As filed with the Securities and Exchange Commission on October 24, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2744744
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Hartwell Avenue
Lexington, Massachusetts 02173-3134
(Address of principal executive offices)
(617) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Class A Warrants
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(Title of Class)
Class AA Warrants
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(Title of Class)
Class X Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates, based upon the closing price for such stock on February 28, 1997
was approximately $110,375,000. As of February 28, 1997, 15,767,875 shares of
common stock, $.01 par value, were outstanding.
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Documents Incorporated By Reference
None.
(1)
<PAGE>
PART I
ITEM 1. BUSINESS.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed or referred
to in "Risk Factors".
MacroChem's primary business is the development and commercialization of
transdermal drug delivery compounds and systems designed to promote the delivery
of drugs from the surface of the skin into the skin or into the bloodstream.
SEPA(R) compounds, the Company's proprietary transdermal penetration enhancers,
when properly combined with particular drugs, create pharmaceutical formulations
(creams, gels, solutions, etc.) that enhance the transdermal delivery of drugs
into the skin or into the bloodstream. SEPA formulations combined with the
Company's polymers and adhesives can also be used with patch formats to achieve
the transdermal delivery of selected drugs. The Company believes that SEPA
compounds enhance the diffusion of drugs into and through the skin by making the
outer layer of the skin (stratum corneum) more permeable to the drug molecule.
Transdermal delivery provides an alternative to other methods of drug
administration (injection, oral dosage forms, inhalation), and may allow
selected drugs to be administered more effectively, at lower doses, with fewer
adverse events and improved patient compliance.
The Company is developing specific SEPA formulations for use with
non-proprietary and proprietary drugs manufactured by pharmaceutical companies,
and plans to commercialize these products through the formation of partnerships,
strategic alliances and license agreements with those companies. In order to
attract strategic partners, the Company is conducting clinical testing of
certain SEPA-enhanced pharmaceuticals. The Company believes that if the clinical
trials are successful the results will aid the Company in attracting partners to
assist in the promotion of the product. Because of the substantial costs
involved in bringing a new pharmaceutical product or a new formulation of an old
drug to the market, the Company may be required to rely on pharmaceutical
companies to conduct all or part of the clinical trials necessary to gain
regulatory approval to manufacture and to market any resulting product.
The Company has also developed a series of new low molecular weight
polymers, termed MacroDerm,TM for cosmetic use and the topical delivery of
pharmaceuticals. The Company has created, tested and evaluated prototypes of
MacroDerms and is determining the full market opportunities for this technology.
The Company does not maintain general product liability insurance, since
the Company does not market drug products. The Company recently commenced
clinical studies and obtained specific liability insurance relating to such
studies. As of December 31, 1996, no asserted liability claims exist against the
Company. However, in the future, incidents could give rise to claims which could
exceed the Company's insurance coverage and resources.
BUSINESS AGREEMENTS
On January 22, 1997 the Company signed a license and supply agreement with
Cytopharm, Inc., a California corporation. Cytopharm invented and is the owner
of certain patent rights covering a photo-activated compound for the treatment
of certain dermatological diseases. The Company will make available its enhancer
for use by Cytopharm and its licensee in the agreed to photo-activated
formulation. Cytopharm agrees to pay or cause its licensee to pay royalties to
the Company on all license fees, milestone payments, advance royalty payments
and other lump-sum payments with respect to license and sale of such formulation
for a period equal to the longer of the life of the Company's patent or ten
years from the commencement of commercial marketing of the formulation in each
country where the formulation is marketed.
(2)
<PAGE>
In September 1990, the Company entered into a license agreement with Ascent
Pharmaceuticals, Inc. ("Ascent") in which Ascent received an exclusive license
to develop, test and market the Company's SEPA compounds in combination with
catecholamine bronchodilators for the treatment of respiratory disorders and, in
combination with cromolyn sodium, to treat allergic disorders. Ascent is in the
clinical stage of its development program. However, no assurances can be given
that the work conducted by Ascent will lead to the marketing of SEPA-containing
products for these indications.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development activities through its
own staff and facilities, as well as through collaborative arrangements with
universities, contract research organizations and independent consultants. As of
March 1, 1997, the Company had 19 full-time employees, 11 of whom are devoted to
research and development and regulatory affairs. In addition, two Company
officers devote approximately 75% of their time to research and development.
Research and developmental expenditures aggregated $1,736,600, $1,238,100 and
$864,100 during the years ended December 31, 1996, 1995 and 1994, respectively .
The Company is also dependent upon third parties to conduct clinical studies,
obtain FDA and other regulatory approvals and manufacture and market a finished
product.
The Company anticipates incurring significant development expenditures in
the future as the Company continues its efforts to develop its present compounds
and new drug formulations and as it begins to research other technologies and to
expand its toxicological and clinical studies of certain drugs. The Company
conducts stability studies, tests its unique formulations and designs
manufacturing processes for its SEPA compounds and adhesive and polymer
technologies at its facility and other facilities. The Company has cGMP (current
Good Manufacturing Practices) facilities for the manufacture of dosage forms for
clinical evaluations.
PRODUCTS AND TECHNOLOGIES
BACKGROUND
To be effective, drugs must reach an intended site in the body, at an
effective concentration, and for an appropriate length of time. Traditional
methods of drug administration, such as oral ingestion, intramuscular and
intravenous injections and inhalation, are effective for a wide variety of
drugs. However, depending upon the given drug, each method may have
disadvantages. For example, in oral administration, a drug must pass through the
gastrointestinal system to be absorbed and may be metabolized or broken down,
resulting in a lower amount of effective drug being therapeutically available.
As a result, higher dosages of the drug must be used to produce the desired
effect, which may cause irritation of the gastrointestinal tract and systemic
toxicity.
In addition, the rate at which orally administered drugs are absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. Although the pharmaceutical industry has investigated a variety
of alternative approaches for dealing with drug adverse events and loss of
efficacy following oral dosing, through enteric coating of tablets, formulating
with various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers, the desired effects of these approaches are not
always reproducible from patient to patient or effective in modifying metabolic
effects produced in the liver.
TRANSDERMAL DRUG DELIVERY
Transdermal drug delivery is the process of delivering drugs into the skin
so that they can be effective in the treatment of dermatological conditions and
diseases or through the skin and into the bloodstream for the treatment of
systemic diseases.
(3)
<PAGE>
The skin is made up of three layers: the outer layer, the stratum corneum,
the middle layer or viable epidermis, and the inner layer, the dermis. The
stratum corneum, which serves as the skin's primary barrier to the external
environment, consists of closely packed dead cells and fatty (lipid) material.
The epidermis is composed of several layers of active cells and the dermis
consists, in part, of tissue containing hair follicles, nerve endings and blood
capillaries. Within the stratum corneum, lipid layers bind the dead cells
together to form a protective barrier. Research conducted by MacroChem shows
that SEPA compounds affect drug delivery by acting, in part, upon the stratum
corneum to disrupt the alignment of the lipid molecules within the lipid layers.
This disruption increases the porosity of the lipid-cell layers, allowing drugs
to diffuse through the stratum corneum through the more porous epidermis to the
dermis, where they enter the blood stream through the capillaries. The rate and
amount of drug absorbed can be controlled by varying the formulation used.
THE COMPANY'S DRUG-DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA COMPOUNDS
The delivery of a drug through the skin depends on the drug's physical and
chemical characteristics (molecular size and shape, the drug's solubility in
lipids and water, its melting point and whether it is lipophilic or
hydrophilic).
Since some drugs move through the skin too rapidly, the transdermal system
must retard the rate of drug absorption to ensure optimal efficacy with minimum
toxicity. Other drugs move through the skin with difficulty, so the transdermal
system must be formulated to increase the drug's rate of absorption through the
skin. Common methods of transdermal delivery use common chemicals such as
ethanol or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have proven to be
somewhat effective with specific drugs, such as drugs used for the treatment of
motion sickness or hormone deficiencies, they have caused adverse events, such
as skin irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug necessary to
achieve the desired therapeutic effect, have not been successfully delivered
transdermally to date.
The Company has developed SEPA compounds that are designed to enhance the
transport, penetration and controlled delivery of drugs through the skin. SEPA
compounds are generally colorless, clear liquids that are intended to promote
drug delivery by aiding drug molecules to penetrate the skin, diffuse into or
through the skin layers and become absorbed into the bloodstream.
The Company has set up its own facility for the in vitro testing of drug
formulations containing SEPA, and is currently less dependent on outside
laboratories for this type of testing. The Company is conducting in vitro
studies to evaluate the transdermal enhancing effect of SEPA in combination with
a variety of drugs with differing physical and chemical characteristics,
representing a broad spectrum of potential drug products. Although the Company's
research and development efforts with SEPA are at an advanced stage, the Company
must still conduct substantial additional studies to demonstrate the efficacy
and safety of any SEPA-drug formulation. The Company has found that specific
drugs administered transdermally with SEPA demonstrated increased transdermal
absorption. Some of the drug formulations tested by the Company with SEPA
contain compounds generally recognized as unlikely or difficult candidates for
transdermal delivery because of their physical and chemical properties and
molecular size. As these drug formulations are further developed, the Company
plans to conduct additional studies to investigate the efficacy and safety of
some of these formulations.
(4)
<PAGE>
Although in vivo testing has been conducted on SEPA compounds, more studies
will be needed to demonstrate the safety and efficacy of SEPA in formulations
with specific drugs. The Company is currently conducting clinical trials with a
topical SEPA formulation of alprostadil, for the treatment of erectile
dysfunction.
The Company intends to begin clinical trials of a topical formulation of
SEPA and testosterone in early 1997 and plans additional clinical studies of
SEPA in a topical gel formulation with ibuprofen for the treatment of muscle
pain.
In addition to the ongoing clinical development programs cited above, the
Company, in association with third parties, is currently conducting pre-clinical
studies with SEPA formulations in combination with specific drugs for a variety
of applications.
The Company believes that SEPA compounds can be used with a broad variety
of new and existing drugs to enhance their commercial value. The improved
therapeutic effectiveness and convenience of a transdermal SEPA product may
substantially expand the existing market for a drug. In addition, a formulation
containing a SEPA compound may prove to be a superior alternative to the
existing methods of administering certain drugs.
MACRODERM(TM)DRUG DELIVERY SYSTEM
The Company has developed a series of new low molecular weight polymers,
termed MacroDerm,TM for use in cosmetics and in the superficial dermal delivery
of pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents. The Company has created, tested and
evaluated prototypes of MacroDerms and is determining the full market
opportunities for this technology.
COMPETITION
The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. The Company believes
that its major competitors in the drug-delivery sector of the health care
industry include ALZA Corporation, Cygnus Therapeutic Systems, Elan Corporation,
plc., Ciba-Geigy Limited and Sandoz Limited. These firms have substantially
greater capital resources, research and development and technical staffs,
facilities and experience in obtaining regulatory approvals, as well as in
manufacturing, marketing and distribution of products, than the Company. Recent
trends in this area are toward further market consolidation of large drug
companies into a smaller number of very large entities, further concentrating
financial, technical and market strength and increasing competitive pressure in
the industry. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies of
their own through joint ventures or other arrangements. In addition, recently
developed technologies or technologies that may be developed in the future may
or could be the basis for competitive products. No assurance can be given that
the Company's competitors will not succeed in developing technologies and
products that are more effective or less costly to use than any that are
currently being developed by the Company.
Alprostadil, a synthetic prostaglandin E1, is the only drug approved for
marketing in the U.S. for erectile dysfunction. It is available in two dosage
forms. Caverject(R), marketed by Pharmacia & Upjohn, is administered by needle
injection directly into the penis. The second product, developed by Vivus, is a
pellet form of the drug administered through a tube inserted into the urethra.
In contrast to the invasive forms now available, MacroChem believes that a
topical gel formulation applied to the penis will be the preferred dosage form
for treatment of this disorder.
(5)
<PAGE>
The Company expects products approved for sale, if any, to compete
primarily on the basis of product efficacy, safety, patient compliance,
reliability, price and patent position. Generally, the first pharmaceutical
product to reach the market in a therapeutic or preventative area is often at a
significant advantage relative to later entrants to the market. The Company's
competitive position will also depend on its ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, implement production and marketing plans, obtain patent protection and
secure adequate capital resources.
EMPLOYEES
As of March 1, 1997, the Company had 19 full time employees, 11 of whom are
devoted to research and development and regulatory affairs. In addition, two
Company officers devote approximately 75% of their time to research and
development.
GOVERNMENT REGULATION
The production and marketing of the Company's drug delivery systems and
pharmaceutical products are subject to regulation for safety, efficacy and
quality by numerous federal, state and local agencies and comparable agencies in
foreign countries. In the United States, the Federal Food, Drug and Cosmetics
Act, the Public Health Service Act, the Controlled Substances Act and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, advertising and promotion
of the Company's proposed products and technologies.
Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including recalls and criminal prosecutions based
on products, promotional practices, or manufacturing practices that violate
statutory requirements. In addition, administrative remedies can involve
voluntary recalls or cessation of sale of products, administrative detention,
public notice, voluntary changes in labeling, manufacturing or promotional
practices, as well as refusal of the government to approve NDAs. The FDA also
has the authority to withdraw approval of drugs in accordance with statutory
procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
studies to the FDA in an IND application in support of performing clinical
trials. IND allowance is then followed by performance of human clinical trials,
and additional pre-clinical and manufacturing quality control studies,
supporting safety, efficacy and manufacturing quality control. The information
developed under the IND is compiled into an NDA or ANDA and submitted to FDA for
approval to market.
Pre-clinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing of the
product in a small number of normal volunteers primarily for safety. In Phase
II, in addition to safety, the efficacy of the product is evaluated in a small
patient population. Phase III trials typically involve multicenter testing for
safety and clinical efficacy in an expanded population of patients at
geographically dispersed test sites. A clinical plan, or "protocol," accompanied
by the approval of the institutions participating in the trials, must be
submitted to the FDA prior to commencement of each clinical trial. The FDA may
order the temporary or permanent discontinuation of a clinical trial at any time
if adverse events that endanger patients in the trials are observed. In
addition, the FDA may request Phase IV clinical trials, to be performed after
marketing approval, to resolve any lingering questions.
(6)
<PAGE>
A 30-day waiting period after the filing of each IND application is
required by the FDA prior to the commencement of clinical testing in human
subjects. If the FDA has not commented on or questioned the IND application
within 30 days, initial clinical studies may begin. However, any FDA comments or
questions must be answered to the satisfaction of the FDA before initial
clinical testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the pre-clinical and clinical studies on new drugs are
submitted to the FDA in the form of NDAs for approval to commence commercial
sales. Following extensive review, the FDA may grant marketing approval, require
additional testing or information or deny the application. Continued compliance
with all FDA requirements and the conditions in an approved application,
including product specifications, manufacturing process and labeling
requirements, are necessary for all products. Failure to comply, or the
occurrence of unanticipated adverse events during commercial marketing, could
lead to the need for labeling changes, product recall, seizure, injunctions
against distribution or other FDA-initiated action, which could delay further
marketing until the products are brought into compliance.
In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA
relies on bioequivalency tests that compare the applicant's drug with an already
approved reference drug, rather than on clinical trials. An ANDA may be
available to the Company for a new formulation of a drug which has already been
approved by the FDA in other topical dosage forms. By concentrating on drug
delivery systems employing existing drugs, the Company expects that the time for
regulatory approval of certain products should be shorter than for entirely new
substances.
The NDA itself is a complicated and detailed document and must include the
results of extensive animal, clinical and other testing, the cost of which is
substantial. Although the FDA is required to review applications within 180 days
of filing, in the process of reviewing applications the FDA frequently requests
that additional information be submitted and starts the 180 day regulatory
review period anew when the requested additional information is submitted. The
effect of such requests and subsequent submissions can significantly extend the
time for the NDA review process. Until an NDA is actually approved, no assurance
can be given that the information requested and submitted will be considered
adequate by the FDA to justify approval.
In addition to the above, packaging and labeling of most of the Company's
proposed products are subject to FDA regulation. The Company must get FDA
approval for all labeling and packaging prior to marketing of a regulated
product.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority must be obtained in most foreign countries prior
to the commencement of marketing of the product in that country. The approval
procedure varies from country to country and may involve additional testing, and
the time required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedure and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from foreign regulatory authorities can result after the relevant
applications are filed. After such approvals are obtained, further delays may be
encountered before the products become commercially available.
No assurance can be given that any required FDA or other governmental
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures and furnish
a competitive advantage to the more substantially capitalized companies with
which the Company plans to compete. In addition, the extent of potentially
adverse government regulations that may arise from future administrative action
or legislation cannot be predicted.
(7)
<PAGE>
PATENTS AND LICENSE RIGHTS
The Company was granted a new U.S. patent in 1996 based on the combination
of various different classes of enhancer compounds in conjunction with
iontophoresis. In addition, the corresponding European application has also been
found allowable and will cover the combination of iontophoresis with SEPA as
well as other enhancer compounds.
The Company's U.S. patent applications filed in 1995 for the use of SEPA
with minoxidil for once-a-day treatment and covering its MacroDerm(TM)
technology were allowed in 1996 and patents are expected to issue in 1997.
Applications covering modified forms of the MacroDerm polymers were filed during
1996. Also allowed in 1996 were the Company's patent applications for low
molecular weight polyvinyl pyrrolidone molecules and their use in stabilizing
enzymes and other types of proteins (U.S.); and for SEPA in Japan. This
technology no longer fits within the product development and technology focus of
the Company, and it intends to sublicense the technology, if possible. No
assurance can be given, however, that a sublicensee can be identified who will
be willing to license the technology.
The Company was granted a U.S. patent in 1994 relating to certain compounds
useful for the treatment of osteoporosis and hypercalcemia. Corresponding
foreign patents have also issued in several European countries and Canada. A
related U.S. patent issued in 1995 for the use of these compounds in the
treatment of hypercalcemia. The Company holds patents on its SEPA compounds in
the United States, Canada, throughout Europe and in Japan. The Company owns a
U.S. patent on a transdermal medicator.
The Company believes that patent protection of its technologies, processes
and products is important to its future operations. The success of the Company's
proposed products may depend, in part, upon the Company's ability to obtain
patent protection.
The Company intends to enforce its patent position and intellectual
property rights vigorously. The cost of enforcing the Company's patent rights in
lawsuits, if necessary, may be significant and could interfere with the
Company's operations.
Although the Company intends to file additional patent applications as
management believes appropriate with respect to any new products or
technological developments, no assurance can be given that any additional
patents will be issued or, if issued, will be of commercial benefit to the
Company. In addition, to anticipate the breadth or degree of protection that any
such patents may afford is impossible. To the extent that the Company relies on
unpatented proprietary technology, no assurance can be given that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets, that any
obligation of confidentiality will be honored or that the Company will be able
to effectively protect its rights to proprietary technology. Further, no
assurance can be given that any products developed by the Company will not
infringe patents held by third parties or that, in such case, licenses from such
third parties would be available on commercially acceptable terms, if at all.
In connection with the prior research and development efforts of the
Company, the Company owns several patents and possesses certain license rights
in connection with other technologies, which it is not currently pursuing.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
(8)
<PAGE>
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN
FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO
BELOW.
HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from the commercial sale
of its products and licensing of certain technology. The Company has had no
revenues relating to the sale of any products currently under development. The
Company has incurred net losses every year since its inception and the Company
anticipates that losses may continue for the foreseeable future. At December 31,
1996, the Company's accumulated deficit was approximately $18.1 million. The
Company's ability to continue operations after its current capital resources are
exhausted depends on its ability to obtain additional financing and achieve
profitable operations, as to which no assurance can be given. However, the
Company believes that its financial resources are sufficient to meet planned
operating activities for the next twelve months.
The Company continues to pursue the commercialization of its SEPA
technology through discussion and presentation of its technology to potential
licensees. No assurance can be given that these discussions will lead to any
licenses. No assurance can be given that any license fees will be received by
the Company in the current fiscal year. For the foreseeable future, and until
marketing approvals are obtained, and/or license agreements are entered into, if
ever, the Company anticipates limited licensing revenue and no royalties from
sales of products using SEPA for pharmaceutical purposes.
TECHNOLOGY UNCERTAINTY AND EARLY STAGE DEVELOPMENT
Although several systems have been developed by various pharmaceutical
companies to enhance the transdermal delivery of specific drugs, relatively
limited research has been conducted in the expansion of transdermal delivery
systems to a wider range of pharmaceutical products. Although the Company has
demonstrated in preclinical and clinical studies that its SEPA transdermal
compounds may have applicability with a broad range of drugs, transdermal
delivery systems are currently marketed for only a limited number of products.
In addition, transdermal delivery systems used to date have often demonstrated
adverse side effects for users, such as skin irritation and delivery
difficulties.
The Company's proposed products are in the early development stage, require
significant further research, development, testing and regulatory clearances and
are subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibilities that any
or all of the proposed products may be found to be ineffective or toxic, or
otherwise may fail to receive necessary regulatory clearances; that the proposed
products, although effective, may be uneconomical to market; or that third
parties may market superior or equivalent products. Due to the extended testing
and regulatory review process required before marketing clearance can be
obtained, the Company does not expect to be able to realize revenues from the
sale of any drugs in the near term.
NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING
Before the Company or any licensees of the Company may market any products
based upon the Company's technology, significant additional development efforts
and substantial preclinical and clinical testing will be necessary. Unless
substantial additional financing is obtained, the Company may not have
sufficient working capital to complete clinical studies on any proposed
products. No assurance can be given that the Company will be able to secure such
financing on favorable terms, if at all.
(9)
<PAGE>
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approval for the commercial sale of any of its
pharmaceutical products under development, the Company must demonstrate that the
product is safe and efficacious for use in each proposed indication. The results
of preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be no
assurance that clinical trials of the Company's products will demonstrate the
safety and efficacy of its products or will result in marketable products. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. If the Company were unable to demonstrate the safety and efficacy of
certain of its products, the Company may be adversely affected.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSED AGREEMENTS
The Company intends to rely on licensees and joint venture arrangements to
fund most of the costs relating to product development and clinical trials.
Licensees may be expected to have the legal right to terminate funding a product
at any time for any reason without significant penalty. The resources and
attention devoted by a licensee to a product are not within the Company's
control, and this can result in delays in clinical testing, the preparation and
prosecution of regulatory filings and commercialization efforts. Further, no
assurance can be given that the Company will be able to enter into new
collaborative arrangements or that existing or future collaborative arrangements
will be successful.
PRIOR DEVELOPMENT EFFORTS HAVE NOT GENERATED SUSTAINED REVENUES OR ANY PROFITS
Since the Company's inception in 1981, the Company has engaged in research
and development activities with respect to a variety of technologies and
products, including polymers for medical and industrial use, dental adhesives,
osteoporotic drugs and transdermal drug-delivery products. Although the Company
has generated differing levels of revenue over the last several years, none of
the Company's products or technologies has ever generated sustained revenues and
the Company has never had profitable operations. The Company has expended a
substantial amount of its resources in researching and developing technology
relating to these products as well as in connection with the research and
development of its transdermal delivery systems. No assurance can be given that
the Company's development activities with respect to its transdermal delivery
systems will be successful or that these efforts, as well, will not be
eventually abandoned.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR MARKETING AND
DISTRIBUTION OF PRODUCTS
The Company intends to market and distribute its proposed products through
others pursuant to licensing, joint venture, or similar collaborative
arrangements or distribution agreements. The Company has no sales force or
marketing organization. If the Company directly markets and sells any of such
products, it will, among other things, have to attract and retain qualified or
experienced marketing and sales personnel. No assurance can be given that the
Company will be able to attract and retain qualified or experienced marketing
and sales personnel or that any efforts undertaken by such personnel will be
successful. Any contractual arrangements with others may result in a lack of
control by the Company over any or all of the marketing and sales of such
products.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company currently does not have facilities capable of manufacturing any
proposed products in commercial quantities. Accordingly, the Company expects
that it will be dependent to a significant extent on licensees, corporate
partners or contract manufacturers for such manufacturing and for compliance
with regulatory requirements for good manufacturing practices. The Company's
dependence on third parties for manufacturing may adversely affect the Company's
(10)
<PAGE>
ability to develop and deliver products on a timely and competitive basis. If
the Company decides to establish a commercial manufacturing facility, it will
require substantial additional funds, will be required to hire and retain
significant additional personnel and will be required to comply with extensive
government regulations. No assurance can be given that the Company will be able
to obtain additional capital to conduct such activities directly.
RELIANCE ON KEY EMPLOYEES; LIMITED PERSONNEL; ABILITY TO ATTRACT AND RETAIN
QUALIFIED SCIENTISTS
The success of the Company is dependent on the efforts and abilities of Dr.
Carlos M. Samour, its Chairman of the Board of Directors and Scientific
Director, Alvin J. Karloff, its Chief Executive Officer and President and Dr.
Stephen J. Riggi, its Vice President of Operations. Dr. Samour, Mr. Karloff and
Dr. Riggi are employed by the Company under employment agreements that are of
indefinite length and include non-disclosure and non-competition provisions. The
loss of Dr. Samour, Mr. Karloff or Dr. Riggi could have a material adverse
effect on the Company's business.
The Company's business also depends on access to scientific talent,
competition for which is intense and can be expected to increase. There can be
no assurances that the Company will be able to retain its existing personnel or
to attract additional qualified employees.
COMPETITION, GOVERNMENT REGULATION, PATENTS AND LICENSE RIGHTS
See these sections, above, for a description of risk factors relating to
these matters.
RISKS OF PRODUCT LIABILITY CLAIMS; LACK OF PRODUCT LIABILITY INSURANCE; EXPENSE
AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE COVERAGE
The design, development, manufacture and sale of the Company's products
involve an inherent risk of liability claims and associated adverse publicity.
The Company currently has liability insurance to cover claims that may result
from clinical trials, but does not maintain product liability insurance and may
need to acquire such insurance coverage prior to the commercial introduction of
its products. No assurance can be given that the coverage limits of the
Company's insurance policies will be adequate. 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 if it is uninsured, or
which is in excess of the Company's insurance coverage, if any, could have a
material adverse effect upon the Company and its financial condition.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of, and availability of capital for
bio-medical 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 and to reform in the health care system. In the United
States, there have been, and the Company expects there will continue to be, a
number of federal and state proposals to implement similar government control.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted, the announcement or adoption of such proposals could
have a material adverse effect on the Company's prospects. If the Company or one
of its partners succeeded in bringing one or more of its products, based upon
the Company's technology, to market, there can be no assurance that these
products will be cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company or its partners to sell
such products on a profitable basis.
(11)
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the age, positions, and offices presently
held by each Director with the Corporation:
Year
Nominee
First
Became a
Name Age Director Position
- --------------------------------------------------------------------------------
Carlos M. Samour...........76 1981 Chairman of the Board of Directors and
Scientific Director
Alvin J. Karloff...........65 1990 Chief Executive Officer, President and
Director
Willard M. Bright .........83 1993 Director
Peter G. Martin............48 1995 Director
Stephen J. Riggi...........59 1996 Vice President, Operations and Director
Michael A. Davis...........55 --- Consultant
With the exception of Carlos Samour and Pierrette Samour, who are husband
and wife, respectively, no Director or executive officer is related to any other
Director or executive officer by blood or marriage.
BACKGROUND
The following is a brief summary of the background of each nominee for
election as a Director of the Corporation:
CARLOS M. SAMOUR, PH.D., the Corporation's Chairman of the Board of
Directors and its Scientific Director, founded the Corporation in 1981. Since
1990, Dr. Samour has served in an unpaid capacity as President and Chairman of
the Augusta Epilepsy Research Foundation, a non-profit organization, in
Washington, D.C. From 1958 until the formation of the Corporation, Dr. Samour
was director of the corporate research laboratory at The Kendall Corporation, a
general medical supply company, and its Lexington Laboratory after Kendall was
acquired by Colgate-Palmolive Corporation in 1972. Dr. Samour is the inventor of
many of the technologies under development by the Corporation and is responsible
for managing research and product development activities. He received an M.S.
degree from the Massachusetts Institute of Technology and a Ph.D. degree in
organic chemistry from Boston University.
ALVIN J. KARLOFF has served as the Corporation's Chief Executive Officer,
President and as a Director since January 1990. In 1986, Mr. Karloff founded
Medical and Scientific Enterprises, Inc., a privately held medical diagnostic
equipment company, where he served as Chairman, Chief Executive Officer and
President prior to joining the Corporation. Mr. Karloff was Director of
Marketing for Medical Products with New England Nuclear ("NEN"), a Dupont
company, from 1984 to 1985, and from 1969 to 1984, he served as Marketing
Manager, Sales Manager, and in several other sales and marketing positions for
NEN. Mr. Karloff holds a B.S. degree from the University of Massachusetts.
(12)
<PAGE>
WILLARD M. BRIGHT, PH.D., has served as a Director of the Corporation since
December 1992. Since 1982, Dr. Bright has served as a Director (from 1982 to
July 1996 as Chairman of the Board of Directors) of Zoll Medical Corporation, a
publicly held medical supply company. Prior to 1982, Dr. Bright served as
President and Chief Executive Officer of The Kendall Corporation; as President
of the Professional Products Division of Warner Lambert; as President of
Boehringer Manheim Corporation USA, a manufacturer of medical products and
biochemicals; and as President and Director of Curtiss-Wright Corp., a
manufacturer of aerospace and industrial products. Dr. Bright received B.S. and
M.S. degrees from the University of Toledo and a Ph.D. in physical chemistry
from Harvard University.
PETER G. MARTIN has served as a Director of the Corporation since 1995.
Since 1990 Mr. Martin has been an independent investment banker and venture
capitalist. Prior to 1990 he was a commercial banker. Mr. Martin is also a
director of KFX, Inc., a public company engaged in coal beneficiation. Mr.
Martin was initially elected to the Board of Directors as the designee of David
Russell, who privately purchased 1 million shares of the Corporation's Common
Stock in 1995. Mr. Russell is no longer entitled to designate a Director of the
Corporation. Mr. Martin received B.A. and J.D. degrees from Fordham University
and an M.B.A. from Columbia University.
STEPHEN J. RIGGI, PH.D., has served as the Corporation's Vice President,
Operations since February 1996 and as a Director of the Corporation since August
1996. He was President and Chief Executive Officer of Telor Ophthalmic
Pharmaceuticals, Inc. from 1989 until 1994. Dr. Riggi served in research and
development positions with Lederle Laboratories from 1963 until 1974, and in
research and development and operations positions with the Pennwalt Corporation
Pharmaceutical Division, of which he became President in 1985. He is a graduate
of the University of Tennessee School of Basic Medical Sciences, where he
received master's and doctor's degrees in physiology and pharmacology.
MICHAEL A. DAVIS, M.D., SC.D. Since 1980 Dr. Davis has been Professor of
Radiology and Nuclear Medicine Director, Division of Radiologic Research,
University of Massachusetts Medical School. Since 1982 Dr. Davis has been
Adjunct Professor of Nuclear Medicine at Tufts University School of Veterinary
Medicine, and since 1986, Affiliate Professor of Biomedical Engineering at
Worcester Polytechnic Institute. He has provided medical consulting services to
the Corporation since 1991. He is also a director of EZ EM, Inc., a public
company engaged in supplying oral radiographic contrast media, as well as
medical devices. Dr. Davis received B.S. and M.S. degrees from Worcester
Polytechnic Institute, S.M. and Sc.D. degrees from the Harvard School of Public
Health, an M.B.A. from Northeastern University and an M.D. from the University
of Massachusetts Medical School.
EXECUTIVE OFFICERS
The executive officers of the Corporation, their ages and their positions
with the Corporation are as follows:
Name Age Position
- -------------------------------------------------------------------------------
Carlos M. Samour........76 Chairman of the Board of Directors and
Scientific Director
Alvin J. Karloff........65 Chief Executive Officer, President and Director
Stephen J. Riggi........59 Vice President, Operations
Pierrette E. Samour.....72 Treasurer and Secretary
(13)
<PAGE>
The following is a brief summary of the background of Pierrette E. Samour.
The backgrounds of the Corporation's other executive officers, Dr. Samour, Mr.
Karloff and Dr. Riggi, are summarized above.
PIERRETTE E. SAMOUR, the Corporation's Treasurer since February 1993 and
Secretary since May 1992, co-founded the Corporation in 1981 along with her
husband, Carlos Samour. Mrs. Samour served as the Corporation's Clerk from 1985
through 1992 and as its Assistant Treasurer from 1985 through February 1993.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's officers and directors, and persons who beneficially own more than
10 percent of the Corporation's Common Stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. Based solely on its review of
the copies of such reports received by it, and written representations from
certain reporting persons that no Forms 5 were required for those persons, the
Corporation believes that during the fiscal year ended December 31, 1996 all
filing requirements applicable to its officers, directors, and such 10 percent
beneficial owners were complied with, except that D. Ray Taylor filed a late
report covering one sale of the Corporation's Common Stock, Peter Janssen filed
a late report covering four sales of the Corporation's Common Stock, and Peter
Martin failed to file a report covering a purchase of the Corporation's Common
Stock and a report covering a sale of the Corporation's Common Stock.
(14)
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation earned by or paid or
awarded to Dr. Samour and Mr. Karloff during each of the three fiscal years
ended December 31, 1996 and to Dr. Riggi during the fiscal year ended December
31, 1996:
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
- --------------------------------------------------------------------------------
Securities
Other Annual Underlying
Name and Principal Salary Bonus Compensation Options
Position Year $ $(1) $(2) #
- --------------------------------------------------------------------------------
Carlos M. Samour 1996 185,000 33,300 10,959 280,000
Chairman, Scientific 1995 155,000 27,900 13,643 -----
Director and Director 1994 153,750 27,675 14,709 240,000
Alvin J. Karloff 1996 185,000 33,300 13,140 240,000
President, Chief 1995 155,000 27,900 12,530 -----
Executive Officer and 1994 153,750 27,675 13,462 240,000
Director
Stephen J. Riggi (3) 1996 133,557 ----- 408 180,000
Vice President,
Operations and Director
- --------------------------------------------------------------------------------
(1) Since March 1992, Dr. Samour and Mr. Karloff have each received, in lieu of
retirement benefits, annual payments equal to eighteen percent of their
salaries.
(2) Includes amounts paid for taxable group term life insurance. Also includes
for Dr. Samour and Mr. Karloff a monthly automobile allowance of $500 net
of taxes, plus a health insurance benefit equal to the annual premium each
individual pays under separate health insurance policies maintained by
their former employers, which health insurance benefit is paid in lieu of
any other health, medical or retirement benefits.
(3) Dr. Riggi's employment commenced on February 12, 1996.
(15)
<PAGE>
STOCK OPTIONS
The following table provides information concerning the grant of stock
options during the fiscal year ended December 31, 1996 to Dr. Samour, Mr.
Karloff and Dr. Riggi:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------
Potential
Realizable
Value
at Assumed
Annual Rates
of Stock Price
Number of % of Total Appreciation for
Securities Options Exercise Option Term
Underlying Granted to or Base -----------
Options Employees in Price Expiration 5% 10%
Name Granted(#) Fiscal Year ($/Sh) Date ($) ($)
- --------------------------------------------------------------------------------
Carlos M. Samour 280,000(1) 27% 5.875 June 2006 1,034,500 2,621,700
Alvin J. Karloff 240,000(2) 23% 4.875 August 2006 735,800 1,864,700
Stephen J. Riggi 180,000(3) 17% 5.875 March 2006 665,100 1,685,400
- -------------------------------------------------------------------------------
(1) The option granted to Dr. Samour was granted in June 1996 under the
Corporation's 1994 Equity Incentive Plan at an exercise price of $5.875
per share. The option expires ten years from the date of grant and vests
with respect to all 280,000 shares in June 1997.
(2) The option granted to Mr. Karloff was granted in August 1996 under the
Corporation's 1994 Equity Incentive Plan at an exercise price of $4.875 per
share. The option expires ten years from the date of grant and vests with
respect to all 240,000 shares in August 1997.
(3) The option granted to Dr. Riggi was granted in March 1996 under the
Corporation's 1994 Equity Incentive Plan at an exercise price of $5.875 per
share. The option expires ten years from the date of grant and vests with
respect to 60,000 shares in February in each of 1997, 1998, and 1999.
(16)
<PAGE>
The following table provides information concerning unexercised options
held by Dr. Samour, Mr. Karloff and Dr. Riggi as of December 31, 1996 (no
options were exercised by these persons during the fiscal year ended December
31, 1996):
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options at Options at
Fiscal Year-End Fiscal Year-End
# $ (1)
- -------------------------------------------------------------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- -------------------------------------------------------------------------------
Carlos M. Samour (2) 415,080/280,000 $ 1,901,422/NA
Alvin J. Karloff 840,000/240,000 $ 4,477,500/NA
Stephen J. Riggi 0/180,000 $ 0/NA
- --------------------------------------------------------------------------------
(1) The value of Dr. Samour's and Mr. Karloff's in-the-money unexercised
options at the end of the fiscal year ended December 31, 1996 was
determined by multiplying the number of options held by the difference
between the market price of the Common Stock underlying the options on
December 31, 1996 ($6.50 per share) and the exercise price of the options
granted. Dr. Samour holds 175,080 options exercisable at $.4375 per share
and Mr. Karloff holds 600,000 options exercisable at $.4375 per share.
(2) Does not include options to purchase up to 300,000 shares of Common Stock
granted to Pierrette Samour, Dr. Samour's wife, of which he is deemed to
have beneficial ownership. If such 300,000 options were included,
Dr. Samour would be deemed to have had a total of 715,080 exercisable
options as of December 31, 1996, the value of which would have been
$3,196,422.
DIRECTORS' COMPENSATION
Each non-employee Director of the Corporation receives compensation of
$4,000 annually, $500 per meeting attended, $300 for each committee meeting
attended if held on a separate day from a Board of Directors meeting, $300 per
telephone meeting and reimbursement of travel expenses in connection with
attending meetings of the Board of Directors. Dr. Bright receives additional
Director compensation of $1,000 per month. Dr. Samour, Mr. Karloff and Dr. Riggi
do not receive any additional compensation for their services as Directors.
During 1996 each non-employee Director was granted stock options as follows: Dr.
Bright - 10,000; Mr. Martin - 10,000; and Mr. Taylor - 10,000. The options are
all exercisable at $4.875 per share and become fully vested on May 24, 1997.
The Corporation entered into Consulting Agreements commencing January 1993,
with each of E. Donald Shapiro and Abraham Cohen, both former Directors of the
Corporation, pursuant to which Messrs. Shapiro and Cohen provided advice on the
general development of the Corporation's business. Under the Consulting
Agreements the Corporation paid each of Mr. Shapiro and Mr. Cohen $1,000 per
month through March 1996.
(17)
<PAGE>
Michael A. Davis, a nominee for election as a Director, entered into a
Finder's Compensation Agreement dated March 7, 1996 with the Corporation. The
Agreement provides for the Corporation to pay Dr. Davis a fee equal to 5% (up to
a maximum or $250,000) for each agreement resulting from his introduction for
(a) up-front licensing fees received by the Corporation for the use of SEPA(R)
or other technologies in any over-the-counter or pharmaceutical product and (b)
royalties received by the Corporation for products licensed with SEPA(R)or other
technologies. No such fees have been paid to date to Dr. Davis. In addition, the
Corporation currently compensates Dr. Davis at the rate of $3,000 per month for
medical consulting services.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Corporation has entered into employment agreements of indefinite length
effective as of November 1, 1992 with each of Dr. Samour and Mr. Karloff. Each
agreement currently provides for annual compensation of $200,000. Each agreement
also provides for a monthly automobile allowance of $500 net of taxes and a
payment equal to 18% of the individual's base salary, which payment is in lieu
of retirement benefits. Further, each agreement provides for the payment of 12
months' salary in the event the individual is terminated without cause. In
addition, each agreement precludes the individual from competing with the
Corporation during his employment and for a period of one year thereafter, and
from disclosing confidential information.
The Corporation has entered into an employment agreement of indefinite
length effective as of March 25, 1996 with Dr. Riggi. The agreement currently
provides for annual compensation of $160,000 and for the payment of six months'
salary in the event he is terminated without cause. In addition, the agreement
precludes Dr. Riggi from competing with the Corporation during his employment
and for a period of two years thereafter, and from disclosing confidential
information.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Corporation's Compensation Committee consists of Mr. Taylor (Chairman),
Mr. Martin and Dr. Bright.
Notwithstanding anything to the contrary set forth in any of the previous
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings, including this
Annual Report on Form 10-K, in whole or in part, the following report and the
Performance Graph on page 20 shall not be incorporated by reference into any
such filings.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors consists of Mr. Taylor
(Chairman), Mr. Martin and Dr. Bright. The Committee's responsibilities include
determining the compensation of the Corporation's executive officers, making
awards under the Corporation's stock option plans and making recommendations to
the Board of Directors with regard to the adoption of new employee benefit
plans. No member of the Committee was an officer or employee of the Corporation
during the year ended December 31, 1996.
The Corporation's executive compensation programs reflect input from the
Corporation's Chairman and from its Chief Executive Officer. The Compensation
Committee reviews their proposals concerning executive compensation and makes a
final determination concerning the scope and nature of compensation
arrangements. The action of the Committee is reported to the Corporation's
entire Board of Directors. It is the Corporation's current policy to establish,
structure and administer compensation plans and arrangements so that the
deductibility to the Corporation of such compensation will not be limited under
Section 162(m) of the Internal Revenue Code.
(18)
<PAGE>
CEO COMPENSATION
The Corporation and Mr. Karloff are parties to an employment agreement with
a 1996 base salary of $185,000, compared with a 1995 base salary of $155,000.
The increase in 1996 was based on his accomplishments listed in the following
paragraph. Under the contract, Mr. Karloff also receives payments equal to 18%
of base salary in lieu of receiving certain benefits from the Corporation.
During the year ended December 31, 1996, Mr. Karloff received these payments, as
provided by the employment contract. These payments were not related to the
Corporation's performance during the period.
In August 1996 the Committee granted Mr. Karloff a stock option to purchase
240,000 shares of the Corporation's Common Stock at an exercise price of $4.875
per share, vesting in one year. In June 1996 Dr. Samour received a stock option
to purchase 280,000 shares of the Corporation's Common Stock at an exercise
price of $5.875 per share, vesting in one year. The terms of these options were
determined subjectively. These option grants were in part compensation for
accomplishments of Mr. Karloff and Dr. Samour during the period since February
1994 as well as future incentive. During the period, Mr. Karloff and Dr. Samour,
among other things, arranged a private placement in which the Corporation
received net proceeds of approximately $2.4 million; facilitated the orderly
exercise of Unit Purchase Options and Class A Warrants, Class AA Warrants and
Class X Warrants, resulting in net proceeds of approximately over $12 million;
supervised the construction of an on-site production facility that conforms to
the FDA's current Good Manufacturing Practices (cGMP) to produce and supply
products for use in pre-clinical and clinical evaluations; built a dedicated and
competent management and research team; secured FDA approval of an
Investigational New Drug (IND) application to conduct a double-blind Phase II
clinical trial with a SEPA/Ibuprofen formulation for treating muscle pain; and
initiated a Phase I/II clinical trial of a topical formulation for treating
erectile dysfunction. No specific weight was assigned to each of these
accomplishments by the Committee.
EXECUTIVE OFFICER COMPENSATION
The Corporation maintains compensation and incentive programs designed to
motivate, retain and attract capable management. Dr. Samour and Dr. Riggi are
also parties to employment contracts with the Corporation described elsewhere in
this Annual Report on Form 10-K. The compensation levels provided for in the
Corporation's employment contracts with its executive officers are determined
subjectively, but reflect consideration of the compensation levels of comparable
companies, the achievements and potential of the officer and negotiations with
the officer.
Ongoing executive officer compensation is determined subjectively, in that
the Chairman and the Chief Executive Officer provide recommendations to the
Compensation Committee for the proposed remuneration of the Corporation's
officers based on their perceptions of those individuals' performance against
objectives jointly formulated by the Chairman, the Chief Executive Officer and
the officers, any change in their functional responsibilities, their potential
to contribute to the success of the Corporation and the compensation levels
provided to officers of comparable companies. No specific weights have been
assigned to these factors by the Committee.
(19)
<PAGE>
Officer compensation is generally composed of cash compensation and grants
of options under the Corporation's stock option plans. Options generally vest
over three years, in order to serve as a future incentive. There is no set
formula for the award of stock options to individual executives. Factors
considered in making option awards include prior grants to the officer, the
importance of retaining the officer's services, the officer's potential to
contribute to the success of the Corporation and the officer's past
contributions to the Corporation.
Dated: April 17, 1997 COMPENSATION COMMITTEE
D. Ray Taylor
Peter G. Martin
Willard M. Bright
PERFORMANCE GRAPH
The following five-year performance graph compares the cumulative total
shareholder return (assuming reinvestment of dividends) on $100 invested in the
Corporation's Common Stock for the five-year period from December 31, 1991
through December 31, 1996 with similar investments in the NASDAQ Market Index of
companies and a New Peer Group Index of the following four companies that
provide similar services to those provided by the Corporation -- ALZA
Corporation, Cygnus Inc., Noven Pharmaceuticals Inc. and Theratech Inc. The New
Peer Group Index has been changed from the Former Peer Group Index used in the
Proxy Statement for the 1996 Annual Meeting of Stockholders. Theratech Inc. has
been added because it closely resembles the Corporation in the size, focus and
character of its activities. Elan Plc has been deleted because it bears less of
a resemblance to the Corporation in the size, focus and character of its
activities.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN (1)
AMONG MACROCHEM CORPORATION, THE NASDAQ STOCK MARKET-U.S. INDEX,
AN OLD PEER GROUP AND A NEW PEER GROUP
1991 1992 1993 1994 1995 1996
MacroChem Corporation $100 $258 $142 $ 74 $168 $274
NASDAQ Market Index $100 $116 $134 $131 $185 $227
Former Peer Group Index (2) $100 $ 98 $ 77 $ 55 $ 76 $ 87
New Peer Group Index (3) $100 $ 95 $ 63 $ 41 $ 60 $ 61
___________________________
(1) $100 invested on 12/31/91 in stock or index - including reinvestment of
dividends. Fiscal year ending December 31.
(2) Former Peer Group Companies: ALZA Corporation, Cygnus Inc., Elan Plc and
Noven Pharmaceuticals Inc.
(3) New Peer Group Companies: ALZA Corporation, Cygnus Inc., Noven
Pharmaceuticals Inc. and Theratech Inc.
(20)
<PAGE>
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 28, 1997, certain
information concerning stock ownership of the Corporation by (i) each person
known by the Corporation to be the beneficial owner of more than five percent
(5%) of the Corporation's Common Stock, (ii) each of the Corporation's Directors
and nominees for Director, (iii) each of the executive officers named in the
Summary Compensation Table and (iv) all Directors and executive officers as a
group. Except as otherwise indicated, the stockholders listed in the table have
sole voting and investment powers with respect to the shares indicated.
NUMBER OF SHARES
NAME AND ADDRESS OF COMMON STOCK PERCENTAGE
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED OF CLASS
- --------------------------------------------------------------------------------
Carlos M. and Pierrette E. Samour(2)(3)... 1,226,000 7.8%
Alvin J. Karloff(2) ...................... 840,000 5.3%
D. Ray Taylor(2) ......................... 20,000 *
Willard M. Bright(2) ..................... 50,000 *
Peter G. Martin(2) ....................... 10,000 *
Stephen J. Riggi(2)....................... 60,000 *
Michael A. Davis.......................... 10,000 *
Bruce Meyers(4) .......................... 1,433,895 9.1%
17 State Street
New York, NY 10004
Peter Janssen(4).......................... 1,918,895 12.2%
17 State Street
New York, NY 10004
Mellon Bank Corporation(5)................ 1,415,000 9.0%
One Mellon Bank Center
Pittsburgh, PA 15258
David Russell(6).......................... 1,110,102 7.0%
45 Park Place South, Suite 103
Morristown, NJ 07960
WisdomTree Capital Management, Inc. (7)... 979,100 6.2%
1633 Broadway
New York, NY 10019
All Directors and Officers as a Group
(7 persons) (2)....................... 2,216,000 14.1%
- --------------------------------------------------------------------------------
* Less than one percent (1%).
(1) The address of Dr. Samour, Mrs. Samour, Mr. Karloff, Mr. Taylor, Dr. Bright,
Mr. Martin, Dr. Riggi and Dr. Davis is c/o the Corporation, 110 Hartwell
Avenue, Lexington, Massachusetts 02173.
(2) Includes the following number of shares issuable upon the exercise of stock
options or warrants exercisable within 60 days: Dr. and Mrs. Samour 715,080;
Mr. Karloff 840,000; Mr. Taylor 15,000; Dr. Bright 50,000;
Mr. Martin 10,000; Dr. Riggi 60,000; Dr. Davis 10,000.
(3) Includes 33,500 shares held by trusts for the benefit of Dr. and Mrs.
Samour's children. Dr. and Mrs. Samour have voting and dispositive power
over, but disclaim beneficial ownership with respect to, such shares.
(4) Includes the following number of shares issuable upon the exercise of
warrants, options, or unit purchase options exercisable immediately:
Mr. Meyers 1,421,395 and Mr. Janssen 1,693,896, including 33,279 shares and
33,279 shares, respectively, issuable upon exercise of a warrant owned by
Janssen-Meyers Associates, L.P. ("Janssen-Meyers"). Messrs. Janssen and
Meyers each own 50% of Janssen-Meyers and each has voting and dispositive
power over 50% of the shares beneficially owned by Janssen-Meyers.
(21)
<PAGE>
(5) Of the 1,415,000 shares shown for Mellon Bank Corporation, its Schedule 13G
as amended on January 24, 1997 shows the following: 1,415,000 shares of
which the sole voting power and shared dispositive power are held by Mellon
Bank, N.A. and The Dreyfus Corporation, and 875,000 shares of which the sole
voting power and shared dispositive power are held by Premiere Capital
Growth Fund.
(6) The 1,110,102 shares shown for Mr. Russell include 100,000 shares owned by
Mr. Russell's wife; although Mr. Russell disclaims beneficial ownership of
such 100,000 shares. 1,010,102 of the shares shown for Mr. Russell are held
by Emin Company, L.L.C., which is controlled by Mr. Russell.
(7) Includes 831,700 shares for which voting and dispositive power is shared
with WisdomTree Associates, L.P., and 147,400 shares for which voting and
dispositive power is shared with WisdomTree Offshore, Ltd., according to a
Schedule 13D dated February 5, 1997.
(22)
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
Pursuant to a consulting agreement dated July 27, 1995 and expiring on
March 27, 1996, the Corporation engaged Janssen-Meyers Associates, L.P.
("Janssen-Meyers") to perform consulting services relating to corporate finance
and other financial service matters and to act as co-soliciting agent with D.H.
Blair Investment Banking Corp. in connection with certain exercises of the
Corporation's Class A Warrants and Class AA Warrants. The Corporation
compensated Janssen-Meyers at the rate of $5,000 per month, plus pre-approved
expenses. On June 17, 1996, in connection with services performed for the
Corporation, Janssen-Meyers received a warrant, expiring June 17, 1999, for the
purchase of 145,800 shares of the Corporation's Common Stock at a price of
$6.075 per share. The Corporation has agreed to pay Janssen-Meyers a monthly fee
of $5,000 for consulting services relating to public relations from December
1996 through April 1997. Peter Janssen and Bruce Meyers, who own 50% and 50%,
respectively, of Janssen-Meyers, owned 1,918,895 shares (12.2%) and 1,433,895
shares (9.1%), respectively, of the Corporation's Common Stock as of February
28, 1997.
(23)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused Amendment No. 1 to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MACROCHEM CORPORATION
Dated: October 23, 1997 By: /s/ Alvin J. Karloff
Alvin J. Karloff
President, Chief Executive Officer
and Principal Financial Officer
(24)
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