U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
AMENDMENT NO. 1
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 (Fee required)
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
of 1934 (No fee required)
For the transition period from to
Commission file number 0-26422
DISCOVERY LABORATORIES, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 94-3171943
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
509 MADISON AVENUE, 14TH FLOOR, NEW YORK, NEW YORK 10022
(Address of Principal Executive Offices Including Zip Code)
(212) 223-9504
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value Class A Warrants Class B Warrants
(Title of Class) (Title of Class) (Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year. $ 0.00
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 24, 1998: $30,941,8821
State the number of shares outstanding of each class of the issuer's common
equity as of March 24, 1998: 3,175,955 shares of Common Stock, par value.
- --------
1 Outstanding shares of the issuer's Series B Convertible Preferred Stock, par
value $0.001 per share, are valued on the basis of the number of shares of the
issuer's Common Stock, par value $0.001 per share, into which such preferred
shares are convertible.
2
The undersigned registrant hereby amends the following items of its Report on
Form 10-K for the year ended December 31, 1997 as set forth below.
ITEM 7. FINANCIAL STATEMENTS
NOTE L - SUBSEQUENT EVENTS
On March 5, 1998, the Company entered into an agreement and plan of
reorganization and merger with ATI and ATI Acquisition Corp. ("Acquisition
Sub"), a wholly owned subsidiary of the Company (the "ATI Merger Agreement").
Pursuant to the ATI Merger Agreement, subject to receipt of approval of the
stockholders of the Company and ATI and the fulfillment of other conditions,
Acquisition Sub will merge (the "ATI Merger") with and into ATI in a transaction
in which (i) ATI will be the surviving corporation, (ii) the existing holders of
ATI common stock will receive 3.91 shares of common stock for each share of ATI
common stock held by such holders and (iii) certain outstanding ATI options will
be assumed by Discovery and will become exercisable for 3.91 shares of common
stock per share of ATI common stock for which such options are presently
exercisable (the "ATI Transaction"). Pending the closing of the merger, the
Company will be managed by ATI's management team pursuant to a management
agreement entered into simultaneously with the execution of the ATI Merger
Agreement (the "Management Agreement"). The Company has agreed to pay to ATI 50%
of the salary expense attributable to the ATI management team during the period
from the execution of the ATI Merger Agreement through the date of any
termination or abandonment of the transactions contemplated by the ATI Merger
Agreement if the ATI Merger is not consummated due to a breach of the ATI Merger
Agreement by Discovery or its stockholders. Members of ATI's management team
(the "ATI Management Members") will be issued options to purchase an aggregate
of 338,500 shares of the Company's common stock in connection with the ATI
Merger and additional options to purchase an aggregate of 335,000 shares subject
to the achievement of certain corporate milestones. Upon execution of the ATI
Management Agreement, ATI Management Members were granted options to purchase an
aggregate of 126,500 shares of the Company's common stock, which will vest on
the earlier of the consummation of the ATI Merger or on the termination of the
ATI Management Agreement by the Company in the absence of a material breach
thereof by ATI, provided that in the case of the ATI Management Members other
than its President, such options shall vest over a three-year period in the
event the ATI Merger is completed. If the ATI Merger has not occurred by July
15, 1998 due to action or inaction by the Company, its management or its
stockholders, all such options shall be immediately vested in full.
Pro forma results of operations of the Company, giving effect to the ATI Merger
as if it had occurred at the beginning of 1997 would not differ from the
historical consolidated results of the Company as the operations of ATI have
been included in the consolidated results of the Company. A substantial
nonrecurring charge for in-process research and development which will be
recorded by the Company upon consummation of the ATI Merger.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Item 9 is hereby amended as follows:
Section 16(a) of the Exchange Act requires the Company's directors, executive
officers (including a person performing a principal policy-making function) and
persons who own more than 10% of a registered class of the Company's equity
securities ("10% Holders") to file with the SEC initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Directors, officers and 10% Holders are required by SEC regulations
to furnish the Company with copies of all of the Section 16(a) reports they
file. Based solely upon a review of the copies of the forms furnished to the
Company and the representations made by the reporting persons to the Company,
the Company believes that during fiscal 1997 its directors, officers and 10%
Holders complied with all substantive filing requirements under Section 16(a) of
the Exchange Act except that Paramount Capital Asset Management, Inc. ("PCAM")
and The Aries Fund, a Cayman Island Trust (the "Aries Fund") did not timely file
Form 3's reporting beneficial ownership of more than ten percent of a class of
equity securities of the Company. A Form 5 was timely filed by each of the Aries
Fund and PCAM.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned by
the persons who served as Discovery's chief executive officer during the last
completed fiscal year (the "Named Officers" for services rendered in all
capacities to Discovery for each of the last three completed fiscal years). No
other executive officer earned compensation in excess of $100,000 for services
rendered to the Company during the last completed fiscal year, and no executive
officer who would have otherwise been included in such table resigned or
terminated employment during that year.
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
Securities
Name and Other Annual Restricted Underlying All Other
Principal Position Year Salary Bonus Compensation Stock Award(s) Options/SARs Compensation
- ------------------ ---- ------ ----- ------------ -------------- ------------ ------------
($) ($) ($) ($) (#) ($)
James S. Kuo, M.D. 1997 $175,000 $50,000(1) -- -- 77,831 --
President, Chief 1996 $102,708 $30,000(1) -- (2) -- --
Executive Officer & 1995 --- --- -- -- -- --
Director
Vaughan Shalson 1997 $150,013 -- -- -- -- (3)
Former President and 1996 -- -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- -- --
S. Mark Moran, M.D. 1997 $ 43,885 -- -- -- -- --
Former President and 1996 $190,657 $157,185 -- $120,000 27,439 --
Chief Executive Officer 1995 $138,750 $120,000 --- -- 20,948 --
(1) Bonus amounts earned by Dr. Kuo with respect to 1996 and 1997 were paid to
Dr. Kuo in 1997 and 1998, respectively.
(2) In May 1996, Old Discovery issued 340,000 shares of Old Common Stock, par
value $0.001 per share ("Old Discovery Common Stock") to Dr. Kuo at a purchase
price of $0.002. At the time of issuance, there was no market for such shares.
Such shares were converted into 132,313 shares of Discovery Common Stock as a
result of the 1997 Merger and the Reverse Split.
(3) Mr. Shalson is entitled to six months' salary as a severance payment
pursuant to his employment agreement with the Company, as amended. $15,417 of
such amount is included in his 1997 salary amount.
3
Option Grants In Last Fiscal Year(1)
The following table contains information concerning the stock option grants made
to the Named Officers for the fiscal year ended December 31, 1997. No stock
appreciation rights were granted to these individuals during such year.
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base
Name Expiration Date Granted in Fiscal Year Price ($/sh)(2)
---- --------------- ------- -------------- ---------------
James S. Kuo, M.D.(3) 1/20/07 77,831 21.8% $0.51
Vaughan Shalson 111/25/99 60,666 17.0% $4.50
S. Mark Moran, M.D. -- -- -- --
(1) Based on combined issuances by the Company and Old Discovery. The options
granted to Dr. Kuo during 1997 vest according to the following schedule: 25% as
of January 1, 1997 and 2.1% on the last day of each month commencing January 31,
1997. The options granted to Mr. Shalson during 1997 are vested and exercisable
immediately.
(2) The exercise price of options issued by Discovery and options issued by Old
Discovery may be paid in cash, in shares of Common Stock valued at the fair
market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. Discovery may also finance
the exercise of options issued by Discovery by loaning the optionee sufficient
funds to pay the exercise price for the purchased shares.
(3) Represents options granted to Dr. Kuo as Chief Executive Office of Old
Discovery and assumed by the Company in the Merger.
Aggregate Option Exercises In Last Fiscal Year And Fiscal Year-End Option Values
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1997 with respect to the
Named Officers. No stock appreciation rights were exercised during such year or
were outstanding at the end of that year.
Number of Securities Underlying Value of Unexercised
Shares Acquired Unexercised Options at FY-End (#) In The Money Options at FY-End(1)
Name on Exercise(#) Exercisable Unexercisable(2) Exercisable Unexercisable(2)
---- -------------- ----------- ---------------- ----------- ----------------
James S. Kuo, M.D. -- 38,915 38,915(3) $130,948 $130,948
Vaughn Shalson -- 60,666 -- 0 --
S. Mark Moran 2,000 -- -- -- --
(1) Based on the fair market value of the Common Stock at year-end, $3.875 per
share, less the exercise price payable for such shares.
(2) Will become fully vested and exercisable upon Dr. Kuo's termination in
connection with the Merger.
EMPLOYMENT AGREEMENTS
In March 1996, Old Discovery entered into a three-year employment agreement with
Dr. Kuo (the "Kuo Employment Agreement"). The Kuo Employment Agreement was
assumed by the Company in connection with the 1997 Merger. Pursuant to the Kuo
Employment Agreement, Dr. Kuo received a salary of $145,000 per annum during
1996 and a salary of $175,000 per annum during
4
1997. Dr. Kuo received cash bonuses of $30,000 with respect to fiscal year 1996
and $50,000 with respect to fiscal year 1997. Pursuant to his employment
agreement, Dr. Kuo is entitled to health and life insurance coverage for his
family. On March 20, 1996, under the Kuo Employment Agreement, Dr. Kuo purchased
340,000 shares of Common Stock of Old Discovery for $0.002 per share. Such
shares were converted into 132,313 shares of Common Stock in the 1997 Merger. A
portion of such shares of Common Stock are subject to the Company's right of
repurchase in the event that Dr. Kuo's employment is terminated prior to the end
of the three-year term of the Kuo Employment Agreement; provided, however, that
in the event that Dr. Kuo's employment is terminated subsequent to the Merger,
and certain conditions are satisfied, the Company's right to repurchase such
shares will lapse.
In June 1996, Old Discovery entered into manager agreements with Mr. Kanzer and
Mr. Myrianthopoulos (the "Manager Agreements"). Pursuant to Mr. Kanzer's Manager
Agreement, which was assumed by the Company in the 1997 Merger, Mr. Kanzer is
entitled to $3,000 per month, while such Manager Agreement remains in effect.
Such Manager Agreement is terminable at any time by the Company. Mr.
Myrianthopoulos' Manager Agreement, pursuant to which he was entitled to receive
$1,500 per month, was terminated in June 1996 when Mr. Myrianthopoulos became a
full-time employee of Old Discovery.
Upon consummation of the Merger, Dr. Capetola will become the President and
Chief Executive Officer of Discovery and the remaining ATI Management Members
will assume executive positions at Discovery corresponding to their present
positions with ATI and on substantially their present terms, including
compensation terms.
The employment agreements between ATI and the remaining ATI Management Members
(the "ATI Management Members' Employment Agreements"), provide for aggregate
base compensation in the amount of $829,000 for each year of their respective
three year employment terms. Pursuant to the ATI Management Members' Employment
Agreements, the ATI Management Members are eligible to receive incentive bonuses
at the discretion of, and in amounts to be determined by, ATI's Chief Executive
Officer. The ATI Management Members' Employment Agreements also provide that
such employees are entitled to health and disability benefits and life insurance
in the amount of the employee's annual base compensation. In the event of
termination without cause, the ATI Management Members' Employment Agreements
typically provide for severance payments of either 3 or 6 months subject to
set-off.
DIRECTOR COMPENSATION
Pursuant to Discovery's 1995 Stock Option Plan, non-employee Directors of
Discovery are entitled to receive an award of options for the purchase of 1,667
shares of Common Stock upon their election to the Board of Directors of
Discovery (the "Discovery Board") and an annual award of options for the
purchase of 333 shares of Common Stock following each annual meeting of
stockholders at which they are reelected. Director options are exercisable at a
price per share of Common Stock equal to the fair market value of the Common
Stock on the date of grant, become exercisable in four equal annual installments
commencing six months from the date of grant and expire upon the earlier of ten
years after the date of grant or 90 days after the termination of the Director's
service on the Discovery Board. In addition, each Discovery Director receives
cash compensation in the amount of $1,000 per quarter, $1,000 for each meeting
of the Board of Directors attended in person and $500 for each meeting of the
Board of Directors attended telephonically. Directors are not precluded from
serving the Company in any other capacity and receiving compensation therefor.
5
Assuming approval by Discovery's stockholders of the 1998 Discovery
Laboratories, Inc. Stock Incentive Plan (the "1998 Stock Incentive Plan") at the
1998 Annual Meeting, each individual who has previously served as a non-employee
Board member of Discovery or ATI and who is to serve as a non-employee Board
member of the Company following the Merger will automatically be granted at that
meeting a stock option to purchase 10,000 shares of Common Stock.. Each
individual who first becomes a non-employee member of the Board of the Company
or any of its subsidiaries after the date of the 1998 Annual Meeting, whether
through election by the stockholders or appointment by the Board, will receive,
at the time of such initial election or appointment, an automatic option grant
for 20,000 shares of Common Stock and, in addition, following each annual
meeting of stockholders at which they are reelected, will receive an option
grant under the Automatic Option Grant Program of such plan for 10,000 option
shares provided that such individual has served as a non-employee Board member
for at least six months. Each such option will have an exercise price equal to
60% of the fair market value of Discovery Common Stock on such date and will
have a maximum term of ten years, subject to earlier termination should the
optionee cease to serve as a Director of the Company. Each option will be
immediately exercisable for all of the option shares. However, the option shares
will be subject to repurchase by the Company, at the exercise price paid per
share, in the event of the optionee's termination of service prior to vesting in
the shares. The optionee will vest in the option shares in four equal annual
installments commencing six months after the date of grant.
In the event the Merger is not approved by the stockholders at the 1998 Annual
Meeting, the 1998 Stock Incentive Plan will not be implemented and the Directors
of Discovery will continue to receive option grants, as described above, under
Discovery's 1995 Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board is comprised of Mr. McDade and
Dr. Rogers. Neither Mr. McDade nor Dr. Rogers was at any time during the fiscal
year ended December 31, 1997, or at any other time, an officer or employee of
the Company. Neither Mr. McDade nor Dr. Rogers serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following sets forth certain information, as of March 31, 1998, regarding
the beneficial ownership of the Common Stock and Series B Preferred Stock (i) by
each person known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of the Common Stock or the Series B Preferred
Stock, (ii), by each of the named executive officers and directors of the
Company and (iii) by all officers and directors of the Company as a group.
MANAGEMENT
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL SHARES
OWNER BENEFICIALLY PERCENTAGE OF CLASS
(1) TITLE OF STOCK OWNED BENEFICIALLY OWNED
------------------------------------- -------------- ------------ ------------------
Steve H. Kanzer, C.P.A., Esq. (2) Common Stock 215,531 6.69%
787 Seventh Avenue, 48th Floor
New York, NY 10019
6
James S. Kuo, M.D. (3) Common Stock 240,145 7.31%
509 Madison Avenue, 14th Floor
New York, NY 10022
Evan Myrianthopoulos (4) Common Stock 112,540 3.50%
509 Madison Avenue, 14th Floor
New York, NY 10022
David Crockford (5) Common Stock 58,916 1.82%
509 Madison Avenue, 14th Floor
New York, NY 10022
Juerg F. Geigy, Esq. Common Stock 13,620 *
44 Elisabethenstrasse
CH-4051 Basel, Switzerland
Max Link, Ph.D. Common Stock 13,620 *
230 Central Park West, Apt.14A
New York, NY 10024
Herbert H. McDade, Jr. (6) Common Stock 13,620 *
Access Pharmaceuticals
660 White Plains Road, Suite 400
Tarrytown, NY 10591
Mark C. Rogers, M.D. (6) Common Stock 18,485 *
4406 W. Cornwallis Road
Durham, NC 27705
Vaughn H.J. Shalson (7) Common Stock 60,666 1.87%
39939 Stevenson Common
Apt K-3063
Freemont, CA 94538
Richard Sperber (8) Common Stock 9,274 *
304 West 75th Street, Suite 16H
New York, NY 10023
David Naveh, Ph.D. (9) Common Stock 7,600 *
Bayer Corporation
800 Dwight Way
P.O. Box 1986
Berkeley, CA 94701-1986
All Discovery directors and Common Stock 764,018 24.06%
officers as a group (11 persons)
PRINCIPAL STOCKHOLDERS
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL SHARES
OWNER BENEFICIALLY PERCENTAGE OF CLASS
(1) TITLE OF STOCK OWNED BENEFICIALLY OWNED
------------------------------------- -------------- ------------ ------------------
The Aries Fund, a Cayman Island Common Stock 337,105 9.77%
Trust (10)
c/o Mees Pierson (Cayman) Limited
P.O. Box 2003 Series B Preferred 173,250 7.82%
British American Centre, Phase 3 Stock
Dr. Roy's Drive
George Town, Grand Cayman
RAQ, LLC (11) Common Stock 1,001,739 31.54%
787 Seventh Avenue, 48th Floor
New York, NY 10019
7
Lindsay A. Rosenwald, M.D.(11) Common Stock 1,636,753 42.95%
787 Seventh Avenue, 48th Floor
New York, NY 10019 Series B Preferred 326,298 14.18%
Stock
Paramount Capital Asset Common Stock 481,578 13.49%
Management, Inc. (11)
787 Seventh Avenue, 48th Floor Series B Preferred 247,500 11.13%
New York, NY 10019 Stock
- --------------------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934 (the "Exchange Act") and includes voting and
investment power with respect to shares of Common Stock and Series B Preferred
Stock. Shares of Common Stock and Series B Preferred Stock subject to options or
warrants currently exercisable or exercisable within 60 days of the date hereof,
are deemed outstanding for computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for purposes of
computing the percentage ownership of any other person.
(2) Includes 15,566 shares of Common Stock issuable on the exercise of
outstanding options granted on January 1, 1997 and 30,000 shares of Common Stock
issuable on the exercise of outstanding options granted on January 2, 1998, all
of which are immediately exercisable. Shares of Common Stock subject to such
options vest twenty five percent at the time of grant with the balance vesting
in thirty-six equal monthly installments upon the optionee's successive
completion of service with the Company. Unvested shares of Common Stock subject
to such options remain subject to the Company's right to repurchase at the
exercise price paid per share. Does not include an additional 35,413 shares of
Common Stock owned by certain family members of Mr. Kanzer, as to which Mr.
Kanzer disclaims beneficial ownership.
(3) Includes 11,026 shares that are subject to the Company's right to repurchase
in the event Dr. Kuo's employment with the Company is terminated prior to
expiration of such right. The Company's right to repurchase lapses at quarterly
intervals over Dr. Kuo's three year employment term expiring April 1999. In
addition, in the event that Dr. Kuo's employment is terminated subsequent to the
Merger, and certain conditions are satisfied, the Company's right to repurchase
such shares will lapse. Also includes 77,831 shares of Common Stock issuable on
the exercise of outstanding options granted on January 1, 1997 and 30,000 shares
of Common Stock issuable on the exercise of outstanding options granted on
January 2, 1998, all of which are immediately exercisable. Shares of Common
Stock subject to such options vest twenty five percent at the time of grant with
the balance vesting in thirty-six equal monthly installments upon the optionee's
successive completion of service with the Company. Unvested shares of Common
Stock subject to such options remain subject to the Company's right to
repurchase at the exercise price paid per share.
(4) Includes 11,675 shares of Common Stock issuable on the exercise of
outstanding options granted on January 1, 1997 and 30,000 shares of Common Stock
issuable on the exercise of outstanding options granted on January 2, 1998, all
of which are immediately exercisable. Shares of Common Stock subject to such
options vest twenty five percent at the time of grant with the balance vesting
in thirty-six equal monthly installments upon the optionee's successive
completion of service with the Company. Unvested shares of Common Stock subject
to such options remain subject to the Company's right to repurchase at the
exercise price paid per share. Does not include an additional 1,906 shares of
Common Stock owned by Mr. Myrianthopoulos' brother, as to which Mr.
Myrianthopoulos disclaims beneficial ownership.
8
(5) Consists of 38,916 shares of Common Stock issuable on the exercise of
outstanding options granted on January 1, 1997 and 20,000 shares of Common Stock
issuable on the exercise of outstanding options granted on January 2, 1998, all
of which are immediately exercisable. Shares of Common Stock subject to such
options vest twenty five percent at the time of grant with the balance vesting
in thirty-six equal monthly installments upon the optionee's successive
completion of service with the Company. Unvested shares of Common Stock subject
to such options remain subject to the Company's right to repurchase at the
exercise price paid per share.
(6) Consists of 13,620 shares of Common Stock issuable on the exercise of
outstanding options, all of which are immediately exercisable and fully vested.
(7) Consists of 60,666 shares of Common Stock issuable on the exercise of
outstanding options, all of which are immediately exercisable and fully vested.
(8) Consists of 9,274 shares of Common Stock issuable on the exercise of
outstanding options, all of which are immediately exercisable and fully vested.
(9) Consists of 7,600 shares of Common Stock issuable on the exercise of
outstanding options, all of which are immediately exercisable and fully vested.
(10) Beneficial ownership of Common Stock includes (i) 245,168 shares issuable
on the conversion of Series B Preferred Stock, (ii) 6,129 shares issuable upon
exercise of warrants, all of which are exercisable within 60 days of the date
hereof, and (iii) 24,516 shares issuable on the conversion of Series B Preferred
Stock issuable on the exercise of warrants, all of which are exercisable within
60 days of the date hereof.
Beneficial ownership of Series B Preferred Stock includes 15,750 shares
issuable on the exercise of warrants, all of which are exercisable within 60
days of the date hereof.
(12) Dr. Rosenwald is Chairman, President and sole stockholder of PCAM. PCAM is
the general partner of Aries Domestic and the investment manager of Aries Fund.
As a consequence of these relationships, each of Dr. Rosenwald and PCAM may be
deemed to share beneficial ownership of the Common Stock and Series B Preferred
Stock beneficially owned by Aries. Dr. Rosenwald is also the Managing Member of
RAQ, LLC and, accordingly, may be deemed to have beneficial ownership of the
Common Stock beneficially owned by RAQ, LLC. Dr. Rosenwald disclaims beneficial
ownership of any securities issuable upon exercise of warrants granted to
employees of Paramount Capital, Incorporated ("Paramount Capital").
PCAM's and Dr. Rosenwald's beneficial ownership of Common Stock includes (i)
350,240 shares issuable upon conversion of Series B Preferred Stock held by
Aries, (ii) 8,755 shares issuable upon exercise of warrants exercisable for
Common Stock held by Aries, all of which are exercisable within 60 days of the
date hereof, and (iii) 35,023 shares issuable upon exercise of warrants
exercisable for Series B Preferred Stock held by Aries, all of which are
exercisable within 60 days of the date hereof. Dr. Rosenwald's beneficial
ownership also includes (iv) 111 shares issuable upon exercise of outstanding
options held by Dr. Rosenwald, (v) 30,665 shares issuable upon exercise of
warrants exercisable for Common Stock held by Dr. Rosenwald and (vi) 122,659
shares issuable upon exercise of warrants exercisable for Series B Preferred
Stock, all of which are exercisable within 60 days of the date hereof.
PCAM's and Dr. Rosenwald's beneficial ownership of Series B Preferred Stock
includes 22,500 shares issuable upon exercise of warrants exercisable for Series
B Preferred Stock held by Aries, all of which are exercisable within 60 days of
the date hereof. Dr. Rosenwald's beneficial ownership
9
also includes 78,798 shares issuable upon exercise of warrants exercisable for
Series B Preferred Stock held by Dr. Rosenwald.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 5, 1998, Discovery entered into the Merger Agreement with ATI and
Acquisition Sub relating to the Merger and, concurrently therewith, entered into
the Management Agreement with ATI.
Simultaneously with and as a condition to the closing of the 1997 Merger, the
Company repaid to Titan, which was a 32% stockholder of the Company at such
time, all outstanding indebtedness of Discovery to Titan (including indebtedness
under a convertible debenture in the original principal amount of $1 million
purchased by Titan in March 1997) pursuant to agreements (the "Titan
Agreements") reached between Discovery and Titan at the time the merger
agreement relating to the 1997 Merger was executed. Such indebtedness aggregated
approximately $1,200,000. Also pursuant to the Titan Agreements, upon
effectiveness of the 1997 Merger, (i) all of the capital stock of Discovery
owned by Titan was surrendered to Discovery for cancellation (other than certain
shares of capital stock currently held in escrow which will be cancelled upon
their release from escrow) and (ii) Discovery's rights pursuant to the Bar-Ilan
License Agreement underlying certain drug products that had been subject to
development efforts by Discovery prior to the Merger were transferred to Titan
in exchange for Titan's agreement to pay a 2% royalty to Discovery on any sales
of such drug products.
From Discovery's inception until the closing of the 1997 Merger, Titan provided
certain executive, administrative, financial, business development and
regulatory services to Discovery. During the year ended December 31, 1996, and
the year ended December 31, 1997, Discovery incurred expenses in the aggregate
of approximately $57,000 and $35,400, respectively, pursuant to the services
arrangement. Discovery has in the past used certain facilities and equipment
leased by Titan and reimbursed Titan for the expenses incurred by Titan with
respect to such use, in addition to having entered an assignment and sublease
with Titan, along with the other subsidiaries of Titan, under such equipment
lease. Discovery's liability with respect to such equipment lease has been
terminated.
In October 1996, ATI entered into a consulting agreement with The Sage Group
pursuant to which The Sage Group will be paid a monthly consulting fee of $7,500
through March 1998, subject to quarterly performance evaluation by the Chief
Executive Officer of ATI. Richard Power, a director of ATI, is a principal and
the executive director of The Sage Group.
Pursuant to a private equity offering conducted during June through November
1996 (the "Unit Offering") in which Paramount Capital acted as placement agent
for Old Discovery, Old Discovery raised aggregate gross proceeds of
approximately $22,002,000. In connection with services rendered by Paramount
Capital as placement agent for the Unit Offering, and pursuant to a placement
agency agreement (the "Placement Agency Agreement") entered into by Old
Discovery and Paramount Capital, Old Discovery paid Paramount Capital cash
commissions of approximately $1,980,000 and a non-accountable expense allowance
of approximately $880,000. In addition, Old Discovery issued placement warrants
to Paramount Capital that were assumed by the Company in the 1997 Merger and are
currently exercisable for 220,026 shares of Series B Convertible Preferred Stock
at an exercise price of $11 per share and 85,624 shares of Common Stock at an
exercise price of $0.64 per share. Pursuant to the Placement Agency Agreement,
on November 7, 1996, Old Discovery and Paramount Capital entered into a
financial advisory agreement (the "Financial Advisory Agreement"), pursuant to
which Paramount Capital receives a monthly retainer of $4,000 per month for a
minimum of 24 months (all of which was pre-paid by Discovery), plus expenses
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and success fees. The Financial Advisory Agreement was assumed by Discovery in
the 1997 Merger.
Old Discovery agreed to indemnify Paramount Capital and certain related parties
with respect to liabilities arising out of the Unit Offering under the Federal
securities laws pursuant to the Placement Agency Agreement. Old Discovery also
agreed to indemnify Paramount Capital and certain related parties with respect
to liabilities arising out of services rendered pursuant to the Financial
Advisory Agreement. Discovery assumed such obligations in connection with the
1997 Merger.
Lindsay A. Rosenwald, M.D., is the Managing Member of RAQ, LLC, a principal
stockholder of Discovery. In May 1993, Old Discovery issued a total of 1,132,500
shares of its common stock (equivalent to 440,720 shares of Common Stock) to Dr.
Rosenwald for $0.002 per share. Dr. Rosenwald subsequently transferred these
shares to RAQ, LLC. In March 1996, Old Discovery issued an additional 1,595,100
shares of its common stock (equivalent to 620,744 shares of Common Stock) to
RAQ, LLC at a price per share equivalent to $0.002.
Dr. Rosenwald is also the sole stockholder of PCAM (which in turn is the general
partner of the Aries Domestic Fund, L.P. ("Aries Domestic") and the investment
manager of The Aries Fund, a Cayman Island Trust ("Aries Fund" and, together
with Aries Domestic, "Aries")) and the Chairman of the Board of Directors, Chief
Executive Officer, President and sole stockholder of Paramount Capital. Dr.
Rosenwald is also a director of Titan and, prior to the 1997 Merger, was a
director of Discovery. Steven H. Kanzer, C.P.A., Esq., the Chairman of the Board
of Directors and a stockholder of Discovery, is a Senior Managing Director of
Paramount Capital and Senior Managing Director--Head of Venture Capital of
Paramount Investments. Kenneth Johnson, the Director of Business Development and
an option holder of Discovery, is a Technology Associate of an affiliate of
Paramount Capital. Evan Myrianthopolous, Chief Financial Officer of Discovery,
was previously a Technology Associate of Paramount Capital Investments, LLC.
Steven Birnbaum, Discovery's Project Manager for the ST-630 program for
postmenopausal osteoporosis, was previously employed by Paramount Investments as
a Technology Associate. Paramount Capital acted as placement agent in connection
with Titan's private equity placement during 1993 and in connection therewith
received fees (including a non accountable expense allowance) totaling
$2,306,100. In 1995, Paramount Capital received $148,500 in fees as placement
agent for a subsequent private equity placement by Titan.
During 1995 and the first quarter of 1996, Dr. Rosenwald provided loans to Old
Discovery in the aggregate amount of $17,794, the proceeds of which were used
for salary and administration purposes. Dr. Rosenwald contributed such loans to
the capital of Old Discovery prior to the initiation of the Unit Offering. Dr.
Rosenwald had guaranteed a credit facility provided by Fleet Bank in favor of
Old Discovery in an amount up to $350,000. The proceeds of these loans were used
by Old Discovery in connection with its entry into a license agreement and for
general operating and working capital purposes. The outstanding balance of such
loans, $201,000, was repaid in September 1996 using a portion of the proceeds of
the Unit Offering.
In February 1995, Old Discovery issued a total of 194,250 shares of its common
stock (equivalent to 75,593 shares of Common Stock) at a per share price
equivalent to $0.002 to Mr. Kanzer and an additional 85,000 shares (equivalent
to 33,078 shares of Common Stock) at such price to certain family member of Mr.
Kanzer. In March 1996, Old Discovery issued an additional 242,500 shares of its
common stock (equivalent to 94,370 shares of Common Stock) to Mr. Kanzer at such
price. In February 1995, Old Discovery issued an additional 1,500 shares of its
common stock and in March 1996 issued an additional 123,500 shares of its common
stock (equivalent to 583 shares of Common Stock and 48,061 shares of Common
Stock, respectively) to Mr. Myrianthopoulos at such price. In
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September 1996, Old Discovery issued an additional 62,000 shares of its common
stock (equivalent to 24,127 shares of Common Stock) to Mr. Myrianthopoulos at
such price in recognition of his identification and introduction of the
SurfaxinTM technology to Old Discovery, which preceded his employment by Old
Discovery. In September 1996, Old Discovery issued 50,000 shares of its common
stock (equivalent to 19,458 shares of Common Stock) to Steve Birnbaum at such
price.
In October 1996, Harris Kanzer, who is the father of Steve H. Kanzer, purchased
6,000 shares of Old Discovery's common stock (equivalent to 2,333 shares of
Common Stock) and 6,000 shares of preferred stock (equivalent to 6,000 shares of
Series B Preferred Stock) from Old Discovery in the Unit Offering.
Discovery has agreed pursuant to its charter documents to indemnify its
Directors to the maximum extent permissible under the General Corporation Law of
the State of Delaware (the "DGCL").
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DISCOVERY LABORATORIES, INC.
Date: April 30, 1998 By: /s/ Robert J. Capetola, Ph.D
--------------------------------
Robert J. Capetola, Ph.D
Acting Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE NAME & TITLE DATE
/s/ James S. Kuo, M.D.
-------------------------------
James S. Kuo, M.D. April 30, 1998
Director
/s/ Evan Myrianthopoulos
--------------------------------
Evan Myrianthopoulos
Chief Financial Officer April 30, 1998
(Principal Accounting Officer)
/s/ Steve H. Kanzer, C.P.A., Esq.
--------------------------------
Steve H. Kanzer, C.P.A., Esq.
Chairman of the Board April 30, 1998
---------------------------------
Mark C. Rogers, M.D.
Director April 30, 1998
/s/ Herbert McDade, Jr.
---------------------------------
Herbert McDade, Jr.
Director April 30, 1998
---------------------------------
Max Link, Ph.D.
Director April 30, 1998
/s/ David Naveh, Ph. D.
--------------------------------
David Naveh, Ph.D.
Director April 30, 1998
--------------------------------
Juerg Geigy, Esq.
Director April 30, 1998
/s/ Richard Sperber
--------------------------------
Richard Sperber
Director April 30, 1998
13