailability in animal models as well as
in Phase I and certain Phase II clinical trials. Pilocarpine-SME given twice a
day in a Phase II trial for glaucoma was as effective as the four times a day
regimen required with generic pilocarpine, with fewer side effects and an
improved degree of comfort and safety. Similarly, a Phase II trial of
Adaprolol-SME demonstrated safety, efficacy and lower ocular irritation compared
to an aqueous formulation. Presently, the Company is attempting to identify a
strategic partner to assist in the continued development of Pilocarpine-SME.
COMPETITION
The pharmaceutical industry is highly competitive, and research relating to
drug delivery and formulation technologies is developing rapidly. The Company
competes with a number of pharmaceutical companies which have financial,
technical and marketing resources significantly greater than those of the
Company. Some companies with established positions in the pharmaceutical
industry may be better equipped than the Company to develop and market products
in the markets the Company 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
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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 the Company in recruiting highly qualified scientific
personnel.
The Company is pursuing areas of product development in which there is a
potential for extensive technological innovation. The Company's competitors may
succeed in developing products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's potential products becoming obsolete or non-competitive.
COLLABORATIVE RELATIONSHIPS
The Company's commercial strategy includes the development of products 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 the Company's products in development and potential future
products. Depending on the availability of financial, marketing and scientific
resources, among other factors, the Company 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 the
Company's flexibility in pursuing alternatives for the commercialization of its
products. There can be no assurance that the Company will establish any
collaborative arrangements or that, if established, such relationship will be
successful.
Bausch & Lomb. On June 30, 1995, the Company signed a definitive agreement
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with Bausch & Lomb to manufacture and market LotemaxTM, the Company's lead
product, in the United States. The agreement also covers LotemaxTM line
extension products currently being developed by the Company.
Under the agreement, Bausch & Lomb will purchase the active drug substance
from the Company and has provided the Company $4 million in cash advances. An
additional $2 million is subject to reaching certain development milestones in
the LotemaxTM line extension products. Bausch & Lomb will also collaborate in
the development of such additional products by making available amounts up to
50% of their Phase III clinical trial costs. The Company will retain certain
conditional co-marketing rights to all of the products covered by the marketing
agreement.
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 the Company's
technologies may depend, in part, upon the ability to obtain strong patent
protection.
Some of the technologies underlying the Company's potential products were
invented or are owned by various third parties, including various universities
and Dr. Nicholas Bodor. The Company is the licensee of these technologies under
patents held by the applicable owner through
6
licenses which generally remain in effect for the life of the applicable patent.
The Company 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.
The Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop its competitive position. The
Company's 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. The Company
intends to file additional patent applications, when appropriate, relating to
its technology, improvements to its technology and to specific products it
develops. There can be no assurance that any additional patents will be issued,
or if issued, that they will be of commercial benefit to the Company. In
addition, it is impossible to anticipate the breadth or degree of protection
that any such patents will afford.
The patent positions of pharmaceutical firms, including the Company, 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, the Company 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, the Company 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, the
Company 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 the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that the patents relating to
the licensed technology, if issued, will be upheld by a court of competent
jurisdiction 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 the
Company's fields. If patents are issued to other companies that contain
competitive or conflicting claims and such claims are ultimately determined to
be valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost or be able to develop or obtain
alternative technology.
The Company also relies upon trade secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commitment of employment or consulting or
advisory relationships with the Company. These agreements generally provide that
all confidential information developed or made known to the individual during
the course of the individual's relationship with the Company is to be kept
7
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 the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information. The Company's patents and licenses underlying its potential
products described herein are summarized below.
SITE-SPECIFIC DRUGS. In the general category of site-specific drugs which
-------------------
are active mainly in the eye and have limited systemic side effects, the Company
has licensed several patents from Dr. Nicholas Bodor. The earliest patents date
from 1984 and the most recent from 1993. Some of these patents cover LotemaxTM,
the ophthalmic anti-inflammatory product, and Adaprolol Maleate, for treatment
of glaucoma.
NEUROPROTECTIVE AGENTS. The Company has licensed from the Hebrew
----------------------
University, which is the academic affiliation of the inventor, Dr. Raphael
Mechoulam, patents covering novel compounds which have demonstrated certain
beneficial neuropharmacological activity while appearing to be devoid of most of
the deleterious effects usually associated with this class of compounds. This
group of patents has been designed to protect this family of compounds and their
uses devised by the Company and the inventors. The earliest patent applications
resulted in patents issued in 1989, and the most recent patents date from 1994.
These patents cover Dexanabinol, which is under development for the treatment of
glaucoma, head trauma, cardiac arrest, and stroke. The Company has received
notice of allowance for another of its U.S. patent applications relating to
certain uses of analogs of this compound. Three additional U.S. patent
applications are pending.
TAMOXIFEN METHIODIDE. The Company has filed patent applications in the
--------------------
U.S. and Israel, and has an international application, to protect pharmaceutical
compositions of Tamoxifen Methiodide and other charged derivatives of anti-
estrogens. These charged derivatives are superior to the parent compounds in
that they are devoid of CNS side effects and show an overall improved
pharmacological profile.
EMULSION-BASED DRUG DELIVERY SYSTEMS. In the general category of SubMicron
------------------------------------
Emulsion (SME) technology, the Company licensed two patent applications from the
Hebrew University of Jerusalem ("Hebrew University") and has separately filed
six patent applications which are at different stages of prosecution. These
patents and patent applications have been devised to protect a group of
formulation technologies devised by the Company and the inventors as they relate
to pharmaceutical and medicinal products. The earliest patent filings for SME
technology date from 1986 and the most recent, from 1994. These patents cover
Pilocarpine-SME, which is being developed to treat glaucoma.
LICENSES
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The Company's license agreements generally require the Company, as
licensee, to pay royalties on sale of products developed from the licensed
technologies, and fees on revenues the Company receives for sublicenses, where
applicable. The royalty rates defined in the licenses are customary and usual
in the pharmaceuticals industry. The royalties will be payable for periods up
8
to fifteen years from the date of certain 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 in which FDA approval has been received for a developed product. Certain
of the license agreements also require annual payments through 2012.
GOVERNMENT REGULATION
The Company's activities and products are significantly regulated by a
number of governmental entities, especially the FDA, in the U.S. and by
comparable authorities in other countries. These entities regulate, among other
things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's potential products. Product
development and approval within this regulatory framework takes a number of
years and involves the expenditure of substantial resources. Many products that
appear promising initially ultimately do not reach the market because they are
found to be unsafe (perhaps too toxic) or to lack effectiveness, as demonstrated
by testing required by government regulation during the development process. In
addition, there can be no assurance that this regulatory framework will not
change or that additional regulation will not arise at any stage of the
Company's product development that may preclude or otherwise adversely affect
approval, delay an application or require additional expenditures by the
Company. Moreover, even if approval is obtained, failure to comply with present
or future regulatory requirements, or new information adversely reflecting on
the safety or effectiveness of the approved drug, can lead to FDA withdrawal of
approval to market the product.
The regulatory process required to be completed by the FDA before a new
drug delivery system may be marketed in the U.S. depends significantly on
whether the drug (which will be delivered by the drug delivery system in
question) has existing approval for use and in what dosage form. If the drug is
a new chemical entity that has not been approved, then the process includes (I)
preclinical laboratory and animal tests, (ii) an IND application which has
become effective, (iii) adequate and well-controlled human clinical trials to
establish the safety and effectiveness of the drug for its intended indication
and (iv) FDA approval of a pertinent NDA. If the drug has been previously
approved, then the approval process is similar, except that certain toxicity
tests normally required for the IND application may not be necessary. Even with
previously approved drugs, additional toxicity testing may be required when the
delivery form is substantially changed, or when a company does not have access
to the raw data from the prior preclinical studies.
The activities required before a pharmaceutical product may be marketed in
the U.S. begin with preclinical testing. Preclinical tests include laboratory
evaluation of product chemistry and other end points and animal studies to
assess the potential safety and efficacy of the product as formulated. The
conduct of preclinical studies is regulated by the FDA under a series of
regulations called the Good Laboratory Practice regulations. Violations of these
regulations can, in some cases, lead to invalidation of the data from these
studies, requiring such studies to be replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an
Investigative New Drug ("IND") application to the FDA. FDA regulations provide
that human clinical trials may begin thirty days following the submission and
receipt of an IND application, unless the FDA advises otherwise or requests
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additional information, clarification or additional time to review the IND
application; it is generally considered good practice to obtain affirmative FDA
response before commencing trials. There is no assurance that the submission of
an IND application will eventually allow a company to commence clinical trials.
Once trials have commenced, the FDA may stop the trials, or particular types or
parts of trials, by placing a "clinical hold" on such trials because of concerns
about, for example, safety of the product being tested or the adequacy of the
trial design. Such holds can cause substantial delay and in some cases may
require abandonment of a product.
Clinical testing involves the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician pursuant to an FDA-reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards ("IRBs") at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.
Phase I clinical studies are commonly performed in 20 to 40 healthy human
subjects or, more rarely, in selected patients with the targeted disease or
disorder. Their goal is to establish initial data about tolerance and safety of
the drug in humans. Also, the first data regarding the absorption, distribution,
metabolism, and excretion of the drug in humans are established.
In Phase II human clinical studies, preliminary evidence is sought
regarding the pharmacological effects of the drug and the desired therapeutic
efficacy in limited studies with small numbers of selected patients (50 to 200).
Efforts are made to evaluate the effects of various dosages and to establish an
optimal dosage level schedule and validate clinical efficacy endpoints to be
used in Phase III trials. Additional safety data are also gathered from these
studies.
Phase III clinical studies consist of expanded, large scale studies of
patients (200 to several thousand) with the target disease or disorder, to
obtain definitive statistical evidence of the effectiveness and safety of the
proposed product and dosing regimen. These studies may also include separate
investigations of the effects in subpopulations of patients, such as the
elderly.
At the same time that the human clinical program is being performed,
additional non-clinical (i.e., animal) studies are also being conducted.
Expensive, long duration (12-18 months) toxicity and carcinogenicity studies are
done to demonstrate the safety of drug administration for the extended period of
time required for effective therapy. Also, a variety of laboratory, animal, and
initial human studies may be performed to establish manufacturing methods for
the drug, as well as stable, effective dosage forms.
The results of product development, preclinical studies and clinical
studies and other information are submitted to the FDA in an NDA to seek
approval for the marketing and interstate commercial shipment of the drug. With
the NDA, a company must pay the FDA a user fee in of approximately $200,000.
Companies with less than 500 employees and no revenues from products are
eligible for an exception. This exception was granted to the Company in
connection with the NDA for LotemaxTM and reduces the fee to $100,000, which is
payable 12 months after the NDA is filed by the FDA. The FDA may refuse to file
or deny an NDA if applicable regulatory requirements, such as compliance with
Current Good Clinical Practice ("cGCP") requirements, are
10
not satisfied or may require additional clinical testing. Even if such data are
submitted, the FDA may ultimately decide that the NDA does not satisfy the
requirements for approval. If the FDA does ultimately approve the product, it
may require, among other things, post-marketing testing, including potentially
expensive Phase IV studies, and surveillance to monitor the safety and
effectiveness of the drug. In addition, the FDA may in some circumstances impose
restrictions on the use of the drug that may be difficult and expensive to
administer, and almost always seeks to require prior approval of promotional
materials. Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems occur after the product reaches
the market. After a product is approved for a given indication in an NDA,
subsequent new indications or dosages for the same product are reviewed by the
FDA via the filing and upon receipt of a Supplemental NDA ("sNDA") submission as
well as payment of another user fee. The sNDA is more focused than the NDA and
deals primarily with safety and effectiveness data related to the new indication
or dosage, and labeling information for the sNDA indication or dosage. Finally,
the FDA requires reporting of certain information, e.g., adverse experience
reports, that becomes known to a manufacturer of an approved drug.
Each domestic drug product manufacturing establishment must be registered
with, and approved by, the FDA and must pay the FDA a registration fee and
annual fee. In addition, each such establishment must inform the FDA of every
drug product it has in commercial distribution and keep such list updated.
Establishments handling controlled substances must be licensed and are inspected
by the U.S. Drug Enforcement Agency ("DEA"). The Company has a current DEA
license appropriate for handling the substances it uses in its facilities.
Domestic establishments are also subject to inspection by the FDA for compliance
with Current Good Manufacturing Practice ("cGMP") regulations after an NDA has
been filed and thereafter, at least biennially. The labeling, advertising and
promotion of drug products also must be in compliance with pertinent FDA
regulatory requirements. Failure to comply with applicable requirements relating
to production, distribution or promotion of a drug product can lead to FDA
demands that production and shipment cease, and, in some cases, that product be
recalled, or to enforcement actions that can include seizures, injunctions and
criminal prosecution.
To develop and market its potential products abroad, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing, among other things, the design and
conduct of human clinical trials, pricing and marketing. The approval procedure
varies among countries and can involve additional testing, and the time required
to obtain approval may differ from that required to obtain FDA approval. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Union ("EU") certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
almost always granted. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval set forth above. Approval by
the FDA does not ensure approval by other countries.
Various aspects of the Company's business and operations are also regulated
by a number of other governmental agencies including the DEA, U.S. Department of
Agriculture, Environmental Protection Agency and Occupational Safety and Health
Administration as well as by other federal,
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state and local authorities. In addition, any future international sales would
be regulated by numerous foreign authorities.
The Company's ability to commercialize its products successfully may depend
in part on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and there can be no assurance that adequate third-party
coverage will be available to enable the Company or any of its future licensees
to maintain price levels sufficient to realize an appropriate return on its
investment in product development.
CORPORATE HISTORY
Pharmos Corporation (the "Company"), 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, the Company completed a merger (the
"Merger") with Pharmos Corporation, a privately held New York corporation ("Old
Pharmos"), and on October 30, 1992 exercised an option to acquire all of the
outstanding shares of Xenon Vision, Inc., a privately held Delaware corporation
("Xenon"). Prior to the Merger, Old Pharmos was a biopharmaceutical company with
proprietary drug delivery and formulation technologies, one of which involved an
initial application of ophthalmic drugs, and another of which involved research
pharmaceuticals with neuroprotective properties being developed for applications
such as stroke and head trauma. Prior to the Merger, the Company was a
publicly-held company primarily engaged in the development and testing of a
chemical delivery system which has been shown in animal studies to permit the
passage of drugs across the blood-brain barrier. Prior to its acquisition, Xenon
was a research-based pharmaceutical company developing several patented products
for the ophthalmic field. In April 1995, the Company acquired Oculon
Corporation ("Oculon") a privately-held development stage company with anti-
cataract technologies and net assets of approximately $3.5 million, consisting
substantially of cash and cash equivalents.
HUMAN RESOURCES
As of March 1, 1996, the Company had 46 full time employees, 19 in the
U.S. and 27 in Israel, of whom approximately 18 hold doctorate or medical
degrees.
The Company's employees are not covered by a collective bargaining
agreement. The Company has never experienced employment-related work stoppages
and considers its employee relations to be excellent.
PUBLIC FUNDING AND GRANTS
The Company's 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 SME technology for injection
and nutrition as well as for research relating to
12
pilocarpine, dexamethasone and ophthalmic formulations for dry eyes. The Company
has received approximately $1,400,000 under such agreements through December 31,
1995. Funding is repayable on the basis of royalties from the sale of products
developed as a result of the research activities conducted with such funds. The
obligation to pay royalties is limited to the amount of such funding received,
linked to the exchange rate of the U.S. dollar and the New Israeli Shekel.
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."
In November 1992, the Company was awarded a grant of approximately $750,000
from the Israel-U.S. Binational Industrial Research and Development Foundation
to develop LotemaxTM. The agreement terminated in April 1995. The Company has
received the entire amount allowed under the grant as of December 31, 1995.
Funding is repayable on the basis of royalties from the sale of products
developed as a result of the research activities conducted with such funds. The
obligation to pay royalties is limited to 150% of the amount of such funding
received.
CONDITIONS IN ISRAEL
The Company conducts significant operations in Israel through its
subsidiary, Pharmos Ltd., and therefore is affected by the political, economic
and military conditions to which that country is subject.
Pharmos Ltd. has received certain funding from the Chief Scientist
with respect to its SubMicron Emulsion Technology and with respect to its new
chemical entity, Dexanabinol. The proclaimed purpose of the legislation under
which such funding is provided is to develop local industry, improve the state
balance of trade and to create new jobs in Israel. Such 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 it is
the Company's belief 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, there can be no assurance that such consent, if requested,
would be granted upon terms satisfactory to the Company or granted at all.
ITEM 2. PROPERTIES
The Company is headquartered in Alachua, Florida and leases facilities used
in the operation of its research, development, pilot manufacturing and
administrative activities in Alachua, Florida and Rehovot, Israel. These
facilities have been improved to meet the special requirements necessary for the
operation of the Company's research and development activities. In the opinion
of the management these facilities are sufficient to meet the current and
anticipated future requirements of the Company. In addition management believes
that it has sufficient ability to renew its present leases related to these
facilities or obtain suitable replacement facilities.
13
ITEM 3. LEGAL PROCEEDINGS
In September 1994, a class action was commenced in the United States
District Court for the Southern District of New York against David Blech
("Blech"), D. Blech & Co. ("Blech & Co."), Bear Stearns & Co., Inc. and certain
other Defendants alleging that Defendants conspired to manipulate and inflate
the prices of the securities of a number of publicly traded biotechnology
companies in which Blech and Blech & Co. allegedly had a controlling interest
for an alleged class period from July 1, 1991 through September 21, 1994.
On March 28, 1995, an Amended Consolidated Class Action Complaint, entitled
In re Blech Securities Litigation, 94 Civ. 7696 (RWS) (S.D.N.Y.) ("Amended
---------------------
Complaint") was filed, in which action the Company was named as an additional
co-Defendant. The Amended Complaint names as Defendants, Blech, Blech & Co.,
Bear Stearns & Co., Inc. and numerous other Defendants, including eleven
publicly traded biotechnology companies, one of which is the Company (the
"Defendants"). The Amended Complaint asserts the same basic claims as the
original complaint. The Amended Complaint seeks certification as a class action
and requests unspecified damages against Defendants in connection with the
alleged unlawful manipulation of the stock market prices of twenty-four
different biotechnology companies.
The Company believes that the claims against it have no factual or legal
basis, and filed in June 1995 a motion to dismiss the claims asserted against
it. In the Company's motion to dismiss, the Company maintained, inter alia,
----- ----
that the Amended Complaint did not contain any specific or legally cognizable
allegations of fraudulent conduct on the part of the Company, and that the named
Plaintiffs (none of whom are alleged to have purchased or sold common stock of
the Company) lacked standing to assert any claims against the Company.
The Company's motion to dismiss (along with motions to dismiss by numerous
other Defendants) was argued and submitted before United States District Court
Judge Robert W. Sweet, the Federal Judge assigned the case on November 9, 1995.
The Federal Judge took the motions under submission at the conclusion of oral
argument on November 9, 1995, and a decision has not yet been rendered by the
Court.
On October 27, 1995, the Company commenced an action in Supreme Court, New
York County (the "State Court"), against Dr. Nicholas Bodor, a former director
of the Company, seeking to enjoin Dr. Bodor from taking any steps to terminate
or interfere with the Company's rights under its License Agreement with Dr.
Bodor relating to LotemaxTM. Dr. Bodor claims that the advances against future
revenues of LotemaxTM recently received by the Company under its Marketing
Agreement with Bausch & Lomb are an up front licensing fee of which Dr. Bodor is
entitled to receive a portion and that the failure to pay would constitute
grounds for his terminating the License Agreement. Dr. Bodor also claims that
the Marketing Agreement is actually a sublicense entitling Dr. Bodor to
additional royalties under his License Agreement. In such event, Dr. Bodor
would be entitled to receive a portion of the Company's advances from Bausch &
Lomb as well as a higher royalty percentage from the Company on future sales of
LotemaxTM.
14
The Company strongly disagrees with Dr. Bodor's characterization of the
Bausch & Lomb Marketing Agreement and believes his interpretation is incorrect
and has no merit. To prevent Dr. Bodor from wrongfully terminating the License
Agreement, the Company commenced the action to protect its rights under both the
License Agreement and the Marketing Agreement.
In a Memorandum Decision obtained by the Company in February 1996, the
Court ruled in favor of the Company on both motions, granting the Company's
motion for a preliminary injunction and denying Dr. Bodor's motion to dismiss.
The Court instructed the parties to submit a proposed order implementing the
terms of the Court's Memorandum Decision and affidavits regarding an appropriate
undertaking (bond) by the Company pending a final determination of the action.
In late November 1995, Dr. Bodor commenced an action against the Company in
the state court in Florida seeking a declaratory judgement and money damages.
An amended complaint in the Florida action was recently served on the Company.
The Company will vigorously defend the Florida action.
In March 1996, the Company reached a settlement with Yissum Research
Development Company of the Hebrew University of Jerusalem ("Yissum'), licensor
to the Company's Israel subsidiary, Pharmos Ltd., of the SME technology. Such
settlement provides the Company with an exclusive license to utilize new
technology developed by Yissum in connection with the Company's SME
technologies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting held on October 31, 1995, the stockholders of
the Company elected the following persons as directors of the Company to hold
office until the next annual meeting of the stockholders and until their
successors are duly elected and qualified: Haim Aviv, Stephen C. Knight, David
Schlachet, Marvin P. Loeb, E. Andrews Grinstead, III and William C. Hulley.
Each of these individuals received 16,523,399 votes for and 84,328 votes
withheld.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
From October 20, 1993 until January 26, 1995, the Company's Common Stock
was traded on the NASDAQ National Market System under the symbol "PARS", and
prior thereto was traded on the Nasdaq SmallCap Market. Prior to the Merger,
the Common Stock was quoted under the symbol "PHTC". The Company's Common Stock
was moved to the Nasdaq SmallCap Market, effective January 27, 1995, as a result
of the Company's non-compliance with certain Nasdaq corporate governance
requirements. 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, 1995 HIGH LOW
---------------------------- ------ ------
1st Quarter................. $ 1.37 $ .50
2nd Quarter................. 2.75 .62
3rd Quarter................. 3.19 1.50
4th Quarter................. 2.56 1.22
Year ended December 31, 1994 HIGH LOW
---------------------------- ------ ------
1st Quarter................. $7.88 $6.50
2nd Quarter................ 6.63 4.50
3rd Quarter................. 5.00 1.25
4th Quarter................. 2.00 1.06
The foregoing represent inter-dealer prices, without retail mark-up, mark-
down or commission, and may not necessarily represent actual transactions.
On March 22, 1996, there were 533 record holders of the Common Stock of the
Company and approximately 4,127 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 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.
16
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991*
---- ---- ---- ---- ----
Revenues, net $ 75,000 $ 7,815 $ 81,900 $ 395,093 $ 1,007,026
Operating expenses, net (8,171,085) (12,963,114) (9,480,595) (6,454,670) (3,317,961)
Acquired research and
development - - - (6,284,136) -
Merger and related
expenses - - - (1,579,256) -
---------- ------------ ---------- ----------- ----------
Net loss ($8,096,085) ($12,955,299) ($9,398,695) ($13,922,969) ($2,310,935)
============ ============= ============ ============= ============
Net loss per share ($0.37) ($1.19) ($1.24) ($2.26) ($1.04)
======= ======= ======= ======= =======
Total assets $9,461,654 $4,289,416 $10,608,458 $10,197,057 $13,672,407
=========== ========== =========== =========== ============
Long term obligations $2,294,268 $91,318 $129,240 - $1,570,000
========== ======= ======== =========== ==========
Cash dividends declared - - - - -
========== ========== =========== =========== ============
*Restated to reflect the transfer of assets among entities under common control
in a manner similar to a pooling of interests.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has generated limited revenues from product sales and is
dependent upon external financing, interest income, and research and development
contracts to pursue its intended business activities. The Company has not been
profitable since inception and has incurred a cumulative net loss of $54,024,741
through December 31, 1995. Losses have resulted principally from costs incurred
in research activities aimed at identifying and developing the Company's product
candidates, clinical research studies, merger and acquisition costs, the write-
off of purchased research and development, and general and administrative
expenses. The Company expects to incur additional operating losses over the
next several years as the Company's research and development and clinical trials
programs continue. The Company's ability to achieve profitability is dependent
on its ability to develop and obtain regulatory approvals for its products, to
enter into agreements for product development and commercialization with
strategic corporate partners and to develop the capacity to manufacture and sell
its products, and to secure additional financing. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
RESULTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
Total revenues increased by $67,185 from $7,815 in 1994 to $75,000 in 1995.
This increase resulted from a fee the Company received as a result of
sublicensing certain technologies which were not being actively developed by the
Company. Revenues in 1994 related to sales of fine chemicals. The Company
phased out the selling of specialty chemicals and no such revenues were received
in 1995.
Total operating expenses decreased by $4,782,795, or 37%, from $13,036,461
in 1994 to $8,253,666 in 1995 primarily due to decreases in research and
development expenses, patent expenses and general and administrative expenses.
Research and development expenses decreased by $2,931,323, or 37%,
primarily due to clinical trials of the Company's lead product Lotemax(TM) being
substantially completed in 1994; the Company submitted a New Drug Application
("NDA") for this product with the Federal Drug Administration ("FDA") in March
1995. Late in 1995, the Company began clinical trial testing on one of its
Lotemax line extension products and such trials are expected to continue into
1997.
Patent expenses decreased by $461,596, or 49%, in 1995. This decrease
reflects a return to more normalized levels of patent expenses as 1994 was
impacted by costs of defending patent challenges related to technologies
licensed by the Company. In addition patent expenses in 1994 were impacted by
costs associated with improving the Company's patent coverage for its lead
product Lotemax(TM) and its Dexinabinol and Tamoxifen Methiodide compounds.
18
General and administrative expenses decreased by $1,503,343, or 41%, in
1995 primarily reflecting the impact of the cost savings which resulted from the
Company's decisions in late 1994 and early 1995 to eliminate staff and relocate
its corporate headquarters from New York to Alachua, Florida. In 1994 the
Company recognized costs of approximately $360,000 related to this restructuring
primarily related to severance and relocation expenses.
Net interest income in 1995 of $82,581 represented an increase of 13%
compared to 1994, and was comprised of interest income of $209,584 offset by
interest expense of $127,003. Interest income in 1995 increased by $62,654, or
42%, compared to 1994 and resulted from the Company's higher level of
investible funds in 1995. Interest expense in 1995 increased by $53,270, or 72%
compared to 1994 and resulted from interest expense on the convertible
debentures issued by the Company in February 1995 and converted into Common
Stock by July 1995.
The net loss for 1995 of $8,096,085 reflected a decrease of $4,859,214, or
38%, from the net loss of $12,955,299 for 1994. The decrease in operating
expenses described above accounted for substantially all of this decrease.
Years Ended December 31, 1994 and 1993
Total revenues decreased by $74,085, or 90%, from $81,900 in 1993 to $7,815
in 1994. The Company is phasing out the sale of specialty chemicals and has
already phased out specialized research contracts conducted for outside parties
in favor of developing patented, proprietary pharmaceuticals.
Total 1994 operating expenses increased by $3,442,370, or 36%, from
$9,594,091 in 1993 to $13,036,461 in 1994 primarily due to increases in research
and development and Phase III clinical trials for the Company's lead compound,
LotemaxTM.
Research and development expenses increased by $2,233,806, or 39%, from
$5,753,349 in 1993 to $7,987,155 in 1994, as the number of research personnel,
research expenses, and clinical trial programs expanded. Patent expenses
increased by $360,818, or 62%, from $581,637 in 1993 to $942,455 in 1994. This
is primarily due to the advancement of product development and reimbursements to
the University of Florida for patent expenses incurred under the terms of the
Company's license agreement.
General and administrative expenses increased by $776,225, or 27%, from
$2,908,083 in 1993 to $3,684,308 in 1994. These increases were caused primarily
by the expansion of staff in the first half of 1994, and the subsequent
restructuring costs, including severance expenses of $253,500, incurred in the
second half of 1994. In addition, during 1994 the Company had been working to
raise funds through various financing, which were unsuccessful. The related
costs of these financing, such as travel, printing, legal and accounting fees,
are a component of the increase in general and administrative expenses.
19
Net interest income of $73,197 for 1994 was comprised of interest income of
$146,930 offset by interest expense of $73,733. Net interest income of $111,866
for 1993 was comprised of interest income of $166,459 and interest expense of
$54,593. The decrease in interest income from 1993 to 1994 of $19,529, or 12%,
results from smaller balances of funds and the general decline in interest rates
in 1994. The increase in interest expense of $19,140, or 35%, between 1993 and
1994 primarily reflects costs related to financing activity in the form of a
loan and a line or credit obtained by the Company's Israeli subsidiary, Pharmos
Ltd.
The net loss for 1994 of $12,955,299 reflected an increase of $3,556,604,
or 38%, from the net loss of $9,398,695 for 1993. The increase of research and
development, and general and administrative expenses detailed above account for
the majority of the increase in net loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception and has financed its operations with public
and private offerings of securities, a marketing agreement with Bausch & Lomb,
research contracts, license fees, royalties and sales, and interest income.
The Company had working capital of $6.4 million, including cash and cash
equivalents of $7.4 million as of December 31, 1995. Management believes that
existing cash and cash equivalents combined with additional cash inflows from
investment income, grants and advances pursuant to the Marketing Agreement
described below, will be sufficient to support operations through the first
quarter of 1997. Management believes that additional funding will be required
to fund operations until, if ever, profitable operations can be achieved.
Therefore, the Company is continuing to actively pursue various funding options,
including additional equity offerings, commercial and other borrowings,
strategic corporate alliances and business combination transactions, the
establishment of product related research and development limited partnerships,
or a combination of these methods for obtaining the additional financing that
would be required to continue the research and development necessary to complete
the development of its products and bring them to commercial markets.
During 1995, the Company raised additional equity of $12,481,426 through
the issuance of 14,517,309 shares of common stock. A portion of these funds,
$201,258 net of short term deposits securing such borrowings, were used to pay
off short term bank debt and the remaining funds were available to fund ongoing
operations of the Company. In addition, during 1995, the Company signed a
definitive marketing agreement (the "Marketing Agreement") with Bausch & Lomb to
market Lotemax(TM), the Company's lead product, on an exclusive basis in the
United States. Under the Marketing Agreement, Bausch & Lomb will purchase the
active drug substance from the Company and provide the Company with $4 million
in cash advances through March 1996. An additional $2 million in advances may
be made subject to reaching certain development milestones in the Lotemax(TM)
line extension products. Bausch & Lomb will also collaborate in the development
of such additional products by making available amounts up to 50% of the
Phase III clinical trial costs.
As of the date hereof, the Company has received $4,000,000 in advances against
future sales to Bausch & Lomb of the active drug substance (needed to
manufacture the drug). Bausch & Lomb will
20
be entitled to credits against such future purchases of the drug substance based
on the advances and future advances until the advances have been recouped. The
Company may be obligated to repay such advances if it is unable to supply Bausch
& Lomb with certain specified quantities of the active drug substance.
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.
21
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. 55 Chairman, Chief Executive Officer,
Acting President, Chief Scientist and
Director
Marvin P. Loeb 69 Director
E. Andrews Grinstead, III 50 Director
Stephen C. Knight, M.D. 36 Director
David Schlachet 50 Director
William C. Hulley 38 Director
Gad Riesenfeld, Ph.D. 52 Executive Vice President, Chief
Operating Officer
S. Colin Neill 49 Acting Vice President/Finance, Chief
Financial Officer, Treasurer and
Secretary
John F. Howes, Ph.D. 53 Vice President/Clinical Affairs
Anat Biegon, Ph.D. 42 Vice President/Research and Development
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Acting President,
Chief Scientist and a Director of the Company and co-founded in 1990, Pharmos
Corporation, a New York corporation ("Old Pharmos"), which merged into the
Company on October 29, 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 Chairman of the Board and
22
holds over 5% of the common stock of Peptor, Ltd., an Israeli corporation
engaged in the research and development of drugs based on peptides. Dr. Aviv is
also a Director, officer and/or significant stockholder of several privately-
held Israeli pharmaceutical and venture capital companies.
Marvin P. Loeb, a Director, was Chairman of the Board of the Company (then
known as Pharmatec, Inc.) from December 1982 through October 1992. He has been
Chairman of Trimedyne, Inc. (and its subsidiaries), a publicly-held company
engaged in the manufacture of lasers, optical fibers and laser delivery systems,
since April 1981; a Director of Gynex Pharmaceuticals, Inc., from April 1986
until its merger with and into Biotechnology General Corporation in 1993, a
publicly-held company engaged in the development and commercialization of
pharmaceutical products; a Director of Petrogen, Inc., an inactive, privately-
held company engaged in the genetic engineering of bacteria for cleanup of oil
waste and toxic waste, from April 1987 to April 1992 (Chairman from November
1980 to December 1982 and from July 1983 to April 1987); Chairman of Automedix
Sciences, Inc., an inactive, publicly-held company engaged in the development of
products for treating cancer and other diseases, since September 1980; Chairman
of Cardiomedics, Inc., a privately-held, development stage company engaged in
the development of heart assist devices, from May 1986; Chairman of Xtramedics,
Inc. (now Athena Medical Corporation), a publicly-held company developing a
feminine hygiene product, from November 1986 to February 1994, and a Director
from November 1986 until May 1994; Chairman of Ultramedics, Inc., an inactive,
privately-held company developing blood treatment products, since November 1988;
and President and Director of Marvin P. Loeb & Co. since 1965, and Master Health
Services, Inc. since 1972, both of which are family-held companies engaged in
licensing of inventions and financial consulting.
E. Andrews Grinstead, III, a Director of the Company since 1991, is
Chairman and Chief Executive Officer of Hybridon, Inc., a publicly-held
biotechnology company. Mr. Grinstead joined Hybridon in 1991. From 1987 to
October 1990, he was Managing Director and group head of the life sciences group
at PaineWebber, Inc. From 1986 to 1987, Mr. Grinstead was Managing Director
and group head of the life sciences group at Drexel Burnham Lambert. From 1984
to 1986, he was a Vice President at Kidder, Peabody & Co., Inc., where he
developed the life sciences corporate finance specialty group. Prior to his
seven years on Wall Street, Mr. Grinstead served in a variety of operational and
executive positions with Eli Lilly & Company, most recently as general manager
of Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical
Operations. Since 1991, Mr. Grinstead has served as a Director of EcoScience
Corporation, a development-stage company engaged in the development of
biopesticides. Since 1994, Mr. Grinstead has served as a member of the Board of
Trustees for the Albert B. Sabine Vaccine Foundation, a 501(c)(3) charitable
foundation dedicated to disease prevention. Mr. Grinstead was appointed to the
President's Council of the National Academy of Sciences and the Institute of
Medicine in 1992.
Stephen C. Knight, M.D., a Director of the Company since November 10, 1994,
is a Senior Consultant in the Process Industries section of the North American
Management Consulting Directorate at Arthur D. Little, Inc. Dr. Knight recently
returned from a two-year assignment in the Arthur D. Little office in Brussels,
Belgium. During the past five years, he has been involved
23
in a variety of corporate and research and development strategic planning,
technology assessment, and merger and acquisition studies in the pharmaceutical,
biotechnology, health care information, medical equipment and diagnostic
industries. Prior to joining Arthur D. Little, Dr. Knight worked as a
consultant at APM, Inc. Dr. Knight has performed medical research at the
National Institutes of Health, AT&T Bell Laboratories, and Yale and Columbia
Universities.
David Schlachet, a Director of the Company since December 15, 1994, is Vice
President of Finance and Administration at the Weizmann Institute of Science in
Rehovot, Israel, a position he has held since 1990. Mr. Schlachet is
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. Mr. Schlachet is a Director of Taya Investment Company
Ltd., an Israeli publicly-held investment company.
William C. Hulley, a Director of the Company since April 11, 1995, is Vice
President and General Partner of Adams Capital Management, a venture capital
management firm. Mr. Hulley co-founded Adams Capital Management in January
1995. From 1989 until January 1995, Mr. Hulley was employed by Fostin Capital
Corp, a venture capital management where he served as a General Partner of
Fostin Capital Partners beginning in 1993. Prior to 1989, Mr. Hulley held
engineering and marketing management positions in several high technology
companies, most recently with Carnegie Group Inc. Mr. Hulley is a director of
On Technology and several privately held companies.
Gad Riesenfeld, Ph.D., was named Chief Operating Officer in March 1995 and
has served as Executive Vice President since December 1994. He had been the Vice
President of Corporate Development and General Manager of Florida Operations
since October 1992 and was employed by Pharmos Ltd. from March 1992 until the
Merger. Prior thereto, he was engaged in free-lance consulting relating to the
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 private company involved in extracorporeal blood therapy.
S. Colin Neill became Acting Vice President/Finance, Secretary, Treasurer
and Chief Financial Officer of the Company at the end of March 1995. Mr. Neill
is a certified public accountant and worked at Price Waterhouse, the Company's
auditor, for eight years. Prior to joining the Company, Mr. Neill worked as a
financial consultant. From October 1992 until December 1993, Mr. Neill was Vice
President - Finance of BTR Inc., a British diversified manufacturing company.
From January 1991 to October 1992, he worked as a financial consultant. From
1986 through January 1991, Mr. Neill served as Vice President - Financial
Services of BOC Group, Inc., a British industrial gases and health care company.
John F. Howes, Ph.D., was named Vice President of Clinical Affairs in
December 1994. He had been Senior Director of Clinical Affairs from the Merger
in 1992 until his recent
24
appointment as a Vice President. From 1988 until the Merger, Dr. Howes served
as Vice President for Development at Xenon Vision, Inc.
Anat Biegon, Ph.D., was named Vice President of Research and Development in
December 1994. Dr. Biegon became head of Research and Development for the
Company in 1994. From 1992 to 1994, Dr. Biegon was a director in Pharmos Ltd.'s
Department of Pharmacology. From 1991 to 1992, she was a Staff Physiologist at
the University of California at Berkeley's Lawrence Berkeley Laboratory,
Division of Research Medicine and Radiation Biophysics. From 1990 to 1991, Dr.
Biegon was a Research Associate Professor in the Department of Psychiatry at New
York University Medical Center. From 1988 to 1990, she was an Associate
Professor in the Department of Neurobiology at the Weizmann Institute of
Science.
SECTION 16 FILINGS
The following individuals did not file reports on Form 4 regarding certain
transactions during the fiscal year ended December 31, 1995:
Haim Aviv - re-pricing of options and grant of options in October; Gad
Riesenfeld - re-pricing of options and grant of options in October; E. Andrews
Grinstead III - re-pricing of options and grant of options in October; Marvin
Loeb - re-pricing of options and grant of options in October; Colin Neill -
sale of shares and grant of warrants in October; John Howes -re-pricing of
options and grant of options in October; Anat Biegon - re-pricing of options and
grant of options in October; William Hulley - grant of options in October;
Stephen Knight - grant of options in October; David Schlachet - grant of options
in October; (Form 5's were filed for the above-named individuals, except Ms.
Biegon, in February 1995).
25
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief
Executive Officer of the Company for 1995 and the two previous years, as well as
all other executive officers of the Company who received compensation in excess
of $100,000 for 1995. Stock options have been adjusted for the Reverse Share
Split.
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------
Annual Compensation Restricted Stock
Name/ ------------------- Stock Underlying
Principal Position Year Salary Bonus Other Awards($) Options
- ------------------ ---- ------ ----- ------ ---------- ----------
Haim Aviv, Ph.D./ 20,551(1)
Chairman, Chief 1995 $200,230 324,376
Executive Officer, 1994 195,476 25,750(4) 225,000
Acting President, 1993 187,320 $17,500 25,750
and Chief Scientist
Gad Riesenfeld, Ph.D./
Executive Vice 1995 136,664 34,481(2) 79,333
President, Chief 1994 110,000 40,828(2) 29,333
Operating Officer 1993 110,000 17,000 28,410(2)
S. Colin Neill/
Acting Vice 1995 109,375(3) 10,000(5)
President/Finance
and Administration,
Chief Financial
Officer, Secretary
and Treasurer
John F. Howes, Ph.D./
Vice President/ 1995 115,000 34,933
Clinical Affairs 1994 109,200 5,000 14,933
1993 105,300
- ---------------
1) Consists of car allowance
2) Consists of housing allowance ($15,300) contributions to insurance premiums
($13,500), and car allowance.
3) Consists of non-employee compensation
4) These amounts represent the value of 94,115 shares of Old Pharmos common
stock (equal to 18,000 shares of Common Stock, as adjusted) issued in 1990,
subject to forfeiture in the amount of 75%, 50%, 25% and 0%, respectively,
on each anniversary of grant until four years after grant. (No dividends
have been paid to date on these shares). The market value of these 18,000
equivalent shares as of December 31, 1995 was $26,438.
5) Consists of warrant to purchase 10,000 shares of common stock at $1.88 per
share expiring on 10/31/2001
26
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, 1995:
Potential Realizable Value
% of Total at Assumed Annual Rate of
Options Stock Price Appreciation
Number of Granted to Exercise for Option Term
Options Employees Price Expiration -------------------------
Name Granted During Year Per Share Date 5% 10%
---- ------- ----------- --------- ---- --------- --------
Haim Aviv, 60,000 8.6% $1.94 10/31/05 $73,100 $185,300
Ph.D. (1) 264,376 37.8% $2.50 10/31/05 $171,500 $668,900
Gad 40,000 5.8% $1.94 10/31/05 $49,000 $123,500
Riesenfeld, (1) 39,333 5.6% $2.50 10/31/05 $25,800 $99,300
Ph.D.
John F. 20,000 2.9% $1.94 10/31/05 $24,000 $61,800
Howes, Ph.D. (1) 14,933 2.1% $2.50 10/31/05 $9,800 $37,700
(1) represents previously issued options canceled and regranted in 1995
AGGREGATED OPTION EXERCISES
FOR THE YEAR ENDED DECEMBER 31, 1995
AND OPTION VALUES AS OF DECEMBER 31, 1995:
Number of Unexercised Value of Unexercised
Number of Options at In-the-Money Options at
Shares December 31, 1995 December 31, 1995(1)
Acquired on Value --------------------- -------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ---------------- -------------- -------------
Haim Aviv,
Ph.D. 0 0 31,501 292,875 $ -0- $ -0-
Gad
Riesenfeld, 0 0 0 79,333 -0- -0-
Ph.D.
John F.
Howes, 0 0 0 34,933 -0- -0-
Ph.D.
(1) Based upon closing price on December 31, 1995 as reported on the Nasdaq
SmallCap Market and the exercise price per option.
27
TEN YEAR OPTION REPRICINGS
Number of Length of
Securities Original Option
Underlying Market Price of Exercise Price term Remaining
Options Stock at Time at Time of Net Exercise at Date of
Name Date Repriced of Repricing Repricing Price Repricing
---- ---- -------- ------------ --------- ----- ---------
Haim Aviv, 10/31/95 39,376 $1.94 $6.80 $2.50 6.5 years
Ph.D. 10/31/95 148,080 $1.94 $6.50 $2.50 8.5 years
10/31/95 79,920 $1.94 $6.50 $2.50 8.5 years
Gad 10/31/95 29,333 $1.94 $6.50 $2.50 8.5 years
Riesenfeld, 10/31/95 10,000 $1.94 $10.46 $2.50 7.0 years
Ph.D.
John Howes, 10/31/95 14,933 $1.94 $6.50 $2.50 8.5 years
Ph.D.
REPORT ON REPRICING OF OPTIONS
The Compensation/Stock Option Committee of the Board of Directors ( the
"Committee") establishes the general compensation policies of the Company,
establishes the compensation plans and specific compensation levels for
executive officers, and administers the 1992 Incentive and Non-Qualified Stock
Option Plan as well as the Company's other Stock Option Plans. The Committee is
composed of two independent, non-employee Directors.
The Committee believes that the chief executive officer's ("CEO")
compensation and the compensation of other officers of the Company should be
heavily influenced by Company performance. Stock options are granted to the CEO
and other executives, primarily based upon the executive's ability to influence
the Company's long term growth. In addition, the Committee considers factors
such as relative Company performance, the individual's past performance and
future potential in establishing the compensation levels and stock option
awards.
During 1995 the Committee considered the fact that the exercise price for
existing stock options for executive officers, employees, current directors and
consultants of the Company granted in prior years had become considerably in
excess of market prices for the Company's Common Stock and that as a result
such options did not provide the holders with the desired incentive of linking
their long term compensation with the performance goals of the Company's
stockholders. This consideration along with the Committee's consideration of
the performance of the executive officers during a very critical period of
the Company's history, including: the filing of the NDA for the Company's
leading product candidate Lotemax(TM), the signing of the Marketing Agreement
with Bausch & Lomb, the progress made by the Company with other new compounds,
and the improved cash and equity positions of the Company as a result of equity
offerings and the implementation of cost savings, lead to the Committee's
recommendation that
28
previously issued options be canceled and reissued at exercise prices closer to
the market value of the Company's Common Stock.
As a result in October 1995, the Committee and Board approved the
cancellation and reissuance of certain previously issued options held by current
executives, employees, directors and consultants of the Company at an exercise
price of $2.50 per share. Such price represented a 29% premium over the market
price of the Company's Common Stock as of the date of the grant. The options
regranted subject to the 1992 Plan are subject to an exercise schedule which
provides that none of the regranted options may be exercised until one year from
the date of the grant, October 31, 1995. See "Stock Option Plans" included
herein for a further discussion of the Company's Stock Option Plans.
STOCK OPTION PLANS
It is currently the Company's policy that all full time key employees be
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 improve loyalty to the Company and help make each
employee aware of the importance of the business success of the Company. The
amount and exercise price of all options discussed herein have been adjusted for
the Reverse Share Split.
As of December 31, 1995, the Company has 994,378 options to purchase shares
of the Company's Common Stock outstanding under various option plans, 282,626
of which were issued under no established plan. During 1995 the Company granted
options to purchase 300,000 shares of its Common Stock to employees under a plan
established in 1992 and granted options to purchase 70,000 shares of its common
stock under no established plan to Directors of the Company. In addition,
during 1995 the Company's Board elected to reprice certain options issued prior
to 1995 under the various option plans and as a result 561,118 previously issued
options were canceled and regranted. A summary of the various established stock
option plans is as follows:
1983, 1984, 1986, 1988 Plans. The Company (then known as Pharmatec, Inc.)
----------------------------
established Incentive Stock Option Plans in 1983, 1984, 1986 and 1988) for
officers and employees. There are currently no options outstanding under these
plans and it is anticipated that future grants of stock options will not be made
from these plans.
1991 Plan. Old Pharmos established a stock option plan in 1991. There
---------
are currently 11,476 options outstanding under this plan and it is anticipated
that future grants of stock options will not be made from this plan.
1992 Plan. The 1992 Plan is administered by a committee appointed by the
---------
Board of Directors (the "Committee"), consisting of Messrs. Marvin P. Loeb and
E. Andrews Grinstead, III. The 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.
29
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, 1995, there were options to purchase 700,266 shares of the
Company's Common Stock outstanding under this plan. Options to purchase 300,000
shares were granted on October 31, 1995 at an exercise price of $1.94 per share
and options to purchase 400,266 shares previously outstanding and having an
average exercise price of $6.50 were canceled and reissued with an exercise
price of $2.50 per share. Each option granted outstanding under the 1992 plan as
of December 31, 1995 expires on October 31, 2005.
The price at which shares of the Company's Common Stock may be purchased
upon exercise of an incentive stock option must be at least 100% of the fair
market value of the Company's Common Stock on the date the option is granted (or
at least 110% of fair market value in the case of a 10% Holder).
The aggregate fair market value (determined at the time the option is
granted) of the Company's Common Stock with respect to which incentive stock
options are exercisable for the first time in any calendar year by an optionee
under the 1992 Plan, or any other plan of the Company or a subsidiary, shall not
exceed $100,000. The 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% Holder). 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 1992 Plan, for the purpose of exercising
an option or may permit the option price to be paid in shares of the Company's
Common Stock at the then current fair market value, as defined in the 1992 Plan.
No option may be exercised unless the holder has been an employee or
consultant of the Company or a subsidiary for six months from the date of grant.
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). If
an optionee dies while he or she 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 Board of Directors may amend, suspend or discontinue the 1992 Plan, but
it must obtain stockholder approval to (I) increase the number of shares subject
to the 1992 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
therefor specifying a lower exercise price that is not less than the fair market
value of the Company's Common Stock on the date the new option is granted, (iv)
remove the administration of the 1992 Plan from the Committee, (v) render any
member of the Committee eligible to receive an option,
30
other than options granted pursuant to formula, under the 1992 Plan while
serving thereon, or (vi) amend the 1992 Plan in such a manner that options
issued under it intended to be incentive stock options fail to meet the
requirements of Incentive Stock Options as defined in Section 422 of the Code.
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 renews for additional one-year periods unless either the
Company or Dr. Aviv terminates the agreement at least 90 days prior to a
scheduled expiration date. The agreement has been renewed on an annual basis
and presently expires on May 3, 1997. Dr. Aviv is 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 is required to render certain consulting
services to the Company and in consideration therefore, Dr. Aviv is entitled to
receive $170,000 per year, subject to yearly increases and review.
The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief
Executive Officer under an employment agreement with Dr. Aviv pursuant to which
Dr. Aviv receives $30,000 per year, subject to yearly increases and review. Dr.
Aviv is 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. Dr. Aviv
was issued at par value effective as of the time of his engagement, the
equivalent of 18,000 shares of Common Stock, subject to a four year divesting
program; all shares under this agreement are fully vested.
Gad Riesenfeld, Ph.D. In October 1992, Old Pharmos entered into a one-year
---------------------
employment agreement with Dr. Riesenfeld, which is automatically renewable for
successive one-year terms unless either party gives three months prior notice of
non-renewal. Under the Agreement, Dr. Riesenfeld devotes his full time to
serving as Executive Vice President of the Company. Dr. Riesenfeld's annual
gross salary is $150,000.
31
Directors' Compensation. In 1995, Directors did not receive cash
-----------------------
compensation for service on the Board or for attending Board meetings. Non
employee members of the Board received options to purchase shares of the
Company's Common Stock at an exercise price of $1.94 per share. Such options
expire on October 31, 2001. These options become exercisable in three equal
installments on October 31, 1996, 1997, and 1998. The number of shares to be
acquired under such options as granted to each Director is as follows: Messrs.
Loeb and Grinstead 20,000 each, Messrs. Knight, Hulley, and Schlachet 10,000
each. During 1995, the Board canceled and reissued options previously issued
to current Directors. The following table reflects the impact of such
cancellation and reissuance.
Length of
Original
Number Option
of Market term
Securities Price of Exercise Remaining
Underlying Stock at Price at Net at Date
Options Time of Time of Exercise of
Name Date Repriced Repricing Repricing Price Repricing
---- ---- -------- --------- --------- ----- ---------
Marvin P. 10/31/95 30,000 $1.94 $6.50 $2.50 4.5 years
Loeb
E. Andrews 10/31/95 80,000 $1.94 $6.50 $2.50 4.5 years
Grinstead 10/31/95 5,738 $1.94 $5.23 $2.50 5.5 years
III
32
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 1, 1996, 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
Name and Address of of Beneficial Percentage
Beneficial Ownership Ownership of Total (1)
- -------------------- -------------- ------------
Grace Brothers Ltd.(2) 1,923,077 6.6%
1000 W. Diversey Parkway
Suite 233
Chicago, IL 60614
Haim Aviv, Ph.D.(3) 833,805 2.9%
c/o Pharmos Ltd.
Kiryat Weizmann
Rehovot, Israel
Marvin P. Loeb(4) 300,271 *
Trimedyne, Inc.
2810 Barranca Road
Irvine, CA 92714
E. Andrews Grinstead, III(5) 75,738 *
Hybridon, Inc.
One Innovation Drive
Worcester, MA 01605
Stephen C. Knight, M.D. -0- -0-
Arthur D. Little, Incorporated
Acorn Park
Cambridge, MA 02140
33
David Schlachet -0- -0-
Weizmann Institute of Science
Rehovot, Israel
William C Hulley(6) 16,161 -0-
Adams Capital Management, Inc.
Sewickley, PA 15143
All Directors and 1,225,975 9.2%
Executive Officers
as a group
(9 persons)(7)
- ----------------
* Indicates ownership of less than 1%.
(1) Based on 29,205,683 shares of Common Stock outstanding, plus each
individual's currently exercisable, or exercisable within 60 days, warrants
and/or options. Assumes that no other individual will exercise any
warrants and/or options.
(2) Information determined according to a Schedule 13G filed with the
Securities and Exchange Commission.
(3) 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 to purchase 39,376
shares of Common Stock.
(4) Held jointly with his wife. Also includes currently exercisable options to
purchase 20,000 shares of Common Stock. Does not include shares held by
his adult children, his grandchildren or a trust for the benefit of his
grandchildren.
(5) Consists of currently exercisable options to purchase Common Stock.
(6) Consists of shares of Common stock held by Croesus Biotech Investments
L.P., a limited partnership of which Mr. Hulley is a general partner.
(7) Based on the number of shares of Common Stock outstanding, plus 135,114
currently exercisable warrants and/or options held by the Directors and
executive officers.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1995, the Company completed the sale of $1,270,000 principal
amount convertible debentures bearing an interest rate of 10% per annum in a
private placement transaction. Such debentures were convertible into shares of
the Company's Common Stock at $.52 per share. A member of the Company's Board
of Directors, Marvin P. Loeb, purchased $70,000 of such debentures and upon
conversion of such debentures received 134,616 shares of Common Stock. In
addition the Company paid this director $3,920 in interest related to these
debentures. Another investor in these debentures, Grace Brothers, Ltd., was a
holder of over 5% of the Company's common stock at the time of this transaction.
This investor purchased $1,000,000 of such debentures and upon conversion
received 1,923,077 shares of Common Stock. In addition the Company paid this
investor $49,167 in interest related to these debentures.
In connection with an agreement between the Company and Mr. Dachowitz, who
served as Vice President - Finance and Chief Financial Officer through March
1995, during 1995 the Company made a severance payment of $75,000 to Mr.
Dachowitz on the date he terminated his employment with the Company.
35
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, 1995 and 1994
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
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 notes thereto.
(3) EXHIBITS; EXECUTIVE COMPENSATION PLANS
--------------------------------------
EXHIBITS
- --------
2 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
2(a) Agreement and Plan of Merger dated as of March 28, 1995 between
Pharmos Corporation, PMC Merger Corporation and Oculon Corporation
(Incorporated by reference to the Company's Current Report on
Form 8-K, dated April 11, 1995, as amended).
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
36
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
(Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1994).
3(c) Amended and Restated By-Laws (Incorporated by reference to Form S-1
Registration Statement of the Company dated June 30, 1994
(No. 33-80916)).
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4(a) 1983 Incentive Stock Option Plan (The Company's 1984 and 1986 Plans
are identical in all respects except as to the number of shares
subject to option) (Incorporated by reference to Form S-18
Registration Statement of the Company dated June 7, 1983 (2-84298-C)).
4(b) Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans
(Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1988).
4(c) 1988 Incentive Stock Option Plan (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1988).
4(d) Pharmos Corporation 1991 Incentive Stock Option Plan (Incorporated by
reference to Annual Report on Form 10-K for the year ended
December 31, 1992).
4(e) 1992 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix F to the Joint Proxy Statement/Prospectus).
4(f) Form of Class A Warrant to purchase (x) shares of Common Stock and (y)
Class B Warrants (Incorporated by reference to Annual Report on Form
10-K for the year ended December 31, 1991).
4(g) Form of Class B Warrant to purchase shares of Common Stock
(Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1991).
4(h) Unit Purchase Option Agreement dated February 18, 1992 between the
Company and David Blech (Incorporated by reference to Annual Report on
Form 10-K for the year ended December 31, 1991).
37
4(i) Form of Warrant to purchase Common Stock at an exercise price of $1.31
per share (pre-reverse split) (Incorporated by reference to Form S-3
Registration Statement of the Company dated September 14, 1993
(33-68762)).
4(j) 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(k) Registration Agreement dated as of January 18, 1994 by and among the
Company, David Blech and Lake Charitable Remainder Trust (Incorporated
by reference to Form S-3 Registration Statement of the Company dated
January 28, 1993 (33-74638)).
4(l) Form of Stock Purchase Agreement dated as of September 2, 1994 between
the Company and the Purchaser (Incorporated by reference to Form S-1
Registration Statement of the Company dated June 30, 1994
[No. 33-80916], Amendment No. 2).
4(m) 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(n) Form of Common Stock Purchase Agreement dated as of October 4,
1994 between the Company and the Purchasers (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
November 25, 1994 [No. 33-86720]).
4(o) 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(p) Form of Convertible Debenture Purchase Agreement dated as of
February 7, 1995 between the Company and the Investors
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1994).
4(q) 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).
38
4(r) 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(s) Form of Penalty 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(t) Form of Unit Purchase 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(u) 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(v) 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(w) 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(x) 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]).
10 MATERIAL CONTRACTS
10(a) License Agreement dated as of March 14, 1989 between National
Technical Information Service (NTIS), U.S. Department of Commerce
and the Company (Incorporated by reference to Annual Report on
Form 10-K for year ended December 31, 1989).
39
10(b) Common Stock and Warrant Purchase Agreement, dated November 5,
1991, between the Company and David Blech (Incorporated by
reference to Annual Report on Form 10-K for year ended December
31, 1991).
10(c) Private Placement Agreement, dated November 5, 1991, between the
Company and David Blech and D. Blech & Company, Incorporated
(Incorporated by reference to Annual Report on Form 10-K for year
ended December 31, 1991).
10(d) Stock Option Agreement, dated March 20, 1992, between the
Company, Pharmos Corporation, Xenon Vision, Inc. and the security
holders of Xenon Vision, Inc. (Incorporated by reference to
Annual Report on Form 10-K for year ended December 31, 1991).
10(e) Agreement and Plan of Merger, dated May 13, 1992, as amended, by
and among the Company, Pharmatec Merger Corporation and Pharmos
Corporation (composite copy as amended to date) (Incorporated by
reference to the Joint Proxy Statement/Registration Statement).
10(f) Registration Rights Agreement dated October 30, 1992 between the
Company and the security holders of Xenon Vision, Inc.
(Incorporated by reference to the Joint Proxy Statement/
Registration Statement).
10(g) 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 Form 10-K/A, for year
ended December 31, 1992).1
10(g)(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
10(g)(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(h) 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(h)(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
40
10(h)(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(i) 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)(i)(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(j) Pharmos Ltd. Employment Agreement with Haim Aviv ("Aviv")
dated as of May 2, 1990 and Old Pharmos Consulting Agreement
with Aviv dated as of May 2, 1990, as amended by letter from
Old Pharmos to Aviv dated June 27, 1990 and Unanimous
Written Consent of the Board of Directors of Old Pharmos
dated March 17, 1992 (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1992).
10(k) Letter from Old Pharmos to D. Blech & Co. Incorporated ("D.
Blech & Co.") dated June 27, 1991 re: consulting services
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992).
10(l) Old Pharmos Employment Agreement with Stephen Streber dated
as of July 1, 1992 (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1992).
10(m) Letter dated July 27, 1992 from Old Pharmos to Henry
Dachowitz re employment (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1992).
10(n) Personal Employment Agreement dated October 1, 1992 between
Old Pharmos and Gad Riesenfeld (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for
year ended December 31, 1992).
10(o) Lease Agreement dated as of November 1, 1992 between Talquin
Development Company and the Company (Incorporated by
reference to Annual Report on Form 10-K, as amended by Form
10-K/A, for year ended December 31, 1992).
41
10(p) Form of Purchase Agreement dated as of August 13, 1993 by and
among the Registrant and the Investors listed on Exhibit A
thereto (Incorporated by reference to Form S-3 Registration
Statement of the Company dated September 29, 1993 [33-68762]).
10(q) Amended and Restated License Agreement with Research Component
dated July 1, 1993 between University of Florida Research
Foundation, Inc. and the Company (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(r) 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(s) Consulting Agreement dated as of January 1, 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(t) Agreement and Release dated as of November 11, 1994 between the
Company and Stephen R. Streber (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1994).
10(u) Employment Agreement dated as of November 11, 1994 between the
Company and Henry M. Dachowitz (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1994).
10(v) 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(w) 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
42
21 SUBSIDIARIES OF THE REGISTRANT
21(a) Subsidiaries of the Registrant.
Xenon Vision - Incoporated under the laws of Delaware
Pharmos Limited - Incorporated under the laws of Israel
Oculon Corporation - Incorporated under the laws of Delaware
- ----------------
1 Confidential information is omitted and identified by a * and filed
separately with the SEC.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
1983 Incentive Stock Option Plan (The Company's 1984 and 1986 Plans are
identical in all respects except as to the number of shares subject to
option) (Incorporated by reference to Exhibit 4(a) to Annual Report on Form
10-K for the year ended December 31, 1988).
Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans (Incorporated
by reference to Exhibit 4(b) to Annual Report on Form 10-K for the year
ended December 31, 1988).
1988 Incentive Stock Option Plan (Incorporated by reference to Exhibit 4(C)
to Annual Report on Form 10-K for the year ended December 31, 1988).
Pharmos Corporation 1991 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 4(e) to Annual Report on Form 10-K for the year ended
December 31, 1992).
1992 Incentive and Non-Qualified Stock Option Plan (Annexed as Appendix F
to the Joint Proxy Statement/Prospectus).
Pharmos Ltd. Employment Agreement with Haim Aviv ("Aviv") dated as of May
2, 1990 and Old Pharmos Consulting Agreement with Aviv dated as of May 2,
1990, as amended by letter from Old Pharmos to Aviv dated June 27, 1990 and
Unanimous Written Consent of the Board of Directors of Old Pharmos dated
March 17, 1992 (Incorporated by reference to Exhibit 10(t) to Annual Report
on Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).
Old Pharmos Employment Agreement with Stephen Streber dated as of July 1,
1992 (Incorporated by reference to Exhibit 10(x) to Annual Report on Form
10-K, as amended by Form 10-K/A, for year ended December 31, 1992).
43
Letter dated July 27, 1992 from Old Pharmos to Henry Dachowitz re
employment (Incorporated by reference to Exhibit 10(y) to Annual Report on
Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).
Personal Employment Agreement dated October 1, 1992 between Old Pharmos and
Gad Riesenfeld (Incorporated by reference to Exhibit 10(z) to Annual Report
on Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).
Agreement and Release dated as of November 11, 1994 between the Company and
Stephen R. Streber (Exhibit 10(u) hereto).
Employment Agreement dated as of November 11, 1994 between the Company and
Henry M. Dachowitz (Exhibit 10(t) hereto).
(B) REPORTS ON FORM 8-K
Since October 1, 1995 the Company has filed the following reports on
Form 8-K
1. The Company's Current Report on Form 8-K, dated February 15,
1996, filed pursuant to Section 13 of the Exchange Act.
2. The Company's Current Report on Form 8-K, dated October 27, 1995,
as amended, filed pursuant to Section 13 of the Exchange Act.
(C) EXHIBITS
See Item 14(a)(3) above
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above
44
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: March 28, 1996
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/ S. COLIN NEILL Acting Vice President/Finance March 28, 1996
- ------------------
S. Colin Neill and Administration, Acting
Chief Financial Officer,
Acting Secretary and Acting
Treasurer (Principal Financial
and Accounting Officer)
/s/ MARVIN P. LOEB Director March 28, 1996
- ----------------------
Marvin P. Loeb
/s/ E. ANDREWS GRINSTEAD III Director March 28, 1996
- ----------------------------
E. Andrews Grinstead III
/s/ STEPHEN C. KNIGHT Director March 28, 1996
- ---------------------
Stephen C. Knight
/s/ DAVID SCHLACHET Director March 28, 1996
- -------------------
David Schlachet
/s/ WILLIAM C. HULLEY Director March 28, 1996
- -------------------------
William C. Hulley
45
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 shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Pharmos
Corporation and its subsidiaries at December 31, 1995 and 1994 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these statements
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and, at December 31, 1995, has an accumulated deficit of
$54,024,741 that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
March 26, 1996
PHARMOS CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------
December 31, December 31,
1995 1994
Assets
Cash and cash equivalents $7,442,791 $1,864,065
Prepaid expenses and other current assets 477,393 735,582
---------------- ---------------
Total current assets 7,920,184 2,599,647
Fixed assets, net 855,456 1,258,935
Other assets 301,704
Intangible assets, net 384,310 430,834
---------------- ---------------
Total assets $9,461,654 $4,289,416
================ ===============
Liabilities and Shareholders' Equity
Accounts payable $739,356 $1,920,104
Accrued wages and other compensation 205,336 234,688
Accrued expenses & other liabilities 516,034 383,452
Current portion of long term debt 93,684 480,219
---------------- ---------------
Total current liabilities 1,554,410 3,018,463
Long term debt 181,648 39,132
Other liabilities 235,479 52,186
Advances against future sales 1,877,141
---------------- ---------------
Total liabilities 3,848,678 3,109,781
================ ===============
Shareholders' equity
Preferred stock, 1,250,000 shares authorized,
none issued
Common stock, $.03 par value; 50,000,000 and 20,000,000
shares authorized, 29,149,039 and 14,631,726 shares issued,
29,130,683 and 14,613,370 shares outstanding, respectively 874,471 438,952
Paid in capital in excess of par 58,763,797 46,669,890
Accumulated deficit (54,024,741) (45,928,656)
---------------- ---------------
5,613,527 1,180,186
Less: Common stock in treasury, at par (551) (551)
---------------- ---------------
Total shareholders' equity 5,612,976 1,179,635
---------------- ---------------
Commitments and contingencies (Note 12)
Total liabilities and shareholders' equity $9,461,654 $4,289,416
================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
PHARMOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993
---- ---- ----
Revenues
Sales of fine chemicals, net $75,000 $7,815 $81,900
-------------- ------------- --------------
License fees, royalties, net 75,000 7,815 81,900
-------------- ------------- --------------
Expenses
Research and development, net 5,055,832 7,987,155 5,753,349
Patents 480,859 942,455 581,637
General and administrative 2,180,965 3,684,308 2,908,083
Depreciation and amortization 536,010 422,543 351,022
--------- --------- ---------
8,253,666 13,036,461 9,594,091
-------------- -------------- --------------
Loss from operations (8,178,666) (13,028,646) (9,512,191)
Interest income, net of interest expense of $127,003,
$73,733 and $54,593, respectively 82,581 73,197 111,866
Other income 150 1,630
-------------- ------------- --------------
Net loss ($8,096,085) ($12,955,299) ($9,398,695)
============== ============== ==============
Loss per share ($0.37) ($1.19) ($1.24)
============== ============== ==============
Weighted average shares outstanding 21,885,862 10,852,807 7,569,678
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
PHARMOS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (NOTE 9)
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Class B Paid-in
Common Stock Common Stock Capital in
Shares Amount Shares Amount Excess of Par
------ ------------ ------ ------ -------------
December 31, 1992 3,605,902 $108,177 3,342,460 $100,274 $32,517,705
Issuance of common stock, net of offering costs
of $1,065,607 1,666,668 50,000 8,884,401
Amortization of unearned compensation
Warrant exchange 875,000 26,250 (26,250)
Net loss
----------- ----------- ------------ ----------- ------------
December 31, 1993 6,147,570 184,427 3,342,460 100,274 41,375,856
Conversion of Class B common stock to common stock 3,342,460 100,274 (3,342,460) (100,274)
Issuance of common stock, net of offering costs
of $317,400 5,086,665 152,600 5,147,500
Warrant exercise 54,893 1,647 146,526
Share adjustment for reverse split 138 4 (4)
Return of shares to treasury 12
Net loss
----------- ----------- ------------ ----------- ------------
December 31, 1994 14,631,726 438,952 46,669,890
Issuance of common stock to purchase Oculon Corp. 6,000,000 180,000 2,892,426
Conversion of debentures to common stock 2,442,309 73,269 1,196,731
Warrant exercise 75,000 2,250 36,750
Issuance of common stock, net of offering costs
of $900,000 6,000,000 180,000 7,920,000
Warrant grant to consultant 48,000
Share adjustment for reverse split 4
Net loss
----------- ----------- ------------ ----------- ------------
December 31, 1995 29,149,039 $874,471 $58,763,797
=========== =========== ============ =========== ============
--------------------------------------------------------------------
Total
Accumulated Unearned Treasury Stock Shareholders'
Deficit Compensation Shares Amount Equity
December 31, 1992 ----------- ------------ -------- ------ -------------
Issuance of common stock, net of offering costs ($23,574,662) ($35,265) 17,962 ($539) $9,115,690
of $1,065,607
Amortization of unearned compensation 8,934,401
Warrant exchange 35,265 35,265
Net loss (9,398,695) (9,398,695)
------------- -------- ----------- ------- -----------
December 31, 1993 (32,973,357) 17,962 (539) 8,686,661
Conversion of Class B common stock to common stock
Issuance of common stock, net of offering costs
of $317,400 5,300,100
Warrant exercise 148,173
Share adjustment for reverse split
Return of shares to treasury 394 (12)
Net loss (12,955,299) (12,955,299)
------------- -------- ----------- ------- -----------
December 31, 1994 (45,928,656) 18,356 (551) 1,179,635
Issuance of common stock to purchase Oculon Corp. 3,072,426
Conversion of debentures to common stock 1,270,000
Warrant exercise 39,000
Issuance of common stock, net of offering costs
of $900,000 8,100,000
Warrant grant to consultant 48,000
Share adjustment for reverse split
Net loss (8,096,085) (8,096,085)
------------- -------- ----------- ------- -----------
December 31, 1995 ($54,024,741) 18,356 ($551) $5,612,976
============= ======== =========== ======= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
PHARMOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
($8,096,085) ($12,955,299) ($9,398,695)
------------- -------------- -------------
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 536,010 422,543 351,022
Warrant grant to consultant 48,000
Unearned compensation expense 35,265
Changes in operating assets and liabilities, net
of effects of Oculon
Prepaid expenses and other current assets 360,629 415,695 (599,579)
Accounts payable (1,180,748) 590,500 926,057
Accrued expenses, wages and other liabilities 89,219 117,265 (31,054)
Advances against future sales 1,877,141
Advance payments (183,813)
------------- -------------- -------------
Total adjustments 1,730,251 1,546,003 497,898
------------- -------------- -------------
Net cash flows used in operating activities (6,365,834) (11,409,296) (8,900,797)
------------- -------------- -------------
Cash flows from investing activities
Purchases of fixed assets, net (56,647) (111,062) (639,374)
Decrease in certificates of deposit 180,000
------------- -------------- -------------
Net cash flows used in investing activities (56,647) (111,062) (459,374)
------------- -------------- -------------
Cash flows from financing activities
Proceeds from issuances of common stock, net 8,100,000 5,300,100 8,934,401
Proceeds from issuance of convertible debentures 1,270,000
Proceeds from exercise of warrants 39,000 148,173
Proceeds from acquisition of Oculon, net 3,072,426
Increase (decrease) in loans payable (480,219) 480,219
------------- -------------- -------------
Net cash flows provided by financing activities 12,001,207 5,928,492 8,934,401
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents 5,578,726 (5,591,866) (425,770)
Cash and cash equivalents at beginning of year 1,864,065 7,455,931 8,291,839
------------- -------------- -------------
Cash and cash equivalents at end of year $7,442,791 $1,864,065 $7,866,069
============= ============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
1. The Company
Pharmos Corporation (the "Company") is a bio-pharmaceutical company
incorporated under the laws of the state of Nevada and is engaged in
the design and development of novel pharmaceutical products in various
fields including: site specific drugs for ophthalmic indications,
neuroprotective agents for treatment of central nervous system
("CNS") disorders, systemic drugs designed to avoid CNS related side
effects, and emulsion based products for topical and systemic
applications. The Company uses a variety of patented and proprietary
technologies to improve the efficacy and/or safety of drugs. The
Company's compounds are in various stages of development, from
preclinical to advanced clinical trials and in March 1995, the Company
completed the submission of its first New Drug Application ("NDA")
with the U.S. Food & Drug Administration ('FDA"). In conjunction with
its development efforts, the Company has also undertaken research and
development contracts in the past and has sold fine chemicals to the
pharmaceutical research community. The Company conducts operations in
Alachua, Florida and through its wholly-owned subsidiary, Pharmos,
Ltd., in Rehovot Israel.
2. Liquidity and Business Risks
The Company currently has no sources of recurring revenues and has
incurred operating losses since its inception. At December 31, 1995,
the Company has an accumulated deficit of $54,024,741. Such losses
have resulted principally from costs incurred in research and
development and from general and administrative expenses associated
with the Company's operations. The Company expects that operating
losses will continue for at least the next few years as product
development, clinical testing and other operations continue. The
Company currently funds its operations principally through the use of
cash obtained from third party financing. Management believes that
existing cash and cash equivalents of $7.4 million as of December 31,
1995, combined with anticipated cash inflows from investment income,
grants and advances pursuant to the Marketing Agreement (See Note 4),
will be sufficient to support operations through the first quarter of
1997. The Company is continuing to actively pursue various funding
options, including equity offerings, commercial and other borrowings,
strategic corporate alliances and business combination transactions,
the establishment of product related research and development limited
partnerships, or a combination of these methods for obtaining the
additional financing that would be required to continue the research
and development necessary to complete the development of its products
and bring them to commercial markets.
As described in Note 1, in March 1995, the Company submitted its first
NDA. It is reasonably possible that FDA approval for this product
candidate will not be granted on a timely basis or at all. Any delay
in obtaining or failure to obtain such approval would materially and
adversely affect the marketing of the Company's drug candidate and the
Company's business, financial position and results of operations.
1
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
3. Significant Accounting Policies
Basis of Consolidation
The accompanying financial statements include all wholly owned
subsidiaries. Intercompany transactions are eliminated in consolidation.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Cash and cash equivalents
The Company invests its excess cash in U.S. Treasury securities and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to
diversification and maturity that maintain safety and liquidity.
Investments having original maturities of three months or less and are
classified as cash equivalents.
Revenue recognition
Revenue for contracted research and development services is recognized as
performed. Revenue from these contracts is recognized as costs are
incurred (as defined in the contract), generally direct labor and supplies
plus agreed overhead rates. Any advance payments on contracts are deferred
until the related services are performed. License fees and royalties are
recognized when earned in accordance with the underlying agreements. Sales
revenue is recognized upon shipment of goods.
Fixed assets
Fixed assets are recorded at cost. Maintenance and repairs are expensed as
incurred. Property, furniture and equipment are depreciated on a straight-
line basis over their estimated useful lives which range from three to
fourteen 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.
Intangible assets
Intangible assets represent the Company's rights to develop and
commercialize certain products derived from certain licensed technologies.
The assets are being amortized over fifteen years. As of December 31,
1995 and 1994, accumulated amortization was $655,470 and $608,946,
respectively. In 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". SFAS 121 requires that assets to be held and used be reviewed
for impairment whenever events or changes indicate that the carrying amount
of the asset in question may not be recoverable. In accordance with this
statement, and as a result of the current period operating loss combined
with a
2
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
history of operating losses, management assessed whether or not the
Company's intangible assets were recoverable. As of December 31, 1995,
management estimates that the net future cash inflows expected to result
from the commercial exploitation of the licensed technologies will exceed
the carrying amount and accordingly, no impairment loss was recognized.
On a periodic basis, the Company will assess whether there are conditions
present that indicate an impairment of long lived assets and long lived
assets to be disposed of. In the event such an impairment is present,
management will consider the undiscounted cash flows from such assets to
qualify the amount of such impairment and the loss to be recorded.
Amortization expense amounted to approximately $46,000 in each of the years
ended December 31, 1995, 1994 and 1993.
Research and development costs
All research and development costs are expensed when incurred. The Company
has accounted for reimbursements of research and development expenses
received with respect to the royalty participation agreements described in
Note 7 as a reduction of research and development expense.
Income taxes
Income taxes are provided for on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss carry forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Postemployment benefits
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, 'Employers' Accounting for Postemployment
Benefits' ("SFAS 112"). The implementation of SFAS 112 did not have a
significant impact on the Company's financial position or results of
operations.
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.
Treasury stock
Shares of common stock held in treasury are accounted for at par value with
any difference between cost and par included in paid-in capital in excess
of par value.
3
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
Loss per share
Loss per share is calculated based on the weighted average number of common
shares and convertible Class B common shares outstanding during the period.
Options and warrants outstanding are excluded from the calculations because
their impact would be antidilutive.
Restatement for reverse stock split
On October 18, 1993, the Company announced a reverse stock split on a 1-
for-4 basis of all common and Class B convertible common shares.
Additionally, the reverse stock split provided for a corresponding
reduction in the number of shares of authorized preferred, common and Class
B convertible common shares.
All common and Class B convertible common shares, warrants, options and
related per share data, except for the par value per share, reflected in
the accompanying financial statements and notes thereto, have been
presented as if the reverse stock split in October 1993 on a 1-for-4 basis
and reduction in the number of shares of authorized shares had occurred as
of the beginning of the earliest year presented.
New accounting principle
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation", which the Company will adopt in 1996. The Company intends
to adopt this statement through disclosure in the notes to the financial
statements.
Reclassifications
Certain amounts for 1994 and 1993 have been reclassified to conform with
the presentation in 1995 to maintain comparability. Such reclassifications
did not have an impact on the Company's shareholders' equity.
4. Collaborative Agreement
On June 30, 1995, the Company signed a marketing agreement (the "Marketing
Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb") to
market Lotemax(TM), the Company's lead product candidate, on an exclusive
basis in the United States. As described in Notes 1 and 2, this product
candidate is pending FDA approval. The Marketing Agreement also includes
Lotemax(TM) line extension products currently being developed by the
Company. Under the Marketing Agreement, Bausch & Lomb will purchase the
active drug substance (Loteprednol Etabonate) from the Company and provide
the Company with $4 million in cash advances through March 1996. An
additional $2 million advances may be made subject to reaching certain
development milestones in the Lotemax(TM) line extension products.
Bausch & Lomb will also collaborate in the development of such additional
products by making available amounts up to 50% of the Phase III clinical
trial costs. The Company has retained certain conditional co-marketing
rights to all of the products covered by the Marketing Agreement.
4
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
As of December 31, 1995, the Company has received $1,877,141 in advances
against future sales to Bausch & Lomb of the active drug substance (needed
to manufacture the drug). Bausch & Lomb will be entitled to credits
against such future purchases of the drug substance based on the advances
and future advances until the advances have been recouped. The Company may
be obligated to repay such advances if it is unable to supply Bausch & Lomb
with certain specified quantities of the active drug substance. Advances
received through December 31, 1995 are reflected as a long term liability
in the accompanying balance sheet as, in the opinion of management, no
recoupment of such advances is expected to occur in 1996.
5. The Acquisition of Oculon Corporation
In April 1995, the Company acquired Oculon Corporation ("Oculon"), a
privately-held drug development stage company with anti-cataract
technologies. The acquisition was primarily intended to provide a source of
working capital for the Company, the operations of Oculon were discontinued
and technologies licensed by Oculon were assigned to the licensor. Under an
agreement with the licensor, the Company has no future responsibilities
related to the maintenance of patents or payment of license fees related to
these technologies. In the event certain of these technologies produce
future royalty revenues, the Company would receive a proportional share of
such royalties.
Under the terms of the acquisition agreement, the Company issued 6,000,000
shares of its common stock to the holders of Oculon's Series III Senior
Preferred Stock. The shares of all other holders of Oculon capital stock
were canceled. In addition, the Company issued ten year warrants to
purchase 500,000 shares of the Company's common stock at an exercise price
of $2.75 per share to certain holders of Oculon stock options. The
acquisition agreement also provides that additional consideration of up to
600,000 shares may be issuable if the Company fails to meet certain
milestones relating to further development or commercialization of the
technology and products acquired from Oculon.
At the time of the acquisition, Oculon had net assets with a fair value of
$3,555,812, including cash and cash equivalents of $4,218,669. The
transaction was accounted for as an acquisition of net assets. Accordingly,
the shares of stock and warrants issued have been recorded at the fair
value of the net assets received less transaction costs of $483,386.
5
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
6. Fixed Assets
Fixed assets consist of the following:
December 31,
1995 1994
Laboratory, pilot plant and other equipment $1,600,611 $1,715,352
Office furniture and fixtures 233,230 326,569
Vans 51,378 51,378
Computer equipment 109,544 66,948
Leasehold improvements 567,738 596,066
---------- ----------
2,562,501 2,756,313
Less - Accumulated depreciation and amortization
(1,707,045) (1,497,378)
----------------------------
$ 855,456 $1,258,93
========= =========
Depreciation and amortization of fixed assets amounted to $489,486,
$389,261 and $304,498 in 1995, 1994 and 1993, respectively.
7. Government 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 earned pursuant to these agreements
have been reflected as a reduction of research and development expense.
Such reductions amounted to $331,546, $900,298, and $1,014,403 during 1995,
1994 and 1993, respectively.
The grant agreements generally provide for reimbursement of a percentage of
allowable research and development costs, to a specified maximum,
undertaken in the Company's research facilities. The grants are to be
repaid on the basis of royalties from the sale of products developed as a
result of the research activities carried out with the grant funds. As of
December 31, 1995, the total amounts received under grants which contain
repayment provisions amounted to $2,189,120. Potential repayment liability
for royalties related to these grants amounted to $2,564,120. Agreements
with certain agencies of the State of Israel place certain legal
restrictions on the transfer of technology and manufacture of resulting
products outside Israel.
6
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
8. Licensing Arrangements
The Company is both a licensor and licensee of certain research
technologies.
As a licensor, the Company has entered into various agreements under which
the rights to certain of its technologies are licensed to others. The
Company is to be compensated by receipt of its share of defined future
product sales or royalties earned by the licensee. These agreements have
provided for funding of research, either in whole or in part by the
licensee.
As a licensee, the Company has various license agreements with certain U.S.
federal agencies and the State of Israel, certain universities, and a
former director who had been a vice president of the Company, wherein the
Company has acquired exclusive or coexclusive rights to develop and
commercialize certain research technologies. These agreements, which
include agreements related to Lotemax(TM) (the Company's lead product
candidate), generally require the Company to pay royalties on sale of
products developed 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 certain 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 in which U.S. Food and Drug Administration approval has
been received for a developed product. No amounts have been recorded as a
liability with respect to these contingent royalties as of December 31,
1995, as none of the specified events have occurred. In addition, certain
of the license agreements require annual payments for periods extending
through 2012. License fee expense amounted to approximately $355,000,
$455,000 and $270,000 during 1995, 1994 and 1993 respectively. As of
December 31, 1995, aggregate minimum annual payments under such agreements
range from $103,500 to $132,500 per year.
As discussed in Note 12, the Company is involved in disputes with
certain of its licensors.
9. Shareholders' Equity, Warrants, Stock Options and Certain Related Party
and Other Financing Transactions
1993 transactions
On August 13, 1993, the Company completed a private offering (the " 1993
Private Placement") of 1,666,668 shares of common stock at $6.00 per share.
The proceeds of the 1993 Private Placement, net of costs, were $8,934,401.
In connection with this offering the Company issued 161,667 warrants to
purchase an equivalent number of shares of the Company's common stock to
placement agents who assisted in this transaction. Such warrants had an
exercise price of $7.50 per share and expire in August 1998. The sole
shareholder and chief executive officer of one placement agent was David
7
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
Blech. Mr. Blech served as a director of the Company until February 1994.
This placement agent earned commissions of $734,500 and also received
134,167 of the warrants described above.
In connection with the 1993 Private Placement, Lake Charitable Remainder
Trust, of which David Blech is the income beneficiary, agreed to cancel
1,800,000 of its $5.00 and $7.00 per share warrants in exchange for 875,000
newly issued shares of the Company's common stock. This transaction was
completed in December 1993.
On October 20, 1993, the Company qualified and began listing its common
shares on the National Market System of the NASDAQ, ticker symbol PARS.
During 1993, the Company paid $155,950 in consulting fees to D. Blech and
Company for services rendered. Additionally, the Company paid $50,000 in
consulting fees to one director and $202,692 in consulting and licensing
fees to another director during 1993 under the terms of certain consulting
and license agreements.
The Company leased corporate office space in New York through May 15, 1993
from D. Blech & Company on a month to month basis at a rate at $6,000 per
month.
1994 transactions
The Company issued an aggregate of 5,086,665 unregistered shares of common
stock in two private placement transactions on September 2 and October 4,
1994 (the "1994 Private Placement Transactions"). The proceeds from the
1994 Private Placement Transactions were $5,300,100, net of issuance costs
of $317,400. In connection with the 1994 Private Placement Transactions,
the Company also issued to the finders an aggregate of 242,000 warrants to
purchase an equivalent number of shares of the Company's common stock.
42,000 of such warrants had an exercise price of $3.50 per share and
expire in September 1999. 200,000 of such warrants had an exercise price
of $.90 per share, and expire in October 1999.
During 1994, the Company paid $100,000 and recorded an additional liability
of $53,192, which was paid in 1995, in consulting fees to D. Blech &
Company. Additionally, the Company made payments of $182,934 to a former
director of the Company (who served as a director through March 1994) for
consulting and licensing fees; an additional $100,000 due to this former
director was included in accrued expenses at December 31, 1994 and was paid
in 1995. A second former director of the Company (who served as a director
through October 1994) was paid $50,000 for consulting services.
During the first quarter of 1994, the Company exchanged all convertible
Class B stock for an equal amount of shares of the Company's common stock.
There was no impact on shareholder's equity as a result of this exchange.
8
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
1995 transactions
On January 18, 1995, the Company's stockholders authorized an amendment to
the Company's Restated Articles of Incorporation which provided for an
increase in the number of shares of authorized common stock from 20 million
shares to 50 million shares, and the elimination of the Class B convertible
common stock.
In January 1995, the Company sought a waiver from Nasdaq of a rule
requiring shareholder approval or prior notification of the October 1994
Private Placement Transaction, a transaction involving the issuance of 20%
or more of the Common Stock outstanding at below market prices. The Nasdaq
Listing Qualifications Committee rejected the Company's request, and
determined that the Company's Common Stock had to be moved from the Nasdaq
National Market and listed on the Nasdaq SmallCap Market, effective January
27, 1995, as a result of the Company's non-compliance with Nasdaq corporate
governance requirements.
In February 1995, the Company completed the sale of $1,270,000 principal
amount convertible debentures in a private placement transaction to several
accredited investors, including a large institutional shareholder. A member
of the Company's Board of Directors purchased $70,000 of such debentures.
During 1995, all of the debentures were converted into 2,442,309 shares of
the Company's common stock at an exchange price of $.52 per share. In
connection with this transaction the Company issued warrants to purchase
150,000 shares of common stock at an exercise price of $.52 per share.
During 1995, warrants to purchase 75,000 shares were exercised and the
remaining 75,000 were exercised in January 1996.
In connection with the acquisition of Oculon (see Note 5), the Company
issued 6,000,000 shares of its common stock and warrants to purchase
500,000 shares of common stock.
On September 14, 1995, the Company completed a private offering of
6,000,000 units at $1.50 per unit. The proceeds of the private offering,
net of costs of $900,000, were $8,100,000. Each unit consisted of 1 share
of the Company's common stock and one warrant to purchase 0.075 of one
share of common stock (450,000 shares). In addition the Company issued
warrants to purchase 450,000 of common stock to the two finders who
assisted in this transaction. Both groups of warrants have an exercise
price of $1.80 per share and may be exercised commencing September 14, 1996
and expire on September 14, 2000.
During 1995, the Company issued warrants to consultants who assisted the
Company on various business and financial matters as follows: warrants to
purchase 10,000 shares at an exercise price of $1.88 per share, which
expire on October 31, 2001; warrants to purchase 10,000 shares of the
Company's common stock at an exercise price of $.78 per share, which expire
on April 10, 2005; warrants to purchase 75,000 shares, 25,000 each of which
have an exercise price of $.75, $1.00 and $1.50 per share, respectively,
and may be exercised beginning May 1, 1996 and expire on April 30, 2000.
The Company recognized compensation expense of $48,000 related to warrants
in 1995.
9
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
Many of the warrants issued in connection with various equity financings
and related transactions during 1991 through 1995 contain anti-dilution
provisions requiring adjustment if at a latter date, securities are issued
at prices below the respective warrant's exercise price. The following
table summarizes the shares issuable upon exercise of warrants outstanding
at December 31, 1995 as adjusted for the events which have triggered anti-
dilution provisions contained in the respective warrant agreements:
Shares
Issuable
Upon Exercise
Issuance Date Expiration Date Exercise Price
------------- --------------- -------- -----
November 1991 November 1996 223,342 $5.24
November 1991 March 1998 236,540 2.29
March 1998 267,971 2.83
March 1998 331,328 1.66
August 1993 August 1998 398,852 3.04
September 1994 September 1999 61,766 2.38
October 1994 October 1999 222,222 .81
February 1995 February 2000 75,000 .52
April 1995 April 2005 556,680 2.47
April 2005 10,000 .78
April 2000 25,000 .75
April 2000 25,000 1.00
April 2000 25,000 1.50
September 1995 September 2000 900,000 1.80
October 1995 October 2001 10,000 1.88
-------
Total shares and average exercise price 3,368,701 $2.29
========= =====
10
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
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, and generally
expire ten years from the date of grant. The following table summarizes
activity in approved incentive stock options:
Shares Average
Under Exercise
Option Price
------ -----
Options Outstanding at December 31, 1992 93,883 $ 6.47
Exercised (10,500) 10.50
-------
Options Outstanding at December 31, 1993 83,383 5.97
Granted 389,439 6.50
Expired (38,832) 7.02
-------
Options outstanding at December 31, 1994 433,990 6.35
Granted 300,000 1.94
Expired (181,804) 6.12
Canceled (252,186) 6.66
Reissued 252,186 2.50
-------
Options outstanding at December 31, 1995 552,186 2.19
======= ====
Options exercisable at December 31, 1995 - -
======= =====
11
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
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:
Shares Average
Under Exercise
Option Price
------ -----
Options Outstanding at 229,868 $10.79
December 31, 1992
Granted 63,254 7.29
Exercised (36,875) 15.30
-------
Options Outstanding at 256,247 8.24
December 31, 1993
Granted 407,160 6.50
Expired (28,251) 10.50
-------
Options outstanding at 635,156 7.02
December 31, 1994
Granted 70,000 1.94
Expired (262,964) 7.44
Canceled (308,932) 6.49
Reissued 308,932 2.50
-------
Options outstanding at 442,192 3.10
======= =====
December 31, 1995
Options exercisable at 168,577 $4.18
======= =====
December 31, 1995
12
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
10. Loans Payable
The Company's Israeli subsidiary, Pharmos Limited, obtained short term
financing in 1994 in the form of a short term loan and a line of credit
facility from one of its banks. Such agreements provide for interest
payable monthly at an annualized rate of LIBOR plus 1.5%. Borrowings under
such agreement amounted to $401,953 at December 31, 1994 and were repaid in
full in November 1995. As of December 31, 1995, Pharmos Limited had an
unutilized line of credit of $100,000 denominated in New Israeli Shekels.
The Company has a note payable outstanding relating to the refurbishment of
the Florida facility. The note is payable in monthly installments of
$7,500 including interest at 8%, the final payment is due in June 1996. As
of December 31, 1995, the outstanding obligation amounted to $ 39,133 and
is recorded as a current liability in the accompanying balance sheet.
The Company's subsidiary, Oculon Corporation ( Note 5 ) has a note payable
related to leasehold improvements to a research facility (Note 12). The
note is payable in monthly installments of $6,281 including interest at
the prime rate plus 1% ( 8.5% at December 31, 1995) the final payment is
due in September 1999. As of December 31, 1995 the outstanding balance of
such note was $236,199 of which $54,551 has been classified as a current
liability in the accompanying balance sheet.
Minimum annual principal repayments of long term debt by year are as
follows: 1996-$93,684, 1997- $60,355 , 1998 -$66,701 , 1999-$54,592.
11. Income Taxes
No provision for income taxes was recorded for the three years ended
December 31, 1995 due to net operating losses incurred. Net operating loss
carry forwards for U.S. tax purposes of approximately $47,500,000 expire
from 2000 through 2010.
The Company's gross deferred tax assets of $19,387,000 and $16,297,000 at
December 31, 1995 and 1994, respectively, represent primarily the tax
effect of both the net operating loss carry forwards and deferred research
and development costs and, research and development tax credit carry
forwards. As a result of previous business combinations and changes in
stock ownership, substantially all of these net operating loss and credit
carry forwards are subject to substantial restriction with regard to annual
utilization. A full valuation allowance has been established with regard
to the gross deferred tax assets.
13
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
12. Commitments and Contingencies
Legal proceedings
On October 27, 1995, the Company commenced an action in Supreme Court, New
York County (the "Court"), against Dr. Nicholas Bodor, a former director of
the Company, seeking to enjoin Dr. Bodor from taking any steps to terminate
or interfere with the Company's rights under an agreement (the "License
Agreement") with Dr. Bodor relating to LotemaxTM. Dr. Bodor claims that
the advances against future revenues of LotemaxTM received by the Company
under its Marketing Agreement with Bausch & Lomb are an up front licensing
fee of which Dr. Bodor is entitled to receive a portion and that the
failure to pay would constitute grounds for terminating the License
Agreement. Dr. Bodor also claims that the Marketing Agreement is actually
a sublicense entitling Dr. Bodor to additional royalties under his License
Agreement and in response has commenced a separate action seeking judicial
clarification of these issues. If successful in all aspects of the
litigation, Dr. Bodor could possibly receive approximately $750,000 based
on advances received by the Company as of December 31, 1995, and a similar
amount based on advances received by the Company in 1996, as well as a
higher royalty percentage on sales of LotemaxTM.
The Company strongly disagrees with Dr. Bodor's characterization of the
Marketing Agreement and believes his interpretation is incorrect and has no
merit. To prevent Dr. Bodor from wrongfully terminating the License
Agreement, the Company commenced the action to protect its rights under
both the License Agreement and the Marketing Agreement.
In a Memorandum Decision obtained by the Company in February 1996, the
Court ruled in favor of the Company on both motions, granting the Company's
motion for a preliminary injunction and denying Dr. Bodor's motion to
dismiss. The Court instructed the parties to submit a proposed order
implementing the terms of the Court's Memorandum Decision and affidavits
regarding an appropriate undertaking (bond) by the Company pending a final
determination of the action. Although the Company intends to vigorously
defend its position related to this matter and believes its position is
correct in this dispute and that it will prevail, an adverse determination
or resolution of this dispute could have a material adverse effect on the
Company's financial position and results of operations.
In March 1995, the Company was named as an additional co-defendant in an
amended complaint filed in a pending purported class action suit against
David Blech, D. Blech & Co. and a number of other defendants, including
eleven publicly traded biotechnology companies. The complaint seeks
damages for alleged unlawful manipulation of the stock market prices of the
named biotechnology companies. The Company believes that the claims
against it have no factual or legal basis and are without merit and has
filed a motion to dismiss the claims asserted against it. The Company's
motion to dismiss (along with motions to dismiss by numerous other
Defendants) was argued and submitted before United States District Court
on November 9, 1995 and a decision has not yet been rendered by the Court.
Management believes that the ultimate outcome will not have a significant
impact on the Company's financial position or results of operations.
14
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
Management has reviewed with counsel all other actions and proceedings
pending against or involving the Company. Although the ultimate outcome of
such actions and proceedings cannot be predicted with certainty at this
time, management believes that losses, if any, in excess of amounts accrued
resulting from those actions will not have a significant impact on the
Company's financial position or results of operations.
Leases
The Company leases research and office facilities in Israel and Florida
which are used in operation of the Company's research and administration
activities. The Florida facility which serves as a research and development
facility as well as the corporate headquarters is leased under an agreement
which expires in November 1996 and can be renewed at the Company's option
for two additional one year periods. The research and development facility
in Israel is leased under an agreement which expires in May 1998 but may
be terminated at the Company's option in May 1997.
The Company also has a long term lease on office facilities in New York,
which previously served as the Company's executive headquarters, which
expires in March 2000. In conjunction with relocating its corporate
headquarters, the Company entered into a non-cancelable sublease agreement
for this facility. Such sublease expires in March 2000. The anticipated
shortfall between future lease payments to be made by the Company and
income to be received under the sublease amounts to $36,000 and has been
reflected as a liability in the accompanying balance sheet at December 31,
1995.
Oculon Corporation leased office and research facilities in Cambridge,
Massachusetts and Seattle, Washington under long term lease agreements
which expire in July and October 1999, respectively. The Company has
entered into subleases for these facilities. The sublease for the Seattle
facility is non-cancelable and expires in October 1999. There is no
difference between the anticipated minimum payments to be made under the
lease agreement and the minimum sublease income to be received under the
sublease agreement. The Cambridge facility is subleased under a non-
cancelable agreement which expires on December 31, 1996. Minimum sublease
income to be received under the non-cancelable sublease amounts to
$241,000. Minimum future payments under the lease agreement for the
Cambridge facility amount to $815,000. Management expects that in the
normal course of business that the sublease which expires in December 1996
will be replaced by a new sublease. The Company has recorded a liability
based upon management's estimate of the amount by which future payments to
be made under the lease agreement are expected to exceed contractual and
estimated future sublease income. As of December 31, 1995, such estimated
liability amounted to $185,000, of which $90,000 is reflected as a current
liability. It is possible that the Company will not be successful in
obtaining a new sublease after December 1996, or if successful, that such
rental income will be insufficient to cover the Company's minimum rental
payments. If the Company is not successful, additional provisions will be
required.
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.
15
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
At December 31, 1995 the future minimum lease commitments and sublease
rental receivables with respect to non-cancelable operating leases with
terms in excess of one year are as follows:
Lease Sublease
Commitments Rentals
----------- -------
1996 $1,017,626 590,600
1997 777,726 373,517
1998 777,726 373,517
1999 387,323 315,269
2000 35,131 35,131
---------- -------
$2,995,532 $1,688,034
========== ==========
Rent expense during 1995, 1994 and 1993 amounted to $542,885, $488,136, and
$316,602, respectively. Rent expense in 1995 is net of $88,698 of sublease
income.
In connection with the sublease of the Seattle facility the Company's
subsidiary Oculon Corporation leases certain leasehold improvements to a
third party under a sublease agreement. As of December 31, 1995, the
present value of such payments of $206,407 is reflected in the accompanying
balance as $146,100 in other assets and the current portion of $60,307 in
prepaid expenses and other current assets. Future payments to be received
under this leasehold improvements sublease are as follows: $81,318 each in
1996, 1997 and 1998 and $64,387 in 1999.
Manufacturing agreement
The Company has a five year agreement with a foreign company to manufacture
bulk quantities of the drug product which will be used in Lotemax(TM), the
Company's lead product. As of December 31, 1995, the Company has a non-
cancellable commitment to purchase approximately $750,000 in 1996, payable
in a foreign currency. In the event the Company does not receive approval
from the FDA or other countries to market its Lotemax(TM) or line extension
products, the active drug substance required to be purchased pursuant to
this commitment could have little or no value to the Company.
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.
16
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
- ------------------------------------------
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, 1995, 1994 or 1993. 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
$10,731, $16,890 and $6,559 in 1995, 1994 and 1993 respectively.
16. Estimated Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined based
upon available market information and appropriate valuation methodologies.
However, considerable judgement is necessarily required in interpreting
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts
that the Company might realize in a current market exchange. The use of
different market assumptions and or estimation methodologies may have a
material effect on the estimated fair value.
The carrying amounts of cash and cash equivalents, accounts payable and
accrued expenses are reasonable estimates of their fair values. The
estimated fair value of investment in sublease is not materially different
from its carrying value for financial statement purposes at December 31,
1995. In making this determination the Company used interest rates based
upon the credit worthiness of the sublessor. Due to the uncertainty of the
timing of future product sales it is not practical to estimate the fair
value of advances against future sales which have a carrying value
$1,877,141 at December 31, 1995.
17