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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended COMMISSION FILE NO. 0-11550
DECEMBER 31, 1996
PHARMOS CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 36-3207413
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(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
2 INNOVATION DRIVE
ALACHUA, FL 32615
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (904) 462-1210
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
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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 3,
1997 held by those persons deemed to be non-affiliates was approximately
$46,500,000.
As of March 3, 1997, the Registrant had outstanding 31,095,510 shares of
its $.03 par value Common Stock.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Pharmos Corporation (the "Company") is an emerging pharmaceutical Company
engaged in the discovery, design, development and commercialization of
pharmaceuticals to meet significant therapeutic needs in major markets. The
Company is developing pharmaceuticals in various fields including: site specific
drugs for ophthalmic indications, neuroprotective agents with a novel mechanism
of action for the treatment of central nervous system (CNS) disorders, newly
designed molecules to treat cancer, and emulsion-based products for topical and
systemic applications. In February 1997, the Company submitted a New Drug
Application ("NDA") with the U.S. Food and Drug Administration ("FDA") for its
proprietary anti-inflammatory product (LE-A) for the treatment of ocular
allergies. In March 1997, the Company amended its previously filed Lotemax(TM)
(loteprednol etabonate 0.5% ophthalmic suspension) NDA with additional clinical
data aimed at supporting approval for the treatment of additional ocular
inflammatory indications. The Company has agreements with Bausch & Lomb
Pharmaceuticals ("Bausch & Lomb") to market these two products, as well as a
third product under joint development, in the United States, Europe, Canada and
other selected countries. Dexanabinol (HU-211), the Company's lead CNS product
aimed at treating stroke, head trauma and cardiac arrest is currently being
studied in a Phase II clinical trial for severe head trauma. The Company's
tamoxifen analog anti-cancer program is advancing in preclinical development.
STRATEGY
The Company's business is the design of novel drugs with superior safety
and efficacy profiles, initially targeted to ophthalmic and neurological
disorders. The Company seeks to enter into collaborative relationships with
established pharmaceutical companies to bring its products to market.
The Company is developing pharmaceuticals which are designed to address
unmet needs in certain markets and to exhibit superior efficacy and/or safety
profiles over competing products in other markets. For example, many current
anti-inflammatory ophthalmic drugs either have significant side effects, such as
the elevation of intraocular pressure ("IOP") by steroids, or are drugs which
are safer, but only moderately effective at reducing inflammation, such as non-
steroidal anti-inflammatory drugs (NSAIDs). For many neurological indications,
such as head trauma, there are no effective drug therapies available. In the
case of cancer treatment, potential side effects make current therapies less
desirable.
The Company is applying its experience in drug design and its novel drug
delivery technology in developing products directed at several fields including:
Site specific drugs for ophthalmic indications, neuroprotective compounds
targeted at specific CNS biochemical pathways associated with neurological
indications and systemic drugs designed to avoid CNS side effects and to have an
excellent peripheral safety profile. The Company is also using proprietary
lipid-based technologies, primarily submicron emulsions, to achieve better
delivery routes.
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PRODUCTS
LOTEPREDNOL ETABONATE
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Lotemax(TM) is the trade name of a drug product in a form of eye drop
suspension in which the active compound is loteprednol etabonate ("LE"). The
product is a unique steroid, designed to act in the eye and cure inflammatory
and allergic conditions, and then, be deactivated to a predictable inactive
metabolite once it reaches the inner eye or the systemic circulation. This
pharmacological profile 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 IOP which is sight-threatening. While
glucocorticoids, for lack of an alternative, are regularly used for severe
inflammatory conditions of the eye; milder conditions, such as allergies, are
preferentially treated with less potent non-steroidal agents. The Company
believes that Lotemax(TM) and LE-A have demonstrated attractive safety and
efficacy profiles in the treatment of ocular inflammatory and allergic
conditions.
An NDA for Lotemax(TM) (loteprednol etabonate ophthalmic suspension, 0.5%)
for general ocular inflammatory indications was submitted to the FDA in March
1995. Additional data relating to Phase III clinical trials of Lotemax for the
treatment of uveitis and post operative eye inflammation was submitted to the
FDA in March, 1997. In February of 1997, the Company filed a separate NDA for
LE-A (loteprednol etabonate ophthalmic suspension, 0.2%) for the treatment of
seasonal allergic conjunctivitis. A combination of LE with the antibiotic
tobramycin ("LE-T") for the treatment of inflammatory and infectious indications
is in the preclinical development stage.
On June 30, 1995, the Company entered into an agreement with Bausch &
Lomb to market Lotemax(TM), LE-A and LE-T in the U.S. A second agreement,
covering Europe, Canada and other selected countries, was signed on December 12,
1996 . Both agreements give Bausch & Lomb the right to purchase the "drug
substance" from the Company, to manufacture the "drug product" and to assist the
Company in developing the products. In 1995, the Company also signed an
agreement with SIPSY Chemical Corporation for exclusive manufacturing of LE for
sale to the Company.
DEXANABINOL (HU-211)
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Dexanabinol (HU-211) is the Company's lead synthetic cannabinoid compound
in a family of neuroprotective molecules originally designed to avoid the
psychotropic and sedative spectrum of cannabinimetic agents, while retaining
their beneficial properties as anti-emetics, analgesics and anti-glaucoma
agents.
It is now well established that the psychotropic effects of cannabinoids
are mediated via stereo selective (-) preferring receptors. Dexanabinol is a
(+) optical isomer and does not interact with cannabinoid receptors. It does,
nevertheless, retain anti-emetic and anti-glaucoma properties. More importantly,
it is also a stereo selective, non-competitive antagonist of the glutamate NMDA
receptor channel with a unique safety profile, activation of which is believed
to play a key role in secondary neuronal damage due to head trauma, stroke and
cardiac arrest. The molecule also has free radical scavenging properties, and
anti-inflammatory properties (involving inhibition of
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TNF-[alpha] production). Both of these latter mechanisms are important for
neuroprotection. Therefore, dexanabinol emerges as a unique modality to
neuroprotection, combining three relevant mechanisms of action in a single
molecule which act at different steps of the neurotoxic process in stroke, head
trauma and potentially other indications.
While head trauma and stroke are the highest priority indications for
dexanabinol, its spectrum of activities has potential as a chronic
neuroprotectant in other diseases such as glaucoma, Parkinson's and Alzheimer's
diseases, as well as various other inflammatory conditions. Development of
dexanabinol for these chronic indications is being explored at the preclinical
level.
In several animal models ( including closed head injury, focal and global
forebrain ischemia and optic nerve crush), the drug has demonstrated significant
neuroprotective activity. In these studies, a single injection of dexanabinol
given after the insult suggests significant long term functional improvement and
an increase in neuronal survival.
In early 1996, a Phase I study of rising dose tolerance in healthy
volunteers (30 subjects) showed dexanabinol to be safe and well tolerated at
doses up to and including the expected therapeutic doses. Specifically, there
were no hallucinations, sedation or blood pressure changes of the type reported
with other glutamate antagonists. In late 1996, the Company started a Phase II
study of head injured patients, which is targeted for completion in late 1997.
This study, which is conducted at six medical centers in Israel in patients with
moderate to severe head injury, has been reviewed and approved by the American
Brain Institute Consortium (ABIC) and the European Brain Institute Consortium
(EBIC). As of March, 1997, there were 20 patients enrolled in the study which
is expected to have a total enrollment of 40-60 patients.
TAMOXIFEN ANALOGS
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Several diseases are currently treated with drugs that produce mild to
dose-limiting CNS side effects. For instance, tamoxifen, which is used to treat
breast cancer patients and has been suggested for use as a prophylactic agent in
healthy women at risk of developing the disease, causes hot flashes and may be
associated with cognitive and affective deficits as well. Additionally,
corticosteroids, used to treat chronic inflammatory and auto-immune diseases,
cause psychotic reactions in some patients and have been shown to cause
selective neuronal death in animals. Neuropathic pain could be treated by
certain systemic anesthetics, but the resulting CNS side effects make such
therapy unsafe. These side effects could be addressed by designing drugs with
limited passage to the brain through the blood brain barrier (BBB).
In the light of this concept, several analogs of tamoxifen and lidocaine
with poor CNS uptake have been synthesized and tested in several animal models.
Tamoxifen methiodide, a permanently charged tamoxifen derivative, was tested in
animals (nude mice) inoculated with human breast cancer cells. Treatment
resulted in rapid arrest of growth followed by tumor regression. Growth arrest
was also observed in estrogen-independent tumors. The rate and magnitude of
response was higher than that seen with tamoxifen itself. The compound retains
the anti-osteoporotic effects of tamoxifen in bone but is considerably less
active than tamoxifen as a utero trophic agent, demonstrating an improved
therapeutic profile as compared to the parent
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compound. Permanently charged lidocaine analogs suppress electrophysiological
activities typical to neuropathic pain in vivo, similar to that achieved with
the parent compound.
Further preclinical pharmacology is underway to identify additional analogs
of tamoxifen and to gain a fuller understanding of the mechanism of action anti-
angiogenesis profile.
PILOCARPINE-SME
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Pilocarpine-SME is an eye drop formulation of generic Pilocarpine in a
submicron emulsion ("SME") for the treatment of glaucoma. The Company's SME
technology, consisting of oily droplets in an aqueous medium, has demonstrated
advantages over standard formulations in terms of reduced irritation and
increased bioavailability in animal models as well as safety and efficacy in
Phase I and certain Phase II clinical trials. Licensing arrangements are being
sought to support development of this product.
ADAPROLOL MALEATE
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The Company is seeking a licensing arrangement for continued development of
Adaprolol Maleate, a beta blocker for the treatment of glaucoma with a
predictable metabolic disposition in the systemic circulation. Systemic side
effects of beta blockers limit the use of beta blockers in the elderly, cardiac
patients and asthmatics.
In 1994, the Company completed a Phase II clinical trial of Adaprolol
Maleate with a control group treated with the standard beta blocker, Timolol,
has shown an average of 18% reduction in IOP without the deleterious effect on
mean arterial blood pressure experienced by the Timolol treated patients.
COMPETITION
The pharmaceutical industry is highly competitive, and research relating to
drug delivery and formulation technologies is developing rapidly. The Company
competes with a number of pharmaceutical companies which have financial,
technical and marketing resources significantly greater than those of the
Company. Some companies with established positions in the pharmaceutical
industry may be better equipped than the Company to develop and market products
in the markets the Company is seeking to enter. A significant amount of
pharmaceutical research is also being carried out at universities and other not-
for-profit research organizations. These institutions are becoming increasingly
aware of the commercial value of their findings and are becoming more active in
seeking patent protection and licensing arrangements to collect royalties for
the use of technology they have developed. These institutions may also market
competitive commercial products on their own or through joint ventures and will
compete with the Company in recruiting highly qualified scientific personnel.
The Company is pursuing areas of product development in which there is a
potential for extensive technological innovation. The Company's competitors may
succeed in developing products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's potential products becoming obsolete or non-competitive.
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COLLABORATIVE RELATIONSHIPS
The Company's 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 the Company's products in development and potential
future products. Depending on the availability of financial, marketing and
scientific resources, among other factors, the Company may license its
technology or products to others and retain profit sharing, royalty,
manufacturing, co-marketing, co-promotion or similar rights. Any such
arrangements could limit the Company's flexibility in pursuing alternatives for
the commercialization of its products. There can be no assurance that the
Company will establish any additional collaborative arrangements or that, it
established, any such relationships will be successful.
BAUSCH & LOMB. On June 30, 1995, the Company signed a definitive agreement
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with Bausch & Lomb to manufacture and market Lotemax/TM/, the Company's lead
product, in the United States upon receipt of FDA approval. The agreement
includes two other loteprednol etabonate-based products (LE-A and LE-T)
currently being developed by the Company. A second agreement signed December
12, 1996, extends Bausch & Lomb's rights to manufacture and market these
products in Europe, Canada and other selected countries pending regulatory
approval.
Under the agreements, Bausch & Lomb will purchase the active drug substance
from the Company and, as of March 1, 1997, has provided the Company with a total
of $5 million in cash advances against future sales to Bausch & Lomb, with
another $1 million due subject to receiving regulatory approval for LE-T in the
United States. An additional $1.6 million in advances against future sales of
Bausch & Lomb will be due to the Company following receipt of regulatory
clearance in certain markets outside of the United States. Bausch & Lomb
collaborates in the development of these products by making available amounts up
to 50% of their Phase III clinical trial costs. The Company retains certain
conditional co-marketing rights in the U.S. to all of the products covered by
the marketing agreement.
In a separate agreement completed in December 1996, Bausch & Lomb made a $2
million investment in the common stock of the Company.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
PATENTS AND PROPRIETARY RIGHTS
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Proprietary protection generally has been important in the pharmaceutical
industry, and the commercial success of products incorporating the Company's
technologies may depend, in part, upon the ability to obtain strong patent
protection.
Some of the technologies underlying the Company's potential products were
invented or are owned by various third parties, including the University of
Florida, Dr. Nicholas Bodor, and the Hebrew University of Jerusalem ("Hebrew
University"). The Company is the licensee of these
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technologies under patents held by the applicable owner through licenses which
generally remain in effect for the life of the applicable patent. The Company
generally maintains, at its expense, U.S. and foreign patent rights with respect
to both the licensed and its own technology and files and/or prosecutes the
relevant patent applications in the U.S. and foreign countries. The Company also
relies upon trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop its competitive position. The Company's
policy is to protect its technology by, among other things, filing, or requiring
the applicable licensor to file, patent applications for technology that it
considers important to the development of its business. The Company intends to
file additional patent applications, when appropriate, relating to its
technology, improvements to its technology and to specific products it develops.
There can be no assurance that any additional patents will be issued, or if
issued, that they will be of commercial benefit to the Company. In addition, it
is impossible to anticipate the breadth or degree of protection that any such
patents will afford.
The patent positions of pharmaceutical firms, including the Company, are
uncertain and involve complex factual questions. In addition, the coverage
claimed in a patent application can be significantly reduced before or after the
patent is issued. Consequently, the Company does not know whether any of the
pending patent applications underlying the licensed technology will result in
the issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated.
Since patent applications in the U.S. are maintained in secrecy until patents
issue and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it or its licensors, as the case may be, were the first creators of
inventions covered by pending and issued patents or that it or its licensors, as
the case may be, were the first to file patent applications for such inventions.
Moreover, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. There can be no assurance that the
patents relating to the licensed technology, if issued, will be upheld by a
court of competent jurisdiction or that a competitor's product will be found to
infringe such patents.
Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in the
Company's fields. If patents are issued to other companies that contain
competitive or conflicting claims and such claims are ultimately determined to
be valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost or be able to develop or obtain
alternative technology.
The Company also relies upon trade secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commitment of employment or consulting or
advisory relationships with the Company. These agreements generally provide that
all confidential information developed or made known
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to the individual during the course of the individual's relationship with the
Company 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 the Company. There can be no assurance, however, that these agreements will
provide meaningful protection or adequate remedies for the Company's trade
secrets in the event of unauthorized use or disclosure of such information. The
Company's patents and licenses underlying its potential products described
herein are summarized below.
SITE-SPECIFIC DRUGS. In the general category of site-specific drugs
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which are active mainly in the eye and have limited systemic side effects, the
Company has licensed several patents from Dr. Nicholas Bodor. The earliest
patents date from 1984 and the most recent from 1996. Some of these patents
cover loteprednol etabonate-based products and adaprolol maleate.
NEUROPROTECTIVE AGENTS. The Company has licensed from the Hebrew
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University, which is the academic affiliation of the inventor, Dr. Raphael
Mechoulam, patents covering novel compounds which have demonstrated certain
beneficial neuropharmacological activity while appearing to be devoid of most of
the deleterious effects usually associated with this class of compounds. This
group of patents has been designed to protect this family of compounds and their
uses devised by the Company and the inventors. The earliest patent applications
resulted in patents issued in 1989, and the most recent patents date from 1997.
These patents cover Dexanabinol, which is under development for the treatment of
head trauma, stroke, and glaucoma. The Company has received notice of allowance
for another of its U.S. patent applications relating to certain uses of analogs
of this compound. Three additional U.S. patent applications are pending.
TAMOXIFEN ANALOGS. The Company has filed patent applications in the U.S.
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and Israel, and has an international application, to protect pharmaceutical
compositions of Tamoxifen Analogs and Tamoxifen Methiodide. In November 1996,
the Company received a Notice of Allowance from the U.S. Patent and Trademark
Office for a new patent with claims covering the use of permanently ionic
derivatives of steroid hormones and their antagonists known as Tamoxifen
Analogs. The patent also claims novel analogs of tamoxifen and other steroid
hormones and their antagonists. The Company believes that these charged
derivatives are superior to the parent compounds in that they are devoid of CNS
side effects and show an overall improved pharmacological profile.
EMULSION-BASED DRUG DELIVERY SYSTEMS. In the general category of SubMicron
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Emulsion (SME) technology, the Company licensed two patents from the Hebrew
University of Jerusalem ("Hebrew University") and has separately filed ten
patent applications which are at different stages of prosecution. These patents
and patent applications have been devised to protect a group of formulation
technologies devised by the Company and the inventors as they relate to
pharmaceutical and medicinal products. The earliest patent filings for SME
technology date from 1986 and the most recent, from 1996. These patents cover
Pilocarpine-SME, which is an improved formulation to treat glaucoma.
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LICENSES
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The Company's license agreements generally require the Company, as
licensee, to pay royalties on sale of products developed from the licensed
technologies, and fees on revenues the Company receives for sublicenses, where
applicable. The royalty rates defined in the licenses are customary and usual
in the pharmaceuticals industry. The royalties will be payable for periods up
to fifteen years from the date of certain specified events, including the date
of the first sale of such products, or the date from which the first registered
patent from the developed technologies is in force, or the year following the
date in which FDA approval has been received for a developed product. Certain
of the license agreements also require annual payments.
GOVERNMENT REGULATION
The Company's activities and products are significantly regulated by a
number of governmental entities, especially the FDA, in the U.S. and by
comparable authorities in other countries. These entities regulate, among other
things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's potential products. Product
development and approval within this regulatory framework takes a number of
years and involves the expenditure of substantial resources. Many products that
appear promising initially ultimately do not reach the market because they are
found to be unsafe (perhaps too toxic) or to lack effectiveness, as demonstrated
by testing required by government regulation during the development process. In
addition, there can be no assurance that this regulatory framework will not
change or that additional regulation will not arise at any stage of the
Company's product development that may preclude or otherwise adversely affect
approval, delay an application or require additional expenditures by the
Company. Moreover, even if approval is obtained, failure to comply with present
or future regulatory requirements, or new information adversely reflecting on
the safety or effectiveness of the approved drug, can lead to FDA withdrawal of
approval to market the product.
The regulatory process required to be completed by the FDA before a new
drug delivery system may be marketed in the U.S. depends significantly on
whether the drug (which will be delivered by the drug delivery system in
question) has existing approval for use and in what dosage form. If the drug is
a new chemical entity that has not been approved, then the process includes (i)
preclinical laboratory and animal tests, (ii) an IND application which has
become effective, (iii) adequate and well-controlled human clinical trials to
establish the safety and effectiveness of the drug for its intended indication
and (iv) FDA approval of a pertinent NDA. If the drug has been previously
approved, then the approval process is similar, except that certain toxicity
tests normally required for the IND application may not be necessary. Even with
previously approved drugs, additional toxicity testing may be required when the
delivery form is substantially changed, or when a company does not have access
to the raw data from the prior preclinical studies.
The activities required before a pharmaceutical product may be marketed in
the U.S. begin with preclinical testing. Preclinical tests include laboratory
evaluation of product chemistry and other end points and animal studies to
assess the potential safety and efficacy of the product as formulated. The
conduct of preclinical studies is regulated by the FDA under a series of
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regulations called the Good Laboratory Practice regulations. Violations of these
regulations can, in some cases, lead to invalidation of the data from these
studies, requiring such studies to be replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an
Investigative New Drug ("IND") application to the FDA. FDA regulations provide
that human clinical trials may begin thirty days following the submission and
receipt of an IND application, unless the FDA advises otherwise or requests
additional information, clarification or additional time to review the IND
application; it is generally considered good practice to obtain affirmative FDA
response before commencing trials. There is no assurance that the submission of
an IND application will eventually allow a company to commence clinical trials.
Once trials have commenced, the FDA may stop the trials, or particular types or
parts of trials, by placing a "clinical hold" on such trials because of concerns
about, for example, safety of the product being tested or the adequacy of the
trial design. Such holds can cause substantial delay and in some cases may
require abandonment of a product.
Clinical testing involves the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician pursuant to an FDA-reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards ("IRBs") at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.
Phase I clinical studies are commonly performed in 20 to 40 healthy human
subjects or, more rarely, in selected patients with the targeted disease or
disorder. Their goal is to establish initial data about tolerance and safety of
the drug in humans. Also, the first data regarding the absorption, distribution,
metabolism, and excretion of the drug in humans are established.
In Phase II human clinical studies, preliminary evidence is sought
regarding the pharmacological effects of the drug and the desired therapeutic
efficacy in limited studies with small numbers of selected patients (50 to 200).
Efforts are made to evaluate the effects of various dosages and to establish an
optimal dosage level schedule and validate clinical efficacy endpoints to be
used in Phase III trials. Additional safety data are also gathered from these
studies.
Phase III clinical studies consist of expanded, large scale studies of
patients (200 to several thousand) with the target disease or disorder, to
obtain definitive statistical evidence of the effectiveness and safety of the
proposed product and dosing regimen. These studies may also include separate
investigations of the effects in subpopulations of patients, such as the
elderly.
At the same time that the human clinical program is being performed,
additional non-clinical (i.e., animal) studies are also being conducted.
Expensive, long duration (12-18 months) toxicity and carcinogenicity studies are
done to demonstrate the safety of drug administration for the extended period of
time required for effective therapy. Also, a variety of laboratory, animal, and
initial human studies may be performed to establish manufacturing methods for
the drug, as well as stable, effective dosage forms.
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The results of product development, preclinical studies and clinical
studies and other information are submitted to the FDA in an NDA to seek
approval for the marketing and interstate commercial shipment of the drug. With
the NDA, a company must pay the FDA a user fee in excess of $200,000. Companies
with less than 500 employees and no revenues from products may be eligible for
an exception. This exception was granted to the Company in connection with the
NDA for Lotemax/TM/ and reduces the fee by 50%, which is payable 12 months after
the NDA is filed by the FDA. The FDA may refuse to file or deny an NDA if
applicable regulatory requirements, such as compliance with Current Good
Clinical Practice ("cGCP") requirements, are not satisfied or may require
additional clinical testing. Even if such data are submitted, the FDA may
ultimately decide that the NDA does not satisfy the requirements for approval.
If the FDA does ultimately approve the product, it may require, among other
things, post-marketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the drug.
In addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer, and almost always
seeks to require prior approval of promotional materials. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
problems occur after the product reaches the market. After a product is filed
for a given indication in an NDA, subsequent new indications or dosages for the
same product are reviewed by the FDA via the filing and upon receipt of a
Supplemental NDA ("sNDA") submission as well as payment of a separate user fee.
The sNDA is more focused than the NDA and deals primarily with safety and
effectiveness data related to the new indication or dosage, and labeling
information for the sNDA indication or dosage. Finally, the FDA requires
reporting of certain information, e.g., adverse experience reports, that becomes
known to a manufacturer of an approved drug.
Each domestic drug product manufacturing establishment must be registered
with, and approved by, the FDA and must pay the FDA a registration fee and
annual fee. In addition, each such establishment must inform the FDA of every
drug product it has in commercial distribution and keep such list updated.
Establishments handling controlled substances must be licensed and are inspected
by the U.S. Drug Enforcement Agency ("DEA"). The Company has a current DEA
license appropriate for handling the substances it uses in its facilities.
Domestic establishments are also subject to inspection by the FDA for compliance
with cGMP regulations after an NDA has been filed and thereafter, at least
biennially. The labeling, advertising and promotion of drug products also must
be in compliance with pertinent FDA regulatory requirements. Failure to comply
with applicable requirements relating to production, distribution or promotion
of a drug product can lead to FDA demands that production and shipment cease,
and, in some cases, that product be recalled, or to enforcement actions that can
include seizures, injunctions and criminal prosecution.
To develop and market its potential products abroad, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing, among other things, the design and
conduct of human clinical trials, pricing and marketing. The approval procedure
varies among countries and can involve additional testing, and the time required
to obtain approval may differ from that required to obtain FDA approval. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Union ("EU") certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
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almost always granted. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval set forth above. Approval by
the FDA does not ensure approval by other countries.
Various aspects of the Company's business and operations are also regulated
by a number of other governmental agencies including the DEA, U.S. Department of
Agriculture, Environmental Protection Agency and Occupational Safety and Health
Administration as well as by other federal, state and local authorities. In
addition, any future international sales would be regulated by numerous foreign
authorities.
There continue to be a number of legislative and regulatory proposals aimed
at changing the health care system. It is uncertain what, if any, legislative
proposals will be adopted or what actions federal or state agencies, or third
party payors may take in response to any health care reform proposals or
legislation. Although the Company cannot predict whether any such legislative
or regulatory proposals will be adopted or the effect such proposals may have on
its business, the uncertainty surrounding such proposals could have a material
adverse effect on the Company. Furthermore, the Company's ability to
commercialize its potential product portfolio may be adversely affected to the
extent that such proposals have a material adverse effect on the business,
financial condition and profitability of other companies that are prospective
collaborators for certain of the Company's potential products.
The Company's ability to commercialize its products successfully may depend
in part on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and there can be no assurance that adequate third-party
coverage will be available to enable the Company or any of its future licensees
to maintain price levels sufficient to realize an appropriate return on its
investment in product development.
CORPORATE HISTORY
Pharmos Corporation (the "Company"), a Nevada corporation, formerly
known as Pharmatec, Inc., was incorporated under the laws of the State of Nevada
on December 20, 1982. On October 29, 1992, the Company completed a merger (the
"Merger") with Pharmos Corporation, a privately held New York corporation ("Old
Pharmos"), and on October 30, 1992 exercised an option to acquire all of the
outstanding shares of Xenon Vision, Inc., a privately held Delaware corporation
("Xenon"). Prior to the Merger, Old Pharmos was a biopharmaceutical company with
proprietary drug delivery and formulation technologies, one of which involved an
initial application of ophthalmic drugs, and another of which involved research
pharmaceuticals with neuroprotective properties being developed for applications
such as stroke and head trauma. Prior to the Merger, the Company was a publicly-
held company primarily engaged in the development and testing of a chemical
delivery system which has been shown in animal studies to permit the passage of
drugs across the blood-brain barrier. Prior to its acquisition, Xenon was a
research-based pharmaceutical company developing several patented products for
the ophthalmic field. In April 1995, the Company acquired Oculon Corporation
("Oculon") a privately-held development stage company with anti-cataract
technologies and net assets of approximately $3.5 million, consisting
substantially of cash and cash equivalents.
12
<PAGE>
HUMAN RESOURCES
As of March 1, 1997, the Company had 49 full time employees, 17 in the
U.S. and 32 in Israel, of whom approximately 15 hold doctorate or medical
degrees.
The Company's employees are not covered by a collective bargaining
agreement. The Company has never experienced employment-related work stoppages
and considers its employee relations to be excellent.
PUBLIC FUNDING AND GRANTS
The Company's subsidiary, Pharmos Ltd., has received certain funding
from the Chief Scientist of the Israel Ministry of Industry and Trade (the
"Chief Scientist") for research and development of SME technology for injection
and nutrition as well as for research relating to pilocarpine, dexamethasone and
ophthalmic formulations for dry eyes. The Company has received approximately
$1,600,000 under such agreements through December 31, 1996. Funding is repayable
on the basis of royalties from the sale of products developed as a result of the
research activities conducted with such funds. The obligation to pay royalties
is limited to the amount of such funding received, linked to the exchange rate
of the U.S. dollar and the New Israeli Shekel. Additionally, funding by the
Chief Scientist places certain legal restrictions on the transfer of know-how
and the manufacture of resulting products outside of Israel. See "Conditions in
Israel."
The Company has received certain funding of approximately $810,000 from the
Israel-U.S. Binational Industrial Research and Development Foundation to develop
Lotemax/TM/ and LE-T. Funding is repayable on the basis of royalties from the
sale of products developed as a result of the research activities conducted with
such funds. The obligation to pay royalties is limited to 150% of the amount of
such funding received, linked to the exchange rate of the U.S. dollar and the
New Israeli Shekel.
CONDITIONS IN ISRAEL
The Company conducts significant operations in Israel through its
subsidiary, Pharmos Ltd., and therefore is affected by the political, economic
and military conditions to which that country is subject.
Pharmos Ltd. has received certain funding from the Chief Scientist
with respect to its SubMicron Emulsion Technology and with respect to its new
chemical entity, Dexanabinol. The proclaimed purpose of the legislation under
which such funding is provided is to develop local industry, improve the state
balance of trade and to create new jobs in Israel. Such funding prohibits the
transfer or license of know-how and the manufacture of resulting products
outside of Israel, without the permission of the Chief Scientist. Although it is
the Company's belief that the Chief Scientist does not unreasonably withhold
this permission if the request is based upon commercially justified
circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, there can be no assurance that such consent, if requested,
would be granted upon terms satisfactory to the Company or granted at all.
13
<PAGE>
ITEM 2. PROPERTIES
The Company is headquartered in Alachua, Florida and leases facilities used
in the operation of its research, development, pilot manufacturing and
administrative activities in Alachua, Florida and Rehovot, Israel. These
facilities have been improved to meet the special requirements necessary for the
operation of the Company's research and development activities. In the opinion
of the management these facilities are sufficient to meet the current and
anticipated future requirements of the Company. In addition management believes
that it has sufficient ability to renew its present leases related to these
facilities or obtain suitable replacement facilities.
ITEM 3. LEGAL PROCEEDINGS
In April 1996, the Company reached a settlement with a former director of
the Company regarding its licensing of LE. In October 1995, the Company
commenced an action in Supreme Court, New York County, against this former
director of the Company, seeking to enjoin him from taking any steps to
terminate or interfere with the Company's rights under its License Agreement
with him relating to LE. Pursuant to a Court-referenced mediation, the Company
and the former director agreed to discontinue with prejudice all pending actions
in New York and Florida. The settlement involved a lump sum advance payment to
the former director, based on advances received by the Company from Bausch &
Lomb Pharmaceuticals, Inc., with whom it has a marketing agreement for LE and
line extension products, as well as additional advances based on future advances
and other non-royalty payments from Bausch and Lomb or other parties with whom
the Company enters into marketing or similar arrangements. The advances will be
offset against agreed-upon royalty payments to be made to the former director
based on the net selling price of Bausch & Lomb or other marketing partners.
In June 1996, the United States District Court, Southern District of New
York granted the Company's motion to be dismissed from a class action suit
against David Blech, D. Blech & Co., Bear Stearns & Co., Inc. and certain other
defendants, including the Company and ten other publicly traded biotechnology
companies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting held on December 18, 1996, the stockholders of
the Company elected the following persons as directors of the Company to hold
office until the next annual meeting of the stockholders or until their
successors are duly elected and qualified: Haim Aviv (20,774,054 votes for and
1,981,630 votes against), Stephen C. Knight (22,664,456 votes for and 91,228
against), David Schlachet (22,665,956 votes for and 89,728 votes against),
Marvin P. Loeb (22,662,631 votes for and 93,053 votes against), E. Andrews
Grinstead, III (22,664,931 votes for and 90,753 votes against) and Fredric D.
Price (22,666,431 votes for and 89,253 votes against). The stockholders of the
Company also voted to reject a resolution to adopt the Company's 1996 Incentive
and Non-Qualified Stock Option Plan as the resolution did not receive votes
constituting a majority of the shares of Common Stock present and entitled to
vote at the Annual Meeting (7,898,484 voted in favor, 2,713,302 voted against
and the remainder abstained or were withheld).
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
From October 20, 1993 until January 26, 1995, the Company's Common Stock
was traded on the NASDAQ National Market System under the symbol "PARS", and
prior thereto was traded on the Nasdaq SmallCap Market. Prior to the Merger,
the Common Stock was quoted under the symbol "PHTC". The Company's Common Stock
was moved to the Nasdaq SmallCap Market, effective January 27, 1995, as a result
of the Company's non-compliance with certain Nasdaq corporate governance
requirements. The following table sets forth the range of high and low bid
prices for the Common Stock as reported on the NASDAQ National Market System and
the Nasdaq SmallCap Market during the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31, 1996 HIGH LOW
- --------------------------------- ----- -----
<S> <C> <C>
1st Quarter................... $2.50 $1.38
2nd Quarter................... 2.88 1.69
3rd Quarter................... 2.00 1.22
4th Quarter................... 1.78 1.16
Year ended December 31, 1995 HIGH LOW
- --------------------------------- ----- -----
1st Quarter................... $1.37 $ .50
2nd Quarter................... 2.75 .62
3rd Quarter................... 3.19 1.50
4th Quarter................... 2.56 1.22
</TABLE>
The foregoing represent inter-dealer prices, without retail mark-up, mark-
down or commission, and may not necessarily represent actual transactions.
On March 17, 1997, there were 322 record holders of the Common Stock of the
Company and approximately 5,523 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.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ $ 75,000 $ 7,815 $ 81,900 $ 395,093
Operating expenses, net (8,077,210) (8,171,085) (12,963,114) (9,480,595) (6,454,670)
Acquired research and - - - - (6,284,136)
development
Merger and related - - - - (1,579,256)
expenses ------------ ------------ ------------- ------------ -------------
Net loss ($8,077,210) ($8,096,085) ($12,955,299) ($9,398,695) ($13,922,969)
============ ============ ============= ============ =============
Net loss per share ($0.28) ($0.37) ($1.19) ($1.24) ($2.26)
============ ============ ============= ============ =============
Total assets $ 7,468,293 $ 9,461,654 $ 4,289,416 $ 10,608,458 $ 10,197,057
============ ============ ============= ============ =============
Long term obligations $ 4,201,156 $ 2,294,268 $ 91,318 $ 129,240 -
============ ============ ============= ============ =============
Cash dividends declared - - - - -
============ ============ ============= ============ =============
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has generated limited revenues from product sales and is
dependent upon external financing, interest income, and research and development
contracts to pursue its intended business activities. The Company has not been
profitable since inception and has incurred a cumulative net loss of $62,101,952
through December 31, 1996. Losses have resulted principally from costs incurred
in research activities aimed at identifying and developing the Company's product
candidates, clinical research studies, merger and acquisition costs, the write-
off of purchased research and development, and general and administrative
expenses. The Company expects to incur additional operating losses over the
next several years as the Company's research and development and clinical trials
programs continue. The Company's ability to achieve profitability is dependent
on its ability to develop and obtain regulatory approvals for its products, to
enter into agreements for product development and commercialization with
strategic corporate partners and to develop the capacity to manufacture and sell
its products, and to secure additional financing. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenues decreased by $75,000 from 1995. Revenues in 1995 related to
fees the Company received as a result of sublicensing certain technologies which
were not being actively developed by the Company.
Total operating expenses increased by $101,325, or 1%, from $8,253,666 in
1995 to $8,354,991 in 1996 due to increased research and development spending
partially offset by lower general, administrative and other expenses.
Research and development expenses increased by $936,563, or 19%, primarily
due to significant spending on clinical trails in 1996. During the past year,
the company initiated and completed Phase III clinical trials of Lotemax(TM) for
the treatment of uveitis and post cataract surgery as well as Phase III clinical
trials of LE-A for the treatment of seasonal ocular allergies. In October of
1996, the Company commenced a Phase II study of HU-211 for severe head injury.
In February 1997, the Company submitted an NDA for LE-A and in March 1997, the
Company amended and supplemented the previously filed NDA for Lotemax with the
results of the 1996 clinical trials. The increased clinical trial expenses were
partially offset by cost saving measures taken by the Company in early 1995 that
focused research and development activities on products which were closest to
commercialization. Bausch & Lomb net reimbursements for clinical trials totaled
$1.2 million during 1996, thereby reducing research and development expenses by
this amount.
Patent expense decreased by $199,447, or 41%, in 1996. The company was
able to reduce patent maintenance costs by returning to an original patent
holder several patents covering technologies which are no longer being pursued.
Further, the Company's in-house patent counsel now executes work previously
undertaken by external patent attorneys.
17
<PAGE>
General and administrative costs decreased by $445,376, or 20%, in 1996.
This reduction resulted primarily from the 1995 relocation of corporate
headquarters from New York to the Company's existing facility in Alachua,
Florida.
Depreciation and amortization expenses decreased by $190,415, or 35%, in
1996 due to the absence in 1996 of depreciation of New York facilities following
the 1995 closing, a write-off of certain leasehold improvements, as well as
reduced depreciation relating to the Florida operation.
Net interest income increased by $195,200 in 1996, reflecting the higher
level of investable funds in 1996. In addition, the Company had higher interest
expense in 1995 relating to interest on the convertible debentures issued by the
Company in February 1995 , and converted into Common Stock by July 1995, and a
note that was paid in full.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues increased by $67,185 from $7,815 in 1994 to $75,000 in 1995.
This increase resulted from a fee the Company received as a result of
sublicensing certain technologies which were not being actively developed by the
Company. Revenues in 1994 related to sales of fine chemicals. The Company
phased out the selling of speciality chemicals and no such revenues were
received in 1995.
Total operating expenses decreased by $4,782,795, or 37%, from $13,036,461
in 1994 to $8,253,666 in 1995 primarily due to decreases in research and
development expenses, patent expenses and general and administrative expenses.
Research and development expenses decreased by $2,931,323, or 37%,
primarily due to certain clinical trials of the Company's lead product
Lotemax(TM) being substantially completed in 1994; the Company submitted a New
Drug Application ("NDA") for this product with the Federal Drug Administration
("FDA") in March 1995. Late in 1995, the Company began clinical trial testing on
one of its Lotemax line extension products.
Patent expenses decreased by $461,596, or 49%, in 1995. This decrease
reflects a return to more normalized levels of patent expenses as 1994 was
impacted by costs of defending patent challenges related to technologies
licensed by the Company. In addition patent expenses in 1994 were impacted by
costs associated with improving the Company's patent coverage for its lead
product Lotemax(TM) and its Dexanabinol and Tamoxifen Methiodide compounds.
General and administrative expenses decreased by $1,503,343, or 41%, in
1995 primarily reflecting the impact of the cost savings which resulted from the
Company's decisions in late 1994 and early 1995 to eliminate staff and relocate
its corporate headquarters from New York to Alachua, Florida. In 1994 the
Company recognized costs of approximately $360,000 related to this restructuring
primarily for severance and relocation expenses.
Net interest income in 1995 of $82,581 represented an increase of 13%
compared to 1994, and was comprised of interest income of $209,584 offset by
interest expense of $127,003. Interest income in 1995 increased by $62,654, or
42%, compared to 1994 and resulted from the Company's higher level of
investible funds in 1995. Interest expense in 1995 increased by $53,270, or 72%
compared to 1994 and
18
<PAGE>
resulted from interest expense on the convertible debentures issued by the
Company in February 1995 and converted into Common Stock by July 1995.
The net loss for 1995 of $8,096,085 reflected a decrease of $4,859,214, or
38%, from the net loss of $12,955,299 for 1994. The decrease in operating
expenses described above accounted for substantially all of this decrease.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception and has financed its operations with public
and private offerings of securities, advances and other funding pursuant to a
marketing agreement with Bausch & Lomb, research contracts, license fees,
royalties and sales, and interest income.
The Company had working capital of $4.0 million, including cash and cash
equivalents of $5.1 million, as of December 31, 1996. In March 1997, the
Company received an additional $1 million cash advance from Bausch & Lomb
following the NDA submission for LE-A, $143,333 of which was subsequently
advanced to the license holder. On March 31, 1997 the Company completed a $6
million private placement of convertible preferred stock and warrants.
Management believes that existing cash and cash equivalents combined with
additional cash inflows from investment income and grants will be sufficient to
support operations into the first quarter of 1998. Management believes that
additional funding will be required to fund operations until, if ever,
profitable operations can be achieved. Therefore, the Company is continuing to
actively pursue various funding options, including additional equity offerings,
strategic corporate alliances, business combinations and the establishment of
product related research and development limited partnerships, to obtain the
additional financing that would be required to continue the the development of
its products and bring them to commercial markets.
During 1996, the Company raised additional equity of $3.9 million through
the issuance of common stock, convertible preferred stock and warrants. All net
proceeds were available to fund the Company's operations. In addition, during
1996, the Company signed an international marketing agreement with Bausch & Lomb
to market, upon regulatory approval, the Company's three leading ophthalmic
products (including Lotemax(TM)) in Europe, Canada and other selected countries.
Under this agreement, Bausch & Lomb will provide the Company with $1.6 million
in cash advances upon receipt of regulatory approvals in these markets.
Pursuant to the U.S. Marketing Agreement with Bausch & Lomb, as of March
31, 1997, the Company has received $5 million ($4 million as of December 31,
1996) in advances against future sales of the active drug substance (needed to
manufacture the drug). Bausch & Lomb will be entitled to credits against such
future purchases of the drug substance until the advances have been recouped.
The Company may be obligated to repay such advances if it is unable to supply
Bausch & Lomb with certain specified quantities of the active drug substance.
19
<PAGE>
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.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------- --- ----------------------------------------
<S> <C> <C>
Haim Aviv, Ph.D. 56 Chairman, Chief Executive Officer, Chief
Scientist and Director
Gad Riesenfeld, Ph.D. 53 President, Chief Operating Officer and
Acting Secretary
Alan M. Mark 37 Acting Chief Financial Officer and
Acting Treasurer
Anat Biegon, Ph.D. 43 Vice President/Research and Development
Marvin P. Loeb 70 Director
E. Andrews Grinstead III 52 Director
Stephen C. Knight, M.D. 37 Director
David Schlachet 51 Director
Fredric D. Price 51 Director
</TABLE>
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and
a Director of the Company and co-founded in 1990, Pharmos Corporation, a New
York corporation ("Old Pharmos"), which merged into the Company on October 29,
1992 (the "Merger"). Dr. Aviv also served as Chairman, Chief Executive Officer,
Chief Scientist and a Director of Old Pharmos prior to the Merger. Dr. Aviv was
the co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a publicly-
traded company engaged in the development of products using recombinant DNA, its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific Consultant until August 1993. Prior to that time, Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv
is the principal stockholder of Avitek Ltd., a stockholder of the Company. Dr.
Aviv is also an officer and/or significant stockholder of several privately-held
Israeli pharmaceutical and venture capital companies and was recently appointed
Chairman of the Israel National Committee for Biotechnology .
21
<PAGE>
Gad Riesenfeld, Ph.D., was named President and Acting 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 Ltd. from March 1992 until
the Merger. Prior thereto, he was engaged in free-lance consulting relating to
the commercialization of intellectual property, primarily in the pharmaceutical
and medical fields. From March 1990 through May 1991 Dr. Riesenfeld was a
Managing Director of Kamapharm Ltd., a private company specializing in human
blood products. Prior thereto, from May 1986, he was Managing Director of
Galisar Ltd., a private company involved in extracorporeal blood therapy.
Alan M. Mark became Acting Chief Financial Officer and Acting Treasurer of
the Company in July 1996. Prior to joining the Company, Mr. Mark served as
financial and strategic advisor to growing companies from 1995 to 1996. From
1991 to 1995, Mr. Mark was an investment banker at NatWest Markets in New York,
serving most recently as Managing Director. From 1986 to 1990, Mr. Mark was a
member of the corporate finance group at Drexel Burnham Lambert, serving most
recently as Vice President. Mr. Mark received a BS from the Wharton School of
the University of Pennsylvania and an MBA from Harvard Business School.
Anat Biegon, Ph.D., has served as Vice President of Research and
Development since December 1994. Dr. Biegon became head of Research and
Development for the Company in 1994. From 1992 to 1994, Dr. Biegon was a
director in Pharmos Ltd.'s Department of Pharmacology. From 1991 to 1992, she
was a Staff Physiologist at the University of California at Berkeley's Lawrence
Berkeley Laboratory, Division of Research Medicine and Radiation Biophysics.
From 1990 to 1991, Dr. Biegon was a Research Associate Professor in the
Department of Psychiatry at New York University Medical Center. From 1988 to
1990, she was an Associate Professor in the Department of Neurobiology at the
Weizmann Institute of Science.
Marvin P. Loeb, a Director, was Chairman of the Board of the Company (then
known as Pharmatec, Inc.) from December 1982 through October 1992. He has been
Chairman of Trimedyne, Inc. (and its subsidiaries), a publicly-held company
engaged in the manufacture of lasers, optical fibers and laser delivery systems,
since April 1981; a Director of Gynex Pharmaceuticals, Inc., from April 1986
until its merger with and into Biotechnology General Corporation in 1993, a
publicly-held company engaged in the development and commercialization of
pharmaceutical products; a Director of Petrogen, Inc., a privately-held company
engaged in the genetic engineering of bacteria for cleanup of oil waste and
toxic waste, from April 1987 to April 1992 (Chairman from November 1980 to
December 1982 and from July 1983 to April 1987); Chairman of Automedix Sciences,
Inc., an inactive, publicly-held company engaged in the development of products
for treating cancer and other diseases, since September 1980; Chairman of
Cardiomedics, Inc., a privately-held, development stage company engaged in the
development of heart assist devices, from May 1986; Chairman of Xtramedics,
Inc., a publicly-held company developing a feminine hygiene product, from
November 1986 to February 1994 and a Director of Xtramedics from November 1986
until May 1994; Chairman of Ultramedics, Inc., an inactive, privately-held
company developing blood treatment products, since November 1988; and President
and Director of Marvin P. Loeb & Co. since 1965, and Master Health Services,
Inc. since 1972, both of which are family-held companies engaged in licensing of
inventions and financial consulting.
E. Andrews Grinstead, III, a Director of the Company since 1991, is
Chairman and Chief Executive Officer of Hybridon, Inc., a privately-held
biotechnology company. Mr. Grinstead joined Hybridon in 1991. From 1987 to
October 1990, he was Managing Director and group head of the life sciences group
22
<PAGE>
at PaineWebber, Inc. From 1986 to 1987, Mr. Grinstead was Managing Director
and group head of the life sciences group at Drexel Burnham Lambert. From 1984
to 1986, he was a Vice President at Kidder, Peabody & Co., Inc., where he
developed the life sciences corporate finance specialty group. Prior to his
seven years on Wall Street, Mr. Grinstead served in a variety of operational and
executive positions with Eli Lilly & Company, most recently as general manager
of Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical
Operations. Since 1991, Mr. Grinstead has served as a Director of EcoScience
Corporation, a development-stage company engaged in the development of
biopesticides. Since 1994, Mr. Grinstead has served as a member of the Board of
Trustees for the Albert B. Sabine Vaccine Foundation, a 501(c)(3) charitable
foundation dedicated to disease prevention. Mr. Grinstead was appointed to the
President's Council of the National Academy of Sciences and the Institute of
Medicine in 1992.
Stephen C. Knight, M.D., a Director of the Company since November 10, 1994,
is Vice President, Corporate Development and Strategic Planning, of Epix
Medical, Inc. Prior to joining Epix Medical in July 1996, Dr. Knight was a
Senior Consultant in the Process Industries section of the North American
Management Consulting Directorate at Arthur D. Little, Inc. While working for
Arthur D. Little, Dr. Knight went on a two-year assignment in the Arthur D.
Little office in Brussels, Belgium. During the past five years, he has been
involved in a variety of corporate and research and development strategic
planning, technology assessment, and merger and acquisition studies in the
pharmaceutical, biotechnology, health care information, medical equipment and
diagnostic industries. Prior to joining Arthur D. Little, Dr. Knight worked as
a consultant at APM, Inc. Dr. Knight has performed medical research at the
National Institutes of Health, AT&T Bell Laboratories, and Yale and Columbia
Universities.
David Schlachet, a Director of the Company since December 15, 1994, is
Chief Executive Officer at Strauss Holdings Ltd. and Vice President at Strauss
Dairies Ltd. The Strauss Group is Israel's largest privately owned food
manufacturer. Mr. Schlachet was Vice President of Finance and Administration at
the Weizmann Institute of Science in Rehovot, Israel from 1990 to December,
1995. Mr. Schlachet 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. Mr. Schlachet is a Director of
Taya Investment Company Ltd., an Israeli publicly-held investment company.
Fredric D. Price, a Director of the Company since August 1996, is Chief
Executive Officer and member of the Board of Directors of Applied Microbiology,
Inc., a publicly-traded health care company engaged in the development of food
ingredients, special dietary foods, and therapeutic agents that may be useful
against infectious diseases. He is also a member of the Executive Committee
(and Secretary) of the Board of Directors of the New York Biotechnology
Association. From July 1991 to September 1994, he was Vice President Finance &
Administration and Chief Financial Officer of Regeneron Pharmaceuticals, Inc.
For the five years prior to joining Regeneron, Fred was the President of FxFDP,
a consulting practice that provided strategic planning, market development, and
new product introduction services to pharmaceutical and other health care
businesses. From 1973 to 1986, he worked for Pfizer Pharmaceuticals, where he
was Vice President, responsible for both the Pfipharmecs Division and the
Controllers's Department for all of Pfizer Pharmaceuticals. Fred received a BA
from Dartmouth College in 1967 and an MBA in 1969 from the Wharton School of the
University of Pennsylvania.
23
<PAGE>
SECTION 16 FILINGS
No person who, during the fiscal year ended December 31, 1996, 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.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief
Executive Officer of the Company for 1996 and the two previous years, as well as
all other executive officers of the Company who received compensation in excess
of $100,000 for 1996. Stock options have been adjusted for the Reverse Share
Split.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Restricted Stock
Name/ ----------------------------------------------------- Stock Underlying
Principal Position Year Salary Bonus Other Awards($) Options
- ------------------ ----------------------------------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Haim Aviv, Ph.D.
Chairman, Chief 1996 $236,453 $ 27,435 (1)
Executive Officer, 1995 200,230 20,551 (1) 324,376
Acting President, and 1994 195,476 $25,750 (4) 225,000
Chief Scientist
Gad Riesenfeld, Ph.D.
President and 1996 150,000 43,798 (2)
Chief Operating Officer 1995 136,664 34,481 (2) 79,333
1994 110,000 40,828 (2) 29,333
Alan M. Mark
Acting Chief 1996 150,000 (3) 75,000 (5)
Financial Officer (6)
Anat Biegon, Ph.D.
Vice President of 1996 85,516 26,565 (1)
Research and
Development
S. Colin Neill (6)
Acting Vice 1996 119,000 (3)
President/Finance 1995 109,375 (3) 10,000 (5)
and Administration,
Chief Financial Officer
- --------------
</TABLE>
1) Consists of contributions to insurance premiums, car allowance and car
expenses.
2) Consists of housing allowance, contributions to insurance premiums, and car
allowance.
3) Consists of non-employee compensation.
4) These amounts represent the value of 94,115 shares of Old Pharmos common
stock (equal to 18,000 shares of Common Stock, as adjusted) issued in 1990,
subject to forfeiture in the amount of 75%, 50%, 25% and 0%, respectively,
on each anniversary of grant until four years after grant. ( No dividends
have been paid to date on these shares). The market value of these 18,000
equivalent shares as of December 31, 1995 was $26,438.
5) Consists of warrants to purchase common stock.
6) Appointed Acting Chief Financial Officer as of July 1996, replacing Mr. S.
Colin Neill who provided consulting services to the Company through
September 1996.
25
<PAGE>
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, 1996:
None (1)
(1) On February 12, 1997, the Company issued warrants to purchase an
aggregate of 1,055,000 shares of common stock at an exercise price of
$1.59 per share to 17 employees of the Company. Of such warrants,
250,000 were issued to Dr. Aviv, 175,000 were issued to Dr. Riesenfeld
and 125,000 were issued to Dr. Biegon. Such warrants become exercisable
in increments of 25% each on February 12, 1998, February 12, 1999,
February 12, 2000 and February 12, 2001. All of such warrants expire on
February 12, 2007.
AGGREGATED OPTION EXERCISES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND OPTION VALUES AS OF DECEMBER 31, 1996:
<TABLE>
<CAPTION>
Value of Unexercised
Number of Number of Unexercised In-the-Money Options at
Shares Options at December 31, 1996 December 31, 1996 (1)
Acquired on Value ------------------------------ ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Haim Aviv,
Ph.D. 0 0 198,376 126,000 $ -0- $ -0-
Gad Riesenfeld, 0 0 43,600 35,733 -0- -0-
Ph.D.
Anat Biegon, 0 0 24,320 26,213 -0- -0-
Ph.D.
Alan Mark 0 0 0 75,000 (2) -0- 64,500
</TABLE>
(1) Based upon closing price on December 31, 1996 as reported on the Nasdaq
SmallCap Market and the exercise price per option.
(2) Consists of warrants to purchase common stock.
STOCK OPTION PLANS
It is currently the Company's policy that all full time key employees be
considered annually for the possible grant of stock options, depending upon
employee performance. The criteria for the awards are experience, uniqueness of
contribution to the Company and level of performance shown during the year.
Stock options are intended to improve loyalty to the Company and help make each
employee aware of the importance of the business success of the Company. The
amount and exercise price of all options discussed
26
<PAGE>
herein have been adjusted for the Reverse Share Split.
As of December 31, 1996, the Company has 945,435 options to purchase shares
of the Company's Common Stock outstanding under various option plans, 272,626 of
which were issued under no established plan. During 1996, the Company granted
options to purchase 4,000 shares of its Common Stock to employees under a plan
established in 1992. A summary of the various established stock option plans is
as follows:
1983, 1984, 1986, 1988 Plans. The Company (then known as Pharmatec, Inc.)
----------------------------
established Incentive Stock Option Plans in 1983, 1984, 1986 and 1988 for
officers and employees. There are currently no options outstanding under these
plans and it is anticipated that future grants of stock options will not be made
from these plans.
1991 Plan. Old Pharmos established a stock option plan in 1991. There are
---------
currently 11,476 options outstanding under this plan and it is anticipated that
future grants of stock options will not be made from this plan.
1992 Plan. The 1992 Plan is administered by a committee appointed by the
---------
Board of Directors (the "Committee"), consisting of Messrs. Marvin P. Loeb and
E. Andrews Grinstead, III. The Committee will designate the persons to receive
options, the number of shares subject to the options and the terms of the
options, including the option price and the duration of each option, subject to
certain limitations.
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, 1996, there were options to purchase 661,333 shares of the
Company's Common Stock outstanding under this plan. Each option granted
outstanding under the 1992 plan as of December 31, 1996 expires on October 31,
2005.
The price at which shares of the Company's Common Stock may be purchased
upon exercise of an incentive stock option must be at least 100% of the fair
market value of the Company's Common Stock on the date the option is granted (or
at least 110% of fair market value in the case of a 10% Holder).
The aggregate fair market value (determined at the time the option is
granted) of the Company's Common Stock with respect to which incentive stock
options are exercisable for the first time in any calendar year by an optionee
under the 1992 Plan, or any other plan of the Company or a subsidiary, shall not
exceed $100,000. The Committee will fix the time or times when, and the extent
to which, an option is exercisable, provided that no option will be exercisable
earlier than one year or later than ten years after the date of grant (or five
years in the case of a 10% Holder). The option price is payable in cash or by
check. However, the Board of Directors may grant a loan to an employee,
pursuant to the loan provision of the 1992 Plan, for the purpose of exercising
an option or may permit the option price to be paid in shares of the Company's
Common Stock at the then current fair market value, as defined in the 1992 Plan.
No option may be exercised unless the holder has been an employee or
consultant of the Company or a subsidiary for six months from the date of grant.
Upon termination of an optionee's employment or consultancy, all options held by
such optionee will terminate, except that any option that was exercisable on the
date employment or consultancy terminated may, to the extent then exercisable,
be exercised within
27
<PAGE>
three months thereafter (or one year thereafter if the termination is the result
of permanent and total disability of the holder). If an optionee dies while he
or she is an employee or a consultant or during such three month period, the
option may be exercised within one year after death by the decedent's estate or
his legatees or distributees, but only to the extent exercisable at the time of
death.
The Board of Directors may amend, suspend or discontinue the 1992 Plan, but
it must obtain stockholder approval to (i) increase the number of shares subject
to the 1992 Plan, (ii) change the designation of the class of persons eligible
to receive options, (iii) decrease the price at which options may be granted,
except that the Board may, without stockholder approval, accept the surrender of
outstanding options and authorize the granting of new options in substitution
therefor specifying a lower exercise price that is not less than the fair market
value of the Company's Common Stock on the date the new option is granted, (iv)
remove the administration of the 1992 Plan from the Committee, (v) render any
member of the Committee eligible to receive an option, other than options
granted pursuant to formula, under the 1992 Plan while serving thereon, or (vi)
amend the 1992 Plan in such a manner that options issued under it intended to be
incentive stock options fail to meet the requirements of Incentive Stock Options
as defined in Section 422 of the Code.
EMPLOYMENT/CONSULTING CONTRACTS/DIRECTORS' COMPENSATION
Haim Aviv, Ph.D. In addition to serving as Chairman of the Board and Chief
----------------
Executive Officer of the Company, Dr. Aviv has provided consulting services
under a consulting agreement with an initial three-year term ended May 3, 1993.
The term automatically renews for additional one-year periods unless either the
Company or Dr. Aviv terminates the agreement at least 90 days prior to a
scheduled expiration date. The agreement has been renewed on an annual basis
and presently expires on May 3, 1998. Dr. Aviv is entitled to severance pay
equal to 25% of his salary in the event of termination or non-renewal without
cause. Under the agreement, Dr. Aviv is required to render certain consulting
services to the Company and in consideration therefore, Dr. Aviv is entitled to
receive $170,000 per year, subject to yearly increases and review.
The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief
Executive Officer under an employment agreement with Dr. Aviv pursuant to which
Dr. Aviv receives $50,000 per year, subject to yearly increases and review. Dr.
Aviv is required to devote at least 50% of his business time and attention to
the business of Pharmos, Ltd. and to serve on its Board of Directors.
Gad Riesenfeld, Ph.D. In October 1992, Old Pharmos entered into a one-
---------------------
year employment agreement with Dr. Riesenfeld, which is automatically renewable
for successive one-year terms unless either party gives three months prior
notice of non-renewal. Under the Agreement, Dr. Riesenfeld devotes his full
time to serving as President of the Company. Dr. Riesenfeld's annual gross
salary is $150,000.
Directors' Compensation. In 1996, Directors did not receive any
-----------------------
compensation for service on the Board or for attending Board meetings.
28
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 1, 1997, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's Directors, and
(iii) all current Directors and executive officers of the Company as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.
Amount
Name and Address of of Beneficial Percentage
Beneficial Ownership Ownership of Total /(1)/
- -------------------------------- ------------- ---------------
Grace Brothers Ltd. 1,887,077 6.0%
1560 Sherman Avenue, Suite 900
Evanston, IL 60201
Haim Aviv, Ph.D./(2)/ 1,047,805 3.3%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel
Marvin P. Loeb/(3)/ 282,323 *
Trimedyne, Inc.
2810 Barranca Road
Irvine, CA 92714
E. Andrews Grinstead III/(4)/ 86,667 *
Hybridon, Inc.
One Innovation Drive
Worcester, MA 01605
Stephen C. Knight, M.D./(4)/ 3,333 *
Epix Medical, Inc.
71 Rogers Street
Cambridge, MA 02142
David Schlachet/(4)/ 3,333 *
Straus Ltd.
16 Bazel Street
Petach-Tikva, Israel 49510
29
<PAGE>
Fredric D. Price 1,750 *
Applied Microbiology, Inc.
771 Old Saw Mill River Road
Tarrytown, NY 10591
All Directors and 1,493,131 4.7%
Executive Officers
as a group
(9 persons)/(5)/
____________________________
* Indicates ownership of less than 1%.
(1) Based on 31,095,510 shares of Common Stock outstanding, plus each
individual's currently exercisable warrants and/or options. Assumes that no
other individual will exercise any warrants and/or options.
(2) Includes 276,153 shares of Common Stock held in the name of Avitek Ltd., of
which Dr. Aviv is the Chairman of the Board of Directors and the principal
stockholder, and, as such, shares the right to vote and dispose of such
shares. Also includes currently exercisable options to purchase 198,376
shares of Common Stock.
(3) Held jointly with his wife. Also includes currently exercisable options to
purchase 36,667 shares of Common Stock. Does not include shares held by his
adult children, his grandchildren or a trust for the benefit of his
grandchildren.
(4) Consists of currently exercisable options to purchase Common Stock.
(5) Based on the number of shares of Common Stock outstanding, plus all
currently exercisable warrants and/or options of the Directors and executive
officers.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
--------------------
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
All financial statement schedules are omitted because they
are not applicable or the required information is shown in
the financial statements or note thereto.
(3) EXHIBITS; EXECUTIVE COMPENSATION PLANS
--------------------------------------
EXHIBITS
2 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
2(a) Agreement and Plan of Merger dated as of March 28, 1995 between
Pharmos Corporation, PMC Merger Corporation and Oculon
Corporation (Incorporated by reference to the Company's Current
Report on Form 8-K, dated April 11, 1995, as amended).
3 ARTICLES OF INCORPORATION AND BY-LAWS
3(a) Restated Articles of Incorporation (Incorporated by reference to
Appendix E to the Joint Proxy Statement/Prospectus included in the
Form S-4 Registration Statement of the Company dated September 28,
1992 (No. 33-52398) (the "Joint Proxy Statement/Prospectus").
31
<PAGE>
3(b) Certificate of Amendment of Restated Articles of Incorporation
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1994).
3(c) Amended and Restated By-Laws (Incorporated by reference to Form S-
1 Registration Statement of the Company dated June 30, 1994 (No.
33-80916)).
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4(a) 1983 Incentive Stock Option Plan (The Company's 1984 and 1986
Plans are identical in all respects except as to the number of
shares subject to option) (Incorporated by reference to Form S-18
Registration Statement of the Company dated June 7, 1983 (2-84298-
C)).
4(b) Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1988).
4(c) 1988 Incentive Stock Option Plan (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1988).
4(d) Pharmos Corporation 1991 Incentive Stock Option Plan
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1992).
4(e) 1992 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix F to the Joint Proxy Statement/Prospectus).
4(f) Form of Class A Warrant to purchase (x) shares of Common Stock
and (y) Class B Warrants (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1991).
4(g) Form of Class B Warrant to purchase shares of Common Stock
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1991).
4(h) Unit Purchase Option Agreement dated February 18, 1992 between
the Company and David Blech (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1991).
4(i) Form of Warrant to purchase Common Stock at an exercise price of
$1.31 per share (pre-reverse split) (Incorporated by reference to
Form S-3 Registration Statement of the Company dated September
14, 1993 (33-68762)).
4(j) Form of Placement Agent's Warrant Agreement, dated August 13,
1993, to purchase shares of Common Stock (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
September 14, 1993 (33-68762)).
32
<PAGE>
4(k) Registration Agreement dated as of January 18, 1994 by and among
the Company, David Blech and Lake Charitable Remainder Trust
(Incorporated by reference to Form S-3 Registration Statement of
the Company dated January 28, 1993 (33-74638)).
4(l) Form of Stock Purchase Agreement dated as of September 2, 1994
between the Company and the Purchaser (Incorporated by reference
to Form S-1 Registration Statement of the Company dated June 30,
1994 [No. 33-80916], Amendment No. 2).
4(m) Form of Warrant Agreement dated September 2, 1994 to purchase
42,000 shares of Common Stock (Incorporated by reference to Form
S-1 Registration Statement of the Company dated June 30, 1994
[No. 33-80916], Amendment No. 2).
4(n) Form of Common Stock Purchase Agreement dated as of October 4,
1994 between the Company and the Purchasers (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
November 25, 1994 [No. 33-86720]).
4(o) Warrant Agreement dated October 4, 1994 between the Company and
Judson Cooper (Incorporated by reference to Form S-3 Registration
Statement of the Company dated November 25, 1994 [No. 33-86720]).
4(p) Form of Convertible Debenture Purchase Agreement dated as of
February 7, 1995 between the Company and the Investors
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1994).
4(q) Warrant Agreement dated February 7, 1995 between the Company and
Judson Cooper (Incorporated by reference to Annual Report on Form
10-K for the year ended December 31, 1994).
4(r) Form of Employee Warrant Agreement, dated April 11, 1995, between
the Company and Oculon Corporation (Incorporated by reference to
the Company's Current Report on Form 8-K, dated April 11, 1995,
as amended).
4(s) Form of Penalty Warrant Agreement, dated April 11, 1995, between
the Company and Oculon Corporation (Incorporated by reference to
the Company's Current Report on Form 8-K, dated April 11, 1995,
as amended).
4(t) Form of Unit Purchase Agreement dated as of September 14, 1995
between the Company and the Investors (Incorporated by reference
to the Company's Current Report on Form 8-K, dated September 14,
1995).
4(u) Form of Warrant Agreement dated as of September 14, 1995 between
the Company and the Investors (Incorporated by reference to the
Company's Current Report on Form 8-K, dated September 14, 1995).
4(v) Form of Warrant Agreement dated as of April 30, 1995 between the
Company and Charles Stolper (Incorporated by reference to Form S-
3 Registration Statement of the Company dated November 14, 1995,
as amended [No. 33-64289]).
33
<PAGE>
4(w) Form of Warrant Agreement dated as of April 30, 1995 between the
Company and Janssen/Meyers Associates, L.P. (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
November 14, 1995, as amended [No. 33-64289]).
4(x) Form of Warrant Agreement dated as of October 31, 1995 between
the Company and S. Colin Neill (Incorporated by reference to Form
S-3 Registration Statement of the Company dated November 14,
1995, as amended [No. 33-64289]).
4(y) Certificate of Designation, Rights, Preferences and Privileges
of Series A Preferred Stock of the Company (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
December 20, 1996, as amended [No. 333-15165])
4(z) Form of 5% Preferred Stock Securities Purchase Agreement dated as
of September 30, 1996 between the Company and the Investors
(Incorporated by reference to Form S-3 Registration Statement of
the Company dated December 20, 1996, as amended [No. 333-15165])
4(a)(a) Form of Stock Purchase Warrant dated as of September 30, 1996
between the Company and the Investors (Incorporated by reference
to Form S-3 Registration Statement of the Company dated December
20, 1996, as amended [No. 333-15165])
4(a)(b)* Stock Purchase Agreement, dated December 12, 1996, between
the Company and Bausch & Lomb Pharmaceuticals, Inc.
10 MATERIAL CONTRACTS
10(a) License Agreement dated as of March 14, 1989 between National
Technical Information Service (NTIS), U.S. Department of Commerce
and the Company (Incorporated by reference to Annual Report on
Form 10-K for year ended December 31, 1989).
10(b) Common Stock and Warrant Purchase Agreement, dated November 5,
1991, between the Company and David Blech (Incorporated by
reference to Annual Report on Form 10-K for year ended December
31, 1991).
10(c) Private Placement Agreement, dated November 5, 1991, between the
Company and David Blech and D. Blech & Company, Incorporated
(Incorporated by reference to Annual Report on Form 10-K for year
ended December 31, 1991).
10(d) Stock Option Agreement, dated March 20, 1992, between the
Company, Pharmos Corporation, Xenon Vision, Inc. and the security
holders of Xenon Vision, Inc. (Incorporated by reference to
Annual Report on Form 10-K for year ended December 31, 1991).
10(e) Agreement and Plan of Merger, dated May 13, 1992, as amended, by
and among the Company, Pharmatec Merger Corporation and Pharmos
Corporation (composite copy as amended to date) (Incorporated by
reference to the Joint Proxy Statement/Registration Statement).
10(f) Registration Rights Agreement dated October 30, 1992 between the
Company and the security holders of Xenon Vision, Inc.
(Incorporated by reference to the Joint Proxy Statement/
Registration Statement).
10(g) Agreement between Avitek Ltd. ("Avitek") and Yissum Research
Development Company of the Hebrew University of Jerusalem
("Yissum") dated November 20, 1986 (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1992).(1)
34
<PAGE>
10(g)(1) Supplement to Agreement (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992). (1)
10(g)(2) Hebrew language original executed version of Agreement
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992). (1)
10(h) Agreement between Avitek and Yissum dated January 25, 1987
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992). (1)
10(h)(1) Schedules and Appendixes to Agreement (Incorporated by reference
to Annual Report on Form 10-K, as amended by Form 10-K/A, for
year ended December 31, 1992). (1)
10(h)(2) Hebrew language original executed version of Agreement
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992). (1)
10(i) Research, Development and License Agreement between Pharmos Ltd.,
Pharmos Corporation ("Old Pharmos") and Yissum dated February 5,
1991 (Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992). (1)
(10)(i)(1) Schedules and Appendixes to Agreement (Incorporated by reference
to Annual Report on Form 10-K, as amended by Form 10-K/A, for
year ended December 31, 1992). (1)
10(j) Pharmos Ltd. Employment Agreement with Haim Aviv ("Aviv") dated
as of May 2, 1990 and Old Pharmos Consulting Agreement with Aviv
dated as of May 2, 1990, as amended by letter from Old Pharmos to
Aviv dated June 27, 1990 and Unanimous Written Consent of the
Board of Directors of Old Pharmos dated March 17, 1992
(Incorporated by reference to Annual Report on Form 10-K, as
amended by Form 10-K/A, for year ended December 31, 1992).
10(k) Letter from Old Pharmos to D. Blech & Co. Incorporated ("D. Blech
& Co.") dated June 27, 1991 re: consulting services (Incorporated
by reference to Annual Report on Form 10-K, as amended by Form
10-K/A, for year ended December 31, 1992).
10(l) Old Pharmos Employment Agreement with Stephen Streber dated as of
July 1, 1992 (Incorporated by reference to Annual Report on Form
10-K, as amended by Form 10-K/A, for year ended December 31,
1992).
10(m) Letter dated July 27, 1992 from Old Pharmos to Henry Dachowitz re
employment (Incorporated by reference to Annual Report on Form
10-K, as amended by Form 10-K/A, for year ended December 31,
1992).
35
<PAGE>
10(n) Personal Employment Agreement dated October 1, 1992 between Old
Pharmos and Gad Riesenfeld (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1992).
10(o) Lease Agreement dated as of November 1, 1992 between Talquin
Development Company and the Company (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1992).
10(p) Form of Purchase Agreement dated as of August 13, 1993 by and
among the Registrant and the Investors listed on Exhibit A
thereto (Incorporated by reference to Form S-3 Registration
Statement of the Company dated September 29, 1993 [33-68762]).
10(q) Amended and Restated License Agreement with Research Component
dated July 1, 1993 between University of Florida Research
Foundation, Inc. and the Company (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1993). (1)
10(r) License Agreement dated as of April 2, 1993 between the Company
and Dr. Nicholas Bodor (Incorporated by reference to Annual
Report on Form 10-K, as amended by Form 10-K/A, for year ended
December 31, 1993). (1)
10(s) Consulting Agreement dated as of January 1, 1993 between the
Company and Dr. Nicholas Bodor (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1993). (1)
10(t) Product Development and Clinical Manufacturing Services Agreement
dated as of October 21, 1994 between the Company and Bausch &
Lomb Pharmaceuticals, Inc. (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1994).
10(u) Agreement and Release dated as of November 11, 1994 between the
Company and Stephen R. Streber (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1994).
10(v) Employment Agreement dated as of November 11, 1994 between the
Company and Henry M. Dachowitz (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1994).
10(w) Marketing Agreement, dated as of June 30, 1995, between the
Company and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1995). (1)
10(x) Processing Agreement, dated as of June 30, 1995, between the
Company and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1995). (1)
36
<PAGE>
10(y)* Marketing Agreement, dated as of December 12, 1996, between the
Company and Bausch & Lomb Pharmaceuticals, Inc. (1)
10(z)* Consulting Agreement, dated November 11, 1996, between the
Company and Alan Mark.
10(a)(a) Form of Stock Purchase Warrant dated as of September 30, 1996
between the Company and Alan M. Mark (Incorporated by reference
to Form S-3 Registration Statement of the Company dated December
20, 1996, as amended [No. 333-15165])
10(a)(b) Form of Warrant Agreeement dated as of March 15, 1996 between the
Company and Michael E. Lewis, Ph.D. (Incorporated by reference to
Form S-3 Registration Statement of the Company dated December 20,
1996, as amended [No. 333-15165])
21 SUBSIDIARIES OF THE REGISTRANT
21(a) Subsidiaries of the Registrant (Incorporated by reference to
Annual Report on Form 10-K, as amended by Form 10-K/A, for year
ended December 31, 1992).
____________________
* Filed herewith.
1 Confidential information is omitted and identified by a * and filed
separately with the SEC.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
1983 Incentive Stock Option Plan (The Company's 1984 and 1986 Plans are
identical in all respects except as to the number of shares subject to
option) (Incorporated by reference to Exhibit 4(a) to Annual Report on Form
10-K for the year ended December 31, 1988).
Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans (Incorporated
by reference to Exhibit 4(b) to Annual Report on Form 10-K for the year
ended December 31, 1988).
1988 Incentive Stock Option Plan (Incorporated by reference to Exhibit 4(c)
to Annual Report on Form 10-K for the year ended December 31, 1988).
Pharmos Corporation 1991 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 4(e) to Annual Report on Form 10-K for the year ended
December 31, 1992).
1992 Incentive and Non-Qualified Stock Option Plan (Annexed as Appendix F to
the Joint Proxy Statement/Prospectus).
Pharmos Ltd. Employment Agreement with Haim Aviv ("Aviv") dated as of May 2,
1990 and Old Pharmos Consulting Agreement with Aviv dated as of May 2, 1990,
as amended by letter from Old Pharmos to Aviv dated June 27, 1990 and
Unanimous Written Consent of the Board of Directors of Old Pharmos dated
March 17, 1992 (Incorporated by reference to Exhibit 10(t) to Annual Report
on Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).
Old Pharmos Employment Agreement with Stephen Streber dated as of July 1,
1992 (Incorporated by reference to Exhibit 10(x) to Annual Report on Form
10-K, as amended by Form 10-K/A, for year ended December 31, 1992).
Letter dated July 27, 1992 from Old Pharmos to Henry Dachowitz re employment
(Incorporated by reference to Exhibit 10(y) to Annual Report on Form 10-K,
as amended by Form 10-K/A, for year ended December 31, 1992).
37
<PAGE>
Personal Employment Agreement dated October 1, 1992 between Old Pharmos and
Gad Riesenfeld (Incorporated by reference to Exhibit 10(z) to Annual Report
on Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).
Agreement and Release dated as of November 11, 1994 between the Company and
Stephen R. Streber (Exhibit 10(u) hereto).
Employment Agreement dated as of November 11, 1994 between the Company and
Henry M. Dachowitz (Exhibit 10(t) hereto).
(B) REPORTS ON FORM 8-K
The Company has not filed any reports on Form 8-K since October 1,
1996.
(C) EXHIBITS
See Item 14(a)(3) above
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above
38
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHARMOS CORPORATION
By:/s/ HAIM AVIV
----------------------------------
Dr. Haim Aviv, Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ ALAN MARK Acting Chief March 31, 1997
- -------------
Alan Mark Financial Officer
and Acting Treasurer
(Principal Financial
and Accounting Officer)
/s/ MARVIN P. LOEB Director March 31, 1997
- ----------------------
Marvin P. Loeb
/s/ E. ANDREWS GRINSTEAD III Director March 31, 1997
- ----------------------------
E. Andrews Grinstead III
/s/ STEPHEN C. KNIGHT Director March 31, 1997
- -----------------------
Stephen C. Knight
/s/ DAVID SCHLACHET Director March 31, 1997
- -----------------------
David Schlachet
/s/ FREDRIC D. PRICE Director March 31, 1997
- -----------------------
Fredric D. Price
39
<PAGE>
[LETTERHEAD OF PRICE WATERHOUSE LLP]
REPORT OF INDEPENDENT ACCOUNTANTS
March 31, 1997
To the Board of Directors and
Shareholders of Pharrnos Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Pharmos
Corporation and its subsidiaries at December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these statements
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concem. The Company has suffered recurring
losses from operations and, at December 31, 1996, has an accumulated deficit of
$62,101,952 that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ PRICE WATERHOUSE LLP
F-1
<PAGE>
PHARMOS CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,132,906 $ 7,442,791
R & D reimbursements receivable 359,019 104,261
Prepaid expenses and other current assets 247,363 373,132
---------------- ------------
TOTAL CURRENT ASSETS 5,739,288 7,920,184
Fixed assets, net 629,413 855,456
Prepaid royalties 573,334
Intangible assets, net 337,786 384,310
Other assets 188,472 301,704
---------------- ------------
TOTAL ASSETS $ 7,468,293 $ 9,461,654
---------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 847,415 $ 739,356
Accrued expenses & other liabilities 451,136 516,034
Accrued wages and other compensation 357,981 205,336
Current portion of long term debt 115,244 93,684
---------------- ------------
TOTAL CURRENT LIABILITIES 1,771,776 1,554,410
Advances against future sales 4,000,000 1,877,141
Long term debt 157,133 181,648
Other liabilities 51,119 235,479
---------------- ------------
TOTAL LIABILITIES 5,980,028 3,848,678
---------------- ------------
SHAREHOLDERS' EQUITY
Preferred stock, $.03 par value, 1,250,000 shares authorized,
1,900 and 0 shares issued and outstanding, respectively of
Series A convertible, with a $1,000 liquidation preference 57
Common stock, $.03 par value; 50,000,000 shares authorized,
30,727,525 and 29,149,039 shares issued, 30,709,169 and
29,130,683 shares outstanding, respectively 921,825 874,471
Paid in capital in excess of par 62,668,886 58,763,797
Accumulated deficit (62,101,952) (54,024,741)
---------------- ------------
1,488,816 5,613,527
Less: Common stock in treasury, at par (551) (551)
---------------- ------------
TOTAL SHAREHOLDERS' EQUITY 1,488,265 5,612,976
---------------- ------------
Commitments and contingencies (Note 12)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 7,468,293 $ 9,461,654
--------------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
PHARMOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Sales of fine chemicals, net $7,815
License fees, royalties, net $ 75,000
------------ ------------ -----------
75,000 7,815
------------ ------------ -----------
EXPENSES
Research and development, net $5,992,395 5,055,832 7,987,155
Patents 281,412 480,859 942,455
General and administrative 1,735,589 2,180,965 3,684,308
Depreciation and amortization 345,595 536,010 422,543
------------ ------------ -----------
8,354,991 8,253,666 13,036,461
------------ ------------ -----------
LOSS FROM OPERATIONS (8,354,991) (8,178,666) (13,028,646)
Interest income, net of interest expense of
$ 71,595, $127,003 and $73,733, respectively 277,781 82,581 73,347
------------ ------------ -----------
NET LOSS ($8,077,210) ($8,096,085) ($12,955,299)
------------ ------------ -----------
Loss per share ($0.28) ($0.37) ($1.19)
------------ ------------ -----------
Weighted average shares outstanding 29,291,401 21,885,862 10,852,807
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
Pharmos Corporation
Consolidated Statements of Changes in Shareholders' Equity (Note 9)
==============================================================================
<TABLE>
<CAPTION>
Series A Paid-In
Convertible Class B Convertible Capital in
Common Stock Common Stock Preferred Stock Excess of Accumulated
Shares Amount Shares Amount Shares Amount Par Deficit
--------- -------- --------- -------- ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993 6,147,570 $184,427 3,342,460 $100,274 $41,375,856 ($32,973,358)
Conversion of Class B common 3,342,460 100,274 (3,342,460) (100,274)
stock to common stock
Issuance of common stock, net of
of offering costs of $317,400 5,086,665 152,600 5,147,500
Warrant exercise 54,893 1,647 146,526
Share adjustment for reverse 138 4 (4)
split
Return of shares to treasury 12
Net loss (12,955,299)
--------- -------- --------- -------- --------- -------- ---------- -----------
December 31, 1994 14,631,726 438,952 46,669,890 (45,928,657)
Issuance of common stock to 6,000,000 180,000 2,892,426
purchase Oculon Corp.
Conversion of debentures to 2,442,309 73,269 1,196,731
common stock
Warrant exercise 75,000 2,250 36,750
Issuance of common stock, net of
of offering costs of $900,000 6,000,000 180,000 7,920,000
Warrant grant to consultants 48,000
Share adjustment for reverse
split 4
Net loss (8,096,085)
--------- -------- --------- -------- --------- -------- ---------- -----------
December 31, 1995 29,149,039 874,471 58,763,797 (54,024,742)
Warrant exercise 99,286 2,978 55,522
Issuance of preferred stock, 1,900 57 1,881,943
net of offering costs of
$18,000
Private placement of common stock 1,479,200 44,376 1,955,624
Warrant grant to consultants 12,000
Net loss (8,077,210)
--------- -------- --------- -------- --------- -------- ---------- -----------
December 31, 1996 30,727,525 $921,825 0 0 1,900 $57 $62,668,886 ($62,101,952)
========= ======== ========= ======== ========= ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stock Shareholders'
Shares Amount Equity
------- ------ -------------
<S> <C> <C> <C>
December 31, 1993 17,962 ($539) $8,686,660
Conversion of Class B common
stock to common stock
Issuance of common stock, net of
of offering costs of $317,400 5,300,100
Warrant exercise 148,173
Share adjustment for reverse
split
Return of shares to treasury 394 (12)
Net loss (12,955,299)
-------- -------- -----------
December 31, 1994 18,356 (551) 1,179,634
Issuance of common stock to 3,072,426
purchase Oculon Corp.
Conversion of debentures to 1,270,000
common stock
Warrant exercise 39,000
Issuance of common stock, net of
of offering costs of $900,000 8,100,000
Warrant grant to consultants 48,000
Share adjustment for reverse
split
Net loss (8,096,085)
-------- -------- -----------
December 31, 1995 18,356 (551) 5,612,975
Warrant exercise 58,500
Issuance of preferred stock, 1,882,000
net of offering costs of
$18,000
Private placement of common stock 2,000,000
Warrant grant to consultants 12,000
Net loss (8,077,210)
-------- -------- -----------
December 31, 1996 18,356 ($551) $1,488,265
======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Pharmos Corporation
Consolidated Statements of Cash Flows
===============================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ($8,077,210) ($8,096,085) ($12,955,299)
---------------- --------------- -------------
Adjustments to reconcile net loss to net
cash flow used in operating activities
Depreciation and amortization 345,595 536,010 422,543
Warrant grant to consultant 12,000 48,000
Changes in operating assets and liabilities, net
of effects of acquistion in 1995
Prepaid expenses and other current assets 239,000 202,240 415,695
R&D reimbursements receivable (254,758) 158,389
Accounts payable 108,059 (1,180,748) 590,500
Accrued expenses, wages and other
liabilities 758 89,219 117,265
Prepaid royalties (573,334)
Advances against future sales 2,122,859 1,877,141
---------------- --------------- -------------
Total adjustments 2,000,179 1,730,251 1,546,003
---------------- --------------- -------------
Net cash flows used in operating activities (6,077,031) (6,365,834) (11,409,296)
---------------- --------------- -------------
Cash flows from investing activities
Purchases of fixed assets, net (73,028) (56,647) (111,062)
---------------- --------------- -------------
Net cash flows used in investing activities (73,028) (56,647) (111,062)
---------------- --------------- -------------
Cash flows from financing activities
Proceeds from issuances of common stock, net 2,000,000 8,100,000 5,300,100
Proceeds from issuance of preferred stock,
net 1,822,000
Proceeds from issuance of convertible
debentures 1,270,000
Proceeds from exercise of warrants 58,500 39,000 148,173
Proceeds from acquisition of Oculon, net 3,072,426
Increase (decrease) in loans payable (100,326) (480,219) 480,219
---------------- --------------- -------------
Net cash flows provided by financing activities 3,840,174 12,001,207 5,928,492
---------------- --------------- -------------
Net increase (decrease) in cash and cash (2,309,885) 5,578,726 (5,591,866)
equivalents
Cash and cash equivalents at beginning of year 7,442,791 1,864,065 7,455,931
---------------- --------------- -------------
Cash and cash equivalents at end of year $5,132,906 $7,442,791 $1,864,065
================ =============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
1. THE COMPANY
Pharmos Corporation (the "Company") is a bio-pharmaceutical company
incorporated under the laws of the state of Nevada and is engaged in the
design and development of novel pharmaceutical products in various fields
including: site specific drugs for ophthalmic indications, neuroprotective
agents for treatment of central nervous system ("CNS") disorders, systemic
drugs designed to avoid CNS related side effects, and emulsion-based
products for topical and systemic applications. The Company uses a variety
of patented and proprietary technologies to improve the efficacy and/or
safety of drugs. The Company's compounds are in various stages of
development, from preclinical to advanced clinical trials. As of March 1997,
the Company has submitted two separate New Drug Applications ("NDA") to the
U.S. Food & Drug Administration ("FDA"): Lotemax/TM/ for the treatment of
several ocular inflammatory diseases and LE-A, a product for the treatment
of seasonal allergic conjunctivitis. In conjunction with its development
efforts, the Company has also undertaken research and development contracts
in the past and has sold fine chemicals to the pharmaceutical research
community. The Company conducts operations in Alachua, Florida and through
its wholly-owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
2. LIQUIDITY AND BUSINESS RISKS
The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception. At December 31, 1996, the Company has
an accumulated deficit of $62,101,952. Such losses have resulted
principally from costs incurred in research and development and from
general and administrative expenses. The Company expects that operating
losses will continue as product development, clinical testing and other
normal operations continue. The Company currently funds its operations
through the use of cash obtained principally from third party financing.
Management believes that cash and cash equivalents of $5.1 million as of
December 31, 1996, combined with anticipated cash inflows and the proceeds from
the March 31, 1997 private placement (see "Subsequent Events") will be
sufficient to support operations into the first quarter of 1998. The Company is
continuing to actively pursue various funding options, including equity
offerings, strategic corporate alliances, business combinations, and the
establishment of research and development partnerships to obtain the additional
financing necessary to complete the development of its product candidates and
bring them to commercial markets.
As described in Note 1, the Company has submitted two NDAs to the FDA. It
is possible that FDA approval for these product candidates will not be
granted on a timely basis or at all. Any delay in obtaining approval or
failure to obtain such approvals would materially and adversely affect the
Company's business, financial position and results of operations.
F-6
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying financial statements include all wholly owned subsidiaries.
Intercompany transactions are eliminated in consolidation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company invests its excess cash in U.S. Treasury securities and debt
instruments of financial institutions and corporations with strong credit
ratings. Investments having original maturities of three months or less are
classified as cash equivalents.
REVENUE RECOGNITION
Revenue for contracted research and development services is recognized as
performed. Revenue from these contracts is recognized as costs are incurred (as
defined in the contract), generally direct labor and supplies plus agreed
overhead rates. Any advance payments on contracts are deferred until the
related services are performed. License fees and royalties are recognized when
earned in accordance with the underlying agreements. Sales revenue is
recognized upon shipment of products.
FIXED ASSETS
Fixed assets are recorded at cost. Maintenance and repairs are expensed as
incurred. Property, furniture and equipment are depreciated on a straight-line
basis over their estimated useful lives which range from three to fourteen
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated lives of the related assets.
F-7
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
INTANGIBLE ASSETS
Intangible assets represent the Company's rights to develop and commercialize
certain products derived from certain licensed technologies. The assets are
being amortized over fifteen years. As of December 31, 1996 and 1995,
accumulated amortization was $701,994 and $655,470, respectively. Amortization
expense amounted to approximately $46,524 in each of the years ended December
31, 1996, 1995 and 1994.
As a result of the current period operating loss combined with a history of
operating losses, management assessed whether or not the Company's intangible
assets were recoverable. As of December 31, 1996, management estimates that the
net future cash inflows expected to result from the commercial marketing of the
licensed technologies will exceed the carrying amount of the Company's
intangible assets and accordingly, no impairment loss was recognized.
On a periodic basis, the Company will assess whether there are conditions
present that indicate an impairment of long lived assets and long lived assets
to be disposed of. In the event such an impairment is present, management will
consider the undiscounted cash flows from such assets to quantify the amount of
such impairment and the loss to be recorded.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed when incurred. The Company has
accounted for reimbursements of research and development costs as a reduction of
research and development expense.
INCOME TAXES
Income taxes are provided for on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
carry forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date such changes are enacted.
FOREIGN EXCHANGE
The Company's foreign operations are principally conducted in U.S. dollars. Any
transactions or balances in currencies other than U.S. dollars are remeasured
and any resultant gains and losses are included in the determination of current
period income and loss. To date, such gains and losses have been insignificant.
F-8
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
TREASURY STOCK
Shares of common stock held in treasury are accounted for at par value with any
difference between cost and par included in paid-in capital in excess of par
value.
LOSS PER SHARE
Loss per share is calculated based on the weighted average number of common
shares outstanding during the period. Convertible preferred stock, options and
warrants outstanding are excluded from the calculations because their impact
would be anti-dilutive.
RECLASSIFICATIONS
Certain amounts for 1995 and 1994 have been reclassified to conform with the
presentation in 1996 to maintain comparability. Such reclassifications did not
have an impact on the Company's shareholders' equity.
4. COLLABORATIVE AGREEMENTS
In June 1995, the Company entered into a marketing agreement (the "Marketing
Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb") to
market Lotemax(TM), the Company's lead product candidate, on an exclusive basis
in the United States following receipt of FDA approval. The Marketing
Agreement also covers the Company's two other Loteprednol etabonate based
products, which are referred to as LE-A and LE-T. Under the Marketing
Agreement, Bausch & Lomb will purchase the active drug substance (Loteprednol
etabonate) from the Company and, through December 31, 1996, has provided the
Company with $4 million in cash advances against future sales. An additional
$1 million in advances was received in March 1997. Bausch & Lomb also
collaborates in the development of products by making available amounts up to
50% of the Phase III clinical trial costs. The Company has retained certain
conditional co-marketing rights to all of the products covered by the
Marketing Agreement.
In December 1996, the Company and Bausch & Lomb signed an international
marketing agreement for the marketing of Lotemax(TM), LE-A and LE-T in certain
territories outside of the U.S. The Company expects to receive an additional
$1.6 million of advances that will follow the receipt of regulatory clearance in
those markets.
Bausch & Lomb will be entitled to credits against future purchases of the active
drug substance based on the advances and future advances until the advances have
been repaid. The Company may be obligated to repay such advances if it is unable
to supply Bausch & Lomb with certain specified quantities of the active drug
substance. Advances received through December 31, 1996 are reflected as a long
term liability in the accompanying balance sheet as, in the opinion of
management, no significant repayment, if any, of such advances is expected to
occur in 1997.
F-9
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
Net reimbursements from Bausch & Lomb were approximately $1.2 million and $0.1
million in 1996 and 1995, respectively, and were offset against research and
development in the accompanying consolidated statements of operations. Included
as R&D reimbursements receivable on the December 31, 1996 balance sheet were
$145,113 of reimbursements which were uncollected at year end.
5. THE ACQUISITION OF OCULON CORPORATION
In April 1995, the Company acquired Oculon Corporation ("Oculon"), a
privately-held development stage drug company with anti-cataract
technologies. The acquisition was primarily intended to provide a source of
working capital for the Company; the operations of Oculon have been
discontinued and technologies licensed by Oculon were assigned to the
licensor. Under an agreement with the licensor, the Company has no future
responsibilities related to the maintenance of patents or payment of license
fees related to these technologies. In the event certain of these
technologies produce future royalty revenues, the Company would receive a
proportional share of such royalties.
Under the terms of the acquisition agreement, the Company issued 6,000,000
shares of its common stock to the holders of Oculon's Series III Senior
Preferred Stock. The shares of all other holders of Oculon capital stock
were canceled. In addition, the Company issued 10 year warrants to purchase
500,000 shares of the Company's common stock at an exercise price of $2.75
per share to certain holders of Oculon stock options. The acquisition
agreement also provides that additional consideration of up to 600,000 shares
may be issuable if the Company meets or fails to meet certain milestones
relating to further development or commercialization of the technology and
products acquired from Oculon. None of the events which would result in the
issuance of additional shares have occurred at December 1996, and none are
expected to occur in 1997.
At the time of the acquisition, Oculon had net assets with a fair value of
$3,555,812, including cash and cash equivalents of $4,218,669. The
transaction was accounted for as an acquisition of net assets. Accordingly,
the shares of stock and warrants issued have been recorded at the fair value
of the net assets received less transaction costs of $483,386.
F-10
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
6. FIXED ASSETS
<TABLE>
<CAPTION>
Fixed assets consist of the following: DECEMBER 31,
1996 1995
<S> <C> <C>
Laboratory, pilot plant and other equipment $ 1,810,310 $ 1,600,611
Leasehold improvements 402,936 567,738
Office furniture and fixtures 235,663 233,230
Computer equipment 133,973 109,544
Vans 52,873 51,378
----------- -----------
2,635,755 2,562,501
Less - Accumulated depreciation and amortization (2,006,342) (1,707,045)
----------- -----------
$ 629,413 $ 855,456
=========== ===========
</TABLE>
Depreciation and amortization of fixed assets was $299,071, $489,486 and
$389,261 in 1996, 1995 and 1994, respectively.
7. GRANTS FOR RESEARCH AND DEVELOPMENT
The Company has entered into agreements with U.S. federal agencies and the
State of Israel which provide for grants for research and development
relating to certain projects. Amounts received pursuant to these
agreements have been reflected as a reduction of research and development
expense. Such reductions amounted to $245,302, $331,546, and $900,298
during 1996, 1995 and 1994, respectively. The agreements with agencies of
the State of Israel place certain legal restrictions on the transfer of
technology and manufacture of resulting products outside Israel and also
generally provide for reimbursement of a percentage of allowable research
and development costs, to a specified maximum. The grants are to be repaid
on the basis of royalties from the sale of products developed as a result
of the research activities carried out with the grant funds. As of
December 31, 1996, the total amounts received under grants which contain
repayment provisions amounted to $2,430,161. Potential repayment liability
for royalties related to these grants amounted to $2,803,030 at December
31, 1996.
In 1996, the Israel-U.S. Binational Industrial Research and Development
Foundation (BIRD-F) approved a joint research & development project for a period
of twenty months between the Company and Bausch & Lomb with a total combined
conditional grant up to $962,459. An agreement was signed covering the first ten
month period starting November 1, 1996. The conditional grant totaled $437,326
of which the Company is entitled to $207,124 or 50% of the approved expenses for
that period, whichever is less. In 1996, the Company received grants from BIRD-F
totaling $69,041.
F-11
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
8. LICENSING ARRANGEMENTS
The Company is both a licensor and licensee of certain research technologies.
As a licensor, the Company has entered into various agreements under which
the rights to certain of its technologies are licensed to others. The
Company is to be compensated by receipt of its share of defined future
product sales or royalties earned by the licensee. These agreements have
provided for funding of research, either in whole or in part by the
licensee.
As a licensee, the Company has various license agreements wherein the
Company has acquired exclusive or co-exclusive rights to develop and
commercialize certain research technologies. These agreements, which
include agreements related to Lotemax(TM) (the Company's lead product
candidate), generally require the Company to pay royalties on the sale of
products developed from the licensed technologies and fees on revenues from
sublicenses, where applicable. The royalty rates, as defined in the
respective license agreements, are customary and usual in the
pharmaceutical industry. The royalties will be payable for periods up to
fifteen years from the date of specified events, including the date of the
first sale of such products, or the date from which the first registered
patent from the developed technologies is in force, or the year following
the date in which FDA approval has been received for a developed product.
No amounts have been recorded as a liability with respect to any contingent
royalties as of December 31, 1996, as none of the specified events have
occurred.
Certain of the license agreements require annual payments for periods extending
through 2012. License fee expense amounted to approximately $103,500, $355,000
and $455,000 during 1996, 1995 and 1994, respectively. As of December 31, 1996,
minimum annual payments under licensing agreements are $103,500.
In May 1996, the Company paid a licensor, who is a former director, $573,334.
This payment represented prepaid royalties to the former director against
future royalties on sales of Lotemax(TM) and is reflected as an asset on the
December 31, 1996 balance sheet. The Company has agreed to pay additional
prepaid royalties based on future advances and other non-royalty payments
from Bausch & Lomb or other parties with whom the Company enters into
marketing or similar arrangements.
F-12
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
9. COMMON AND PREFERRED STOCK TRANSACTIONS
1996 TRANSACTIONS
In January 1996, the Company issued 89,286 shares of its common stock as a
result of the exercise of certain warrants. Of this amount, 75,000 shares were
issued at an exercise price of $.52 per share and 14,286 shares were issued at
an exercise price of $.84 per share.
On September 30, 1996, the Company completed a private placement of Series A
Convertible Preferred Stock and warrants to purchase common stock, with
institutional investors generating gross proceeds of $1.9 million. The Series A
preferred stock carries a 5% dividend rate payable in cash or common stock, at
the option of the Company, and is convertible into common shares of the Company
based on the share price at the time of conversion less discounts ranging from
17% to 20%. Until converted into common stock, the preferred stock has no
voting rights. The 50,000 warrants issued to the investors are exercisable at a
price of $1.75 per share, commencing one year after the closing for a three year
period. The investors were granted limited rights to approve certain financing
by the Company for 180 days from closing.
In December 1996, the Company issued 10,000 shares of its common stock as a
result of the exercise of warrants to purchase shares of the Company's common
stock. The 10,000 shares were issued at an exercise price of $.75 per share.
In December 1996, Bausch & Lomb purchased 1,479,200 shares of common stock from
the Company for $2 million in a private placement. The purchase price of $1.35
per share was equal to the average closing price for the prior 15 days.
During 1996, the Company issued warrants to consultants who assisted the Company
on various business and financial matters as follows: warrants to purchase
15,000 shares at an exercise price of $2.31 per share, which expire in March
2002; warrants to purchase 65,000 shares of the Company's common stock at an
exercise price of $1.34 per share, which expire in September 2007; warrants to
purchase 10,000 shares at an exercise price of $1.39 per share, which expire in
November 2006. The Company recognized compensation expense of $12,000 related
to warrants in 1996.
1995 TRANSACTIONS
On January 18, 1995, the Company's stockholders authorized an amendment to
the Company's Restated Articles of Incorporation which provided for an
increase in the number of shares of authorized common stock from 20 million
shares to 50 million shares, and the elimination of the Class B convertible
common stock.
In February 1995, the Company completed the sale of $1,270,000 principal
amount convertible debentures in a private placement transaction to several
accredited investors,
F-13
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
including a large institutional shareholder. A member of the Company's Board of
Directors purchased $70,000 of such debentures. During 1995, all of the
debentures were converted into 2,442,309 shares of the Company's common
stock at an exchange price of $.52 per share. In connection with this
transaction the Company issued warrants to purchase 150,000 shares of common
stock at an exercise price of $.52 per share. During 1995, warrants to
purchase 75,000 shares were exercised and the remaining 75,000 warrants were
exercised in January 1996.
In connection with the acquisition of Oculon (see Note 5), the Company
issued 6,000,000 shares of its common stock and warrants to purchase 500,000
shares of common stock.
On September 14, 1995, the Company completed a private offering of 6,000,000
units at $1.50 per unit. The proceeds of the private offering, net of costs
of $900,000, were $8,100,000. Each unit consisted of one share of the
Company's common stock and one warrant to purchase 0.075 of one share of
common stock (450,000 shares). In addition the Company issued warrants to
purchase 450,000 shares of common stock to the two finders who assisted in
this transaction. Both groups of warrants have an exercise price of $1.80
per share and may be exercised commencing September 14, 1996 and expire on
September 14, 2000.
During 1995, the Company issued warrants to consultants who assisted the
Company on various business and financial matters as follows: warrants to
purchase 10,000 shares at an exercise price of $1.88 per share, which expire
on October 31, 2001; warrants to purchase 10,000 shares of the Company's
common stock at an exercise price of $.78 per share, which expire on April
10, 2005; warrants to purchase 75,000 shares, 25,000 each of which have an
exercise price of $.75, $1.00 and $1.50 per share, respectively, and may be
exercised beginning May 1, 1996 and expire on April 30, 2000. The Company
recognized compensation expense of $48,000 related to warrants in 1995.
1994 TRANSACTIONS
The Company issued an aggregate of 5,086,665 unregistered shares of common
stock in two private placement transactions on September 2 and October 4,
1994 (the "1994 Private Placement Transactions"). The proceeds from the
1994 Private Placement Transactions were $5,300,100, net of issuance costs
of $317,400. In connection with the 1994 Private Placement Transactions,
the Company also issued to the finders an aggregate of 242,000 warrants to
purchase an equivalent number of shares of the Company's common stock. Of
these warrants, 42,000 had an exercise price of $3.50 per share and expire
in September 1999. The remaining 200,000 warrants have an exercise price of
$.90 per share and expire in October 1999.
During the first quarter of 1994, the Company exchanged all convertible
Class B stock for an equal amount of shares of the Company's common stock.
There was no impact on shareholders' equity as a result of this exchange.
F-14
<PAGE>
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
===============================================================================
10. Warrants
Many of the warrants issued in connection with various equity financings and
related transactions during 1991 through 1996 contain anti-dilution provisions
requiring adjustment, if at a later date securities are issued at prices below
the respective warrant's exercise price. The following table summarizes the
shares issuable upon exercise of warrants outstanding at December 31, 1996 as
adjusted for the events which have triggered anti-dilution provisions contained
in the respective warrant agreements:
Shares
Issuable
Upon Exercise
Issuance Date Expiration Date Exercise Price
- ------------- --------------- ---------- --------
November 1991 March 1998 240,744 $2.25
March 1998 268,917 2.82
March 1998 333,335 1.65
August 1993 August 1998 406,880 2.98
September 1994 September 1999 63,913 2.30
October 1994 October 1999 200,000 .84
April 1995 April 2005 500,000 2.75
April 2005 10,000 .78
April 2000 15,000 .75
April 2000 25,000 1.00
April 2000 25,000 1.50
September 1995 September 2000 900,000 1.80
October 1995 October 2001 10,000 1.88
March 1996 March 2002 15,000 2.31
September 1996 September 2000 50,000 1.75
September 2007 65,000 1.34
November 1996 November 2006 10,000 1.39
--------- -----
Total shares and average
exercise price 3,138,789 $2.13
========= =====
F-15
<PAGE>
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
==============================================================================
11. Stock Option Plans
The Company's shareholders have approved incentive stock option plans for
officers and employees. Options granted are generally exercisable over a
specified period, not less than one year from the date of grant, and generally
expire ten years from the date of grant. The following table summarizes activity
in approved incentive stock options approved by the Company's Board of
Directors:
Shares Average
Under Exercise
Option Price
------ ------
Options outstanding at 12/31/93 83,383 $5.97
Granted 389,439 6.50
Expired (38,832) 7.02
------- ----
Options outstanding at 12/31/94 433,990 6.35
Granted 300,000 1.94
Expired (189,804) 5.75
Canceled (252,186) 6.66
Reissued 252,186 2.50
------- ----
Options outstanding at 12/31/95 544,186 2.20
Granted 4,000 2.28
Expired (34,933) 2.18
------ ----
Options outstanding at 12/31/96 513,253 $2.13
======= ====
Options exercisable at 12/31/96 255,152 $2.26
======= ====
F-16
<PAGE>
Pharmos Corporation
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
===============================================================================
The Company's Board of Directors approved nonqualified stock options for key
employees, directors and certain non-employee consultants. The following table
summarizes activity in Board-approved nonqualified stock options:
Shares Average
Under Exercise
Option Price
------ -----
Options outstanding at 12/31/93 256,247 $8.24
Granted 407,160 6.50
Expired (28,251) 10.50
------- -----
Options outstanding at 12/31/94 635,156 7.02
Granted 70,000 1.94
Expired (262,974) 7.58
Canceled (308,932) 6.49
Reissued 308,932 2.50
------- -----
Options outstanding at 12/31/95 442,182 3.10
Expired (10,000) 1.94
------- -----
Options outstanding at 12/31/96 432,182 $3.12
======= ====
Options exercisable at 12/31/96 312,950 $3.43
======= =====
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock and performance-based
awards. Had compensation cost for the Company's other stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
Company's net loss and loss per share would have been increased by approximately
$203,000, or $.01 per share in 1996 and $320,000 or $.01 per share in 1995
before deducting the value of stock options that were cancelled in 1995. The
fair value of options and warrants granted to employees, officers, and directors
during 1995 and 1996 are estimated as $.51 to $1.17 on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield 0%, volatility of 50%, risk-free interest rate of 6.5%, assumed forfeiture
rate of 3%, and an expected life of 3 to 5 years.
F-17
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
12. LONG TERM DEBT
As of December 31, 1996, Pharmos Limited has an unused line of credit of
$50,000 denominated in New Israeli Shekels.
The Company has a note payable related to leasehold improvements to a
research facility. The note is payable in monthly installments of $6,948
including interest at the prime rate plus 1% (9.25% and 8.5% at December
31, 1996 and 1995, respectively). The final payment is due in September
1999. As of December 31, 1996 and 1995, the outstanding balance of such
note was $175,006 and $236,199, respectively, of which $70,107 and $54,551,
respectively, has been classified as a current liability in the
accompanying balance sheet.
In 1996, the Company incurred a liability relating to the negotiated buy-out of
a lease obligation. The termination agreement provides for monthly installment
payments of $4,375 through December 1998. At December 31, 1996, the outstanding
balance was $97,370 and $45,137 has been classified as a current liability in
the accompanying balance sheet.
Minimum annual principal repayments of long term debt by year are as
follows: 1997 - $115,244; 1998 - $129,107; 1999 - $28,026.
13. INCOME TAXES
No provision for income taxes was recorded for the four years ended
December 31, 1996 due to net operating losses incurred. Net operating loss
carry forwards for U.S. tax purposes of approximately $47,300,000 expire
from 2000 through 2011.
The Company's gross deferred tax assets of $22,870,000 and $19,387,000 at
December 31, 1996 and 1995, respectively, represented primarily the tax
effect of both the net operating loss carry forwards and deferred research
and development costs and, research and development tax credit carry
forwards. As a result of previous business combinations and changes in
stock ownership, substantially all of these net operating losses and tax
credit carry forwards are subject to substantial restriction with regard to
annual utilization. A full valuation allowance has been established with
regard to the gross deferred tax assets.
14. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases research and office facilities in Israel and Florida
which are used in the operation of the Company's research and
administration activities. The Florida facility which serves as a research
and development facility as well as the corporate headquarters is leased
under an agreement which expires in October 1997 and can be renewed at the
Company's
F-18
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
option for two additional one year periods. The research and development
facility in Israel is leased under an agreement which expires in May 1998.
The Company also has a long term lease on office facilities in New York,
which previously served as the Company's executive headquarters, which
expires in March 2000. The Company has entered into a non-cancelable
sublease agreement for this facility which expires in March 2000.
The Company leased office and research facilities in Seattle, Washington
under a long term lease agreement which expires in October 1999. The
Company has entered into a sublease for this facility which is non-
cancelable and expires in October 1999.
All of the leases and subleases described above call for base rentals, payment
of certain building maintenance costs (where applicable) and future increases
based on the consumer price indices.
F-19
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
At December 31, 1996, the future minimum lease commitments and sublease rental
receivables with respect to non-cancelable operating leases with initial terms
in excess of one year are as follows:
LEASE SUBLEASE
COMMITMENTS RENTALS
----------- --------
1997 $ 716,056 $305,916
1998 475,226 305,916
1999 326,202 265,209
2000 35,772 35,772
---------- --------
$1,553,256 $912,813
========== ========
Rent expense during 1996, 1995 and 1994 amounted to $371,526, $542,885, and
$488,136, respectively. Rent expense in 1996 and 1995 is net of $499,106 and
$88,698 of sublease income, respectively.
MANUFACTURING AGREEMENT
In 1995, the Company entered into a five-year agreement with a foreign company
to manufacture bulk quantities of the drug product which will be used in
Lotemax(TM), the Company's lead product. As of December 31, 1996, the Company
has a noncancelable commitment to purchase approximately $1.6 million of the
drug product noted above in 1997, payable in a foreign currency. In the event
the Company does not receive approval from the FDA or other countries to market
its Lotemax(TM) or line extension products, the active drug substance required
to be purchased pursuant to this commitment could have little or no value to the
Company.
CONSULTING CONTRACTS AND EMPLOYMENT AGREEMENTS
In the normal course of business, the Company enters into annual employment and
consulting contracts with various employees and consultants. During 1994, the
Company paid $100,000 and recorded an additional liability of $53,192, which was
paid in 1995, in consulting fees to D. Blech & Company, an affiliate of a former
Director of the Company.
F-20
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
DIVIDEND RESTRICTIONS
Dividends may be paid by the Company's subsidiary, Pharmos Limited, only out of
retained earnings as determined for Israeli statutory purposes. There are no
retained earnings in Israel available for distribution as dividends as of
December 31, 1996, 1995 or 1994. The Company does not intend to pay a cash
dividend in the foreseeable future.
15. EMPLOYEE BENEFIT PLAN
The Company has a 401-K defined contribution profit-sharing plan covering
certain employees. Contributions to the plan are based on salary reductions by
the participants, matching employer contributions as determined by the Company,
and allowable discretionary contributions, as determined by the Company's Board
of Directors, subject to certain limitations. Contributions by the Company to
the plan amounted to $11,363, $10,731 and $16,890 in 1996, 1995 and 1994,
respectively.
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, R&D reimbursements
receivable, accounts payable and accrued expenses are reasonable estimates
of their fair values. Due to the uncertainty of the timing of future
product sales it is not practical to estimate the fair value of advances
against future sales which have a carrying value of $4,000,000 at December
31, 1996. The estimated fair values of all other financial instruments
approximate, or are not materially different, than their carrying values.
17. LEGAL PROCEEDINGS
Management has reviewed with counsel all actions and proceedings pending against
or involving the Company. Although the ultimate outcome of such actions and
proceedings cannot be predicted with certainty at this time, management believes
that losses, if any, in excess of amounts accrued, resulting from those actions
will not have a significant impact on the Company's financial position or
results of operations.
18. SUBSEQUENT EVENTS
On February 12, 1997, the Company issued warrants to purchase an aggregate of
1,055,000 shares of common stock at an exercise price of $1.59 per share to 17
employees of the Company. Such warrants become exercisable in increments of 25%
each on February 12, 1998, February 12, 1999, February 12, 2000 and February 12,
2001. All of such warrants expire on February 12, 2007. Also on February 12,
1997, the Company issued warrants to purchase an aggregate of 100,000 shares of
common stock at an exercise price of $1.59 per share to the Company's five
outside directors. These warrants become exercisable on the same basis as the
warrants issued to employees, but expire on February 12, 2003. Upon
F-21
<PAGE>
PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
termination of employment or termination as a director, all warrants held by
such employee or director will expire, except that any warrant that was
exercisable on the date of termination may, to the extent then exercisable, be
exercised within three months thereafter (or one year thereafter if the
termination is the result of death or permanent disability of such employee or
director).
On March 31, 1997, the Company completed a private placement of Series B
Convertible Preferred Stock and warrants to purchase common stock, with
institutional investors generating gross proceeds of $6 million. The
preferred stock carries a 5% dividend rate payable in cash or common stock, at
the option of the Company, and is convertible into common shares of the Company
based on the share price at the time of conversion less discounts ranging from
17% to 20%. Until converted into common stock, the preferred stock has no
voting rights. The 159,000 warrants issued to the investors are exercisable
at a price of $1.75 per share, commencing one year after the closing for a three
year period. The investors were granted limited rights to approve certain
financing by the Company for 180 days from closing.
F-22
<PAGE>
EXHIBIT 4(a)(b)
PHARMOS CORPORATION
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of
December 12, 1996 by and between Pharmos Corporation (the "Company"), a Nevada
corporation having its principal offices at 2 Innovation Drive, Alachua, FL
32615, and Bausch & Lomb Pharmaceuticals, Inc., a Delaware corporation having
its principal offices at 8500 Hidden River Parkway, Tampa, FL 33637 ("BLP").
BACKGROUND
----------
A. The Company has provided to BLP information regarding the Company
and the Company's Common Stock, par value $.03 per share ("Common Stock").
B. The Company has developed and is currently seeking approval of
certain drug products for the treatment of ophthalmic disorders. BLP, in the
course of its association with the Company, has investigated such products as
well as other drug substances and products which may be offered by the Company,
and believes that the purchase of the Common Stock represents a sound investment
in the Company and its future growth apart from other business activities and
ventures between the Company and BLP.
C. Based upon BLP's review of the information provided by the
Company, BLP's discussions with representatives of the Company, BLP's
independent investigation of the Company and its reliance on the warranties and
representations made by the Company herein, BLP desires to purchase, and the
Company desires to sell, shares of Common Stock upon the terms and conditions
set forth herein.
NOW THEREFORE, in consideration of the premises and for other good and
lawful considerations, the receipt and sufficiency of which is hereby
acknowledged, the parties, intending to be legally bound, do hereby agree:
AGREEMENT
---------
1. Sale of Stock.
-------------
1.1 Authorization. The Company has duly authorized the issuance and
-------------
sale of the shares of Common Stock (the "Shares") which are being issued and
sold in accordance with the terms of this Agreement.
1.2 Sale. Subject to the terms and conditions of this Agreement, at
----
the Closing (as hereinafter defined) the Company shall sell and issue to BLP,
and BLP shall purchase, the Shares at a price per share equal to the lower of
(i) the average of the closing prices for a share of Common Stock as reported in
the East Coast edition of the Wall Street Journal for the fifteen (15) trading
days ending immediately prior to the date of this Agreement, and (ii) the
closing price for a share of Common Stock as reported in the East Coast edition
of the Wall Street Journal for the trading day immediately prior to the date of
this Agreement, in either case for
<PAGE>
an aggregate purchase price of $2,000,000.
1.3 Closing. The purchase and sale of the shares shall take place at
-------
the offices of the Company's counsel, Eilenberg & Zivian, New York, NY, upon the
execution of this Agreement, or at such other time and place as the Company and
BLP shall mutually agree in writing (which time and place are referred to herein
as the "Closing"). At the Closing, the Company will deliver to BLP a copy of an
irrevocable letter of instructions to the registrar and transfer agent of the
Company's Common Stock directing the issuance of a certificate representing the
Shares, against payment by BLP to the Company of the purchase price therefor by
wire transfer of immediately available U.S. funds or other method acceptable to
the Company, with certificates representing the Shares to be delivered to BLP
within ten (10) days after the Closing.
1.4 Legend. The certificates representing the Shares to be issued at
------
Closing will bear the following legend:
----
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED, OR HYPOTHECATED EXCEPT
PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES THAT IS EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 OR RULE
144A UNDER SUCH ACT, OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES.
2. Representations and Warranties of the Company. The Company does
---------------------------------------------
hereby represent and warrant to BLP that:
2.1 Organization and Good Standing. The Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Nevada. The Company has full power and authority to own or lease and to operate
its properties and to conduct its business as presently conducted. The Company
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the operations or financial condition of the Company.
2.2 Authority. The execution, delivery and performance by the Company of
---------
this Agreement and the consummation by the Company of the transaction
contemplated hereby have been duly authorized by all necessary corporate action.
This Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the rights and remedies of
creditors generally and as may be limited by general equitable principles.
2.3 Non-Contravention. The execution of, performance under and compliance
-----------------
with this Agreement by the Company will not violate any provision of law and
will not conflict with or result in any breach of any of the terms, conditions,
or provisions of, or constitute, with or without the passage of time or the
giving of notice, a default under, or give to any person the right to exercise
any remedy under, or to accelerate the maturity of, or to cancel, terminate or
<PAGE>
modify, or require a consent or waiver under, its Articles of Incorporation or
By-laws (each as amended and presently in effect) or any indenture, lease,
agreement or other instrument to which the Company is a party or by which it or
any of its properties is bound.
2.4 Capitalization. The authorized capital stock of the Company
--------------
(immediately prior to the Closing) is 50,000,000 shares of Common Stock, par
value $.03 per share, of which 29,219,969 shares were issued and outstanding as
of September 30, 1996, and 1,250,000 shares of undesignated preferred stock, no
par value per share, of which 1,900 Series A Convertible Preferred shares are
issued and outstanding. All of such outstanding common shares have been validly
issued and are fully paid and non-assessable. No class of capital stock of the
Company is entitled to preemptive rights. Since the date of the Company's most
recent '34 Act Filing (as hereinafter defined), the Company has not changed the
amount of its authorized capital stock or purchased any shares of its capital
stock, or subdivided or otherwise changed any shares of any class of its capital
stock, whether by way of reclassification, recapitalization, stock split or
otherwise, or issued or reissued, or agreed to issue or reissue any of its
capital stock, and has not since such date declared or paid any dividend in cash
or stock or made any other distribution of assets to its shareholders. Except
as described in the Company's '34 Act Filings (as hereinafter defined) and
pursuant to this Agreement, at the date hereof, there are no shares of capital
stock or other equity securities of the Company's outstanding and no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into,
shares of any capital stock of the Company or any of its subsidiaries, or
contracts, commitments, understandings, or arrangements by which the Company or
any of its subsidiaries is or may become bound to issue additional shares of its
capital stock or options, warrants or rights to purchase or acquire any shares
of its capital stock.
2.5 Validity of Shares. The Shares have been duly authorized and reserved
------------------
for issuance and, upon their issuance in accordance with the terms hereof, will
be validly issued, fully paid and non-assessable. The Common Stock is traded on
NASDAQ SmallCap Market.
2.6 Compliance with Law. The Company is not in default with respect to
-------------------
any judgment, order, writ, injunction, decree or award, and the Company is not
in violation of, and the business of the Company is presently being conducted so
as to comply in all material respects with, applicable Federal, state and local
governmental laws and regulations, including, without limitation, laws and
regulations relating to environmental requirements (such as requirements in
respect of air, water and noise pollution) drug testing, manufacturing and
distribution, and to employment practices (such as practices in respect of
discrimination, wage and hour and health and safety), all to the extent
necessary to avoid any material adverse effect on the business, properties or
financial condition of the Company.
2.7 Governmental Consent, etc. The Company is not required to obtain any
-------------------------
consent, approval or authorization of, or to make any declaration or filing
with, any governmental authority as a condition to or in connection with the
valid execution, delivery and performance of this Agreement and the valid offer,
sale or delivery of the Shares, or the performance by the Company of its
obligations in respect thereof.
2.8 Taxes. The Company and its subsidiaries have filed or caused to be
-----
filed, or will file within the time period prescribed by law, all federal and
state income tax returns which are
<PAGE>
required to be filed and have paid or caused to be paid all taxes to the extent
that such taxes have become due and payable, except taxes the validity or amount
of which is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been set aside. The Company has paid or
caused to be paid, or has established reserves adequate in all material
respects, for all Federal income tax liabilities and state income tax
liabilities applicable to the Company for all fiscal years which have not been
examined and reported on by the taxing authorities (or closed by applicable
statutes).
2.9 Material Adverse Change. Except as described in the Company's filings
-----------------------
with the SEC under the Securities and Exchange Act of 1934, as amended (the "'34
Act") during the twelve (12) months prior to the date of this Agreement (the
"'34 Act Filings") or as otherwise previously disclosed in writing to BLP and
identified as an exception to this representation, there has been no material
adverse change in the business, financial condition, or results of operations of
the Company since the date of the most recent '34 Act Filing.
2.10 ERISA. No accumulated funding deficiency (as defined in Section 302
-----
of ERISA and Section 412 of the Internal Revenue Code of 1986, as amended (the
"Code")), whether or not waived, exists with respect to any Plan (as defined
below) (other than a Multiemployer Plan (as defined below)). No liability to
the Pension Benefit Guaranty Corporation has been incurred with respect to any
Plan (other than a Multiemployer Plan) by the Company which is or would be
materially adverse to the Company taken as a whole. Neither the Company nor any
of its subsidiaries has incurred any withdrawal liability under Title IV of
ERISA with respect to any Multiemployer Plan which is or would be materially
adverse to the Company and its subsidiaries taken as a whole. The execution and
delivery of this Agreement and the sale of the Shares will not involve any
transaction which is subject to the prohibitions of Section 406 of ERISA or in
connection with which a tax could be imposed pursuant to Section 4975 of the
Code. As used in this Section 2.11, the term "Plan" shall mean an "employee
pension benefit plan" (as defined in Section 392 of ERISA) which is or has been
established or maintained, or to which contributions are or have been made, by
the Company or by any trade or business, whether or not incorporated, which,
together with the Company, is under common control, as described in Section
414(b) or (c) of the Code; and the term "Multiemployer Plan" shall mean any Plan
which is a "multiemployer plan" (as such term is defined in section 4001(a)(3)
of ERISA).
2.11 Possession of Franchises, Licenses, etc. To the Company's knowledge,
---------------------------------------
the Company possesses all franchises, certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities that are necessary in any material respect for the ownership,
maintenance and operation of their respective properties and assets, and to
conduct the businesses now conducted or proposed to be conducted, and the
Company is not in violation of any thereof in any material respect.
2.12 Trademarks, Patents, etc. To the Company's knowledge, the Company
------------------------
owns, or possesses the right to use to the extent necessary in its businesses,
all trade secrets, trademarks, trade names, copyrights, patents, patent rights,
computer software, licenses and other assets considered to be "intangible
assets" in accordance with generally accepted accounting principles
(collectively, "Intangible Assets") that are used or are necessary in any
material respect in the conduct of its business as now operated. No such
Intangible Asset, to the best knowledge of the Company, conflicts with the valid
trade secret, trademark, trade name, copyright, patent, patent
<PAGE>
right or other Intangible Asset of any other person.
2.13 Employee Matters. There is no strike, work stoppage or labor dispute
----------------
with any union or group of employees pending or, to the knowledge of the
Company, threatened involving the Company.
2.14 Financial Statements. The financial statements included in the '34
--------------------
Act Filings, including in each case the related notes, fairly present the
financial position of the Company as of the respective dates of said balance
sheets and the results of the operations of the Company for the respective
periods covered by said statements of operations and retained earnings and
changes in financial position, and have been prepared in accordance with
generally accepted accounting principles consistently applied by the Company
throughout the periods involved and the Company has no knowledge of any material
liabilities contingent or otherwise, not reflected in said balance sheet as of
said date or in the '34 Act Filings.
2.15 No Change of Control. Consummation of the transactions contemplated
--------------------
by this Agreement will not constitute a "change of control" or "change in
control" or any other event of similar import as defined in any agreement to
which the Company is a party, and will not subject BLP to the provisions of
Sections 78.378 through 78.3793 or Sections 78.411 through 78.444 of the Nevada
Corporate law.
2.16 No General Solicitation. The sale of the Shares hereunder is exempt
-----------------------
from the registration and prospectus delivery requirements of the Securities Act
of 1933, as amended (the "Securities Act"). In connection with the issuance and
sale of the Shares, no form of general solicitation or general advertising was
used by the Company or any of its representatives including, but not limited to
advertisements, articles, notices or other communications published in any
newspaper, magazine or similar medium or broadcast over television or radio, or
any seminar or meeting whose attendees had been invited by any general
solicitation or general advertising.
2.17 Litigation. There is no action, suit, proceeding or, to the knowledge
----------
of the Company, investigation pending or, to the Company's knowledge, currently
threatened against the Company which might result, either individually or in the
aggregate, in any material adverse changes in the material assets, condition,
affairs or prospects of the Company, financially or otherwise, nor is the
Company aware that there is any basis for any of the foregoing.
2.18 Filings. The Company has timely filed all reports, registration
-------
statements and other documents required to be filed by it with the SEC under the
Securities Act or the '34 Act, including without limitation the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996, and
Annual Report on Form 10-K for the fiscal year ended December 31, 1995. As of
its filing date, no such report or statement contained or contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading as of the date made.
2.19 Disclosure. This Agreement, including schedules and exhibits, does
----------
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the
<PAGE>
statements made in this Agreement not misleading in light of the circumstances
under which they were made.
3. Representation of BLP. BLP represents and warrants to the Company
---------------------
that:
3.1 Investment. BLP is acquiring the Shares for its own account for
----------
investment and not with a view to, or for sale in connection with, any
distribution thereof which would be in violation of the securities laws of the
United States, and any sale, transfer or other disposition of any Shares will be
made in compliance with all applicable provisions of the Securities Act and the
rules and regulations promulgated thereunder.
3.2 Authority. BLP has full power and authority to enter into, to perform
---------
under and comply with this Agreement and this Agreement constitutes the valid
and binding obligation of BLP enforceable in accordance with its terms, except
as may be limited by bankruptcy, insolvency, reorganization, moratorium or other
laws limiting the rights and remedies of creditors generally and as may be
limited by general equitable principles.
3.3 Independent Investigation. BLP, in entering into this Agreement, has
-------------------------
relied upon an independent investigation made by it and its representatives, if
any. In making its investment decision to purchase the Shares, BLP is not
relying on any oral or written representations or assurances from the Company or
any of its employees, representatives or agents other than as set forth in this
Agreement.
3.4 Accredited Investor. BLP is an Accredited Investor as such term is
-------------------
defined in the Securities Act, Rule 501(a).
3.5 Non-Contravention. The execution of, performance under and compliance
-----------------
with this Agreement by BLP will not violate any provision of law and will not
conflict with or result in any breach of any of the terms, conditions, or
provisions of, or constitute, with or without the passage of time or the giving
of notice, a default under, or require a consent or waiver under, any indenture,
lease, agreement or other instrument to which BLP is a party or by which BLP or
any of its properties is bound except as would not have a material adverse
effect on the business, financial condition or results of operations of BLP.
4. Closing Conditions. The obligations of each of the parties hereto
------------------
shall be subject to the satisfaction or waiver of each of the following
conditions:
4.1 No Judgments or Actions. There shall not be in effect a judgment,
-----------------------
order or decree of a court of competent jurisdiction that prevents or delays the
consummation of the transactions contemplated hereby. There shall not be any
actions, suits, investigations or proceedings pending or to the best knowledge
of the Company threatened against or affecting the Company or its properties
which, if adversely determined, would interfere with or adversely affect the
issuance of the Shares.
4.2 Representations and Warranties. The representations and warranties of
------------------------------
the other party hereto shall have been true when made and shall be true at and
as of the Closing as though made at and as of such date.
<PAGE>
4.3 Approvals and Consents. The Company shall have received all consents
----------------------
and approvals required in connection with the issuance of the Shares, including,
without limitation, those required by law, any contract or agreement to which
the Company is a party or any securities exchange on which the Company's
securities are listed or quoted.
4.4 Officer's Certificate. The Company shall have delivered the
---------------------
certificate of an executive officer of the Company to the effect that the
foregoing conditions to closing have, to such officer's best knowledge, been
satisfied.
4.5 Legal Opinion. A favorable written opinion of Eilenberg & Zivian,
-------------
counsel to the Company, in a form satisfactory to BLP shall have been delivered
with respect to due authorization and valid issuance of the Shares, due
execution and enforceability of this Agreement, and good standing of the
Company. Such counsel may rely as to matters of Nevada law on an opinion of
local counsel.
4.6 Satisfactory Proceedings. All proceedings taken in connection with
------------------------
the sale of the Shares and all documents relating thereto shall be satisfactory
in form and substance to BLP. BLP shall have received copies of such documents
as it may request in connection with the Closing, or as a basis for the Closing
opinions, all in form and substance satisfactory to BLP.
5. Adjustment Upon Changes in Capitalization. In the event of any change
-----------------------------------------
in the Company's common stock prior to the Closing by reason of stock dividends,
split-ups, recapitalizations, combinations, exchanges of shares or the like, the
number of Shares and the purchase price per Share provided for hereunder shall
be adjusted proportionately. In addition, the Company agrees that it shall not
issue shares of Common Stock at a price which is below fair value for such
shares as determined in good faith by, and the informed judgement of, the Board
of Directors of the Company.
6. BLP Covenants. BLP covenants that:
-------------
6.1 Press Release. BLP shall not issue any press release relating to the
-------------
sale and acquisition of the Shares and related matters contemplated hereby
without the prior approval of the Company.
6.2 Confidentiality. BLP acknowledges and agrees that any information or
---------------
data it has acquired from the Company, not otherwise properly in the public
domain, was received in confidence. BLP agrees (and agrees to cause his
officers, employees, agents, representatives and directors) not to, without the
Company's consent, divulge, communicate or disclose any confidential information
it has obtained prior to the date hereof with respect to the Company, except as
may be required by law, or as may be necessary to disclose to its attorneys,
accountants and other advisors (but only to the extent such individuals agree to
be bound by the confidentiality provisions hereof). BLP's obligation under this
Section 6.2 shall cease as to any information or data which after its
acquisition from the Company became or becomes generally available to the public
otherwise than as a result of a disclosure by BLP or anyone to whom it, directly
or indirectly, transmits such information or data in violation of this Section
6.2.
<PAGE>
7. Registration Rights. BLP shall have the following registration rights
-------------------
with respect to the Shares:
7.1 Certain Definitions. As used in this Section 7, the following terms
-------------------
shall have the following meanings:
(a) The terms "Register", "Registered" and "Registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act ("Registration Statement") for the purpose of
effecting a public sale of securities, and the declaration or ordering of the
effectiveness of such Registration Statement.
(b) "Registration Expenses" shall mean all expenses incurred by the Company
---------------------
in complying with this Section 7, including, without limitation, all federal and
state registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, Blue Sky fees and expenses, and the
expense of any special audits incident to or required by any such Registration.
(c) "Selling Expenses" shall mean all underwriting discounts and selling
----------------
commissions applicable to the sale of Shares pursuant to a Registration and all
fees and disbursements of counsel for BLP.
(d) "Shares" for purposes of this Section 7 shall include any securities of
------
the Company issued to BLP on account of the Shares, whether by way of stock
split or recapitalization or as a dividend on the Shares.
7.2 Registration.
------------
(a) Piggyback Registration. From and after the date of this Agreement,
-----------------------
and subject to the applicable provisions of Section 7.3 below, BLP shall have
the right, at any time the Company shall commence the preparation and filing of
a Registration Statement to Register its securities to include in the offering
such amount of Shares as BLP shall request to be included by written notice to
the Company received within five (5) business days after receipt of the
Company's notice of such Registration. The Company shall give BLP prompt notice
of the date on which it commences the preparation and filing of such a
Registration Statement.
(b) Demand Registration. If upon the later to occur of (i) the first
-------------------
commercial sale of a drug product containing Loteprednol Etabonate in any
country outside of the United States, or (ii) the second anniversary of this
Agreement, BLP cannot sell or otherwise transfer the Shares after exercising
diligent efforts for six (6) months, pursuant to Rule 144 promulgated under the
Securities Act, and a similar exemption under applicable state securities laws,
BLP shall have the right, at any time subsequent to the later of the dates set
forth above, to make one (1) request that the Company register any Shares
specified in the notice and not previously registered under the Securities Act
on any form which may be used for such Registration as determined in good faith
by the Company, and under other relevant securities laws, for disposition in
accordance with methods stated in the notice, and otherwise subject to the
applicable provisions of Section 7.3 below.
<PAGE>
(c) Notice of Registration. Each request delivered by BLP pursuant to
----------------------
Section 7.2(a) or (b) above shall: (i) specify the amount of Shares intended to
be offered and sold by BLP; and (ii) contain the undertaking of BLP to provide
all such information and materials and take all such action as may be required
in order to permit the Company to comply with all applicable requirements of the
Securities Act, the SEC and state securities and "blue sky" laws and to obtain
acceleration of the effective date of the Registration Statement, and (iii) if
applicable, specify the intended method of disposition.
7.3 Limitations on Registrations. Notwithstanding anything contained
----------------------------
herein to the contrary, the obligations of the Company to cause Shares to be
registered pursuant to Sections 7.2(a) and 7.2(b) above are subject to each of
the following limitations, conditions and qualifications, as applicable:
(a) The Company shall not be required to give notice or include Shares in
any registration pursuant to Section 7.2(a) if the proposed Registration is
primarily: (i) a registration of a stock option, thrift, employee benefit or
compensation plan or of securities issued or issuable pursuant to any such plan;
(ii) a registration of securities proposed to be issued in connection with a
dividend reinvestment and stock purchase plan or customer stock purchase plan;
(iii) a registration of securities proposed to be issued in exchange for
securities or assets of, or in connection with a merger or consolidation with,
another corporation or other entity; or (iv) a registration of securities which
is solely a combination of any of the above.
(b) The Company shall not be obligated to give notice or include Shares in
any registration pursuant to Section 7.2(b) during the period starting with the
date thirty (30) days prior to the Company's estimated date of filing of, and
ending on a date six months following the effective date of, a registration
pertaining to an underwritten public offering of securities for the account of
the Company, provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company's estimates of the date of filing of such registration
statement is made in good faith.
(c) If (i) there is material non-public information regarding the Company
which the Board of Directors of the Company determines in good faith, based upon
an informed judgement, not to be in the Company's best interest to disclose and
which the Company is not otherwise required to disclose, or (ii) there is a
significant business opportunity available to the Company which the Board
determines in good faith, based upon an informed judgement, not to be in the
Company's best interest to disclose and which the Company is not otherwise
required to disclose, or (iii) there is a significant business opportunity
available to the Company and the Board determines in good faith, based upon an
informed judgement, that the Company's ability to pursue such opportunity would
be materially and adversely affected by a registered public offering of the
Common Stock, then the Company may postpone filing a registration statement
requested pursuant to Section 7.2(b) for a period not to exceed 150 days,
provided that the Company may not postpone its obligation under this subpart
more than once every 12 months.
(d) If (i) BLP requests inclusion of any Shares in a registration
statement pursuant to Section 7.2(a) of this Agreement, (ii) the offering
proposed to be made is to be an underwritten public offering, and (iii) the
managing underwriters of such public offering furnish a written opinion that the
total amount of Common Stock to be included in such offering would exceed
<PAGE>
the maximum amount of Common Stock (as specified in such opinion) which can be
marketed at a price reasonably related to the then current market value of the
Common Stock and without materially and adversely affecting such offering, then
in such case the rights of BLP, of the holders of other securities having the
right to include such securities in such registration and of the Company to
participate in such offering shall be in the following order of priority: First:
the Company; and then Second: the holders (including BLP) shall be entitled to
participate in such offering, pro rata among themselves in accordance with the
number of shares of Common Stock which each such holder has requested be
registered.
(e) In connection with any offering involving an underwriting of Shares
pursuant to Section 7.2(a) of this Agreement, the Company shall not be required
to include any of the Shares of BLP in such offering unless BLP agrees to the
terms of the underwriting agreed to between the Company and the underwriter or
underwriters selected by the Company, provided that no such agreement shall add
to the indemnities or affect the priorities set forth in this Agreement.
(f) The Company may, in its sole discretion, without the consent of BLP
and without liability to BLP for such action, withdraw a Registration Statement
at any time described in Section 7.2(a).
7.4 Blue Sky. The Company will exercise its best efforts to Register and
--------
qualify the Shares included in the Registration Statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by BLP for the distribution of such securities; provided, however,
that the Company shall not be required to qualify to do business, to file a
general consent to service of process, or to subject itself to taxation in any
state or jurisdiction in which it is not now so qualified or taxed.
7.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with the Registration Statement pursuant to Section 7.2 shall be
borne by the Company. All Selling Expenses shall be borne by BLP. Fees and
expenses of counsel engaged by BLP for purposes of any Registration shall be
borne by BLP.
7.5 Registration Procedures.
-----------------------
(a) Advice By the Company. The Company will keep BLP advised as to the
---------------------
initiation and completion of any Registration Statement. At its expense the
Company will (i) furnish such number of prospectuses (including preliminary
prospectuses) and other documents as BLP from time to time may reasonably
request; and (ii) furnish to BLP, upon the effectiveness of the Registration
Statement and upon each change in facts set forth in such memorandum, a
memorandum of counsel advising as to the status of its registration and
qualification of its Shares under the securities or Blue Sky laws of those
jurisdictions reasonably requested by BLP pursuant to this Section 7. In
addition, the obligation of the Company to maintain the effectiveness of any
Registration Statement shall be suspended with respect to any Shares held by BLP
at any time following the sale of such Shares pursuant to Rule 144(k) or through
the Registration Statement.
(b) Amendments. The Company will promptly prepare and file with the SEC
----------
such amendments and prospectus supplements, including post-effective amendments,
to the
<PAGE>
Registration Statement as the Company determines may be necessary or
appropriate, and use its best efforts to have such post-effective amendments
declared effective as promptly as practicable; cause the related prospectus to
be supplemented by any prospectus supplement, and as so supplemented, to be
filed with the SEC; and notify BLP promptly when a prospectus, any prospectus
supplement or post-effective amendment must be filed (because the Registration
Statement has become inaccurate or otherwise) or has been filed and, with
respect to any post-effective amendment, when the same has become effective.
7.6 Information Furnished by BLP. It shall be a condition precedent to
----------------------------
the Company's obligations to register the Shares under this Agreement that BLP
furnish to the Company in writing such information regarding BLP and the
distribution proposed by BLP as the Company may reasonably request.
7.7 Indemnification.
---------------
(a) The Company's Indemnification. The Company will indemnify BLP and its
-----------------------------
officers and directors, and each person controlling BLP, with respect to which
Registration, qualification or compliance has been effected pursuant to this
Agreement, against all claims, losses, damages or liabilities (or actions in
respect thereof) to the extent such claims, losses, damages or liabilities arise
out of or are based upon any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus or any related Registration Statement
incident to any such Registration, qualification or compliance, or any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of any rule or regulation promulgated under the 1933
Act applicable to the Company and relating to action or inaction required of the
Company in connection with any such Registration; and the Company will reimburse
BLP, and each person who controls BLP, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action; provided, however, that the indemnity
contained in this Section shall not apply to amounts paid in settlement of any
such claim, loss, damage, liability or action if settlement is effected without
the consent of the Company (which consent shall not unreasonably be withheld and
may not be withheld unless the Company has acknowledged in writing BLP's right
to indemnity under such claim); and provided, further, that the Company will not
be liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based upon any untrue statement or
omission based upon written information furnished to the Company by BLP, or
controlling person and stated in writing to be for use in connection with the
offering of securities of the Company. Notwithstanding the above, the foregoing
indemnity is subject to the condition that, insofar as it relates to any such
untrue statement, alleged untrue statement, omission or alleged omission made in
a preliminary prospectus on file with the SEC at the time the Registration
Statement becomes effective or a prospectus filed with the SEC pursuant to Rule
424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the
benefit of BLP, if (i) a copy of the Final Prospectus was not furnished to the
person asserting the loss, liability, claim or damage at or prior to the time
such action is required by the 1933 Act, (ii) the Final Prospectus corrected the
untrue statement or omission or alleged untrue statement or omission, and (iii)
BLP or an agent of BLP had an affirmative obligation under applicable laws,
rules or regulations to deliver the Final Prospectus to the person asserting the
loss, liability, claim or damage.
<PAGE>
(b) BLP's Indemnification. BLP will indemnify the Company, each of its
---------------------
directors and officers, each person who controls the Company within the meaning
of the 1933 Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based upon (i) any untrue statement (or
alleged untrue statement) of a material fact contained in such Registration
Statement or related prospectus, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) the failure by BLP to deliver a Final
Prospectus to any person as required by any rule or regulation promulgated under
the 1933 Act, and will reimburse the Company, such directors, officers, or
control persons for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in the Registration Statement or prospectus in reliance upon
and in conformity with written information furnished to the Company by BLP and
stated to be specifically for use in connection with the offering of the
Company; provided, however, that BLP's liability under this Section shall not
--------
exceed BLP's proceeds from the offering of its Shares made in connection with
such Registration.
(c) Indemnification Procedure. Promptly after receipt by an indemnified
-------------------------
party under this Section 7 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section 7, notify the indemnifying party in
writing of the commencement thereof and generally summarize such action. The
indemnifying party shall have the right to participate in and to assume the
defense of such claim, and shall be entitled to select counsel for the defense
of such claim with the approval of the party entitled to indemnification, which
approval shall not be unreasonably withheld. Notwithstanding the foregoing, the
party entitled to indemnification shall have the right to employ separate
counsel (reasonably satisfactory to the indemnifying party) to participate in
the defense thereof, but the fees and expenses of such counsel shall be the
expense of such indemnified party unless the named parties to such action or
proceedings include both the indemnifying party and the indemnified party and
the indemnifying party or the indemnified party shall have been advised by
counsel that there are one or more legal defenses available to it which are
different from or additional to those available to the indemnifying party (in
which case, if the indemnified party notifies the indemnifying party in writing
that it elects to employ separate counsel at the reasonable expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such action or proceeding on behalf of the indemnified party).
(d) Contribution. If the indemnification provided for in this Section 7.7
------------
from an indemnifying party is unavailable to an indemnified party hereunder in
respect to any losses, claims, damages, liabilities or expenses referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified party in connection with the statements or omissions which
result in such losses, claims, damages, liabilities or expenses, as well as any
other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by such
<PAGE>
indemnifying party or indemnified party and the parties' relative intent,
knowledge, access to information supplied by such indemnifying party or
indemnified party and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action, suit, proceeding or
claim.
7.8 No-Action Letter or Opinion of Counsel in Lieu of Registration.
--------------------------------------------------------------
Notwithstanding anything else in this Agreement, if the Company shall have
obtained from the SEC a "no-action" letter in which the SEC has indicated that
it will take no action if, without Registration under the 1933 Act, BLP disposes
of Shares covered by any request for Registration made under this Section 7 in
the specific manner in BLP proposes to dispose of the Shares included in such
request (such as including, without limitation, inclusion of such Shares in an
underwriting initiated by the Company), or if in the opinion of counsel for the
Company concurred in by counsel for BLP, which concurrence shall not be
unreasonably withheld, no Registration under the 1933 Act is required in
connection with such disposition, due to the applicability of Rule 144(k) as
promulgated under the 1933 Act (or any successor provision), the Shares included
in such request shall not be eligible for Registration under this Agreement;
provided, however, that any Shares not so disposed of shall be eligible for
Registration in accordance with the terms of this Agreement with respect to
other proposed dispositions to which this Section 7.8 does not apply. In
addition, the obligation of the Company to file or maintain the effectiveness of
any Registration Statement shall be suspended with respect to any Shares held by
BLP following such time.
8. Miscellaneous.
-------------
8.1 Amendments. This Agreement may not be modified, amended, altered or
----------
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
8.2 Termination. This Agreement may be terminated by mutual consent of
-----------
the parties hereto or by either party if the other party breaches this
Agreement.
8.3 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by hand delivery, by cable,
telegraph or telex, Federal Express or other recognized overnight courier by
mail (registered or certified mail, postage prepaid, return receipt requested)
or by facsimile transmission to the respective parties as follows:
If to BLP to:
Bausch & Lomb Pharmaceuticals, Inc.
8500 Hidden River Parkway
Tampa, FL 33637
Attn: Mark Tomaino, Esq.
Fax No. 716-338-8706
<PAGE>
If to the Company, to:
Pharmos Corporation
2 Innovation Drive
Alachua, FL 32615
Fax No. 904-462-5401
With a copy to:
Adam D. Eilenberg, Esquire
Eilenberg & Zivian
666 3rd Avenue, 30th Floor
New York, NY 10017
Fax No. 212-986-2399
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
8.4 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties contained herein or made in writing by the Company or BLP in
connection herewith shall survive the execution and delivery of this Agreement,
the sale and purchase of the Shares and any disposition thereof, regardless of
any investigation made by or on behalf of BLP or the Company, as the case may
be.
8.5 Indemnification. Each of the Company and BLP agrees to indemnify and
---------------
to hold the other harmless against and in respect of any and all losses,
damages, costs and expenses, including, without limitation, reasonable
attorneys' fees, as incurred by the indemnified party, by reasons of a breach of
any of the express representations, warranties or covenants and agreements of
the other made in this Agreement, or otherwise on account of the transactions
contemplated herein except that BLP shall only be liable to the Company for
breaches of representations and warranties with respect to itself only.
8.6 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the substantive law of the State of New York without giving
effect to the principles of conflict of laws thereof.
8.7 Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
8.8 Trading Market; Reports. The Company shall use best efforts to ensure
-----------------------
that its Common Stock is listed and eligible for trading on the NASDAQ stock
market or a national securities exchange until such time as BLP has resold all
of the Shares purchased hereunder.
*****END OF TEXT*****
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Stock Purchase Agreement
to be duly executed on the day and year first above written.
BAUSCH & LOMB PHARMACEUTICALS, INC
By: /s/ Alan P. Damper
----------------------------------------------
Title: President
-------------------------------------------
PHARMOS CORPORATION
By: /s/ Gad Riesenfeld
----------------------------------------------
Title: Exec. V.P. and C.O.O.
-------------------------------------------
<PAGE>
EXHIBIT 10(Y)
NEW TERRITORIES MARKETING AGREEMENT
-----------------------------------
THIS MARKETING AGREEMENT (this "AGREEMENT"), dated as of December 12, 1996,
between Bausch & Lomb Pharmaceuticals, Inc., a Delaware corporation having its
principal office at 8500 Hidden River Parkway, Tampa, Florida 33637 ("BLP") and
Pharmos Corporation, a Nevada corporation having its principal office at 2
Innovation Drive, Alachua, Florida 32615 ("PHARMOS").
In consideration of the respective representations, warranties, covenants
and agreements of the parties set forth below, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE I
DEFINITIONS
Unless otherwise defined in this Agreement, all capitalized terms used
herein shall have the following meanings:
1.1 "ADJUSTED SALES" means the gross sales price for a Drug Product
invoiced for sale by BLP to third parties in the New Territories, less (i)
discounts, chargebacks, rebates with respect to national healthcare or medical
insurance programs existing in any jurisdiction within the New Territories, and
rebates to purchasers actually allowed and taken and in amounts customary in the
trade; (ii) insurance and freight costs separately billed to the purchaser and
actually paid or prepaid by the purchaser; (iii) returns from purchasers for
exchange or credit (provided that Drug Product delivered to such purchaser in
such circumstance shall be deemed a separate sale subject to this Agreement);
and (iv) sales and other taxes (exclusive of taxes on income) levied by any
governmental authority in the New Territories directly on sales of Drug Products
which are collected by BLP from a purchaser and in turn paid by BLP to the
taxing authority.
1.2 "BLP MONTH" means each fiscal month of BLP established during the term
of this Agreement and communicated to Pharmos prior to the beginning of each BLP
fiscal year for the succeeding twelve (12) BLP fiscal months.
1.3 "BLP TECHNICAL DOCUMENTATION" means all written data and information
embodying BLP Technology, including, without limitation, Master Batch Records,
SOPs, Protocols and Studies.
1.4 "CGMP" means the good manufacturing practice regulations promulgated
by any Regulatory Authority with respect to a particular jurisdiction having the
force of law within such jurisdiction, and as such regulations may be modified
or supplemented from time to time during the term of this Agreement by such
appropriate Regulatory Authority.
1.5 "COMMERCIAL SALE" means the transfer or sale for value by BLP of Drug
Product to an unaffiliated third party.
<PAGE>
1.6 "COMPETITOR" means each of ***** and any other entity which currently
manufactures and sells ophthalmic pharmaceutical products in the Major European
Markets and has derived gross revenues of more than $***** from such sales in
the fiscal year of such entity immediately prior to the year in which either
party to this Agreement desires to make any assignment of this Agreement or any
of their respective rights hereunder.
1.7 "DEVELOPMENT PRODUCT" means either of LEA or LET until such time as an
NDA is submitted to a Regulatory Authority with respect to LEA or LET, as the
case may be, pursuant to the terms of this Agreement.
1.8 "DMF" means appropriate Drug Master File(s) or similar files or
documents covering the manufacture of Drug Product at a Facility.
1.9 "DRUG PRODUCT" means (i) the Initial Drug Product, and (ii) any
Development Product on which an NDA is submitted to a Regulatory Authority by
Pharmos during the term of this Agreement.
1.10 "DRUG SUBSTANCE" means Loteprednol Etabonate.
1.11 "EUROPEAN COMMUNITY" means all of the countries set forth on Schedule
--------
1.11, inclusive of the Major European Markets.
- ----
1.12 "EXCLUSIVITY AMOUNT" means an amount determined for each Product Year
by multiplying for each Major European Market, Other Major Market and Region,
(i) the positive difference between the Exclusive Quantity for such Exclusive
Quantity Territories in such Product Year and the units of a Drug Product
actually sold and included within Adjusted Sales in such Product Year, by (ii)
the average Adjusted Sales Price for all units of such Drug Product sold in such
Exclusive Quantity Territories in such Product Year calculated in the currency
for which such units of Drug Product were sold, and converted to U.S. dollars
under Section 2.4 below.
1.13 "EXCLUSIVE MARKETING RIGHTS" means a grant of an exclusive right, in
the name of Pharmos, BLP or another third party distributor, as the case may be,
to market and sell a Drug Product in a jurisdiction within the New Territories
by a Regulatory Authority.
1.14 "EXCLUSIVITY QUANTITY" means the amount of units of Drug Product set
forth on Schedule 1.14 attached to this Agreement with respect to a referenced
-------------
Product Year for the Initial Drug Product and each Development Product for each
of the Exclusive Quantity Territories, as such Schedule may be amended
subsequent to the date of this Agreement as contemplated below; provided, that
--------
with respect to any Exclusive Quantity Territories for which there is no
specific amount set forth on Schedule 1.14 on the date this Agreement is
executed, the parties agree, within six months following execution of this
Agreement, to allocate by mutual good faith agreement, a certain number of units
of Initial Drug Product and each Development Product to such Exclusive Quantity
Territories calculated by taking a mutually agreed to percentage of *****% of
the total Exclusive Quantity Amounts set forth on Schedule 1.14 on the date this
Agreement is executed.
<PAGE>
1.15 "EXCLUSIVITY QUANTITY TERRITORIES" means each of the Major European
Markets individually, each of the Other Major Markets individually, and each of
the following regions ("REGIONS"): (i) the European Community (inclusive of the
Major European Markets); (ii) all other European countries (including without
limitation Russia), exclusive of the Major European Markets and the European
Community); and (iv) Central and South America.
1.16 "FACILITY" means BLP's facility located in Tampa, Florida, and such
other facility owned or operated by or for the benefit of BLP in the New
Territories.
1.17 "FIELD" means the topical ophthalmic use of Drug Product.
1.18 "INITIAL DRUG PRODUCT" means the product including the Drug Substance
described in the Initial NDA.
1.19 "INITIAL MARKETING PLAN" means a plan for the marketing, sale and
distribution of the Initial Drug Product in the New Territories prepared by BLP
pursuant to the terms of this Agreement.
1.20 "INITIAL NDA" means, where appropriate, either (i) the MAA, or (ii)
the New Drug Application (#*****) submitted by Pharmos to the United States Food
and Drug Agency on March 30, 1995, including in either case any amendments,
supplements, schedules and exhibits thereto.
1.21 "INTELLECTUAL PROPERTY" means patents, patent applications,
trademarks, trade names, trade dress, trademark registrations and applications
therefore, and copyrights, copyright registrations and applications therefore
pertaining to the Drug Product and Drug Substance, in the New Territories.
1.22 "LABEL", "LABELING" or a word or phrase of similar import has the
meaning ascribed under the applicable Regulatory Act.
1.23 "LEA" means an ophthalmic suspension or solution of Drug Substance for
treatment of allergies.
1.24 "LET" means one (1) combination of Drug Substance and Tobramycin (or
such other antibiotic mutually agreed to by the parties).
1.25 "MAA" means the Marketing Authorization Application to be filed by
Pharmos in the United Kingdom in accordance with this Agreement.
1.26 "MAJOR EUROPEAN MARKETS" means the United Kingdom, France, Germany,
Italy and Spain.
1.27 "OTHER MAJOR MARKETS" means each of Austria, Switzerland, Canada and
Mexico.
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
1.28 "MASTER BATCH RECORDS" means the master batch records prepared by BLP
in accordance with CGMP requirements which now or hereafter govern the
Processing of Drug Substance into Drug Product.
1.29 "NEW TERRITORIES" means all territories in the world exclusive of (i)
the United States (including its possessions and military bases abroad), (ii)
the State of Israel, and (iii) each of the countries set forth on Schedule 1.29
-------------
attached to this Agreement, such countries being those in which third parties
unaffiliated with Pharmos hold the rights to manufacture and sell Drug
Substance.
1.30 "NDA" means (i) each new drug application or similar filing with a
Regulatory Authority for approval of the sale and marketing of the Initial Drug
Product within a particular jurisdiction in the New Territories, including the
MAA, and (ii) any new drug application covering a Development Product which may
be submitted by Pharmos or BLP to a Regulatory Authority during the term of, and
as contemplated by, this Agreement.
1.31 "NDA SUBMISSION PACKAGE" means all pre-clinical, laboratory, clinical,
biocompatibility and other testing data; labeling; processing, material and
packaging specifications; and supplements or amendments to any of the foregoing;
and all other information in the possession of and used by Pharmos for
submitting, obtaining and maintaining approval of a Regulatory Authority in
accordance with the requirements of applicable law.
1.32 "PATENT RIGHTS" means those foreign patents and foreign patent
applications relating to Drug Substance listed on Schedule 1.32 attached hereto,
-------------
including an indication of which countries such patents and patent applications
pertain to, which shall be supplemented from time to time hereafter, as
necessary to reflect any patents or patent applications owned or controlled by
Pharmos after the date hereof, and which cover the Processing, use, sale or
importation of the Drug Substance.
1.33 "PLACEBO PRODUCT" means a Drug Product excluding the Drug Substance.
1.34 "POTENTIAL MAJOR MARKETS" means China, India, South Africa and Russia.
1.35 "PRIOR AGREEMENTS" means each of the U.S. Marketing Agreement and the
Processing Agreement.
1.36 "PROCESS" and "PROCESSING" and other forms of such word or phrase
shall refer to the processing, handling, storage and/or disposal of the Drug
Substance and Placebo Product, and other raw materials included within a Drug
Product or used in connection therewith, and the processing, handling, storage
and/or packaging of a Drug Product.
1.37 "PROCESSING AGREEMENT" means that certain Processing Agreement dated
as of October 21, 1994, between the parties, as it may be amended or
supplemented from time to time.
1.38 "PRODUCT YEAR" means, with respect to each Drug Product, each twelve
(12) BLP Month period during the Term commencing with the first day of the first
full BLP Month in which a Commercial Sale of such Drug Product shall occur in
the New Territories,
<PAGE>
provided, that the first Product Year shall include any portion of the BLP Month
- --------
preceding the first Product Year.
1.39 "PROTOCOLS" means those testing methods and standards developed and
used by BLP in performing the Services which comply with each applicable
Regulatory Act, subject to the approval of Pharmos which shall not be
unreasonably withheld.
1.40 "REGULATORY ACT" means, with respect to a particular jurisdiction
within the New Territories, any statutes or laws in such Jurisdiction of similar
effect or substance to the United States Food, Drug and Cosmetic Act, as such
statutes or laws may be amended from time to time, and all regulations
promulgated pursuant thereto.
1.41 "REGULATORY AUTHORITY" means any governmental agency or body having
regulatory authority for the approval and sale of Drug Product, or otherwise for
the regulation or control over the sale of cosmetics and for drugs (including
Drug Product), within a particular jurisdiction in the New Territories.
1.42 "REGULATORY COMMUNICATIONS" means any action, request, order,
instruction, communication, complaint, notice, public announcement or inquiry by
a Regulatory Authority or any submission, filing, letter or other communication
by Pharmos, BLP or any manufacturer of Drug Substance to a Regulatory Authority,
with respect to Drug Product, Placebo Product, Development Product or Drug
Substance which is sent by or is received by either party (or, in the case of
Pharmos, by any manufacturer of Drug Substance), or which comes to either
party's or its agent's attention, including, but not limited, to field actions,
investigations or recalls of Drug Product or Placebo Product in the New
Territories.
1.43 "SALES FORECAST" means BLP's forecast of Adjusted Sales for a Drug
Product in the New Territories or any subset thereof for each Product Year
throughout the term of this Agreement.
1.44 "SECONDARY MARKETS" means all of the New Territories (exclusive of the
countries of the European Community set forth on Schedule 1.11 attached hereto),
-------------
Canada and Mexico, collectively.
1.45 "SERVICES" means those services described on Schedule 1.45 attached
-------------
hereto to be performed by BLP with respect to the Initial Drug Product and any
other Drug Product or Development Product during the term of this Agreement, and
such other similar or comparable services as may be necessary or are required by
any regulatory agency of competent jurisdiction to obtain approval for the sale
of Drug Product in the New Territories, provided, that in no event shall BLP be
--------
required to render any such similar or comparable services which would impose
obligations on BLP other than those which are explicitly described in the text
of this Agreement, or which are required due to a failure of Pharmos to perform
its obligations under this Agreement, and provided further that the failure of
----------------
BLP to render such similar or comparable services shall result in the loss of
rights granted to BLP pursuant to Section 2.1 below with respect to the country
or jurisdiction in question.
1.46 "SOPs" means BLP's methods and procedures for Processing Drug
Substance into Drug Product, including, without limitation, those SOPs
specifically identified by BLP as set forth Schedule 1.46 to this Agreement.
-------------
<PAGE>
1.47 "SPECIFICATIONS" as it relates to each Drug Product shall refer to the
Drug Product specifications contained in the NDA submission package (which shall
be mutually agreed to by the parties hereto) for such Drug Product in each
applicable jurisdiction in the New Territories as required by each applicable
Regulatory Act, as such specifications may be amended from time to time by a
supplement to a NDA mutually agreed to by the parties or as required by the
appropriate Regulatory Authority. "SPECIFICATIONS" as it relates to a
Development Product shall refer to the specifications for such Development
Product contained in Pharmos' United States Investigational New Drug Application
or the MAA, as appropriate, for such Development Product until such time as an
NDA is submitted to a Regulatory Authority within the New Territories with
respect to such Development Product. "SPECIFICATIONS" as it relates to Drug
Substance shall refer to the specifications for bulk Drug Substance contained or
referenced in the NDA for any Drug Product.
1.48 "STUDIES" means those studies conducted by BLP in the course of
performing Services necessary to submit and file an NDA for a Drug Product with
a Regulatory Authority and to obtain the appropriate Regulatory Authority
approval of such NDA, and shall further include any "Phase IV" studies with
respect to each such Drug Product.
1.49 "TECHNOLOGY" means the technical knowledge and confidential
information which Pharmos or BLP owns or controls pertaining to, in the case of
Pharmos, the Drug Substance and the formulation of the Drug Substance, or in the
case of BLP, to the Processing of Drug Product, including technical knowledge
pertaining to the design, assembly, installation, operation and maintenance of
machinery, tooling and equipment required for, and the plant layout necessary
for such Processing.
1.50 "TESTING LABORATORY" means a testing laboratory in each region of the
New Territories mutually agreed to by Pharmos and BLP.
1.51 "U.S. MARKETING AGREEMENT" means that certain Marketing Agreement
dated as of June 30, 1995, between the parties, as it may be amended or
supplemented from time to time.
<PAGE>
ARTICLE II
MARKETING AND DISTRIBUTION OF DRUG PRODUCT
2.1 Grant of Exclusive Distribution Rights.
--------------------------------------
(a) Except as otherwise provided in this Agreement, BLP shall have the
exclusive right to market, promote, sell and distribute Drug Product within the
Field and within the New Territories by any legal means. BLP acknowledges that
Pharmos has no right or authority to grant exclusive rights to market, promote,
sell and distribute specific Drug Product in any country in which Pharmos does
not own or otherwise have a valid license to any patent or patent application
protecting such Drug Product or the Drug Substance, and in such countries the
rights granted to BLP under this Agreement shall be non-exclusive. Pharmos
agrees that while this Agreement is in effect it shall not grant to any third
party any license or other rights to use any unpatented or unpatentable
proprietary information owned by Pharmos to make, have made, sell or distribute
Drug Product in any of the New Territories, except as contemplated by this
Agreement. Subject to the terms of this Agreement, BLP agrees to use, or cause
distributors to use, commercially reasonable efforts (but in any event efforts
consistent with those used by BLP or its affiliates with respect to their own
proprietary ophthalmic products in the New Territories generally) to effect the
sale of Drug Product in the New Territories in a manner designed to achieve or
exceed the Sales Forecast for each Product Year during the term of this
Agreement. In addition, BLP agrees that it will use good faith, commercially
reasonable efforts to obtain and thereafter maintain Exclusive Marketing Rights,
in the name of Pharmos, wherever obtainable in each country within the New
Territories for each Drug Product which may at any time during the term of this
Agreement be distributable in any such country, provided, that subject to the
--------
applicable terms of this Agreement, BLP or its local distributor shall be
entitled to obtain and thereafter maintain such Exclusive Marketing Rights in
any such country within the New Territories in the name of BLP or such local
distributor if the applicable Regulatory Act in such country within the New
Territories does not permit the registration of such Exclusive Marketing Rights
in the name of Pharmos.
(b) Subject to the terms of this Agreement, BLP shall have the right to
appoint distributors and subdistributors for the marketing, promotion, sale and
distribution of Drug Product in the New Territories. Each such grant of rights
shall conform to the terms of this Agreement in all respects, except with the
prior written approval of Pharmos granted or withheld in the discretion of
Pharmos not unreasonably. BLP agrees that commencing with execution of this
Agreement it shall use its commercially reasonable efforts to identify and
promptly as commercially reasonable conclude agreements with recognized and
reputable distributors for Drug Product in (i) the Major European Markets and
Other Major Markets (exclusive of Germany, Austria and Switzerland, in which BLP
or an affiliate of BLP shall market and distribute Drug Product directly), the
other countries of the European Community and Scandinavia, (ii) such of the
Potential Major Markets in which BLP shall determine to market Drug Product as
otherwise contemplated by this Agreement, and (iii) such other markets within
the New Territories in which BLP does not have its own or affiliated marketing
organization. BLP shall provide Pharmos with substantially complete drafts of
all distribution agreements negotiated by BLP in the New Territories at least
five (5) days prior to the anticipated date of execution, and shall consult with
Pharmos on the terms of such agreements as Pharmos may request prior to
execution.
<PAGE>
(c) BLP agrees that it shall sell in each Product Year, within each Major
European Market, Other Major Markets and Regions, respectively, units of Drug
Product in an amount not less than the applicable Exclusivity Quantity for such
country or Region constituting the Exclusivity Quantity Territories. BLP and
Pharmos acknowledge that the amounts set forth on Schedule 1.14 for the
countries listed on Schedule 1.14 shall serve as the Exclusivity Quantities for
such countries, that the Exclusivity Quantities to be allocated to all other
countries or regions as contemplated by this Agreement shall be a mutually
agreed to percentage of *****% of the total volume of Exclusivity Quantities set
forth on Schedule 1.14 for the respective Drug Products, and that the parties
shall make such allocation by mutual, good faith agreement, and amend Schedule
1.14 accordingly, no later than six (6) months following the execution of this
Agreement.
(d) If the total units of Drug Products sold by BLP or its affiliates
under this Agreement for a Product Year shall not equal or exceed the
Exclusivity Quantity for such such Product Year in any Exclusivity Quantity
Territory, then on the last Payment Date (as defined below) of such Product
Year, BLP shall, subject to the terms and conditions of this Agreement and
except as otherwise set forth in Section 2.2 below, have the option to pay
Pharmos an additional sum equal to the relevant Exclusivity Amount for such
Product Year for such Exclusivity Quantity Territory, and BLP shall retain it
exclusive rights during the following Product Year.
(e) In addition and not by way of limitation of the foregoing, Pharmos
shall have the right, which Pharmos must exercise within five (5) years of the
date of this Agreement, to manufacture and sell to BLP up to *****% of the
production requirements of Drug Product for the Secondary Markets, provided that
such Drug Product meets applicable regulatory requirements and, unless
otherwise agreed by the parties, the standards and specifications for such Drug
Product (including those related to quality) set forth in this Agreement and the
Processing Agreement. The sale price for the Drug Product sold by Pharmos to
BLP pursuant to the above sentence shall be as mutually agreed between the
parties, provided that the price shall be no greater than the sum of BLP's
"Processing Costs", "Warehousing Costs" and "Other Costs" (each such term as
defined in the Processing Agreement) pertaining to such Secondary Markets with
respect to such Drug Product. If Pharmos desires to exercise the right set
forth in this subsection (e), promptly following notice of such desire BLP shall
provide Pharmos with true and complete copies of all then existing BLP Technical
Documentation. BLP hereby grants to Pharmos a non-exclusive, royalty-free,
worldwide and perpetual license to use, and allow third party manufacturers to
use for sale to Pharmos only, the BLP Technical Documentation, and to refer to
any DMF, to make and have Drug Substance for the account of, and for sale and
marketing by or on behalf of, Pharmos pursuant to this Section 2.1(e) and
otherwise following termination of this Agreement for any reason. Pharmos
agrees that prior to providing any BLP Technical Documentation to any third
party manufacturer it shall obtain a confidentiality agreement from such third
party protecting the BLP Technical Documentation on terms no less restrictive
than those set forth in Article VII below.
2.2 Loss of Exclusivity.
-------------------
(a) From and after the last Payment Date for a Product Year in which BLP
fails to sell the Exclusivity Quantity for a particular Drug Product within a
particular Major
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
European Market, Other Major Market or Region, and to pay the relevant
Exclusivity Amount, Pharmos shall be entitled at any time thereafter, subject to
delivery of a written notice delivered to BLP no later than sixty (60) days
following the last Payment Date for a Product Year in question, to grant to any
third party or parties the right to market such Drug Product in the subject
Major European Market, Other Major Market or Region on a non-exclusive basis,
and the marketing and sale rights granted to BLP under this Agreement with
respect to such Drug Product within such Major European Market, Other Major
Market or Region, as the case may be, shall become and thereafter remain non-
exclusive.
(b) Notwithstanding subsection (a) above, if the Exclusivity Quantity for
a particular Drug Product is achieved for a Region within the Exclusivity Amount
Territories, but not for one or more of the Major European Markets or Other
Major Markets within such Region, BLP shall retain its exclusive rights with
respect to all countries within such Region, and shall have no obligation to pay
an Exclusivity Amount for the Major European Market or Other Major Market within
such Region for which the Exclusivity Quantity was not met. In addition,
notwithstanding Section 2.1(d) to the contrary, if the Exclusivity Quantity is
met for a particular Major European Market or Other Major Market, and the
Exclusivity Quantity for the Region in which such Major European Market or Other
Major Market is included is not met following two (2) full Product Years after
approval of an NDA for such Drug Product in such Region, then the rights to all
countries within such Region (other than the Major European Market or Other
Major Market within such Region for which the Exclusivity Quantity has been met)
shall become non-exclusive following delivery of a written notice to BLP by
Pharmos no later than 60 days following the last day of such second full Product
Year, and Pharmos shall have the right specified in the first sentence of this
Section 2.2 with respect to all countries such Region, provided, however, that
--------
during the first two (2) full Product Years after approval of an NDA for such
Drug Product in such Region, BLP shall maintain its exclusive rights to all
countries within such Region (other than the Major European Markets and Other
Major Markets within the Region), without any obligation to pay an Exclusivity
Amount for such Region.
2.3 Product Price.
-------------
(a) As consideration for Drug Substance to be purchased by BLP for
Processing into Drug Product under this Agreement, BLP shall pay Pharmos an
amount equal to *****% of BLP's Adjusted Sales of each Drug Product sold by BLP
in any BLP Month (the "PRODUCT PRICE") in accordance with Section 2.4 below,
provided that in no event shall the Product Price be less than an amount equal
- --------
to (A) Pharmos' cost to purchase and deliver to BLP the Drug Substance included
in such unit of Drug Product (as evidenced by appropriate documentation), plus
(B) *****% of the Adjusted Sales price for such unit of Drug Product (the "FLOOR
PRICE"). In addition, in any given Product Year, if the Adjusted Sales for all
Drug Product sold in the New Territories exceeds *****% of the amount set forth
in the Sales Forecast for the New Territories in such Product Year attached
hereto as Schedule 2.3(a) (the "SALES FORECAST TRIGGER AMOUNT"), and the average
---------------
Adjusted Sales Price of units of Drug Product sold in the New Territories during
such Product Year exceeds $***** per unit, BLP shall pay Pharmos within 60 days
of the end of such Product Year an amount equal to *****% of that portion of
Adjusted Sales for such Product Year which exceeds the Sales Forecast Trigger
Amount (the "PREMIUM PRICE"); provided that (i) BLP has satisfied the cumulative
Sales Forecast for the New Territories for all prior Product Years, and (ii) the
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
average Adjusted Sales Price of units of Drug Product sold in the New
Territories in all prior Product Years exceeded $***** per unit.
Notwithstanding the foregoing, and further subject to Section 2.9 below, BLP
shall be entitled to credit (X) *****% of any Product Price which is equal to or
less than *****% of Adjusted Sales, and (Y) *****% of any Product Price which
exceeds *****% of Adjusted Sales, otherwise payable to Pharmos against advances
previously made to Pharmos by BLP pursuant to Section 2.5 below until such
advances have been recouped in full by BLP, provided, however, that if BLP fails
--------
to provide any required advance pursuant to Section 2.5 below for any reason
other than the reasons set forth in Section 2.8(i), (ii), (iii) or (iv) below,
the rate of recoupment of advances set forth above shall thereafter be reduced
to *****% of any Product Price payable to Pharmos.
(b) Pursuant to Section 2.1(a) above, BLP may appoint distributors which
are controlled by or under common control with BLP ("AFFILIATED DISTRIBUTORS").
If BLP appoints an Affiliated Distributor, Adjusted Sales for purposes of
determining Product Price shall be determined based upon the net sales price
(calculated using the deduction set forth in Section 1.1 above) obtained by such
Affiliated Distributor from third parties which are not affiliated with BLP or
such Affiliated Distributor.
(c) Pharmos and BLP agree that BLP may use up to *****% of the total units
of Drug Product sold in any country as samples to be distributed free of charge
in such country in the first Product Year in which Drug Product is sold in such
country, and up to *****% of the total units of Drug Product sold in such
country as samples to be distributed free of charge in such country in each
Product Year thereafter. BLP agrees that it shall pay to Pharmos the cost
incurred by Pharmos to purchase and deliver to BLP the Drug Substance included
in each sample unit of Drug Product, such amount to be paid at the times set
forth for payments of Product Price in Section 2.4 below, provided, that if (I)
--------
the average Adjusted Sales Price for all Drug Product sold in a country in such
Product Year exceeds $*****, and (II) the Exclusivity Quantity for such Product
Year in such country is achieved, then BLP shall be entitled, at the end of such
Product Year, to treat amounts paid by BLP to Pharmos pursuant to this sentence
for Drug Substance used in samples in such country in such Product Year as
advances against Product Price.
2.4 Payment; Currency Conversions.
-----------------------------
(a) Within the earlier of thirty (30) days following the end of each BLP
Month during the term of this Agreement (each a "PAYMENT DATE"), beginning with
the end of the first full BLP Month following the first Commercial Sale of Drug
Product by BLP in the Territory, BLP shall pay Pharmos the Product Price for
Drug Substance Processed into Drug Product sold by BLP in the preceding BLP
Month (and any portion of any preceding BLP Month), less any recoupment
contemplated in Section 2.3 above. In addition, on each Payment Date, BLP shall
deliver to Pharmos information which sets forth the aggregate sales and Adjusted
Sales of each Drug Product in the applicable currency and units of such Drug
Product for the preceding BLP Month and any portion of any preceding BLP Month
in each country and region within the New Territories (with sales made by
Affiliated Distributors reported separately by Distributor), and further sets
forth the aggregate of all advances previously made to Pharmos pursuant to
Section 2.5 below and the amount of credits against such advances taken by BLP
with respect to such preceding BLP Month.
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
(b) All payments which may become due and owing to Pharmos under this
Agreement shall be paid by BLP in U.S. Dollars. For purposes of determining any
Exclusivity Amount payment due to Pharmos hereunder, any amounts due for the
payment of Product Price, or the calculation of any other sums due Pharmos under
this Agreement, including the Premium Price, the parties agree that amount due
Pharmos will be determined based on the applicable rate of exchange published by
in The Wall Street Journal, East Coast Edition, on the Thursday preceding BLP's
internal month-end closing date for a particular BLP Month or Product Year for
which the determination is to be made under this Agreement.
2.5 Advances of Product Price. BLP agrees to pay Pharmos the following
-------------------------
sums as advances against payments of Product Price for Drug Substance Processed
into Drug Product which may become due to Pharmos under this Agreement:
(i) $*****, immediately upon receipt of approval of the NDA for the Initial
Drug Product in the first of the countries comprising the Major European
Markets, against purchases of Drug Substance to be Processed into Drug Product;
(ii) $*****, immediately upon receipt of approval of the NDA for the sale
of the Initial Drug Product in the second of the countries comprising the Major
European Markets, against purchases of Drug Substance to be Processed into Drug
Product;
(iii) $*****, immediately upon receipt of approval of an NDA for either of
LET or LEA, whichever approval shall occur first, in the first of the countries
comprising the Major European Markets, against purchases of Drug Substance to be
Processed into either LEA or LET; and
(iv) $*****, immediately upon receipt of approval of an NDA for either of
LET or LEA, whichever approval shall occur first, in the second of the countries
comprising the Major European Markets, against purchases of Drug Substance to be
Processed into either LEA or LET.
In addition to the advances specified above, Pharmos and BLP further agree
that from and after the date on which BLP has received a total of $***** of
proceeds from or arising out of the execution by BLP of distribution agreements
for the sale of Drug Product in the New Territories with distributors other than
Affiliated Distributors, BLP shall thereafter pay to Pharmos as an advance
against the purchase of Drug Product to be sold in a particular country by BLP
*****% of any payments made to BLP (other than payments which constitute
Adjusted Sales) with respect to the grant of marketing rights by BLP in such New
Territories, or as advances for future purchases of Drug Product for sale by the
distributor in such New Territories. There shall be credited against the
amounts owed to Pharmos hereunder any sums of the nature described above prior
to the execution of this Agreement. In addition, any payments received by
Pharmos under this paragraph shall be allocated, for purposes of determining
credits, recoupments and other similar matters, among the Initial Drug Product
and LET and LEA in the proportions of *****%, *****% and *****%, respectively.
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
2.6 Credits of Prior Advances. If BLP has not recouped an advance made
-------------------------
pursuant to Section 2.5 above on or before the third anniversary of the date of
payment of such advance, Pharmos agrees that it shall pay to BLP the amount of
such unrecouped advance on or before the 90th day following such third
anniversary date.
2.7 Packaging.
---------
(a) The parties acknowledge that the Initial Drug Product will be sold
under BLP's own label using the brand name "Lotemax\\TM\\" or such other names
chosen by Pharmos and approved by BLP, such approval not to be unreasonably
withheld, and the Development Products will be sold under BLP's own label using
a brand name mutually agreed to by the parties (each a "BRAND NAME"), provided
--------
that to the extent permitted by applicable law, the packaging of Drug Product
shall include a mutually acceptable reference to Pharmos as follows:
"Manufactured by BLP under Agreement with Pharmos". The parties acknowledge
that the Brand Name shall be owned by Pharmos, and further agree that neither
shall acquire rights in or to any trademarks or trade names of the other, except
that BLP shall have the right to use the Brand Name in connection with its
marketing, sale and distribution of Drug Product in the New Territories and
within the Field, pursuant to the Trademark License attached as Exhibit 2.8 to
-----------
this Agreement (the "TRADEMARK LICENSE"). BLP shall submit all Drug Product
advertising, promotional and packaging material (excluding Labels or Labeling
for the Drug Product which comply with the NDA and applicable Regulatory Acts)
to Pharmos for prior approval, which shall not be unreasonably withheld. Failure
of Pharmos to disapprove of any such material within ten (10) days of receipt
shall be deemed to constitute Pharmos' consent. All artwork, advertising and
packaging used by each party is and shall remain the exclusive property of each
party. Such artwork, advertising and packaging or any reproduction thereof
owned by one party may not be used by the other party following the termination
of this Agreement; provided, however that BLP shall provide Pharmos with its
--------
marketing plans and/or sales training materials pertaining to the sale of Drug
Product in the New Territories for informational purposes only. At Pharmos'
request, and subject to Article X hereof, Pharmos shall have the right to attend
and participate in meetings associated with the development of BLP's marketing
plans and training programs pertaining to marketing and distribution of Drug
Product in the New Territories. BLP agrees that, immediately upon execution of
this Agreement, it shall cause Dr. Mann Pharma to assign to Pharmos all right,
title and interest Dr. Mann Pharma shall hold in any registration for a
trademark on Lotemax\\TM\\ in any country, without consideration of any kind.
(b) Pharmos and BLP agree to use good faith efforts to review the
advisability of granting to each other mutually satisfactory, royalty-free
trademark license agreements with respect to any trademarks owned by either
party with respect to any Development Product prior to the first Commercial Sale
of the Development Product in the New Territories marketed using such trademark,
provided that in no event shall either party be entitled to any use of any
- --------
trademark used or reserved for use by the other party in connection with any
good or service or which includes all or any part of a party's or its
Affiliate's corporate name or identity.
2.8 Termination of Certain Rights. The parties agree that if BLP fails to
-----------------------------
provide any required advance or purchase pursuant to Section 2.4 or Section 2.5
above with respect to a Drug Product (or Development Product, as the case may
be) because BLP has notified Pharmos in writing that (i) such Drug Product or
Development Product is reasonably determined by BLP not to have achieved the
safety or efficacy targets mutually agreed to by
<PAGE>
the parties, (ii) BLP reasonably determines that further investment in such Drug
Product or Development Product is not financially justifiable, (iii) BLP
reasonably determines that material adverse changes in the market or potential
market for such Drug Product or Development Product have occurred, or (iv) BLP
reasonably determines upon the written advice of independent counsel that the
commercial sale of such Drug Product would infringe on the patent rights of
third parties not otherwise licensed to or owned by Pharmos or BLP, then (X) BLP
shall have no further rights or obligations with respect to such Drug Product
under this Agreement of any kind, and (Y) the failure of BLP to make any such
payments in the circumstances described above or for any other reason with
respect to such Drug Product or Development Product in the New Territories shall
not be deemed to be a breach of BLP's obligations under this Agreement.
Notwithstanding the foregoing, this Agreement shall terminate and BLP shall lose
any and all rights it may have in or to the marketing of any Drug Product and
any Development Product in the New Territories if BLP shall determine and notify
Pharmos that any of the circumstances described above apply to the Initial Drug
Product.
2.9 Additional Obligations.
----------------------
(a) The parties acknowledge that the obligations of BLP to sell the
Exclusivity Quantities with respect to the Initial Drug Product and any
subsequent Drug Product are dependent on the ability of Pharmos to provide BLP
with sufficient quantities of Drug Substance to be Processed into Drug Product
to substantially meet the Sales Forecast for Drug Product under this Agreement.
Pharmos acknowledges and agrees that until such time as BLP shall have made
sufficient Adjusted Sales of Drug Product under this Agreement in order to
recoup in full the advances made by BLP to Pharmos under Section 2.5 above, the
failure of Pharmos to supply BLP with substantially all of its requirements of
Drug Substance as required under this Agreement shall constitute a material
breach of this Agreement, and that as a result of such breach BLP may suffer
damage at least in the amount of any outstanding and unrecouped advances paid to
Pharmos under Section 2.5 above. Notwithstanding the foregoing or any other
provision of this Agreement to the contrary, BLP agrees to forebear and not
exercise any of its remedies hereunder as a result of Pharmos' breach of its
supply obligations under this Agreement, and will allow Pharmos to cure such
breach, subject to the following:
(i) from and after any such breach, and for so long as (X) Pharmos is
unable for any reason to supply BLP with Drug Substance sufficient to
enable BLP to meet its Sales Forecast for Drug Product in any BLP Month
within the New Territories, and (Y) BLP has not recouped in full any
advances made by BLP to Pharmos under Section 2.5 above, then BLP shall be
entitled to credit *****% of any Product Price payable to Pharmos against
advances previously paid to Pharmos by BLP pursuant to Section 2.5 until
such advances have been recouped in full by BLP; and
(ii) BLP shall be permitted to immediately take out of consignment for
Processing into Drug Product quantities of Drug Substance sufficient to
generate Drug Product that, when sold, will generate Adjusted Sales of Drug
Product in the New Territories in an amount sufficient to allow BLP to
recoup any remaining advances paid to Pharmos under Section 2.5.
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
If such inventory of Drug Substance is insufficient to permit BLP to Process the
quantities of Drug Product as stated above, and Pharmos has not otherwise
provided BLP, within ten (10) days following the date of the breach by Pharmos
described above in this subsection (a) with quantities of Drug Substance
sufficient to generate Drug Product that, when sold in the New Territories, will
generate Adjusted Sales sufficient to allow BLP to recoup any remaining advances
made to Pharmos under Section 2.5, Pharmos shall pay to BLP the difference
between the sum of (X) any outstanding advances that have been recouped by BLP
under Section 2.5, plus the amount of advances that would be recouped upon the
sale of any Drug Product (including Drug Product work in process) remaining in
the possession of BLP at the time of the breach described above in this
subsection (a), and (Y) the total amount of outstanding and unrecouped advances
under Section 2.5 on the date of Pharmos' default hereunder. If Pharmos fails
to satisfy the foregoing payment obligation within ninety (90) days following
the expiration of the ten (10) day period set forth above, BLP will be relieved
of its forbearance commitment, and in such event may exercise any remedies
available to it under this Agreement, and further provided that BLP may defer
----------------
any prospective obligations to make advances under Section 2.5 and make payments
of Exclusivity Amounts until Pharmos resumes performance of its supply
obligations hereunder, and BLP is reasonably satisfied that there will be no
substantial future interruption.
(b) Pharmos acknowledges that, following BLP's recoupment in full of all
advances paid by BLP to Pharmos under Section 2.5, the failure of Pharmos to
supply BLP with substantially all of its requirements of Drug Substance as
required under this Agreement shall constitute a material breach of this
Agreement, and that as a result of such breach BLP may suffer damage.
Notwithstanding the foregoing or any other provision of this Agreement to the
contrary, BLP agrees to forebear and not exercise any of its remedies hereunder
with respect to such breach until such time as Pharmos is unable to provide BLP
with sufficient Drug Substance to ensure that BLP has on hand at least enough
Drug Substance to satisfy substantially all of BLP's rolling six (6) month
requirements for Drug Substance (or if such amount of Drug Substance on hand at
BLP goes below BLP's rolling six (6) month requirement and the parties cannot
mutually agree after good faith consultation that a resumption of supply is
reasonably imminent), unless Pharmos has concluded a supply contract with a
second manufacturer of Drug Substance contemplated under the U.S. Marketing
Agreement within ninety (90) days following the day on which the inventory of
Drug Substance on hand at BLP falls below six (6) months and the parties cannot
mutually agree after good faith consultation that a resumption of supply is
reasonably imminent, it being understood that in such event Pharmos shall be
deemed to have cured the breach described above in this subsection (b). If
Pharmos has failed to cure such breach as set forth above the Product Price for
each Drug Product payable in each BLP Month in which such breach occurred or is
continuing under this Agreement shall be reduced to *****% of BLP's Adjusted
Sales of Drug Product in such BLP Month. Notwithstanding anything in this
subsection (b) to the contrary, BLP agrees that it will not terminate this
Agreement as a result of Pharmos' breach hereunder.
2.10 Generic Versions of Drug Product.
--------------------------------
(a) BLP shall have the right, if available within the subject jurisdiction
within the New Territories, to manufacture, use, sell, promote and distribute a
generic equivalent to any such Drug Product (each a "GENERIC") in each
jurisdiction within the New Territories in
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
which any third person (exclusive of any BLP affiliate) files, or otherwise
makes known a good faith intention to file, for regulatory approval of a Generic
within the subject jurisdiction. Prior to exercising the right set forth in the
preceding sentence, BLP shall inform Pharmos in writing of all relevant facts
known to BLP regarding the specific circumstances in the subject jurisdiction,
including the identity of the third person and anticipated filing and approval
dates, and shall consult with Pharmos prior to taking any action permitted in
this Section 2.10(a). BLP agrees that if a third party files or otherwise makes
known an intention to file for regulatory approval of a Generic within the
subject jurisdiction, but does not receive marketing approval for such Generic
or does not otherwise attempt to promote and sell a Generic, the rights accorded
to BLP under this Section 2.10(a) shall terminate with respect to the subject
jurisdiction unless and until a third party shall once again file, or otherwise
makes known an intention to file, for regulatory approval of a Generic in such
jurisdiction, provided, however, that in such event, BLP shall have the right to
--------
sell off, and to have sold off, all existing inventories of Generics at prices
and on terms which are no more favorable to the customer than the best price and
terms offered by BLP for such Generic prior to the termination of rights of BLP
described above. All Generics shall be deemed to be "Drug Product" for all
purposes of this Agreement and any other agreement between Pharmos and BLP which
may then be in full force and effect.
(b) Notwithstanding anything in this Agreement to the contrary, (i) BLP
agrees that it shall have no right, except as permitted hereunder, to market,
distribute or sell any Generic under any Abbreviated New Drug Application (an
"ANDA") or NDA, (ii) BLP shall bear all costs and expenses which BLP may incur
with respect to approval for or filing or any approval for any ANDA, and, as
otherwise contemplated by this Agreement, for the promotion, marketing, sale and
distribution of any Generic, (iii) BLP shall pay to Pharmos the Product Price
for each unit of a Generic product sold by BLP pursuant to this Section 2.10,
and (iv) Pharmos and BLP agree that if BLP markets a Generic in any jurisdiction
within the New Territories pursuant to the rights set forth in Section 2.10(a)
above, BLP and Pharmos shall work together in good faith to determine an
appropriate reduction in the Product Price owed to Pharmos with respect to such
Generic in such jurisdiction based on the sales price of such Generic, BLP's
margins with respect to such Generic in such jurisdiction, and the economic
effects of competitive actions taken by third persons in such jurisdiction to
promote, market, sell and distribute a substitute for the Generic, it being
understood and agreed that the objective of such reduction in Product Price
shall be to enable BLP to compete in the market for such generics in such
jurisdiction. Notwithstanding anything contained in this Section 2.10 to the
contrary, if BLP shall incur costs and expenses as a result of the conduct of
clinical studies which are necessary in order to obtain approval for the sale of
a Generic in any jurisdiction, and BLP and Pharmos have mutually agreed in good
faith that such clinical studies should be performed, BLP and Pharmos shall
mutually agree on appropriate allocation per unit of such costs and a timetable
for recovering *****% of such costs in the form of additional deductions to
determine the Adjusted Sales Price of Drug Product.
2.11 Marketing Plans.
---------------
(a) BLP shall deliver to Pharmos a written marketing plan for the Initial
Drug Product (the "MARKETING PLAN") for the first three (3) Product Years for
each of the Major European Markets individually, and each of the Regions
included within the Exclusivity
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
Amount Territories, and to the extent commercially reasonable for the remainder
of the New Territories. The Marketing Plan for the Major European Markets and
the European Community shall be delivered within six (6) months following
submission of the NDA for the Initial Drug Product in the first Major European
Market, and the Marketing Plan for each of the remaining Exclusivity Quantity
Territories, the Other Major Markets and the Potential Major Markets shall be
delivered within one (1) year thereafter. The Marketing Plan shall be set forth
in reasonable and customary detail, and shall include in such plans commercially
reasonable descriptions of intended pre-marketing and marketing investments,
tactics and efforts, promotion and distribution efforts and mechanisms,
descriptions and estimated timing of any anticipated Phase IV studies,
compilations of market research and analysis performed by or for BLP, and other
related matters customarily included by BLP in such plans for the marketing,
promotion and sale of a new ophthalmic drug product. BLP or its affiliates
shall further include in each Marketing Plan a Sales Forecast for each of the
first ten (10) Product Years for the Initial Drug Product.
(b) On or before the date sixty (60) days following the submission of an
NDA with respect to each Development Product in the first Major European Market,
BLP shall deliver to Pharmos a written marketing plan for such Development
Product (the "ADDITIONAL MARKETING PLANS") for the first three (3) Product Years
of each such Development Product for each of the Major European Markets, the
remainder of the European Community and the remaining Exclusivity Quantity
Territories. Pharmos agrees to use good faith efforts to notify BLP at least
180 days before the anticipated submission of an NDA to a Regulatory Authority
with respect to each Development Product. The Additional Marketing Plans shall
be set forth in substantially the same level of detail, and shall include
substantially the same information, plans, budgets and other information, as
required with respect to the Marketing Plan set forth in subsection (a) above.
BLP shall further include in each Additional Marketing Plan a Sales Forecast for
each of the first ten (10) Product Years for each Development Product.
2.12 Marketing Committee. Pharmos and BLP agree to expand the scope of the
-------------------
Marketing and Commercialization Committee formed pursuant to the U.S. Marketing
Agreement to include all matters with respect to the marketing, promotion and
sale of Drug Product under this Agreement. The membership of the Committee will
remain as currently constituted, with the addition of two (2) members from Dr.
Mann Pharma, a BLP affiliate. With respect to the New Territories, the
Committee will consider and make recommendations to Pharmos and BLP regarding
all matters related to the marketing, promotion and sale of Drug Product in the
New Territories, including issues with respect to pricing, promotion and other
similar matters, and shall have further responsibility for the development and
presentation of Additional Marketing Plans described in Section 2.1 above. The
Committee shall remain the primary forum for the resolution of disputes between
the parties with respect to the New Territories as currently contemplated
provided that the failure of the Committee to resolve any such dispute shall
- --------
not constitute a default under, or breach of, this Agreement.
ARTICLE III
PROCESSING OF DRUG PRODUCT
3.1 Processing. Except as otherwise provided herein, and in consideration
----------
of the rights granted to BLP hereunder, during the term of this Agreement BLP
shall Process Drug Substance into Drug Product in accordance with the applicable
Specifications, CGMP
<PAGE>
requirements, the applicable NDA, the applicable Regulatory Acts, and otherwise
in accordance with this Agreement. BLP further agrees to Process Drug Product
and Placebo Product for sale by Pharmos and third parties pursuant to the terms
of the Processing Agreement if and to the extent any of the rights of BLP
hereunder may become non-exclusive pursuant to Article II above.
3.2 Drug Substance Consignment.
--------------------------
(a) During the term of this Agreement, Pharmos shall deliver on consignment
to BLP (at Pharmos' sole cost and expense) for Processing into Drug Product and
subsequent distribution of Drug Product within the New Territories by BLP, a
supply of Drug Substance as and when ordered by BLP in accordance with the
procedures set forth in this Section 3.2. All Drug Substance delivered to BLP
by Pharmos (i) shall continue to be the sole and exclusive property of Pharmos
and full and complete title therein shall remain with Pharmos until such time as
BLP shall remove Drug Substance from its warehouse and commences Processing of
such Drug Substance, and (ii) shall be kept reasonably segregated and separate
from all other products and materials stored or warehoused at the Facility. BLP
agrees that Pharmos may file, and BLP shall execute, Uniform Commercial Code
financing statements evidencing the ownership by Pharmos of Drug Substance on
consignment in the possession of BLP from time to time. BLP shall keep complete
and accurate records detailing the receipt of each shipment of Drug Substance
received by BLP and each unit of Drug Product Processed by BLP under this
Agreement. To the extent practicable and at no additional premium cost to BLP,
BLP agrees to cause Pharmos to be named as an additional insured with respect to
any policies of insurance carried by BLP and covering the loss of any Drug
Substance held on consignment by BLP from Pharmos for Processing under this
Agreement due to fire or other casualty of the type customarily insured at the
Facility.
(b) By the twentieth day of every other calendar month after the initial
forecast described below, BLP shall submit to Pharmos a written forecast listing
BLP's reasonably estimated requirements of Drug Substance under this Agreement
for the subsequent twelve (12) month period, presented in six two (2) month
intervals, on a rolling basis. BLP's initial twelve (12) month rolling forecast
for the Initial Drug Product shall be provided to Pharmos no later than thirty
(30) days following Regulatory Authority approval of the Initial NDA. Unless
otherwise agreed in writing by the parties, BLP's estimated bi-monthly
requirements of Drug Substance set forth in each rolling forecast shall be
delivered or caused to be delivered by Pharmos to BLP F.O.B. the Facility,
commencing within thirty (30) days of the date each written forecast is
forwarded to Pharmos, and continuing thereafter on a timely basis. Each
shipment of Drug Substance delivered to BLP hereunder shall be accompanied by an
appropriate certificate of analysis (or similar certificate or document as
required by any Regulatory Authority or Regulatory Act) which evidences testing
of the Drug Substance for conformity to Specifications (except for bioburden,
the testing for which shall be the responsibility of BLP). The parties agree
that consigned Drug Substance will be delivered to BLP in such batch sizes as
the parties shall mutually agree from time to time in order to minimize waste
and loss in the Processing of Drug Substance into Drug Product by BLP.
(c) Drug Substance shall be received by BLP subject to BLP's inspection and
may be rejected if found not to conform to the Specifications or otherwise fail
to be as warranted hereunder. Within two (2) business day of delivery of Drug
Substance, BLP shall inspect such shipment of Drug Substance for visually
obvious defects and report such defects immediately to Pharmos. Within thirty
(30) days of delivery to BLP, BLP may undertake its
<PAGE>
own quality control tests to ensure that the Drug Substance delivered is in
accordance with the terms of this Agreement. Pharmos' representatives may be
present at the Facility during the conduct of such quality control tests by BLP.
BLP shall be deemed to have accepted each shipment of Drug Substance delivered
by Pharmos if Pharmos does not receive written notice to the contrary within
thirty (30) days of delivery.
(d) All claims for shortages or other damage not visually obvious shall be
reported in writing to Pharmos within thirty (30) days after the date of arrival
of each shipment of Drug Substance at the Facility. At Pharmos' request, BLP
shall promptly supply either some of the Drug Substance which is allegedly
defective or some other evidence of deficiency which Pharmos shall reasonably
specify. If Drug Substance does not meet Specifications, or is subject to any
claim, defect or shortage, the rejected Drug Substance shall not be used by BLP
and shall be returned promptly by BLP to Pharmos at Pharmos' expense, or such
other mutually agreed upon response shall be undertaken. Pharmos shall replace
such rejected Drug Substance with such quantity of Drug Substance which conforms
to the Specifications as soon as practicable. In the event of any dispute
between BLP and Pharmos as to whether any of the Drug Substance delivered to BLP
conforms with the Specifications, samples of the Drug Substance in dispute shall
be sent to the Testing Laboratory, whose findings shall be binding on the
parties except in cases of gross and manifest error on the part of the Testing
Laboratory; provided, however that if the Testing Laboratory determines that the
--------
Drug Substance is not defective, the parties agree that BLP's sole obligation
shall be to use reasonable, good faith efforts to reconcile its quality
assurance testing results with the findings of the Testing Laboratory. If BLP is
unable to reconcile such results, BLP shall have no obligation to use the
rejected Drug Substance. The cost of such testing with the Testing Laboratory
shall be borne by the losing party.
(e) BLP shall store the inventory of consigned Drug Substance and Drug
Product Processed pursuant to this Agreement in compliance with all applicable
Regulatory Authority and Regulatory Act requirements, with sound commercial
practices common to the industry, and with the same degree of care which BLP
applies to its own raw materials and finished products; and such inventories
shall be reserved exclusively for the Processing of Drug Substance into Drug
Product under this Agreement. BLP shall be entitled from time to time to
withdraw from the consigned inventory of Drug Substance in its possession, in
appropriate batch sizes, a sufficient quantity of Drug Substance necessary for
BLP to meet its Processing needs, or to make such other use of the Drug
Substance necessary to comply with CGMP requirements and/or any applicable
Regulatory Act.
(f) Notwithstanding anything in this Article III to the contrary, Pharmos
warrants to BLP that the Drug Substance, when shipped to BLP, will conform to
the Specifications, will not be adulterated or misbranded within the meaning of
any applicable Regulatory Act, and will have a remaining shelf life of no less
than ***** months.
ARTICLE IV
DRUG PRODUCT DEVELOPMENT, R&D AND REGISTRATION
4.1 Services. BLP shall exercise its commercial and scientific good faith
--------
efforts to continue to perform the Services with respect to the Initial Drug
Product with
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
respect to the New Territories, and will perform such Services with respect to
any subsequent Drug Product, and to develop a DMF covering the Processing of the
Drug Substance into the Initial Drug Product and any subsequent Drug Product,
provided that BLP shall not be obligated to perform such Services or develop a
- --------
DMF with respect to any Drug Product or Development Product with respect to
which BLP shall have lost all marketing rights under this Agreement. Such
efforts shall be consistent with those employed by BLP for its own proprietary
drug products. BLP shall allow Pharmos to continue to reference any DMF in the
course of seeking and obtaining Regulatory Authority approval of the Initial NDA
and any subsequent NDA, and shall provide Pharmos with a DMF reference letter in
each case; provided, however, that BLP shall have no obligation to disclose to
--------
Pharmos the contents of any DMF. BLP further agrees to continue to provide
Pharmos with BLP Technical Documentation as Pharmos may reasonably deem
necessary or appropriate solely in order for Pharmos to obtain and thereafter
maintain Regulatory Authority approval of the Initial NDA and any subsequent NDA
as Pharmos may from time to time reasonably request during the Term.
4.2 Performance of Services. BLP agrees to perform the Services with
-----------------------
respect to the New Territories for the Drug Products and Drug Substance in
accordance with CGMP requirements. Except for the foregoing, and as otherwise
specifically stated in this Agreement, BLP makes no other agreement with respect
to the performance of the Services, and BLP shall have no liability whatsoever
for Pharmos' failure to obtain Regulatory Authority approval of any NDA.
Pharmos shall be solely responsible for obtaining approval of the NDA by a
Regulatory Authority at its sole expense and cost, and, subject to Section 4.1
above, BLP shall be solely responsible for providing the Services at its sole
expense and cost.
4.3 Development Products. As soon as is mutually convenient for the
--------------------
parties, Pharmos and BLP agree to use good faith efforts to prepare a mutually
agreeable research and development plan for each Development Product (each an
"R&D PLAN") similar in form and content previously agreed to in the U.S.
Marketing Agreement. If the parties shall not have agreed on the R&D Plan for a
particular Development Product for the New Territories after good faith efforts,
the parties shall resolve their disagreement in the manner contemplated by the
U.S. Marketing Agreement. The parties further agree that the failure to agree
on an R&D Plan or the failure of BLP to perform its obligations under Section
4.5 below shall have the consequences set forth in Section 5.7 of the U.S.
Marketing Agreement.
4.4 Pharmos' Development Obligations. If mutually agreed to by the
--------------------------------
parties, Pharmos shall use good faith, scientifically reasonable efforts to
execute each R&D Plan substantially in accordance with its terms and in
consultation with BLP. In connection therewith, Pharmos shall be responsible
for the preparation and conduct of all Phase I, II and III studies and other
clinical trials as may be included in the subject R&D Plan, the preparation,
submission and maintenance of any NDA's in connection therewith in the name of
Pharmos, the provision to BLP of Drug Substance necessary for use in the
generation of suitable materials for the conduct of related clinical trials, and
generally otherwise do all such things with respect to a Development Product as
previously done by Pharmos in connection with the Initial Drug Product. Except
as specifically set forth in this Agreement or as otherwise agreed in writing by
Pharmos and BLP, all actions taken by Pharmos in connection with its obligations
under this Section shall be at the sole cost and expense of Pharmos. If BLP
believes in good faith that an R&D Plan is not being substantially performed in
accordance with such Plan, the parties shall at the request of BLP meet to
mutually determine
<PAGE>
in good faith any corrective actions, and associated costs, which may be
necessary to perform such R&D Plan. If the parties are unable to agree, in good
faith, on any corrective actions and associated costs, or if agreement on the
foregoing is reached but Pharmos subsequently breaches such agreement, BLP may,
following written notice to Pharmos, assume responsibility for performing
Pharmos's obligations with respect to such aspect of the particular R&D Plan
which Pharmos failed to be performed on a commercially reasonable, cost-
effective basis, and offset the out-of-pocket costs associated therewith against
any payment obligations owed to Pharmos hereunder in an equitable manner which
does not cause Pharmos to breach any of its other obligations hereunder.
Notwithstanding anything contained in this Section 4.4 to the contrary, BLP's
obligation to agree in good faith on any corrective actions and associated costs
will not be deemed to impose on BLP any obligation to assume responsibility for
any costs which are not expressly assumed by BLP hereunder.
4.5 BLP's Development Obligations. BLP shall use good faith,
-----------------------------
scientifically reasonable efforts to support the activities of Pharmos under
Section 4.4 above in connection with the development of each Development
Product, provided that, except as expressly set forth below with respect to the
--------
obligations of BLP set forth below, BLP shall not be required to incur any out-
of-pocket costs in connection therewith. In connection therewith, BLP shall
prepare and provide Pharmos with copies of any validation and stability studies
(including related documentation) and related DMF's as may be contemplated by
the relevant R&D Plan, and shall be responsible for performing any Phase IV
studies which may be necessary to comply with Regulatory Authority rules or
regulation or which BLP reasonably determines to be advisable to support the
marketing and sales of Drug Product. In addition, and subject to the provision
of suitable Drug Substance by Pharmos, BLP shall supply Pharmos with suitable
clinical materials in accordance with CGMP requirements for use in Phase I, II
and III (or similar) clinical studies of a Development Product, and such
materials shall meet all other applicable legal and regulatory requirements for
use in such of the New Territories in which the parties intend in good faith to
submit an NDA based on the Marketing Plans required to be delivered pursuant to
Section 2.11 above, provided that BLP shall have no obligations under this
--------
sentence with respect to a particular jurisdiction if the parties mutually agree
in the exercise of their good faith judgement that the Marketing Plans with
respect to such jurisdiction do not justify the expense contemplated by this
sentence. Except as specifically set forth in this Agreement or as otherwise
agreed in writing by Pharmos and BLP, all actions taken by BLP in connection
with its obligations under this Section 4.5 shall be at the sole cost and
expense of BLP.
4.6 R&D Committee. Pharmos and BLP agree to expand the scope of the
-------------
Research and Development Committee formed pursuant to the U.S. Marketing
Agreement with respect to the performance of the R&D Plans for the New
Territories. The Committee membership will remain as currently constituted.
The Committee will monitor and evaluate the performance of the R&D Plans by both
parties. The Committee shall remain the primary forum for the resolution of
disputes between the parties with respect to research and development matters
which are not otherwise addressed in this Agreement or any other agreements
between the parties, provided that the failure of the Committee to resolve any
--------
such dispute shall not constitute a default under, or breach of, this Agreement.
4.7 Product Registration. (a) The parties agree that Pharmos shall be
--------------------
responsible for, and shall bear the related expense of, using commercially
reasonable efforts to obtain approval of the MAA (or similar regulatory approval
in a country within the New Territories mutually acceptable to Pharmos and BLP)
for the sale of the Initial Drug Product. In
<PAGE>
connection with such efforts by Pharmos, Pharmos shall have the right to
reference as its office for purposes of the MAA filing an office of Dr. Mann
Pharma in Berlin, and BLP will provide Pharmos with office facilities at such
location, at no cost to BLP, as may be required by appropriate Regulatory
Authorities in connection with the MAA filing. Subject to the following
paragraph, BLP or an affiliate of BLP shall be responsible for (or require local
distributors to be responsible for), and shall bear (or require local
distributors to bear) the related expense of using commercially reasonable
efforts to obtain all other required or desirable Regulatory Authority approvals
for, and to qualify BLP's Facilities in, each of the Major Markets.
(b) BLP shall bear (or shall cause an affiliate or local distributor to
bear) up to $***** for each of the Major European Markets and Other Major
Markets of out-of-pocket expenses to register each Drug Product in any such
individual Major European Market or Other Major Market (exclusive of the expense
of clinical trials). Pharmos will bear the necessary out-of-pocket expenses
related to such registrations in any such Major European Markets and Other Major
Markets from $***** to $*****. If there are proposed expenditures for any such
Major European Markets or Other Major Markets above $*****, BLP will consult
with Pharmos prior to such expenditures as to whether such expenditures should
be made and which party shall bear the cost. BLP and Pharmos shall consult with
respect to the responsibility for such expenses in jurisdictions outside of the
Major European Markets and Other Major Markets, it being acknowledged that BLP
shall use good faith efforts to cause local distributors to incur such expenses
in such jurisdictions. If BLP is unable to cause such local distributors to
incur such expenses, BLP and Pharmos shall share such costs equally after the
extent of such costs have been mutually agreed to by the parties. Pharmos will
assist BLP's efforts to receive local approvals by providing previously
generated data and other file preparation work. BLP will assist Pharmos with
the MAA filing by using reasonable commercial efforts to meet Regulatory
Authority requirements for Drug Product and manufacturing processes and by using
reasonable commercial efforts to provide the required documentation in a timely
manner.
(c) The parties agree that BLP and Pharmos shall investigate and mutually
determine whether to proceed with efforts to obtain required marketing and
regulatory approvals for sale of Drug Product in the Potential Major Markets on
an out-of-pocket cost sharing basis substantially as set forth in the preceding
paragraph, and otherwise in a timely manner following the date of this
Agreement. The parties further acknowledge that, if BLP determines not to
proceed with, or abandons, such efforts with respect to a particular Potential
Major Market after three (3) years from the date of this Agreement, all rights
with respect to such Potential Major Market shall revert to Pharmos.
(d) All registrations in the New Territories of Drug Product shall be made
in the name of Pharmos unless such registration is not allowed under local
regulations. Pharmos agrees to coordinate the MAA with BLP to assure optimal
regulatory response in Europe. Subject to the limitations on expenditures set
forth in this Section 4.7 above, BLP agrees to use its reasonable commercial
efforts to obtain (or cause its local distributors or affiliates to obtain) any
available registrations that provide market exclusivity for Drug Product in a
particular Major European Market or Other Major Market.
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
4.8 Clinical Trials. Pharmos, using commercially reasonable efforts,
---------------
shall be responsible for conducting all currently contemplated clinical trials
and for any other clinical study reasonably required for registration of Drug
Product in Major Markets, at no cost to BLP, and on which the parties shall
mutually agree with respect to Drug Product in the Major Markets. The cost of
such clinical trials shall not be included in the product registration expenses
which may be incurred by Pharmos pursuant to this Section 4.8. At no charge to
Pharmos, and using commercially reasonable efforts, BLP shall process and supply
to Pharmos reasonable quantities of the clinical trial material required by
Pharmos for such trials, and Pharmos shall provide BLP with necessary quantities
of Drug Substance necessary for BLP to produce the clinical trial materials at
no cost to BLP. BLP (or the appropriate local distributors or affiliates of BLP)
shall conduct all optional, post-approval studies at their expense. Pharmos
shall have the right to approve any BLP clinical protocols for such post-
approval studies, such approval not to be unreasonably withheld. The parties
agree that without the approval of Pharmos not unreasonably withheld, Pharmos
shall not be obligated to perform any separate clinical trials specifically for
any country in the New Territories other than the Major Markets.
ARTICLE V
ADDITIONAL OBLIGATIONS
5.1 Notice of Regulatory Authority Communication. Each party shall
--------------------------------------------
promptly, but in no event more than three (3) business days after receipt
thereof, advise the other, and provide copies or transcriptions, if available,
of any Regulatory Authority Communication regarding the Drug Product and/or the
Drug Substance, any NDA, BLP's DMF relating to the Drug Product, or any other
related matters, whether received by Pharmos, BLP, any distributor appointed by
BLP, or any subdistributor of a distributor appointed by BLP.
5.2 Adverse Drug Reaction Reports. BLP shall establish a system for
-----------------------------
monitoring, investigating and following-up on adverse reaction reports involving
the Drug Product Processed by BLP under this Agreement. If either party becomes
aware that the Drug Product Processed by BLP contains a defect which could or
did cause death or injury, each party shall immediately by FAX and telephone
provide the other with a complete written description of all relevant details
known to such party concerning any such incident, including but not limited to,
a description of any defect and such other information which may be necessary to
report the incident to the appropriate Regulatory Authority. BLP and its
distributors and subdistributors will be responsible for preparing adverse drug
reaction reports, administering adverse drug reaction files relating to the Drug
Product and filing all such reports with the appropriate Regulatory Authorities,
at its sole expense, with respect to Drug Product Processed by BLP under this
Agreement. The obligations of BLP under this Section 5.2 with respect to a
particular Drug Product shall terminate at such time as BLP is no longer
entitled to market and sell such Drug Product unless and to the extent otherwise
required by applicable Regulatory Authorities and Regulatory Acts.
5.3 Complaint Handling. If Pharmos or BLP (or its distributors or
------------------
subdistributors) receives any complaint, claims or adverse reaction reports
regarding Drug Product, including notices from a Regulatory Authority regarding
any alleged regulatory non-compliance of the Drug Product, each party shall,
within five (5) business days of receipt with respect to medical reports and ten
(10) business days of receipt with respect to any other product reports (or in
either case such shorter periods as may be required by applicable laws, rules,
<PAGE>
or regulations), provide the other with all information contained in the
complaint, report, or notice and such additional information regarding the
specific Drug Product as may be reasonably requested, except knowledge of Drug
Product incidents described in Section 6.2 above, which shall be communicated by
FAX and telephone report. Pharmos shall comply, at a minimum, with Regulatory
Authority and CGMP requirements for complaint handling. Pharmos will decide
which complaints are to be submitted to the relevant Regulatory Authority
according to applicable law, and shall provide a copy of any such submission to
BLP.
ARTICLE VI
INTELLECTUAL PROPERTY RIGHTS
6.1 Representations of Pharmos. Pharmos represents and warrants to BLP
--------------------------
that (i) Pharmos has the right to provide Drug Substance to BLP for the
Processing of Drug Substance into Drug Product under this Agreement and (ii) to
the best of Pharmos' knowledge after diligent investigation under the
circumstances, the manufacture, use or sale of Drug Product incorporating the
Drug Substance does not infringe or violate any intellectual property rights of
others in the New Territories. Pharmos represents and warrants to BLP that, to
the best of Pharmos' knowledge after diligent investigation under the
circumstances, the Patent Rights covering the Drug Substance are valid and
enforceable, and there are no other patents with claims that cover the Drug
Substance or Drug Product issued within the New Territories. No right or
license is granted to Pharmos, expressly or by implication, under any patent,
proprietary right, tradename, trademark, service mark or copyright of BLP or
Bausch & Lomb Incorporated. Under no circumstance shall Pharmos use BLP's or
Bausch & Lomb Incorporated's name, tradenames, trademarks, service marks or
copyrights, in connection with the Drug Product or Placebo Product, unless BLP
specifically has given prior written approval for any such particular use.
6.2 Representations of BLP. BLP represents and warrants to Pharmos that
----------------------
(i) BLP has the right to Process Drug Substance into Drug Product and otherwise
perform its obligations under this Agreement, and (ii) to the best of BLP's
knowledge after diligent investigation under the circumstances, BLP has all
intellectual property rights (or can acquire such rights under commercially
reasonable terms) to perform the Processing of Drug Substance into Drug Product
at the Facilities and otherwise within the New Territories. No right or license
is granted to BLP, expressly or by implication, under any patent, proprietary
right, tradename, trademarks, service mark or copyright of Pharmos. Under no
circumstance shall BLP use Pharmos' name, tradenames, trademarks, service marks
or copyrights in connection with the Drug Product or Placebo Product unless
Pharmos specifically has given prior written approval for any such particular
use.
6.3 Patent Matters. (a) Pharmos shall undertake and shall bear all costs
--------------
of the prosecution and maintenance of the Patent Rights in the Major Markets,
Other Major Markets, Potential Major Markets, other countries within a Region,
and such other countries within the New Territories which BLP designates in
writing to Pharmos that it intends to market and sell Drug Product and in which
Patent Rights are available based upon a good faith determination of Pharmos
using customary practices (the "Patent Countries"). Pharmos shall exercise
commercially reasonable efforts to prosecute the Patent Rights in the Patent
Countries and thereafter to maintain such Patent Rights. Furthermore, Pharmos
shall
<PAGE>
exercise reasonable efforts to keep BLP fully informed with respect to the
course and conduct of patent application and prosecution matters within the
scope of the Patent Rights.
(b) If Pharmos elects to terminate either the prosecution or maintenance of
the Patent Rights in any of the Patent Countries prior to the completion of
normal prosecution before the patent examiner or prior to the end of the term
for maintenance, as the case may be, it will give BLP sixty (60) days prior
written notice of such election prior to any time limit on any action due. BLP,
upon receipt of such notice, shall have the option, subject to any obligations
binding on Pharmos with respect to any of the Patent Rights held by Pharmos
under licenses from third parties, to undertake the continuation of such
prosecution or maintenance and, upon BLP's election to undertake such
continuation, and, to the extent owned by Pharmos, Pharmos shall transfer title
to BLP for the subject Patent Rights in the subject country.
(c) If either party shall become aware of any infringement of threatened
infringement of any Patent Rights, then the party having such knowledge shall
give notice to the other within ten (10) days of becoming aware of such
infringement or threatened infringement.
(d) Pharmos shall have the first right but not the obligation to bring an
enforcement action or to take any other reasonable steps to defend the Patent
Rights against infringement and BLP shall in such event give all reasonable
assistance to Pharmos with respect to related patent and legal issues. The
costs of, and any recovery from, any such patent enforcement shall be borne by
and belong to Pharmos. If Pharmos does not commence a particular infringement
action within ninety (90) days after it has received notice of such
infringement, BLP (subject to any rights of any third parties having granted
Pharmos a license to use the subject Patent Rights), after notifying Pharmos in
writing, shall be entitled to bring such infringement action or other
appropriate action or claim at its own expense, but may request in writing that
Pharmos fund *****% of such expenses. If Pharmos declines to pursue such action
or fails to respond to BLP within sixty (60) days after receipt of BLP's notice
that it will do so, BLP shall have the right to undertake such action, and if
BLP undertakes such action, it shall be entitled to *****% of all recoveries, if
Pharmos does not contribute to the expenses incurred in connection with such
prosecution. BLP and Pharmos shall split any recovery if Pharmos does
contribute to the expenses incurred by BLP in connection with such prosecution,
pro rata in proportion to their relative contributions to such expenses.
Notwithstanding the foregoing, if the monetary recovery is less than the out-of-
pocket expenses of Pharmos and BLP, reimbursement shall be on a pro rata basis,
based upon costs incurred. In any event, BLP and Pharmos shall assist one
another and reasonable cooperate in any such litigation at the other's request
without expense to the requesting party.
(e) For purposes of this Section 6.3, "Patent Rights" shall include non-
United States patents and non-United States patent applications covering the
invention covered by the "Formulation Patent", as defined in that certain
License Agreement dated as of June 30, 1995, between Pharmos and BLP.
ARTICLE VII
CONFIDENTIALITY
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
7.1 Confidential Information. Pharmos and BLP agree that all Technology
------------------------
and other proprietary or confidential information owned by each other, including
any Technology and proprietary or confidential information previously described
in or by the Prior Agreements (collectively, the "CONFIDENTIAL INFORMATION"),
and provided to or possessed by the other party, shall be kept strictly
confidential and each party agrees further that:
(a) all such information so possessed or accessed shall remain the
exclusive property of the other party;
(b) it shall maintain, and shall use reasonable and prudent efforts to
cause its employees and agents to maintain, all such information as
confidential;
(c) it shall not, and shall use reasonable and prudent efforts to
ensure that its employees and agents do not copy, publish, disclose to others,
or preempt and use for any purposes (other than for purposes of fulfilling its
obligations pursuant to this Agreement) any such information;
(d) it shall return such information to the other party upon
termination of this Agreement; and
(e) it shall maintain, and shall use reasonable and prudent efforts to
cause its employees and agents to maintain, all such information in a clean,
orderly, and businesslike fashion and in accordance with any applicable
governmental regulations.
7.2 Exception. Provided that BLP and Pharmos provides the other party with
---------
written notice in advance of the need to disclose any of the Confidential
Information obtained from the other party in connection with this Agreement,
Section 7.1 shall not apply to information disclosed by either party:
(a) to any governmental or other Regulatory Authority in response to a
subpoena; or
(b) to ensure compliance with Regulatory Authorities and Regulatory
Acts; or
(c) as may be required to ensure compliance with law or in connection
with any litigation or legal process; or
(d) to the extent that any of the information is in or enters the
public domain or is received from a third party without breach of any obligation
of confidentiality to BLP or Pharmos or is independently developed by BLP or
Pharmos.
ARTICLE VIII
INDEPENDENCE OF THE PARTIES
BLP and Pharmos shall at all times act as independent parties without the
right or authority to bind the other with respect to any agreement,
representation or warranty made with or to any third party. Except as otherwise
stated herein, BLP and Pharmos each shall be responsible for all costs,
expenses, taxes and liabilities arising from the conduct of its own business, as
well as for the activities of its officers, directors, agents or employees, and
each shall hold harmless and indemnify the other from any such obligations.
<PAGE>
ARTICLE IX
TERM AND TERMINATION
9.1 Term. The initial term of this Agreement shall commence on the date
----
hereof and shall continue, subject to Section 9.2 below, with respect to each
country in the New Territories until the longer of (i) the tenth anniversary of
the first commercial sale of Drug Product in the New Territories, with respect
to each country within the New Territories severally, or (ii) the last date of
expiration of any patent right pertaining to such Drug Product in such
jurisdiction, or (iii) the last date of expiration of any Exclusive Marketing
Right in such jurisdiction. Following the expiration of the initial term, and
subject to Section 9.2 below, this Agreement shall automatically renew for
successive twelve (12) month periods unless terminated by BLP by written notice
delivered to Pharmos at least [[180 days]] prior to the expiration of any such
renewal period.
9.2 Termination. Except as otherwise stated herein, this Agreement may be
-----------
terminated during the initial term and any renewal term upon the happening of
one or more of the following events:
(i) By either party in the case of a material or persistent breach by the
other party of any one or more of the material terms of this Agreement which is
not remedied within thirty (30) days after written notice of the breach by the
terminating party, or if such breach cannot reasonably be cured with such thirty
(30) day period, the breaching party has failed to commence such cure within
such period and diligently prosecute such cure to completion within a reasonable
time thereafter;
(ii) Immediately by either party in the event that the other party attempts
to assign this Agreement in any manner or circumstance other than those
expressly permitted in Article XIV below;
(iii) Immediately by Pharmos if BLP files a petition in bankruptcy or a
petition in bankruptcy is filed against BLP which is not vacated within sixty
(60) days, or BLP becomes insolvent or makes an assignment for the benefit of
creditors generally or any arrangement pursuant to any bankruptcy or insolvency
law;
(iv) Immediately by BLP if a Competitor directly or indirectly (X) becomes
the beneficial owner of more than *****% of Pharmos' total voting securities,
(Y) purchases all or substantially all of the assets of Pharmos related to the
Drug Substance, or (Z) otherwise acquires Control (as defined in Section 13.1(b)
below) over the business and affairs of Pharmos; and
(v) Immediately by Pharmos if a Competitor directly or indirectly (X)
becomes the beneficial owner of more than *****% of BLP's total equity
securities, (Y) purchases all or substantially all of the assets of BLP with
respect to the Processing of Drug Product, or (Z) otherwise acquires Control
over the business and affairs of BLP.
9.3 Effect of Termination. Within thirty (30) days following the
---------------------
effective date of termination of this Agreement, BLP will provide Pharmos with a
detailed accounting of (i)
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
the amount of consigned Drug Substance held by or for BLP in the form in which
it was delivered to BLP by Pharmos, (ii) the amount of Drug Product being
Processed by BLP for sale by BLP, and (iii) the amount of Drug Product then held
in inventory by BLP (including Drug Product which has not been subjected to
BLP's quality assurance testing procedures). Unless otherwise mutually agreed
by the parties prior to the effective date of termination and subject to any
other rights granted to BLP by Pharmos, (X) BLP will return to Pharmos all Drug
Substance held on consignment by BLP for Pharmos, and (Y) BLP shall be entitled
to finish the Processing of all Drug Substance in BLP's possession for use by
BLP, and to market and sell all finished goods inventory of Drug Product in its
possession, for a period of six (6) months following termination at a price and
on terms no less favorable to BLP as the price and terms generally offered to
purchasers of Drug Product by BLP prior to termination. In addition, effective
immediately upon termination, BLP shall take all actions as may be necessary to
assign, transfer, or otherwise convey to Pharmos all licenses, permits,
authorizations, and approvals, and any applications for any of the foregoing
then pending, related to or used in the sale and marketing of Drug Product in
any of the New Territories, exclusive of the DMF and any approvals for the sale
of Generics registered in the name of BLP or any or its Distributors.
9.4 Effect on Other Obligations. No termination of this Agreement shall
---------------------------
have any effect on, or relieve either party from, (i) the obligation to make any
payment or perform any act arising prior to the effective date of termination,
and (ii) the performance of their respective obligations under the Processing
Agreement in accordance with the terms and conditions of the Processing
Agreement.
ARTICLE X
FORCE MAJEURE
Notwithstanding anything in this Agreement to the contrary (except with
respect to Section 2.10 above until such time as BLP shall have recouped an
aggregate of $***** of advances paid to Pharmos pursuant to Section 2.5 above),
neither party shall be liable for delay or failure in the performance of any of
its obligations under this Agreement if and to the extent such delay or failure
is due to circumstances beyond the reasonable control of such party, including
but not limited to fires, floods, explosions, accidents, acts of God, war, riot,
strike, lockout or other concerted acts of workers, acts of government and
shortages of materials; provided, however, that the party claiming that "force
--------
majeure" has affected its performance shall give notice to the other party
within ten (10) days of becoming aware of the occurrence of force majeure,
giving full particulars of the cause or event and the date of first occurrence
thereof, and provided further that until such time as BLP shall have recouped
----------------
all advances paid to Pharmos pursuant to Section 2.5 above, any Regulatory
Authority enforcement action other than with respect to Processing by BLP shall
not constitute "force majeure." The party claiming force majeure shall use its
best efforts to eliminate or prevent the cause so as to continue performing its
obligations under this Agreement.
ARTICLE XI
INDEMNIFICATION
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
11.1 Indemnification of BLP. Pharmos shall indemnify, defend, save and
----------------------
hold BLP and each of its Affiliates, officers, directors, employees and agents
harmless from and against all claims, liabilities, costs and expenses, resulting
from third party claims, including without limitation reasonable attorneys' fees
and disbursements, arising as a result of (a) any material breach of any
warranty hereunder or material non-fulfillment or non-performance by Pharmos of
any agreement, covenant or obligation of Pharmos under this Agreement; (b) any
actual or alleged defect in any Drug Product Processed by BLP and delivered to
Pharmos hereunder other than arising out of BLP's failure to Process Drug
Product in accordance with the terms of this Agreement; (c) any actual or
alleged infringement or violation of any patent, trade secret or proprietary
right governing the Drug Substance or a Drug Product (exclusive of any actual or
alleged infringement or violation of any patent, trade secret or proprietary
rights used by BLP in Processing Drug Product); (d) Regulatory Authority
enforcement action, inspections or Drug Product recalls or market withdrawals
except where arising out of or resulting from BLP's failure to Process Drug
Product in accordance with the terms of this Agreement; (e) Pharmos' acts
relating to the promotion, marketing and/or distribution of Drug Product in the
New Territories, except where arising out of or resulting from BLP's failure to
Process Drug Product in accordance with the terms of this Agreement or, if
applicable, the Processing Agreement; (f) breach by Pharmos of the terms of any
agreement pursuant to which Pharmos has obtained any rights in connection with
or related to the Drug Substance and Drug Product; and (g) breach by any third
party manufacturer of Drug Product of any confidentiality agreement entered into
with Pharmos, as contemplated under Section 2.1(e) above.
11.2 Indemnification of Pharmos. BLP shall indemnify, defend, save and
--------------------------
hold Pharmos and each of its Affiliates, officers, directors, employees and
agents harmless from and against all claims, liabilities, costs and expenses
resulting from third party claims, including without limitation reasonable
attorneys' fees and disbursements, arising as a result of (a) any material
breach of any warranty hereunder or material non-fulfillment or non-performance
by BLP of any agreement, covenant or obligation of BLP under this Agreement; (b)
any actual or alleged defect in any Drug Product Processed and delivered to
Pharmos hereunder arising out of BLP's failure to Process Drug Product in
accordance with the terms of this Agreement; (c) any actual or alleged
infringement or violation of any patent, trade secret or proprietary rights used
by BLP in Processing Drug Product; and (d) Regulatory Authority enforcement
action, inspection or Drug Product recalls or market withdrawals in the New
Territories resulting from BLP's failure to Process the Drug Product in
accordance with the terms of this Agreement. BLP shall further indemnify,
defend, save and hold Pharmos and each of its Affiliates, officers, directors,
employees and agents harmless from and against all claims, liabilities, costs
and expenses resulting from third party claims, including without limitation
reasonable attorneys' fees and disbursements, arising as a result of (i) any
material breach of the terms of any agreement or arrangement between or among
BLP, any Affiliated Distributor, and any other distributor or subdistributor
appointed by BLP as contemplated by this Agreement, (ii) any violations of any
Regulatory Act or other law, rule or regulation applicable to the activities of
any such Affiliated Distributor and any other distributor or subdistributor
appointed by BLP as contemplated by this Agreement, and (iii) any loss or injury
to property or persons caused by, or resulting from the negligence or wilful
misconduct of, any Affiliated Distributor and any other distributor or
subdistributor appointed by BLP as contemplated by this Agreement.
11.3 Notice. As a prerequisite for indemnification hereunder as soon as
------
the party claiming indemnification has actual notice of the matter for which
indemnification is sought,
<PAGE>
it shall give prompt notice of such matter to the party claimed to be
responsible for indemnification, with the right of the indemnitor to conduct any
investigation reasonably necessary and to control the defense, appeal and
settlement of the matter with the cooperation of the indemnitee, its employees
and agents as may be reasonably requested by the indemnitor. Regardless of
anything in this Article XI to the contrary, the indemnitor shall not be liable
for attorneys fees or expenses of litigation of the indemnitee unless the
indemnitee gives the indemnitor the opportunity to assume control of the defense
of such action, and in no event shall the indemnitor be permitted to assume
control of the defense of the indemnitee, or to surrender, modify or otherwise
make any determinations with respect to the rights of the indemnitee by way of
any settlement, without the consent of the indemnitee (which consent shall not
be unreasonable withheld).
11.4 Survival. The indemnification contained herein shall survive any
--------
termination of this Agreement.
ARTICLE XII
NOTICES
Any notice, request, instruction or other communication required or
permitted to be given under this agreement shall be in writing and shall be
given by sending such notice properly addressed to the other party's address
shown below (or any other address as either party may indicate by notice in
writing to the other from time to time) (i) by hand or by prepaid registered or
certified mail, return receipt requested, in either of such cases which notice
shall be deemed delivered upon receipt, (ii) via telecopy or telegram, in either
of such cases which notice shall be deemed delivered upon receipt, or (iii) via
nationally recognized overnight courier, in which case such notice shall be
deemed delivered upon receipt. All such notices shall be deemed given when
received:
If to Pharmos, at: Pharmos Corporation
2 Innovation Drive
Alachua, Florida 32615
Attn: Chief Operating Officer
With a copy to: Eilenberg & Zivian
666 Third Avenue, 30th Floor
New York, New York 10017
Attn: Adam D. Eilenberg, Esq.
If to BLP, at: Bausch & Lomb Pharmaceuticals, Inc.
8500 Hidden River Parkway
Tampa, Florida 33637
Attn: President
With a copy to: Bausch & Lomb Incorporated
One Chase Square
Rochester, NY 14601
Attn: General Counsel
<PAGE>
ARTICLE XIII
ASSIGNMENT
13.1 No Assignment.
-------------
(a) Except as otherwise specifically set forth in this Agreement above,
neither party may assign any of their rights or obligations under this Agreement
without the prior written consent of the other party hereto, which consent shall
not be unreasonably withheld, provided that subject to other applicable
--------
conditions stated in this Agreement, (i) either party may assign this Agreement,
in whole or in part, to an Affiliate (as defined below) of such party upon prior
written notice to the other party, (ii) in the case of an assignment or
attempted assignment by BLP to an Affiliate, Pharmos has been given the right to
inspect and reasonably approve or disapprove of the facility operated by such
BLP affiliate, (iii) Pharmos may assign this Agreement to a purchaser of all or
substantially all of the business of Pharmos if such purchaser is not a
Competitor, and (iv) neither party shall be deemed to have unreasonably withheld
its consent to a request from the other party to assign any of such other
party's rights or obligations under this Agreement to a Competitor.
(b) Neither party shall be deemed to have unreasonably withheld its consent
with respect to any assignment which such party reasonably believes may
adversely affect the status, validity or maintenance of any NDA. No assignment,
whether approved or otherwise, shall relieve the assigning party of its
responsibility for the performance of its obligations hereunder by its assignee.
"AFFILIATE" means any entity controlling, controlled by or under common control
with a referenced entity. "CONTROL" means the direct or indirect right to
control the business or affairs of the referenced entity, whether by the
exercise of voting rights, by control of board of directors or other body with
management or similar authority, by contract, by law or otherwise.
ARTICLE XIV
MISCELLANEOUS
14.1 Enforceability. The parties hereto agree that this Agreement shall be
--------------
legally binding upon, and shall inure to the benefit of, each of them and their
respective legal representatives, successors and permitted assigns.
14.2 Entire Agreement. This Agreement including Schedules and Exhibits,
----------------
contains the entire understanding of the parties relating to the subject matter
hereof, and supersedes all prior discussions and agreements between them with
respect to the specific subject matter herein contained, and, except as set
forth herein, neither party shall be bound by any definition, condition,
warranty, or representation other than as expressly stated in this Agreement or
as subsequently set forth in any instrument in writing signed by an authorized
officer of the party to be charged.
14.3 Governing Law. This Agreement shall be governed by and interpreted in
-------------
accordance with the laws of the United States and the State of New York as
applied by the courts therein.
14.4 Waiver. No waiver by either party of any breach or default in
------
performance by the other party, and no failure, refusal or neglect of either
party to exercise
<PAGE>
any right, power or option given to it hereunder or to insist upon strict
compliance with or performance of the other party's obligations under this
Agreement, shall constitute a waiver of the provisions of this Agreement with
respect to any subsequent breach thereof or a waiver by that party of its right
at any time thereafter to require strict compliance with the provisions thereof.
14.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same agreement.
14.6 Audit. BLP shall keep accurate books and records (for a period of two
-----
(2) years from creation) reflecting fully and adequately BLP Adjusted Sales
under this Agreement, in sufficient detail to permit verification thereof.
During the term of this Agreement and for a period of two (2) years thereafter,
BLP will permit these books and records to be examined and copied from time to
time upon reasonable prior written notice, during normal working hours by
Pharmos or any representative of Pharmos. Such examination shall be made at
Pharmos' expense, except that if such examination discloses a discrepancy of
*****% or more in any amount due Pharmos under this Agreement, BLP shall
reimburse Pharmos for the out-of-pocket cost of such examination, including any
reasonable professional fees and expenses incurred by Pharmos. In connection
with any examination or copying of books and records in accordance with this
Section, Pharmos or such representative of Pharmos shall examine only such
information as is required to verify BLP's compliance under this Agreement.
Pharmos agrees to cause each representative to hold all such information in
confidence and not use such information for any purpose other than for purposes
of assisting Pharmos in the enforcement of its rights under this Agreement.
14.7 Public Announcement. Unless otherwise required by applicable laws,
-------------------
rules or regulations or by a Regulatory Authority, neither party shall issue a
press release or make any public announcement concerning this Agreement without
the prior approval of the other party, which approval shall not be unreasonably
withheld.
14.8 Prior Agreements. The parties agree that the Prior Agreements remain
----------------
in full force and effect in accordance with their terms with respect to the
matters agreed to by the parties in such Prior Agreements.
*****END OF TEXT*****
<PAGE>
IN WITNESS WHEREOF, the parties hereto have read and executed this
Marketing Agreement and have set their hands and seals hereto as of the day and
year first above written.
BAUSCH & LOMB PHARMACEUTICALS, INC
By: /s/ Alan P. Damper
----------------------------------------------
Title: President
-------------------------------------------
PHARMOS CORPORATION
By: /s/ Gad Riesenfeld
----------------------------------------------
Title: Exec. V.P. and C.O.O.
-------------------------------------------
<PAGE>
SCHEDULE 1.11 TO
THE NEW TERRITORIES MARKETING AGREEMENT
Belgium
Denmark
France
Germany
Greece
Ireland
Italy
Luxemborg
Netherlands
Portugal
Spain
United Kingdom
<PAGE>
SCHEDULE 1.14 TO
THE NEW TERRITORIES MARKETING AGREEMENT
See Attached. For each country referenced on the attachment to this Schedule
1.14, and for each referenced Product Year and Drug Product described on such
attachment, the amount of units of Drug Product deemed to be set forth on this
Schedule 1.14 shall be *****% of the amount of units set forth on such
attachment.
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
ATTACHMENT TO SCHEDULE 1.14
Summary
-------
PRODUCT YEAR 1
- -------------------------------
<TABLE>
<CAPTION>
Rest
GER FRA UK ITA SPA BELG NETH SCAND AUS EUROPE countries Total
---- ---- ---- ---- ---- ---- ---- ----- ---- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lotemax k units **** **** **** **** **** **** **** **** **** **** **** ****
Lotemax Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LET k units **** **** **** **** **** **** **** **** **** **** **** ****
LET Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LEA k units **** **** **** **** **** **** **** **** **** **** **** ****
LEA Gross units **** **** **** **** **** **** **** **** **** **** **** ****
Total Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
PRODUCT YEAR 2
- -------------------------------
Rest
GER FRA UK ITA SPA BELG NETH SCAND AUS EUROPE countries Total
---- ---- ---- ---- ---- ---- ---- ----- ---- ------ ---------- -----
Lotemax k units **** **** **** **** **** **** **** **** **** **** **** ****
Lotemax Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LET k units **** **** **** **** **** **** **** **** **** **** **** ****
LET Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LEA k units **** **** **** **** **** **** **** **** **** **** **** ****
LEA Gross units **** **** **** **** **** **** **** **** **** **** **** ****
Total Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
</TABLE>
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
PRODUCT YEAR 3
- -------------------------------
<TABLE>
<CAPTION>
Rest
GER FRA UK ITA SPA BELG NETH SCAND AUS EUROPE countries Total
---- ---- ---- ---- ---- ---- ---- ----- ---- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lotemax k units **** **** **** **** **** **** **** **** **** **** **** ****
Lotemax Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LET k units **** **** **** **** **** **** **** **** **** **** **** ****
LET Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LEA k units **** **** **** **** **** **** **** **** **** **** **** ****
LEA Gross units **** **** **** **** **** **** **** **** **** **** **** ****
Total Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
</TABLE>
PRODUCT YEAR 5
- -------------------------------
<TABLE>
<CAPTION>
Rest
GER FRA UK ITA SPA BELG NETH SCAND AUS EUROPE countries Total
---- ---- ---- ---- ---- ---- ---- ----- ---- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lotemax k units **** **** **** **** **** **** **** **** **** **** **** ****
Lotemax Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LET k units **** **** **** **** **** **** **** **** **** **** **** ****
LET Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LEA k units **** **** **** **** **** **** **** **** **** **** **** ****
LEA Gross units **** **** **** **** **** **** **** **** **** **** **** ****
Total Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
</TABLE>
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
PRODUCT YEAR 5 AND THEREAFTER
- -------------------------------
<TABLE>
<CAPTION>
Rest
GER FRA UK ITA SPA BELG NETH SCAND AUS EUROPE countries Total
---- ---- ---- ---- ---- ---- ---- ----- ---- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lotemax k units **** **** **** **** **** **** **** **** **** **** **** ****
Lotemax Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LET k units **** **** **** **** **** **** **** **** **** **** **** ****
LET Gross sales **** **** **** **** **** **** **** **** **** **** **** ****
LEA k units **** **** **** **** **** **** **** **** **** **** **** ****
LEA Gross units **** **** **** **** **** **** **** **** **** **** **** ****
Total 1999-2003 **** **** **** **** **** **** **** **** **** **** **** ****
</TABLE>
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
SCHEDULE 1.29 TO
THE NEW TERRITORIES MARKETING AGREEMENT
See Attached
<PAGE>
ATTACHMENT TO SCHEDULE 1.29
PATENTS FOR LOTEPREDNOL ETABONATE AND RELATED CARBONATES
NOT LICENSED TO PHARMOS
---
COUNTRY APPLN. NO. FILING DATE PATENT NO. ISSUE DATE
- ------- ---------- ----------- ---------- ----------
Japan ******************************************
South Korea ******************************************
South Korea ******************************************
Philippines ******************************************
Taiwan ******************************************
Australia ******************************************
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
SCHEDULE 1.32 TO
THE NEW TERRITORIES MARKETING AGREEMENT
See Attached
<PAGE>
ATTACHMENT TO SCHEDULE 1.32
SCHEDULE 1.h
------------
(1) SOFT STEROIDS HAVING ANTI-INFLAMMATORY ACTIVITY
<TABLE>
<CAPTION>
BDS APPLN. FILING PATENT ISSUE EXPIRATION
No. COUNTRY NO. DATE NO. DATE DATE
- ---- ------------- ------ ------ ------ ----- ----------
<C> <S> <C> <C> <C> <C> <C>
- -006 United ***** ***** ***** *****
States
- -011 Austria ***** ***** ***** *****
- -020 Austria ***** ***** ***** *****
- -009 Belgium ***** ***** ***** *****
- -003 Canada ***** ***** ***** *****
- -010 Denmark ***** ***** ***** *****
- -015 Finland ***** ***** ***** *****
- -008 France ***** ***** ***** *****
- -016 Italy ***** ***** ***** *****
- -002 Netherlands ***** ***** ***** *****
- -014 Norway ***** ***** ***** *****
- -017 Portugal ***** ***** ***** *****
- -019 South ***** ***** ***** *****
Africa
none Spain ***** ***** ***** *****
none Spain ***** ***** ***** *****
- -013 Sweden ***** ***** ***** *****
- -012 Switzerland ***** ***** ***** *****
- -007 United ***** ***** ***** *****
Kingdom
- -024 West ***** ***** ***** *****
Germany
</TABLE>
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
SCHEDULE 1.45 TO
THE NEW TERRITORIES MARKETING AGREEMENT
See Letter Agreement of even date with this Marketing Agreement
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
SCHEDULE 1.46 TO
THE NEW TERRITORIES MARKETING AGREEMENT
See Letter Agreement of even date with this Marketing Agreement
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
SCHEDULE 2.3(a) TO
THE NEW TERRITORIES MARKETING AGREEMENT
See Attached
<PAGE>
ATTACHMENT TO SCHEDULE 2.3 (a)
THE NEW TERRITORIES MARKETING AGREEMENT
SALES FORECAST ($000's)
Product Year
------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10 and
1 2 3 4 5 6 7 8 9 Thereafter
- -------- ----- ----- ----- ----- ----- ----- ----- ----- ----------
****** ***** ***** ***** ***** ***** ***** ***** ***** *****
</TABLE>
* Confidential information is omitted and filed separately with the SEC.
<PAGE>
EXHIBIT 10(z)
November 11,1996
Mr. Alan M. Mark
41 Seminole Way
Short Hills, NJ 07078
Dear Mr. Mark:
This letter agreement (the "Agreement") will confirm the understanding
between Pharmos Corporation ("Pharmos" or the "Company") and Alan M. Mark (the
"Consultant") pursuant to which the Company agrees to engage the Consultant and
the Consultant agrees to provide services to the Company under the terms and
conditions herein provided.
1. TERM - The Company hereby agrees to retain the Consultant for the six month
-----
period commencing November 1, 1996. This agreement may be terminated by the
Consultant after 3 months with 30 days written notice to the Company (the
"Consulting Term").
2. DUTIES- During the Consulting Term, the Company hereby retains the
------
Consultant as the Company's financial advisor and the Consultant agrees to
advise the Company with respect to the Company's capital structure and other
matters. The Consultant will be acting CFO, reporting to the Chief Executive
Officer, and will assist the Company with certain responsibilities typically
performed by the chief financial officer, including financial planning,
budgeting, investor relations, preparation of SEC reports and other
administrative responsibilities.
3. COMPENSATION - For Consultant's services hereunder during the Consulting
------------
Term, the Company will pay the Consultant a Consulting Fee of $15,000 per month,
payable in advance on the first of each month, and will reimburse all reasonable
out-of-pocket expenses. The Company recognizes that the Consultant will not be
located at a Pharmos owned or leased facility and therefore agrees to reimburse
Consultant for the costs of an office, certain equipment and an automobile used
by the Consultant; such amounts will not exceed $3,000 per month but in no case
will they be less than $2,000 per month. In the event that the end of the
Consulting Term is in the middle of a month, the fees and reimbursements will be
pro rated.
The Consultant will receive 10,000 warrants upon the signing of this agreement,
15,000 additional warrants after three months and 15,000 additional warrants at
the termination of this agreement. However, if the Consultant elects to effect
a termination of this agreement prior to the scheduled grant date of additional
warrants, such warrants will not be granted. Warrants will have an exercise
price equal to the average of the closing bid and ask prices prior to the grant
date, will have a six year term (not exerciseable in first year), and will
contain terms and registration rights similar to the warrants issued to C.
Neill.
The Company understands that the Consultant's services are important in
assisting the Company to raise additional financing and complete strategic
transactions. In addition to the
<PAGE>
compensation provided above, Consultant shall receive from the Company success
fees as follows:
(i) with respect to financings arranged without a finder, agent and
underwriter, such fee will consist of a cash payment of 3% of gross proceeds
("Investment") received by the Company and 3% value in warrants to purchase
common stock of the Company at 100% of the closing bid price on the date of
subscription.
(ii) with respect to financing arranged in part or in full with the
assistance of a finder, agent or underwriter, the fees will be one-half of those
indicated in 3(i) for the portion of the financing utilizing such finder, agent
or underwriter and the fees will be 100% of the amounts in 3(i) for any other
portion.
(iii) with respect to a merger, sale of Company, sale of assets or
subsidiary, or an acquisition by the Company, the cash fee will be 0.5% of the
transaction value (defined as the fair market value of the consideration
received or paid plus the assumption of any liabilities).
All above fees will be payable in full at the closing of each transaction. All
warrants will be valued using Black-Sholes formula and will be similar in form
to those issued to Consultant in October 1996. In the event transactions
described in Sections 3(i), 3(ii), and 3(iii) are initiated during the
Consulting Term (as evidenced by a draft term sheet, draft agreement, draft
memorandum of understanding, or draft letter of intent and, in the case of
Section 3(iii), approval of the proposed transaction by the relevant Boards of
Directors) and consummated within six months of the termination of this
engagement, the success fees shall be payable to the Consultant. No success
fees will be payable in connection with any strategic alliance or related equity
investment.
4. INDEMNITY- The Company agrees to hold harmless, defend and indemnify
---------
Consultant from any firm or individual associated with Consultant for all
reasonable expenses incurred by the Consultant in connection with any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal administrative or investigative to which Consultant is, was or at any
time becomes a party, or is threatened to be made a party, by reason of this
Agreement or Consultant's performance of services for or on behalf of Company.
The Consultant will benefit from the Company's D&O insurance program.
5. INDEPENDENT CONTRACTOR- During the Consulting Term, Consultant will serve
----------------------
the Company an an independent contractor.
6. HEADINGS- The headings in this Agreement are solely for the convenience of
--------
reference and shall be given no effect in the construction or interpretation of
this Agreement.
7 GOVERNING LAW- This Agreement, and any dispute arising under or relating to
-------------
any provision of this Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
8. AMENDMENTS - This Agreement may not be amended or changed except by the
----------
written agreement of the Company and the Consultant.
<PAGE>
Mr. Alan M. Mark
November 11, 1996
Page 4
9. SEVERABILITY - If any one or more of the provisions contained in this
------------
Agreement are held to be invalid, illegal or unenforceable in any respect, the
validity of the remaining provisions contained herein shall not in any way be
affected or impaired.
10. AGREEMENTS - This agreement, once executed by the parties, will replace and
----------
supersede any previous consulting agreements between the Company and the
Consultant except that the provision relating to fees on future financings by
investors in the September 1996 agreement (providing for the payment of a
finder's fee in the event certain investors make additional investments in the
Company prior to September 1997) shall remain in force.
If the foregoing terms correctly set forth our agreement please confirm this
letter by signing and returning to us the duplicate of this letter.
/S/ Haim Aviv /S/ Alan Mark
- ------------- ---------------------------------
By: Dr. Haim Aviv, CEO By: Alan M. Mark, Consultant
Pharmos Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,132,906
<SECURITIES> 0
<RECEIVABLES> 359,019
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,739,288
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,468,293
<CURRENT-LIABILITIES> 1,771,776
<BONDS> 0
0
57
<COMMON> 921,825
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,468,293
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,595
<INCOME-PRETAX> (8,077,210)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,077,210)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,077,210)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
