U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
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|_| Transition report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________to________
Commission file number 0-26422
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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.)
350 SOUTH MAIN STREET, SUITE 307, DOYLESTOWN, PENNSYLVANIA
18901 (Address of Principal Executive Offices Including Zip Code)
(215) 340-4699
(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
(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. $1,112,000.
The aggregate market value of all of the registrant's outstanding common stock,
par value $0.001 per share (26,385,680 shares, including shares of common stock
held by each director and executive officer (as such term is defined in Rule
16a-1(f) of the Exchange Act) and each person who beneficially owns 10% or more
of the outstanding shares of common stock), was approximately $83 million
computed by reference to the closing price of such common equity on the Nasdaq
SmallCap Market on March 18, 2002.
As of March 18, 2002, 21,835,063 shares of the registrant's common stock were
outstanding. The aggregate market value of voting and non-voting common equity
held by non-affiliates computed by using the closing price of such common equity
on the Nasdaq SmallCap Market on March 18, 2002, was approximately $69 million.
Shares of common stock beneficially owned by each director and executive officer
(as such term is defined in Rule 16a-1(f) of the Exchange Act) and each person
who beneficially owns 10% or more of the outstanding shares of common stock have
been excluded from the calculations set forth in this paragraph in that such
persons may be deemed affiliates of the registrant. This determination of
affiliate status is not necessarily conclusive.
The information required by Items 9 through 12 of Part III is incorporated by
reference to the extent described herein from our definitive proxy statement to
be filed with the Commission within 120 days after the end of our most recent
fiscal year.
Transitional Small Business Disclosure Format: YES |_| NO |X|
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Unless the context otherwise requires, all references to "we," "us," "our," and
the "Company" include Discovery Laboratories, Inc. ("Discovery"), and its
wholly-owned, presently inactive subsidiary, Acute Therapeutics, Inc.
FORWARD LOOKING STATEMENTS
The statements set forth under Item 1: "Description of Business" and elsewhere
in this prospectus, including in Item 6: "Management's Discussion and Analysis -
Risks Related to Our Business" and those incorporated by reference herein which
are not historical constitute "Forward Looking Statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the expectations, beliefs,
intentions or strategies for the future. We intend that all forward-looking
statements be subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are only
predictions and reflect our views as of the date they are made with respect to
future events and financial performance. Forward-looking statements are subject
to many risks and uncertainties which could cause our actual results to differ
materially from any future results expressed or implied by the forward-looking
statements.
Examples of the risks and uncertainties include, but are not limited to, the
inherent risks and uncertainties in developing products of the type we are
developing; possible changes in our financial condition; the progress of our
research and development (including the risk that our lead product candidate,
Surfaxin(R), will not prove to be safe or useful for the treatment of certain
indications); the impact of development of competing therapies and/or
technologies by other companies; our ability to obtain additional required
financing to fund our research programs; our ability to enter into agreements
with collaborators and the failure of collaborators to perform under their
agreements with us; the results of clinical trials being conducted by us; the
progress of the FDA approvals in connection with the conduct of our clinical
trials and the marketing of our products; the additional cost and delays which
may result from requirements imposed by the FDA in connection with obtaining the
required approvals; and the other risks and certainties detailed in Item 6:
"Management's Discussion and Analysis - Risks Related to Our Business," and in
the documents incorporated by reference in this report.
Except to the extent required by applicable laws or rules, we do not undertake
to update any forward-looking statements or to publicly announce revisions to
any of the forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY SUMMARY
We are a specialty pharmaceutical company applying our platform technology,
based on humanized lung surfactants, to develop potential novel respiratory
therapies and pulmonary drug delivery products. Surfactants are substances that
are produced naturally in the lungs and are essential to the lungs' ability to
absorb oxygen. Our humanized surfactant technology is being developed initially
for critical care patients with life-threatening respiratory disorders where
there are few, if any, approved therapies. These severe respiratory disorders
generally are associated with a lack of functional surfactant. Surfaxin(R), our
lead product, is an engineered humanized surfactant and is currently in two
Phase 3 clinical trials for Respiratory Distress Syndrome in premature infants,
a Phase 3 clinical trial for Meconium Aspiration Syndrome in full-term infants,
and a Phase 2 clinical trial for Acute Lung Injury/Acute Respiratory Distress
Syndrome in adults.
We are currently conducting research and development of aerosolized formulations
of our humanized surfactant to treat respiratory conditions such as asthma and
as a novel pulmonary drug delivery vehicle to render drugs more effective when
delivered to or via the respiratory tract.
We believe that our platform technology has the potential to generate products
for the critical care markets as well as for use in the broad non-critical care,
ambulatory markets. We are presently developing a dedicated sales and marketing
capability through a collaboration with Quintiles Transnational to commercialize
Surfaxin in the United States. We also have entered into a strategic alliance
with Laboratorios del Dr. Esteve to commercialize Surfaxin in Europe, Central
and South America, and Mexico. In the non-critical care, ambulatory markets, we
plan to establish strategic alliances for the development and commercialization
of our products.
PLATFORM TECHNOLOGY
Surfactants are protein and lipid (fat) compositions that are produced naturally
in the lungs and are critical to all air-breathing mammals. They facilitate
respiration by continually modifying the surface tension of the fluid normally
present within the air sacs, or alveoli, that line the inside of the lungs. In
the absence of sufficient surfactant, these air sacs tend to collapse, and, as a
result, the lungs do not absorb sufficient oxygen.
A lack of surfactant adversely affects both infants and adults. Premature
infants born prior to 32 weeks gestation have not fully developed a natural lung
surfactant and therefore need treatment to sustain life. In other clinical
conditions, surfactant that normally exists in the lungs is degraded or
otherwise destroyed, resulting in a variety of respiratory diseases.
Human surfactants include four known surfactant proteins, A, B, C and D.
Surfactant protein B has been found essential for respiratory function in
numerous studies. Our humanized surfactant
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platform technology, including Surfaxin, is engineered to mimic human surfactant
protein B and is based on our proprietary peptide, which is known as sinapultide
(a 21 amino acid protein-like substance that mimics an important human lung
protein). This technology was invented at The Scripps Research Institute and was
exclusively licensed to Johnson & Johnson which, together with its wholly owned
subsidiary, Ortho Pharmaceutical, developed it further. We acquired the
exclusive worldwide sublicense to the technology in October 1996.
Presently, the FDA has only approved replacement surfactants for Respiratory
Distress Syndrome in premature infants. The most commonly used of these approved
replacement surfactants are derived from pig and cow lungs. Though they are
clinically effective, they have drawbacks and cannot readily be scaled and
developed to treat broader populations for Respiratory Distress Syndrome in
premature infants and other respiratory diseases. These animal-sourced products
are prepared using a chemical extraction process from minced cow and pig lung.
Because of the animal-sourced materials and the chemical extraction processes,
there is significant variation in production lots and, consequently, product
quality specifications must be broad. In addition, the protein levels of these
animal-derived surfactants are inherently lower than the protein levels of
native human surfactant. The production costs of these animal-derived
surfactants are high, relative to other pharmaceutical products, generation of
large quantities is severely limited, and these products cannot readily be
reformulated for aerosol delivery to the lungs.
We believe that our potential products, based on engineered humanized
surfactant, can be manufactured less expensively than the animal-derived
surfactants, in exact and consistent pharmaceutical grade quality, and in
volumes to meet significant medical needs. In addition, we believe that our
engineered humanized surfactants might possess other pharmaceutical benefits not
currently found with the animal surfactants such as longer shelf-life, reduced
number of administrations to the patient's lungs, and elimination of the risk of
animal-borne diseases including the brain-wasting bovine spongiform
encephalopathy (commonly called "mad-cow disease") and adverse immunological
responses in young and older adults. Our products also have the ability to be
more precisely formulated, such as aerosolized liquids or dry powders, to
address various medical indications.
PRODUCTS
Surfaxin(R)
Surfaxin, our lead product, is the first humanized, protein B-based agent that
mimics the surface-active properties of human surfactant. Surfaxin has been
shown to remove inflammatory and infectious infiltrates from patients' lungs
when used by our proprietary lavage (or "lung wash") and replenish the vital
surfactant levels in the lungs. Currently, we are developing Surfaxin for the
treatment of Respiratory Distress Syndrome in premature infants, Meconium
Aspiration Syndrome in full-term infants, and Acute Lung Injury/Acute
Respiratory Distress Syndrome in adults. Surfaxin is delivered in a liquid form
and is injected through an endotracheal tube (a tube inserted into the infant's
mouth and down the trachea) in premature infants, and as a proprietary lavage
through a tube, called a bronchoscope, in full-term infants and adults.
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Respiratory Distress Syndrome is a condition in which premature infants are born
with an insufficient amount of their own natural surfactant. Meconium Aspiration
Syndrome is a condition in which full-term infants are born with meconium in
their lungs that depletes the natural surfactant in their lungs. Meconium is a
baby's first bowel movement in its mother's womb and Meconium Aspiration
Syndrome can occur if the baby breathes it in. Both Respiratory Distress
Syndrome and Meconium Aspiration Syndrome can be life-threatening as a result of
the failure of the lungs to absorb sufficient oxygen. These conditions can also
deplete natural surfactants in the lungs and result in the need for mechanical
ventilation.
Acute Lung Injury/Acute Respiratory Distress Syndrome in adults is a
life-threatening disorder for which no approved therapies exist anywhere in the
world. It is characterized by an excess of fluid in the lungs and decreased
oxygen levels in the patient. One prominent characteristic is the destruction of
surfactants present in lung tissue. The conditions are caused by illnesses
including pneumonia and septic shock (a toxic condition caused by infection) and
events such as smoke inhalation, near drowning, industrial accidents and other
traumas.
Respiratory Distress Syndrome in Premature Infants
In 2001, we initiated two Phase 3 clinical trials for the treatment of
Respiratory Distress Syndrome in premature infants - a pivotal, multinational
landmark trial in 1,500 patients and a 500 patient supportive, multinational
trial. The landmark trial is designed to demonstrate the superiority of Surfaxin
over certain commercially available treatments. The supportive trial is being
conducted in Europe and is designed to demonstrate the safety and
non-inferiority of Surfaxin over a certain animal-derived surfactant. These
trials are intended, if successful, to provide the basis for New Drug
Applications with the FDA and other worldwide regulatory authorities. Enrollment
for these trials is expected to be completed by the end of 2002 with data
expected to be announced in the first half of 2003.
Respiratory Distress Syndrome in premature infants affects approximately two
million babies worldwide with approximately 270,000 cases occurring in the
developed world. Due to limitations associated with the products currently
approved, only approximately 100,000 infants are estimated to be receiving
surfactant therapy worldwide.
The FDA has granted us Orphan Drug Designation for Surfaxin for this indication.
Orphan drugs are pharmaceutical products that are intended to treat diseases
affecting fewer than 200,000 patients in the United States. The Office of Orphan
Product Development of the FDA grants certain advantages to the sponsors of
orphan drugs including, but not limited to, seven years of market exclusivity
upon approval of the drug, certain tax incentives for clinical research and
grants to fund testing of the drug. We also are seeking Orphan Product
designation from the European Medicines Evaluation Agency (Europe's regulatory
approval agency that is similar to the FDA) for Surfaxin for the treatment of
Respiratory Distress Syndrome in premature infants.
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Meconium Aspiration Syndrome in Full-Term Infants
Surfaxin is being evaluated in a Phase 3 clinical trial for the treatment of
Meconium Aspiration Syndrome in full-term infants and may be the only product in
the world being developed to treat this syndrome. The trial is designed for the
enrollment of up to 200 infants at medical centers throughout the United States
to compare Surfaxin lavage to the current standard of care. Enrollment is
ongoing but has been slower than expected and completion is now anticipated for
late 2003. Given our belief in the importance of the pivotal Phase 3 trial for
Respiratory Distress Syndrome in premature infants to our present development
plan, resources have been and may continue to be reallocated from the Meconium
Aspiration Syndrome program to the Respiratory Distress Syndrome program, as
needed.
We are also developing a clinical program for Surfaxin lavage potentially for
use as a prophylactic for infants who are at risk for Meconium Aspiration
Syndrome but have not shown symptoms of compromised respiratory function. There
are approximately 600,000 babies born each year that are at risk for Meconium
Aspiration Syndrome, of which about 10% develop the condition. We believe an
effective and affordable surfactant prophylactic therapy could significantly
lower the risk to meconium-stained infants of chronic respiratory conditions and
reduce the need for costly mechanical ventilation.
There are presently no drug therapies approved for the treatment of Meconium
Aspiration Syndrome in full-term infants. The FDA has granted us Fast Track
Approval Status and Orphan Drug Designation for Surfaxin for the treatment of
Meconium Aspiration Syndrome in full-term infants. We have also received Orphan
Product designation of Surfaxin for the treatment of Meconium Aspiration
Syndrome from the European Medicines Evaluation Agency. In October 1998, the
Office of Orphan Products Development awarded us a renewable Orphan Products
Development Grant for up to approximately $580,000 over three or more years to
finance our Meconium Aspiration Syndrome trial. Continued funding of the grant
is subject to our meeting certain performance criteria.
Acute Lung Injury and Acute Respiratory Distress Syndrome in Adults
In 2001, we initiated a Phase 2 randomized dose-ranging, open-label, controlled,
multi-center clinical trial of Surfaxin in adults with Acute Respiratory
Distress Syndrome. Up to 110 patients will receive high concentrations of
Surfaxin via our proprietary lavage technique that administers the drug
sequentially to the different segments of the lung through a tube, called a
bronchoscope. The procedure is intended to cleanse and remove inflammatory
substances and debris from the lungs, while leaving amounts of Surfaxin behind
to help re-establish the lungs' capacity to absorb oxygen. The objective is to
restore functional surfactant levels and to get critically ill patients off
mechanical ventilation. We expect data from this trial to be available in the
second half of 2002.
The current standard of care for Acute Lung Injury and Acute Respiratory
Distress Syndrome includes placing patients on mechanical ventilators in
intensive care units at a cost of approximately $3,000 to $4,000 per day. There
are estimated to be between 150,000 and 250,000 adults per year in the United
States suffering from Acute Lung Injury and Acute
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Respiratory Distress Syndrome with similar numbers afflicted in Europe. Because
there are no approved treatments for these diseases, the mortality rate can
range from 35% to 50%.
The FDA has granted us Fast Track Approval Status and Orphan Drug Designation
for Surfaxin for the treatment of Acute Respiratory Distress Syndrome for
adults. The European Medicines Evaluation Agency has granted us Orphan Product
designation for Surfaxin for the treatment of Acute Lung Injury in adults (which
in this circumstance encompasses Acute Respiratory Distress Syndrome). In
October 2000, we were awarded a $1 million Fast-Track Small Business Innovative
Research Grant by the National Institutes of Health to develop Surfaxin for the
treatment of Acute Respiratory Distress Syndrome and Acute Lung Injury in
adults.
Aerosolized Humanized Surfactants for Respiratory Therapy
We have begun preclinical research for the use of our engineered humanized
surfactant as an aerosol spray for the treatment of asthma, chronic obstructive
pulmonary disease (commonly known as COPD, which is a chronic condition of the
lung that prevents enough oxygen from reaching the blood), and a variety of
other respiratory diseases. In all of these conditions a patient's endogenous
lung surfactant is destroyed. If this surfactant is not replaced, the air-sacs
in the lung collapse and the patient will require mechanical ventilation to
survive. In addition, upper respiratory conditions such as ear infections and
sinusitis are characterized by a loss of functioning surfactants in the upper
airways.
According to data from the Centers for Disease Control in Atlanta, asthma
afflicts approximately 14 million people in the United States and its incidence
rate is rising. In the United States alone, there are roughly one million
emergency room visits each year due to acute asthma attacks, while the worldwide
population of COPD sufferers is estimated at 100 million. We believe that our
engineered humanized surfactant can also be used in an aerosol form as a
prophylactic treatment for Acute Lung Injury/Acute Respiratory Distress Syndrome
in adults. We believe that we may have our lead aerosol product in a Phase 1
clinical trial in late 2003.
Aerosolized Humanized Surfactants for Pulmonary Drug Delivery
We are also initiating preclinical research to evaluate formulations of our
engineered humanized surfactants as novel pulmonary drug delivery vehicles with
the potential to deliver other pharmaceutical products to the lungs so that such
products can exert their pharmacological effects locally or systemically.
Existing drug delivery technology has effectively addressed the development of
delivery devices, drug storage systems and compatible drug formulations.
However, a significant unmet need in pulmonary drug delivery is to provide
better performance once a drug is deposited in the lungs.
Currently existing technologies for delivering insulin through the respiratory
system may require up to seven times the amount of insulin administered by
injection. An aerosol version of our humanized lung surfactant, with its ability
to penetrate and spread in an even manner throughout the lungs, has the
potential to be an excellent vehicle to more efficiently deliver drugs via or
within the respiratory tract. These drugs include antibiotics, pulmonary
vasodilators that lower
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blood pressure in the lung arteries, elastase inhibitors (drugs that are
anti-inflammatory by inhibiting a potentially destructive enzyme that comes from
certain types of white blood cells), bronchodilators (drugs that mitigate
constriction of small airways), steroids and proteins. Surfactant delivery of
drugs through the respiratory tract may efficiently treat tens of millions of
people afflicted with hepatitis, diabetes, cystic fibrosis, pneumonia and
tuberculosis. We believe that we may have our first drug delivery product in a
Phase 1 clinical trial in late 2003.
Supervent(R)
We have decided to discontinue the clinical development of Supervent(R) for
Cystic Fibrosis in its current form. However, we believe that tyloxapol, the
active compound of Supervent, is potentially a multi-dimensional therapy and has
the possibility to be used in combination with other drugs for the treatment of
Cystic Fibrosis or other inflammatory respiratory diseases. We intend to
evaluate future development activities for tyloxapol over the next year.
STRATEGIC ALLIANCES
Laboratorios del Dr. Esteve, S.A.
On March 6, 2002, we significantly expanded our existing relationship with
Laboratorios del Dr. Esteve by entering into a new collaboration arrangement
with Esteve. This new collaboration supersedes the Sublicense and Supply
Agreements we entered into with Esteve on October 26, 1999, and expands the
territory covered by those original agreements to all of Europe, Central America
and South America, and Mexico.
In connection with this new Esteve collaboration, Esteve purchased 821,862
shares of our common stock at $4.867 per share for $4.0 million in gross
proceeds and paid us a non-refundable licensing fee of $500,000. Esteve agreed
to provide certain commercialization services in the expanded territory for
Surfaxin for the treatment of Respiratory Distress Syndrome in premature
infants, Meconium Aspiration Syndrome in full-term infants and Acute Lung
Injury/Acute Respiratory Distress Syndrome in adult patients.
We have agreed to an exclusive supply agreement which provides that Esteve will
purchase from us all of its Surfaxin drug product requirements at an established
transfer price based on sales of Surfaxin by Esteve and/or its sublicensee(s).
Esteve has also agreed to sponsor certain clinical trial costs related to
obtaining European Medicines Evaluation Agency approval for commercialization of
Surfaxin in Europe for the Acute Lung Injury/Acute Respiratory Distress Syndrome
indications. Esteve also agreed to make certain milestone payments upon the
attainment of European Medicines Evaluation Agency marketing regulatory approval
of Surfaxin for sale in Europe for the foregoing indications.
Quintiles Transnational Corp., and PharmaBio Development, Inc.
On December 10, 2001, we entered into a collaboration arrangement with Quintiles
Transnational, and its affiliate, PharmaBio Development, to provide certain
commercialization services in the United States for Surfaxin for the treatment
of Respiratory Distress Syndrome in
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premature infants and Meconium Aspiration Syndrome in full-term infants. We
issued to PharmaBio 791,905 shares of our common stock and warrants to purchase
approximately 677,143 shares of our common stock for aggregate net proceeds of
approximately $2.7 million. Quintiles will hire and train a dedicated United
States sales force that will be branded in the market as ours. PharmaBio has
agreed to fund up to $70 million of the sales force costs and other sales and
marketing costs for Surfaxin for seven years of commercialization of Surfaxin in
the United States.
PharmaBio also agreed to extend a secured revolving credit facility of up to
$8.5 million to $10 million to fund pre-marketing activities associated with the
launch of Surfaxin in the United States as we achieve certain milestones. We are
obligated to use a significant portion of the funds borrowed under the credit
facility for pre-launch marketing services to be provided by Quintiles.
Principal amounts owed by us under the credit facility may be repaid out of the
proceeds of milestone payments to be paid to us by PharmaBio upon our
achievement of certain corporate milestones. To the extent that availability
under the credit facility is increased to greater than $8.5 million, for each $1
million increase, the amount of shares of common stock issuable pursuant to the
warrants will be increased by approximately 38,000 shares.
Under the arrangement, we will receive 100% of the revenues from sales of
Surfaxin and have agreed to pay PharmaBio a commission on net sales in the
United States of Surfaxin for the treatment of Respiratory Distress Syndrome in
premature infants and Meconium Aspiration Syndrome in full-term infants and all
"off-label" uses for 10 years following first launch of the product in the
United States. The arrangement with Quintiles allows us to retain product
ownership and to have sales and marketing expertise in place for the
commercialization of Surfaxin, if approved. Additionally, the arrangement allows
for the specialty sales force to become ours at the end of the seven year term,
with an option to acquire it sooner.
LICENSING ARRANGEMENTS; PATENTS AND PROPRIETARY RIGHTS
Johnson & Johnson License Agreement
Our humanized surfactant platform technology, including Surfaxin, is based on
the proprietary peptide, sinapultide, (a 21 amino acid protein-like substance
that mimics an important human lung protein). This technology was invented at
The Scripps Research Institute and was exclusively licensed to and further
developed by Johnson & Johnson, and its wholly owned subsidiary, Ortho
Pharmaceutical. We have received an exclusive, worldwide sublicense from Johnson
& Johnson for, and have rights to, a series of over 30 patents which are
important, either individually or collectively, to our strategy of
commercializing our humanized surfactant technology for the diagnosis,
prevention and treatment of disease. Such patents, which include relevant
European patents, expire on various dates beginning in 2009 and ending in 2017.
Patents covering our proprietary humanized surfactant technology that have been
issued or are pending worldwide include composition of matter, formulation,
manufacturing and uses, including pulmonary lavage, or "lung wash" techniques.
Our most significant patent rights principally consist of four issued United
States patents and two pending United States patent applications. The four
issued patents are: U.S. Patent No. 5,407,914; U.S. Patent No. 5,260,273;
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U.S. Patent No. 5,164,369; and U.S. Patent No. 6,013,619. These patents relate
to engineered humanized pulmonary surfactants (including Surfaxin), certain
related peptides (amino acid protein-like substances) and a method of treating
respiratory distress syndrome with these surfactants. The two pending United
States applications relate to pulmonary surfactants, including related
compositions and methods of treating respiratory distress syndromes with these
surfactants and compositions. We also have certain pending United States patent
applications that relate to methods of manufacturing certain peptides which may
be used in the manufacture of Surfaxin. In October 2000, we were issued European
Patent No. 0350506 covering certain surfactant peptides.
The Scripps Research Institute
U.S. Patent No. 6,013,619 was issued to Scripps and licensed to us and covers
all known engineered (including Surfaxin), animal- or human-derived surfactants
for use in any form of pulmonary lavage for respiratory distress syndromes. Our
proprietary pulmonary lavage techniques (using surfactant) include lavage via a
bronchoscope in adults as well as direct pulmonary lung lavage via an
endotracheal tube in newborn babies with Meconium Aspiration Syndrome. We
believe that our proprietary lavage technique may provide a clinical benefit to
the treatment of Acute Lung Injury/Acute Respiratory Distress Syndrome in adults
and Meconium Aspiration Syndrome in full-term infants by decreasing the amount
of infectious and inflammatory debris in the lungs, restoring the air sacs to a
more normal state and possibly resulting in patients getting off mechanical
ventilation sooner.
We are parties with Scripps to a research funding and option agreement which
expired in February 2002. We are currently negotiating an amendment to the
agreement to extend the term for an additional three years but we may not be
able to agree on terms that are acceptable to us. Pursuant to this agreement, we
were required to fund a portion of Scripps' research efforts and Scripps granted
us an option to acquire an exclusive worldwide license to the technology
developed from the research program during the term of the agreement. Scripps
owns all of the technology that it developed pursuant to work performed under
the agreement. To the extent we did not exercise our option, we have the right
to receive 50% of the net royalty income received by Scripps for inventions that
were jointly developed by us and Scripps. It is our belief that Scripps will
agree to extend the agreement for an additional three year term according to the
same, or substantially similar, terms and conditions.
MANUFACTURING AND DISTRIBUTION - THIRD PARTY SUPPLIERS
Our products must be manufactured in compliance with good manufacturing practice
requirements (GMPs) set by the FDA and other relevant worldwide regulatory
authorities. We rely on outside manufacturers, for our drug substance and other
active ingredients for Surfaxin and to produce material that meets appropriate
standards for use in clinical studies of our products and for their
commercialization. We are also in the process of qualifying alternate third
party suppliers for our manufacturing and raw material needs.
We own certain specialized equipment necessary to manufacture the Surfaxin drug
product. This equipment is maintained at and manufacturing occurs at a
third-party facility under the direction
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and supervision of our manufacturing and quality control personnel. We are
presently evaluating investing in additional manufacturing capability in
anticipation of optimizing the commercial process for Surfaxin and to scale up
the manufacturing process to meet clinical and commercial needs as they expand.
We are currently evaluating third party distribution capability in order to
commercialize Surfaxin in the United States. Our collaboration with Esteve
provides that Esteve has the responsibility for distribution throughout Europe,
Central and South America, and Mexico. See Item 6: "Management's Discussion and
Analysis - Risks Related to Our Business-Our lack of marketing and sales
experience could limit our ability to generate revenues from future product
sales."
COMPETITION
We are engaged in highly competitive fields of pharmaceutical research.
Competition from numerous existing companies and others entering the fields in
which we operate is intense and expected to increase. We expect to compete with,
among others, conventional pharmaceutical companies. Most of these companies
have substantially greater research and development, manufacturing, marketing,
financial, technological, personnel and managerial resources than we do.
Acquisitions of competing companies by large pharmaceutical or health care
companies could further enhance such competitors' financial, marketing and other
resources. Moreover, competitors that are able to complete clinical trials,
obtain required regulatory approvals and commence commercial sales of their
products before we do may enjoy a significant competitive advantage over us.
There are also existing therapies that may compete with the products we are
developing. See Item 6: "Management's Discussion and Analysis - Risks Related to
Our Business."
Presently, there are no approved drugs that are specifically indicated for the
treatment of Meconium Aspiration Syndrome in full-term infants or Acute Lung
Injury/Acute Respiratory Distress Syndrome in adults. Current therapy consists
of general supportive care and mechanical ventilation.
For Respiratory Distress Syndrome in premature infants, four products are
currently approved for treatment: Curosurf(TM) is a porcine lung extract that is
marketed in Europe by Chiesi Farmaceutici S.p.A., and in the United States by
Dey Laboratories, Inc. Exosurf(TM) is marketed by GlaxoSmithKline, plc, outside
the United States and contains only phospholipids (fats that are normally
present in the lungs) and synthetic organic detergents and no stabilizing
protein or peptides. Survanta(TM), marketed by the Ross division of Abbott
Laboratories, Inc., is derived from a chemical extraction process from minced
cow lung that contains the cow version of surfactant protein B. Forrest
Laboratories, Inc., markets its calf lung surfactant, Infasurf(TM) in the United
States for the treatment of Respiratory Distress Syndrome in premature infants.
There are a significant number of other potential therapies in development for
the treatment of Acute Lung Injury/Acute Respiratory Distress Syndrome in adults
that are not surfactant related. Any of these various drugs or devices could
significantly impact the commercial opportunity for Surfaxin.
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We believe that engineered humanized surfactants such as Surfaxin will be far
less expensive to produce than the animal-derived products currently approved
for the treatment of Respiratory Distress Syndrome in premature infants and can
be produced in exact and consistent pharmaceutical grade quality and in volumes
to meet significant medical needs. In addition, we believe that such products
might possess other pharmaceutical benefits not currently found with the
animal-derived surfactants such as potentially longer shelf-life, reduced number
of administrations to the patient's lungs, and would eliminate the risk of
animal-borne diseases including the brain-wasting bovine spongiform
encephalopathy (commonly called "mad-cow disease") and adverse immunological
responses in young and older adults. Our products also have the ability to be
precisely formulated, such as aerosolized liquids or dry powders, to address
various medical indications.
GOVERNMENT REGULATION
The testing, manufacture, distribution, advertising and marketing of drug
products are subject to extensive regulation by governmental authorities in the
United States and other countries. Prior to marketing, any pharmaceutical
products developed or licensed by us must undergo an extensive regulatory
approval process required by the FDA and by comparable agencies in other
countries. This process, which includes preclinical studies and clinical trials
of each pharmaceutical compound to establish its safety and efficacy and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over us. The FDA review
process can be lengthy and unpredictable, and we may encounter delays or
rejections of our applications when submitted. If questions arise during the FDA
review process, approval may take a significantly longer period of time.
Generally, in order to gain FDA approval, we first must conduct preclinical
studies in a laboratory and in animal models to obtain preliminary information
on a compound's efficacy and to identify any safety problems. The results of
these studies are submitted as part of an Ivestigational New Drug (IND)
application that the FDA must review before human clinical trials of an
investigational drug can start.
Clinical trials are normally done in three phases and generally take two to five
years or longer to complete. Phase 1 consists of testing the drug product in a
small number of humans, normally healthy volunteers, to determine preliminary
safety and tolerable dose range. Phase 2 involves larger studies to evaluate the
effectiveness of the drug product in humans having the disease or medical
condition for which the product is indicated and to identify possible common
adverse effects in a larger group of subjects. Phase 3 consists of additional
controlled testing to establish clinical safety and effectiveness in an expanded
patient population of geographically dispersed test sites to evaluate the
overall benefit-risk relationship for administering the product and to provide
an adequate basis for product labeling.
After completion of clinical trials of a new drug product, FDA and foreign
regulatory authority marketing approval must be obtained. A New Drug Application
submitted to the FDA generally takes one to three years to obtain approval. If
questions arise during the FDA review process, approval may take a significantly
longer period of time. The testing and approval processes require substantial
time and effort and we may not receive approval on a timely basis, if at all.
13
Even if regulatory clearances are obtained, a marketed product is subject to
continual review, and later discovery of previously unknown problems or failure
to comply with the applicable regulatory requirements may result in restrictions
on the marketing of a product or withdrawal of the product from the market as
well as possible civil or criminal sanctions. For marketing outside the United
States, we also will be subject to foreign regulatory requirements governing
human clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. None of our
products under development have been approved for marketing in the United States
or elsewhere. We may not be able to obtain regulatory approval for any such
products under development. Failure to obtain requisite governmental approvals
or failure to obtain approvals of the scope requested will delay or preclude us,
or our licensees or marketing partners, from marketing our products, or limit
the commercial use of our products, and thereby would have a material adverse
effect on our business, financial condition and results of operations. See Item
6: "Management's Discussion and Analysis - Risks Related to Our Business."
The FDA has granted us Fast Track Approval Status for the Acute Respiratory
Distress Syndrome and Meconium Aspiration Syndrome indications. Fast Track
Approval Status facilitates the development and expedites the review of new
drugs intended for treatment of life-threatening conditions for which there is
presently no medical option by providing for the FDA's review of the New Drug
Application for a drug granted such Fast Track Status within six months
following filing. We have also received Orphan Drug Designation from the FDA's
Office of Orphan Products Development of Surfaxin as a treatment for Respiratory
Distress Syndrome in premature infants, Meconium Aspiration Syndrome in
full-term infants, and Acute Respiratory Distress Syndrome in adults. We have
also received designation of Surfaxin as an Orphan Product for Meconium
Aspiration Syndrome and Acute Lung Injury (which, in this circumstance,
encompasses Acute Respiratory Distress Syndrome) from the European Medicines
Evaluation Agency.
In October 2000, we were awarded a $1 million Fast-Track Small Business
Innovative Research Grant by the National Institutes of Health to develop
Surfaxin for the treatment of Acute Respiratory Distress Syndrome in adults. In
October 1998, the Office of Orphan Products Development awarded us a renewable
Orphan Products Development Grant, ranging from $194,390 for the first year to
$583,170 over three or more years, to finance our Meconium Aspiration Syndrome
trial. Continued funding under both of these grants is subject to our meeting
certain performance criteria.
EMPLOYEES
We have approximately 50 full-time employees. Our future success depends in
significant part upon the continued service of our key scientific personnel and
executive officers and our continuing ability to attract and retain highly
qualified scientific and managerial personnel. Competition for such personnel is
intense and we may not be able to retain our key employees or attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. See Item 6: "Management's Discussion and Analysis - Risks Related
to Our Business."
14
ITEM 2. DESCRIPTION OF PROPERTY.
Our executive offices are located at 350 South Main Street, Suite 307,
Doylestown, Pennsylvania 18901. The telephone number of our executive office is
(215) 340-4699 and the facsimile number is (215) 340-3940. In January 2002, we
established a research facility in Redwood City, California, to develop
aerosolized formulations based on our proprietary humanized surfactant
technology platform to develop other novel respiratory therapies and pulmonary
drug delivery products. In November 2000, we established a satellite office in
the United Kingdom to manage and oversee our European clinical research
programs. We lease all of these properties.
ITEM 3. LEGAL PROCEEDINGS.
We are not aware of any pending or threatened legal actions other than disputes
arising in the ordinary course of our business that would not, if determined
adversely to us, have a material adverse effect on our business and operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"DSCO." As of March 18, 2002, the number of stockholders of record of shares of
our common stock was approximately 195, and the number of beneficial owners of
shares of our common stock was approximately 4,500. As of March 18, 2002, there
were approximately 26,386,000 shares of our common stock issued and outstanding.
The following table sets forth the quarterly price ranges of our common stock
for the periods indicated, as reported by Nasdaq.
First Quarter 2000..........................................$2.44 $12.63
Second Quarter 2000 ........................................$2.75 $7.69
Third Quarter 2000..........................................$3.88 $7.63
Fourth Quarter 2000.........................................$3.03 $7.44
First Quarter 2001..........................................$2.72 $5.91
Second Quarter 2001 ........................................$2.94 $5.49
Third Quarter 2001..........................................$2.00 $4.65
Fourth Quarter 2001.........................................$2.22 $4.38
First Quarter 2002 (through March 18, 2002).................$2.70 $4.19
We have not paid dividends on our common stock. It is anticipated that we will
not pay dividends on our common stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS.
Overview
We are a specialty pharmaceutical company applying our platform technology,
based on humanized lung surfactants, to develop potential novel respiratory
therapies and pulmonary drug delivery products. Surfaxin, our lead product, is
currently in two Phase 3 clinical trials for Respiratory Distress Syndrome in
premature infants, a Phase 3 clinical trial for Meconium Aspiration Syndrome in
full-term infants, and a Phase 2 clinical trial for Acute Lung Injury/Acute
Respiratory Distress Syndrome in adults. We are also developing aerosolized
formulations of our humanized surfactant to treat respiratory conditions such as
asthma and as a novel pulmonary drug delivery vehicle to render drugs more
effective when delivered to or via the respiratory tract.
We are presently developing a dedicated sales and marketing capability through a
collaboration with Quintiles Transnational Corp. to commercialize Surfaxin in
the United States. We have entered into a strategic alliance with Laboratorios
del Dr. Esteve, S.A., to commercialize Surfaxin in Europe, Central and South
America, and Mexico. In the non-critical care, ambulatory markets,
16
we plan to establish strategic alliances for the development and
commercialization of our products.
Since our inception, we have incurred significant losses and, as of December 31,
2001, had a deficit accumulated during the development stage of approximately
$55 million (including historical results of predecessor companies). Most of our
expenditures to date have been for research and development activities and
general and administrative expenses. Research and development expenses represent
costs incurred for clinical trials, regulatory filings and manufacturing efforts
(including raw material costs). We expense our research and development costs as
they are incurred. General and administrative expenses consist primarily of
salaries and related expenses, rents, and general corporate activities.
Plan of Operations
We expect to continue to incur increasing operating losses for the foreseeable
future, primarily due to our continued research and development activities
attributable to new and existing products, manufacturing, initial
commercialization, and general and administrative activities.
We anticipate that during the next 12 to 24 months we will:
(i) significantly increase our research, development and regulatory
activities. It is anticipated that the primary focus of our research
and development activities will be the several clinical trials for
Surfaxin indications and related regulatory filings. In the fall of
2001, we initiated two pivotal, landmark multinational Phase 3
trials for Respiratory Distress Syndrome in premature infants: a
1,500 patient trial and a 500 patient supporting trial. The majority
of our development resources are focused on the completion of these
trials and we anticipate completion of enrollment by the end of 2002
with data announced in the first half of 2003. For Acute Respiratory
Distress Syndrome in adults, we currently are conducting a Phase 2
dose-ranging safety and efficacy study of up to 110 patients in the
United States. We expect data from the Acute Respiratory Distress
Syndrome trial to be available in the second half of 2002. For
Meconium Aspiration Syndrome in full-term infants, we currently are
conducting a Phase 3 clinical trial of up to 200 patients in the
United States. Enrollment is ongoing but has been slower than
expected and completion is now anticipated for late 2003. Given our
belief in the importance of the pivotal Phase 3 trial for
Respiratory Distress Syndrome in premature infants to our present
development plan, resources have been and may continue to be
reallocated from the Meconium Aspiration Syndrome program to the
Respiratory Distress Syndrome program, as needed. The clinical trial
and regulatory process is lengthy, expensive and uncertain and
subject to numerous risks including, without limitation, the risks
discussed in "Risks Related to Our Business - The clinical trial and
regulatory approval process for our products will be expensive and
time consuming, and the outcome is uncertain."
To develop new products, we are conducting research and development
of aerosolized formulations of our humanized surfactant to treat
respiratory conditions
17
such as asthma and as a novel pulmonary drug delivery vehicle to
deliver drugs via the respiratory tract.
(ii) invest in additional manufacturing capability in anticipation of
optimizing the production process for Surfaxin(R) and to allow scale
up of the manufacturing process to meet our clinical and commercial
needs as they expand.
(iii) invest in additional general and administrative resources primarily
to support our business development initiatives, financial systems
and controls and management information technologies.
(iv) invest in marketing and commercialization management infrastructure
to manage the strategic relationships with our collaborative
partners for the launch of Surfaxin, if approved, and the execution
of our "Discovery/Surfaxin" worldwide marketing strategy.
On December 10, 2001, we entered into a collaboration arrangement with
Quintiles, and its affiliate, PharmaBio Development Inc., to provide certain
commercialization services in the United States for Surfaxin for the treatment
of Respiratory Distress Syndrome in premature infants and Meconium Aspiration
Syndrome in full-term infants. Quintiles will hire and train a dedicated United
States sales force that will be branded in the market as ours. Quintiles made a
financial commitment to us that included a $3 million equity investment, a
secured, revolving credit facility of up to $8.5 to $10 million to fund Surfaxin
pre-launch activities, and up to $70 million in post-launch funding to cover the
first seven years of U.S. sales and marketing costs. In return, Quintiles will
receive a commission on net sales of Surfaxin over a ten-year period. We may
also receive milestone payments from PharmaBio that would be used to offset
amounts owed under the credit facility. The Quintiles arrangement allows us to
retain product ownership and have sales and marketing expertise in place for the
commercialization of Surfaxin in the U.S., if approved. Additionally, the
agreement allows for the specialty sales force to become ours at the end of the
seven year term, with an option to acquire it sooner.
In March 2002, we expanded our existing alliance with Esteve to develop, market
and sell Surfaxin throughout Europe, Central and South America, and Mexico. In
connection with this new Esteve collaboration, Esteve purchased $4 million of
common stock and paid us a non-refundable licensing fee of $500,000. Esteve
agreed to provide certain commercialization services for Surfaxin for the
treatment of Respiratory Distress Syndrome in premature infants, Meconium
Aspiration Syndrome in full-term infants and Acute Lung Injury/Acute Respiratory
Distress Syndrome in adult patients. We have agreed to an exclusive supply
agreement which provides that Esteve will purchase from us all of its Surfaxin
drug product requirements at an established transfer price based on sales of
Surfaxin by Esteve and/or its sublicensee(s). Esteve has also agreed to sponsor
certain clinical trial costs related to obtaining regulatory approval in Europe
for the Acute Lung Injury/Acute Respiratory Distress Syndrome indications.
Esteve also agreed to make certain milestone payments to us upon the attainment
of European marketing regulatory approval of Surfaxin.
18
We will need to generate significant revenues from product sales and or related
royalties and transfer prices to achieve and maintain profitability. Through
December 31, 2001, we have had no revenues from any product sales, and have not
achieved profitability on a quarterly or annual basis. Our ability to achieve
profitability depends upon, among other things, our ability to develop products,
obtain regulatory approval for products under development and enter into
agreements for product development, manufacturing and commercialization. In
addition, our results are dependent upon the performance of our strategic
partners and third party suppliers. Moreover, we may never achieve significant
revenues or profitable operations from the sale of any of our products or
technologies.
Through December 31, 2001, we had not generated taxable income. At December 31,
2001, net operating losses available to offset future taxable income for Federal
tax purposes were approximately $47.5 million. The future utilization of such
loss carryforwards may be limited pursuant to regulations promulgated under
Section 382 of the Internal Revenue Code. In addition, we have a research and
development tax credit carryforward of $846,000. The Federal net operating loss
and research and development tax credit carryforwards expire beginning in 2008
and continuing through 2021.
Results of Operations
Our operating expenses increased from $12,639,000 in 2000 to $13,074,000 in
2001. The increase was primarily due to an increase in our research and
development activities. Included in the 2000 operating expenses was a non-cash
compensation charge of $2,515,000 recorded as a result of the grant of options
and the vesting of certain milestone-based stock options. As a result of the
increases in expenses from 2000, our net loss increased from $10,861,000 in 2000
to $11,146,000 in 2001. Taking into consideration the increase in the weighted
average number of common shares outstanding during 2001 compared to 2000, our
net loss per share decreased from $0.58 in 2000 to $0.51 in 2001.
Liquidity and Capital Resources
As of December 31, 2001, we had working capital of approximately $16.5 million.
We believe our current working capital is sufficient to meet our planned
research and development activities into the second quarter of 2003. We will
need additional financing from investors or collaborators to complete research
and development and commercialization of our current product candidates under
development.
In December 2001, we entered into a secured revolving credit facility of up to
$8.5 million to $10 million with PharmaBio to fund pre-marketing activities for
a Surfaxin launch in the United States. The credit facility is available for use
until December 10, 2004, and monies become available in three tranches upon
satisfying certain conditions. In connection with the credit facility, we issued
to PharmaBio Class H warrants to purchase 320,000 shares of common stock. The
Class H warrants are exercisable at $3.03 per share (subject to adjustment) and
are exercisable proportionately only upon use of the credit facility. To the
extent the credit facility availability is increased to greater than $8.5
million, for each $1 million increase, the amount of
19
shares of common stock issuable pursuant to the Class H warrants shall be
increased by approximately 38,000 shares.
Interest on amounts advanced under the credit facility will be payable quarterly
in arrears. We may repay principal amounts owed by us under the credit facility
from proceeds of milestone payments to be paid to us by PharmaBio upon the
achievement of certain corporate milestones. As of December 31, 2001, no amounts
were outstanding under the credit facility. We are obligated to use a
significant portion of the funds borrowed under the credit facility for
pre-launch marketing services to be provided by Quintiles and anticipate using a
portion of the first tranche during 2002.
Our working capital requirements will depend upon numerous factors, including,
without limitation, the progress of our research and development programs,
clinical trials, timing and cost of obtaining regulatory approvals, timing and
cost of pre-launch marketing activities, levels of resources that we devote to
the development of manufacturing and marketing capabilities, levels of resources
that our collaboration partners devote to the development of sales and marketing
capabilities, technological advances, status of competitors and our ability to
establish collaborative arrangements with other organizations, the ability to
defend and enforce our intellectual property rights and the establishment of
additional strategic or licensing arrangements with other companies or
acquisitions.
Historically, the Company's working capital has been provided from the proceeds
of private financings:
Pursuant to our collaboration arrangement with Esteve on March 6, 2002, we
issued 821,862 shares of common stock to Esteve at a purchase price equal to
$4.867 per share and received a licensing fee of $500,000, for approximate net
aggregate proceeds of $4.45 million. See Item 1: "Description of Business."
Pursuant to the collaboration arrangement we entered into with Quintiles and
PharmaBio on December 10, 2001, we issued to PharmaBio, for approximate net
aggregate proceeds of $2.7 million: (i) 791,905 shares of common stock at a
price equal to $3.79 per share; and (ii) Class G warrants to purchase 357,143
shares of common stock at an exercise price equal to $3.485 per share. See Item
1: "Description of Business."
On October 1, 2001, we received approximately $7.3 million in net proceeds from
a private financing. In the financing, we issued 3,562,759 shares of common
stock and 712,553 Class F warrants to purchase shares of common stock at an
exercise price of $2.365 per share. The Class F warrants have a five-year term.
On April 27, 2001, we received approximately $1 million in gross proceeds in a
private offering of 296,560 shares of common stock at a per share price equal
to $3.37.
In March 2000, we received approximately $17,500,000 in net proceeds from the
sale of 37.74 units from a private placement offering. Each unit consisted of
76,923 shares of common stock and Class E warrants to purchase an additional
15,385 shares of common stock for $7.38 per
20
share. The Class E warrants issued in the offering aggregate approximately
581,000 shares and are exercisable through March 2005.
In October 1999, in connection with our strategic alliance with Esteve, we
issued to Esteve in a private placement 317,164 shares of common stock at a
purchase price of $2.68 per share.
In July 1999, we raised approximately $2,231,000 in net proceeds in a private
placement offering of an aggregate of 2,024,792 shares of common stock and
2,024,792 Class D warrants to purchase common stock. All of the Class D warrants
have been exercised.
During March and April 1999, we raised $1.0 million in a private placement
offering of 826,447 shares of common stock and 569,026 Class C warrants to
purchase common stock at an exercise price of $2.15 per share. The Class C
warrants are exercisable through April 2006.
We will require substantial additional funding to conduct our business,
including our expanded research and product development activities. Based on our
current operating plan, we believe that our currently available resources will
be adequate to satisfy our capital needs into the second quarter of 2003. Our
future capital requirements will depend on the results of our research and
development activities, clinical studies and trials, competitive and
technological advances and the regulatory process. Our operations will not
become profitable before we exhaust our current resources; therefore, we will
need to raise substantial additional funds through additional debt or equity
financings or through collaborative ventures with potential corporate partners.
We may in some cases elect to develop products on our own instead of entering
into collaboration arrangements and this would increase our cash requirements.
We have not entered into any additional arrangements to obtain any additional
financing. The sale of additional equity and debt securities may result in
additional dilution to our stockholders, and we cannot be certain that
additional financing will be available in amounts or on terms acceptable to us,
if at all. If we fail to enter into collaborative ventures or to receive
additional funding, we may have to reduce significantly the scope of or
discontinue our planned research, development and commercialization activities,
which could significantly harm our financial condition and operating results.
Furthermore, we could cease to qualify for listing of our common stock on the
NASDAQ SmallCap Market if the market price of our common stock declines as a
result of the dilutive aspects of such potential financings. See "Risks Related
to Our Business."
Risks Related to Our Business
The following risks, among others, could cause our actual results, performance,
achievements or industry results to differ materially from those expressed in
our forward-looking statements contained herein and presented elsewhere by
management from time to time.
Because we are a development stage company, we may not successfully develop and
market our products, and even if we do, we may not generate enough revenue or
become profitable.
We are a development stage company. Therefore, you must evaluate us in light of
the uncertainties and complexities present in a development stage biotechnology
company. We are
21
conducting research and development on our product candidates. As a result, we
have not begun to market or generate revenues from the commercialization of any
of these products. To date, we have only generated revenues from investments,
research grants and collaborative research and development agreements. We will
need to engage in significant, time-consuming and costly research, development,
pre-clinical studies, clinical testing and regulatory approval for our products
under development prior to their commercialization. In addition, pre-clinical or
clinical studies may show that our products are not effective or safe for one or
more of their intended uses. We may fail in the development and
commercialization of our products. As of December 31, 2001, we have incurred a
deficit accumulated during the development stage of approximately $55 million,
and we expect to continue to incur significant increasing operating losses over
the next several years. If we succeed in the development of our products, we
still may not generate sufficient or sustainable revenues or we may not be
profitable.
If we cannot raise additional capital, we may need to discontinue our research
and development activities. In addition, any additional financing could result
in equity dilution.
We may need substantial additional funding to conduct our research and product
development activities. Based on our current operating plan, we believe that our
currently available resources will be adequate to satisfy our capital needs into
the second quarter of 2003. Our future capital requirements will depend on the
results of our research and development activities, clinical studies and trials,
competitive and technological advances and the regulatory process. If our
operations do not become profitable before we exhaust our resources, we will
likely need to raise substantial additional funds through collaborative ventures
with potential corporate partners and through additional debt or equity
financings. We may in some cases elect to develop products on our own instead of
entering into collaboration arrangements. This would increase our cash
requirements for research and development.
However, we have not entered into arrangements to obtain any additional
financing, except for the credit facility with PharmaBio. Any additional
financing could include unattractive terms or result in significant dilution of
stockholders' interests and share prices may decline. If we fail to enter into
collaborative ventures or to receive additional funding, we may have to delay,
scale back or discontinue our research and development operations, and consider
licensing the development and commercialization of products that we consider
valuable and which we otherwise would have developed ourselves. Furthermore, we
could cease to qualify for listing of our securities on the NASDAQ SmallCap
Market if the market price of our common stock declines as a result of the
dilutive aspects of such potential financings. See "Risks Related to Our
Business-The market price of our stock may be adversely affected by market
volatility."
The clinical trial and regulatory approval process for our products will be
expensive and time consuming, and the outcome is uncertain.
In order to sell our products that are under development, we must receive
regulatory approvals for each product. The FDA and comparable agencies in
foreign countries extensively and rigorously regulate the testing, manufacture,
distribution, advertising, pricing and marketing of drug products like our
products. This approval process includes preclinical studies and clinical trials
of each pharmaceutical compound to establish its safety and effectiveness and
confirmation
22
by the FDA and comparable agencies in foreign countries that the manufacturer
maintains good laboratory and manufacturing practices (GMPs) during testing and
manufacturing. The process is lengthy, expensive and uncertain. It is also
possible that the FDA or comparable foreign regulatory authorities could
interrupt, delay or halt our clinical trials. If we, or any regulatory
authorities, believe that trial participants face unacceptable health risks, the
trials could be suspended or terminated. We also may not reach agreement with
the FDA and/or comparable foreign agencies on the design of clinical studies
necessary for approval. In addition, conditions imposed by the FDA and
comparable agencies in foreign countries on our clinical trials could
significantly increase the time required for completion of our clinical trials
and the costs of conducting the clinical trials.
To succeed, clinical trials require adequate supplies of drug substance and drug
product, which may be difficult or uneconomical to procure or manufacture, and
sufficient patient enrollment. Patient enrollment is a function of several
factors, including the size of the patient population, the nature of the
protocol, the proximity of the patients to the trial sites and the eligibility
criteria for the clinical trials. Delays in patient enrollment can result in
greater costs and longer trial timeframes. Patients may also suffer adverse
medical events or side effects that are common to this class of drug such as a
decrease in the oxygen level of the blood upon administration.
Clinical trials generally take two to five years or more to complete, and,
accordingly, our first product is not expected to be commercially available in
the United States until at least 2004, and our other product candidates will
take longer. The FDA has notified us that two of our intended indications for
Surfaxin, Meconium Aspiration Syndrome in full-term infants and Acute
Respiratory Distress Syndrome in adults, have been granted designation as "fast
track" products under provisions of the Food and Drug Administration
Modernization Act of 1997, and the FDA has awarded us an Orphan Products
Development Grant to support our development of Surfaxin for the treatment of
Meconium Aspiration Syndrome. Fast Track Status does not accelerate the clinical
trials nor does it mean that the regulatory requirements are less stringent. The
Fast Track Status provisions are designed to expedite the FDA's review of new
drugs intended to treat serious or life-threatening conditions. The FDA
generally will review the New Drug Application for a drug granted Fast Track
Status within six months instead of the typical one to three years. Our products
may not, however, continue to qualify for expedited review and our other drug
candidates may fail to qualify for fast track development or expedited review.
Even though some of our drug candidates have qualified for expedited review, the
FDA may not approve them at all or any sooner than other drug candidates that do
not qualify for expedited review.
The FDA and comparable foreign agencies could withdraw any approvals we obtain.
Further, if there is a later discovery of unknown problems or if we fail to
comply with other applicable regulatory requirements at any stage in the
regulatory process, the FDA may restrict or delay our marketing of a product or
force us to make product recalls. In addition, the FDA could impose other
sanctions such as fines, injunctions, civil penalties or criminal prosecutions.
To market our products outside the United States, we also need to comply with
foreign regulatory requirements governing human clinical trials and marketing
approval for pharmaceutical products. The FDA and foreign regulators have not
yet approved any of our products under development for marketing in the United
States or elsewhere. If the FDA and other regulators do not approve our
products, we will not be able to market our products.
23
Our strategy, in many cases, is to enter into collaboration agreements with
third parties with respect to our products and we may require additional
collaboration agreements. If we fail to enter into these agreements or if we or
the third parties do not perform under such agreements, it could impair our
ability to commercialize our products.
Our strategy for the completion of the required development and clinical testing
of our products and for the manufacturing, marketing and commercialization of
our products, in many cases, depends upon entering into collaboration
arrangements with pharmaceutical companies to market, commercialize and
distribute our products. On March 6, 2002, we expanded our relationship with
Esteve by entering into a collaboration arrangement with Esteve for Surfaxin
covering all of Europe, Central America and South America, and Mexico. Esteve
will be responsible for the marketing of Surfaxin for the treatment of
Respiratory Distress Syndrome in premature infants, Meconium Aspiration Syndrome
in full-term infants, and Acute Lung Injury/Acute Respiratory Distress Syndrome
in adults. Esteve will also be responsible for the sponsorship of certain
clinical trial costs related to obtaining European Medicines Evaluation Agency
approval for commercialization of Surfaxin in Europe for the Acute Lung
Injury/Acute Respiratory Distress Syndrome indications. We will be responsible
for the remainder of the regulatory activities relating to Surfaxin, including
with respect to European Medicines Evaluation Agency filings.
On December 10, 2001, we entered into an exclusive collaboration arrangement in
the United States with Quintiles, and its affiliate, PharmaBio, to
commercialize, sell and market Surfaxin in the United States for indications of
Respiratory Distress Syndrome and Meconium Aspiration Syndrome. As part of our
collaboration with Quintiles, Quintiles will build a sales force solely
dedicated to the sale of Surfaxin upon the approval of a New Drug Application
for either of the two indications. If Quintiles and we fail to devote
appropriate resources to commercialize, sell and market Surfaxin, sales of
Surfaxin could be reduced. As part of the collaboration, PharmaBio is obligated
to provide us with certain financial assistance in connection with the
commercialization of Surfaxin, including, but not limited to, a secured,
revolving credit facility for at least $8.5 million which may be increased to
$10 million. A failure by us to repay amounts outstanding under the credit
facility would have a material adverse effect on us. To obtain the benefits of
such financing, we are obligated to meet certain development and performance
milestones. The failure by us to meet the milestones, our failure to meet other
terms and conditions of the financing leading to PharmaBio's termination thereof
or the failure of PharmaBio to fulfill its obligation to partially fund the
commercialization of Surfaxin, may affect our ability to successfully market
Surfaxin.
If Esteve, Quintiles or we breach or terminate the agreements that make up such
collaboration arrangements or Esteve or Quintiles otherwise fail to conduct
their Surfaxin-related activities in a timely manner or if there is a dispute
about their respective obligations, we may need to seek other partners or we may
have to develop our own internal sales and marketing capability for the
indications of Surfaxin which Esteve and/or Quintiles have agreed to assist in
commercializing. Accordingly, we may need to enter into additional collaboration
agreements and our success, particularly outside of the United States, may
depend upon obtaining additional collaboration partners. In addition, we may
depend on our partners' expertise and dedication of sufficient
24
resources to develop and commercialize our proposed products. We may, in the
future, grant to collaboration partners rights to license and commercialize
pharmaceutical products developed under collaboration agreements. Under these
arrangements, our collaboration partners may control key decisions relating to
the development of the products. The rights of our collaboration partners would
limit our flexibility in considering alternatives for the commercialization of
our products. If we fail to successfully develop these relationships or if our
collaboration partners fail to successfully develop or commercialize any of our
products, it may delay or prevent us from developing or commercializing our
products in a competitive and timely manner and would have a material adverse
effect on the commercialization of Surfaxin. See "Risks Related to Our
Business-Our lack of marketing and sales experience could limit our ability to
generate revenues from future product sales."
If we cannot protect our intellectual property, other companies could use our
technology in competitive products. If we infringe the intellectual property
rights of others, other companies could prevent us from developing or marketing
our products.
We seek patent protection for our drug candidates so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend in part on our ability and that
of parties from whom we license technology to:
- -- defend our patents and otherwise prevent others from infringing on our
proprietary rights;
- -- protect trade secrets; and
- -- operate without infringing upon the proprietary rights of others, both in
the United States and in other countries.
The patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved. To date, the United States Patent and Trademark
Office has not adopted a consistent policy regarding the breadth of claims that
the United States Patent and Trademark Office allows in biotechnology patents or
the degree of protection that these types of patents afford. As a result, there
are risks that we may not develop or obtain rights to products or processes that
are or may seem to be patentable.
Even if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us.
We, or the parties licensing technologies to us, have filed various United
States and foreign patent applications with respect to the products and
technologies under our development, and the United States Patent and Trademark
Office and foreign patent offices have issued patents with respect to our
products and technologies. These patent applications include international
applications filed under the Patent Cooperation Treaty. Our pending patent
applications, those we may file in the future or those we may license from third
parties may not result in the United States Patent and Trademark Office or
foreign patent office issuing patents. Also, if patent rights covering our
products are not sufficiently broad, they may not provide us with sufficient
25
proprietary protection or competitive advantages against competitors with
similar products and technologies. Furthermore, if the United States Patent and
Trademark Office or foreign patent offices issue patents to us or our licensors,
others may challenge the patents or circumvent the patents, or the patent office
or the courts may invalidate the patents. Thus, any patents we own or license
from or to third parties may not provide any protection against competitors.
Furthermore, the life of our patents is limited. We have licensed a series of
patents from Johnson & Johnson and Ortho Pharmaceutical which are important,
either individually or collectively, to our strategy of commercializing our
surfactant technology. Such patents, which include relevant European patents,
expire on various dates beginning in 2009 and ending in 2017. We have filed, and
when possible and appropriate, will file, other patent applications with respect
to our products and processes in the United States and in foreign countries. We
may not be able to develop additional products or processes that will be
patentable or additional patents may not be issued to us. See also "Risks
Related to Our Business-If we cannot meet requirements under our license
agreements, we could lose the rights to our products."
Intellectual property rights of third parties could limit our ability to market
our products.
Our commercial success also significantly depends on our ability to operate
without infringing the patents or violating the proprietary rights of others.
The United States Patent and Trademark Office keeps United States patent
applications confidential while the applications are pending. As a result, we
cannot determine which inventions third parties claim in pending patent
applications that they have filed. We may need to engage in litigation to defend
or enforce our patent and license rights or to determine the scope and validity
of the proprietary rights of others. It will be expensive and time consuming to
defend and enforce patent claims. Thus, even in those instances in which the
outcome is favorable to us, the proceedings can result in the diversion of
substantial resources from our other activities. An adverse determination may
subject us to significant liabilities or require us to seek licenses that third
parties may not grant to us or may only grant at rates that diminish or deplete
the profitability of the products to us. An adverse determination could also
require us to alter our products or processes or cease altogether any related
research and development activities or product sales.
If we cannot meet requirements under our license agreements, we could lose the
rights to our products.
We depend on licensing arrangements with third parties to maintain the
intellectual property rights to our products under development. Presently, we
have licensed rights from Johnson & Johnson and Ortho Pharmaceutical, and the
Charlotte-Mecklenberg Hospital Authority. These agreements require us to make
payments and satisfy performance obligations in order to maintain our rights
under these licensing arrangements. All of these agreements last either
throughout the life of the patents, or with respect to other licensed
technology, for a number of years after the first commercial sale of the
relevant product.
In addition, we are responsible for the cost of filing and prosecuting certain
patent applications and maintaining certain issued patents licensed to us. If we
do not meet our obligations under
26
our license agreements in a timely manner, we could lose the rights to our
proprietary technology.
In addition, we may be required to obtain licenses to patents or other
proprietary rights of third parties in connection with the development and use
of our products and technologies. Licenses required under any such patents or
proprietary rights might not be made available on terms acceptable to us, if at
all.
We rely on confidentiality agreements that could be breached and may be
difficult to enforce.
Although we believe that we take reasonable steps to protect our intellectual
property, including the use of agreements relating to the non-disclosure of
confidential information to third parties, as well as agreements that purport to
require the disclosure and assignment to us of the rights to the ideas,
developments, discoveries and inventions of our employees and consultants while
we employ them, the agreements can be difficult and costly to enforce. Although
we seek to obtain these types of agreements from our consultants, advisors and
research collaborators, to the extent that they apply or independently develop
intellectual property in connection with any of our projects, disputes may arise
as to the proprietary rights to this type of information. If a dispute arises, a
court may determine that the right belongs to a third party, and enforcement of
our rights can be costly and unpredictable. In addition, we will rely on trade
secrets and proprietary know-how that we will seek to protect in part by
confidentiality agreements with our employees, consultants, advisors or others.
Despite the protective measures we employ, we still face the risk that:
- -- they will breach these agreements;
- -- any agreements we obtain will not provide adequate remedies for this type
of breach or that our trade secrets or proprietary know-how will otherwise
become known or competitors will independently develop similar technology;
and
- -- our competitors will independently discover our proprietary information
and trade secrets.
If the parties we depend on for manufacturing our pharmaceutical products do not
timely supply these products, it may delay or impair our ability to develop and
market our products.
We rely on outside manufacturers for our drug substance and other active
ingredients for Surfaxin and to produce material that meets appropriate
standards for use in clinical studies for our products. We will also rely on
outside manufacturers for production of our products after marketing approval.
We may also enter into arrangements with other manufacturers for the manufacture
of materials for use in clinical testing and after marketing approval.
Our outside manufacturers may not perform as they have agreed or may not remain
in the contract manufacturing business for a sufficient time to successfully
produce and market our product candidates. If we do not maintain important
manufacturing relationships, we may fail to find a replacement manufacturer or
to develop our own manufacturing capabilities. If we cannot do so, it could
delay or impair our ability to obtain regulatory approval for our products and
27
substantially increase our costs or deplete any profit margins. If we do find
replacement manufacturers, we may not be able to enter into agreements with them
on terms and conditions favorable to us and, there could be a substantial delay
before a new facility could be qualified and registered with the FDA and foreign
regulatory authorities.
We may in the future elect to manufacture some of our products on our own.
Although we own certain specialized manufacturing equipment, are considering an
investment in additional manufacturing equipment and employ certain
manufacturing managerial personnel, we do not presently maintain a complete
manufacturing facility or manufacturing department and we do not anticipate
manufacturing on our own any of our products during the next 12 months. If we
decide to manufacture products on our own and do not successfully develop
manufacturing capabilities, it will adversely affect sales of our products.
In addition, the FDA and foreign regulatory authorities require manufacturers to
register manufacturing facilities. The FDA and corresponding foreign regulators
inspect these facilities to confirm compliance with good manufacturing practices
(GMPs) or similar requirements that the FDA or corresponding foreign regulators
establish. If our third-party foreign or domestic suppliers or manufacturers of
our products or, if we decide to manufacture our products on our own, we, fail
to comply with GMP requirements or other FDA and comparable foreign regulatory
requirements, it could adversely affect our ability to market and develop our
products.
Our lack of marketing and sales experience could limit our ability to generate
revenues from future product sales.
We do not have marketing, sales or distribution experience or marketing or sales
personnel. As a result, we will depend on our collaboration with Quintiles for
the marketing and sales of Surfaxin for indications of Respiratory Distress
Syndrome in premature infants and Meconium Aspiration Syndrome in full-term
infants in the United States and with Esteve for the marketing and sales of
Surfaxin for the treatment of Respiratory Distress Syndrome, Meconium Aspiration
Syndrome and Acute Lung Injury/Acute Respiratory Distress Syndrome in adult
patients in all of Europe, Central America and South America, and Mexico. See
"Risks Related to Our Business-Our strategy, in many cases, is to enter into
collaboration agreements with third parties with respect to our products and we
may require additional collaboration agreements. If we fail to enter into these
agreements or if we or the third parties do not perform under such agreements,
it could impair our ability to commercialize our products." If we do not develop
a marketing and sales force of our own, then we will depend on arrangements with
corporate partners or other entities for the marketing and sale of our remaining
products.
The sales and marketing of Surfaxin for indications of Respiratory Distress
Syndrome in premature infants, Meconium Aspiration Syndrome in full-term
infants, and Acute Lung Injury/Acute Respiratory Distress Syndrome in adult
patients in the relevant territories depends, in part, on Quintiles' and
Esteve's performance of their contractual obligations. The failure of either
party to do so would have a material adverse effect on the sales and marketing
of Surfaxin. We may not succeed in entering into any satisfactory third party
arrangements for the marketing and sale of our remaining products. In addition,
we may not succeed in developing marketing and sales capabilities, our
commercial launch of certain products may be delayed until we
28
establish marketing and sales capabilities or we may not have sufficient
resources to do so. If we fail to establish marketing and sales capabilities or
fail to enter into arrangements with third parties, in a timely manner,
it will adversely affect sales of our products.
We depend upon key employees and consultants in a competitive market for skilled
personnel. If we are unable to attract and retain key personnel, it could
adversely affect our ability to develop and market our products.
We are highly dependent upon the principal members of our management team,
especially our Chief Executive Officer, Dr. Capetola, and our directors, as well
as our scientific advisory board members, consultants and collaborating
scientists. Many of these people have been involved in our formation or have
otherwise been involved with us for many years, have played integral roles in
our progress and we believe that they will continue to provide value to us. A
loss of any of these personnel may have a material adverse effect on aspects of
our business and clinical development and regulatory programs. We have an
employment agreement with Dr. Capetola that expires on December 31, 2005. We
also have employment agreements with other key personnel with termination dates
in 2003 and 2004. Although these employment agreements generally provide for
severance payments that are contingent upon the applicable employee's refraining
from competition with us, the loss of any of these persons' services would
adversely affect our ability to develop and market our products and obtain
necessary regulatory approvals, and the applicable noncompete provisions can be
difficult and costly to monitor and enforce. Further, we do not maintain key-man
life insurance.
Our future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel, including marketing and sales staff. We experience intense
competition for qualified personnel, and the existence of non-competition
agreements between prospective employees and their former employers may prevent
us from hiring those individuals or subject us to suit from their former
employers.
While we attempt to provide competitive compensation packages to attract and
retain key personnel, some of our competitors are likely to have greater
resources and more experience than we have, making it difficult for us to
compete successfully for key personnel.
Our industry is highly competitive and we have less capital and resources than
many of our competitors, which may give them an advantage in developing and
marketing products similar to ours or make our products obsolete.
Our industry is highly competitive and subject to rapid technological innovation
and evolving industry standards. We compete with numerous existing companies
intensely in many ways. We intend to market our products under development for
the treatment of diseases for which other technologies and treatments are
rapidly developing and, consequently, we expect new companies to enter our
industry and that competition in the industry will increase. Many of these
companies have substantially greater research and development, manufacturing,
marketing, financial, technological, personnel and managerial resources than we
have. In addition, many of
29
these competitors, either alone or with their collaborative partners, have
significantly greater experience than we do in:
- -- developing products;
- -- undertaking preclinical testing and human clinical trials;
- -- obtaining FDA and other regulatory approvals or products; and
- -- manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA or comparable foreign approval or commercializing products before
us. If we commence commercial product sales, we will compete against companies
with greater marketing and manufacturing capabilities who may successfully
develop and commercialize products that are more effective or less expensive
than ours. These are areas in which, as yet, we have limited or no experience.
In addition, developments by our competitors may render our product candidates
obsolete or noncompetitive.
Presently, there are no approved drugs that are specifically indicated for
Meconium Aspiration Syndrome in full-term infants or Acute Lung Injury/Acute
Respiratory Distress Syndrome in adults. Current therapy consists of general
supportive care and mechanical ventilation. Four products are specifically
approved for the treatment of Respiratory Distress Syndrome in premature
infants. Curosurf(TM) is a porcine lung extract that is marketed in Europe by
Chiesi Farmaceutici S.p.A., and in the United States by Dey Laboratories, Inc.
Exosurf(TM) is marketed by GlaxoSmithKline, plc, outside the United States and
contains only phospholipids (the fats normally present in the lungs) and
synthetic organic detergents and no stabilizing protein or peptides.
Survanta(TM), marketed by the Ross division of Abbot Laboratories, Inc., is an
extract of bovine lung that contains the cow version of surfactant protein B.
Forrest Laboratories, Inc., markets its calf lung surfactant, Infasurf(TM) in
the United States for the treatment of Respiratory Distress Syndrome in
premature infants. Although none of the four approved surfactants for
Respiratory Distress Syndrome in premature infants is approved for Acute Lung
Injury or Acute Respiratory Distress Syndrome in adults, which are significantly
larger markets, there are a significant number of other potential therapies in
development for the treatment of Acute Lung Injury/Acute Respiratory Distress
Syndrome that are not surfactant-related. Any of these various drugs or devices
could significantly impact the commercial opportunity for Surfaxin. We believe
that engineered humanized surfactants such as Surfaxin will be far less
expensive to produce than the animal-derived products approved for the treatment
of Respiratory Distress Syndrome in premature infants and will have no
capability of transmitting the brain-wasting bovine spongiform encephalopathy
(commonly called "mad-cow disease") or causing adverse immunological responses
in young and older adults.
We also face, and will continue to face, competition from colleges,
universities, governmental agencies and other public and private research
organizations. These competitors are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed. Some of these technologies may compete directly with
the technologies that we are developing. These institutions will also compete
with us in recruiting highly qualified scientific personnel. We expect that
therapeutic developments in the areas in which we are active may occur at a
rapid rate and that competition will intensify as advances in
30
this field are made. As a result, we need to continue to devote substantial
resources and efforts to research and development activities.
If product liability claims are brought against us, it may result in reduced
demand for our products or damages that exceed our insurance coverage.
The clinical testing of, marketing and use of our products exposes us to product
liability claims in the event that the use or misuse of those products causes
injury, disease or results in adverse effects. Use of our products in clinical
trials, as well as commercial sale, could result in product liability claims. In
addition, sales of our products through third party arrangements could also
subject us to product liability claims. We presently carry product liability
insurance with coverages of up to $10,000,000 per occurrence and $10,000,000 in
the aggregate, an amount we consider reasonable and customary relating to our
clinical trials of Surfaxin. However, this insurance coverage includes various
deductibles, limitations and exclusions from coverage, and in any event might
not fully cover any potential claims. We may need to obtain additional product
liability insurance coverage prior to initiating other clinical trials. We
expect to obtain product liability insurance coverage before commercialization
of our proposed products; however, the insurance is expensive and insurance
companies may not issue this type of insurance when we need it. We may not be
able to obtain adequate insurance in the future at an acceptable cost. Any
product liability claim, even one that was not in excess of our insurance
coverage or one that is meritless and/or unsuccessful, could adversely affect
our cash available for other purposes, such as research and development. In
addition, the existence of a product liability claim could affect the market
price of our common stock.
We expect to face uncertainty over reimbursement and healthcare reform.
In both the United States and other countries, sales of our products will depend
in part upon the availability of reimbursement from third party payors, which
include government health administration authorities, managed care providers and
private health insurers. Third party payors are increasingly challenging the
price and examining the cost effectiveness of medical products and services. In
addition, significant uncertainty exists as to the reimbursement status of newly
approved health care products. Our products may not be considered cost
effective. Adequate third party reimbursement may not be available to enable us
to maintain price levels sufficient to realize an appropriate return on our
investment in the research and development of our products.
The United States and other countries continue to propose and pass legislation
designed to reduce the cost of healthcare. Accordingly, legislation and
regulations affecting the pricing of our products may change before the products
are approved for marketing to the public. Adoption of new legislation and
regulations could further limit reimbursement for our products. If third party
payors fail to provide adequate coverage and reimbursement rates for our
products, the market acceptance of the products may be adversely affected. In
that case, our business and financial condition will suffer.
31
Directors, executive officers, principal stockholders and affiliated entities
own a significant percentage of our capital stock, and they may make decisions
that you do not consider to be in your best interest.
As of March 18, 2002, our directors, executive officers, principal stockholders
and affiliated entities beneficially owned, in the aggregate, approximately 24%
of our outstanding voting securities. As a result, if some or all of them acted
together, they would have the ability to exert substantial influence over the
election of our Board of Directors and the outcome of issues requiring approval
by our stockholders. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company that may be favored by
other stockholders. This could prevent transactions in which stockholders might
otherwise recover a premium for their shares over current market prices.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock, like that of many other development stage
pharmaceutical or biotechnology companies, has been and is likely to be
volatile. In addition to general economic, political and market conditions, the
price and trading volume of our stock could fluctuate widely in response to many
factors, including:
- -- announcements of the results of clinical trials by us or our competitors;
- -- adverse reactions to products;
- -- governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory
agency concerns regarding the safety or effectiveness of our products;
- -- changes in U.S. or foreign regulatory policy during the period of product
development;
- -- developments in patent or other proprietary rights, including any third
party challenges of our intellectual property rights;
- -- announcements of technological innovations by us or our competitors;
- -- announcements of new products or new contracts by us or our competitors;
- -- actual or anticipated variations in our operating results due to the level
of development expenses and other factors;
- -- changes in financial estimates by securities analysts and whether our
earnings meet or exceed the estimates;
- -- conditions and trends in the pharmaceutical and other industries;
- -- new accounting standards; and
- -- the occurrence of any of the risks described in these "Management's
Discussion and Analysis - Risks Related to Our Business."
Our common stock is listed for quotation on the NASDAQ SmallCap Market. For the
12-month period ended December 31, 2001, the price of our common stock has
ranged from $2.00 to $5.91. We expect the price of our common stock to remain
volatile. The average daily trading volume in our common stock varies
significantly. For the 12-month period ending December 31, 2001, the average
daily trading volume in our common stock was approximately 41,200 shares and the
average number of transactions per day was approximately 52. Our relatively low
average volume and low average number of transactions per day may affect the
ability of our
32
stockholders to sell their shares in the public market at prevailing prices and
a more active market may never develop.
In addition, we may not be able to continue to adhere to the strict listing
criteria of the SmallCap Market. If the common stock were no longer listed on
the SmallCap Market, investors might only be able to trade in the
over-the-counter market in the Pink Sheets(R) (a quotation medium operated by
the National Quotation Bureau, LLC) or on the OTC Bulletin Board(R) of the
National Association of Securities Dealers, Inc. This would impair the liquidity
of our securities not only in the number of shares that could be bought and sold
at a given price, which might be depressed by the relative illiquidity, but also
through delays in the timing of transactions and reduction in media coverage.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if meritless or unsuccessful, it would result in
substantial costs and a diversion of management attention and resources, which
would negatively impact our business.
A substantial number of our securities are eligible for future sale and this
could affect the market price for our stock and our ability to raise capital.
The market price of our common stock could drop due to sales of a large number
of shares of our common stock or the perception that these sales could occur. As
of March 18, 2002, we had 26,385,680 shares of common stock outstanding. In
addition, as of March 18, 2002, up to approximately 8,303,000 shares of our
common stock were issuable on exercise of outstanding options and warrants.
Holders of our stock options and warrants are likely to exercise them, if ever,
at a time when we otherwise could obtain a price for the sale of our securities
that is higher than the exercise price per security of the options or warrants.
This exercise, or the possibility of this exercise, may impede our efforts to
obtain additional financing through the sale of additional securities or make
this financing more costly, and may reduce the price of our common stock.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation and Delaware law may make it more
difficult for someone to acquire control of us or for our stockholders to remove
existing management, and might discourage a third party from offering to acquire
us, even if a change in control or in management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us to issue
shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of Directors also
has the authority to issue preferred stock without further stockholder approval.
As a result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the
33
holders of common stock and the right to the redemption of the shares, together
with a premium, prior to the redemption of our common stock. In addition, our
Board of Directors, without further stockholder approval, could issue large
blocks of preferred stock.
34
ITEM 7. FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
35
PART III
The information required by Items 9 through 12 of Part III is incorporated by
reference to our definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits are listed on the Index to Exhibits at the end of this Report. The
exhibits required by Item 601 of Regulation S-B, listed on such Index in
response to this Item, are incorporated herein by reference.
(b) Reports on Form 8-K
We filed two Current Reports on Form 8-K during the three months ended December
31, 2001. A Current Report was filed on October 5, 2001, reporting our
completion of a private placement of approximately 3.5 million shares of our
common stock and approximately 700,000 warrants to purchase our common stock. On
December 19, 2001, a Current Report was filed reporting our collaboration with
Quintiles, and the related sale of our common stock to PharmaBio.
36
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: March 27, 2002 By: /s/ Robert J. Capetola
-------------------------------------
Robert J. Capetola, Ph.D.
President and 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
--------- ------------ ----
Robert J. Capetola, Ph.D.
/s/ Robert J. Capetola President and Chief Executive Officer March 27, 2002
- -----------------------------
/s/ John G. Cooper John G. Cooper March 27, 2002
- ----------------------------- Senior Vice President and Chief Financial
Officer
/s/ Cynthia Davis Cynthia Davis March 27, 2002
- ----------------------------- Vice President, Administrative Operations
and Controller
(Principal Accounting Officer)
/s/ Herbert McDade Herbert McDade, Jr. March 27, 2002
- ----------------------------- Chairman of the Board of Directors
/s/ Richard Power Richard Power March 27, 2002
- ----------------------------- Director
/s/ Marvin E. Rosenthale Marvin E. Rosenthale, Ph.D. March 27, 2002
- ----------------------------- Director
/s/ Mark C. Rogers Mark C. Rogers, M.D. March 27, 2002
- ----------------------------- Director
/s/ Max E. Link Max E. Link, Ph.D. March 27, 2002
- ----------------------------- Director
37
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1(1) Agreement and Plan of Merger dated as of March 5, 1998,
among Discovery, ATI Acquisition Corp. and Old ATI.
2.2(3) Agreement and Plan of Reorganization and Merger, dated as
of July 16, 1997, by and between Discovery and Old
Discovery.
3.1(1) Restated Certificate of Incorporation of Discovery.
3.2(12) Amendment to Restated Certificate of Incorporation of
Discovery.
3.3(2) By-laws of Discovery.
3.4(10) Certificate of Ownership Merging ATI Acquisition Corp.,
into Discovery.
4.1(6) Form of Class C Warrant.
4.2(9) Form of Class E Warrant.
4.3(10) Unit Purchase Option issued to Paramount Capital, Inc.,
in connection with the March 1999 private placement.
4.4(14) Form of Class F Warrant.
4.5(15) Form of Class G Warrant issued to PharmaBio Development
Inc. ("PharmaBio").
4.6(15) Form of Class H Warrant issued to PharmaBio.
4.7(15) Form of Promissory Note issued to PharmaBio.
10.1 Reference is made to Exhibits 2.1 and 2.2.
10.2(1) Investor Rights Agreement, dated as of March 20, 1996,
between Old Discovery and RAQ, LLC.
10.3(1) Registration Rights Agreement, dated as of October 28,
1996, between ATI, Johnson & Johnson Development
Corporation ("JJDC"), and The Scripps Research Institute
("Scripps").
10.4(4)+ Sublicense Agreement, dated as of October 28, 1996,
between ATI, Johnson & Johnson, Inc., and Ortho
Pharmaceutical Corporation.
38
10.5(4)+ License Agreement, between Discovery and The
Charlotte-Mecklenburg Hospital Authority ("CMHA") dated
as of March 20, 1996.
10.6(10)+ Amendment of License Agreement between Discovery and
CMHA, dated as of March 20, 1996.
10.7(2) Restated 1993 Stock Option Plan of Discovery.
10.8(2) 1995 Stock Option Plan of Discovery.
10.9(7) Amended and Restated 1998 Stock Incentive Plan of
Discovery.
10.10(6) Indenture of Lease, dated as of July 1, 1998, between
SLT1, LLC and Acute Therapeutics, Inc.
10.11(12) Amendment, dated as of September 15, 2000, to the
Indenture of Lease dated as of July 1, 1998, between
SLT1, LLC and Discovery.
10.12(6) Registration Rights Agreement, dated as of June 16, 1998,
among Discovery, JJDC and Scripps.
10.13(6) Stock Exchange Agreement, dated as of June 16, 1998,
between Discovery and JJDC.
10.14(12) Employment Agreement, dated January 1, 2001, between
Discovery and Robert J. Capetola, Ph.D.
10.15 Employment Agreement, dated as of June 16, 2001, between
Discovery and Christopher J. Schaber.
10.16 Employment Agreement, dated as of June 16, 2001, between
Discovery and Cynthia Davis.
10.17(6) Form of Intellectual Property and Confidential
Information Agreement.
10.18(6) Form of Stock Purchase Agreement Under the 1998 Stock
Incentive Plan of Discovery.
10.19(8) Notice of Grant of Stock Option.
10.20(10) Securities Purchase Agreement between Discovery and
Laboratorios P.E.N., S.A., dated October 26, 1999.
10.21(10)+ Research Funding and Option Agreement, dated as of March
1, 2000, between Discovery and Scripps.
39
10.22(13) Amended and Restated 1998 Stock Incentive Plan of
Discovery, amended on June 15, 2001.
10.23 Employment Agreement, dated as of December 1, 2001,
between Discovery and Ralph Niven, Ph.D.
10.24 Employment Agreement, dated as of December 11, 2001,
between Discovery and John G. Cooper.
10.25 Employment Agreement, dated as of August 15, 2000,
between Discovery and Deni M. Zodda, Ph.D.
10.26(16)+ Commercialization Agreement, dated as of December 10,
2001, between Discovery and Quintiles Transnational Corp.
("Quintiles").
10.27(16)+ Investment and Commission Agreement, dated as of December
10, 2001, between Discovery and PharmaBio.
10.28(16) Common Stock and Warrant Purchase Agreement, dated as of
December 10, 2001, between Discovery and PharmaBio.
10.29(16)+ Loan Agreement, dated as of December 10, 2001, between
Discovery and PharmaBio.
10.30(17)+ Sublicense and Collaboration Agreement, dated as of March
6, 2002, between Discovery and Laboratorios del Dr.
Esteve ("Esteve").
10.31(17)+ Supply Agreement, dated as of March 6, 2002, between
Discovery and Esteve.
10.32(17) Common Stock Purchase Agreement, dated as of March 6,
2002, between Discovery and Esteve.
16.1(5) Letter dated as of January 28, 1998, from Ernst & Young
LLP to the Securities and Exchange Commission.
16.2(11) Letter dated January 9, 2001, from Richard A. Eisner &
Company, LLP, to the Securities and Exchange Commission.
21.1(1) Subsidiaries of Discovery.
23.1 Consent of Richard A. Eisner & Company, LLP.
23.2 Consent of Ernst & Young LLP.
- ----------
(1) Incorporated by reference to Discovery's Annual Report on Form 10-KSB for
the year ending December 31, 1997.
40
(2) Incorporated by reference to Discovery's Registration Statement on Form
SB-2 (File No. 33-92-886).
(3) Incorporated by reference to Discovery's Registration Statement on Form
S-4 (File No. 333-34337).
(4) Incorporated by reference to Discovery's Registration Statement on Form
SB-2 (File No. 333-19375).
(5) Incorporated by reference to Discovery's Current Report on form 8-K/A
dated January 16, 1998.
(6) Incorporated by reference to Discovery's Annual Report on Form 10-KSB for
the year ending December 31, 1998.
(7) Incorporated by reference to Discovery's Proxy Statement on Schedule 14A
filed June 1, 1999.
(8) Incorporated by reference to Discovery's Quarterly Report on Form 10-QSB
for the quarter ending September 30, 1999.
(9) Incorporated by Reference to Discovery's Current Report on Form 8-K filed
March 29, 2000.
(10) Incorporated by reference to Discovery's Annual Report on Form 10-KSB for
the year ending December 31, 1999.
(11) Incorporated by Reference to Discovery's Amended Current Report on Form
8-K/A filed January 9, 2001.
(12) Incorporated by reference to Discovery's Annual Report on Form 10-KSB for
the year ending December 31, 2000.
(13) Incorporated by Reference to Discovery's Quarterly Report on Form 10-QSB
for the quarter ending June 30, 2001.
(14) Incorporated by Reference to Discovery's Current Report on Form 8-K filed
October 5, 2001.
(15) Incorporated by Reference to Discovery's Current Report on Form 8-K filed
December 19, 2001.
(16) Incorporated by Reference to Discovery's Amended Current Report on Form
8-K/A filed January 14, 2002.
(17) Incorporated by Reference to Discovery's Current Report on Form 8-K filed
March 8, 2002.
41
+ Confidential treatment requested as to certain portions of these exhibits.
Such portions have been redacted and filed separately with the Commission.
42
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Contents
Page
----
Consolidated Financial Statements
Reports of independent auditors F-2
Balance sheets as of December 31, 2001 and December 31, 2000 F-4
Statements of operations for the years ended December 31, 2001 and
2000 and the period from May 18, 1993 (inception), through
December 31, 2001 F-5
Statements of changes in stockholders' equity for the period from
May 18, 1993 (inception), through December 31, 2001 F-6
Statements of cash flows for the years ended December 31, 2001 and
2000 and the period from May 18, 1993 (inception), through
December 31, 2001 F-8
Notes to consolidated financial statements F-9
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Discovery Laboratories, Inc.
Doylestown, Pennsylvania
We have audited the accompanying consolidated balance sheets of Discovery
Laboratories, Inc. (a development stage enterprise) as of December 31, 2001 and
2000, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2001, and for the period May 18, 1993 (inception) through
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
for the period May 18, 1993 (inception) through December 31, 1999 include total
revenues and net loss of $205,000 and $32,446,000, respectively. Our opinion on
the consolidated statements of operations, changes in stockholders' equity, and
cash flows for the period May 18, 1993 (inception) through December 31, 2001,
insofar as it relates to amounts for prior periods through December 31, 1999, is
based solely on the report of other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Discovery Laboratories, Inc., at December
31, 2001 and 2000, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended December 31, 2001 and the
period from May 18, 1993 (inception) through December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 15, 2002
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Discovery Laboratories, Inc.
Doylestown, Pennsylvania
We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of Discovery Laboratories, Inc. and
subsidiary's (a development stage company) for the period from May 18, 1993
(inception) through December 31, 1999, the consolidated statements of operations
and cash flows are not presented separately herein. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated results of operations and
consolidated cash flows of Discovery Laboratories, Inc. and subsidiary for the
period from May 18, 1993 (inception) through December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Richard A. Eisner & Company, LLP
New York, New York
February 25, 2000
F-3
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheets
December 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 3,758,000 $ 7,281,000
Available-for-sale marketable securities 12,938,000 11,587,000
Note receivable - current 2,000 --
Prepaid expenses and other current assets 1,580,000 149,000
------------ ------------
Total current assets 18,278,000 19,017,000
Property and equipment, net of accumulated depreciation 822,000 697,000
Note receivable 197,000 --
Other assets 768,000 3,000
------------ ------------
$ 20,065,000 $ 19,717,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,750,000 $ 2,382,000
Capitalized lease - current 44,000 17,000
------------ ------------
Total current liabilities 1,794,000 2,399,000
------------ ------------
Deferred revenue 615,000 851,000
Capitalized lease 33,000 31,000
------------ ------------
Total liabilities 2,442,000 3,281,000
------------ ------------
Stockholders' equity:
Common Stock, $.001 par value; 35,000,000 authorized; 25,546,293 and
20,871,112 shares issued at December 31, 2001 and 2000,
respectively 26,000 21,000
Additional paid-in capital 73,163,000 60,891,000
Unearned portion of compensatory stock options (264,000) (347,000)
Deficit accumulated during the development stage (55,135,000) (43,989,000)
Treasury stock (at cost; 38,243 and 26,743 shares of Common Stock
at December 31, 2001 and 2000, respectively) (239,000) (213,000)
Accumulated other comprehensive income 72,000 73,000
------------ ------------
17,623,000 16,436,000
$ 20,065,000 $ 19,717,000
============ ============
See notes to consolidated financial statements F-4
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
May 18, 1993
Years Ended (inception)
December 31, through
---------------------------- December 31,
2001 2000 2001
------------ ------------ ------------
Revenues:
Research and development collaborative contracts $ 1,112,000 $ 741,000 $ 2,058,000
------------ ------------ ------------
Expenses:
Write-off of acquired in-process research and
development and supplies -- -- 13,508,000
Research and development 8,007,000 7,494,000 28,370,000
General and administrative 5,067,000 5,145,000 17,967,000
------------ ------------ ------------
Total expenses 13,074,000 12,639,000 59,845,000
------------ ------------ ------------
Operating loss (11,962,000) (11,898,000) (57,787,000)
Other income and expense:
Interest income, dividends, realized gains,
and other income 842,000 1,042,000 3,352,000
Minority interest in net loss of subsidiary -- -- 26,000
Interest expense (26,000) (5,000) (44,000)
------------ ------------ ------------
Net loss $(11,146,000) $(10,861,000) $(54,453,000)
============ ============ ============
Net loss per common share - basic and diluted $ (0.51) $ (0.58)
============ ============
Weighted average number of common shares Outstanding -
basic and diluted 22,038,067 18,806,265
============ ============
See notes to consolidated financial statements F-5
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity
May 18, 1993 (Inception) Through December 31, 2001
Preferred Stock
-------------------------------------------------
Common Stock Series B Stock Series C Stock
------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------
Issuance of common shares, May 1993 440,720 $1,000
Expenses paid on behalf of
the Company, 1993
Payment on stock subscriptions, 1995
Issuance of common shares, February 1995 143,016
Expenses paid on behalf of
the Company, 1995
Issuance of common shares, March 1996 1,070,175 1,000
Issuance of private placement units
August, October and November 1996 856,138 1,000 2,200,256 $ 2,000
Issuance of common shares for cash and
Compensation, September 1996 82,502
Exercise of stock options,
1996, 1997, 1998, 1999 288,379
Private placement expenses, 1997
Issuance of common shares pursuant to
Ansan Merger, November 1997 546,433
Accumulated dividends on preferred stock,
1997
Issuance of common shares pursuant to
ATI Merger, June 1998 1,033,500 1,000
Fair value of Common Stock issuable on
Exercise of ATI options, 1998
Series C preferred stock issued pursuant to
ATI Merger, June 1998 2,039 $ 2,039,000
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger, 1998 238,000
Common Stock issued in settlement of
Series C preferred stock dividends, 1998 49,846 (204,000)
Common Stock and warrants in a private
placement offering in March and April 1999 826,447 1,000
Issuance of private placement units in
July and August 1999 (net of offering costs) 2,024,792 2,000
Common Stock issued in connection with
sublicense agreement, 1999 317,164 1,000
Series B preferred stock converted, 1998, 1999 1,980,588 2,000 (669,500)
Noncash exercise of private placement
warrants, 1998 8,372
Common Stock issued in payment for services,
1998, 1999 21,168
Compensatory stock options granted
Dividends payable on Series C preferred stock,
1998, 1999 408,000
Treasury stock acquired, 1998, 1999
Treasury stock issued in payment for services,
1998, 1999
Unrealized gain (loss) on Available-for-sale
marketable securities, 1998, 1999
Fair value of options granted, 1998
Amortization of unearned portion of
Compensatory stock options, 1998, 1999
Net loss, Inception through 12/31/99
Balance - December 31, 1999
----------------------------------------------------------------------
(carried forward) 9,689,240 $ 10,000 1,530,756 $ 2,000 2,039 2,481,000
----------------------------------------------------------------------
Deficit
Unearned Accumulated
Additional Portion of During Treasury Stock Stock
Paid-in Compensatory Development --------------------- Subscriptions
Capital Stock Options Stage Shares Amount Receivable
---------------------------------------------------------------------------------
Issuance of common shares, May 1993 $ 1,000 $ (2,000)
Expenses paid on behalf of
the Company, 1993 1,000
Payment on stock subscriptions, 1995 2,000
Issuance of common shares, February 1995 1,000 (1,000)
Expenses paid on behalf of
the Company, 1995 18,000
Issuance of common shares, March 1996 5,000
Issuance of private placement units
August, October and November 1996 18,933,000
Issuance of common shares for cash and
Compensation, September 1996 42,000
Exercise of stock options,
1996, 1997, 1998, 1999 63,000
Private placement expenses, 1997 (11,000)
Issuance of common shares pursuant to
Ansan Merger, November 1997 2,459,000
Accumulated dividends on preferred stock,
1997 $ (238,000)
Issuance of common shares pursuant to
ATI Merger, June 1998 5,037,000
Fair value of Common Stock issuable on
Exercise of ATI options, 1998 2,966,000
Series C preferred stock issued pursuant to
ATI Merger, June 1998
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger, 1998
Common Stock issued in settlement of
Series C preferred stock dividends, 1998 204,000
Common Stock and warrants in a private
placement offering in March and April 1999 999,000
Issuance of private placement units in
July and August 1999 (net of offering costs 2,231,000
Common Stock issued in connection with
sublicense agreement, 1999 563,000
Series B preferred stock converted, 1998, 1999 (2,000)
Noncash exercise of private placement
warrants, 1998
Common Stock issued in payment for services,
1998, 1999 47,000
Compensatory stock options granted 37,000 $ (37,000)
Dividends payable on Series C preferred stock,
1998, 1999 (408,000)
Treasury stock acquired, 1998, 1999 (33,750) $ (95,000)
Treasury stock issued in payment for services,
1998, 1999 14,000 31,750 90,000
Unrealized gain (loss) on Available-for-sale
marketable securities, 1998, 1999
Fair value of options granted, 1998 142,000 (142,000)
Amortization of unearned portion of
Compensatory stock options, 1998, 1999 142,000
Net loss, Inception through 12/31/99 (32,446,000)
Balance - December 31, 1999
--------------------------------------------------------------------------------
(carried forward) $33,749,000 $ (37,000) (33,092,000) (2,000) $ (5,000) $ --
--------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Loss Total
--------------------------
Issuance of common shares, May 1993 $ --
Expenses paid on behalf of
the Company, 1993 1,000
Payment on stock subscriptions, 1995 2,000
Issuance of common shares, February 1995 --
Expenses paid on behalf of
the Company, 1995 18,000
Issuance of common shares, March 1996 6,000
Issuance of private placement units
August, October and November 1996 18,936,000
Issuance of common shares for cash and
Compensation, September 1996 42,000
Exercise of stock options,
1996, 1997, 1998, 1999 63,000
Private placement expenses, 1997 (11,000)
Issuance of common shares pursuant to
Ansan Merger, November 1997 2,459,000
Accumulated dividends on preferred stock,
1997 (238,000)
Issuance of common shares pursuant to
ATI Merger, June 1998 5,038,000
Fair value of Common Stock issuable on
Exercise of ATI options, 1998 2,966,000
Series C preferred stock issued pursuant to
ATI Merger, June 1998 2,039,000
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger, 1998 238,000
Common Stock issued in settlement of
Series C preferred stock dividends, 1998 --
Common Stock and warrants in a private
placement offering in March and April 1999 1,000,000
Issuance of private placement units in
July and August 1999 (net of offering costs) 2,233,000
Common Stock issued in connection with
sublicense agreement, 1999 564,000
Series B preferred stock converted, 1998, 1999 --
Noncash exercise of private placement
warrants, 1998 --
Common Stock issued in payment for services,
1998, 1999 47,000
Compensatory stock options granted --
Dividends payable on Series C preferred stock,
1998, 1999 --
Treasury stock acquired, 1998, 1999 (95,000)
Treasury stock issued in payment for services,
1998, 1999 104,000
Unrealized gain (loss) on Available-for-sale
marketable securities, 1998, 1999 $ -- --
Fair value of options granted, 1998 --
Amortization of unearned portion of
Compensatory stock options, 1998, 1999 142,000
Net loss, Inception through 12/31/99 (32,446,000)
Balance - December 31, 1999
-------------------------
(carried forward) $ -- $3,108,000
-------------------------
See notes to consolidated financial statements F-6
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity
May 18, 1993 (Inception) Through December 31, 2001
(continued)
Preferred Stock
-------------------------------------------------
Common Stock Series B Stock Series C Stock
------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------
(brought forward)
Balance - December 31, 1999 9,689,240 $10,000 1,530,756 $ 2,000 2,039 $ 2,481,000
Comprehensive loss:
Net loss
Other comprehensive income - unrealized
gain on marketable securities
available-for-sale
Total comprehensive loss
Exercise of stock options 532,059
Common placement warrant conversions 18,232
Preferred placement warrant conversions 18,511
Exercise of Class C & D warrant conversions 2,536,911 3,000
Series B preferred stock converted 4,765,631 5,000 (1,530,756) (2,000)
Treasury stock issued in payment for services
Common Stock issued in payment for services 9,496
Compensation charge on vesting of
options and warrants
Compensatory stock options and warrants
granted
Dividend payable on Series C stock 36,000
Series C preferred stock conversions 398,186 (2,039) (2,517,000)
Issuance of private placement units 2,902,846 3,000
------------------------------------------------------------------------
Balance - December 31, 2000 20,871,112 21,000 -- -- -- --
------------------------------------------------------------------------
Comprehensive loss:
Net loss
Other comprehensive loss - unrealized loss on
marketable securities available-for-sale
Total comprehensive loss
Exercise of stock options 6,224
Common Stock issued in payment for services 10,902
Compensation charge on modification of
options
Compensatory stock options and warrants
granted/earned
Common Stock issued in April 2001
private financing 296,560
Common Stock and warrants issued in
October 2001 private financing 3,562,759 4,000
Common Stock and warrants issued in
December 2001 791,905 1,000
Placement agent warrant exercise 6,831
Purchase of Treasury Stock
------------------------------------------------------------------------
Balance - December 31, 2001 25,546,293 $ 26,000 -- $ -- -- $ --
========================================================================
Deficit
Unearned Accumulated
Additional Portion of During Treasury Stock Stock
Paid-in Compensatory Development --------------------- Subscriptions
Capital Stock Options Stage Shares Amount Receivable
---------------------------------------------------------------------------------
(brought forward)
Balance - December 31, 1999 $ 33,749,000 $ (37,000) $ (33,092,000) (2,000) $ (5,000) $ --
Comprehensive loss:
Net loss (10,861,000)
Other comprehensive income - unrealized
gain on marketable securities
available-for-sale
Total comprehensive loss
Exercise of stock options 524,000 (31,743) (245,000)
Common placement warrant conversions
Preferred placement warrant conversions
Exercise of Class C & D warrant conversions 3,792,000
Series B preferred stock converted (3,000)
Treasury stock issued in payment for services 7,000 37,000
Common Stock issued in payment for services 47,000
Compensation charge on vesting of
options and warrants 2,330,000
Compensatory stock options and warrants
granted 495,000 (310,000)
Dividend payable on Series C stock (36,000)
Series C preferred stock conversions 2,517,000
Issuance of private placement units 17,440,000
---------------------------------------------------------------------------------
Balance - December 31, 2000 60,891,000 (347,000) (43,989,000) (26,743) (213,000) --
---------------------------------------------------------------------------------
Comprehensive loss:
Net loss (11,146,000)
Other comprehensive loss - unrealized loss on
marketable securities available-for-sale
Total comprehensive loss
Exercise of stock options 2,000
Common Stock issued in payment for services 42,000
Compensation charge on modification of
options 109,000
Compensatory stock options and warrants
granted/earned 325,000 83,000
Common Stock issued in April 2001
private financing 998,000
Common Stock and warrants issued in
October 2001 private financing 7,256,000
Common Stock and warrants issued in
December 2001 3,540,000
Placement agent warrant exercise
Purchase of Treasury Stock (11,500) (26,000)
------------------------------------------------------------------------------
Balance - December 31, 2001 $73,163,000 $(264,000) $ (55,135,000) (38,243) $ (239,000) $ --
==============================================================================
Accumulated
Other
Comprehensive
Loss Total
--------------------------
(brought forward)
Balance - December 31, 1999 $ -- $3,108,000
Comprehensive loss:
Net loss (10,861,000)
Other comprehensive income - unrealized
gain on marketable securities
available-for-sale 73,000 73,000
-----------
Total comprehensive loss (10,788,000)
Exercise of stock options 279,000
Common placement warrant conversions --
Preferred placement warrant conversions --
Exercise of Class C & D warrant conversions 3,795,000
Series B preferred stock converted --
Treasury stock issued in payment for services 37,000
Common Stock issued in payment for services 47,000
Compensation charge on vesting of
options and warrants 2,330,000
Compensatory stock options and warrants
granted 185,000
Dividend payable on Series C stock --
Series C preferred stock conversions --
Issuance of private placement units 17,443,000
--------------------------
Balance - December 31, 2000 73,000 16,436,000
--------------------------
Comprehensive loss:
Net loss (11,146,000)
Other comprehensive loss - unrealized loss on
marketable securities available-for-sale (1,000) (1,000)
------------
Total comprehensive loss (11,147,000)
Exercise of stock options 2,000
Common Stock issued in payment for services 42,000
Compensation charge on modification of
options 109,000
Compensatory stock options and warrants
granted/earned 408,000
Common Stock issued in April 2001
private financing 998,000
Common Stock and warrants issued in
October 2001 private financing 7,260,000
Common Stock and warrants issued in
December 2001 3,541,000
Placement agent warrant exercise --
Purchase of Treasury Stock (26,000)
--------------------------
Balance - December 31, 2001 $ 72,000 17,623,000
==========================
See notes to consolidated financial statements F-7
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
May 18, 1993
(inception)
Year Ended through
December 31, December 31,
---------------------------- ------------
2001 2000 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(11,146,000) $(10,861,000) $(54,453,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of acquired in-process research and
development and supplies -- -- 13,508,000
Write-off of licenses -- -- 683,000
Depreciation and amortization 205,000 123,000 544,000
Compensatory stock options 517,000 2,515,000 3,174,000
Expenses paid using treasury stock and Common Stock 42,000 84,000 204,000
Loss on sale of property -- 4,000 4,000
Changes in:
Prepaid expenses, inventory and other current assets (876,000) 492,000 (419,000)
Accounts payable and accrued expenses (632,000) 1,957,000 1,617,000
Other assets (18,000) 15,000 (21,000)
Proceeds from R&D collaborative contracts -- 605,000 1,641,000
Amortization of deferred revenue (791,000) (790,000) (1,581,000)
Expenses paid on behalf of company -- -- 18,000
Employee stock compensation -- -- 42,000
Reduction of research and development supplies -- -- (161,000)
------------ ------------ ------------
Net cash used in operating activities (12,699,000) (5,856,000) (35,200,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (257,000) (948,000) (1,751,000)
Proceeds from sale of property and equipment -- 550,000 575,000
Purchase of marketable securities (10,676,000) (11,514,000) (43,935,000)
Proceeds from sale or maturity of marketable securities 9,324,000 -- 31,474,000
Loan from related party (200,000) -- (200,000)
Related party loan payments received 1,000 -- 1,000
Net cash payments on merger -- -- (1,670,000)
Acquisition of licenses -- -- (711,000)
------------ ------------ ------------
Net cash used in investing activities (1,808,000) (11,912,000) (16,217,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of securities, net of expenses 11,033,000 21,517,000 55,344,000
Purchase of treasury stock (26,000) -- (121,000)
Principal payments under capital lease obligation (23,000) (15,000) (48,000)
------------ ------------ ------------
Net cash provided by financing activities 10,984,000 21,502,000 55,175,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (3,523,000) 3,734,000 3,758,000
Cash and cash equivalents - beginning of period 7,281,000 3,547,000 --
------------ ------------ ------------
Cash and cash equivalents - end of period $ 3,758,000 $ 7,281,000 $ 3,758,000
============ ============ ============
Supplementary disclosure of cash flows information:
Interest paid $ 26,000 $ 5,000 $ 44,000
Noncash transactions:
Class H warrants issued $ 768,000 $ -- $ 768,000
Accrued dividends on Series C preferred stock $ -- $ 36,000 $ 682,000
Series C preferred stock dividends paid using Common
Stock $ -- $ -- 204,000
Preferred stock issued for inventory $ -- $ -- $ 575,000
Equipment acquired through capitalized lease $ 52,000 $ -- $ 125,000
Unrealized (loss) gain on marketable securities $ (1,000) $ 73,000 $ 72,000
Common stock and treasury stock issued in payment for payables $ -- $ -- $ 73,000
See notes to consolidated financial statements F-8
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Discovery Laboratories, Inc. (the "Company") is a specialty pharmaceutical
company leveraging its platform technology in humanized lung surfactants to
develop novel respiratory therapies and pulmonary drug delivery products.
Surfactants are produced naturally in the lungs and are essential to the lungs'
ability to absorb oxygen.
The Company's humanized surfactant technology is being developed initially for
critical care patients with life-threatening respiratory disorders where there
are few, if any, approved therapies. These severe respiratory disorders
generally are associated with a lack of functional surfactant. The Company's
lead product, Surfaxin(R), is an engineered humanized surfactant and is
currently in two Phase 3 clinical trials for Respiratory Distress Syndrome in
premature infants (RDS), a Phase 3 clinical trial for Meconium Aspiration
Syndrome in full-term infants (MAS), and a Phase 2 clinical trial for Acute Lung
Injury/Acute Respiratory Distress Syndrome in adults (ALI/ARDS).
The Company is also performing research and development of aerosolized
formulations of its humanized surfactant technology to treat respiratory
conditions such as asthma and as a novel pulmonary drug delivery vehicle to
render drugs more effective when delivered to or via the respiratory tract.
Historical Founding Transactions
The Company, formerly known as Ansan Pharmaceuticals, Inc. ("Ansan"), was
incorporated in Delaware on November 6, 1992. In November 1997, Ansan merged
(the "Ansan Merger") with Discovery Laboratories, Inc., a former Delaware
corporation ("Old Discovery"), and was the surviving corporate entity.
Immediately following the Ansan Merger, Ansan changed its name to Discovery
Laboratories, Inc. The Ansan Merger was accounted for as a reverse acquisition
with Old Discovery as the acquirer for financial reporting purposes since Old
Discovery's stockholders owned approximately 92% of the merged entity. The
consolidated financial statements include the accounts of Ansan from November
25, 1997 (the date of acquisition).
In October 1996, the company invested $7,500,000 in exchange for 600,000 shares
of Series A preferred stock, of Acute Therapeutics, Inc., a Delaware Corporation
("Old ATI"). The stock represented 75% of the voting securities of Old ATI. In
June 1998, ATI Acquisition Corp., a Delware Corporation and a wholly owned
subsidiary of the Company, merged with and into Old ATI with Old ATI being the
surviving entity (the "Old ATI Merger"). Pursuant to the Old ATI Merger, each
outstanding share of Old ATI's Common Stock was exchanged for 3.90 shares (the
"Old ATI Exchange Ratio") of the common stock ("Common Stock"), par value $0.001
per share, of the Company; each share of Old ATI's Series B preferred stock was
converted into one share of the Company's Series C preferred stock and all
outstanding options to purchase Old ATI Common Stock were assumed by the Company
and became exercisable for shares of the Common Stock on the basis of the Old
ATI Exchange Ratio.
In October 1999, Old ATI was merged with and into the Company. Also in October
1999, the Company created Acute Therapeutics, Inc. ("New ATI"), a wholly owned
subsidiary, which is currently inactive.
The value of the Common Stock issued to Old ATI's Common Stockholders plus the
assumption of the outstanding Old ATI options and merger related costs has been
attributed to in-process research and development upon management's evaluation
and was recorded as an expense in connection with the Old ATI Merger.
F-9
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
The cost of the Old ATI Merger is as follows:
Common Stock issued to Old ATI stockholders
(1,033,500 shares at fair value) $ 5,038,000
Fair value of Common Stock issuable on exercise of options to
purchase Old ATI Common Stock net of exercise proceeds 2,966,000
Transaction costs 216,000
------------
$ 8,220,000
============
The accompanying consolidated financial statements include the accounts of the
Company and Old ATI (through the date of its merger into the Company) and New
ATI (from October 1999). All intercompany balances and transactions have been
eliminated.
Management's Plans and Financings
The Company is a development stage company and has incurred substantial losses
since inception. To date, the Company has funded its operations primarily
through the issuance of equity. The Company expects to continue to expend
substantial amounts for continued product research, development, and initial
commercialization activities for the foreseeable future. Management's plans with
respect to funding this development are to secure additional equity, if
possible, and to secure collaborative arrangements that will provide available
cash funding for operations. Continuation of the Company is dependent on its
ability to obtain additional financing and, ultimately, on its ability to
achieve profitable operations. There is no assurance, however, that such
financing will be available or that the Company's efforts ultimately will be
successful.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Available-for-sale marketable securities
The investments are classified as available for sale and are comprised
of commercial paper and shares in fixed-income mutual funds. Investments
are carried at fair market value. Realized gains and losses are computed
using the average cost of securities sold. Any appreciation/depreciation
on these investments is recorded as other comprehensive income in the
statements of changes in stockholders' equity until realized.
Property and equipment
Property and equipment is recorded at cost. Depreciation of furniture and
equipment is computed using the straight-line method over the estimated
useful lives of the assets (five to seven years). Leasehold improvements
are amortized over the lower of the (a) term of the lease or (b) useful
life of the improvements.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts
F-10
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-lived assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company records impairment losses on
long-lived assets used in operations, including intangible assets, when
events and circumstances indicate that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. No such losses have been
recorded.
Research and development
Research and development costs are charged to operations as incurred.
Revenue recognition - research and development collaborative agreements
The Company received nonrefundable fees from companies under license,
sublicense, collaboration and research funding agreements. The Company
initially records such funds as deferred revenue and recognizes research
and development collaborative contract revenue when the amounts are
earned, which occurs over a number of years as the Company performs
research and development activities. See Note 6 - License, Research
Funding, and Commercialization Agreements for a detailed description of
the Company's revenue recognition methodology under these agreements.
Additionally, the Company has been awarded grants from certain third party
organizations to help fund research for the drugs that the Company is
attempting to bring to full commercial use. Once research and development
expenditures qualifying under the grant are incurred, grant reports are
periodically completed and submitted to the granting agency for review. If
approved, the granting agency will then remit payment to the Company. Such
amounts are recorded as revenue upon receipt.
Stock-based compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). The provisions
of SFAS No. 123 allow companies to either expense the estimated fair value
of employee stock options or to continue to follow the intrinsic value
method set forth in Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees" ("APB 25") but disclose the pro forma
effects on net income (loss) had the fair value of the options been
expensed. The Company has elected to continue to apply APB 25 in
accounting for its employee stock option incentive plans and to provide
the required SFAS No. 123 disclosures. See Note 8 - Stock Options.
Net loss per common share
Net loss per common share is computed pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
and is based on the weighted average number of common shares outstanding
for the periods. For the years ended December 31, 2001 and 2000, 5,211,000
and 2,891,000 common shares, respectively, are potentially issuable upon
the exercise of certain of the Company's stock options and warrants and
are not included in the calculation of net loss per share as the effect
would be anti-dilutive.
F-11
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 3 - INVESTMENTS
The available-for-sale marketable securities are as follows:
December 31,
2001 2000
----------------------------------
Cost $ 12,866,000 $ 11,514,000
Gross unrealized gain 131,000 240,000
Gross unrealized loss (59,000) (167,000)
----------------------------------
Estimated fair value $ 12,938,000 $ 11,587,000
==================================
NOTE 4 - NOTE RECEIVABLE
Note receivable pertains to a $200,000, 7% per annum mortgagor's note due from a
vice president of the Company. This note is secured by a mortgage agreement
dated July 24, 2001. The note calls for monthly payments of principal and
interest over a 360-month period. The principal balance outstanding at December
31, 2001 was approximately $199,000.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2001 and 2000 was comprised of the
following:
December 31,
2001 2000
----------------------------
Leasehold improvements $ 144,000 $ 140,000
Furniture 189,000 141,000
Equipment 989,000 732,000
----------------------------
1,322,000 1,013,000
Less accumulated depreciation 500,000 316,000
----------------------------
$ 822,000 $ 697,000
============================
The equipment balance at December 31, 2001 and 2000 includes $125,000 and
$73,000, respectively, of property under a capital lease. The related
accumulated depreciation was $26,000 at December 31, 2001 and $13,000 at
December 31, 2000.
F-12
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 6 - INCOME TAXES
Since its inception, the Company has never recorded a provision or benefit for
Federal and state income taxes.
The reconciliation of the income tax benefit computed at the Federal statutory
rates to the Company's recorded tax benefit for the years ended December 31,
2001 and 2000 is as follows:
December 31,
2001 2000
---------------------------------
Income tax benefit, statutory rates $ 3,783,000 $ 3,652,000
State taxes on income, net of Federal
benefit 698,000 836,000
Research and development tax credit 90,000 85,000
Other 3,000 (95,000)
---------------------------------
Income tax benefit 4,574,000 4,478,000
Valuation allowance (4,574,000) (4,478,000)
---------------------------------
Income tax benefit $ -- $ --
=================================
The increase in valuation allowance was $96,000 and $2,489,000 in 2001 and 2000,
respectively.
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities, at December 31, 2001 and 2000, are as follows:
December 31,
2001 2000
------------------------------
Long-term deferred tax assets:
Net operating loss carryforwards
(Federal and state) $ 19,275,000 $ 14,771,000
Research and development tax credits 846,000 660,000
Capitalized research and development 268,000 363,000
------------------------------
Total long-term deferred tax assets 20,389,000 15,794,000
------------------------------
Long-term deferred tax liabilities:
Property and equipment (69,000) (49,000)
------------------------------
Net deferred tax assets 20,320,000 15,745,000
Less: valuation allowance (20,320,000) (15,745,000)
------------------------------
$ -- $ --
==============================
The Company was in a net deferred tax asset position at December 31, 2001 and
2000 before the consideration of a valuation allowance. Due to the fact that the
Company is in the development stage and has never realized a profit, management
believes it is prudent at this time to fully reserve the net deferred tax asset.
At December 31, 2001, the Company had available carryforward net operating
losses for Federal tax purposes of approximately $47,496,000 and a research and
development tax credit carryforward of $846,000. The Federal net operating loss
and research and development tax credit carryforwards expire beginning in 2008
and continuing through 2021. Additionally, at December 31, 2001, the Company had
available carryforward losses of approximately $43,244,000 for state tax
purposes. The utilization of $9,700,000 of the Federal net operating loss
carryforwards is subject to annual limitations in accordance with Section 382 of
the Internal Revenue Code. Certain state carryforward net operating losses are
also subject to annual limitations.
F-13
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 6 - INCOME TAXES (CONTINUED)
The difference between the deficit accumulated during the development stage for
financial reporting purposes and the net operating loss carryforwards for tax
purposes is primarily due to the write-off of the acquired in-process research
and development and supplies, which were not deducted for tax purposes.
NOTE 7 - LICENSE, RESEARCH FUNDING, AND COMMERCIALIZATION AGREEMENTS
On December 10, 2001, the Company entered into a collaboration arrangement with
Quintiles Transnational Corp. ("Quintiles"), and its affiliate, PharmaBio
Development, Inc. ("PharmaBio") whereby Quintiles will provide pre- and
post-launch marketing services for the commercialization of Surfaxin(R) for MAS
and/or IRDS in the United States. In connection therewith, the Company issued to
PharmaBio for aggregate consideration of $3 million: (i) 791,905 shares of
Common Stock; (ii) Class G warrants to purchase 357,143 shares of Common Stock
at an exercise price equal to $3.485 per share (subject to adjustment); and
(iii) Class H warrants to purchase 320,000 shares of Common Stock at an exercise
price equal to $3.03 per share (subject to adjustment).
PharmaBio also committed to provide the Company with a secured revolving credit
facility (the "Credit Facility"), primarily for use to pay pre-launch marketing
services to be provided by Quintiles, subject to the Company satisfying certain
conditions, for up to $8.5 million, which may be increased to $10 million in
specified circumstances. To the extent the Credit Facility availability is
increased to greater than $8.5 million, for each $1 million dollar increase, the
amount of shares of Common Stock issuable pursuant to the Class H warrants will
be increased by approximately 38,000 shares. Principal amounts owed under the
Credit Facility may be paid out of the proceeds of milestone payments to be paid
by PharmaBio to the Company at certain intervals upon the achievement of certain
corporate milestones by the Company. At December 31, 2001, no amounts were
outstanding under the Credit Facility.
In October 1999, the Company granted an exclusive license to Laboratorios Del
Dr. Esteve S.A. ("Esteve") to commercialize and sell Surfaxin(R) within Central
and South America, Mexico and certain Southern European countries (with an
option to include Italy). The license expires, on a country by country basis, on
the later of the expiration of the underlying patents or the fifteenth
anniversary from the first commercial sale of Surfaxin(R) within each country.
Certain additional terms of the agreement are:
o the Company was paid a nonrefundable license fee of $375,000;
o the Company will be the exclusive supplier (except in certain
events) of Surfaxin(R);
o Esteve agreed to reimburse certain research and development
expenditures borne by the Company in conducting certain clinical
trials in the above countries; however, costs as defined in the
license agreement, incurred in connection with such clinical trials
in excess of an agreed upon amount, will not be reimbursed;
o Esteve paid $375,000 in advance for Surfaxin(R) supplied for
clinical trials described above;
o an affiliate of Esteve invested $850,000 in the Company in exchange
for Common Stock issued at a 50% premium over the ten day average
closing price preceding the closing of the investment; the Company
has accounted for the premium as additional license fees amounting
to $286,000; and
o an option to an exclusive license for Italy for additional specified
payments.
The Company has accounted for the license fees (including the premium paid for
Common Stock), the reimbursement of research and development expenditures and
advance payment for Surfaxin(R) to be used in clinical trials as deferred
revenue. The balance in deferred revenue at December 31, 2001 relates entirely
to the license agreement with Esteve for which the Company will recognize
revenue using a straight line method through the anticipated date of FDA
approval for the first Surfaxin(R) neonatal indication. See Note 11 - Subsequent
Event for details concerning a new arrangement with Esteve which supercedes the
agreement entered into in October 1999.
F-14
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 7 - LICENSE, RESEARCH FUNDING, AND COMMERCIALIZATION AGREEMENTS (CONTINUED)
Concurrent with the Company's original investment in Old ATI, Ortho
Pharmaceuticals, Inc., a wholly owned subsidiary of Johnson & Johnson, Inc., and
Old ATI entered into an agreement (the "J&J License Agreement") granting an
exclusive license of the Surfaxin(R) technology to Old ATI in exchange for
certain license fees ($200,000 of which was paid in November 1996), milestone
payments aggregating $2,750,000, royalties and 40,000 shares of Old ATI Common
Stock. The Scripps Research Institute ("Scripps") received 40,000 shares of
Common Stock of Old ATI in exchange for its consent to the J&J License
Agreement.
The Company and Scripps were parties to a research funding and option agreement
which expired in February 2002. The Company is currently negotiating to amend
the agreement to extend the term, if at all, for an additional three years.
Pursuant to this agreement, the Company was required to fund a portion of
Scripps' research efforts and Scripps was obligated to grant an option to the
Company to acquire an exclusive license for the application of technology
developed from the research program. Payments to Scripps were $545,000 and
$468,000 in 2001 and 2000, respectively.
In 1996, the Company entered into a license agreement with the
Charlotte-Mecklenburg Hospital Authority (Charlotte-Mecklenberg) for the use of
the active compound in SuperVent(R). The Company paid a license issue fee of
$86,000 and has agreed to pay amounts based on the achievement of certain
milestones, royalties on future sales and future patent-related costs. If the
Company meets all milestones as defined in the agreement, payments paid to
Charlotte-Mecklenburg will aggregate $850,000. The license expires upon
expiration of the underlying patents.
NOTE 8 - STOCKHOLDERS' EQUITY
2001 private placements
In October 2001, the Company received approximately $7.3 million in net proceeds
from the sale of 3,562,759 shares of Common Stock and 712,553 Class F warrants
to purchase Common Stock at an exercise price of $2.365 per share. The Class F
warrants are exercisable through September 30, 2006. In connection with this
private placement, the placement agent received fees of approximately $360,000
and warrants to purchase 164,911 shares of Common Stock at $2.394 per share. All
of the warrants remain unexercised as of December 31, 2001.
In April 2001, the Company received approximately $1 million in proceeds in a
private placement sale of 296,560 shares of Common Stock to a limited
partnership. This partnership may be deemed to be a related party, in that one
of the partners is a member of the Company's board of directors. The investor is
entitled to certain registration rights with respect to the resale of the shares
of Common Stock issued in the offering.
2000 private placement
In March 2000, the Company received approximately $17,500,000 in net proceeds
from the sale of 37.74 units in a private placement offering. Each unit
consisted of 76,923 shares of Common Stock and Class E warrants to purchase
additional 15,385 shares of Common Stock at $7.38 per share. The Class E
warrants of the Company, aggregating approximately 581,000, are exercisable
through March 2005. In connection with this private placement, the placement
agent received fees of approximately $1,321,000 and warrants to purchase 348,341
shares of Common Stock at $8.113 per share. All of the warrants remain
unexercised as of December 31, 2001.
1999 private placements
During March and April 1999, the Company raised $1.0 million in a private
placement offering of 826,447 shares of Common Stock and 569,026 Class C
warrants to purchase Common Stock at an exercise price of $2.15 per share. The
Class C warrants are exercisable through April 2006. As of December 31, 2001,
approximately 57,000 Class C warrants remain unexercised.
F-15
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
In July 1999, the Company raised approximately $2,231,000 in net proceeds (net
of offering costs of approximately $217,000) in a private placement offering of
units. Each unit was sold for $500,000 and consisted of 413,223 shares of Common
Stock and 413,223 Class D warrants to purchase shares of Common Stock at an
exercise price of $1.33 per share. An aggregate of 2,024,792 shares of Common
Stock and 2,024,792 Class D warrants were issued. All Class D warrants have been
exercised. The placement agent received fees of 7% of the gross proceeds,
reimbursement of certain expenses and an option to purchase 0.49 units at a per
unit exercise price of $550,000. As of December 31, 2001, approximately 395,000
options issued to placement agent remain unexercised.
1996 private placement
In 1996, in a private placement offering, Old Discovery sold approximately 44
units (each unit consisting of securities converted in the Ansan Merger into
50,000 shares of Series B convertible preferred stock of the Company and 19,458
shares of Common Stock). Net proceeds from the private placement approximated
$19,000,000. On December 1, 1998, the conversion rate was adjusted whereby each
share of preferred stock was convertible at the option of the holders into 3.11
shares of Common Stock. Conversions took place at various dates and on March 14,
2000, all of the remaining Series B shares were converted into 4,766,000 shares
of Common Stock of the Company.
The placement agent for the offering received approximately $2,860,000 in cash
plus warrants which, pursuant to the Ansan Merger gave the holders thereof the
right to acquire 220,026 shares of Series B preferred stock (which as a result
of the conversion of the Series B preferred stock were convertible into 685,000
shares of Common Stock) at a price of $11 per share, through November 8, 2006,
and to acquire 85,625 shares of Common Stock at a price of $0.64 per share
through November 8, 2006. The warrants contain certain anti-dilution provisions
and may be exercised on a "net exercise" basis pursuant to a provision that does
not require the payment of any cash to the Company. As of December 31, 2001,
approximately 56,000 warrants were outstanding.
1995 Unit offering
In August 1995, Ansan issued an aggregate of 498,333 units (including 65,000
units pursuant to the underwriter's overallotment option) at $15.00 per unit in
an initial public offering. Each unit consisted of one share of Common Stock,
one redeemable Class A warrant, and one Class B warrant. All Class A and Class B
Warrants remaining unexercised at August 2000 expired by their terms.
Common shares reserved for issuance
As of December 31, 2001 and 2000, the Company has reserved shares of Common
Stock for issuance upon exercise of options and warrants as follows:
December 31,
2001 2000
------------ ------------
Stock option plans 4,296,000 3,162,000
Placement agent and underwriter warrants 1,619,000 1,464,000
Class C warrants (1999 private placement) 57,000 57,000
Class E warrants (2000 private placement) 581,000 581,000
Class F warrants (2001 private placement) 713,000 --
Class G warrants (2001 Quintiles Alliance) 357,000 --
Class H warrants (2001 Quintiles Credit Facility) 565,000 --
Other warrants 115,000 65,000
------------ ------------
8,303,000 5,329,000
============ ============
F-16
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
Treasury stock/Common Stock issued for services
In 1998, the Company's Board of Directors ("Board of Directors") approved a
stock repurchase program wherein the Company could buy its own shares from the
open market and use such shares to settle indebtedness. Such shares are
accounted for as treasury stock.
During 2001, the Company acquired 11,500 shares of Common Stock for
approximately $26,000. Such shares are accounted for as treasury stock. In
addition, during 2001, the Company issued 10,902 shares of Common Stock in lieu
of cash payments for services and rent.
During 2000, the Company acquired 31,743 shares of Common Stock in exchange for
option conversions, having a value of $245,000, and issued 7,000 shares of
treasury stock in satisfaction of services rendered. In addition, during 2000,
the Company issued 9,496 shares of Common Stock in lieu of cash payments for
services and rent.
During 1999, the Company acquired 2,000 shares of Common Stock for approximately
$5,000 and issued 15,600 shares of treasury stock, having a value of
approximately $53,000, in settlement of $39,000 of indebtedness. The difference
between fair market value and amount of indebtedness was charged to expense and
credited to paid-in-capital.
Series C preferred stock
The Company's Series C redeemable convertible preferred stock was convertible at
the option of the holder into Common Stock at a conversion price equal to the
market price of the Common Stock, as defined. On March 3, 2000, the sole Series
C shareholder, Johnson & Johnson, Inc., elected to convert its Series C
preferred stock shares into 398,186 shares of Common Stock.
NOTE 9 - STOCK OPTIONS
In March 1998, the Company adopted its 1998 Stock Incentive Plan which includes
three equity programs (the "1998 Plan"). Under the Discretionary Option Grant
Program, options to acquire shares of the Common Stock may be granted to
eligible persons who are employees, nonemployee directors, consultants and other
independent advisors. Pursuant to the Stock Issuance Program, such eligible
persons may be issued shares of the Common Stock directly, and under the
Automatic Option Grant Program, eligible directors will automatically receive
option grants at periodic intervals at an exercise price equal to 60% of fair
market value per share on the date of the grant. Options granted under the 1998
Plan expire no later than ten years from the date of the grant. On June 16,
2000, the 1998 Stock Incentive Plan was amended to increase the maximum number
of shares of Common Stock reserved for issuance over the term of the plan from
2,200,959 to 3,000,000. Further, on June 15, 2001, the 1998 Stock Incentive Plan
was amended to increase the maximum number of shares of Common Stock reserved
for issuance over the term of the plan from 3,000,000 to 4,150,000.
The Company applies APB 25 in accounting for stock options and, accordingly,
recognizes compensation expense for the difference between the fair value of the
underlying Common Stock and the exercise price of the option at the date of
grant. The effect of applying SFAS No. 123 on pro forma net loss is not
necessarily representative of the effects on reported net income or loss for
future years due to, among other things, (i) the vesting period of the stock
options and (ii) the fair value of additional stock options in future years. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value of the options at the grant date of awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss for each of the years ended December 31, 2001 and 2000 would have been
approximately $13,455,000 or $0.061 per share and $14,092,000 or $0.75 per share
per share, respectively. The weighted average fair value of the options granted
are estimated at $1.93 and $3.40 per share, respectively, for the years ended
December 31, 2001 and 2000, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: dividend
yield 0%, volatility of 118% and 130%, respectively, risk-free interest rate of
4% and 6%, respectively and expected life of three and a half years.
F-17
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 9 - STOCK OPTIONS (CONTINUED)
Additional information with respect to the stock option activity is summarized
as follows:
Year Ended December 31,
----------------------------------------------------------------------------------------
2001 2000
------------------------------------------------------- -------------------------------
Weighted
Weighted Average
Price Average Remaining Price
Per Exercise Contractual Per
Share Shares Price Life Share Shares
Options outstanding at
Beginning of year $0.0026 - $7.00 3,095,594 $ 3.39 8.33 years $0.0026 - $4.87 2,479,653
Options granted 2.10 - 5.25 1,279,000 2.58 1.66 - 7.00 1,187,000
Options exercised 0.3205 - 0.87 (6,224) 0.47 0.08 - 4.44 (532,059)
Options forfeited 2.10 - 5.19 (92,983) 4.01 0.32 (39,000)
Options expired -- -- -- -- --
---------- ---------
Options outstanding at end of
year $0.0026 - $7.00 4,275,387 $ 3.16 8.018 years $0.0026 - $7.00 3,095,594
========== =========
Options exercisable
at end of year $0.0026 - $7.00 4,275,387 $ 3.16 8.018 years $0.0026 - $7.00 3,095,594
========== =========
-----------------------
2000
-----------------------
Weighted
Weighted Average
Average Remaining
Exercise Contractual
Price Life
Options outstanding at
Beginning of year $ 2.27 7.93 years
Options granted 4.36
Options exercised 0.98
Options forfeited 0.32
Options expired --
Options outstanding at end of
year $ 3.39 8.33 years
Options exercisable
at end of year $ 3.39 8.33 years
The following table provides further detail with regard to the options
outstanding and exercisable at December 31, 2001:
Weighted Weighted Average
- ----------------------------------------------------------------------
Average Price Remaining
Price per share Shares per Share Contractual Life
- ----------------------------------------------------------------------
$0.0026 - $2.50 1,605,214 $1.62 8.36 years
$2.51 - $7.00 2,670,173 $4.08 7.82 years
The following table pertains to options granted and exercisable at less than
fair value:
Year Ended Year Ended
December 31, 2001 December 31, 2000
- --------------------------------------------------------------------------
Weighted average exercise price $2.11 $1.94
Weighted average fair value $3.53 $3.24
Currently, all options granted under the 1998 Plan are exercisable immediately
upon grant, however, the shares issuable upon exercise of the options are
subject to repurchase by the Company at the exercise price paid per share. Such
repurchase rights lapse as the options vest according to their stated terms.
In September 1999, management was granted, in the aggregate, options to purchase
500,000 shares of the Common Stock subject to the achievement of certain
corporate milestones. In January 2000, certain milestones related to the options
had been achieved and 50% of the 250,000 related options vested. In September
2000, the Board of Directors accelerated the remaining 50% of the 250,000
milestone options and the Company incurred non-cash compensation charges
amounting to $2,515,000, representing the excess of the fair value over the
exercise price of the options granted.
Included in the options outstanding at December 31, 2001, are options to
purchase 123,200 shares of the Common Stock (at an exercise price of $4.44)
granted during 1998, which vest upon the Company achieving specified milestones
and expire in June 2008. On vesting, the Company will incur a charge amounting
to the excess, if any, of the fair value over the exercise price.
F-18
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 10 - COMMITMENTS
At December 31, 2001, the Company had employment agreements with six officers
providing for an aggregate annual salary of $1,157,000. The agreements expire on
various dates through December 2005. The Company also had employment agreements
with five other executives that provide for an aggregate annual salary of
$709,000. The agreements expire on various dates through July 2003. All of the
foregoing agreements provide for the issuance of annual bonuses and the granting
of options subject to approval by the Board of Directors.
The Company leases office and laboratory space in Doylestown, Pennsylvania under
leases which expire in September 2004 and September 2005. Additionally, the
Company leases office space in Windsor, United Kingdom. Aggregate future minimum
annual rents for these leases are as follows:
2002 $ 365,000
2003 375,000
2004 304,000
2005 111,000
----------
$1,155,000
==========
The Company entered into agreements to lease laboratory equipment, which are
being accounted for as capital leases. Future minimum lease payments for these
leases are as follows:
2002 $ 50,000
2003 36,000
----------
86,000
Less interest included 9,000
----------
$ 77,000
==========
NOTE 11 - RELATED PARTY TRANSACTIONS
In November, 2001, the Company entered into an agreement with Clinical Data
Management, Inc. (CDM), replacing an earlier agreement, to perform duties
associated with processing data for the Company's ongoing clinical trials. CDM
is wholly-owned by the spouse of the Company's President and Chief Executive
Officer. Payments made to CDM and its owner, including payments made prior to
the agreement, for the years ended December 31, 2001 and 2000 were approximately
$221,400 and $110,700, respectively.
The Company, from time to time, engages the spouse of an officer to render
certain facility-based services. Payments made to this party for the years ended
December 31, 2001 and 2000 were approximately $38,700 and $77,900, respectively.
In April 2001, the Company sold 296,560 shares of Common Stock to a limited
partnership. This partnership may be deemed to be a related party, in that one
of the partners is a member of the Board of Directors.
NOTE 12 - SUBSEQUENT EVENT
On March 6, 2002, the Company entered into an expanded collaboration arrangement
with Esteve. This new Esteve collaboration supersedes the Sublicense and Supply
Agreements entered into with Esteve on October 26, 1999 and expands the
territory covered by those original agreements to all of Europe, Central and
South America, and Mexico. Pursuant to the new Esteve collaboration, the Company
issued 821,862 shares of Common Stock to Esteve at a price equal to $4.867 per
share (based on a 50% premium over the average closing price for the 30 days
prior to the closing date).
F-19
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2001
NOTE 12 - SUBSEQUENT EVENT (CONTINUED)
The Company also received a non-refundable licensing fee of $500,000 and Esteve
is committed to make certain milestone payments to the Company upon the
attainment of certain regulatory objectives. Esteve has agreed to pay for
certain clinical trial costs related to obtaining European Medicines Evaluation
Agency approval for Surfaxin(R) for the Acute Lung Injury/Acute Respiratory
Distress Syndrome indication. In addition, the Company entered into an exclusive
supply agreement for the expanded territory which provides that Esteve will
purchase all of its Surfaxin(R) drug product requirements from the Company at an
established transfer price based on sales of Surfaxin(R) by Esteve and or its
sublicensee(s).
F-20
Exhibit 10.15
EMPLOYMENT AGREEMENT
This Employment Agreement ( "Agreement") shall be effective as of
June 16, 2001, by and between DISCOVERY LABORATORIES, INC., a Delaware
corporation (the "Company"), and CHRISTOPHER J. SCHABER ("Executive").
WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be defined.
NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:
1. Terms of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
June 16, 2001, (the "Commencement Date") and continuing until June 15, 2004,
subject, however, to prior termination as hereinafter provided in Section 5
(such term is hereinafter referred to as the "Employment Period").
2. Executive's Duties and Obligations.
a. Duties. Executive shall serve as Executive Vice President,
Drug Development and Regulatory Compliance and Chief Operating Officer,
reporting directly to the Chief Executive Officer of the Company. Executive
shall be responsible for all duties customarily associated with his title.
b. Location of Employment. Executive's principal place of
business shall be at the Company's headquarters to be located within thirty (30)
miles of Doylestown, Pennsylvania; provided, that Executive acknowledges and
agrees that the performance by Executive of his duties shall require frequent
travel including, without limitation, overseas travel from time to time.
c. Proprietary Information and Inventions Agreement. Upon
execution of this Agreement, Executive shall execute the Company's standard form
of Intellectual Property and Confidential Information Agreement (the
"Confidentiality Agreement") a copy of which is attached to this Agreement as
Exhibit A. Executive shall comply at all times with the terms and conditions of
the Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
3. Devotion of Time to Company's Business
a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the proper
2
performance of his implicit and explicit duties and obligations hereunder to the
reasonable satisfaction of the Company.
b. No Other Employment. During his employment with the
Company, Executive shall not, except as otherwise provided herein, directly or
indirectly, render any services of a commercial or professional nature to any
other person or organization, whether for compensation or otherwise, without the
prior written consent of either the Company's Chief Executive Officer, Executive
Committee or Board of Directors.
c. Non-Competition During Employment During the Employment
Period and for the post-termination period set forth in Sections 3(c)(i), (ii)
or (iii), as applicable, Executive shall not, directly or indirectly, without
the prior written consent of the Company, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director,
or in any other individual or representative capacity (X) compete with the
Company in the business of developing or commercializing pulmonary surfactants,
cystic fibrosis treatments or any other category of compounds which forms the
basis of the Company's products or products under active development(1), or (Y)
directly or indirectly solicit or induce any employee of the Company to leave
the employ of the Company:
(i) twelve (12) months in the event Executive's employment
with the Company is terminated pursuant to the terms set forth in Section
6; or
(ii) six (6) months in the event Executive's employment with
the Company is terminated pursuant to the terms set forth in Section 5.b.;
or
(iii) eighteen (18) months in all other cases.
d. In the event that Executive breaches any provisions of this
Section 3.d. or there is a threatened breach, then, in addition to any other
rights which the Company may have, the Company shall be entitled, without the
posting of a bond or other security, to injunctive relief to enforce the
restrictions contained herein. In the event that an actual proceeding is brought
in equity to enforce the provisions of this Section 3.d., Executive shall not
urge as a defense that there is an adequate remedy at law nor shall the Company
be prevented from seeking any other remedies which may be available.
e. To the extent that the restrictions imposed by this Section
3.e are interpreted by any court to be unreasonable in geographic and/or
temporal scope, such restrictions shall be deemed automatically reduced to the
extent necessary to coincide with the maximum geographic and/or temporal
restrictions deemed by such court not to be unreasonable.
- ----------
(1) For the avoidance of doubt, the parties hereby acknowledge and agree the
that the term "cystic fibrosis treatments or any other category of compounds
which forms the basis of the Company's products or products under active
development" shall be construed narrowly so as to prohibit only that activity
that directly competes with the Company.
3
4. Compensation and Benefits.
a. Base Compensation. During the Employment Period, the
Company shall pay to Executive (i) base annual compensation ("Base Salary") of
Two Hundred Ten Thousand Dollars ($210,000), payable in accordance with the
Company's regular payroll practices and less all required withholdings and (ii)
additional compensation, if any, and benefits as hereinafter set forth in this
Section 4. Base Salary shall be reviewed at least annually (the "Annual Review")
for the purposes of determining increases, if any, based on Executive's
performance, the performance of the Company, inflation, the then prevailing
salary scales for comparable positions and other relevant factors, provided that
any such increases in Base Salary shall be solely within the discretion of the
Company. It is the Company's intention that the first of any such Annual Reviews
shall occur on or about January 2002.
b. Bonuses. Executive shall be eligible for such year-end
bonus, which may be paid in either cash or equity, or both, as is awarded solely
at the discretion of the Compensation Committee of the Board of Directors of the
Company after consultation with the Company's Chief Executive Officer. Any such
equity bonus shall contain such rights and features as are typically afforded to
other Company employees of similar level in connection with comparable equity
bonuses awarded by the Company.
c. Benefits. During the Employment Period, Executive shall be
entitled to participate in all employee benefit plans, programs and arrangements
made available generally to the Company's senior executives or to its employees
on substantially the same basis that such benefits are provided to such
executives or employees (including, without limitation profit-sharing, savings
and other retirement plans (e.g., a 401(k) plan) or programs, medical, dental,
hospitalization, vision, short-term and long-term disability and life insurance
plans or programs, accidental death and dismemberment protection, travel
accident insurance, and any other employee welfare benefit plans or programs
that may be sponsored by the Company from time to time, including any plans or
programs that supplement the above-listed types of plans or programs, whether
funded or unfunded); provided, however, that nothing in this Agreement shall be
construed to require the Company to establish or maintain any such plans,
programs or arrangements. Anything contained herein to the contrary
notwithstanding, throughout the Employment Period, Executive shall be entitled
to receive life insurance on behalf of Executive's named beneficiaries in the
amount of $500,000, except the Company shall have no liability whatsoever for
any taxes (whether based on income or otherwise) imposed upon or incurred by
Executive in connection with any such insurance.
d. Vacations. During the Employment Period, Executive shall be
entitled to 15 days paid vacation per year or such other greater number of days
as provided by the Company's policies and procedures then in effect with respect
to the Company's senior executives or employees, to be earned ratably throughout
the year, 5 days of which may be carried over from year to year (provided, that
in no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
4
e. Reimbursement of Business Expenses. Executive is authorized
to incur reasonable expenses in carrying out his duties and responsibilities
under this Agreement and the Company shall reimburse him for all such expenses,
in accordance with reasonable policies of the Company.
f. Tuition Reimbursement. Executive shall be entitled to
receive a payment of $4,700 within 30 days of execution of this Agreement to
cover the cost of tuition, fees, books and other materials related to doctoral
courses taken by Executive (collectively, "Tuition Costs"). In addition,
Executive shall be entitled to receive an additional reimbursement equal to the
lesser of (i) $9,300 or (ii) the remaining unpaid balance of Tuition Costs
incurred from the date hereof; provided, however, that such reimbursement shall
be conditioned upon Executive completing all material requirements for a
doctorate and incurring any such Tuition Costs by no later then June 16, 2002.
Any and all reimbursements to be provided pursuant to this Section 4(f) shall be
subject to documentation in accordance with reasonable policies of the Company.
5. Termination of Employment.
a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for Good Cause, as such term is hereinafter
defined. For the purposes of this Agreement, "Good Cause" means gross
misconduct, gross neglect of duties, conviction of a felony involving moral
turpitude, material breach by Executive of this Agreement or the Confidentiality
Agreement or any act or omission involving fraud or embezzlement against the
Company, or appropriation of any property or proprietary information of the
Company by Executive resulting, in either case, in material economic harm to the
Company, which is not cured by Executive within fifteen (15) days after receipt
of written notice from the Company. If terminated for Good Cause in accordance
with the provisions of this Section 5.a., Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1; provided, however, that in the event
of termination under this Section 5.a, that the number of accrued but unused
vacation days for which Executive shall be entitled to a lump sum payment shall
be limited to a total of 10 days (inclusive of amounts accrued and unpaid in
past service years as well as the present service year, if any). The Executive
shall not be entitled to receive any other compensation or benefits from the
Company whatsoever (except as and to the extent the continuation of certain
benefits is required by law).
b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause the following provisions shall
apply:
(1) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment, a lump sum
payment in respect of all accrued but unused vacation days attributable to past
service years and the present service year (provided, that in no event shall the
aggregate number of such accrued vacation days that are attributable to past
service years exceed 10 days) at his Base Salary in effect on the date such
vacation was earned, and payment of any other amounts earned, accrued or owing
to Executive but not yet paid; and
5
(2) Executive shall be entitled to receive severance
payments equal to his Base Salary in effect on the date of his termination,
payable on normal Company payroll dates, for a six (6) month period, subject to
setoff, for other employment or consulting income received by Executive; and
c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically Disabled as herein defined. For the
purposes of this Agreement, "Disabled" shall mean a mental or physical condition
that renders Executive substantially incapable of performing his duties and
obligations under this Agreement, after taking into account provisions for
reasonable accommodation, as determined by a medical doctor (such doctor to be
mutually determined in good faith by the parties) for three (3) or more
consecutive months or for a total of six (6) months during any twelve (12)
consecutive months; provided, that during such period the Company shall give
Executive at least thirty (30) days' written notice that it considers the time
period for disability to be running. If this Agreement is terminated under this
Section 5.c., Executive, his heirs, legal representatives or his estate shall be
entitled to any unpaid amounts set forth in Section 5.b.1. through the last day
of Executive's employment but shall not be entitled to any severance benefits.
d. Termination by Executive. If Executive, upon 30 days prior
notice to the Company, voluntarily resigns, Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1. through the last day of Executive's
employment but shall not be entitled to any severance benefits.
6. Severance in Connection with Change of Control.
a. In the event that (i) Executive's employment is terminated
by Company without Good Cause or (ii) Executive resigns for Good Reason (as such
term is hereinafter defined); within twelve months of a Change of Control (as
such term is hereinafter defined), Executive shall be entitled to receive, in
addition to the payments set forth in Section 5.b.1. and in lieu of the payments
set forth in Section 5.b.2., severance payments equal to his Base Salary in
effect on the date of his termination, payable on normal Company payroll dates,
for a twelve (12) month period, subject to setoff, for other full-time
employment or full-time consulting income received by Executive.
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean Executive experiences (X) an involuntary reduction of $20,000 or
greater in his then current Base Salary or (Y) a failure of the Company to
provide the Executive with a position, authority or duties at least equivalent
to the position held by Executive on the day immediately preceding the date of
the Change of Control if such circumstance is not remedied within five business
days after written notice from Executive to the Company.
c. Change of Control. For purposes of this Agreement, a
"Change of Control" shall mean the occurrence of any of the following events:
6
(i) Any "person", as such term is currently used in
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act"),
other than any employee benefit plan of the Company, becomes a "beneficial
owner" (as such term is currently used in Rule 13d-3 promulgated under the Act)
of 50% or more of the number of shares of the Company's voting stock;
(ii) The Board adopts any plan of liquidation providing
for the distribution of all or substantially all of the Company's assets;
(iii) All or substantially all of the assets or business
of the Company is disposed of pursuant to a sale, merger, consolidation or other
transaction, unless the shareholders of the Company immediately prior to such
transaction beneficially own (within the meaning of Rule 13d-3 promulgated under
the 1934 Act), as a result of their ownership of stock in the Company, at least
50% of the number of shares of voting stock or other voting equity of the entity
or entities that succeed to the business of the Company; or
(iv) The Company combines with another company and is
the surviving corporation but, immediately after the combination, the
shareholders of the Company immediately before such transaction beneficially own
(within the meaning of Rule 13d-3 promulgated under the 1934 Act), as a result
of their ownership of stock in the Company immediately prior to such
combination, less than 50% of the number of shares of voting stock of the
combined company.
7. Miscellaneous.
a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regards to the
application of choice of law rules.
b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.
d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.
7
e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 7.e.
f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
IN WITNESS THEREOF, the parties have executed this Agreement as of
the date set forth above.
DISCOVERY LABORATORIES, INC.
/s/ Robert J. Capetola
--------------------------------------
By: Robert J. Capetola, Ph.D.
Its: President and CEO
Address: 350 South Main Street, Suite 307
Doylestown, PA 18901
EXECUTIVE, Christopher J. Schaber
/s/ Christopher J. Schaber
--------------------------------------
Address: 40 South Hockey Drive
Columbus, NJ 08022
Exhibit 10.16
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") shall be effective as of
June 16, 2001, by and between DISCOVERY LABORATORIES, INC., a Delaware
corporation (the "Company"), and CYNTHIA DAVIS ("Executive").
WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be defined.
NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:
1. Terms of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
June 16, 2001, (the "Commencement Date") and continuing until June 15, 2004,
subject, however, to prior termination as hereinafter provided in Section 5
(such term is hereinafter referred to as the "Employment Period").
2. Executive's Duties and Obligations.
a. Duties. Executive shall serve as Vice President of
Administrative Operations, Controller, reporting directly to the Chief Executive
Officer and/or Chief Financial Officer (or substantial equivalent) of the
Company. Executive shall be responsible for all duties customarily associated
with her title.
b. Location of Employment. Executive's principal place of
business shall be at the Company's headquarters to be located within thirty (30)
miles of Doylestown, Pennsylvania; provided, that Executive acknowledges and
agrees that the performance by Executive of her duties may require travel from
time to time including, without limitation, overseas travel.
c. Proprietary Information and Inventions Agreement. Upon
execution of this Agreement, Executive shall execute the Company's standard form
of Intellectual Property and Confidential Information Agreement (the
"Confidentiality Agreement") a copy of which is attached to this Agreement as
Exhibit A. Executive shall comply at all times with the terms and conditions of
the Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
3. Devotion of Time to Company's Business
a. Full-Time Efforts. During her employment with the Company,
Executive shall devote substantially all of her business time, attention and
efforts to the proper
2
performance of her implicit and explicit duties and obligations hereunder to the
reasonable satisfaction of the Company.
b. No Other Employment. During her employment with the
Company, Executive shall not, except as otherwise provided herein, directly or
indirectly, render any services of a commercial or professional nature to any
other person or organization, whether for compensation or otherwise, without the
prior written consent of either the Company's Chief Executive Officer, Executive
Committee or Board of Directors.
c. Non-Competition During Employment During the Employment
Period and for the post-termination period set forth in Sections 3(c)(i), (ii)
or (iii), as applicable, Executive shall not, directly or indirectly, without
the prior written consent of the Company, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director,
or in any other individual or representative capacity (X) compete with the
Company in the business of developing or commercializing pulmonary surfactants,
cystic fibrosis treatments or any other category of compounds which forms the
basis of the Company's products or products under active development, or (Y)
directly or indirectly solicit or induce any employee of the Company to leave
the employ of the Company:
(i) twelve (12) months in the event Executive's employment
with the Company is terminated pursuant to the terms set forth in Section
6; or
(ii) six (6) months in the event Executive's employment with
the Company is terminated pursuant to the terms set forth in Section 5.b.;
or
(iii) eighteen (18) months in all other cases.
d. In the event that Executive breaches any provisions of this
Section 3.d., or there is a threatened breach, then, in addition to any other
rights which the Company may have, the Company shall be entitled, without the
posting of a bond or other security, to injunctive relief to enforce the
restrictions contained herein. In the event that an actual proceeding is brought
in equity to enforce the provisions of this Section 3.d., Executive shall not
urge as a defense that there is an adequate remedy at law nor shall the Company
be prevented from seeking any other remedies which may be available.
e. To the extent that the restrictions imposed by this Section
3.e., are interpreted by any court to be unreasonable in geographic and/or
temporal scope, such restrictions shall be deemed automatically reduced to the
extent necessary to coincide with the maximum geographic and/or temporal
restrictions deemed by such court not to be unreasonable.
3
4. Compensation and Benefits.
a. Base Compensation. During the Employment Period, the
Company shall pay to Executive (i) base annual compensation ("Base Salary") of
One Hundred Ten Thousand Dollars ($110,000), payable in accordance with the
Company's regular payroll practices and less all required withholdings and (ii)
additional compensation, if any, and benefits as hereinafter set forth in this
Section 4. Base Salary shall be reviewed at least annually (the "Annual Review")
for the purposes of determining increases, if any, based on Executive's
performance, the performance of the Company, inflation, the then prevailing
salary scales for comparable positions and other relevant factors, provided that
any such increases in Base Salary shall be solely within the discretion of the
Company. It is the Company's intention that the first of any such Annual Reviews
shall occur on or about January 2002.
b. Bonuses. Executive shall be eligible for such year-end
bonus, which may be paid in either cash or equity, or both, as is awarded solely
at the discretion of the Compensation Committee of the Board of Directors of the
Company after consultation with the Company's Chief Executive Officer. Any such
equity bonus shall contain such rights and features as are typically afforded to
other Company employees of similar level in connection with comparable equity
bonuses awarded by the Company.
c. Benefits. During the Employment Period, Executive shall be
entitled to participate in all employee benefit plans, programs and arrangements
made available generally to the Company's senior executives or to its employees
on substantially the same basis that such benefits are provided to such
executives or employees (including, without limitation profit-sharing, savings
and other retirement plans (e.g., a 401(k) plan) or programs, medical, dental,
hospitalization, and vision benefits, short-term and long-term disability and
life insurance plans or programs, accidental death and dismemberment protection,
travel accident insurance, and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans or programs that supplement the above-listed types of plans or programs,
whether funded or unfounded); provided, however, that nothing in this Agreement
shall be construed to require the Company to establish or maintain any such
plans, programs or arrangements. Anything contained herein to the contrary
notwithstanding, throughout the Employment Period, Executive shall be entitled
to receive life insurance on behalf of Executive's named beneficiaries in the
amount of Executive's then current annual salary for the term of this Agreement
at no cost to the Executive, except the Company shall have no liability
whatsoever for any taxes (whether based on income or otherwise) imposed upon or
incurred by Executive in connection with any such insurance.
d. Vacations. During the Employment Period, Executive shall be
entitled to 15 days paid vacation per year or such other greater number of days
as provided by the Company's policies and procedures then in effect with respect
to the Company's senior executives or employees, to be earned ratably throughout
the year, 5 days of which may be carried over from year to year (provided, that
in no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
4
e. Reimbursement of Business Expenses. Executive is authorized
to incur reasonable expenses in carrying out her duties and responsibilities
under this Agreement and the Company shall reimburse her for all such expenses,
in accordance with reasonable policies of the Company.
5. Termination of Employment.
a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for Good Cause, as such term is hereinafter
defined. For the purposes of this Agreement, "Good Cause" means gross
misconduct, gross neglect of duties, conviction of a felony involving moral
turpitude, material breach by Executive of this Agreement or the Confidentiality
Agreement or any act or omission involving fraud or embezzlement against the
Company, or appropriation of any property or proprietary information of the
Company by Executive resulting, in either case, in material economic harm to the
Company, which is not cured by Executive within fifteen (15) days after receipt
of written notice from the Company. If terminated for Good Cause in accordance
with the provisions of this Section 5.a., Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1. The Executive shall not be entitled
to receive any other compensation or benefits from the Company whatsoever
(except as and to the extent the continuation of certain benefits is required by
law).
b. Termination without Good Cause. If Executive's
employment is terminated by the Company without Good Cause the following
provisions shall apply:
(1) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment, a lump sum
payment in respect of all accrued but unused vacation days (provided, that in no
event shall the aggregate number of such accrued vacation days exceed 10 days)
at her Base Salary in effect on the date such vacation was earned, and payment
of any other amounts earned, accrued or owing to Executive but not yet paid; and
(2) Executive shall be entitled to receive severance
payments equal to her Base Salary in effect on the date of her termination,
payable on normal Company payroll dates, for a six (6) month period, subject to
setoff, for other employment or consulting income received by Executive; and
c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically Disabled as herein defined. For the
purposes of this Agreement, "Disabled" shall mean a mental or physical condition
that renders Executive substantially incapable of performing her duties and
obligations under this Agreement, after taking into account provisions for
reasonable accommodation, as determined by a medical doctor (such doctor to be
mutually determined in good faith by the parties) for three (3) or more
consecutive months or for a total of six (6) months during any twelve (12)
consecutive months; provided, that during such period the Company shall give
Executive at least thirty (30) days' written notice that it considers the time
period for disability to be running. If this Agreement is terminated under this
Section 5.c., Executive, her heirs, legal representatives or her estate shall be
entitled to any
5
unpaid amounts set forth in Section 5.b.1. through the last day of Executive's
employment but shall not be entitled to any severance benefits.
d. Termination by Executive. If Executive, upon 30 days prior
notice to the Company, voluntarily resigns, Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1. through the last day of Executive's
employment but shall not be entitled to any severance benefits.
6. Severance in Connection with Change of Control.
a. In the event that (i) Executive's employment is terminated
by Company without Good Cause or (ii) Executive resigns for Good Reason (as such
term is hereinafter defined); within twelve months of a Change of Control (as
such term is hereinafter defined), Executive shall be entitled to receive, in
addition to the payments set forth in Section 5.b.1. and in lieu of the payments
set forth in Section 5.b.2., severance payments equal to her Base Salary in
effect on the date of her termination, payable on normal Company payroll dates,
for a twelve (12) month period, subject to setoff, for other full-time
employment or full-time consulting income received by Executive.
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean Executive experiences (X) an involuntary reduction of $11,000 or
greater in her then current Base Salary or (Y) a failure of the Company to
provide the Executive with a position, authority or duties at least equivalent
to the position held by Executive on the day immediately preceding the date of
the Change of Control if such circumstance is not remedied within five business
days after written notice from Executive to the Company.
c. Change of Control. For purposes of this Agreement, a
"Change of Control" shall mean the occurrence of any of the following events:
(i) Any "person", as such term is currently used in
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act"),
other than any employee benefit plan of the Company, becomes a "beneficial
owner" (as such term is currently used in Rule 13d-3 promulgated under the Act)
of 50% or more of the number of shares of the Company's voting stock;
(ii) The Board adopts any plan of liquidation providing
for the distribution of all or substantially all of the Company's assets;
(iii) All or substantially all of the assets or business
of the Company is disposed of pursuant to a sale, merger, consolidation or other
transaction, unless the shareholders of the Company immediately prior to such
transaction beneficially own (within the meaning of Rule 13d-3 promulgated under
the 1934 Act), as a result of their ownership of stock in the Company, at least
50% of the number of shares of voting stock or other voting equity of the entity
or entities that succeed to the business of the Company; or
6
(iv) The Company combines with another company and is
the surviving corporation but, immediately after the combination, the
shareholders of the Company immediately before such transaction beneficially own
(within the meaning of Rule 13d-3 promulgated under the 1934 Act), as a result
of their ownership of stock in the Company immediately prior to such
combination, less than 50% of the number of shares of voting stock of the
combined company.
7. Miscellaneous.
a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regards to the
application of choice of law rules.
b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.
d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of her rights or obligations under this Agreement.
e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 7.e.
f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
7
IN WITNESS THEREOF, the parties have executed this Agreement as of
the date set forth above.
DISCOVERY LABORATORIES, INC.
/s/ Robert J. Capetola
--------------------------------------
By: Robert J. Capetola, Ph.D.
Its: President and CEO
Address: 350 South Main Street, Suite 307
Doylestown, PA 18901
EXECUTIVE, Cynthia Davis
/s/ Cynthia Davis
--------------------------------------
Address: 4899 Curly Hill Rd.
Doylestown, PA 18901
Exhibit 10.23
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") shall be effective as of
December 1, 2001, by and between DISCOVERY LABORATORIES, INC., a Delaware
corporation (the "Company"), and RALPH NIVEN, PH.D. ("Executive").
WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be defined.
NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:
1. Terms of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
December 1, 2001, (the "Commencement Date") and continuing until November 30,
2004, subject, however, to prior termination as hereinafter provided in Section
5 (such term is hereinafter referred to as the "Employment Period").
2. Executive's Duties and Obligations.
a. Duties. Executive shall serve as Senior Vice President,
Preclinical Development, reporting directly to the Chief Executive Officer of
the Company. Executive shall be responsible for all duties customarily
associated with his title.
b. Location of Employment. Executive's principal place of
business shall be at the Company's West Coast facility which is currently
contemplated to be proximate to the San Francisco, California area, provided,
that Executive acknowledges and agrees that the performance by Executive of his
duties may require travel from time to time including, without limitation,
travel to the Company's headquarters located in Doylestown, Pennsylvania, and
other appropriate domestic and overseas travel.
c. Relocation Reimbursement. Executive shall be entitled to
receive a payment of up to $15,000 to cover reimbursable costs which may include
such items as settlement charges, closing costs and moving of household goods.
Any and all reimbursements to be provided pursuant to this Section 2 (c) shall
be subject to documentation in accordance with reasonable policies of the
Company.
d. Proprietary Information and Inventions Agreement. Upon
execution of this Agreement, Executive shall execute the Company's standard form
of Intellectual Property and Confidential Information Agreement (the
"Confidentiality Agreement") a copy of which is attached to this Agreement as
Exhibit A. Executive shall comply at all times
2
with the terms and conditions of the Confidentiality Agreement and all other
reasonable policies of the Company governing its confidential and proprietary
information.
3. Devotion of Time to Company's Business
a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the proper performance of his implicit and explicit duties and
obligations hereunder to the reasonable satisfaction of the Company.
b. No Other Employment. During his employment with the
Company, Executive shall not, except as otherwise provided herein, directly or
indirectly, render any services of a commercial or professional nature to any
other person or organization for compensation without the prior written consent
of either the Company's Chief Executive Officer, Executive Committee or Board of
Directors.
c. Non-Competition During Employment. During the Employment
Period and for the post-termination period set forth in Sections 3(c)(i) or
(ii), as applicable, Executive shall not, directly or indirectly, without the
prior written consent of the Company, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director,
or in any other individual or representative capacity (X) compete with the
Company in the business of developing or commercializing pulmonary surfactants
and therapeutic compounds which form the basis of the Company's products or
products under active development, or (Y) directly or indirectly solicit or
induce any employee of the Company to leave the employ of the Company:
(i) six (6) months in the event Executive's employment with
the Company is terminated pursuant to the terms set forth in Section 5.b.;
or
(ii) twelve (12) months in all other cases.
d. In the event that Executive breaches any provisions of this
Section 3 or there is a threatened breach, then, in addition to any other rights
which the Company may have, the Company shall be entitled, without the posting
of a bond or other security, to injunctive relief to enforce the restrictions
contained herein. In the event that an actual proceeding is brought in equity to
enforce the provisions of this Section 3, Executive shall not urge as a defense
that there is an adequate remedy at law nor shall the Company be prevented from
seeking any other remedies which may be available.
e. To the extent that the restrictions imposed by this Section
3 are interpreted by any court to be unreasonable in geographic and/or temporal
scope, such restrictions shall be deemed automatically reduced to the extent
necessary to coincide with the maximum geographic and/or temporal restrictions
deemed by such court not to be unreasonable.
3
4. Compensation and Benefits.
a. Base Compensation. During the Employment Period, the
Company shall pay to Executive (i) base annual compensation ("Base Salary") of
One Hundred Ninety Thousand Dollars ($190,000), payable in accordance with the
Company's regular payroll practices and less all required withholdings and (ii)
additional compensation, if any, and benefits as hereinafter set forth in this
Section 4. Base Salary shall be reviewed at least annually (the "Annual Review")
for the purposes of determining increases, if any, based on Executive's
performance, the performance of the Company, inflation, the then prevailing
salary scales for comparable positions and other relevant factors, provided that
any such increases in Base Salary shall be solely within the discretion of the
Company. It is the Company's intention that the first of any such Annual Reviews
shall occur on or about January 2003.
b. Bonuses. Executive shall (i) receive a one-time cash
signing bonus of $25,000 conditioned upon Executive being successfully employed
with the Company as provided hereunder on January 15, 2002 (the "Sign-on
Bonus"); (ii) be eligible for such year-end bonus, which may be paid in either
cash or equity, or both, as is awarded solely at the discretion of the
Compensation Committee of the Board of Directors of the Company after
consultation with the Company's Chief Executive Officer. Any such equity bonus
shall contain such rights and features as are typically afforded to other
Company employees of similar level in connection with comparable equity bonuses
awarded by the Company; and (iii) be entitled to a one-time cash bonus equal to
2% of the aggregate gross proceeds received by the Company as a result of any
collaborative arrangement or capital raising effort (a "Bonus Event") undertaken
by the Company with a principal purpose for drug delivery activities,
conditioned upon, among other customary terms and conditions, the following: (X)
the consummation of such Bonus Event must be directly and substantially
attributable to Executive's efforts and must occur during the Employment Period,
(Y) the gross proceeds received by the Company directly in connection therewith
must be in excess of $1,000,000, and (Z) the determination of aggregate gross
proceeds for purposes of calculating the amount of bonus to be paid to Executive
hereunder shall only include cash payments actually received by the Company at
closing or otherwise during the Employment Period that represent proceeds to the
Company for which the Company is not otherwise under obligation to pay back to
the payor (or an affiliate); provided, however, that any bonus payable pursuant
to this Section 4(b)(iii) shall be payable with respect to one and only one, if
any, Bonus Event.
Executive hereby acknowledges and agrees that the Sign-on
Bonus shall be subject to all customary and required tax and other withholdings
and deductions; provided, however, that the Company shall not withhold any
amount with respect to federal income taxes attributable to such Sign-on Bonus
unless otherwise notified in writing in advance by Executive and, further,
Executive hereby assumes all responsibility and liability, if any, that may
directly or indirectly arise out of such non-withholding of federal income
taxes.
c. Benefits. During the Employment Period, Executive shall be
entitled to participate in all employee benefit plans, programs and arrangements
made available generally to the Company's senior executives or to its employees
on substantially the same basis
4
that such benefits are provided to such executives or employees (including,
without limitation profit-sharing, savings and other retirement plans (e.g., a
401(k) plan) or programs, medical, dental, hospitalization, vision, short-term
and long-term disability and life insurance plans or programs, accidental death
and dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfounded); provided, however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Employment Period, Executive
shall be entitled to receive life insurance on behalf of Executive's named
beneficiaries in the amount of Executive's then current annual salary for the
term of this Agreement at no cost to the Executive, except the Company shall
have no liability whatsoever for any taxes (whether based on income or
otherwise) imposed upon or incurred by Executive in connection with any such
insurance.
d. Vacations. During the Employment Period, Executive shall be
entitled to 15 days paid vacation per year or such other greater number of days
as provided by the Company's policies and procedures then in effect with respect
to the Company's senior executives or employees, to be earned ratably throughout
the year, 5 days of which may be carried over from year to year (provided, that
in no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
e. Reimbursement of Business Expenses. During the Employment
Period, Executive is authorized to incur reasonable expenses in carrying out his
duties and responsibilities under this Agreement and the Company shall reimburse
him for all such expenses, in accordance with reasonable policies of the
Company.
f. Stock Options. (i) The Company, subject to the approval of
the Board of Directors and the Company's shareholders, as appropriate, shall
grant to Executive, effective as of the Commencement Date, incentive stock
options to purchase 50,000 shares of Common Stock, $0.001 par value per share of
the Company, pursuant to the terms of the Notice of Grant attached hereto as
Exhibit B;
(ii) The Company subject to the approval of the Board of
Directors and the Company's shareholders, as appropriate, shall grant to
Executive incentive stock options to purchase 25,000 additional shares;
provided, however, that such grant shall first become effective as of the date
of completion of all requisite action by the Company's shareholder's and
authorized officers, as appropriate, with respect to the due and valid
authorization of such options: and
(iii) The options granted pursuant to this Section 4(f) shall
be in accordance with the terms and conditions of the Company's Amended and
Restated 1998 Stock Incentive Plan, as amended (the "Plan") including, without
limitation, the terms and conditions contained in Article II, Section III
thereof with respect to the acceleration of exercisability of such options in
certain change of control circumstances.
5
5. Termination of Employment.
a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for Good Cause, as such term is hereinafter
defined. For the purposes of this Agreement, "Good Cause" means gross
misconduct, gross neglect of duties, conviction of a felony involving moral
turpitude, material breach by Executive of this Agreement or the Confidentiality
Agreement or any act or omission involving fraud or embezzlement against the
Company, or appropriation of any property or proprietary information of the
Company by Executive resulting, in either case, in material economic harm to the
Company, which is not cured by Executive within fifteen (15) days after receipt
of written notice from the Company. If terminated for Good Cause in accordance
with the provisions of this Section 5 (a), Executive shall be entitled to any
unpaid amounts set forth in Section 5 (b) (1). The Executive shall not be
entitled to receive any other compensation or benefits from the Company
whatsoever (except as and to the extent the continuation of certain benefits is
required by law).
b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause the following provisions shall
apply:
(1) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment, a lump sum
payment in respect of all accrued but unused vacation days (provided, that in no
event shall the aggregate number of such accrued vacation days exceed 10 days)
at his Base Salary in effect on the date such vacation was earned, and payment
of any other amounts earned, accrued or owing to Executive but not yet paid; and
(2) Executive shall be entitled to receive severance
payments equal to his Base Salary in effect on the date of his termination,
payable on normal Company payroll dates, for a six (6) month period, subject to
setoff, for other employment or consulting income received by Executive; and
c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically Disabled as herein defined. For the
purposes of this Agreement, "Disabled" shall mean a mental or physical condition
that renders Executive substantially incapable of performing his duties and
obligations under this Agreement, after taking into account provisions for
reasonable accommodation, as determined by a medical doctor (such doctor to be
mutually determined in good faith by the parties) for three (3) or more
consecutive months or for a total of six (6) months during any twelve (12)
consecutive months; provided, that during such period the Company shall give
Executive at least thirty (30) days' written notice that it considers the time
period for disability to be running. If this Agreement is terminated under this
Section 5.c., Executive, his heirs, legal representatives or his estate shall be
entitled to any unpaid amounts set forth in Section 5.b.1. through the last day
of Executive's employment but shall not be entitled to any severance benefits.
6
d. Termination by Executive. If Executive, upon 30 days prior
notice to the Company, voluntarily resigns, Executive shall be entitled to any
unpaid amounts set forth in Section 5 (b) (1). through the last day of
Executive's employment but shall not be entitled to any severance benefits.
6. Severance in Connection with Change of Control.
a. In the event that (i) Executive's employment is terminated
by Company without Good Cause or (ii) Executive resigns for Good Reason (as such
term is hereinafter defined); within twelve months of a Change of Control (as
such term is hereinafter defined), Executive shall be entitled to receive, in
addition to the payments set forth in Section 5 (b) (1). and in lieu of the
payments set forth in Section 5 (b) (2)., severance payments equal to his Base
Salary in effect on the date of his termination, payable on normal Company
payroll dates, for a twelve (12) month period, subject to setoff, for other
full-time employment or full-time consulting income received by Executive.
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean Executive experiences (X) an involuntary reduction of $11,000 or
greater in his then current Base Salary or (Y) a failure of the Company to
provide the Executive with a position, authority or duties at least equivalent
to the position held by Executive on the day immediately preceding the date of
the Change of Control if such circumstance is not remedied within five business
days after written notice from Executive to the Company.
c. Change of Control. For purposes of this Agreement, a
"Change of Control" shall mean the occurrence of any of the following events:
(i) Any "person", as such term is currently used in
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act"),
other than any employee benefit plan of the Company, becomes a "beneficial
owner" (as such term is currently used in Rule 13d-3 promulgated under the Act)
of 50% or more of the number of shares of the Company's voting stock;
(ii) The Board adopts any plan of liquidation providing
for the distribution of all or substantially all of the Company's assets;
(iii) All or substantially all of the assets or
business of the Company is disposed of pursuant to a sale, merger, consolidation
or other transaction, unless the shareholders of the Company immediately prior
to such transaction beneficially own (within the meaning of Rule 13d-3
promulgated under the 1934 Act), as a result of their ownership of stock in the
Company, at least 50% of the number of shares of voting stock or other voting
equity of the entity or entities that succeed to the business of the Company; or
(iv) The Company combines with another company and is
the surviving corporation but, immediately after the combination, the
shareholders of the Company immediately before such transaction beneficially own
(within the meaning of Rule 13d-3
7
promulgated under the 1934 Act), as a result of their ownership of stock in the
Company immediately prior to such combination, less than 50% of the number of
shares of voting stock of the combined company.
7. Miscellaneous.
a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regards to the
application of choice of law rules.
b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.
d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.
e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 7 (e).
f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
8
IN WITNESS THEREOF, the parties have executed this Agreement as of
the date set forth above.
DISCOVERY LABORATORIES, INC.
/s/ Robert J. Capetola
----------------------------------------
By: Robert J. Capetola, Ph.D.
Its: President and CEO
Address: 350 South Main Street, Suite 307
Doylestown, PA 18901
EXECUTIVE, Ralph Niven
/s/ Ralph Niven
----------------------------------------
Address:
301 Buckingham Rd #3
Pacifica, CA 94044-2715
Exhibit 10.24
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") shall be effective as of
December 10, 2001, by and between DISCOVERY LABORATORIES, INC., a Delaware
corporation (the "Company"), and JOHN G. COOPER. ("Executive").
WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be defined.
NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:
1. Terms of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
December 10, 2001, (the "Commencement Date") and continuing until December 9,
2004, subject, however, to prior termination as hereinafter provided in Section
5 (such term is hereinafter referred to as the "Employment Period").
2. Executive's Duties and Obligations.
a. Duties. Executive shall serve as Senior Vice President,
Chief Financial Officer, reporting directly to the Chief Executive Officer (or
substantial equivalent) of the Company. Executive shall be responsible for all
duties customarily associated with being the Senior Vice President, Chief
Financial Officer of a publicly-traded company which is not a subsidiary of any
other corporation, partnership or other entity.
b. Location of Employment. Executive's principal place of
business shall be at the Company's headquarters to be located within thirty (30)
miles of Doylestown, Pennsylvania; provided, that Executive acknowledges and
agrees that the performance by Executive of his duties may require frequent
travel including, without limitation, overseas travel from time to time.
c. Proprietary Information and Inventions Agreement. Upon
execution of this Agreement, Executive shall execute the Company's standard form
of Intellectual Property and Confidential Information Agreement (the
"Confidentiality Agreement") a copy of which is attached to this Agreement as
Exhibit A. Executive shall comply at all times with the terms and conditions of
the Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
2
3. Devotion of Time to Company's Business
a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the proper performance of his implicit and explicit duties and
obligations hereunder to the reasonable satisfaction of the Company.
b. No Other Employment. During his employment with the
Company, Executive shall not, except as otherwise provided herein, directly or
indirectly, render any services of a commercial or professional nature to any
other person or organization, whether for compensation or otherwise, without the
prior written consent of either the Company's Chief Executive Officer, Executive
Committee or Board of Directors; provided, however, that Executive shall be
permitted to fulfill his remaining responsibilities to a reasonable extent with
respect to his directorship duties for Media Sourcery, Inc, through the period
ending December 31, 2002.
c. Non-Competition During Employment During the Employment
Period and for the post-termination period set forth in Sections 3(c)(i), (ii)
or (iii), as applicable, Executive shall not, directly or indirectly, without
the prior written consent of the Company, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director,
or in any other individual or representative capacity (X) compete with the
Company in the business of developing or commercializing pulmonary surfactants,
cystic fibrosis treatments or any other category of compounds which forms the
basis of the Company's products or products under active development, or (Y)
directly or indirectly solicit or induce any employee of the Company to leave
the employ of the Company:
(i) twelve (12) months in the event Executive's employment
with the Company is terminated pursuant to the terms set forth in Section
6; or
(ii) six (6) months in the event Executive's employment with
the Company is terminated pursuant to the terms set forth in Section 5.b.;
or
(iii) eighteen (18) months in all other cases.
d. In the event that Executive breaches any provisions of this
Section 3.d., or there is a threatened breach, then, in addition to any other
rights which the Company may have, the Company shall be entitled, without the
posting of a bond or other security, to injunctive relief to enforce the
restrictions contained herein. In the event that an actual proceeding is brought
in equity to enforce the provisions of this Section 3.d., Executive shall not
urge as a defense that there is an adequate remedy at law nor shall the Company
be prevented from seeking any other remedies which may be available.
e. To the extent that the restrictions imposed by this Section
3.e., are interpreted by any court to be unreasonable in geographic and/or
temporal scope, such
3
restrictions shall be deemed automatically reduced to the extent necessary to
coincide with the maximum geographic and/or temporal restrictions deemed by such
court not to be unreasonable.
4. Compensation and Benefits.
a. Base Compensation. During the Employment Period, the
Company shall pay to Executive (i) base annual compensation ("Base Salary") of
One Hundred Ninety Thousand Dollars ($190,000), payable in accordance with the
Company's regular payroll practices and less all required withholdings and (ii)
additional compensation, if any, and benefits as hereinafter set forth in this
Section 4. Base Salary shall be reviewed at least annually (the "Annual Review")
for the purposes of determining increases, if any, based on Executive's
performance, the performance of the Company, inflation, the then prevailing
salary scales for comparable positions and other relevant factors, provided that
any such increases in Base Salary shall be solely within the discretion of the
Company. It is the Company's intention that the first of any such Annual Reviews
shall occur on or about January 2003.
b. Bonuses. Executive shall (i) receive a one-time cash
signing bonus of $20,000, conditioned upon the successful completion of 90 days
of employment with the Company as provided hereunder and (ii) shall be eligible
for such year-end bonus, which may be paid in either cash or equity, or both, as
is awarded solely at the discretion of the Compensation Committee of the Board
of Directors of the Company after consultation with the Company's Chief
Executive Officer. Any such equity bonus shall contain such rights and features
as are typically afforded to other Company employees of similar senior executive
level in connection with comparable equity bonuses awarded by the Company.
c. Benefits. During the Employment Period, as applicable,
Executive shall be entitled to participate in all employee benefit plans,
programs and arrangements made available generally to the Company's senior
executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfounded); provided, however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Employment Period, Executive
shall be entitled to receive life insurance on behalf of Executive's named
beneficiaries in the amount of Executive's then current annual salary for the
term of this Agreement at no cost to the Executive, except the Company shall
have no liability whatsoever for any taxes (whether based on income or
otherwise) imposed upon or incurred by Executive in connection with any such
insurance.
d. Vacations. During the Employment Period, Executive shall be
entitled to 15 days paid vacation per year or such other greater number of days
as provided by the
4
Company's policies and procedures then in effect with respect to the Company's
senior executives or employees, to be earned ratably throughout the year, 5 days
of which may be carried over from year to year (provided, that in no event shall
the aggregate number of such vacation days carried over to any succeeding year
exceed 10 days).
e. Reimbursement of Business Expenses. Executive is authorized
to incur reasonable expenses in carrying out his duties and responsibilities
under this Agreement and the Company shall reimburse his for all such expenses,
in accordance with reasonable policies of the Company.
5. Termination of Employment.
a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for Good Cause, as such term is hereinafter
defined. For the purposes of this Agreement, "Good Cause" means gross
misconduct, gross neglect of duties, conviction of a felony involving moral
turpitude, material breach by Executive of this Agreement or the Confidentiality
Agreement or any act or omission involving fraud or embezzlement against the
Company, or appropriation of any property or proprietary information of the
Company by Executive resulting, in either case, in material economic harm to the
Company, which is not cured by Executive within fifteen (15) days after receipt
of written notice from the Company. If terminated for Good Cause in accordance
with the provisions of this Section 5.a., Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1. The Executive shall not be entitled
to receive any other compensation or benefits from the Company whatsoever
(except as and to the extent the continuation of certain benefits is required by
law).
b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause the following provisions shall
apply:
(1) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment, a lump sum
payment in respect of all accrued but unused vacation days (provided, that in no
event shall the aggregate number of such accrued vacation days exceed 10 days)
at his Base Salary in effect on the date such vacation was earned, and payment
of any other amounts earned, accrued or owing to Executive but not yet paid; and
(2) Executive shall be entitled to receive (i)
severance payments equal to his Base Salary in effect on the date of his
termination, payable on normal Company payroll dates, and (ii) medical, dental
and hospitalization coverage at benefit levels that are no greater than those in
effect for Executive on the day immediately preceding his termination, for a six
(6) month period, subject to setoff, for other employment or consulting income
received by Executive or benefit coverage available to Executive; and
c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically Disabled as herein defined. For the
purposes of this Agreement, "Disabled" shall mean a mental or physical condition
that renders Executive substantially
5
incapable of performing his duties and obligations under this Agreement, after
taking into account provisions for reasonable accommodation, as determined by a
medical doctor (such doctor to be mutually determined in good faith by the
parties) for three (3) or more consecutive months or for a total of six (6)
months during any twelve (12) consecutive months; provided, that during such
period the Company shall give Executive at least thirty (30) days' written
notice that it considers the time period for disability to be running. If this
Agreement is terminated under this Section 5.c., Executive, his heirs, legal
representatives or his estate shall be entitled to any unpaid amounts set forth
in Section 5.b.1. through the last day of Executive's employment but shall not
be entitled to any severance benefits.
d. Termination by Executive. If Executive, upon 30 days prior
notice to the Company, voluntarily resigns, Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1. through the last day of Executive's
employment but shall not be entitled to any severance benefits.
6. Severance and Option Acceleration in Connection with Change of
Control.
a. In the event that (i) Executive's employment is terminated
by Company without Good Cause or (ii) Executive resigns for Good Reason (as such
term is hereinafter defined); within twelve months of a Change of Control (as
such term is hereinafter defined), Executive shall be entitled to receive, in
addition to the payments set forth in Section 5.b.1. and in lieu of the payments
set forth in Section 5.b.2., (i) severance payments equal to his Base Salary in
effect on the date of his termination, payable on normal Company payroll dates,
for a twelve (12) month period and (ii) medical, dental and hospitalization
coverage at benefit levels that are no greater than those in effect for
Executive on the day immediately preceding his termination, for a six (6) month
period, subject to setoff, for other employment or consulting income received by
Executive or benefit coverage available to Executive.
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean Executive experiences (X) an involuntary reduction of $19,000 or
greater in his then current Base Salary or (Y) a failure of the Company to
provide the Executive with a position, authority or duties at least equivalent
to the position set forth in Section 2(a) of this Agreement if such circumstance
is not remedied within five business days after written notice from Executive to
the Company.
c. Change of Control. For purposes of this Agreement, a
"Change of Control" shall mean the occurrence of any of the following events:
(i) Any "person", as such term is currently used in
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act"),
other than any employee benefit plan of the Company, becomes a "beneficial
owner" (as such term is currently used in Rule 13d-3 promulgated under the Act)
of 50% or more of the number of shares of the Company's voting stock;
6
(ii) The Board adopts any plan of liquidation providing
for the distribution of all or substantially all of the Company's assets;
(iii) All or substantially all of the assets or
business of the Company is disposed of pursuant to a sale, merger, consolidation
or other transaction, unless the shareholders of the Company immediately prior
to such transaction beneficially own (within the meaning of Rule 13d-3
promulgated under the 1934 Act), as a result of their ownership of stock in the
Company, at least 50% of the number of shares of voting stock or other voting
equity of the entity or entities that succeed to the business of the Company; or
(iv) The Company combines with another company and is
the surviving corporation but, immediately after the combination, the
shareholders of the Company immediately before such transaction beneficially own
(within the meaning of Rule 13d-3 promulgated under the 1934 Act), as a result
of their ownership of stock in the Company immediately prior to such
combination, less than 50% of the number of shares of voting stock of the
combined company.
d. Option Acceleration. In the event of any Corporate
Transaction or Change of Control (as such terms are defined in the Amended and
Restated 1998 Stock Incentive Plan of the Company), the Company shall fully vest
each and every outstanding stock option granted to Executive as of the effective
date thereof.
7. Stock Options. The Company, subject to the approval of the Board
of Directors and the Company's shareholders, as appropriate, shall provide an
initial grant to Executive, effective as of the Commencement Date, of incentive
stock options (the "Options") to purchase 100,000 shares of Common Stock, $0.001
par value per share of the Company, pursuant to the terms of the Notice of Grant
attached hereto as Exhibit B. It is hereby expressly acknowledged that Executive
shall be entitled to additional equity grants, if any, as set forth in more
detail in Section 4(b) of this Agreement.
8. Miscellaneous.
a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regards to the
application of choice of law rules.
b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.
7
d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.
e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 8.e.
f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
IN WITNESS THEREOF, the parties have executed this Agreement as of
the date set forth above.
DISCOVERY LABORATORIES, INC.
/s/ Robert J. Capetola, Ph.D.
----------------------------------------
By: Robert J. Capetola, Ph.D.
Its: President and CEO
Address: 350 South Main Street, Suite 307
Doylestown, PA 18901
EXECUTIVE, John G. Cooper
/s/ John G. Cooper
----------------------------------------
Address: 22 Zinnia Drive
Newtown, PA 18940
Exhibit 10.25
EMPLOYMENT AGREEMENT
This Employment Agreement ( "Agreement") shall be effective as of
August 15, 2000, by and between Discovery Laboratories, Inc., a Delaware
corporation (the "Company"), and Deni M. Zodda, M.B.A., Ph.D. ("Executive").
WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be defined.
NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:
1. Terms of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
September 11, 2000 (the "Commencement Date") and continuing until September 10,
2003, subject, however, to prior termination as hereinafter provided in Section
5 (such term is hereinafter referred to as the "Employment Period").
2. Executive's Duties and Obligations.
a. Duties. Executive shall serve as Senior Vice President,
Business Development, reporting directly to the Chief Executive Officer of the
Company and/or the Chief Operating Officer and Chief Development Officer, as
appropriate. Executive shall be responsible for all duties customarily
associated with his title including, without limitation, activities regarding
(i) the development and commercialization of the Company's products; (ii)
proposed strategic alliances, joint ventures and other potential collaborations
and (iii) other related functions for the Company.
b. Location of Employment. Executive's principal place of
business shall be at the Company's headquarters to be located within thirty (30)
miles of Doylestown, Pennsylvania; provided, that Executive acknowledges and
agrees that the performance by Executive of his duties shall require frequent
travel including, without limitation, overseas travel from time to time.
c. Proprietary Information and Inventions Agreement. Upon
commencement of employment with the Company, Executive shall execute the
Company's standard form of Intellectual Property and Confidential Information
Agreement (the "Confidentiality Agreement") a copy of which is attached to this
Agreement as Exhibit A.
2
3. Devotion of Time to Company's Business
a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the proper performance of his implicit and explicit duties and
obligations hereunder to the reasonable satisfaction of the Company.
b. No Other Employment. During his employment with the
Company, Executive shall not, except as otherwise provided herein, directly or
indirectly, render any services of a commercial or professional nature to any
other person or organization, whether for compensation or otherwise, without the
prior written consent of either the Company's Chief Executive Officer, Executive
Committee or Board of Directors.
c. Non-Competition During Employment During the Employment
Period and for the post-termination period set forth in Sections 3(c)(i), (ii)
or (iii), as applicable, Executive shall not, directly or indirectly, without
the prior written consent of the Company, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director,
or in any other individual or representative capacity (X) compete with the
Company in the business of developing or commercializing pulmonary surfactants,
cystic fibrosis treatments, Vitamin D analogs or any other category of compounds
which forms the basis of the Company's products or products under development,
or (Y) directly or indirectly solicit or induce any employee of the Company to
leave the employ of the Company:
(i) twelve (12) months in the event Executive's employment
with the Company is terminated pursuant to the terms set forth in Section
6; or
(ii) six (6) months in the event Executive's employment with
the Company is terminated pursuant to the terms set forth in Section 5.b.;
or
(iii) eighteen (18) months in all other cases.
d. In the event that Executive breaches any provisions of this
Section 3.d. or there is a threatened breach, then, in addition to any other
rights which the Company may have, the Company shall be entitled, without the
posting of a bond or other security, to injunctive relief to enforce the
restrictions contained herein. In the event that an actual proceeding is brought
in equity to enforce the provisions of this Section 3.d., Executive shall not
urge as a defense that there is an adequate remedy at law nor shall the Company
be prevented from seeking any other remedies which may be available.
e. To the extent that the restrictions imposed by this Section
3.e are interpreted by any court to be unreasonable in geographic and/or
temporal scope, such restrictions shall be deemed automatically reduced to the
extent necessary to coincide with the maximum geographic and/or temporal
restrictions deemed by such court not to be unreasonable.
3
4. Compensation and Benefits.
a. Base Compensation. During the Employment Period, the
Company shall pay to Executive (i) base annual compensation ("Base Salary") of
One Hundred Seventy Five Thousand Dollars ($175,000), payable in accordance with
the Company's regular payroll practices and less all required withholdings and
(ii) additional compensation, if any, and benefits as hereinafter set forth in
this Section 4. Base Salary shall be reviewed at least annually (the "Annual
Review") for the purposes of determining increases, if any, based on Executive's
performance, the performance of the Company, inflation, the then prevailing
salary scales for comparable positions and other relevant factors, provided that
any such increases in Base Salary shall be solely within the discretion of the
Company. It is the Company's intention that the first of any such Annual Reviews
shall occur on or about January 2001. Executive acknowledges that such initial
Annual Review shall, at the Company's sole discretion, be determined on pro-rata
basis with respect to the number of months then completed by Executive pursuant
to this Agreement.
b. Bonuses. Executive shall be eligible for such year-end
bonus, which may be paid in either cash or equity, or both, as is awarded solely
at the discretion of the Compensation Committee of the Board of Directors of the
Company after consultation with the Company's Chief Executive Officer. Any such
equity bonus shall contain such rights and features as are typically afforded to
other Company employees of similar level in connection with comparable equity
bonuses awarded by the Company. Any such bonus, whether in the form of equity or
cash, or both, that may be awarded to Executive in connection with his services
to the Company for the 2000 calendar year, or any part thereof, shall be
determined on a basis as if Executive was employed with the Company from January
1, 2000; provided, however, that Executive acknowledges that any such bonus is
to be awarded solely at the discretion of the Compensation Committee of the
Board of Directors of the Company after consultation with the Company's Chief
Executive Officer.
c. Benefits. During the Employment Period, Executive shall be
entitled to participate in all employee benefit plans, programs and arrangements
made available generally to the Company's senior executives or to its employees
on substantially the same basis that such benefits are provided to such
executives or employees (including, without limitation profit-sharing, savings
and other retirement plans (e.g., a 401(k) plan) or programs, medical, dental,
hospitalization, vision, short-term and long-term disability and life insurance
plans or programs, accidental death and dismemberment protection, travel
accident insurance, and any other employee welfare benefit plans or programs
that may be sponsored by the Company from time to time, including any plans or
programs that supplement the above-listed types of plans or programs, whether
funded or unfounded); provided, however, that nothing in this Agreement shall be
construed to require the Company to establish or maintain any such plans,
programs or arrangements. Anything contained herein to the contrary
notwithstanding, throughout the Employment Period, Executive shall be entitled
to receive life insurance on behalf of Executive's named beneficiaries in the
amount of Executive's then current annual salary for the term of this Agreement
at no cost to the Executive, except the Company shall have no liability
whatsoever for
4
any taxes (whether based on income or otherwise) imposed upon or incurred by
Executive in connection with any such insurance.
d. Stock Options. The Board of Directors of the Company has
granted to Executive, on the date hereof, incentive stock options (the
"Options") to purchase 70,000 shares of Common Stock, $0.001 par value per share
of the Company, pursuant to the terms of the Notice of Grant attached hereto as
Exhibit B.
e. Vacations. During the Employment Period, Executive shall be
entitled to 15 days paid vacation per year, to be earned ratably throughout the
year, 5 days of which may be carried over from year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
f. Reimbursement of Business Expenses. Executive is authorized
to incur reasonable expenses in carrying out his duties and responsibilities
under this Agreement and the Company shall reimburse him for all such expenses,
in accordance with reasonable policies of the Company.
5. Termination of Employment.
a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for Good Cause, as such term is hereinafter
defined. For the purposes of this Agreement, "Good Cause" means gross
misconduct, gross neglect of duties, conviction of a felony involving moral
turpitude, material breach by Executive of this Agreement or the Confidentiality
Agreement or any act or omission involving fraud or embezzlement against the
Company, or appropriation of any property or proprietary information of the
Company by Executive resulting, in either case, in material economic harm to the
Company, which is not cured by Executive within fifteen (15) days after receipt
of written notice from the Company. If terminated for Good Cause in accordance
with the provisions of this Section 5.a., Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1. The Executive shall not be entitled
to receive any other compensation or benefits from the Company whatsoever
(except as and to the extent the continuation of certain benefits is required by
law).
b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause the following provisions shall
apply:
(1) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment, a lump sum
payment in respect of all accrued but unused vacation days (provided, that in no
event shall the aggregate number of such accrued vacation days exceed 10 days)
at his Base Salary in effect on the date such vacation was earned, and payment
of any other amounts earned, accrued or owing to Executive but not yet paid; and
(2) Executive shall be entitled to receive severance
payments equal to his Base Salary in effect on the date of his termination,
payable on normal Company
5
payroll dates, for a six (6) month period, subject to setoff, for other
employment or consulting income received by Executive; and
c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically Disabled as herein defined. For the
purposes of this Agreement, "Disabled" shall mean a mental or physical condition
that renders Executive substantially incapable of performing his duties and
obligations under this Agreement, after taking into account provisions for
reasonable accommodation, as determined by a medical doctor (such doctor to be
mutually determined in good faith by the parties) for three (3) or more
consecutive months or for a total of six (6) months during any twelve (12)
consecutive months; provided, that during such period the Company shall give
Executive at least thirty (30) days' written notice that it considers the time
period for disability to be running. If this Agreement is terminated under this
Section 5.c., Executive, his heirs, legal representatives or his estate shall be
entitled to any unpaid amounts set forth in Section 5.b.1. through the last day
of Executive's employment but shall not be entitled to any severance benefits.
d. Termination by Executive. If Executive, upon 30 days prior
notice to the Company, voluntarily resigns, Executive shall be entitled to any
unpaid amounts set forth in Section 5.b.1. through the last day of Executive's
employment but shall not be entitled to any severance benefits.
6. Severance in Connection with Change of Control.
a. In the event that (i) Executive's employment is terminated
by Company without Good Cause or (ii) Executive resigns for Good Reason (as such
term is hereinafter defined); within twelve months of a Change of Control (as
such term is hereinafter defined), Executive shall be entitled to receive, in
addition to the payments set forth in Section 5.b.1. and in lieu of the payments
set forth in Section 5.b.2., severance payments equal to his Base Salary in
effect on the date of his termination, payable on normal Company payroll dates,
for a twelve (12) month period, subject to setoff, for other full-time
employment or full-time consulting income received by Executive.
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean Executive experiences (X) an involuntary reduction of 18% or greater
in his then current Base Salary or (Y) a failure of the Company to provide the
Executive with a position, authority or duties at least equivalent to the
position held by Executive on the day immediately preceding the date of the
Change of Control if such circumstance is not remedied within five business days
after written notice from Executive to the Company.
c. Change of Control. For purposes of this Agreement, a
"Change of Control" shall mean the occurrence of any of the following events:
(i) Any "person", as such term is currently used in
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act"),
other than any employee benefit plan of the Company, becomes a "beneficial
owner" (as such term is currently used in
6
Rule 13d-3 promulgated under the Act) of 50% or more of the number of shares of
the Company's voting stock;
(ii) The Board adopts any plan of liquidation providing
for the distribution of all or substantially all of the Company's assets;
(iii) All or substantially all of the assets or
business of the Company is disposed of pursuant to a sale, merger, consolidation
or other transaction, unless the shareholders of the Company immediately prior
to such transaction beneficially own (within the meaning of Rule 13d-3
promulgated under the 1934 Act), as a result of their ownership of stock in the
Company, at least 50% of the number of shares of voting stock or other voting
equity of the entity or entities that succeed to the business of the Company; or
(iv) The Company combines with another company and is
the surviving corporation but, immediately after the combination, the
shareholders of the Company immediately before such transaction beneficially own
(within the meaning of Rule 13d-3 promulgated under the 1934 Act), as a result
of their ownership of stock in the Company immediately prior to such
combination, less than 50% of the number of shares of voting stock of the
combined company.
7. Miscellaneous.
a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regards to the
application of choice of law rules.
b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.
d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.
e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
7
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 7.e.
f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
IN WITNESS THEREOF, the parties have executed this Agreement as of
the date set forth above.
DISCOVERY LABORATORIES, INC.
/s/ Robert J. Capetola
----------------------------------------
By: Robert J. Capetola, Ph.D.
Its: President
Address: 350 South Main Street, Suite 307
Doylestown, PA 18901
EXECUTIVE, Deni M. Zodda, M.B.A., Ph.D.
/s/ Deni M. Zodda
----------------------------------------
Address: 440 Coldstream Drive
Berwyn, PA 19312
Exhibit 23.1
Consent of Independent Auditors
We consent to reference to the incorporation by reference in the Registration
Statements of Discovery Laboratories, Inc. and subsidiary on Form S-8 (File No.
333-33900) and Form S-3 (Form S-3 No. 333-72614) of our report dated February
25, 2000, on our audit of the consolidated statements of operations, changes in
stockholders' equity and cash flows for the period Mary 18, 1993 (inception)
through December 31, 1999 (the consolidated statements of operations and cash
flows are not presented separately therein) which report is included in the
annual report on Form 10-KSB for the year ended December 31, 2001. In addition,
we consent to the reference to us under the heading "Experts" in the
Registration Statement on Form S-3.
/s/ Richard A. Eisner & Company, LLP
New York, New York
March 27, 2002
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-67422) pertaining to the Discovery Laboratories, Inc. Amended and
Restated 1998 Stock Incentive Plan and in the Registration Statements (Form S-3
No. 333-35206, Form S-3 No. 333-86105, Form S-3 No. 333-72614, and Form S-3 No.
333-82596) pertaining to the registration of shares of common stock of our
report dated March 15, 2002, with respect to the consolidated financial
statements of Discovery Laboratories, Inc. included in the Annual Report (Form
10-KSB) for the year ended December 31, 2001.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 15, 2002