As filed with the Securities and Exchange Commission on March 5, 1998
Registration No. 333-_________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED
------------------------------------
PHARMOS CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 36-3207413
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
33 Wood Avenue South, Suite 466
Iselin, New Jersey 08830
(732) 603-3526
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------------
GAD RIESENFELD
33 Wood Avenue South, Suite 466
Iselin, New Jersey 08830
(732) 603-3526
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------------
Copies to:
ADAM D. EILENBERG, ESQ.
Ehrenreich Eilenberg Krause & Zivian LLP
11 East 44th Street, 17th Floor
New York, New York 10017
------------------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of the registration statement
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend or interest
reinvestment plans, check the following box. | X |
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Unit Price Fee
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common stock to be 9,050,000(1) $2.22(3) $20,091,000 $5,926.85
sold by Selling Security holder
Shares of Common Stock 800,000(2) $2.67 $2,136,000 $630.12
issuable upon exercise of
Warrants to purchase 800,000
Shares at $2.67 per share
- -----------------------------------------------------------------------------------------------------------------
Shares of Common Stock 150,000(2) $2.28 $342,000 $100.89
issuable upon exercise of
Warrants to purchase 150,000
Shares at $2.28 per share
- -----------------------------------------------------------------------------------------------------------------
Shares of Common Stock 171,052(2) $1.38 $236,052 $69.64
issuable upon exercise of
Warrants to purchase 171,052
Shares at $1.38 per share
- -----------------------------------------------------------------------------------------------------------------
Total Registration Fee $22,805,052 $6,728
</TABLE>
(1) Assumes conversion price for all the preferred stock at $0.88, which is
estimated for the purpose of determining the maximum number of shares of
Common Stock obtained upon conversion.
(2) Pursuant to Rule 416 under the Securities Act of 1933, an indeterminate
number of additional shares of common stock as may become issuable upon
conversion of the preferred stock and the exercise of the Warrants (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transaction, or (ii) by reason of changes in the conversion price of the
preferred stock or the exercise price of the Warrants in accordance with
the terms thereof, as the case may be.
(3) Estimated solely for the purpose of calculating the registration fee.
Proposed maximum offering price per share is estimated based upon the
closing price of the Company's Common Stock listed on the Nasdaq SmallCap
Market on March 2, 1998.
The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PHARMOS CORPORATION
Cross Reference Sheet Showing Location in Prospectus of Information Required
Therein by Item 1 through 13 of Form S-3
Registration Statement Prospectus Caption
Item and Heading of Location
---------------- -----------
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus ...................... Outside Front Cover
2. Inside Front and Outside Back
Cover Pages and Prospectus..................... Inside Front Cover Page
3. Summary Information,
Prospectus Summary
and Ratio of Earnings to Outside Front Cover,
Fixed Charges.................................. Risk Factors
4. Use of Proceeds................................ Use of Proceeds
5. Determination of Offering Price................ Cover Page
6. Dilution....................................... Dilution
7. Selling Security Holder........................ Selling Security Holder
8. Plan of Distribution........................... Cover Page, Plan of
Distribution
9. Description of the Securities to
be Registered.................................. Description of Securities
10. Interest of Named Experts and Counsel.......... Experts
11. Material Changes............................... Recent Developments
12. Incorporation of Certain
Information by Reference....................... Incorporation of Certain
Documents by Reference
13. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................................ Commission's Policy on
Indemnification for
Securities Act
Liabilities
<PAGE>
PHARMOS CORPORATION
-------------------
9,050,000 SHARES OF COMMON STOCK,
$.03 PAR VALUE, TO BE SOLD BY
SELLING SECURITY HOLDER
800,000 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS TO PURCHASE SHARES
AT AN EXERCISE PRICE OF $2.67 PER SHARE
150,000 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS TO PURCHASE SHARES
AT AN EXERCISE PRICE OF $2.28 PER SHARE
171,052 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS TO PURCHASE SHARES
AT AN EXERCISE PRICE OF $1.38 PER SHARE
This Prospectus covers the proposed offer and resale of up to 9,050,000
shares (the "Shares"), the amount of which is calculated based on a $0.88
conversion price, of common stock, par value $.03 ("Common Stock") of Pharmos
Corporation (the "Company") held by the stockholder (the "Selling Stockholder")
who purchased 5,000 shares ($5,000,000 principal amount) of 5% Preferred Stock
(the "Series C Preferred Stock") convertible into such shares in a private
placement transaction in February 1998 (the "Private Placement Transaction").
The Private Placement Transaction, in which the Company issued 5,000 shares of
Series C Preferred Stock to the Selling Stockholder for the principal amount of
$5,000,000, and has the option to sell to the Selling Stockholder 3,000
additional shares for the principal amount of $3,000,000 of Series C Preferred
Stock convertible into shares of Common Stock, was completed on February 4, 1998
(the "Closing Date").
This Prospectus also covers the offer and proposed sale by the Company of
up to (i) 800,000 shares of Common Stock issuable upon the exercise by the
holders thereof of warrants to purchase 800,000 shares at an exercise price of
$2.67 per share issued to the Selling Stockholder in connection with the Private
Placement Transaction; (ii) 150,000 shares of Common Stock issuable upon the
exercise by the holders thereof of warrants to purchase 150,000 shares at an
exercise price of $2.28 per share issued to the placement agent and its
assignees in connection with the Private Placement Transaction; and (iii)
171,052 shares of Common Stock issuable upon the exercise by the holders thereof
of warrants to purchase 171,052 shares at an exercise price of $1.38 per share
issued in connection with a private placement transaction in April 1997 (the
"1997 Private Placement Transaction"). All of these amounts may increase solely
to account for applicable anti-dilution adjustments, if any. (All of the
warrants set forth above are hereinafter separately and collectively referred to
as the "Warrants" and the shares of Common Stock issuable upon the exercise of
the Warrants are hereinafter separately and collectively referred to as the
"Warrant Shares.")
<PAGE>
In connection with this offering, the Selling Stockholder and certain
holders of the Warrants who may be deemed to be "affiliates" of the Company, as
that term is defined under the Securities Act of 1933, as amended (the "Act"),
may be deemed to be an "underwriter," as that term is defined under the Act, of
the Shares or Warrant Shares offered hereby. It is anticipated that the Selling
Stockholder and such affiliates intend to sell the Shares or Warrant Shares
offered hereby from time to time for their own respective accounts in the open
market at the prices prevailing therein or in individually negotiated
transactions at such prices as may be agreed upon. Each Selling Stockholder and
such affiliate will bear all expenses with respect to the offering of the Shares
or Warrant Shares offered hereby by him except the costs of legal counsel and
costs associated with registering such shares under the Act and preparing and
printing this Prospectus.
The net proceeds from Shares to be sold by the Selling Stockholder (and by
holders of Warrant Shares who exercise their Warrants) will inure entirely to
their benefit and not to that of the Company; however the Company will receive
proceeds from the exercise of the Warrants.
The Company's Common Stock is traded on the over-the-counter market and is
quoted on the Nasdaq SmallCap Market under the symbol "PARS" The closing price
of the Company's Common Stock on March 2, 1998 was $2.2188
<PAGE>
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS
DESCRIBED HEREIN (SEE "RISK FACTORS" AND "DILUTION").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _________________________
<PAGE>
The Company will furnish to each person to whom this Prospectus is
delivered, upon written request, a copy of any or all of the documents referred
to by reference, other than exhibits to such documents unless such exhibits are
specifically incorporated herein by reference. Requests should be addressed to:
Mr. Gad Riesenfeld, President and Chief Operating Officer, Pharmos Corporation,
33 Wood Avenue South, Suite 466, Iselin, New Jersey 08830.
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. ANY INFORMATION OR REPRESENTATION NOT HEREIN CONTAINED, IF GIVEN OR
MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN RESPECT OF THE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE OF THIS PROSPECTUS.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, 450
Fifth Street, Washington, D.C. 20549, a Registration Statement on Form S-3 under
the Securities Act of 1933 with respect to the securities offered hereby. This
Prospectus filed as part of such Registration Statement does not contain all the
information set forth in, or annexed as exhibits to, the Registration Statement.
For further information pertaining to the securities offered hereby and the
Company, reference is made to the Registration Statement and the exhibits
thereto. The Registration Statement and exhibits thereto may be inspected at the
Headquarters Office of the Securities and Exchange Commission located at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of the
Commission's regional offices at the following addresses: 7 World Trade Center,
Suite 1300, New York, New York 10048; Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Copies of this material also may be
obtained from the Public Reference Section of the SEC, at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. at prescribed rates. Electronic registration
statements made through the Electronic Data Gathering, Analysis and Retrieval
System are publicly available through the Commission's World Wide Web site at
http:\www.sec.gov. The statements contained in this Prospectus concerning the
contents of any contract or document referred to are not necessarily complete,
and in each instance, reference is made to such contract or document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by provisions of such exhibit to which reference is hereby made for a
full statement of the provisions thereof.
<PAGE>
THE COMPANY
The Company is engaged in the development of novel pharmaceuticals based on
innovative drug design technologies targeting diseases of the eye, principally
ocular inflammation, and the brain, principally stroke and head trauma.
Its leading products are (i) Lotemax(TM), a proprietary ophthalmic
anti-inflammatory drug that has demonstrated significant efficacy in a series of
completed Phase III clinical trials and a uniquely superior safety profile
compared to currently available ophthalmic steroids; and (ii) Alrex(TM), a
product with the same active ingredient as Lotemax(TM) , for the treatment of
seasonal allergic conjunctivitis. The Company has submitted its New Drug
Applications ("NDA's") for Lotemax(TM) and Alrex(TM) to the U.S. Food and Drug
Administration ("FDA").
The Company's principal executive offices are located at 33 Wood Avenue
South, Suite 466, Iselin, New Jersey 08830.
RISK FACTORS
The Common Stock being offered hereby involves a high degree of risk.
Prospective investors should carefully consider the following risk factors in
addition to other information contained in this Prospectus, in evaluating an
investment in the shares of Common Stock offered hereby.
Early Stage of Development; Technological Uncertainty
The Company is at an early stage of development. Apart from Lotemax(TM) and
Alrex(TM), most of the Company's other potential products are early in the
research and development phase, and product revenues may not be realized from
the sale of any such products for at least the next several years, if at all.
Many of the Company's proposed products will require significant additional
research and development efforts prior to any commercial use, including
extensive preclinical and clinical testing as well as lengthy regulatory
approval. There can be no assurance that the Company's research and development
efforts will be successful, that the Company's potential products will prove to
be safe and effective in clinical trials or that any commercially successful
products will ultimately be developed by the Company.
History of Operating Losses; Accumulated Deficit
The Company has experienced significant operating losses since its
inception. As of September 30, 1997, the Company had an accumulated deficit of
approximately $70,177,875 million. The Company expects to incur operating losses
over at least the next several years as the Company's research and development
efforts and preclinical and clinical testing activities continue. The Company's
ability to achieve profitability depends in part upon its ability, alone or with
others, to successfully commercialize and receive approval on its first proposed
product, to
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<PAGE>
complete development of its other proposed products, to obtain required
regulatory approvals and to manufacture and market such products.
Future Capital Needs; Uncertainty of Additional Financing
The Company's operations to date have consumed substantial amounts of cash.
The development of the Company's technology and potential products will require
a commitment of substantial funds to conduct the costly and time-consuming
research necessary to develop and optimize such technology, and ultimately, to
establish manufacturing and marketing capabilities. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in the research and development of the Company's technology and drug
programs, the ability of the Company to establish and maintain collaborative
arrangements with others for drug development, progress with preclinical and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, competing technological and market developments, changes in its
existing research relationships and effective product commercialization
activities and arrangements.
The Company believes that its current cash resources and interest income
thereon, including approximately $4.75 million in net cash and cash equivalents
received by the Company from the Private Placement Transaction, should be
sufficient to fund its operating expenses and capital requirements as currently
planned through the first quarter of 1999. The Company will seek additional
funding through collaborative arrangements or through future public or private
equity or debt financing. There can be no assurance that additional financing
will be available on acceptable terms, or at all. In addition, pursuant to the
Private Placement Transaction, the Company will not, except under certain
limited exceptions, issue or agree to issue any equity securities at a price
less than fair market value or any variably priced securities convertible into
or exercisable or exchangeable for equity or equity like securities of the
Company for a period of one hundred eighty (180) days following the Closing
Date. If additional funds are raised by issuing equity securities, further
dilution to stockholders may result. If adequate funds are not available, the
Company may be required to delay, reduce the scope of or eliminate one or more
of its research or development programs or to obtain funds through arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize itself.
Dependence on Potential Collaborative Partners
The Company's strategy for the development, clinical testing,
manufacturing, marketing and commercialization of certain of its products
includes entering into various collaborations with corporate partners,
licensors, licensees and others. To date, the Company has entered into
agreements with Bausch & Lomb to manufacture and market the Company's lead
products, Lotemax(TM) and Alrex(TM), in the United States and throughout Europe,
Canada and selected other countries. The agreements also cover the
co-development of LE-T, a combination of loteprednol etabonate and the
anti-infective tobromycn, that is currently being developed by the Company.
2
<PAGE>
There can be no assurance that the Company will be able to negotiate any future
collaborative agreement with Bausch & Lomb or other companies on acceptable
terms, or that any present or future collaborative agreements will be
successful. To the extent that the Company chooses not to or is not able to
establish such arrangements, the Company would experience increased capital
requirements to undertake such activities at its own expense. In addition, the
Company may encounter significant delays in introducing its proposed products
currently under development into certain markets or find that the development,
manufacture, or sale of its proposed products in such markets is adversely
affected by the absence of such collaborative agreements.
Technological Change and Competition
The pharmaceutical industry is subject to rapid, unpredictable and
significant technological change. Competition from universities, research
institutions and other pharmaceutical, chemical and biotechnology companies is
intense. Many competitors or potential competitors have greater financial
resources, research and development capabilities, and manufacturing and
marketing experience than the Company. To this end, the Company has entered into
agreements with Bausch & Lomb for the manufacture and marketing of Lotemax(TM)
and Alrex(TM). There can be no assurance that developments by the Company's
competitors or potential competitors will not render the Company's technology or
proposed applications of its technology obsolete.
Technologies Subject to Licenses
As a licensee of certain research technologies, the Company has various
license agreements with certain U.S. federal agencies and the State of Israel,
certain universities and Dr. Nicholas Bodor, a former vice president and
director of the Company, wherein the Company has acquired exclusive and
coexclusive rights to develop and commercialize certain research technologies.
The agreements generally require the Company to pay royalties on sale of
products developed from the licensed technologies and fees on revenues from
sublicensees, where applicable, and the Company is responsible for the costs of
filing and prosecuting patent applications. In addition, some of the Company's
license agreements require that the Company commit certain sums annually for
research and development of the licensed products.
The exclusivity of license agreements generally expires fifteen years after
the later of commercialization or the effectiveness of the patents. Each
agreement is terminable by either party, upon notice, if the other party
defaults in its obligations.
Uncertainty of Protection of Patents and Proprietary Rights
The Company's success will depend in large part on its ability to obtain
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others, both in the U.S. and in other countries. The
patent positions of pharmaceutical companies can be highly uncertain and involve
complex legal and factual questions, and therefore the breadth and
enforceability of claims allowed in pharmaceutical patents cannot be predicted.
There can be no assurance that any issued or pending patents will not be
challenged, invalidated or circumvented, or that the rights
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<PAGE>
granted thereunder will provide proprietary protection or competitive advantages
to the Company.
The commercial success of the Company also will depend, in part, on Pharmos
not infringing patents issued to others and not breaching the technology
licenses upon which any Company products are based. It is uncertain whether any
third-party patents will require the Company to alter its products or processes,
obtain licenses or cease certain activities. In addition, if patents are issued
to others which contain competitive or conflicting claims, and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses to these patents or to develop or obtain alternative technology. If any
licenses are required, there can be no assurance that the Company will be able
to obtain any such licenses on commercially favorable terms, if at all. The
Company's breach of an existing license or failure to obtain a license to any
technology that it may require to commercialize its products may have a material
adverse impact on the Company. Litigation, which could result in substantial
costs to the Company, may also be necessary to enforce any patents licensed or
issued to the Company or to determine the scope and validity of third-party
proprietary rights. If competitors of the Company prepare and file patent
applications in the U.S. that claim technology also claimed by the Company, 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 costs to the Company, even if the eventual outcome is
favorable to the Company. An adverse outcome could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology.
The Company also relies on secrecy to protect its technology, especially
where patent protection is not believed to be appropriate or obtainable. Thus,
Pharmos protects its proprietary technology and processes, in part, by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
Legal Proceedings and Disputes
There are currently no material legal proceedings pending against or
involving the Company.
Extensive Government Regulation
The Company's products require the approval of the FDA before they can be
marketed in the U.S. In addition, approvals are also required from health
authorities in most foreign countries before the Company's products can be
marketed in such countries. Before an NDA, a type of submission used to obtain
FDA approval to market a new drug, can be filed with the FDA, a product must
undergo, among other things, extensive animal testing and human clinical trials,
which can take up to seven years to complete. Except for Lotemax(TM) and
Alrex(TM), the Company has not yet filed NDAs on its products. The time required
for regulatory approval of the Company's products after acceptance for filing an
NDA can vary and is usually one to three years or more, and the FDA may require
additional animal studies and/or clinical trials before granting
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<PAGE>
approval. There can be no assurance that the FDA and foreign regulatory agencies
will be satisfied with the information, including that emanating from clinical
trials, submitted to them in applications (like NDAs) seeking approval and will
approve the marketing of any of the Company's potential products, or that
problems will not arise that could delay or prevent the commercialization of the
Company's future products.
There can be no assurance that any potential products developed by the
Company alone or in conjunction with others will be proven to be safe and
effective in clinical trials and will meet all of the applicable regulatory
requirements needed to receive marketing approval. Data obtained from
preclinical testing and clinical trials can be susceptible to varying
interpretations which could delay, limit or prevent regulatory approvals. In
addition, delays or disapprovals may be encountered based upon additional
government regulation resulting from future legislation or administrative action
or changes in FDA policy made during the period of product development and FDA
regulatory review. Similar delays may also be encountered in foreign countries.
There can be no assurance that even after such time and expenditures, regulatory
approval will be obtained for any potential products developed by the Company.
If regulatory approval of a product is granted, such approval will be limited to
those therapeutic uses for which the product has been demonstrated through
clinical studies and other means to be safe and effective. Furthermore, approval
may entail ongoing requirements for post-marketing studies. Even if regulatory
approval is obtained, a marketed product, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections. The
regulatory standards for manufacturing are currently being applied stringently
by the FDA. Discovery of previously unknown problems with a product,
manufacturer or facility may result in FDA restrictions being placed on such
product or manufacturer or facility, including an order to withdraw a specific
product from the market, and may also result in court enforced sanctions against
the product, manufacturer or facility.
The Company may establish collaborative relationships to conduct clinical
testing and seek regulatory approvals to market its products in major markets
outside the U.S. There can be no assurance that the Company will be successful
in establishing such relationships or that such approvals will be received in a
timely manner, if at all. To market its products abroad, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing the design and conduct of human clinical
trials, pricing and marketing. The approval procedure varies among countries and
can involve additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval. At present, foreign marketing
authorizations are applied for at a national level, although within the European
Union ("EU") certain registration procedures are available to companies wishing
to market a product in more than one EU member country. If a regulatory
authority is satisfied that adequate evidence of safety, quality and efficacy
has been presented, marketing authorization is almost always granted. The
foreign regulatory approval process includes all of the risks associated with
obtaining FDA approval set forth above. Approval by the FDA does not ensure
approval by other countries.
Lack of Sales and Marketing Capability
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<PAGE>
The Company has no experience in sales, marketing or distribution. To
market any of its products directly, the Company must develop a marketing force
and sales force with technical expertise and with supporting distribution
capability. Alternatively, the Company may obtain the assistance of a
pharmaceutical company with an established distribution system and sales force.
The Company has entered into agreements with Bausch & Lomb to market Lotemax(TM)
Alrex(TM). There can be no assurance, however, that the Company will be able to
establish sales and distribution capabilities or be successful in gaining market
acceptance for its products.
Lack of Manufacturing Capability
The Company currently does not have manufacturing facilities to produce its
products for clinical trials. The Company's agreements with Bausch & Lomb
provide for the manufacturing of Lotemax(TM) and Alrex(TM). The proposed
products under development by the Company have never been manufactured on a
commercial scale and there can be no assurances that such products can be
manufactured at a cost or in quantities necessary to make them commercially
viable. Any delay in availability of products may result in delay in the
submission of products for regulatory approval or the market introduction and
subsequent sales of such products, which would have a material adverse effect on
the Company.
Need to Attract and Retain Key Employees and Consultants
The Company is highly dependent on the principal members of its scientific
and management staff. In addition, the Company relies on consultants and
advisors to assist the Company in formulating its research and development
strategy. Retaining and attracting qualified personnel, consultants and advisors
will be critical to the Company's success. In order to pursue its product
development and marketing plans, the Company will be required to hire additional
qualified scientific personnel to perform research and development, as well as
personnel with expertise in clinical testing, government regulation,
manufacturing and marketing. The Company faces competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms
or at all.
The Company's clinical development is conducted under agreements with
universities and medical institutions. The Company depends on the availability
of a principal investigator for each such program, and the Company cannot assure
that these individuals or their research staffs will be available to conduct
clinical development. The Company's academic collaborators are not employees of
the Company. As a result, the Company has limited control over their activities
and can expect that only limited amounts of their time will be dedicated to
Company activities. The Company's academic collaborators may have relationships
with other commercial entities, some of which compete with the Company.
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Uncertainty of Health Care Reform Measures and Third-Party Reimbursement
The levels of revenues and profitability of biotechnology and
pharmaceutical companies may be affected by the continuing efforts of
governmental and third-party payors to contain or reduce the costs of health
care through various means. For example, in certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the U.S., there have been, and the Company expects that there will continue
to be, a number of federal and state proposals to control health care costs.
While 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 proposed products.
Dependence on Reimbursement
Pharmos' 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 Pharmos to maintain price levels sufficient
to realize an appropriate return on its investment in product development.
Risk of Product Liability; Availability of Insurance
The design, development and manufacture of the Company's products involve
an inherent risk of product liability claims and associated adverse publicity.
Although the Company currently maintains general liability insurance, there can
be no assurance that the coverage limits of the Company's insurance policies
will be adequate. Similarly, the Company currently maintains clinical trial
liability insurance, but there can be no assurance that the coverage limit of
the Company's insurance policies will be adequate. The Company currently has no
product liability insurance, and there can be no assurance that the Company will
be able to obtain or maintain product liability insurance on acceptable terms or
with adequate coverage against potential liabilities. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms or at all. A successful claim brought against the Company in
excess of the Company's insurance coverage could have a material adverse effect
upon the Company and its financial condition.
Use of Hazardous Materials; Potential Liability to Comply with Environmental
Laws
The Company's research and development involves the controlled use of
hazardous materials. Although the Company believes that its safety procedures
for handling and disposing
7
<PAGE>
of such materials comply in all material respects with the standard prescribed
by state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result, and any
such liability could exceed the resources of the Company. The Company may incur
substantial costs to comply with environmental regulations if the Company
develops manufacturing capacity.
Market for the Company's Securities; Shares Eligible for Future Sale; Possible
Volatility of Share Prices
The market price of the Company's Common Stock, like that of other emerging
pharmaceutical companies, has fluctuated significantly in recent years and is
likely to fluctuate in the future. Announcements by the Company or others
regarding scientific discoveries, technological innovations, litigation,
products, patents or proprietary rights, the progress of clinical trials,
government regulation, public concern as to the safety of drugs and the
reliability of the Company's testing processes and general market conditions may
have a significant impact on the market price of the Common Stock. The addition
of the shares being offered hereby and the shares issuable upon exercise of the
Company's currently outstanding warrants and options to the number of
publicly-traded shares of the Company's Common Stock may affect the volatility
of share prices of the Company's Common Stock.
Outstanding Stock Options and Warrants
As of September 30, 1997, the Company had outstanding incentive stock
options to purchase an aggregate of 438,419 shares of Common Stock at an average
exercise price of $2.21 per share and non-qualified stock options to purchase an
aggregate of 407,182 at an average exercise price of $2.42 per share issued to
employees, directors and consultants pursuant to stock option plans and
individual agreements with management and directors of the Company and warrants
to purchase 4,629,129 shares of the Company's Common Stock at an average price
of $1.92 per share.
The Company may issue additional capital stock, warrants and/or options to
raise capital in the future. The Company regularly examines opportunities to
expand its technology base and product line through means such as licenses,
joint ventures and acquisition of assets or ongoing businesses and may issue
securities in connection with such transactions. However, no commitments to
enter into or pursue any such transaction have been made and there can be no
assurance that any such discussions will result in any such transaction being
concluded. In order to attract and retain key personnel, the Company may also
issue additional securities, including stock options, in connection with its
employee benefit plans. During the terms of such options and warrants, the
holders thereof are given the opportunity to profit from a rise in the market
price of the Company's Common Stock. The exercise of such options and warrants
may have an adverse effect on the market value of the Company's Common Stock.
Also, the existence of such options and warrants may adversely affect the terms
on which the Company can obtain additional equity financing.
8
<PAGE>
Anti-Takeover Provisions
The Company is subject to Sections 78.411-.444 of the Nevada General
Corporation Law ("Nevada Law"), an anti-takeover law, which may discourage
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the stockholders might otherwise
receive a premium for their shares over the current prices, and may limit the
ability of the stockholders to approve a transaction that they may deem to be in
their best interests. In addition, the Board of Directors has the authority
without action by the stockholders to fix the rights and preferences of and
issue shares of Preferred Stock, which may have the effect of delaying or
preventing a change in control of the Company.
Potential Future Acquisitions
Due to the current uncertainties of the capital markets for emerging
pharmaceutical companies, the Company has had preliminary discussions with
several emerging pharmaceutical and biotechnology companies about potential
business and/or product consolidations, joint ventures, acquisitions, mergers or
other business combinations (collectively "acquisitions"). In the event the
Company undertakes any such acquisitions it may use some of its cash, including
part of the cash received in connection with the Private Placement Transaction,
or may issue its stock in connection therewith. Although management would
attempt to structure such acquisitions in a manner that will minimize dilution
of the equity owned by current stockholders, no assurance can be given that
acquisitions will not result in such dilution or that control of the Company
will not be changed as a result of such acquisitions. Such acquisitions may be
negotiated or may be sought on an unsolicited basis and may involve speculative
and risky undertakings by the Company with increased risks to its stockholders.
Under Nevada law, acquisitions do not require shareholders' approval except when
accomplished by merger or consolidation. The Company does not, in general,
intend to submit acquisitions to shareholder vote except where required by
Nevada law. The Company has not entered into any preliminary undertaking with
any third parties involving any acquisitions or other business combination
transactions.
Special Considerations of Doing Business in Israel
A significant part of the operations of the Company is conducted in Israel
through its wholly-owned subsidiary, Pharmos Limited ("Pharmos Ltd."), and is
directly affected by economic, political and military conditions there. In
addition, Pharmos Ltd. has received certain funding from the Office of the Chief
Scientist of the Israel Ministry of Industry and Trade (the "Chief Scientist")
relating to its proprietary SubMicron Emulsion Technology and to Dexanabinol, a
new chemical entity. 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.
Absence of Dividends
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No dividends have been paid on the Common Stock to date, and the Company
does not expect to pay cash dividends in the foreseeable future.
DILUTION
As of September 30, 1997, the net tangible book value of the Company was
$1,032,955 or $0.03 per share. Net tangible book value per share is determined
by dividing the net tangible book value (tangible assets less liabilities) of
the Company by the number of shares of Common Stock outstanding at that date.
If all of the 800,000 Warrants exercisable at an exercise price of $2.67
per share are exercised, (each of the Warrants purchasing one share of Common
Stock), there would be 34,763,613 shares of Common Stock outstanding with a net
tangible book value of $0.09 and the purchasers of shares through the exercise
of such Warrants at such prices would suffer immediate dilution to $2.58 per
share.
If all of the 150,000 Warrants exercisable at an exercise price of $2.28 per
share are exercised, (each of the Warrants purchasing one share of Common
Stock), there would be 34,113,613 shares of Common Stock outstanding with a net
tangible book value of $0.04 and the purchasers of shares through the exercise
of such Warrants at such prices would suffer immediate dilution to $2.24 per
share.
If all of the 171,052 Warrants exercisable at an exercise price of $1.38 per
share are exercised, (each of the Warrants purchasing one share of Common
Stock), there would be 34,134,665 shares of Common Stock outstanding with a net
tangible book value of $0.04 and the purchasers of shares through the exercise
of such Warrants at such prices would suffer immediate dilution to $1.34 per
share.
If all of the Warrants are exercised, (each of the Warrants purchasing one share
of Common Stock), there would be 35,084,665 shares of Common Stock outstanding
with a net tangible book value of $0.11. The purchasers of shares through the
exercise of such Warrants at a price of $2.67 per share would suffer immediate
dilution to $2.56 per share; the purchasers of shares through the exercise of
such Warrants at a price of $2.28 per share would suffer immediate dilution to
$2.17 per share; and the purchasers of shares through the exercise of such
Warrants at a price of $1.38 per share would suffer immediate dilution to $1.27
per share.
USE OF PROCEEDS
The Company will receive no proceeds from the 9,050,000 shares of Common
Stock to be offered and resold by the Selling Stockholder.
If all 1,112,052 Warrants whose underlying Common Stock is being offered
hereby are exercised, the gross proceeds to be received by the Company will be
$2,714,052 (assuming that the cashless exercise option is not used for the
800,000 Warrants exercisable at an exercise price of $2.67 and the 150,000
Warrants exercisable at an exercise price of $2.28).
10
<PAGE>
The Company believes that its current cash resources and interest income
thereon, including the funds obtained from the Private Placement Transaction,
should be sufficient to fund its operating expenses and capital requirements as
currently planned through the first quarter of 1999. The amounts and timing of
expenditures for each purpose will depend on the progress of the Company's
research and development programs, technological advances, determinations as to
commercial potential, the terms of any collaborative arrangements entered into
by the Company for development and licensing, regulatory approvals, and other
factors, many of which are beyond the Company's control. Pending such uses, the
cash received in connection with the Private Placement Transaction will be
invested in short-term, interest-bearing investment grade securities and
commercial paper.
DESCRIPTION OF SECURITIES
Common Stock
The Common Stock being offered hereby (i) by the Selling Stockholder, (ii)
by the Company upon the exercise of the Warrants, and (iii) by any "affiliate"
of the Company upon the resale of such Common Stock obtained from exercising the
Warrants is fully described in the Company's Registration Statement on Form 8-A
dated January 30, 1984, filed pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). See "Incorporation of Certain
Documents by Reference".
The Company's Restated Articles of Incorporation currently authorize the
issuance of up to 60,000,000 shares of Common Stock. As of March 2, 1998, there
are currently 36,193,652 shares outstanding.
Preferred Stock
The Company's Restated Articles of Incorporation currently authorize the
issuance of up to 1,250,000 shares of Preferred Stock. Of the authorized
Preferred Stock, no shares, designated as Series A or Series B Preferred Stock,
are currently outstanding. In addition 5,000 shares, designated as Series C
Preferred Stock, are currently issued and outstanding and held by the Selling
Stockholder. There are an additional 3,000 shares, designated as Series C
Preferred Stock which may be issued at the discretion of the Company to the
current Selling Stockholder. The Series C Preferred Stock was issued in
connection with the February 1998 Private Placement Transaction (the "Private
Placement Transaction"). Holders of Series C Preferred Stock have the right to
convert their shares as follows: at 90% of the average of the lowest sale price
of the Common Stock for the five consecutive trading days ending on the trading
day immediately preceding the Conversion for the first 6 months after closing;
thereafter, the conversion price will equal the lower of (i) 90% of the then
prevailing market prices, as determined above, or (ii) 120% of the average
closing bid prices for days 151-180 following the closing. For a complete
description of the rights of holders of Series C Preferred Stock, see the
Company's Current Report on Form 8-K, including the exhibits thereto, dated
February 4, 1998.
Warrants
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The 800,000 Warrants exercisable at an exercise price of $2.67 are
exercisable commencing February 4, 1999 and expire on February 4, 2003; the
150,000 Warrants exercisable at an exercise price of $2.28 are exercisable
commencing February 4, 1999 and expire on February 4, 2003; and the 171,052
Warrants exercisable at an exercise price of $1.38 are exercisable commencing on
March 31, 1998 and expire on March 31, 2008. All of the Warrants contain
anti-dilution provisions providing for an adjustment to their respective
exercise prices in the event that the Company effects a stock split or stock
dividend. In addition, the number and kind of shares of Common Stock underlying
the Warrants are subject to adjustments in the event of any capital
reorganization, or reclassification of the capital stock of the Company, or
consolidation or merger of the Company with another corporation or entity (other
than a subsidiary of the Company in which the Company is the surviving or
continuing corporation and no change occurs in the Company's Common Stock).
Other Securities--Preferred Stock
The Company's Restated Articles of Incorporation currently authorize the
issuance of up to 1,250,000 shares of Preferred Stock, of which no shares of
Series A or Series B Preferred Stock are currently outstanding, and 5,000 shares
of Series C Preferred Stock issued in connection with the Private Placement
Transaction are currently issued and outstanding as of March 2, 1998, and
empower the Board of Directors, without the necessity of further action or
authorization by the stockholders, to authorize the issuance of Preferred Stock
from time to time in one or more series and to fix the relative rights,
preferences and limitations of each such series. The issuance of Preferred Stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
additional shares of Preferred Stock.
Other Securities--Options and Warrants
As of September 30, 1997, the Company had outstanding incentive stock
options to purchase an aggregate of 438,419 shares of Common Stock at an average
exercise price of $2.21 per share and non-qualified stock options to purchase an
aggregate of 407,182 at an average exercise price of $2.42 per share issued to
employees, directors and consultants pursuant to stock option plans and
individual agreements with management and directors of the Company and warrants
(excluding the Warrants) to purchase 4,629,129 shares of the Company's Common
Stock at an average price of $1.92 per share, consisting of: 266,835 warrants
which can be exercised until March 1998 each to purchase a single share of
Common Stock for $2.03; 309,741 warrants which can be exercised until March 1998
each to purchase a single share of Common Stock for $2.53; 361,844 warrants
which can be exercised until March 1998 each to purchase a single share of
Common Stock for $1.52; 450,744 warrants which can be exercised until August
1998 each to purchase a single share of Common Stock for $2.69; 65,044 warrants
which can be exercised until September 1999 each to purchase a single share of
Common Stock for $2.26; 200,000 warrants which can be exercised until October
1999 each to purchase a single share of Common Stock for $0.84; 500,000 warrants
which can be exercised until April 2005 each to purchase a single share of
Common Stock for $2.75; 10,000 Warrants which can be exercised until April 2005
each to
12
<PAGE>
purchase a single share of Common Stock for $0.78; 15,000 warrants which can be
exercised until April 2000 each to purchase a single share of Common Stock for
$.75; 25,000 Warrants which can be exercised until April 2000 each to purchase a
single share of Common Stock for $1.00; 25,000 warrants which can be exercised
until April 2000 each to purchase a single share of Common Stock for $1.50;
862,500 warrants which can be exercised until September 2000 each to purchase a
single share of Common Stock for $1.80; 10,000 warrants which can be exercised
until October 2001 each to purchase a single share of Common Stock for $1.88;
15,000 warrants which can be exercised until March 2002 each to purchase a
single share of Common Stock for $2.31; 65,000 warrants which can be exercised
until September 2007 each to purchase a single share of Common Stock for $1.34;
50,000 warrants which can be exercised until September 2007 each to purchase a
single share of Common Stock for $1.75; 159,000 warrants which can be exercised
until March 2001 each to purchase a single share of Common Stock for
$1.75;10,000 warrants which can be exercised from November 1997 until November
2002 each to purchase a single share of Common Stock for $1.39; 115,000 warrants
which can be exercised until February 2003 each to purchase a single share of
Common Stock for $1.59; 955,000 warrants which can be exercised until February
2007 each to purchase a single share of Common Stock for $1.59; 75,000 warrants
which can be exercised until March 2007 each to purchase a single share of
Common Stock for $1.66; 68,421 warrants which can be exercised until March 2008
each to purchase a single share of Common Stock for $1.38; and 15,000 warrants
which can be exercised until April 2003 each to purchase a single share of
Common Stock for $1.22.
Nevada Anti-Takeover Laws
The Company is subject to the provisions of Sections 78.411 through 78.444
of the Nevada Law, an anti-takeover statute (the "Business Combination
Statute"). In general, the Business Combination Statute prohibits a
publicly-held Nevada corporation from engaging in a "combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless such
combination is approved in a prescribed manner or satisfies certain fair value
requirements. For the purposes of the Business Combination Statute,
"combination" includes a merger, an asset sale, the issuance or transfer by the
corporation of its shares in one transaction or a series of transactions, having
an aggregate fair market value equal to five percent or more of the aggregate
market value of the corporation's outstanding shares, to the interested
stockholder or to an associate of the interested stockholder, and certain other
types of transactions resulting in a financial benefit the interested
stockholder. An "interested stockholder" is a person who is the beneficial
owner, directly or indirectly, of ten percent or more of the corporation's
voting stock or an affiliate or associate of the corporation that at any time
within the three years immediately preceding the date in question was the
beneficial owner, directly or indirectly, of ten percent or more of the
corporation's voting stock.
By an amendment to its By-laws, the Company has exempted itself from the
provisions of Sections 78.378 through 78.3793 of the Nevada Law, a "control
share" statute which otherwise prohibits an acquiring person, under certain
circumstances, from voting certain shares of a target corporation's stock after
such acquiring person's percentage of ownership of such corporation's
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<PAGE>
stock crosses certain thresholds, unless the target corporation's disinterested
stockholders approve the granting of voting rights to such shares.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer and Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Shares offered hereby by the Selling Stockholder are 9,050,000 shares
of Common Stock issuable upon conversion of 8,000 shares ($8,000,000 principal
amount) Series C Preferred Stock issued to the holders thereof by the Company in
connection with the Private Placement Transaction (of the 8,000 share only 5,000
are currently issued and the Company may, at it's option, issue the remaining
3,000 to the Selling Stockholder). This prospectus also covers the issuance by
the Company of up to 950,000 shares of Common Stock upon the exercise of the
Warrants, which were issued in connection with the Private Placement
Transaction, and 171,052 shares of Common Stock upon the exercise of Warrants
which were issued in connection with the 1997 Private Placement Transaction.
The Company will receive no proceeds from this offering (other than from
the exercise of the Warrants). The Shares offered hereby may be sold by the
Selling Stockholder or by pledgees, donees, transferees or other successors in
interest that receive such shares as a gift, partnership distribution or other
non-sale related transfer. The Shares may be sold from time to time in
transactions in the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices. The Selling Stockholder may effect such
transactions by selling the Shares to or through broker-dealers, including block
trades in which brokers or dealers will attempt to sell the Shares as agent but
may position and resell the block as principal to facilitate the transaction, or
in one or more underwritten offerings on a firm commitment or best effort basis.
Sales of Selling Stockholder's Shares may also be made pursuant to Rule 144
under the Securities Act, where applicable.
To the extent required under the Securities Act, the aggregate amount of
Selling Stockholder's Shares being offered and the terms of the offering, the
names of any such agents, brokers, dealers or underwriters and any applicable
commission with respect to a particular offer will be set forth in an
accompanying Prospectus supplement. Any underwriters, dealers, brokers or agents
participating in the distribution of the Shares may receive compensation in the
form of underwriting discounts, concessions, commissions or fees from the
Selling Stockholder and/or purchasers of Selling Stockholder's Shares, for whom
they may act (which compensation as to a particular broker-dealer might be in
excess of customary commissions).
From time to time, the Selling Stockholder may pledge, hypothecate or grant
a security interest in some or all of the Shares, and the pledgees, secured
parties or persons to whom such
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<PAGE>
securities have been hypothecated shall, upon foreclosure in the event of
default, be deemed to be Selling Stockholder hereunder. In addition, the Selling
Stockholder may, from time to time, sell short the Shares of the Company, and in
such instances, this Prospectus may be delivered in connection with such short
sales and the Shares offered hereby may be used to cover such short sales.
The Selling Stockholder may transfer, pledge, donate or assign it's Shares
to lenders or others and each of such persons will be deemed to be a "Selling
Stockholder" for purposes of the Prospectus. The number of the Selling
Stockholder's Shares beneficially owned by a Selling Stockholder who transfers,
pledges, donates or assigns Shares will decrease as and when they take such
actions, The plan of distribution for Selling Stockholders' Shares sold
hereunder will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be a Selling Stockholder hereunder.
A Selling Stockholder may enter into hedging transactions with
broker-dealers, and the broker-dealers may engage in short sales of the Shares
in the course of hedging the positions they assume with such Selling
Stockholder, including, without limitation , in connection with distribution of
the Shares by such broker-dealers. The Selling Stockholder may also enter into
option or other transactions with broker-dealers that involve the delivery of
the Shares to the broker-dealers, who may then resell or otherwise transfer such
Shares. The Selling Stockholder may also loan or pledge the Shares to a
broker-dealer and the broker-dealer may sell the Shares as loaned or upon a
default may sell or otherwise transfer the pledge Shares.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available.
The Selling Stockholder and any broker-dealers or agents that participates
with the Selling Stockholder in the distribution of the Shares may be deemed to
be "underwriter" within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of the Shares purchased by them
may be deemed to be underwriting commissions under the Securities Act.
The Company has agreed to pay certain costs and expenses incurred in
connection with the registration of the shares of Common Stock offered hereby,
except that the Selling Stockholder shall be responsible for all selling
commissions, transfer taxes and related charges in connection with the offer and
sale of such shares.
The Company has agreed to keep the Registration Statement of which this
Prospectus forms a part continuously effective until the earlier of the date
that all of such Shares have been sold or three years from the date of this
Prospectus.
SELLING SECURITY HOLDER
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<PAGE>
The table below sets forth the name of the Selling Stockholder; the total
amount of (i) shares of Common Stock beneficially owned by such security holder
as of March 2, 1998; (ii) Warrant Shares issuable upon the exercise of the
Warrants beneficially owned by such security holder; (iii) the aggregate amount
of Common Stock and/or Warrant Shares which may be offered for sale for the
account of such security holder in his/her discretion from time to time pursuant
to this Prospectus; and (iv) the amount and percentage of Common Stock which
would be beneficially owned by such security holder after sale of all securities
offered by the Selling Stockholder pursuant to this Prospectus, if they are
offered and sold, and assuming that any other shares held by such security
holders are not sold. The information included below is based upon information
provided by the Selling Stockholder. The Selling Stockholder referred to herein
has not held any position or office, or had any material relationship, with the
Company or any of its predecessors or affiliates within the last three years,
except as noted below, and the Selling Stockholder will not own 1% or more of
the outstanding stock of the Company after completion of the offering, except as
noted below.
For the purposes of calculating the number of shares of Common Stock
beneficially owned by the Selling Stockholder, the number of shares of Common
Stock calculated to be issuable in connection with the conversion of the Series
C Preferred Stock is based on a conversion price of $1.9688, which is derived
from 90% of the lowest trading price of the Common Stock as of March 2, 1998.
The calculation of the total number of shares of Common Stock to be offered
hereby, however, is based on a hypothetical market price of the Common Stock at
the time of such conversion of $0.98 per share (approximate conversion price of
$0.88), which price is below the lowest trading price of the Common Stock as of
March 2, 1998 (which was $2.1875). The use of such hypothetical price is not
intended, and should in no way be construed, to constitute a prediction as to
the future market price of the Common Stock.
Because the initial issuance by the Company of the Warrant Shares to
non-affiliated holders is covered by the Registration Statement of which this
Prospectus forms a part and the resale thereof by such non-affiliated holders
need not be registered under the Securities Act, the table below does not list
the warrants held by the non-affiliated Selling Stockholder.
<TABLE>
<CAPTION>
============================================================================================================================
Amount of Shares of Shares and Percentage of
Shares of Warrant Shares Common Stock Shares Owned After
Names Common Stock Issuable upon and/or Warrant Completion of Offering
(and position or office held in Beneficially Exercise of Shares ---------------------------------
the Company) Owned (1) Warrants (2) Offered(3) Shares Percentage
============================================================================================================================
<S> <C> <C> <C> <C> <C>
CC Investments, LDC 9,050,000 800,000 9,850,000 0 0
</TABLE>
- --------------------
* Indicates ownership of less than 1%
(1) Does not include the Warrants.
(2) Consists of 500,000 Warrants shares issuable upon the exercise of Warrants
currently held by the Selling Stockholder and 300,000 Warrant shares
issuable to the Selling Stockholder at the option of the Company.
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<PAGE>
(3) Consists of shares of Common Stock issuable upon conversion of 5,000 shares
of Series C Preferred Stock currently held by the Selling Stockholder and
3,000 shares which may be issued to the Selling Stockholder at the option
of the Company, assuming a conversion price of $0.88. Does not include the
Warrant Shares because the initial issuance by the Company of the Warrant
Shares to non-affiliated holders is covered by the Registration Statement
of which this Prospectus forms a part and the resale thereof by such
non-affiliated holders need not be registered under the Securities Act.
Except under certain limited circumstances, the Selling Stockholder of the
Series C Preferred Stock is not entitled to convert such securities to the
extent that the Shares to be received upon such conversion or exercise
would cause such holder to beneficially own more that 4.9% of the Common
Stock of the Company. Therefore, the number of shares set forth herein and
which the Selling Stockholder may sell pursuant to the Prospectus may
exceed the number of shares of Common Stock the Selling Stockholder would
otherwise beneficially own as determined pursuant to Section 13(d) of the
Exchange Act. Moreover, pursuant to the regulations of the National
Association of Securities Dealers, in the absence of shareholder approval,
the aggregate number of shares of Common Stock issuable to the Selling
Stockholder at a discount from market price upon conversion of the
Preferred Stock may not exceed 19.99% of the outstanding shares of Common
Stock . Unless shareholder approval is obtained to issue Common Stock to
the Selling Stockholder in excess of the maximum amount set forth above,
the Selling Stockholder will not be entitled to acquire more than its
proportionate share of such maximum amount. Any Preferred Stock which may
not be converted because of such limitation must be redeemed by the
Company.
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RECENT DEVELOPMENTS
On January 1, 1998, Robert Cook was appointed to the position of Vice
President- Finance and Chief Financial Officer. Prior to joining Pharmos, Mr.
Cook was Vice President in the Healthcare Group of General Electric Capital
Corporation's Commercial Finance unit, working with pharmaceutical companies as
well as middle-market and emerging companies. Prior to working at General
Electric, Mr. Cook was at Chase Manhattan Bank for 18 years.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K, for the fiscal year ended
December 31, 1996, filed pursuant to Section 13 of the Exchange Act.
(b) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A dated January 30, 1984, filed pursuant to
Section 12 of the Exchange Act.
(c) The Company's Quarterly Reports on Form 10Q, for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997.
(d) The Company's Current Report on Form 8-K, including the exhibits
thereto, dated September 16, 1997.
(e) The Company's Current Report on Form 8-K, including the exhibits
thereto, dated February 4, 1998.
In addition, all reports and other documents to be filed by the Company
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to
the filing of a post-effective amendment which indicates that all securities
offered hereby have been sold or which deregisters all securities offered hereby
then remaining unsold, as well as all such reports filed after the date hereof
and prior to the termination of this offering, shall be deemed to be
incorporated by reference herein and shall be deemed to be a part hereof from
the date of the filing of each such report or document.
COMMISSION'S POLICY ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Article 12 of the Company's Restated Articles of Incorporation directs the
Company to provide in its bylaws for provisions relating to the indemnification
of directors and officers to the full extent permitted by law, including the
federal securities law. Section 78.751 of the Nevada Revised Statutes, as
amended, authorizes the Company to indemnify any director or officer under
certain prescribed circumstances and subject to certain limitations against
certain costs and
18
<PAGE>
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. The Company may also purchase and maintain insurance for
the benefit of any director or officer which may cover claims for which the
Company could not indemnify such person.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Company, or to
underwriters (or controlling persons thereof) of which an officer, partner, or
controlling person thereof is one of the foregoing pursuant to the foregoing
provisions or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by any such persons, in the successful
defense of any action, suit or proceeding) is asserted by any such persons in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
LEGAL OPINIONS
Legal matters in connection with the securities being offered hereby will
be passed upon for the Company by Ehrenreich Eilenberg Krause & Zivian LLP, 11
East 44th Street, 17th Floor, New York, NY 10017.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K for the year ended December 31, 1996, have been
so incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
19
<PAGE>
PHARMOS CORPORATION
March __, 1998
INDEX
Page No.
THE COMPANY ............................................................... 1
RISK FACTORS .............................................................. 1
DILUTION .................................................................. 10
USE OF PROCEEDS ........................................................... 10
DESCRIPTION OF SECURITIES ................................................. 11
PLAN OF DISTRIBUTION ...................................................... 14
SELLING SECURITY HOLDER ................................................... 16
RECENT DEVELOPMENTS ....................................................... 18
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ........................... 18
COMMISSION'S POLICY ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES ............................................ 18
LEGAL OPINIONS ............................................................ 19
EXPERTS ................................................................... 19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following statement sets forth the estimated expenses in connection
with the offering described in the Registration Statement, assuming all of the
Warrants are exercised at their respective exercise price (all of which will be
borne by the Registrant).
Securities and Exchange Commission Fee $ 6,728
Printing and Engraving Expenses 100
Accountants' Fees and Expenses 3,000
Legal Fees and Expenses 60,000
Blue Sky Filing Fees 1,500
Miscellaneous 672
-------
TOTAL $72,000
=======
Item 15. Indemnification of Directors and Officers.
Article 12 of the Registrant's Certificate of Incorporation directs the
Registrant to provide in its bylaws for provisions relating to the
indemnification of directors and officers to the full extent permitted by law.
Section 78.751 of the Nevada Revised Statutes, as amended, authorizes the
Registrant to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Registrant if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions.
The Registrant may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Registrant could
not indemnify such person.
Item 16. Exhibits
- -------- --------
4(a) Specimen of Common Stock Certificate (incorporated by reference
to Form S-3 Registration Statement of the Company dated November
25, 1994 [No. 33-86720])
4(b) Restated Articles of Incorporation (incorporated by reference to
Appendix E to the Joint Proxy Statement/ Prospectus included in
the
II-1
<PAGE>
Form S-4 Registration Statement of the Registrant dated September
28, 1992 [No. 33-52398])
4(c) Certificate of Amendment of Restated Articles of Incorporation
(incorporated by reference to the Company's Annual Report on Form
10- K for the year ended December 31, 1994 [No. 0-11550])
*4(d) Certificate of Amendment of Restated Articles of Incorporation
dated January 16, 1998
4(e) 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 [No. 333-15165])
4(f) Certificate of Designation, Rights, Preferences and Privileges of
Series B Preferred Stock of the Company (incorporated by
reference to Form S-3 Registration Statement of the Company dated
April 30, 1997 [No. 333- 26155
4 (g) Certificate of Designation, Rights, Preferences and
Privileges of Series C Convertible Preferred Stock of the Company
(incorporated by reference to the Company's Current Report on
Form 8-K filed on February 6, 1998)
4(h) 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(i) Form Stock Securities Purchase Agreement dated as of February 4,
1998 between the Company and the Investor (incorporated by
reference to the Company's Current Report on Form 8-K filed on
February 6, 1998)
4(j) Form of Stock Purchase Warrant dated as of February 4, 1998
between the Company and the Investor and the Company and the
Placement Agent (incorporated by reference to the Company's
Current Report on Form 8- K filed on February 6, 1998)
*4(k) Form of Stock Purchase Warrant dated as of March 31, 1997 between
the Company and the Investor
*5 Opinion re: legality
II-2
<PAGE>
23(a) Consent of Ehrenreich Eilenberg Krause & Zivian LLP (included in
the Opinion filed as Exhibit 5)
*23(b) Consent of Price Waterhouse LLP
- ---------------
* Filed herewith.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes;
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that Paragraphs (i) and (ii) above do not apply if the
Registration Statement is on Form S-3 and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual
II-3
<PAGE>
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Iselin and State of New Jersey on the 5th day of
March, 1998.
PHARMOS CORPORATION
By:/s/ Dr. Haim Aviv
------------------------------------
Dr. Haim Aviv, Chairman, Chief
Scientist, Chief Executive Officer
and Director (Principal Executive
Officer)
Pursuant to the requirements of the Securities Act of 1933, this registration
statement or amendment has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Robert Cook Chief Financial Officer March 5, 1998
- ---------------------------- (Principal Financial and
Robert Cook Accounting Officer)
/s/ Dr. Gad Riesenfeld March 5, 1998
- ---------------------------- President, Chief Operating
Dr. Gad Riesenfeld Officer and Acting Secretary
/s/ Marvin P. Loeb Director March 5, 1998
- ----------------------------
Marvin P. Loeb
/s/ E. Andrews Grinstead III Director March 5, 1998
- ----------------------------
E. Andrews Grinstead III
/s/ Stephen C. Knight Director March 5, 1998
- ----------------------------
Stephen C. Knight
/s/ David Schlachet Director March 5, 1998
- ----------------------------
David Schlachet
/s/ Fredric D. Price Director March 5, 1998
- ----------------------------
Fredric D. Price
/s/ Mony Ben Dor Director March 5, 1998
- ----------------------------
Mony Ben Dor
II-5
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
PHARMOS CORPORATION
a Nevada Corporation
The undersigned hereby certify as follows:
1. That, respectively, they are the President and Secretary of Pharmos
Corporation, a Nevada Corporation (the "Corporation");
2. That the original Articles of Incorporation of the Corporation were
filed in the Office of the Secretary of State of the State of Nevada on the 20th
day of December, 1982;
3. That the Restated Articles of Incorporation of the Corporation were
filed in the Office of the Secretary of State of the State of Nevada on the 29th
day of October, 1992;
4. That a Certificate of Amendment of Restated Articles of Incorporation
was filed on January 30, 1995;
5. That capital has been paid to the Corporation, and stock of the
Corporation has been issued;
6. That at a meeting of the Corporation's Board of Directors (the "Board")
held on November 25, 1997, the Board unanimously consented to and approved an
amendment to Article FOURTH of the Corporation's Restated Articles of
Incorporation to increase the Corporation's authorized capital stock to 60
million shares of Common Stock (the "Amendment");
7. That at a meeting of the Corporation's stockholders held on January 9,
1998, the Corporation's stockholders voted for the Amendment, and that,
therefore, Article FOURTH of the Corporation's Restated Articles of
Incorporation is amended to read as follows:
"FOURTH. The total number of shares of stock which the corporation
shall have authority to issue is sixty one million two hundred fifty
thousand (61,250,000), of which stock sixty million (60,000,000) shares of
the par value of Three Cents ($0.03) each, amounting in the aggregate to
One Million Eight Hundred Thousand Dollars ($1,800,000), shall be Common
Stock, and of which one million two hundred fifty thousand (1,250,000)
shares of the par value of Three Cents ($0.03) each, amounting in the
aggregate to Thirty Seven Thousand Five Hundred Dollars ($37,500), shall be
Preferred Stock.
The Board of Directors shall have the authority to fix by Resolution the
voting powers (full, limited, multiple, fractional or none), designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights and other special or
<PAGE>
relative rights of the Preferred Stock or any class or series thereof prior to
or concurrently with the issuance of such shares.
There shall be no cumulative voting rights for the Common Stock.
The holders of the Common Stock and the Preferred Stock shall be entitled
to dividends, when, as and if declared by the Board of Directors of the
Corporation, payable at such time or times as the Board of Directors may
determine.
Subject to the determination of the Board of Directors with regard to the
Preferred Stock, in the event of any liquidation, dissolution or winding up of
the affairs of the corporation, whether voluntary or involuntary, all remaining
assets and funds of the corporation available for distribution to its
stockholders shall be distributed in equal amounts per share and without
preference or priority of one class of common stock over the other.
Any action may be taken by the stockholders of the corporation by their
written consent without a stockholders' meeting.
No stockholder of this corporation shall by reason of his holding shares of
any class have any preemptive or preferential right to purchase or subscribe to
any shares of any class of this corporation, now or hereafter to be authorized,
or any notes, debentures, bonds, or other securities convertible into or
carrying options or warrants to purchase shares of any class, now or hereafter
to be authorized, whether or not the issuance of any such shares, or such notes,
debentures, bonds or other securities, would adversely affect the dividend or
voting rights of such stockholder, other than such rights, if any, as the board
of directors, in its discretion from time to time may grant, and at such price
as the board of directors in its discretion may fix; and the board of directors
may issue shares of any class of this corporation, or any notes, debentures,
bonds, or other securities convertible into or carrying options or warrants to
purchase shares of any class, without offering any such shares of any class,
either in whole or in part, to the existing stockholders of any class."
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment of Restated Articles of Incorporation on this ____ day of January,
1998.
-------------------
Gad Riesenfeld
President
-------------------
Robert W. Cook
Secretary
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS STOCK PURCHASE WARRANT SHALL NOT
CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS
PERMITTED UNDER THE 1933 ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
No. W-97D-5
STOCK PURCHASE WARRANT
To Purchase 171,052 Shares of Common Stock of
PHARMOS CORPORATION
THIS CERTIFIES that, for value received, ALAN M. MARK, with an address at
Marksman Capital Advisors, 41 Seminole Way, Short Hills, NJ 07078 (the
"Finder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time on or after March 31, 1998 (the "Initial Exercise Date")
and on or prior to March 31, 2008 (the "Termination Date") but not thereafter,
to subscribe for and purchase from PHARMOS CORPORATION, a Nevada corporation
(the "Company"), 171,052 shares of the Company's Common Stock (the "Warrant
Shares"). The purchase price of one share of Common Stock (the "Exercise Price")
under this Warrant shall be One Dollar and Thirty-Eight Cents ($1.38). The
Exercise Price and the number of Warrant Shares shall be subject to adjustment
as provided herein. This warrant is being issued in connection with the
Preferred Stock Securities Purchase Agreements, dated March 31, 1997, complete
with all listed exhibits thereto (the "Agreement") between the Company and
Elliott Associates, L.P., Paresco, Inc., Libertyview Fund, LLC and Libertyview
Plus Fund and is subject to its terms. In the event of any conflict between the
terms of this Warrant and the Agreement, the Agreement shall control.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company, by
the holder hereof in person or by duly authorized attorney, upon surrender of
this Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of Common
Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
<PAGE>
3. Exercise of Warrant. Exercise of the purchase rights represented by this
Warrant may be made at any time or times, in whole or in part, on or after the
Initial Exercise Date, or such earlier date as provided in paragraph 11(c)
below, and before the close of business on the Termination Date, or such earlier
date on which this Warrant may terminate as provided in paragraph 11(a) below,
by the surrender of this Warrant and the Subscription Form annexed hereto duly
executed, at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company) and upon
payment of the Exercise Price of the shares thereby purchased; whereupon the
holder of this Warrant shall be entitled to receive a certificate for the number
of shares of Common Stock so purchased immediately. In the event upon exercising
the Warrant, the transfer agent requires an opinion of counsel, the Company
shall have such opinion furnished to the transfer agent to the transfer agent's
satisfaction. In the event the Finder is relying on an exemption from
registration under the 1933 Act, the Shares shall be issued immediately, if the
Finder furnishes an opinion of counsel, reasonably satisfactory to the Company,
that such exemption from registration is available. Certificates for shares
purchased hereunder shall be delivered to the holder hereof within three
business days after the date on which this Warrant shall have been exercised as
aforesaid. Payment of the Exercise Price of the shares may be by certified check
or cashier's check or by wire transfer to an account designated by the Company
in an amount equal to the Exercise Price multiplied by the number of shares
being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof, together with evidence satisfactory to the Company that such transfer or
assignment is being made in compliance with all applicable federal and state
securities laws; and provided further, that upon any transfer involved in the
issuance or delivery of any certificates for shares of Common Stock, the Company
may require, as a condition thereto, the payment of a sum sufficient to
reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will at no time close its shareholder
books or records in any manner which interferes with the timely exercise of this
Warrant.
2
<PAGE>
7. No Rights as Shareholder until Exercise. This Warrant does not entitle
the holder hereof to any voting rights or other rights as a shareholder of the
Company prior to the exercise thereof. If, however, at the time of the surrender
of this Warrant and purchase the holder hereof shall be entitled to exercise
this Warrant, the shares so purchased shall be and be deemed to be issued to
such holder as the record owner of such shares as of the close of business on
the date on which this Warrant shall have been exercised.
8. Assignment and Transfer of Warrant. This Warrant may be assigned by the
surrender of this Warrant and the Assignment Form annexed hereto duly executed
at the office of the Company (or such other office or agency of the Company as
it may designate by notice in writing to the registered holder hereof at the
address of such holder appearing on the books of the Company); provided,
however, that this Warrant may not be resold or otherwise transferred except (i)
in a transaction registered under the Securities Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken or
such right may be exercised on the next succeeding day not a legal holiday.
11. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or otherwise convey all
or substantially all of its assets or (ii) to effect a transaction (by merger or
otherwise) in which more than 50% of the voting power of the Company is disposed
of (collectively, a "Sale or Merger Transaction"), in which the consideration to
be received by the Company or its shareholders consists solely of cash, the
Company shall give the holder of this Warrant thirty (30) days' notice of the
proposed effective date of the transaction specifying that the Warrant shall
terminate if the Warrant has not been exercised by the effective date of the
transaction.
(b) In case the Company shall at any time effect a Sale or Merger
Transaction in which the consideration to be received by the Company or its
shareholders consists in part of
3
<PAGE>
consideration other than cash, or shall issue any shares of its capital stock in
a reclassification of the Common Stock, the holder of this Warrant shall have
the right thereafter to purchase, by exercise of this Warrant and payment of the
aggregate Exercise Price in effect immediately prior to such action, the kind
and amount of shares and other securities and property which it would have owned
or have been entitled to receive after the happening of such transaction had
this Warrant been exercised immediately prior thereto.
(c) The Initial Exercise Date shall be accelerated in the event of a Change
in Control or a Going Private Transaction, as defined under the Agreement.
12. Registration Rights. The Company shall register the Warrant Shares
pursuant to Section 7 of the Agreement. In the event of the failure of the
Company to procure registration of the Warrant Shares by the later of (i) the
Initial Exercise Date, as adjusted pursuant to paragraph 11(c) above or (ii)
ninety (90) days from the Closing Date (as defined in the Agreement), or during
a Suspension, as defined under the Agreement, the Company will pay to the Finder
by wire transfer, as liquidated damages for such failure and not as a penalty,
two (2%) percent of the product of the Exercise Price and the number of Warrants
that have not been exercised, for each of the first two (2) months and three
(3%) percent per month thereafter that the registration statement is not
effective or that such Suspension continues. If not paid as required, interest
on such damages will accrue at a rate of 2% per month. If the Company does not
remit the damages to the Finder as set forth above, the Company will pay the
Finder reasonable costs of collection, including attorneys fees, in addition to
the liquidated damages. Such payment shall be made to the Finder immediately if
the registration of the Warrant Shares is not effected and maintained; provided,
however, that the payment of such liquidated damages shall not relieve the
Company from its obligations to register the Warrant Shares pursuant to this
paragraph 12. The registration of the Warrant Shares pursuant to this provision
shall not effect or limit Finder's other rights or remedies as set forth in this
Warrant. The obligations of the Company under this paragraph 12 shall cease and
terminate upon the earlier to occur of (x) such time as all of the Warrant
Shares have been re-sold or (y) such time as all of the Warrant Shares may be
re-sold pursuant to Rule 144(k) under the Securities Act.
13. Adjustments of Exercise Price and Number of Warrant Shares. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
happening of certain events, as hereinafter set forth:
(a) In case the Company shall at any time subdivide its outstanding shares
of Common Stock ("Common Shares") into a greater number of Common Shares or
declare a dividend or distribution upon its Common Shares payable in Common
Shares, the Exercise Price in effect immediately prior to such subdivision or
declaration shall be proportionately reduced, and the number of Warrant Shares
issuable upon exercise of the Warrants shall be proportionately increased.
Conversely, in case the outstanding Common Shares of the Company
4
<PAGE>
shall be combined into a smaller number of Common Shares, the Exercise Price in
effect immediately prior to such combination shall be proportionately increased,
and the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately reduced.
(b) In case the Company shall issue rights, options or warrants to holders
of its outstanding Common Stock entitling them (for a period within 45 days
after the record date mentioned below) to subscribe for or purchase shares of
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock at a Price Per Share (as defined in paragraph (d) below) which is
lower at the date of issuance thereof than the then Current Market Price (as
defined in paragraph (e) below) per share of Common Stock at such date, the
number of Warrant Shares hereafter purchasable upon the exercise of this Warrant
shall be determined by multiplying the number of Warrant Shares theretofore
purchasable upon exercise of this Warrant by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, options or warrants plus the number of additional
shares of Common Stock actually subscribed for and purchased, and of which the
denominator shall be the number of shares of Common Stock outstanding on the
date of issuance of such rights, options or warrants plus the number of shares
of Common Stock which the aggregate Proceeds (as defined in paragraph (d) below)
received by the Company on exercise of such rights, options and warrants would
purchase at the Current Market Price per share of Common Stock at the date of
issuance of such rights, options or warrants. Such adjustment shall be made
whenever such rights, options or warrants are issued, and shall become effective
on the date of distribution retroactive to the record date for the determination
of stockholders entitled to receive such rights, options or warrants.
(c) In case the Company shall distribute to holders of its shares of Common
Stock evidences of its indebtedness or assets (excluding dividends or
distributions referred to in paragraph (a) above or in the paragraph immediately
following this paragraph and excluding any dividend or distribution paid out of
the retained earnings of the Company) or rights, options or warrants, or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (excluding those referred to in paragraph (b)
above), then in each case the number of Warrant Shares thereafter purchasable
upon the exercise of this Warrant shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon the exercise of this Warrant by a
fraction, of which the numerator shall be the then Current Market Price per
share of Common Stock on the date of such distribution, and of which the
denominator shall be such Current Market Price, less the then fair value (as
determined by the Board of Directors of the Company) of the portion of the
assets or evidences of indebtedness so distributed or of such subscription
rights, options or warrants, or of such convertible or exchangeable securities
applicable to one share of Common Stock. Such adjustment shall be made whenever
any such distribution is made, and shall become effective on the date of
distribution retroactive to the record date for the determination of
shareholders entitled to receive such distribution.
5
<PAGE>
(d) For purposes of this Section 13, "Price Per Share" shall be defined and
determined according to the following formula:
R
P = ------------
N
where
P = Price Per Share,
R = the "Proceeds" received or receivable by the Company which
(i) in the case of shares of Common Stock is the total
amount received or receivable by the Company in
consideration for the sale and issuance of such shares;
(ii) in the case of rights, options or warrants to
subscribe for or purchase shares of Common Stock or of
securities convertible into or exchangeable or exercisable
for shares of Common Stock, is the total amount received
or receivable by the Company in consideration for the sale
and issuance of such rights, options, warrants or
convertible or exchangeable or exercisable securities,
plus the minimum aggregate amount of additional
consideration, other than the surrender of such
convertible or exchangeable securities, payable to the
Company upon exercise, conversion or exchange thereof; and
(iii) in the case of rights, options or warrants to
subscribe for or purchase convertible or exchangeable or
exercisable securities, is the total amount received or
receivable by the Company in consideration for the sale
and issuance of such rights, options or warrants, plus the
minimum aggregate amount of additional consideration other
than the surrender of such convertible or exchangeable
securities, payable upon the exercise, conversion or
exchange of such rights, options or warrants and upon the
conversion or exchange or exercise of the convertible or
exchangeable or exercisable securities; provided that in
each case the proceeds received or receivable by the
Company shall be deemed to be the gross cash proceeds
without deducting therefrom any compensation paid or
discount allowed in the sale, underwriting or purchase
thereof by underwriters or dealers or other performing
similar services or any expenses incurred in connection
therewith,
and
N = the "Number of shares," which (i) in the case of Common
Stock is the number of shares issued; (ii) in the case of
rights, options or warrants to subscribe for or purchase
shares of Common Stock or of securities convertible into
or exchangeable or exercisable for shares of Common Stock,
is the maximum number of shares of Common Stock initially
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issuable upon exercise, conversion or exchange thereof;
and (iii) in the case of rights, options or warrants to
subscribe for or purchase convertible or exchangeable or
exercisable securities, is the maximum number of shares of
Common Stock initially issuable upon conversion, exchange
or exercise of the convertible, exchangeable or
exercisable securities issuable upon the exercise of such
rights, options or warrants.
If the Company shall issue shares of Common Stock or rights, options,
warrants or convertible or exchangeable or exercisable securities for a
consideration consisting, in whole or in part, of property other than cash, the
amount of such consideration shall be determined in good faith by the Board of
Directors of the Company whose determination shall be conclusive.
(e) For the purpose of any computation under paragraphs (b), (c) or (d) of
this Section 13, the "Current Market Price" per share of Common Stock at any
date shall be the average of the Closing NASDAQ Price of the Common Stock for
the thirty (30) trading days commencing 30 trading days before the date of
determination. If the Common Stock is not traded on Nasdaq, the Current Market
Price shall be the average closing price (and if not available, the mean of the
high and low prices) of the Common Stock on the over-the-counter-market or the
principal national securities exchange or the National Market System on which
the Common Stock is traded for the thirty (30) trading days commencing 30
trading days before the date of determination.
(f) Whenever the number of Warrant Shares purchasable upon the exercise of
this Warrant is adjusted, as herein provided, the Exercise Price payable upon
exercise of this Warrant shall be adjusted by multiplying such Exercise Price
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of Warrant Shares purchasable upon the exercise of this Warrant
immediately prior to such adjustment, and of which the denominator shall be the
number of Warrant Shares purchasable immediately thereafter.
(g) No adjustment in the number of Warrant Shares purchasable hereunder
shall be required unless such adjustment would result in an increase or decrease
of at least one percent (1%) percent of the Exercise Price; provided that any
adjustments which by reason of this paragraph (h) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest cent or to the nearest
one-thousandth of a share, as the case may be.
(h) No adjustment in the number of Warrant Shares purchasable upon the
exercise of this Warrant need be made under paragraph (b), (c) or (d) if the
Company issues or distributes to the holder of this Warrant the shares, rights,
options, warrants or convertible or exchangeable securities, or evidences of
indebtedness or assets referred to in those paragraphs which the holder of this
Warrant would have been entitled to receive had this Warrant been exercised
prior to the happening of such event or the record date with respect thereto. In
no event
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<PAGE>
shall the Company be required or obligated to make any such distribution
otherwise than in its sole discretion. No adjustment in the number of Warrant
shares purchasable upon the exercise of this Warrant need be made for sales of
Common Stock pursuant to a Company plan for reinvestment of dividends or
interest. No adjustment need be made for a change in the par value of the Common
Stock.
(i) In the event that at any time, as a result of an adjustment made
pursuant to paragraph (a) above, the holder of this Warrant shall become
entitled to purchase any securities of the Company other than shares of Common
Stock, thereafter the number of such other shares so purchasable upon exercise
of this Warrant and the Exercise Price of such shares shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (i), inclusive, above.
14. Voluntary Adjustment by the Company. The Company may at its option, at
any time during the term of this Warrant, reduce the then current Exchange Price
to any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
15. Notice of Adjustment. Whenever the number of Warrant shares or number
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
promptly mail by registered or certified mail, return receipt requested, to the
transfer agent for the Common Stock and to the holder of this Warrant notice of
such adjustment or adjustments setting forth the number of Warrant Shares (and
other securities or property) purchasable upon the exercise of this Warrant and
the Exercise Price of such Warrant Shares after such adjustment, setting forth a
brief statement of the facts requiring such adjustment and setting forth
computation by which such adjustment was made. Such notice, in absence of
manifest error, shall be conclusive evidence of the correctness of such
adjustment.
16. Authorized Shares. The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of Common Stock
upon the exercise of any purchase rights under this Warrant. Such reservation of
shares of Common Stock shall be in addition to those shares of Common Stock
reserved pursuant to the Company's Certificate of Designation for its Series B
Preferred Stock. The Company further covenants that its issuance of this Warrant
shall constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
shares of the Company's Common Stock upon the exercise of the purchase rights
under this Warrant. The Company will take all such reasonable action as may be
necessary to assure that such shares of Common Stock may be issued as provided
herein without violation of any applicable law or regulation, or of any
requirements of NASDAQ or any domestic securities exchange upon which the Common
Stock may be listed.
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<PAGE>
17. Restrictions on Exercise. Notwithstanding anything to the contrary
contained herein, no Warrants may be converted by a holder of Warrants
("Holder") to the extent that, after giving effect to the shares of Common Stock
issued pursuant to the exercise hereof, the total number of shares of Common
Stock deemed beneficially owned by such Holder (other than by virtue of the
ownership of shares of Series A Preferred Stock or Series B Preferred Stock or
Warrants or ownership of other securities that have limitations on a Holder's
rights to convert or exercise similar to those limitations set forth herein),
together with all shares of Common Stock deemed beneficially owned by Holder's
"affiliates" (as defined in Rule 144 under the 1933 Act) that would be
aggregated for purposes of determining whether a group under Section 13(d) of
the Securities Exchange Act of 1934, as amended, exists, would exceed 4.99% of
the total issued and outstanding shares of Common Stock, provided that each
Holder shall have the right to waive this restriction, in whole or in part,
immediately in case of a pending Change in Control Transaction (as defined in
the Agreement) and in any other case upon 61 days prior to the exercise
hereunder by Holder. The exercise of all or part of this Warrant by any Holder
shall be deemed a representation by such Holder it is in compliance with this
Section 17. A transferee of Warrants shall not be bound by this provision unless
it expressly agrees to be so bound. The term "deemed beneficially owned" as used
in this Section 17 shall exclude shares that might otherwise be deemed
beneficially owned by reason of the exercisability of the Warrants.
18. Miscellaneous.
(a) Issue Date. The provisions of this Warrant shall be construed and shall
be given effect in all respects as if it had been issued and delivered by the
Company on the date hereof. This Warrant shall be binding upon any successors or
assigns of the Company. This Warrant shall constitute a contract under the laws
of New York and for all purposes shall be construed in accordance with and
governed by the laws of said state without regard to its conflict of law,
principles or rules.
(b) Restrictions. The holder hereof acknowledges that the Common Stock
acquired upon the exercise of this Warrant, if not registered, may have
restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or permitted to
be given or delivered to the holders hereof or the Company shall be delivered or
shall be sent by certified or registered mail, postage prepaid, or by overnight
courier or by facsimile to each such holder at its address (or fax number) as
shown on the books of the Company or to the Company at the address (or fax
number) set forth in the Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officers thereunto duly authorized.
Dated: March 31, 1997
PHARMOS CORPORATION
By__________________________
Officer
10
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
_______________________________________________ whose address is ______________
________________________________________
________________________________________________________________________________
Dated: ______________, 199_
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
11
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _____________ Shares of
Common Stock at an Exercise Price of $________________, and herewith tenders in
payment for such securities a certified check or official bank check payable in
New York Clearing House Funds to the order of Pharmos Corporation in the amount
of $__________, all in accordance with the terms of the Stock Purchase Warrant
of Pharmos Corporation, dated March 31, 1997. The undersigned requests that a
certificate for such securities be registered in the name of
____________________ whose address is _________________ and that such
Certificate be delivered to ________________ whose address is
__________________.
Dated:
Signature __________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
12
March 4, 1998
Pharmos Corporation
33 Wood Avenue South, Suite 466
Iselin, New Jersey 08830
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 (the "Registration
Statement") to be filed by you with the Securities and Exchange Commission in
connection with the offer of the selling stockholder named therein (the "Selling
Stockholder") to sell from time to time up to 9,050,000 shares (the "Shares") of
the Common Stock, par value $.03 per share, of Pharmos Corporation (the
"Company") upon conversion of the Preferred Stock issued in connection with the
February 4, 1998 private placement transaction (the "Private Placement
Transaction") and up to 950,000 shares of the Company's Common Stock (the
"Warrant Shares") issuable upon the exercise of certain warrants issued in
connection with the Private Placement Transaction and 171,052 warrants issued by
the Company in March 1997(collectively the "Warrants"). As your counsel in
connection with the Private Placement Transaction and the offer and sale of the
Shares and the issuance of the Warrants, we have examined the originals, or
photostatic or certified copies, of such records of the Company, certificates of
the Company and of public officials and such other matters and documents as we
have deemed necessary or relevant as a basis for this opinion.
Based on these examinations, it is our opinion that the Shares and the Warrant
Shares, when issued upon payment therefor, will be validly issued, fully paid
and non-assessable shares of Common Stock of the Company.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the reference to this firm under the caption
"Legal Opinions" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
EHRENREICH EILENBERG KRAUSE & ZIVIAN LLP
/s/ Ehrenreich Eilenberg Krause & Zivian LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Pharmos Corporation
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
March 31, 1997 appearing in Pharmos Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
March 4, 1998
