SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 19, 1998
Date of Report (Date of earliest event reported)
DISCOVERY LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 000-26422 94-3171943
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
509 Madison Avenue, 14th Floor
New York, New York 10022
(Address of principal executive offices)
(212) 223-9504
(Registrant's telephone number, including area code)
Item 6. Resignations of Registrant's Directors
On March 20, 1998, Vaughan Shalson resigned from the Board of
Directors of Discovery Laboratories, Inc. (the "Registrant"). Pursuant to a
resolution adopted by the Board of Directors on February 4, 1998, Mr. Shalson
was not nominated to serve on the Board of Directors following the Registrant's
proposed merger with its majority-owned subsidiary, Acute Therapeutics, Inc.
(the "ATI Merger"). The Registrant expects to submit the ATI Merger to a
stockholder vote during May 1998. Accordingly, Mr. Shalson's resignation has
occurred approximately two months prior to the time the Registrant anticipated
that Mr. Shalson would cease serving as a Board member. Mr. Shalson served as
the Registrant's chief executive officer from February through November 1997. In
a letter to the Registrant, Mr. Shalson stated that he was resigning from the
Board as a result of his opposition to the terms of the compensation to be paid
to the Registrant's new management team pursuant to the proposed ATI Merger,
particularly the compensation to be paid to the new chief executive officer.
Those compensation terms are described in the Registrant's Reports on Form 8-K
dated February 9 and March 5, 1998.
The merger agreement relating to the ATI Merger contemplates that
upon consummation of the ATI Merger, the present management team of Acute
Therapeutics, Inc. ("ATI") will succeed to the management of the Registrant. In
his letter to the Registrant, Mr. Shalson expressed concern that, in view of the
Registrant's rate of use of its existing cash, the current level of such cash
and the cash required to complete the ATI Merger, the proposed compensation
arrangements would put a severe strain on the Registrant resources. Mr. Shalson
reiterated his belief, which had previously been expressed to the Board, that he
did not believe the ATI Merger to be in the best interests of the Registrant's
stockholders.
The ATI Merger has been approved by a majority of the disinterested
members of the Registrant's Board of Directors. The Registrant believes that the
ATI Merger is in the best interests of the Registrant and its stockholders and
represents an opportunity to (i) acquire 100% ownership of ATI's SurfaxinTM
product, (ii) simplify the Registrant's corporate and financial structure,
thereby increasing potential opportunities to obtain third party financing of
the Registrant's research activities, and (iii) resolve management recruitment
and succession issues. The Registrant believes that Mr. Shalson's opposition to
the ATI Merger is based, at least in part, on an inadequate understanding of the
Registrant's financial position and the proposed compensation terms of the
Merger. The Registrant believes that it will have cash and cash-equivalents of
approximately $7.7 million if the ATI Merger is consummated on June 30, 1998 --
approximately $1.2 million more than the $6.5 million projected by Mr. Shalson.
Furthermore, the $1.65 million in potential milestone compensation to which Mr.
Shalson objected in his letter to the Registrant does not represent a use of
cash at closing, as implied by Mr. Shalson, but rather represents potential
payments that will be made to the ATI management team only if important
corporate objectives have been attained. The Registrant believes that the
attainment of these objectives would increase substantially its opportunities to
complete one or more financings and that Mr. Shalson's concerns in this regard
are therefore particularly misplaced.
To the extent that statements in this Form 8-K are not strictly historical,
including statements as to future financial conditions, events conditioned on
stockholder or other approval, or otherwise as to future events, such statements
are forward-looking, and are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. The forward-looking statements contain
in this Form 8-K are subject to certain risks and uncertainties that could cause
actual results to differ materially from the statements made. Among the factors
which could affect the Company's actual results and could cause results to
differ from those contained in the forward-looking statements contained herein
are the risk that financial conditions may change, risks relating to the
progress of the Company's research and development and the development of
competing therapies and/or technologies by other companies. Those associated
risks and others are further described in the Company's filings with the
Securities and Exchange Commission.
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits
(c) Exhibits:
17 Resignation letter of Vaughan Shalson dated March 19, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DISCOVERY LABORATORIES, INC.
Date: March 20, 1998
By: /s/ Robert J. Capetola
--------------------------------------
Name: Robert J. Capetola, Ph.D.
Title: Acting Chief Executive Officer
Exhibit Index
Exhibit Number Description
- -------------- -----------
17 Resignation letter of Vaughan Shalson dated
March 19, 1998.
Exhibit 17
Fax Message
Date: March 19,1998 Time: 8:44 PM
To: Steve Kanzer Phone: (212) 554-4330
Paramount Capital Fax: (212) 554-4490
From: Vaughan Shalson Phone: (510) 661-9062
Fax: (510) 661-9062
cc: Ken Alberstadt Phone: (212) 299-8600
Roberts, Sheridan & Kotel Fax: (212) 299-8686
Re: Resignation from Discovery Board
Number of pages including cover sheet: 2
Message
Dear Steve:
As you are aware from our telephonic board conference calls on January 30 and
February 4, I am strongly opposed to the terms of the merger agreement outlined
in the draft letter of intent dated January 28, 1998.
In summary, I have serious reservations about the judgement of Dr. Capetola and
feel deeply that the compensation proposed for the management team, and in
particular for Dr. Capetola, involves an excessive use of cash. As I have stated
repeatedly in our conference calls, I do not believe this to be in our
shareholders best interests.
On the subject of Dr. Capetola's judgement, at our Board Meeting on December 5
we discussed a merger proposal from Dr. Capetola dated August 28, 1997. The
compensation package included in this proposal was characterized by one of the
other board members present at that meeting as egregious. I and others agreed
with this sentiment.
My own evaluation was that Capetola's proposal went so far beyond the pale of
what could be considered negotiation posturing, as to lead any reasonable person
to conclude that he exhibited either lack of experience or extremely poor
judgement-neither of which should be acceptable qualities in the proposed CEO of
the combined company.
Under the current proposal, Dr. Capetola's minimum guaranteed cash compensation
(base salary plus guaranteed minimum year-end bonus) will be increase 26% from
$225,000 to $283,500 a year (or more , if Dr. Capetola's salary has been
increased above $225,000 since he joined ATI in October 1996), and he is
thereafter guaranteed a minimum annual increase of 5%. In addition, he will
receive a joining bonus of $100,000; a increase in his partnering bonus from a
"once-only" to a "for-each" payout of $50,000; sufficient stock options to give
him a beneficial ownership of 6.8% (the largest of any individual shareholder of
the company); and an increase in his severance provision from 12 months with
Set-Off to 18 months without Set-Off.
If this were all, I would consider him more than generously compensated.
However, the current proposal also includes milestones payments for the
management group totaling $1,650,000 which, it is clear from our board
discussion, Dr. Capetola expects to be paid in cash. While this is a "pool" to
be shared by the whole management team, some insight as to Dr. Capetola's likely
expectations as to his personal share of this cash may be gleaned from the stock
option pool in Schedule A of the letter of intent, wherein Dr. Capetola has
proposed that he receive 34% of all the stock options to be issued. On the same
proportional basis, he would personally receive milestone payouts totalling in
excess of $560,000.
To put this in perspective, from our board discussion on January 30, it appears
that, at the current combined Discovery/ATI burn-rate of approximately $600,000
per month, and allowing for another $500,000 of legal, accounting and severance
costs associated with consummating this merger, if it takes until the Date of
Termination in the current proposal (June 30, 1998) to conclude this
transaction, the merged company would have barely $6.5 million in cash
post-merger to pursue its programs. Absent a crystal ball to know the condition
of the financial markets facing the merged company, which would then need to
raise cash, it seems entirely inappropriate to me to include milestone
compensation to management amounting to $1,650,000, or 25% of the company's
projected cash at closing.
I regard this proposal as further evidence of Capetola's lack of judgement, by
even proposing to expose the company to cash payments of such magnitude that
they could severely strain the company's resources, and that are excessive by
any reasonable standard for a development-stage company in such fragile
financial condition.
In light of the foregoing, I hereby resign from the board of directors effective
immediately.
Please file a report on Form 8-K including a copy of this letter as an exhibit,
and ensure that this is fully disclosed in any information sent to shareholders
in connection with the proposed merger.
Yours truly,
/s/ Vaughan Shalson
Vaughan Shalson