SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 0-11550
December 31, 2001
Pharmos Corporation
(Exact name of registrant as specified in its charter)
Nevada 36-3207413
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
99 Wood Avenue South, Suite 311
Iselin, NJ 08830
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 452-9556
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No[_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's Common Stock at March 15, 2002
held by those persons deemed to be non-affiliates was approximately $98,777,140.
As of March 15, 2002, the Registrant had outstanding 56,573,792 shares of its
$.03 par value Common Stock.
PART I
Item 1. Business
Introduction
Pharmos Corporation is a bio-pharmaceutical company that discovers and develops
new drugs to treat a range of inflammatory and neurological disorders such as
traumatic brain injury and stroke. Although we do not currently have any
approved products, we have an extensive portfolio of drug candidates under
development, as well as discovery, preclinical and clinical capabilities. Prior
to the sale of our existing ophthalmic product line to Bausch & Lomb
Incorporated in October of last year, we had two successful ophthalmic products
on the market. To date, our principal sources of cash have been the sale of our
existing ophthalmic business, revenues from our ophthalmic product line, private
financings and research grants.
Dexanabinol, Pharmos' lead central nervous system product, is currently
undergoing a pivotal Phase III clinical trial for severe traumatic brain injury
in Europe and Israel. The study is expected to enroll a total of 860 patients,
including patients in the U.S. upon receipt of necessary FDA authorization.
Fifty-four centers are currently participating in the trial, which number may
ultimately increase to ninety by the end of the year. The Phase II studies,
completed in early 2000, revealed that the drug inhibited the increase in
intracranial pressure above 25mmHg, the level of pressure above which is
considered to be a prognostic indicator of poor outcome. This result was
statistically significant. The study also showed a trend of efficacy in the drug
treated groups versus the placebo group and, within the most severely injured
patients, a more than two-fold increase in the percentage of those achieving
good recovery (28.0% in the dexanabinol group vs. 11.7% in the placebo group)
was demonstrated. In addition, neurological recovery appeared to be accelerated
in the dexanabinol treated group, such that the percentage of dexanabinol
patients achieving good recovery at one month after injury was significantly
higher than in the placebo group.
Pharmos has identified several promising new compounds based upon its program to
develop synthetic relatives of the active ingredient in cannabis. Preclinical
investigations are underway for compounds to treat stroke, multiple sclerosis,
neuropathic pain and Parkinson's disease.
On October 9, 2001, Pharmos sold all of its rights to its existing ophthalmic
product line to Bausch & Lomb for cash and assumption of certain ongoing
obligations. The disposition had two parts, one for its two products already on
the market, Lotemax(R) and Alrex(R), and the second part for a medication now in
Phase III clinical trials, a product known as LE-T, involving a combination of
loteprednol etabonate and the antibiotic tobramycin. Based on meeting certain
new product milestones for LE-T in the future, the gross proceeds of the total
disposition may reach $49 million.
Pharmos received gross proceeds of approximately $25 million in cash for its
rights to Lotemax(R) and Alrex(R), prescription anti-inflammation and allergy
products that have been manufactured and marketed by Bausch & Lomb under a 1995
Marketing Agreement with Pharmos and for the rights to any future extensions of
LE-T. Additionally, Pharmos may receive up to an additional $14 million in gross
proceeds, adjusted based on the date of FDA approval of this new combination
therapy. An additional milestone payment of up to $10 million could be paid to
Pharmos to the extent certain sales levels are exceeded in the first two years
following commencement of sales in the U.S. Pharmos will pay the loteprednol
etabonate patent owner/licensor 11% of any such gross proceeds and 14.3% of any
such milestone payment. Pharmos agreed to pay up to $3.75 million of the costs
of developing LE-T based on the arrangement with Bausch & Lomb.
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Strategy
Pharmos' business is the discovery and development of new drugs to treat a range
of inflammatory and neurological disorders such as traumatic brain injury and
stroke. We seek to enter into collaborative relationships with established
pharmaceutical companies to complete development and commercialization of our
products.
Pharmos is applying its experience in rational drug design, novel drug delivery
technology and high through-put screening in developing products directed at
several fields including neuroprotective compounds for traumatic brain injury
and stroke, and synthetic, non-psychotropic compounds related to cannabis for
neurological, vascular and other conditions involving inflammatory processes.
Products
Platform Technologies
Pharmos is developing two families of compounds based on scientific knowledge of
the medicinal activities of cannabis. Since these compounds are chemically
similar in several ways to the main active component of cannabis, they are
referred to as cannabinoids. The company utilizes state-of-the-art technologies
to synthesize, evaluate and develop new cannabinoid molecules that exhibit
enhanced therapeutic benefit but do not display the undesirable, psychotropic
effects seen with cannabis. Pharmos continues to expand its library of compounds
through a hybrid methodology combining the rational design of compounds based on
knowledge of detailed molecular requirements for drug activity with
combinatorial chemistry, a technique that utilizes randomized chemical reactions
to synthesize large numbers of different molecules. In contrast to the
conventional random methods of combinatorial chemistry, this hybrid approach
leads to a larger percentage of synthesized compounds that demonstrate activity
in screening assays and increases the potential of developing potent and
selective drug candidates.
Pharmos' chemical library consists of two chemically distinct cannabinoid
platforms, tricyclic dextrocannabinoids and bicyclic cannabinoids. The two
classes of synthetic cannabinoids have different mechanisms of action, but there
is considerable overlap in their therapeutic potential for treating
neurological, cardiovascular, autoimmune and inflammatory disorders.
Tricyclic dextrocannabinoids
The tricyclic dextrocannabinoids, for which dexanabinol is the prototype, do not
bind to either of the two known classes of cannabinoid receptors. Therefore,
this family of compounds does not show the psychotropic and other negative side
effects seen with naturally occurring cannabinoids. Drug candidates in this
family display biological activity by blocking the activation of specific
channels in nerve cells and/or inhibiting several major inflammatory mechanisms.
Both activities may reduce the amount of sudden and programmed cell death caused
by certain disorders.
In addition to dexanabinol, which is currently undergoing a Phase III clinical
study for the treatment of severe head injury, other tricyclic
dextrocannabinoids are under evaluation in preclinical models for stroke;
neuropathic pain, which results from nerve damage or dysfunction; nociceptive
pain, which is caused by activation of nerve sensors as a result of acute tissue
damage; neurodegenerative disorders such as Parkinson's disease; and autoimmune
disorders such as multiple sclerosis, inflammatory bowel disease, rheumatoid
arthritis, etc.
Dexanabinol
Dexanabinol is Pharmos' lead central nervous system product aimed at treating
severe head trauma. It is a member of the tricyclic family of compounds,
therefore it is similar in structure to cannabis but is designed to
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avoid the unwanted psychotropic and sedative effects while retaining properties
as an agent to reduce inflammation and pain.
In 1996, a Phase I study of rising dose tolerance in healthy volunteers (50
subjects) showed dexanabinol to be safe and well tolerated at doses up to and
including the expected therapeutic doses. In late 1996, Pharmos commenced a
Phase II study conducted at six medical centers in Israel on patients with
severe head injury. This trial was reviewed and approved by the American Brain
Injury Consortium and the European Brain Injury Consortium.
In 1998, Pharmos announced the results of the first two cohorts of the three
cohort Phase II Clinical Study involving 67 patients. Clinical endpoints
established an excellent safety profile of the drug in the treated patients.
There were no unexpected adverse experiences reported for either the drug
treated or placebo group. Intracranial pressure above a threshold of 25 mmHg, an
important risk factor and a predictor of poor neurological outcome, was
significantly reduced in the drug-treated patients through the third day of
treatment, without a concomitant reduction in systolic blood pressure. The
mortality rate of 10% (3/30) in the dexanabinol group compared favorably with a
13.5% rate in the placebo group (5/37). The investigators concluded that
dexanabinol was shown to be safe and well tolerated in severe head trauma
patients. Neurological outcomes in the study, assessed periodically up to 6
months after injury, established a strong trend of efficacy. The percentage of
patients achieving Good Neurological Outcome, the highest score on the five
level Glasgow Outcome Score used to assess the recovery of head trauma patients,
was higher in the drug-treated group at each measurement. Among the most
severely injured patients in the study, a better outcome was consistently
observed among the drug treated group than among the placebo treated group.
Patients received an intravenous injection of either dexanabinol or placebo
within 6 hours of the injury. Demographically, all 67 patients were fairly
representative of the characteristics describing severe head trauma.
In early 2000, Pharmos announced the results of the third cohort of the Phase II
Clinical Study. The study concluded that the Phase II goals of establishing the
safety of dexanabinol in traumatic brain injury and the dosing parameters for a
pivotal study were met. 101 patients in total were enrolled in the multi-center,
double-blind, randomized Phase II study, which was carried out in six trauma
centers in Israel affiliated with the American Brain Injury Consortium.
Fifty-two of the patients were treated with dexanabinol at three separate doses
and forty-nine received a placebo. In the third cohort, thirty-three patients
received an intravenous injection of either 200 mg. of dexanabinol (N=21) or
placebo (N=12) within six hours of injury. Demographically, these patients were
fairly representative of the traumatic brain injury population, comprising
mostly young men injured in motor vehicle accidents. However, the dexanabinol
and placebo groups differed with respect to several important baseline entry
parameters affecting the patients' prognosis; for example, injury severity as
determined by the Glasgow Coma Scale was significantly worse in the treated
group than in the placebo group. In addition, the patients' Computerized
Tomography classifications indicating the extent of the brain injury were worse
in the drug-treated group compared to placebo. Predictably, the strong trend for
better neurological outcome in comparison with placebo that was observed in the
first two cohorts was not repeated in this cohort. Nevertheless, intracranial
pressure above a threshold of 25mmHg, a major risk factor affecting the
prognosis of traumatic brain injury, was lower 40-70% of the time during the
first days after injury in the treated group vs. the placebo group. This result
was similar to those of the previous two cohorts (48mg. and 150mg. doses)
reported in 1998. An analysis of patient performance on the Galveston
Orientation and Amnesia Test demonstrated significantly better results in the
dexanabinol treated patients at 1, 3 and 6 months follow-up compared to placebo.
The Galveston Orientation and Amnesia Test is a neurological test that measures
awareness of surroundings and ability to remember.
The 6 month outcome as measured by the Glasgow Outcome Score was similar in the
treated and placebo groups as a whole, a comparison of outcome within the
subgroup of very severe (Glasgow Coma Scale 4-6) patients revealed a more than
two-fold increase in the percentage of those achieving good recovery (28.0% in
the dexanabinol group vs. 11.7% in the placebo group). In addition, neurological
recovery appeared to be accelerated in the dexanabinol treated group, such that
the percentage of dexanabinol patients achieving good
4
recovery (measured by Glasgow Outcome Score) at 1 month was significantly higher
than in the placebo group (17% vs. 2%, p<0.02).
During January 2001, Pharmos announced that its international pivotal trial of
dexanabinol for severe traumatic brain injury commenced in Europe and Israel.
The purpose of the Phase III study is to determine the safety and efficacy of
dexanabinol in severe traumatic brain injury patients. The study is expected to
enroll a total of 860 patients, including patients in the U.S. upon receipt of
necessary FDA authorization. Fifty-four centers are currently participating in
the trial. Approximately 90 centers in Europe, the U.S. and Israel are expected
to participate in the study. European countries participating in the study
include Belgium, Finland, France, Germany, Italy, the Netherlands and the U.K.,
along with Israel. Pharmos is collaborating with the European Brain Injury
Consortium and the American Brain Injury Consortium in a number of areas,
including recruitment efforts with trauma centers.
Bicyclic cannabinoids
As with the tricyclic dextrocannabinoids, the bicyclic cannabinoids do not
display the unwanted psychotropic side effects seen with natural cannabinoids
because they do not bind to cannabinoid receptors known as CB1, which are
located predominately in the brain. However, the molecular activity of the
bicyclics is different from the tricyclics in that the bicyclic cannabinoids
bind with high affinity to cannabinoid receptors known as CB2, which are located
on immune and inflammatory cells. Such binding of bicyclic cannabinoids to CB2
receptors leads to the inhibition of certain intracellular processes that would
normally lead to activation of inflammatory processes. Therefore, active
bicyclic cannabinoids may help prevent certain cells from activating
inflammation pathways.
Pharmaceuticals that activate CB2 receptors may be important in treating various
autoimmune, inflammatory or degenerative disorders. Several candidates from
Pharmos' bicyclic cannabinoid library have shown promise in animal models for
autoimmune disorders including multiple sclerosis, inflammatory bowel disease,
rheumatoid arthritis, and insulin dependent diabetes mellitus; for neuropathic
and nociceptive pain; and for neurodegeneration seen in Parkinson's disease.
Loteprednol Etabonate
Loteprednol etabonate is a unique steroid, designed to act in the eye and
alleviate inflammatory and allergic conditions, and is quickly and predictably
reduced into inactive particles before it reaches the inner eye or systemic
circulation. This results in improved safety by avoiding the side effects
related to exposure to most ocular steroids. In the eye, the most unwanted side
effect of steroids is the elevation of intra-ocular pressure, which can be sight
threatening. While steroids, for lack of an alternative, are regularly used for
severe inflammatory conditions of the eye, milder conditions, such as allergies,
are preferentially treated with less effective non-steroidal agents.
LE-T, a loteprednol etabonate-based eye drug combined with the antibiotic
tobramycin that was sold to Bausch & Lomb as part of the ophthalmic business
disposition in October 2001, is undergoing a further clinical trial before
submitting the New Drug Application for FDA approval. Upon successful completion
of the clinical trial, Bausch & Lomb expects to file the New Drug Application
with the FDA.
In October 2001, Pharmos sold all of the assets of its existing ophthalmic
business to Bausch & Lomb. Pharmos retains no residual rights to Lotemax(R) or
Alrex(R), two commercially-available products which were included in the assets
sold to Bausch & Lomb, but may receive up to a maximum gross $14 million based
on the date of FDA approval of LE-T, and receive an additional fee of up to $10
million if the following occurs: (a) net sales of LE-T in the first 12 months
after commercial launch are at least $7.5 million and (b) net sales of LE-T in
the second twelve consecutive months after commercial launch (i) exceed $15.0
million and (ii) are greater than net sales in (a) above. Future payments will
be included in the Company's income when all
5
contingencies are resolved. In addition, Pharmos has agreed to pay for up to
$3.75 million of the clinical development costs of LE-T, depending upon the
total developmental costs for LE-T. There are several products currently on the
market against which LE-T would compete, with Alcon's Tobradex(R) being the
largest selling product in the category.
SERM Platform
Pharmos has developed a library of new proprietary compounds, called Selective
Estrogen Receptor Modulators (SERM), which have been synthesized and screened
primarily on the basis of their binding activity to estrogen receptors. Pharmos
believes these compounds may be active against various forms of cancer,
including some cancers that are not hormone dependent such as pancreatic cancer
and malignant melanoma. In addition to its anti-cancer potential, this platform
could provide drug candidates to treat various estrogen-related conditions, such
as post-menopausal osteoporosis, cardiovascular disease and mood and cognitive
disorders. This platform is at an early stage of discovery.
Competition
The pharmaceutical industry is highly competitive. Pharmos competes with a
number of pharmaceutical companies that have financial, technical and marketing
resources significantly greater than those of Pharmos. Some companies with
established positions in the pharmaceutical industry may be better equipped than
Pharmos to develop and market products in the markets Pharmos is seeking to
enter. A significant amount of pharmaceutical research is also being carried out
at universities and other not-for-profit research organizations. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for the use of technology they have developed.
These institutions may also market competitive commercial products on their own
or through joint ventures and will compete with Pharmos in recruiting highly
qualified scientific personnel.
Pharmos is pursuing areas of product development in which there is a potential
for extensive technological innovation. Pharmos' competitors may succeed in
developing products that are more effective than those of Pharmos. Rapid
technological change or developments by others may result in Pharmos' potential
products becoming obsolete or non-competitive.
Collaborative Relationships
Pharmos' commercial strategy is to develop products independently and, where
appropriate, in collaboration with established pharmaceutical companies and
institutions. Collaborative partners may provide financial resources, research
and manufacturing capabilities and marketing infrastructure to aid in the
commercialization of Pharmos' products in development and potential future
products. Depending on the availability of financial, marketing and scientific
resources, among other factors, Pharmos may license its technology or products
to others and retain profit sharing, royalty, manufacturing, co-marketing,
co-promotion or similar rights. Any such arrangements could limit Pharmos'
flexibility in pursuing alternatives for the commercialization of its products.
Due to the often unpredictable nature of the collaborative process, we cannot be
sure that we will be able to establish any additional collaborative arrangements
or that, if established, any such relationships will be successful.
Bausch & Lomb
In October 2001, Pharmos sold to Bausch & Lomb all of its rights to manufacture
and market Lotemax(R) and Alrex(R) and the third loteprednol etabonate-based
product, LE-T, which continues to be developed by Bausch & Lomb. As part of the
sale agreement, Pharmos will receive up to an additional $14 million in gross
proceeds, based upon the date of
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FDA approval of the product, and a milestone payment of up to an additional $10
million if actual sales during the first two years following commercialization
exceed agreed-upon forecasted amounts. Pharmos agreed to pay up to $3.75 million
of the costs of developing LE-T based on the arrangement with Bausch & Lomb and
will have a passive role as a member of a joint committee overseeing the
development of LE-T.
Pharmos will pay Dr. Nicholas Bodor, the loteprednol etabonate patent owner and
licensor, who is also a former director of and consultant to our company, a
total of approximately $2.7 million from the initial proceeds of the sale of
Lotemax(R) and Alrex(R) in return for his consent to Pharmos' assignment of its
rights under the license agreement to Bausch & Lomb. Pharmos will also pay Dr.
Bodor 11% of our LE-T proceeds due upon FDA approval and 14.3% of the payment we
will receive in the event that certain sales levels are exceeded in the first
two years following commencement of sales in the U.S.
Patents, Proprietary Rights and Licenses
Patents and Proprietary Rights
Proprietary protection generally has been important in the pharmaceutical
industry, and the commercial success of products incorporating Pharmos'
technologies may depend, in part, upon the ability to obtain strong patent
protection.
Some of the technologies underlying Pharmos' potential products were invented or
are owned by various third parties, including the Hebrew University of
Jerusalem. Pharmos is the licensee of these technologies under patents held by
the applicable owner through licenses that generally remain in effect for the
life of the applicable patent. Pharmos generally maintains, at its expense, U.S.
and foreign patent rights with respect to both the licensed and its own
technology and files and/or prosecutes the relevant patent applications in the
U.S. and foreign countries. Pharmos also relies upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop its
competitive position. Pharmos' policy is to protect its technology by, among
other things, filing, or requiring the applicable licensor to file, patent
applications for technology that it considers important to the development of
its business. Pharmos intends to file additional patent applications, when
appropriate, relating to its technology, improvements to its technology and to
specific products it develops.
The patent positions of pharmaceutical firms, including Pharmos, are uncertain
and involve complex factual questions. In addition, the coverage claimed in a
patent application can be significantly reduced before or after the patent is
issued. Consequently, Pharmos does not know whether any of the pending patent
applications underlying the licensed technology will result in the issuance of
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the U.S. are maintained in secrecy until patents issue and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, Pharmos cannot be certain that it or its licensors,
as the case may be, were the first creators of inventions covered by pending and
issued patents or that it or its licensors, as the case may be, were the first
to file patent applications for such inventions. Moreover, Pharmos may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to Pharmos, even if the eventual outcome is favorable to
Pharmos. The results of the judicial process are often uncertain, and we cannot
therefore be sure that a court of competent jurisdiction will uphold the
patents, if issued, relating to the licensed technology, or that a competitor's
product will be found to infringe such patents.
Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in Pharmos'
fields. If patents are issued to other companies that contain competitive or
conflicting claims and such claims are ultimately determined to be valid, it is
possible that Pharmos would not be able to obtain licenses to these patents at a
reasonable cost or be able to develop or obtain alternative technology.
Pharmos also relies upon trade secret protection for its confidential and
proprietary information. It is always
7
possible that others will independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to Pharmos'
trade secrets.
It is Pharmos' policy to require its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting or
advisory relationships with Pharmos. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Pharmos is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees and certain consultants, the agreements provide that all inventions
conceived by the individual in the course of their employment or consulting
relationship shall be the exclusive property of Pharmos. Due to the vital nature
of trade secrets and the often uncertain results of the judicial process, we
cannot be sure, however, that these agreements will provide meaningful
protection or adequate remedies for Pharmos' trade secrets in the event of
unauthorized use or disclosure of such information. Pharmos' patents and
licenses underlying its potential products described herein are summarized
below.
Neuroprotective Agents. Pharmos has licensed from the Hebrew University of
Jerusalem, which is the academic affiliation of the inventor, Dr. Raphael
Mechoulam, patents covering new compounds that have demonstrated beneficial
activity which may prevent damage or death to nerve cells resulting from various
diseases and disorders of the nervous system while appearing to be devoid of
most of the deleterious side effects usually associated with this class of
compounds. Several patents have been designed to protect this family of
compounds and their uses devised by Pharmos and the inventors. The earliest
patent applications resulted in patents issued in 1989, and the most recent
patents date from 2000. These patents cover dexanabinol, which is under
development for the treatment of head trauma and other conditions, and new
molecules discovered by modifying the chemical structure of dexanabinol.
Site-Specific Drugs. In the general category of site-specific drugs that are
active mainly in the eye and have limited systemic side effects, Pharmos
licensed several patents from Dr. Nicholas Bodor. It assigned its rights under
the Bodor license to Bausch & Lomb in October 2001 in connection with its sale
of its existing ophthalmic business. The earliest patents date from 1984 and the
most recent from 1996. Some of these patents cover loteprednol etabonate-based
products and its formulations.
Selective Estrogen Receptor Modulators (SERM). Pharmos has filed patent
applications in the U.S., Israel, Australia, Canada, Japan, Brazil, Korea and
the European Patent Office to protect certain derivatives of tamoxifen, a drug
approved by the FDA, and other steroid hormones, and molecules that oppose the
hormones' activities. In July 1997, the U.S. Patent and Trademark Office issued
a patent with claims covering the compounds themselves and their use. A second
patent issued in July 2000 claims the use of these compounds as agents to
inhibit growth of new blood vessels, a potential method of treating various
cancers. Pharmos believes that these charged derivatives are superior to the
parent compounds in that they are devoid of central nervous system side effects.
Emulsion-based Drug Delivery Systems. In the general category of SubMicron
Emulsion technology, Pharmos licensed two patents from the Hebrew University of
Jerusalem and has separately filed ten patent applications that are at different
stages of prosecution. These patents and patent applications have been devised
to protect a group of formulation technologies devised by Pharmos and the
inventors as they relate to pharmaceutical and medicinal products. The earliest
patent filings for SubMicron Emulsion technology date from 1986 and the most
recent from 1996. These patents cover a broad range of new formulations, which
improve the absorption of drugs that are poorly soluble in water.
Licenses
As discussed above, Pharmos licenses patents covering neuroprotective agents and
emulsion-based drug delivery systems from the Hebrew University of Jerusalem.
Pharmos assigned its rights as licensee of Dr.
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Bodor's loteprednol etabonate ophthalmic compounds to Bausch & Lomb in October
2001.
Government Regulation
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in our ongoing research and development activities and in the
production and marketing of our products. In order to undertake clinical tests,
to produce and market products for human therapeutic or diagnostic use,
mandatory procedures and safety standards established by the FDA in the U.S. and
comparable agencies in other countries must be followed.
The standard process required by the FDA before a pharmaceutical agent may be
marketed in the U.S. includes the following steps:
(i) Preclinical studies including laboratory evaluation and animal
studies to test for initial safety and efficacy;
(ii) Submission to the FDA of an Investigational New Drug Application,
which must become effective before human clinical trials may
commence;
(iii) Adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug in its intended application;
(iv) Submission to the FDA of a New Drug Application, which application
is not automatically accepted by the FDA for consideration; and
(v) FDA approval of the New Drug Application prior to any commercial
sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered or licensed by the FDA for
each product that is manufactured at that facility. U.S. manufacturing
establishments are subject to inspections by the FDA and by other Federal, state
and local agencies and must comply with current Good Manufacturing Practices,
requirements applicable to the production of pharmaceutical drug products.
Preclinical studies include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. The results of the preclinical studies are submitted to the FDA
as part of an Investigational New Drug Application, and unless the FDA objects,
the application will become effective 30 days following its receipt by the FDA.
Clinical trials involve the administration of the drug to healthy volunteers
and/or to patients under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part
of the application. Each clinical study is approved and monitored by an
independent Institutional Review Board or Ethics Committee at each clinical site
who will consider, among other things, ethical factors, informed consents, the
safety of human subjects and the possible liability of the institution
conducting a clinical study.
Clinical trials typically are conducted in three sequential phases, although the
phases may overlap. In Phase I, the initial introduction of the drug to humans,
the drug is tested for safety and clinical pharmacology such as metabolism.
Phase II involves detailed evaluation of safety and efficacy of the drug in
patients with the disease or condition being studied. Phase III trials consist
of larger scale evaluation of safety and efficacy and usually require greater
patient numbers and multiple clinical trial sites, depending on the clinical
indications for which
9
marketing approval is sought.
The process of completing clinical testing and obtaining FDA approval for a new
product is likely to take a number of years and require the expenditure of
substantial resources. The FDA may grant an unconditional approval of a drug for
a particular indication or may grant approval conditioned on further
post-marketing testing. The FDA also may conclude that the submission is not
adequate to support an approval and may require further clinical and preclinical
testing, re-submission of the New Drug Application, and further review. Even
after initial FDA approval has been obtained, further studies may be required to
provide additional data on safety or to gain approval for the use of a product
for clinical indications other than those for which the product was approved
initially. Also, the FDA may require post-market testing and surveillance
programs to monitor the drug's efficacy and side effects.
Marketing of pharmaceutical products outside of the U.S. are subject to
regulatory requirements that vary widely from country to country. In the
European Union, the general trend has been towards coordination of the common
standards for clinical testing of new drugs. Centralized approval in the
European Union is coordinated through the European Medicines Evaluation Agency,
or EMEA.
The level of regulation outside of the U.S. varies widely. The time required to
obtain regulatory approval from comparable regulatory agencies in each country
may be longer or shorter than that required for FDA or EMEA approval. In
addition, in certain markets, reimbursement may be subject to governmentally
mandated prices.
Corporate History
Pharmos Corporation, a Nevada corporation, formerly known as Pharmatec, Inc.,
was incorporated under the laws of the State of Nevada on December 20, 1982. On
October 29, 1992, Pharmos, the Nevada Corporation, completed a merger with a
privately held New York corporation known as Pharmos Corporation, and in 1992
acquired all of the outstanding shares of Xenon Vision, Inc., a privately held
Delaware corporation.
Human Resources
As of January 1, 2002, Pharmos had 70 employees (62 full-time and 8 part-time),
including 11 in the U.S. (2 part-time) and 59 in Israel (6 part-time), of whom
approximately 29 hold doctorate or medical degrees.
Pharmos' employees are not covered by a collective bargaining agreement. Pharmos
has never experienced employment-related work stoppages and considers its
employee relations to be excellent.
Public Funding and Grants
Pharmos' subsidiary, Pharmos Ltd., has received certain funding from the Chief
Scientist of the Israel Ministry of Industry and Trade (the Chief Scientist) for
research and development of dexanabinol, SubMicron Emulsion technology for
injection and nutrition as well as for research relating to pilocarpine,
dexamethasone and ophthalmic formulations for dry eyes. Pharmos has received an
aggregate of $3,348,189 under such agreements through December 31, 2001. Pharmos
will be required to pay royalties to the Chief Scientist ranging from 2% to 5%
of product sales, if any, as a result of the research activities conducted with
such funds. Aggregate royalty payments per product are limited to the amount of
funding received to develop that product. Additionally, funding by the Chief
Scientist places certain legal restrictions on the transfer of know-how and the
manufacture of resulting products outside of Israel. See "Conditions in Israel."
Pharmos received funding of $925,780 from the Israel-U.S. Binational Industrial
Research and Development Foundation to develop Lotemax(R) and LE-T. Pharmos was
required to pay royalties to this foundation on product sales, if any, of 2.5%,
through September 1999, then 5% thereafter, as a result of the research
activities conducted with such funds. Aggregate royalty payments are limited to
150% of the amount of such funding
10
received, linked to the exchange rate of the U.S. dollar and the New Israeli
Shekel. During October 2001, in connection with the sale of Pharmos's existing
ophthalmic business, Pharmos paid the foundation royalties of approximately $1.0
million for Lotemax(R) which concluded Pharmos' obligation to pay royalties to
the foundation for Lotemax(R).
In April 1997, Pharmos signed an agreement with the Magnet consortium, operated
by the Office of the Chief Scientist, for developing generic technologies and
for the design and development of drug and diagnostic kits. Under such
agreement, Pharmos was entitled to a non-refundable grant amounting to
approximately 60% of the actual research and development and equipment
expenditures on approved projects. No royalty obligations were required within
the framework. As of December 31, 2001, Pharmos had received grants totaling
$1,734,037 pursuant to this agreement.
Conditions in Israel
A significant part of our operations is conducted in Israel through our
wholly-owned subsidiary, Pharmos Ltd., and we are directly affected by economic,
political and military conditions there.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, as well as
incidents of civil unrest. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic boycott. Although
Israel has entered into various agreements with certain Arab countries and the
Palestinian Authority, there has been an increase in the unrest and terrorist
activity that began in September 2000 and has continued with varying levels of
severity into 2002. We do not believe that the political and security situation
has had any material negative impact on our business to date; however, the
situation is volatile and we cannot be sure that security and political
conditions will have no such effect in the future.
Many of our employees in Israel are obligated to perform military reserve duty.
In the event of severe unrest or other conflict, individuals could be required
to serve in the military for extended periods of time. Our operations could be
disrupted by the absence for a significant period of time of some of our
employees due to military service. Such disruption could harm our operations.
In addition, since 1997 Pharmos Ltd. has received funding from the Office of the
Chief Scientist of the Israel Ministry of Industry and Trade relating to generic
technologies for the design and development of drugs and diagnostic kits.
Through 2001, we have received an aggregate of $1,443,335 from these grants, and
may receive future grants, the amounts of which would be determined at the time
of application. This funding prohibits the transfer or license of know-how and
the manufacture of resulting products outside of Israel without the permission
of the Chief Scientist. Although we believe that the Chief Scientist does not
unreasonably withhold this permission if the request is based upon commercially
justified circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, the matter is solely within his discretion and we cannot
be sure that such consent, if requested, would be granted upon terms
satisfactory to us or granted at all. Without such consent, we would be unable
to manufacture any products developed by this research outside of Israel, which
may greatly restrict any potential revenues from such products.
Item 2. Properties
Pharmos is headquartered in Iselin, New Jersey where it leases its executive
offices and maintains clinical, regulatory and business development staff.
Pharmos also leases facilities used in the operation of its research,
development, pilot manufacturing and administrative activities in Rehovot,
Israel. These facilities have been improved to meet the special requirements
necessary for the operation of Pharmos' research and development activities. In
the opinion of the management these facilities are sufficient to meet the
current and anticipated future requirements of Pharmos. In addition, management
believes that it has sufficient ability to renew its present leases related to
these facilities or obtain suitable replacement facilities. The monthly lease
obligations
11
for our office space in 2002 are $9,548 for Iselin, New Jersey and $10,607 for
Rehovot, Israel.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on July 12, 2001, the
stockholders of the Company elected the following persons as directors of the
Company to serve until the next annual meeting of stockholders and until their
successors are duly elected and qualified: Haim Aviv, Elkan R. Gamzu, Samuel D.
Waksal, David Schlachet, Mony Ben Dor and Georges Anthony Marcel. The results of
the voting were as follows:
VOTES FOR VOTES WITHHELD
Haim Aviv 42,272,069 431,763
Elkan R. Gamzu 42,279,742 424,090
Samuel D. Waksal 42,183,724 520,108
David Schlachet 42,283,942 419,890
Mony Ben Dor 42,281,039 422,793
Georges Anthony Marcel 42,282,922 421,010
Also at the Annual Meeting, the stockholders approved the adoption of the
Company's 2001 Employee Stock Purchase Plan, with 41,594,111 votes cast for
approval 1,030,636 votes cast against and 79,085 abstentions. Stockholders also
ratified the appointment by the Board of Directors of PricewaterhouseCoopers LLP
as the independent auditors of the Company for the fiscal year ending December
31, 2001.
12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq SmallCap Marketsm. The
following table sets forth the range of high and low bid prices for the Common
Stock as reported on the NASDAQ National Market System and the Nasdaq SmallCap
Market during the periods indicated.
Year ended December 31, 2001 HIGH LOW
- --------------------- ---- -----
1st Quarter........................... $2.88 $1.50
2nd Quarter........................... 3.80 1.87
3rd Quarter........................... 3.85 1.84
4th Quarter........................... 2.76 1.97
Year ended December 31, 2000 HIGH LOW
- --------------------- ---- -----
1st Quarter........................... $15.38 $1.75
2nd Quarter........................... 6.75 2.38
3rd Quarter........................... 4.56 2.94
4th Quarter........................... 3.59 1.47
The high and low bid prices for the Common Stock during the first quarter of
2002 (through March 15, 2002) were $2.55 and $1.75, respectively. The closing
price on March 15, 2002 was $1.80.
The foregoing represents inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
On March 15, 2002, there were approximately 511 record holders of the Common
Stock of the Company and approximately 19,800 beneficial owners of the Common
Stock of the Company, based upon the number of shares of Common Stock held in
"street name".
The Company has paid no dividends on its Common Stock and does not expect to pay
cash dividends in the foreseeable future. The Company is not under any
contractual restriction as to its present or future ability to pay dividends.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.
13
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Revenues $ 4,298,441 $ 5,098,504 $ 3,279,397 $ 1,539,941 --
Gross Margin 3,029,852 3,222,549 2,284,780 1,102,228 --
Operating expenses (13,789,291) (9,969,879) (6,999,136) (6,109,809) $ (8,563,091)
Income (Loss) Before Income Taxes and
Extraordinary Item 4,819,822* (7,984,202)** (4,618,190) (4,663,347) (8,233,547)
Extraordinary gain from
forgiveness of debt -- -- -- -- 416,248
Dividend embedded in
convertible preferred stock -- -- -- (642,648) (1,952,767)
Preferred Stock dividends -- -- (22,253) (242,295) (240,375)
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common shareholders $ 5,045,855* ($ 7,984,202)** ($4,640,443) ($ 5,548,290) ($10,010,441)
============ ============ ============ ============ ============
Income(loss) per share applicable
to common shareholders before
extraordinary gain - basic & diluted $ 0.09 ($ 0.15) ($ 0.11) ($ 0.15) ($ 0.32)
Extraordinary gain per share -- -- -- -- 0.01
------------ ------------ ------------ ------------ ------------
Net loss per share applicable
to common shareholders - basic & diluted $ 0.09 ($ 0.15) ($ 0.11) ($ 0.15) ($ 0.31)
============ ============ ============ ============ ============
Total assets $ 44,262,991 $ 30,783,109 $ 7,791,294 $ 8,066,670 $ 8,421,841
============ ============ ============ ============ ============
Long term obligations $ 5,847,951 $ 7,680,872 $ 1,277,565 $ 2,691,023 $ 4,100,000
============ ============ ============ ============ ============
Cash dividends declared -- -- -- -- --
* includes a $16.3 million gain on sale of the ophthalmic product line in
October 2001
** includes a beneficial conversion future charge of $1.8 million.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. Such statements reflect our
current views with respect to future events and are subject to unknown risks,
uncertainty and other factors that may cause results to differ materially from
those contemplated in such forward looking statements. In addition, the
following discussion should be read in conjunction with the audited consolidated
financial statements and the related notes thereto included elsewhere in this
report.
During 2000 and through the end of the third quarter of 2001, the Company
generated revenues from product sales but continues to be dependent upon
external financing, interest income, and research and development contracts to
pursue its intended business activities. The Company had not been profitable
from inception through 2000 and has incurred a cumulative net loss of $85.5
million through December 31, 2001. Losses have resulted principally from costs
incurred in research activities aimed at identifying and developing the
Company's product candidates, clinical research studies, the write-off of
purchased research and development, and general and administrative expenses. The
Company expects to incur additional losses over the next several years as the
Company's research and development and clinical trial programs continue. The
Company's ability to achieve profitability is dependent on its ability to
develop and obtain regulatory approvals for its product candidates, to enter
into agreements for product development and commercialization with strategic
corporate partners and contract to develop or acquire the capacity to
manufacture and sell its products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Critical Accounting Policies
The Company considers certain accounting policies related to the tax valuation
allowance and revenue recognition to be critical policies due to the estimation
process involved in each.
Revenue
The Company earns license fees from the transfer of drug candidate technology
and the related preclinical research data. License fee revenue is recognized
when all performance obligations are completed and the amounts are considered
collectible. Up-front license fees are deferred and recognized when all
performance obligations are completed.
Royalty revenue is recognized upon the sale of the related products, provided
the royalty amounts are fixed or determinable and the amounts are considered
collectible. The Company has not recognized any royalty revenue during 2001,
2000 and 1999.
Tax Valuation Allowance
The Company has assessed the future taxable income and has determined that a
100% deferred tax valuation allowance is deemed necessary. In the event the
Company were to determine that it would be able to realize its deferred tax
asset, an adjustment to the deferred tax asset would increase income in the
period such determination is made.
Results of Operations
15
Years Ended December 31, 2001 and 2000
Revenues from sales decreased by $800,063 or 16%, from $5,098,504 in 2000 to
$4,298,441 in 2001. The decrease is due to the sale of the Company's ophthalmic
product line to Bausch & Lomb in October 2001. Bausch & Lomb was the Company's
marketing partner for its ophthalmic product line. Product revenues for the year
ended December 31, 2000 included a full year of revenue, while the product
revenues for the year ended December 31, 2001 included revenues for only the
first three fiscal quarters. Additionally, License Fee revenues were $225,000 in
2000 compared to $80,000 in 2001.
Cost of goods sold decreased by $607,366 or 32%, from $1,875,955 in 2000 to
$1,268,589 in 2001. The decrease reflects the decrease in product revenue due to
the sale of the Company's ophthalmic product line to Bausch & Lomb in October
2001. Cost of goods sold includes the cost of the active drug substance and
royalty payments to the licensor.
Total operating expenses increased by $3,819,412 or 38%, from $9,969,879 in 2000
to $13,789,291 in 2001. The increase in operating expenses is primarily due to
increased research and development expenses as the Company increased
expenditures related to the development of dexanabinol for the treatment of
traumatic brain injury and to increased activity in the Company's cannabinoid
program to treat various central nervous system and inflammation-based
conditions.
The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The only
major project of the Company is the development of dexanabinol for the treatment
of traumatic brain injury, which is currently involved in Phase III testing in
Europe and Israel. During the periods ending December 31, 2001, 2000 and 1999,
the costs of this project were $6.2 million, $2.9 million and $1.9 million,
respectively. Total costs since the project entered Phase II development in 1996
through December 31, 2001 are $14.7 million. Enrollment in the current Phase III
trial is expected to continue until the end of 2003. The principal costs of
completing the project include patient enrollment, production of the drug
product, collection and evaluation of the data, and management of the project.
The primary uncertainties in the completion of the project are the time required
to enroll sufficient numbers of patients in the study, the results of the study
upon its conclusion, and the Company's ability to produce sufficient quantities
of drug product under current Good Manufacturing Practice conditions. Should the
uncertainties delay completion of the project on the current timetable, the
Company may experience additional costs that cannot be accurately estimated. If
the Phase III trial of dexanabinol for the treatment of traumatic brain injury
is successfully completed, the Company can expect to begin to earn revenues upon
marketing approval as early as 2005; however, should our product candidate
experience set backs or should a product fail to achieve FDA approval and market
acceptance for any reason, it would have a material adverse affect on our
business.
Expenses for other research & development projects in earlier stages of
development for the years ended December 31, 2001, 2000 and 1999 were $2.9
million, $2.4 million and $1.9 million, respectively. Total research &
development expenses for the years ended December 31, 2001, 2000 and 1999 were
$9.1 million, $5.3 million and $3.8 million, respectively.
Selling, general and administrative expenses decreased by $378,574 or 9%, from
$5,283,397 in 2000 to $3,666,293 in 2001. The decrease is primarily due to a
reallocation of employee resources to research and development from general and
administrative areas.
Depreciation and amortization expenses increased by $292,249, or 61%, from
$481,724 in 2000 to $773,973 in 2001, reflecting increased depreciation expense
related to laboratory equipment purchases.
Other income (expense), net of interest and other expenses, increased by
$16,816,133 from expense of
16
$1,236,872 in 2000 to income of $15,579,261 in 2000. The increase is primarily
due to a gain of $16.3 million from the sale of the Company's ophthalmic product
line to Bausch & Lomb in October 2001. The reported gain includes charges of
$3.75 million representing the Company's maximum liability for the completion of
the clinical development of LE-T, the final product resulting from the
ophthalmic marketing relationship with Bausch & Lomb. Should LE-T gain FDA
approval, the Company will receive additional gross proceeds up to a maximum of
$14 million depending on the date of FDA approval and up to an additional $10
million based upon the achievement of certain sales goals. Also contributing to
the increase in other income was a lower level of interest expense primarily due
to non-cash charges related to the Company's convertible debt financing,
completed in the third quarter of 2000. Partially offsetting the increase in
other income is decreased interest income as a result of lower market interest
rates on the Company's cash balances in 2001.
Years Ended December 31, 2000 and 1999
Revenues from sales increased $1,819,107 or 55%, from $3,279,397 in 1999 to
$5,098,504 in 2000. The increase primarily resulted from increased market shares
for the Company's products. Additionally, License Fee revenues were $225,000
compared to zero in 1999. The license income was primarily generated from the
licensing of a technology of the Company for use in Japan.
Cost of goods sold increased $881,338 or 89%, from $994,617 in 1999 to
$1,875,955 in 2000. The increase reflects the high product revenue for 2000
compared to 1999. Cost of goods sold includes the cost of the active drug
substance and royalty payments to the licensor. Cost of goods in 2000 grew
faster than product revenues as a result of higher expenses for product samples,
higher LE product license expenses and higher royalties.
Total operating expenses increased $2,970,743 or 42%, from $6,999,136 in 1999 to
$9,969,879 in 2000. The increase in operating expenses is primarily due to
increases in selling, general & administrative expenses, research and
development expenses and depreciation.
Net research and development expenses increased by $1,456,396 or 38%, from
$3,827,001 in 1999 to $5,283,397 in 2000. The increase in R&D expense is
primarily due to increased expenditures, including increased employee
headcounts, related to the development of dexanabinol for the treatment of
traumatic brain injury and to increased activity in the Company's cannabinoid
program to treat various central nervous system and inflammation-based
conditions.
Selling, general and administrative expenses increased by $1,432,697 or 55%,
from $2,612,170 in 1999 to $4,044,867 in 2000. The increase is primarily due to
higher staffing levels and increased investor relations activities.
Depreciation and amortization expenses increased by $135,680, or 39%, from
$346,044 in 1999 to $481,724 in 2000, reflecting increased depreciation expense
related to laboratory equipment purchases.
Other income (expense), net of interest and other expenses, decreased by
$1,333,038 from income of $96,166 in 1999 to expense of $1,236,872 in 2000. A
higher level of interest expense was primarily due to non-cash charges related
to the Company's convertible debt financing, completed in the third quarter of
2000, of approximately $2.4 million. The increased expense was partially offset
by increased interest income of approximately $1.1 million a result of higher
average cash balances in 2000.
Liquidity and Capital Resources
While the Company received revenues since 1998 until the third quarter of 2001
from the sale of its approved products, it has incurred cumulative operating
losses since its inception and had an accumulated deficit of $85,448,454 at
December 31, 2001. The Company has financed its operations with public and
private offerings of securities, advances and other funding pursuant to a
marketing agreement with Bausch & Lomb, research
17
contracts, license fees, royalties and sales, and interest income.
The Company had working capital of $25.7 million as of December 31, 2001
(excluding restricted cash of $2.3 million). Included in the current assets of
$39.2 million is $35.3 million related to cash and cash equivalents.
In October 2001, Bausch & Lomb purchased all rights to the Company's loteprednol
etabonate (LE) ophthalmic product line for cash and assumption of certain
ongoing obligations. The Company received gross proceeds of approximately $25
million in cash for its rights to Lotemax(R) and Alrex(R), prescription products
that are made and marketed by Bausch & Lomb under a 1995 Marketing Agreement
with the Company; in addition, Bausch & Lomb also acquired future extensions of
LE formulations including LE-T, a product currently in Phase III clinical trial.
The Company had no product sales beginning in the fourth quarter of 2001. Bausch
& Lomb will pay the Company up to an additional maximum gross proceeds of $14
million, with the actual payment price based on the date of FDA approval of this
new combination therapy. An additional milestone payment of up to $10 million
could be paid to the Company to the extent sales of the new product exceed an
agreed-upon forecast in the first two years. The Company has a passive role as a
member of a joint committee overseeing the development of LE-T and has an
obligation to Bausch & Lomb to fund up to a maximum of $3.75 million of the LE-T
development cost. As a result of this transaction, the Company recorded a net
gain of $16.3 million. The company recorded an accrual of $3.75 million
representing the Company's maximum obligation in the continuing clinical
development of LE-T. The Company incurred transaction and royalty costs of
approximately $2 million. The Company also compensated the LE patent owner
approximately $2.7 million ($1.5 million paid upon closing and $1.2 million of
this amount is to be paid in October 2002) from the proceeds of the sale of
Lotemax and Alrex in return for his consent to the Company's assignment of its
rights under the license agreement to Bausch & Lomb. Additionally, the patent
owner will receive 11% of the proceeds payable to the Company following FDA
approval of LE-T, as well as 14.3% of its milestone payment, if any.
In September 2000, the Company completed a private placement of Convertible
Debentures, common stock and warrants to purchase shares of common stock with
institutional investors, generating gross proceeds of $11 million. The
Convertible Debentures, which generated gross proceeds of $8 million, were due
in February 2002 and carried a 6% interest payable semiannually in cash or
common stock. In connection with the Convertible Debenture, the institutional
investors also received warrants for the purchase of 276,259 common shares with
a relative fair value of $725,000. The Convertible Debentures were convertible
into common shares of the Company at the conversion price of $3.83 per share (or
2,088,775 common shares) and were convertible beginning October 31. 2000. Under
certain limited anti-dilutive conditions, the conversion price may change. Until
converted into common stock or the outstanding principal is repaid, the terms of
the Convertible Debentures require the Company to deposit $4 million in an
escrow account. The escrowed capital is shown as Restricted Cash on the
Company's balance sheet and will be released to the Company in proportion to the
amount of Convertible Debentures converted into common shares or upon the
repayment of the debt.
In December 2001, the holders of the Convertible Debentures and the Company
agreed to modify the repayment and conversion terms. The holders of $5.8 million
convertible debt (book value on December 31, 2001, including accrued interest)
extended the maturity date to June 2003 in exchange for a reduction in the
conversion price from $3.83 to $2.63 for half of the outstanding balance and $
2.15 for the other half of the outstanding balance. The convertible debt with a
maturity date of June 2003 is convertible beginning December 31, 2001. The
holder of the remaining outstanding debt of $1.9 million (including accrued
interest) changed the maturity date from February 28, 2002 to January 31, 2002
in exchange for lowering the conversion price for the other holders. As the
modification was not significant in accordance with EITF 96-19 the change in the
fair value between the original convertible debt and the modified convertible
debt will be accreted over the remaining term of the convertible debt with a
corresponding charge into interest expense.
Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios, require the Company to compute the Beneficial Conversion Feature ("BCF")
of the convertible debt from the private placement of September 2000. The BCF
must be capitalized and amortized from the closing date until the earliest date
that the investors have the right to convert the debt into common shares. The
BCF was computed at approximately $1.8 million, all of which has been amortized
and included as interest expense in the year ending December 31, 2000.
Additionally, the discount on the Convertible Debenture of approximately
$800,000 will be amortized to interest expense over the life of the debt. For
the year ending December 31, 2001, $533,932 has been amortized.
During 2001, the Company paid $589,819 and issued 182,964 shares of the common
stock of the Company to the investors in the convertible debenture. The payment
of cash and stock were the option chosen by the Company and represent
adjustments to the pricing based upon the Company's stock price during the
adjustment period. Under the terms of the agreements, no further adjustments are
due.
One investor in the September 2000 private placement had an option, in the form
of a warrant, to purchase an additional $2 million of common shares for a period
of one year provided that the future purchase price is greater than the initial
closing price of $3.65 per share. During the third quarter of 2001, the investor
exercised this option and, accordingly, the Company issued 542,299 shares to the
investor. The Private Placement provided certain conditions under which the
number of shares issued for this option could be adjusted and, accordingly, the
Company issued 281,659 shares to the investor in the fourth quarter of 2001 as
an adjustment to the warrant.
The issuance costs related to the Private Placement of approximately $1.4
million were capitalized and amortized over the life of the debt. For the years
ending December 31, 2001 and 2000, $682,464 and $224,691 have been amortized and
included as interest expense, respectively.
18
Commitments and Long Term Obligations
As of December 31, 2001, we had the following commitments and long term
obligations:
2002 2003 2004 2005 Thereafter Total
---- ---- ---- ---- ---------- -----
Operating Leases $ 284,419 $ 184,473 $ 158,617 $ 156,615 $ 202,336 $ 986,460
Convertible debentures,
excluding interest 1,949,317 5,847,951 7,797,268
R&D commitments 761,748 190,437 952,185
---------- ---------- ---------- ---------- ---------- ----------
Grand total $2,995,484 $6,222,861 $ 158,617 $ 156,615 $ 202,336 $9,735,913
The convertible debenture commitment excludes interest that will accrue until
the maturity date in June 2003. The principal amount of the debentures plus any
accrued interest is convertible into common shares and may ultimately not
require a cash outlay. In January 2002, the convertible debenture commitment of
approximately $2 million was repaid in cash. Additionally, $2.6 million
(including accrued interest of $0.1million) was converted into 1,217,485 common
shares, thus leaving $3.9 million (including accrued interest of $0.4 million)
outstanding as of March 15, 2002. After the repayment and conversion, $3.6
million was released from restricted cash.
The R&D commitments represent scheduled professional fee payments for clinical
services relating the phase III clinical study for dexanabinol. Upon the
completion of certain agreed upon milestones, additional fees will be paid. The
fees that Pharmos is obligated to pay upon the reaching of the agreed upon
milestones is not included in the above table due to uncertainties in timing.
The maximum amount that could be paid is approximately $4.6 million.
The Company has entered into various employment agreements. The terms of these
employment agreements include one-year renewable terms and do not represent long
term commitments of the Company.
Management believes that cash and cash equivalents of $35.3 million and the
total restricted cash balance of $5.4 million as of December 31, 2001, will be
sufficient to support the Company's continuing operations through at least the
middle of 2004. The Company is continuing to actively pursue various funding
options, including additional equity offerings, strategic corporate alliances,
business combinations and the establishment of product related research and
development limited partnerships, to obtain additional financing to continue the
development of its products and bring them to commercial markets.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
We assessed our vulnerability to certain market risks, including interest rate
risk associated with financial instruments included in cash and cash
equivalents, restricted cash, and convertible debentures. Due to the short-term
nature of the cash and cash equivalent investments, restricted cash, and the
fixed interest rate on the convertible debt, we have determined that the risks
associated with interest rate fluctuations related to these financial
instruments do not pose a material risk to us.
Item 8. Financial Statements and Supplementary Data
The information called for by this Item 8 is included following the "Index to
Financial Statements" contained in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors, officers and key employees of the Company are as follows:
Name Age Position
- ----- ---- -------
Haim Aviv, Ph.D. 62 Chairman, Chief Executive Officer,
Chief Scientist and Director
Gad Riesenfeld, Ph.D. 58 President, Chief Operating Officer
Robert W. Cook 46 Executive Vice President and
Chief Financial Officer
David Schlachet 56 Director
Mony Ben Dor 56 Director
Georges Anthony Marcel, M.D., Ph.D. 61 Director
Elkan R. Gamzu, Ph.D. 59 Director
Samuel D. Waksal, Ph.D. 53 Director
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and a
Director of the Company. In 1990, he co-founded Pharmos Corporation, a New York
corporation ("Old Pharmos"), which merged into the Company in October 1992 (the
"Merger"). Dr. Aviv also served as Chairman, Chief Executive Officer, Chief
Scientist and a Director of Old Pharmos prior to the Merger. Dr. Aviv was the
co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a publicly-traded
company engaged in the development of products using recombinant DNA, its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific Consultant until August 1993. Prior to that time, Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv is
the principal stockholder of Avitek Ltd., a stockholder of the Company. Dr. Aviv
is also an officer and/or significant stockholder of several privately held
Israeli biopharmaceutical and venture capital companies.
Gad Riesenfeld, Ph.D., was named President and Secretary in February 1997, and
has served as Chief Operating Officer since March 1995. He served as Executive
Vice President from December 1994 to February 1997, Vice President of Corporate
Development and General Manager of Florida Operations from October 1992 to
December 1994, and was employed by Pharmos from March 1992 until the Merger.
Prior thereto, he was engaged in a variety of Pharmaceutical and Biotechnology
business activities relating to the development and commercialization of
intellectual property, primarily in the pharmaceutical and medical fields. From
March 1990 through May 1991 Dr. Riesenfeld was a Managing Director of Kamapharm
Ltd., a private company specializing in human blood products. Prior thereto,
from May 1986, he was Managing Director of Galisar Ltd., a pharmaceutical
company involved in extracorporeal blood therapy. Dr. Riesenfeld holds a Ph.D.
degree from the Hebrew University of Jerusalem and held a scientist position, as
a post doctorate, at the Cedars Sinai Medical Center in Los Angeles, California.
Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998 and became Executive Vice President in February 2001.
From May 1995 until his appointment as the Company's Chief Financial Officer, he
was a vice president in GE Capital's commercial finance subsidiary, based in New
York. From 1977 until 1995, Mr. Cook held a variety of corporate finance and
capital markets positions at The Chase Manhattan Bank, both in the U.S. and in
several overseas locations. He was named a managing director of Chase in January
1986. Mr. Cook holds a degree in international finance from The American
University, Washington, D.C.
David Schlachet, a Director of the Company from December 1994, served as the
Chairman of Elite Industries
20
Ltd. from July 1997 until June 30th 2000. From January 1996 to June 1997, Mr.
Schlachet served as the Vice President of the Strauss Group and Chief Executive
Officer of Strauss Holdings Ltd, one of Israel's largest privately owned food
manufacturers. He was Vice President of Finance and Administration at the
Weizmann Institute of Science in Rehovot, Israel from 1990 to December 1995, and
was responsible for the Institute's administration and financial activities,
including personnel, budget and finance, funding, investments, acquisitions and
collaboration with the industrial and business communities. From 1989 to 1990,
Mr. Schlachet was President and Chief Executive Officer of YEDA Research and
Development Co. Ltd., a marketing and licensing company at the Weizmann
Institute of Science. Today Mr. Schlachet serves as Chairman of Harel Capital
Markets (Israeli broker, underwriter and asset management firm) and as a
Director of Israel Discount Bank Ltd., Hapoalim Capital Markets Ltd, Teldor Ltd.
(software and computer company), Proseed Ltd., a Venture Capital investment
company, Compugen Ltd. and Taya Investment Company Ltd., and also serves as
Managing Partner in Biocom, a V.C. Fund in the field of Life Science.
Mony Ben Dor, a director of the Company since September 1997, has been managing
partner of Biocom, a V.C Fund in the field of Life Science since April 2000.
Prior to that he was Vice President of the Israel Corporation Ltd. from May
1997, and Chairman of two publicly traded subsidiaries: H.L. Finance and Leasing
and Albany Bonded International Trade. He was also a Director of a number of
subsidiary companies such as Israel Chemicals Ltd., Zim Shipping Lines, and
Tower Semi Conductors. From 1992-1997 Mr. Ben Dor was Vice President of Business
Development for Clal Industries Limited, which is one of the leading investment
groups in Israel. He was actively involved in the acquisition of companies
including a portfolio of pharmaceutical companies Pharmaceutical Resources Inc.,
Finetech Ltd., BioDar Ltd., to name a few. He served as a director representing
Clal Industries in all of the acquired companies as well as other companies of
Clal Industries. Prior to his position at Clal Industries, Mr. Ben Dor served as
Business Executive at the Eisenberg Group of companies.
Georges Anthony Marcel, M.D., Ph.D., a Director of the Company since September
1998, is President and Chairman of TMC Development S.A., a biopharmaceutical
consulting firm based in Paris, France. Prior to founding TMC Development in
1992, Dr. Marcel held a number of senior executive positions in the
pharmaceutical industry, including Chief Executive Officer of Amgen's French
subsidiary, Vice President of Marketing for Rhone-Poulenc Sante and Director of
Development for Roussel-Uclaf. Dr. Marcel teaches biotechnology industrial
issues and European regulatory affairs at the Faculties of Pharmacy of Paris and
Lille. Dr. Marcel is also a member of the Gene Therapy Advisory Committee at the
French Medicines Agency.
Elkan R. Gamzu, Ph.D., a Director of the Company since February 2000, is a
consultant to the biotechnology and pharmaceutical industries. Prior to becoming
a consultant, Dr. Gamzu held a number of senior executive positions in the
biotechnology and pharmaceutical industries, including President and Chief
Executive Officer of Cambridge Neuroscience, Inc. from 1994 until 1998. Dr.
Gamzu also served as President and Chief Operating Officer and Vice President of
Development for Cambridge Neuroscience, Inc. from 1989 to 1994. Previously, Dr.
Gamzu held a variety of senior positions with Warner-Lambert and Hoffmann-La
Roche, Inc. Dr. Gamzu is a member of the Board of Directors of three other
biotechnology companies: the publicly traded XTL Biopharmaceuticals Ltd. and the
privately held biotechnology companies Neurotech S.A. of Evry, France and
Hypnion, Inc. of Worcester, MA. He is also on the Board of Directors of
Rho-ADDS, sas, a Paris-based provider of biostatistics and data management for
the biopharmaceutical industry. Since February 2001, Dr. Gamzu has been acting,
on a part-time basis, as Interim VP, Development Product Leadership for
Millennium Pharmaceuticals, Inc.
Samuel D. Waksal, Ph.D., a Director of the Company since March 2000, is a
founder of ImClone Systems Incorporated and has been its Chief Executive Officer
and a Director since August 1985 and President since March 1987. From 1982 to
1985, Dr. Waksal was a member of the faculty of Mt. Sinai School of Medicine as
Associate Professor of Pathology and Director of the Division of Immunotherapy
within the Department of Pathology. He has served as visiting Investigator of
the National Cancer Institute, Immunology Branch, Research Associate of the
Department of Genetics, Stanford University Medical School, Assistant Professor
of
21
pathology at Tufts University School of Medicine and Senior Scientist for the
Tufts Cancer Research Center. Dr. Waksal was a scholar of the Leukemia Society
of America from 1979 to 1984. Dr. Waksal currently serves on the Executive
Committee of the New York Biotechnology Association, the Board of Directors of
Cadus Pharmaceutical Corporation and is Chairman of the New York Council for the
Humanities.
22
Section 16 Filings
No person who, during the fiscal year ended December 31, 2001, was a director,
officer or beneficial owner of more than ten percent of the Company's Common
Stock which is the only class of securities of the Company registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act"), a "Reporting
Person" failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year. The foregoing is based solely upon a
review by the Company of Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
Item 11. Executive Compensation
The following table summarizes the total compensation of the Chief Executive
Officer of the Company for 2001 and the two previous years, as well as all other
executive officers of the Company who received compensation in excess of
$100,000 for 2001.
Annual Compensation Long Term Compensation
------------------- ----------------------
Stock
Name/ Restricted Underlying
Principal Position Year Salary Bonus Other Stock Options
- ----------------- ---- ---- ----- ------- -------- -----------
Haim Aviv, Ph.D
Chairman, Chief 2001 $268,000 $ 80,000 $ 2,844 100,000
Executive Officer, and 2000 $244,662 $ 74,044 $ 2,925 100,000
Chief Scientist 1999 $236,418 $ 29,906 $ 2,829 65,000
Gad Riesenfeld, Ph.D
President and 2001 $209,790 $ 42,000 $ 56,556 (2) 50,000
Chief Operating Officer 2000 $194,250 $ 20,000 $ 71,125 (2) 60,000
1999 $185,000 $ 20,000 $ 53,860 (2) 50,000
Robert W. Cook
Executive Vice President 2001 $198,450 $ 40,000 $ 15,338 (1) 40,000
and Chief Financial Officer 2000 $183,750 $ 40,000 $ 4,800 (1) 45,000
1999 $175,000 $ 20,000 $ 4,800 (1) 40,000
(1) Consists of contributions to insurance premiums, car allowance and car
expenses.
(2) Consists of housing allowance, contributions to insurance premiums, and car
allowance.
23
The following tables set forth information with respect to the named executive
officers concerning the grant, repricing and exercise of options during the last
fiscal year and unexercised options held as of the end of the fiscal year.
Option Grants for the Year Ended December 31, 2001
Common
Stock % of Total
Underlying Options Exercise
options Granted to Price per
Granted Employees Share Expiration Date
------- --------- ----- ---------------
Haim Aviv, Ph.D 100,000 19.6 % $ 1.875 April 2, 2011
Gad Riesenfeld, Ph.D. 50,000 9.8 % $ 1.875 April 2, 2011
Robert W. Cook 40,000 7.8 % $ 1.875 April 2, 2011
Aggregated Option Exercises
for the Year Ended December 31, 2001
and Option Values as of December 31, 2001:
Value of Unexercised
Number of Number of Unexercised In-the-Money Options at
Shares Options at December 31, 2001 December 31, 2001
Acquired on Value ---------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Haim Aviv, Ph.D 0 0 331,876 232,500 $ 60,500 $ 83,250
Gad Riesenfeld, Ph.D. 0 0 179,333 140,000 $ 44,000 $ 51,250
Robert W. Cook 0 0 118,750 106,250 $ 39,500 $ 41,000
Stock Option Plans
It is currently the Company's policy that all full time key employees are
considered annually for the possible grant of stock options, depending upon
employee performance. The criteria for the awards are experience, uniqueness of
contribution to the Company and level of performance shown during the year.
Stock options are intended to generate greater loyalty to the Company and help
make each employee aware of the importance of the business success of the
Company.
As of December 31, 2001, the Company had 2,452,030 options to purchase shares of
the Company's Common Stock outstanding under various option plans, 437,192 of
which are non-qualified options. During 2001, the Company granted 610,500
options to purchase shares of its Common Stock to employees, and directors, of
which 100,000 are non-qualified options. A summary of the various established
stock option plans is as follows:
1992 Plan. The maximum number of shares of the Company's Common Stock available
for issuance under the 1992 Plan is 750,000 shares, subject to adjustment in the
event of stock splits, stock dividends, mergers, consolidations and the like.
Common Stock subject to options granted under the 1992 Plan that expire or
terminate will again be available for options to be issued under the 1992 Plan.
As of December 31, 2001, there were options to purchase 385,792 shares of the
Company's Common Stock outstanding under this plan. Each option granted
outstanding under the 1992 plan as of December 31, 2000 expires on October 31,
2005.
24
1997 Plan and 2000 Plan. The 1997 Plan and the 2000 Plan are each administered
by a committee appointed by the Board of Directors (the "Compensation
Committee"). The Compensation Committee will designate the persons to receive
options, the number of shares subject to the options and the terms of the
options, including the option price and the duration of each option, subject to
certain limitations.
The maximum number of shares of Common Stock available for issuance under the
1997 Plan, as amended, and under the 2000 Plan is 1,500,000 shares each, subject
to adjustment in the event of stock splits, stock dividends, mergers,
consolidations and the like. Common Stock subject to options granted under the
1997 Plan and the 2000 Plan that expire or terminate will again be available for
options to be issued under each Plan.
The price at which shares of Common Stock may be purchased upon exercise of an
incentive stock option must be at least 100% of the fair market value of Common
Stock on the date the option is granted (or at least 110% of fair market value
in the case of a person holding more than 10% of the outstanding shares of
Common Stock (a "10% Stockholder")).
The aggregate fair market value (determined at the time the option is granted)
of Common Stock with respect to which incentive stock options are exercisable
for the first time in any calendar year by an optionee under the 1997 Plan, the
2000 Plan or any other plan of the Company or a subsidiary, shall not exceed
$100,000. The Compensation Committee will fix the time or times when, and the
extent to which, an option is exercisable, provided that no option will be
exercisable earlier than one year or later than ten years after the date of
grant (or five years in the case of a 10% Stockholder). The option price is
payable in cash or by check. However, the Board of Directors may grant a loan to
an employee, pursuant to the loan provision of the 1997 Plan or the 2000 Plan,
for the purpose of exercising an option or may permit the option price to be
paid in shares of Common Stock at the then current fair market value, as defined
in the 1997 Plan or the 2000 Plan.
Under the 1997 Plan, upon termination of an optionee's employment or
consultancy, all options held by such optionee will terminate, except that any
option that was exercisable on the date employment or consultancy terminated
may, to the extent then exercisable, be exercised within three months thereafter
(or one year thereafter if the termination is the result of permanent and total
disability of the holder), and except such three month period may be extended by
the Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such three-month period, the option may be
exercised within one year after death by the decedent's estate or his legatees
or distributees, but only to the extent exercisable at the time of death. The
2000 Plan provides that the Compensation Committee may in its discretion
determine when any particular stock option shall expire. A stock option
agreement may provide for expiration prior to the end of its term in the event
of the termination of the optionee's service to the Company or death or any
other circumstances.
The 1997 Plan and the 2000 Plan each provides that outstanding options shall
vest and become immediately exercisable in the event of a "sale" of the Company,
including (i) the sale of more than 75% of the voting power of the Company in a
single transaction or a series of transactions, (ii) the sale of substantially
all assets of the Company, (iii) approval by the stockholders of a
reorganization, merger or consolidation, as a result of which the stockholders
of the Company will own less than 50% of the voting power of the reorganized,
merged or consolidated company.
The Board of Directors may amend, suspend or discontinue the 1997 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 1997 Plan, (ii) change the designation of the class of persons eligible to
receive options, (iii) decrease the price at which options may be granted,
except that the Board may, without stockholder approval accept the surrender of
outstanding options and authorize the granting of new options in substitution
therefore specifying a lower exercise price that is not less than the fair
market value of Common Stock on the date the new option is granted, (iv) remove
the administration of the 1997 Plan from the Compensation Committee, (v) render
any member of the Compensation Committee eligible to receive an option under the
1997 Plan while serving thereon, or (vi) amend the 1997 Plan in such a manner
25
that options issued under it intend to be incentive stock options, fail to meet
the requirements of Incentive Stock Options as defined in Section 422 of the
Code.
The Board of Directors may amend, suspend or discontinue the 2000 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 2000 Plan or (ii) change the designation of the class of persons eligible to
receive options.
Under current federal income tax law, the grant of incentive stock options under
the 1997 Plan or the 2000 Plan will not result in any taxable income to the
optionee or any deduction for the Company at the time the options are granted.
The optionee recognizes no gain upon the exercise of an option. However the
amount by which the fair market value of Common Stock at the time the option is
exercised exceeds the option price is an "item of tax preference" of the
optionee, which may cause the optionee to be subject to the alternative minimum
tax. If the optionee holds the shares of Common Stock received on exercise of
the option at least one year from the date of exercise and two years from the
date of grant, he will be taxed at the time of sale at long-term capital gains
rates, if any, on the amount by which the proceeds of the sale exceed the option
price. If the optionee disposes of the Common Stock before the required holding
period is satisfied, ordinary income will generally be recognized in an amount
equal to the excess of the fair market value of the shares of Common Stock at
the date of exercise over the option price, or, if the disposition is a taxable
sale or exchange, the amount of gain realized on such sale or exchange if that
is less. If, as permitted by the 1997 Plan or the 2000 Plan, the Board of
Directors permits an optionee to exercise an option by delivering already owned
shares of Common Stock valued at fair market value) the optionee will not
recognize gain as a result of the payment of the option price with such already
owned shares. However, if such shares were acquired pursuant to the previous
exercise of an option, and were held less than one year after acquisition or
less than two years from the date of grant, the exchange will constitute a
disqualifying disposition resulting in immediate taxation of the gain on the
already owned shares as ordinary income. It is not clear how the gain will be
computed on the disposition of shares acquired by payment with already owned
shares.
2001 Employee Stock Purchase Plan. The 2001 Plan is intended to qualify as an
employee stock purchase plan under Section 423 of the Code. All employees of the
Company, its Pharmos Ltd. subsidiary or any other subsidiaries or affiliated
entities who have completed 180 consecutive days of employment and who
customarily work at least 20 hours per week will be eligible to participate in
the 2001 Plan, except for any employee who owns five percent or more of the
total combined voting power or value of all classes of stock of the Company or
any subsidiary on the date a grant of a right to purchase shares under the 2001
Plan (Right) is made. There currently are no such employees with such large
holdings. Participation by officers in the 2001 Plan will be on the same basis
as that of any other employee. No employee will be granted a Right which permits
such employee to purchase shares under the 2001 Plan at a rate which exceeds
$25,000 of fair market value of such shares (determined at the time such Right
is granted) for each calendar year in which such Right is outstanding. Each
Right will expire if not exercised by the date specified in the grant, which
date will not exceed 27 months from the date of the grant. Rights will not be
assignable or transferable by a participating employee, other than in accordance
with certain qualified domestic relations orders, as defined in the Code, or by
will or the laws of descent and distribution.
The total number of shares reserved for issuance under the 2001 Plan is 500,000
shares. Under the 2001 Plan, for any given calendar year, a participating
employee can only be granted Rights to purchase that number of shares which,
when multiplied by the exercise price of the Rights, does not exceed more than
10% of the employee's base pay. The Company contemplates that payroll deductions
generally will be used by participating employees to acquire the shares covered
by their Rights.
From time to time, the Board of Directors may fix a date or a series of dates on
which the Company will grant Rights to purchase shares of Common Stock under the
2001 Plan at prices not less than 85% of the lesser of (i) the fair market value
of the shares on the date of grant of such Right or (ii) the fair market value
of the shares on the date such Right is exercised.
26
The 2001 Plan also provides that any shares of Common Stock purchased upon the
exercise of Rights cannot be sold for at least six months following exercise, to
avoid potential violations of the "short swing" trading provisions of Section 16
of the Securities Exchange Act of 1934, as amended.
The Board of Directors or a committee to which it delegates its authority under
the 2001 Plan will administer, interpret and apply all provisions of the 2001
Plan. The Board has delegated such authority to the Compensation and Stock
Option Committee.
The Board of Directors may amend, modify or terminate the 2001 Plan at any time
without notice, provided that no such amendment, modification or termination may
adversely affect any existing Rights of any participating employee, except that
in the case of a participating employee of a foreign subsidiary of the Company,
the 2001 Plan may be varied to conform with local laws. In addition, subject to
certain appropriate adjustments to give effect to relevant changes in the
Company's capital stock, no amendments to the 2001 Plan may be made without
stockholder approval if such amendment would increase the total number of shares
offered under the 2001 Plan or would render Rights "unqualified" for special tax
treatment under the Code.
No taxable income will be recognized by a participant either at the time a Right
is granted under the 2001 Plan or at the time the shares are purchased. Instead,
tax consequences are generally deferred until a participant disposes of the
shares (e.g., by sale or gift). The federal income tax consequences of a sale of
shares purchased under the 2001 Plan will depend on the length of time the
shares are held after the relevant date of grant and date of exercise, as
described below.
If shares purchased under the 2001 Plan are held for more than one year after
the date of purchase and more than two years from the date of grant, the
participant generally will have taxable ordinary income on a sale or gift of the
shares to the extent of the lesser of: (i) the amount (if any) by which the fair
market value of the stock at the date of grant exceeds the exercise price paid
by the participant; or (ii) the amount by which the fair market value of the
shares on the date of sale or gift exceeds the exercise price paid by the
participant for the shares. In the case of a sale, any additional gain will be
treated as long-term capital gain. If the shares are sold for less than the
purchase price, there will be no ordinary income, and the participant will have
a long-term capital loss for the difference between the purchase price and the
sale price.
If the stock is sold or gifted within either one year after the date of purchase
or two years after the date of grant (a "disqualifying disposition"), the
participant generally will have taxable ordinary income at the time of the sale
or gift to the extent that the fair market value of the stock at the date of
exercise was greater than the exercise price. This amount will be taxable in the
year of sale or disposition even if no gain is realized on the sale, and the
Company would be entitled to a corresponding deduction. A capital gain would be
realized upon the sale of the shares to the extent the sale proceeds exceed the
fair market value of those shares on the date of purchase. A capital loss would
be realized to the extent the sales price of the shares disposed of is less than
the fair market value of such shares on the date of purchase. Special tax
consequences may follow from dispositions other than a sale or gift.
1997 Employees and Directors Warrants Plan
The 1997 Employees and Directors Warrants Plan was approved by the Stock Option
Committee as of February 12, 1997 and March 19, 1997. 1,030,000 Warrants to
purchase 1,030,000 shares of Common Stock were granted to certain employees of
the Company. Of such warrants, 955,000 were granted at an exercise price of
$1.59 per share and 75,000 were granted and an exercise price of $1.66 per share
(together, the "1997 Employees Warrants"). The 1997 Employees Warrants become
exercisable in increments of 25% each on their first, second, third and fourth
anniversaries, respectively, and shall expire in the year 2007. 100,000 Warrants
to purchase 100,000 shares of Common Stock were granted to directors of the
Company at an exercise price of $1.59 per share (the "1997 Directors Warrants")
on February 12, 1997. The 1997 Directors Warrants become exercisable in
increments of 25% each on the first, second, third and fourth anniversaries of
February 12, 1997
27
and shall expire on February 12, 2003. At December 31, 2001, there were 491,500
1997 Employees Warrants at $1.59, no 1997 Employees Warrants at $1.66 and 5,000
1997 Directors Warrants at $1.59 outstanding.
Upon termination of a Warrant Holder's employment, consultancy or affiliation
with the Company, all Warrants held by such Warrant Holder will terminate,
except that any Warrant that was exercisable on the date which the employment,
consultancy or affiliation terminated may, to the extent then exercisable, be
exercised within three months thereafter (or one year thereafter if the
termination is the result of permanent and total disability of the holder). If a
Warrant Holder dies while he or she is an employee, consultant or affiliate of
the Company, or during such three month period, the Warrant may be exercised
within one year after death by the decedent's estate or his legatees or
distributees, but only to the extent exercisable at the time of death.
Employment/Consulting Contracts/Directors' Compensation
Haim Aviv, Ph.D. In addition to serving as Chairman of the Board and Chief
Executive Officer of the Company, Dr. Aviv has provided consulting services
under a consulting agreement with an initial three-year term ended May 3, 1993.
The term automatically renewed for additional one-year periods unless either the
Company or Dr. Aviv terminated the agreement at least 90 days prior to a
scheduled expiration date. The agreement was renewed on an annual basis and was
to have expired on May 3, 2001. Under the agreement, Dr. Aviv was entitled to
severance pay equal to 25% of his salary in the event of termination or
non-renewal without cause. Under the agreement, Dr. Aviv was required to render
certain consulting services to the Company.
The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief Executive
Officer under an employment agreement with Dr. Aviv. Dr. Aviv was required to
devote at least 50% of his business time and attention to the business of
Pharmos, Ltd. and to serve on its Board of Directors.
In April 2001, the Compensation and Stock Option Committee of the Board of
Directors recommended, and the Board approved, a new one-year
employment/consulting agreement for Dr. Aviv, as Chairman of the Board and Chief
Executive Officer of the Company. Dr. Aviv has agreed to devote a majority of
his business time to the Company and to Pharmos Ltd. The agreement provides for
automatic one year renewals unless either the Company terminates the agreement
at least 180 days prior to the scheduled expiration date during for the initial
one year term (and 90 days for subsequent terms) or Dr. Aviv terminates the
agreement at least 60 days prior to the scheduled expiration date. Dr. Aviv's
base compensation for 2001, effective January 1, was $268,000, to be allocated
between the Company and Pharmos Ltd., and his base compensation for 2002,
effective January 1, is $281,400, to be allocated between the Company and
Pharmos Ltd. The Company also agreed to make available for Dr. Aviv's benefit
following his death, termination of employment for disability or retirement at
the age of at least 62 an amount equal to the cost of insurance premiums the
Company would otherwise have incurred to obtain and maintain a "split-dollar"
life insurance policy on his life (approximately $10,000 per year, accruing
interest at 8% per year). In addition, the Company agreed to pay, in lieu of
contributing to other benefits plans on his behalf, an amount equal to an
aggregate of approximately 21% of his base compensation toward the "Management
Insurance Scheme" managed by the government of Israel for members of management
of Israeli companies.
Dr. Aviv's new employment agreement also provides that if his employment is
terminated within one year following a "change of control," he will receive
severance pay of 18 months of base salary for the then-current year, accelerated
vesting of all unvested stock options and extended exercisability of all stock
options until their respective expiration dates. A "change of control" involves
an acquisition of at least 50% of the voting power of the Company's securities,
a change in at least 51% of the composition of the current Board of Directors,
or approval by the Board of Directors or stockholders of the Company of a
transaction where such change of voting control or composition of the Board
would occur, where the Company would be liquidated or where all or substantially
all of its assets would be sold.
28
If Dr. Aviv's employment is terminated by the Company, after notice, other than
for a change in control, death, disability or for "cause," as defined in his
employment agreement, or if he terminates his employment within one year of a
change in control or otherwise for "good reason," as defined in his employment
agreement, he will receive severance pay of 12 months of base salary for the
then-current year, accelerated vesting of all unvested stock options and
extended exercisability of all stock options until their respective expiration
dates.
The new employment agreement also contains customary confidentiality and
non-competition undertakings by Dr. Aviv.
Gad Riesenfeld, Ph.D. In October 1992, the Company's predecessor entered into a
one-year employment agreement with Dr. Riesenfeld, which was automatically
renewable for successive one-year terms unless either party gave three months
prior notice of non-renewal. Under the Agreement, Dr. Riesenfeld devoted his
full time to serving as President and Chief Operating Officer of the Company.
In April 2001, the Compensation and Stock Option Committee of the Board of
Directors recommended, and the Board approved, a new one year employment
agreement for Dr. Riesenfeld, as full-time President and Chief Operating Officer
of the Company. The Committee also increased his base salary, as of January 1,
2001, by 8%, to $209,790. In March 2002, the Committee increased his base
salary, effective January 1, 2002, by 12% to $234,965.
The other provisions of Dr. Riesenfeld's new employment agreement relating to
benefits, severance arrangements and confidentiality and non-competition
obligations are substantially similar to the those included in Dr. Aviv's
employment agreement, as described above, except that the Company's contribution
to the "Management Insurance Scheme" on Dr. Riesenfeld's behalf is approximately
16%. In addition, the Compensation Committee and the Board of Directors in April
2001 also authorized an amendment to Dr. Riesenfeld's new employment agreement
to provide that if the Company hires a new Chief Executive Officer, Dr.
Riesenfeld will be awarded, at the time of commencement of employment, a
one-time stock option grant equal to the highest grant he received during the
previous three years, in addition to his annual stock option awards. In
addition, any termination by the Company within 12 months after such
commencement of employment will require 180 days' prior written notice to Dr.
Riesenfeld and will entitle him to severance pay equal to 12 months of base
salary. In such circumstances, any resignation by Dr. Riesenfeld within 12
months thereafter, other than for "good reason" (as defined in his employment
agreement) will require 90 days' prior written notice by Dr. Riesenfeld and will
entitle him to 12 months of base salary. The amendment to his employment
agreement also provides that Dr. Riesenfeld will act as an unpaid consultant to
the Company for a one year period following any such termination or resignation.
Robert W. Cook. In January 1998, the Company entered into a one-year employment
agreement with Mr. Cook, which was automatically renewable for a successive
one-year term unless either party gave three months prior notice of non-renewal.
Under the Agreement, Mr. Cook devoted his full time to serving as Vice President
Finance and Chief Financial Officer of the Company.
In April 2001, the Compensation and Stock Option Committee of the Board of
Directors recommended, and the Board approved, a new one year employment
agreement for Mr. Cook, as full-time Vice President Finance and Chief Operating
Officer of the Company. The Committee also increased his base salary, as of
January 1, 2001, by 8%, to $198,450 and the Board ratified his promotion to
Executive Vice President. In March 2002, the Committee increased his base
salary, effective January 1, 2002, by 12% to $222,264.
The other provisions of Mr. Cook's new employment agreement relating to
benefits, severance arrangements and confidentiality and non-competition
obligations are substantially similar to the those included in Dr. Aviv's
employment agreement, as described above, except that Mr. Cook does not
participate in the "Management Insurance Scheme" of the Company's Israeli
subsidiary, and that in lieu of investing life insurance premiums for his
benefit, the Company has actually obtained a $500,000 "split-dollar" life
insurance policy for the benefit of Mr. Cook.
29
Elkan R. Gamzu, Ph.D. In January 2000, the Company entered into a consulting
agreement with Dr. Gamzu with a term of one year (subject to extension by
written agreement of the Company and Dr. Gamzu), pursuant to which Dr. Gamzu may
provide certain assistance and consulting services to the Company as and when
needed. The agreement provides for compensation on a per diem basis in
connection with the provision of such assistance and consulting services at the
rate of $3,000 per day. In 2001, the Company paid $ 23,580 to Dr. Gamzu pursuant
to the consulting agreement.
Directors' Compensation. In 2001, Directors did not receive any compensation for
service on the Board or for attending Board meetings. In March 2002, the Board
of Directors of the Company adopted a compensation policy with respect to
outside members of the Board. Specifically, the board approved:
Cash Compensation
1) Two payments of $2,500 each per annum, the first due on January 1,
and the second immediately after the earlier of the director's
initial appointment to the board or election by the shareholders;
and
2) $1,000 per each board or committee meeting attended in person or by
conference call; no payment for a committee meeting if it occurs on
the same day as the board meeting.
Stock Compensation
1) An initial grant of 30,000 options, awardable on the earlier of the
director's initial appointment to the board or election by the
shareholders; and
2) 20,000 options annually thereafter, awardable on the earlier of the
date of the director's re-election by the shareholders or the date
on which a general option grant is made by the Company for its key
employees and directors; and
3) Special, one-time awards may be granted for attaining certain
corporate achievements at the recommendation of the Chairman.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 15, 2002, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's Directors, and
(iii) all current Directors and executive officers of the Company as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.
Amount of
Name and Address of Beneficial Percentage of
Beneficial Ownership Ownership Total (1)
- -------------------- --------- -------------
Haim Aviv, Ph.D. (2) 1,267,995 2.2%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel
David Schlachet (3) 21,250 *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel
30
Mony Ben Dor (3) 18,125